<PAGE> 1
Registration No. 333-45209
Filed Pursuant to Rule 424(b)(4)
FIRST PHYSICIAN CARE, INC.
SUITE 400 WEST
3200 WINDY HILL ROAD
ATLANTA, GEORGIA 30339
June 25, 1998
Dear Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders (the
"Meeting") of First Physician Care, Inc. ("FPC") on July 24, 1998. Details as to
the time and place of the Meeting are set forth in the accompanying Notice of
Special Meeting of Stockholders.
The purpose of the Meeting is to consider and vote upon (i) the approval
and adoption of the Agreement and Plan of Merger, as amended (the "Merger
Agreement"), providing for the merger (the "Merger") of Falcon Acquisition Sub,
Inc., a Delaware corporation and wholly-owned subsidiary of PhyCor, Inc., a
Tennessee corporation ("PhyCor") with and into FPC, with FPC being the surviving
corporation and (ii) the approval of certain payments to Stephen A. George,
M.D., the Chairman, Chief Executive Officer and President of FPC, that will
result from the Merger under the terms of FPC's employment agreement with Dr.
George, the Amended and Restated Consulting and Non-Compete Agreement among Dr.
George, FPC and PhyCor, and FPC's stock option plans (collectively, the "Change
of Control Payments"). If the Merger is consummated, each outstanding share of
FPC Class A Common Stock will be converted into the right to receive 0.207179
shares of PhyCor Common Stock (the "Common Stock Exchange Ratio"), each
outstanding share of FPC Class A Preferred Stock will be converted into the
right to receive 3.830839 shares of PhyCor Common Stock, each outstanding share
of FPC Class B Convertible Preferred Stock will be converted into the right to
receive 7.977189 shares of PhyCor Common Stock, and each outstanding share of
FPC Class C Convertible Preferred Stock will be converted into the right to
receive 2.071790 shares of PhyCor Common Stock. The FPC Class A Common Stock,
FPC Class A Preferred Stock, FPC Class B Convertible Preferred Stock and the FPC
Class C Convertible Preferred Stock collectively are referred to as the FPC
Capital Stock.
After careful consideration, the Board of Directors has unanimously
approved the Merger Agreement and the Change of Control Payments and has
determined that the proposed Merger is in the best interests of stockholders and
recommends that you vote FOR the approval and adoption of the Merger Agreement
and FOR approval of the Change of Control Payments. The Board of Directors
believes that PhyCor and FPC are strategically complementary and that the
combined companies will be able to compete more effectively in the changing
health care marketplace. In addition, Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJ"), financial advisor to FPC in connection with the Merger, has
delivered to the FPC Board of Directors a written opinion dated June 10, 1998 to
the effect that, as of the date of such opinion and based upon and subject to
certain matters stated therein, the Common Stock Exchange Ratio was fair, from a
financial point of view, to the holders of FPC Class A Common Stock. Affiliates
of DLJ own approximately 12% of the outstanding shares of FPC Class A Common
Stock, 30% of the outstanding shares of FPC Class A Preferred Stock and 27% of
the outstanding shares of FPC Class B Convertible Preferred Stock, and, as a
result, DLJ is not independent.
The attached Prospectus-Proxy Statement describes the Merger Agreement, the
proposed Merger and the Change of Control Payments more fully and includes other
information about PhyCor and FPC including the risks associated with becoming a
PhyCor shareholder as more fully described under the caption "Risk Factors"
beginning at page 17 of the Prospectus-Proxy Statement. Please give this
information your thoughtful attention.
Approval and adoption of the Merger Agreement requires the affirmative vote
of a majority of the outstanding shares of FPC Class A Common Stock, FPC Class B
Convertible Preferred Stock and FPC Class C Convertible Preferred Stock (voting
together as a class, with holders of the FPC Class B Convertible
<PAGE> 2
Preferred Stock and FPC Class C Convertible Preferred Stock being entitled to
cast the same number of votes as they would be entitled to cast had they
converted such securities into FPC Class A Common Stock) and the affirmative
vote of 66 2/3% of the outstanding shares of FPC Class A Preferred Stock.
Therefore, you are urged to mark, sign, date and return promptly the
accompanying proxy card for the Meeting even if you plan to attend. You may vote
in person at that time if you so desire even if you have previously returned
your proxy.
Sincerely,
/s/ STEPHEN A. GEORGE, M.D.
Stephen A. George, M.D.
Chairman, Chief Executive Officer
and President
YOUR VOTE IS IMPORTANT
PLEASE SIGN, DATE AND RETURN YOUR PROXY
<PAGE> 3
FIRST PHYSICIAN CARE, INC.
SUITE 400 WEST
3200 WINDY HILL ROAD
ATLANTA, GEORGIA 30339
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
A Special Meeting of Stockholders of First Physician Care, Inc. ("FPC")
will be held at the corporate offices of FPC located at 3200 Windy Hill Road,
Suite 400 West, Atlanta, Georgia 30339 on July 24, 1998, at 9:00 a.m., Eastern
Time, 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 19, 1997, as amended May
18, 1998 and June 10, 1998 (the "Merger Agreement"), among First Physician
Care, Inc. ("FPC"), Falcon Acquisition Sub, Inc. ("Subsidiary") and PhyCor,
Inc. ("PhyCor"), pursuant to which, among other things, (i) Subsidiary will
be merged with and into FPC upon the terms and subject to the conditions
contained in the Merger Agreement (the "Merger"), with FPC being the
surviving corporation, (ii) each share of FPC Class A Common Stock, par
value $.001 per share (the "FPC Class A Common Stock"), issued and
outstanding immediately prior to the effective time of the Merger will be
converted into the right to receive 0.207179 shares of PhyCor Common Stock
(the "Common Stock Exchange Ratio"), (iii) each share of FPC Class A
Preferred Stock will be converted into the right to receive 3.830839 shares
of PhyCor Common Stock (the "Class A Preferred Exchange Ratio"), (iv) each
share of FPC Class B Convertible Preferred Stock will be converted into the
right to receive 7.977189 shares of PhyCor Common Stock (the "Class B
Preferred Exchange Ratio"), (v) each share of FPC Class C Convertible
Preferred Stock will be converted into the right to receive 2.071790 shares
of PhyCor Common Stock (the "Class C Preferred Exchange Ratio")
(collectively, the Common Stock Exchange Ratio, the Class A Preferred
Exchange Ratio, the Class B Preferred Exchange Ratio and the Class C
Preferred Exchange Ratio are referred to herein as the Exchange Ratios) and
(vi) the FPC stock option plans will be adopted by PhyCor and outstanding
stock options previously issued thereunder to purchase shares of FPC Class
A Common Stock held by FPC's directors, officers and employees will be
converted into options to purchase shares of PhyCor Common Stock, or, at
the election of PhyCor, PhyCor will issue options under PhyCor's stock
option plans in substitution thereof, as adjusted to give effect to the
Exchange Ratios, all as described in the accompanying Prospectus-Proxy
Statement. The FPC Class A Common Stock, FPC Class A Preferred Stock, FPC
Class B Convertible Preferred Stock and the FPC Class C Convertible
Preferred Stock collectively are referred to as the FPC Capital Stock.
Based on the $18.31 closing sales price of PhyCor Common Stock on June 24,
1998, the aggregate merger consideration to be paid by PhyCor is $63.9
million (which includes net debt of approximately $10.6 million), the FPC
Common Stock Exchange Ratio is valued at $3.79 (an aggregate of $22.7
million), the FPC Class A Preferred Stock Exchange Ratio is valued at
$70.15 (an aggregate of $14.0 million), the FPC Class B Preferred Stock
Exchange Ratio is valued at $146.09 (an aggregate of $16.1 million) and the
FPC Class C Preferred Stock Exchange Ratio is valued at $37.94 (an
aggregate of approximately $455,300). The Merger is more completely
described in the accompanying Prospectus-Proxy Statement and a copy of the
Merger Agreement is attached as Annex A.
2. To consider and vote upon a proposal to approve certain payments to
Stephen A. George, M.D. that will result from the Merger under the terms of
(i) FPC's employment agreement with Dr. George, (ii) the Amended and
Restated Consulting and Non-Compete Agreement among Dr. George, FPC and
PhyCor, and (iii) FPC's stock option plans (collectively, the "Change of
Control Payments"). The Change of Control Payments are more completely
described in the accompanying Prospectus-Proxy Statement and a copy of the
Consulting Agreement is attached as Annex E.
3. To transact such other business as may properly come before the
Special Meeting or any adjournment thereof.
Holders of record of FPC Class A Common Stock, FPC Class B Convertible
Preferred Stock and FPC Class C Convertible Preferred Stock (collectively, the
"FPC Voting Stock") at the close of business on June 24, 1998 (the "Record
Date") are entitled to notice of, and to vote at, the Special Meeting or any
adjournment thereof. Holders of record of FPC Class A Preferred Stock at the
close of business on the Record
<PAGE> 4
Date are also entitled to notice of the Special Meeting and to vote upon the
approval and adoption of the Merger Agreement, but are not entitled to vote on
the Change of Control Payments, and may not be entitled to vote with respect to
any other matters as may properly come before the Special Meeting. The
affirmative vote of the holders of a majority of the outstanding FPC Voting
Stock (voting together as a class, with holders of the FPC Class B Convertible
Preferred Stock and FPC Class C Convertible Preferred Stock being entitled to
cast the same number of votes as they would be entitled to cast had they
converted such securities into FPC Class A Common Stock) and the affirmative
vote of 66 2/3% of the outstanding shares of FPC Class A Preferred Stock, are
necessary to approve the Merger. The affirmative vote of the holders of 75%,
excluding those shares held by Dr. George of the outstanding FPC Voting Stock
(voting together as a class, with holders of the FPC Class B Convertible
Preferred Stock and Class C Convertible Preferred Stock being entitled to cast
the same number of votes as they converted such securities into Class A Common
Stock) is necessary to approve the Change of Control Payments. Certain
beneficial owners of an aggregate of approximately 81.55% of the votes
attributable to the outstanding shares of FPC Voting Stock and 96.81% of the FPC
Class A Preferred Stock as of the Record Date have granted irrevocable proxies
to certain officers of PhyCor allowing such persons to vote such stock at the
Special Meeting.
Holders of FPC Capital Stock as of the Record Date are entitled to
appraisal rights as a result of the 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.
PLEASE COMPLETE, DATE AND SIGN THE ACCOMPANYING PROXY AND RETURN IT
PROMPTLY. IF YOU ATTEND THE SPECIAL MEETING, YOU MAY REVOKE YOUR PROXY AND VOTE
IN PERSON IF YOU DESIRE TO DO SO, BUT ATTENDANCE AT THE SPECIAL MEETING DOES NOT
ITSELF SERVE TO REVOKE YOUR PROXY.
By order of the Board of Directors,
/s/ STEPHEN A. GEORGE, M.D.
Stephen A. George, M.D.
Chairman, Chief Executive Officer
and President
PLEASE MARK, SIGN, DATE AND RETURN YOUR PROXY
PROMPTLY, WHETHER YOU PLAN TO ATTEND THE
SPECIAL MEETING OR NOT.
A SELF-ADDRESSED ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE.
NO POSTAGE IS REQUIRED IF MAILED WITHIN THE UNITED STATES.
Atlanta, Georgia
June 25, 1998
<PAGE> 5
PROSPECTUS AND PROXY STATEMENT
2,910,330 SHARES
PHYCOR, INC.
COMMON STOCK
---------------------
This Prospectus-Proxy Statement (the "Prospectus-Proxy Statement") is being
furnished to the holders of FPC Class A Common Stock, FPC Class A Preferred
Stock, FPC Class B Convertible Preferred Stock and FPC Class C Convertible
Preferred Stock of First Physician Care, Inc., a Delaware corporation ("FPC"),
in connection with the solicitation of proxies by the Board of Directors of FPC,
for use in connection with a special meeting of stockholders of FPC (the
"Special Meeting"), which is to be held on July 24, 1998, or any adjournment(s)
or postponement(s) thereof. At such meeting, the stockholders of FPC will
consider and vote upon (i) a proposal to approve and adopt an Agreement and Plan
of Merger, dated as of December 19, 1997, as amended on May 18, 1998 and June
10, 1998, by and among PhyCor, Inc., a Tennessee corporation ("PhyCor"), Falcon
Acquisition Sub, Inc., a Delaware corporation and wholly-owned subsidiary of
PhyCor (the "Subsidiary"), and FPC (the "Merger Agreement"), pursuant to which
the Subsidiary will be merged with and into FPC (the "Merger"), with FPC being
the surviving corporation and (ii) a proposal to approve certain payments to
Stephen A. George, M.D., the Chairman, Chief Executive Officer and President of
FPC, that will result from the Merger under the terms of FPC's employment
agreement with Dr. George, the Amended and Restated Consulting and Non-Compete
Agreement among Dr. George, FPC and PhyCor, and FPC's stock option plans
(collectively, the "Change of Control Payments"). As a result of the Merger,
each of the then outstanding shares of FPC Class A Common Stock, par value $.001
per share (the "FPC Class A Common Stock"), will be converted into the right to
receive 0.207179 shares (the "Common Stock Exchange Ratio") of Common Stock, no
par value per share, of PhyCor (the "PhyCor Common Stock"), each share of FPC
Class A Preferred Stock, par value $1.00 per share, will be converted into the
right to receive 3.830839 shares of PhyCor Common Stock (the "Class A Preferred
Exchange Ratio"), each share of FPC Class B Convertible Preferred Stock, par
value $1.00 per share, will be converted into the right to receive 7.977189
shares of PhyCor Common Stock (the "Class B Preferred Exchange Ratio"), and each
share of FPC Class C Convertible Preferred Stock, par value $1.00 per share,
will be converted into the right to receive 2.071790 shares of PhyCor Common
Stock (the "Class C Preferred Exchange Ratio") (the Common Stock Exchange Ratio,
the Class A Preferred Exchange Ratio, the Class B Preferred Exchange Ratio and
the Class C Preferred Exchange Ratio collectively shall be referred to as the
"Exchange Ratios").
In the event the average of the closing sales prices of PhyCor Common Stock
as reported on the Nasdaq Stock Market's National Market (the "Nasdaq National
Market") for the ten consecutive trading days ending on the second trading day
immediately preceding the Special Meeting (the "Closing Price") is less than
$11.00, FPC may terminate the Merger Agreement unless PhyCor agrees to increase
the Exchange Ratios such that the aggregate value of the shares of PhyCor Common
Stock to be received by FPC's stockholders is equal to $11.00 times the number
of shares of PhyCor Common Stock to be received using the current Exchange
Ratios. The FPC Common Stock, FPC Class A Preferred Stock, FPC Class B
Convertible Preferred Stock and FPC Class C Convertible Preferred Stock are
collectively referred to herein as the FPC Capital Stock. The FPC Class A Common
Stock, FPC Class B Convertible Preferred Stock and FPC Class C Convertible
Preferred Stock are collectively referred to herein as the FPC Voting Stock.
Pursuant to agreements with PhyCor dated December 19, 1997, Stephen A.
George, M.D., Andrew B. Adams, M.D., Kelly J. DeKeyser, Donald B. Smallwood,
Karl A. Hardesty, Michael A. Jutras, M.D., Sprout Capital VI, L.P., Sprout
Growth II, L.P., DLJ Capital Corporation and Welsh, Carson, Anderson & Stowe,
VI, L.P., in their individual capacities as stockholders, have granted to
certain officers of PhyCor irrevocable proxies to vote all of their outstanding
shares of FPC Capital Stock (representing approximately 81.55% of the votes
attributable to the outstanding shares of FPC Voting Stock and 96.81% of the
outstanding shares of FPC Class A Preferred Stock of record as of June 24, 1998)
at the Special Meeting. Sprout Capital VI, L.P., Sprout Growth II, L.P. and DLJ
Capital Corporation (which in the aggregate own 12% of the outstanding FPC Class
A Common Stock, 30% of the outstanding FPC Class A Preferred Stock and 27% of
the outstanding FPC Class B Convertible Preferred Stock) are each affiliates of
Donaldson, Lufkin & Jenrette Securities Corporation, which provided certain
advice and delivered a fairness opinion to the Board of Directors of FPC in
connection with the Merger. The Merger is subject to the satisfaction of a
number of conditions, including, among others, approval of the Merger Agreement
and the Merger by the affirmative vote of a majority of the outstanding shares
of FPC Voting Stock and 66 2/3% of the outstanding shares of FPC Class A
Preferred Stock, voting in the manner described herein. As of June 24, 1998,
there were 120 holders of record of FPC Class A Common Stock (ten of whom have
provided irrevocable proxies to
<PAGE> 6
officers of PhyCor), 15 holders of record of Class A Preferred Stock (four of
whom have provided irrevocable proxies to officers of PhyCor), 25 holders of
record of Class B Convertible Preferred Stock (nine of whom have provided
irrevocable proxies to officers of PhyCor) and one holder of record of FPC Class
C Convertible Preferred Stock (who has not provided an irrevocable proxy to
officers of PhyCor). Other than such irrevocable proxies, no holders of FPC
Capital Stock have agreed with PhyCor or FPC to vote such shares in favor of the
Merger. See "THE MERGER."
This Prospectus-Proxy Statement also constitutes a prospectus of PhyCor for
the issuance of up to 2,910,330 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 June 24, 1998, the closing sales
price for PhyCor Common Stock as reported on the Nasdaq National Market was
$18.31 per share. The aggregate merger consideration based on such closing price
is $63.9 million (which includes net debt of approximately $10.6 million). After
the Merger, the former holders of FPC Capital Stock collectively will own
approximately 4% of the outstanding PhyCor Common Stock.
This Prospectus-Proxy Statement and the form of Proxy are first being
mailed to holders of FPC Capital Stock on or about June 25, 1998.
SEE "RISK FACTORS" BEGINNING AT PAGE 17 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY HOLDERS OF SHARES OF FPC 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 COMMISSION
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 JUNE 25, 1998.
<PAGE> 7
TABLE OF CONTENTS
<TABLE>
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<S> <C>
AVAILABLE INFORMATION....................................... 1
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE........... 1
SUMMARY..................................................... 3
RISK FACTORS................................................ 17
THE SPECIAL MEETING......................................... 25
General................................................... 25
Date, Place and Time...................................... 25
Record Date; Quorum....................................... 25
Votes Required............................................ 25
Voting and Revocation of Proxies.......................... 26
Solicitation of Proxies................................... 26
THE MERGER.................................................. 27
Terms of the Merger....................................... 27
Background of the Merger.................................. 28
Reasons for the Merger; Recommendations of the Board of
Directors.............................................. 31
Opinion of Donaldson, Lufkin & Jenrette Securities
Corporation............................................ 35
Effective Time of the Merger.............................. 40
Exchange of Certificates.................................. 40
Representations and Warranties............................ 41
Conditions to the Merger.................................. 41
Regulatory Approvals...................................... 42
Certain Covenants......................................... 42
Waiver and Amendment...................................... 43
Termination............................................... 43
Break-up Fee; Third Party Bids............................ 44
Interests of Certain Persons in the Merger................ 44
Accounting Treatment...................................... 45
Federal Income Tax Consequences........................... 46
Resale of PhyCor Common Stock by Affiliates............... 48
No Solicitation of Transactions........................... 49
Nasdaq National Market Listing............................ 49
PROPOSAL TO APPROVE CHANGE OF CONTROL PAYMENTS.............. 50
APPRAISAL RIGHTS OF FPC STOCKHOLDERS........................ 51
MARKET PRICE DATA........................................... 53
DIVIDENDS................................................... 53
FPC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 54
General................................................... 54
Three Months Ended March 31, 1997 Compared to Three Months
Ended March 31, 1998................................... 56
Year Ended December 31, 1996 Compared to Year Ended
December 31, 1997...................................... 56
Year Ended December 31, 1995 Compared to Year Ended
December 31, 1996...................................... 57
Year Ended December 31, 1994 Compared to Year Ended
December 31, 1995...................................... 58
Liquidity and Capital Resources........................... 58
BUSINESS OF FPC............................................. 60
Services.................................................. 60
Operations................................................ 60
Properties................................................ 62
Employees................................................. 62
Litigation................................................ 62
</TABLE>
i
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<TABLE>
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PRINCIPAL STOCKHOLDERS...................................... 63
BUSINESS OF PHYCOR.......................................... 66
COMPARISON OF RIGHTS OF FPC AND PHYCOR SHAREHOLDERS......... 67
Classes and Series of Capital Stock....................... 67
Class A Common Stock...................................... 67
Class B Common Stock...................................... 67
Class A Preferred Stock................................... 68
Class B Convertible Preferred Stock....................... 68
Class C Convertible Preferred Stock....................... 68
Size and Election of the Board of Directors............... 69
Removal of Directors...................................... 69
Conversion, Dissolution and Redemption.................... 69
Amendment or Repeal of the Certificate of Incorporation or
Charter and Bylaws..................................... 70
Special Meetings of Shareholders.......................... 70
Liability of Directors.................................... 70
Indemnification of Directors and Officers................. 71
Change of Control......................................... 71
Shareholder Rights Agreement.............................. 72
EXPERTS..................................................... 72
LEGAL MATTERS............................................... 72
ADDITIONAL INFORMATION...................................... 73
CONSOLIDATED FINANCIAL STATEMENTS OF FIRST PHYSICIAN CARE,
INC....................................................... F-1
Annex A Agreement and Plan of Merger by and among PhyCor,
Inc., Falcon Acquisition Sub, Inc. and First
Physician Care, Inc., as amended................... A-1
Annex B Opinion of Donaldson, Lufkin & Jenrette Securities
Corporation........................................ B-1
Annex C Form of Proxy...................................... C-1
Annex D Text of Section 262 of the Delaware General
Corporation Law.................................... D-1
Annex E Amended and Restated Consulting and Non-Compete
Agreement by and among Stephen A. George, M.D.,
PhyCor, Inc. and First Physician Care, Inc......... E-1
</TABLE>
ii
<PAGE> 9
AVAILABLE INFORMATION
PhyCor has filed a Registration Statement on Form S-4 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, as amended by the Annual
Report on Form 10-K/A, for the fiscal year ended December 31, 1997.
2. PhyCor's Quarterly Report on Form 10-Q for the quarter ended March
31, 1998.
3. PhyCor's Current Report on Form 8-K filed January 8, 1998.
4. PhyCor's Current Report on Form 8-K filed January 16, 1998.
5. PhyCor's Current Report on Form 8-K filed March 21, 1998.
6. PhyCor's Current Report on Form 8-K filed April 29, 1998.
7. PhyCor's Current Report on Form 8-K filed June 3, 1998.
8. 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.
1
<PAGE> 10
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 was supplied by PhyCor,
and all information contained in this Prospectus-Proxy Statement with respect to
FPC was supplied by FPC. Although neither PhyCor nor FPC 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 FPC 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 THE INFORMATION
CONCERNING PHYCOR OR FPC CONTAINED IN THIS PROSPECTUS-PROXY STATEMENT IS CORRECT
AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. 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.
2
<PAGE> 11
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, Inc. 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 March 31, 1998, PhyCor
operated 55 clinics with approximately 3,800 physicians in 28 states and managed
IPAs with over 21,500 physicians in 34 markets. As of such date, physicians
employed by clinics managed by PhyCor provided capitated medical services to
approximately 1,227,000 members under prepaid health plans, including
approximately 184,000 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, 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. 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."
In May 1998, PhyCor purchased PrimeCare International, Inc. ("PCI"), a
physician practice management company serving southern California. PCI's
operations include a 69-physician multi-speciality group, an 83-bed hospital, a
surgery center and a network of 10 IPAs consisting of 210 primary care
physicians and approximately 2,000 affiliated specialty physicians. PhyCor also
announced that it has entered into an interim management agreement and letter of
intent to acquire certain assets and enter into a long-term service agreement
with Watson Clinic, a 167-physician multi-specialty group based in Lakeland,
Florida. In December 1997, PhyCor announced an agreement to purchase
Seattle-based CareWise, Inc., a nationally recognized leader in the health care
decision support industry.
On April 22, 1998, PhyCor announced that it recorded in the first quarter
of 1998, a pre-tax charge to earnings of approximately $14 million relating to
the termination of its proposed merger with MedPartners, Inc. ("MedPartners")
and approximately $22 million in pre-tax restructuring charges relating to costs
to provide for consolidating facilities and clinic operations and reduced
overhead costs. PhyCor had previously announced plans to restructure or divest
seven of its multi-specialty clinic operations with approximately 370
physicians. In connection with these plans, PhyCor recorded 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. Three of the
seven clinics to which the charge relates involve relationships that are being
terminated as a result of a variety of negative operating and market issues,
including market position, clinic demographics, operating results, physician
relations and ongoing viability of the medical group. The total net revenue for
these clinics was $25.5 million and $26.5 million for 1997 and 1996,
respectively. The remaining four multi-specialty clinics to which the charge
relates represent the Company's earliest developments of multi-specialty clinics
through the formation of new groups. The clinics involved were considered to
have an impairment of certain current assets, property and equipment, other
assets and, primarily, intangible
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assets because of the termination by certain groups of physicians within a
larger clinic of their relationship with the Company and the anticipated impact
of such terminations on the Company's future cash flows. Total net revenue for
these four clinics was $88.4 million and $78.7 million for 1997 and 1996,
respectively. The Company has modified its approach to this type of group
formation and its recent group formations have proven successful. The net
revenue and total assets of new group formations not included in the
non-recurring charge totaled $38.7 million and $61.4 million, respectively, in
1997, and $13.0 million and $37.2 million, respectively, in 1996. Exclusive of
these non-recurring costs, these restructuring plans are not expected to
adversely affect PhyCor's earnings targets for 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."
On April 27, 1998, PhyCor announced that in order to recognize the impact
of various events and trends relating to the physician practice management
segment of the health care industry, effective April 1, 1998, it changed its
policies regarding amortization and adopted a maximum of 25 years as the useful
life for amortization of its intangible assets. If these shorter amortization
periods had been applied as of January 1, 1997, the Company's 1997 diluted
earnings per share would have been reduced by $0.10 per share. On the same
basis, the Company's first quarter 1998 diluted earnings would have been reduced
by $0.03 per share.
At March 31, 1998, PhyCor had consolidated assets of approximately $1.7
billion, consolidated shareholders' equity of approximately $737 million and,
employed directly or indirectly through wholly-owned subsidiaries, approximately
19,000 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.
First Physician Care, Inc. FPC was incorporated in Delaware in June 1993
for the purpose of delivering and managing the delivery of primary care and
certain multi-specialty medical services through multi-sited, community-based
medical groups and IPAs. FPC currently manages the non-medical aspects of three
physician groups pursuant to long-term service agreements (the "Managed Group
Practices"). FPC owns the non-medical assets related to the Managed Group
Practices. The Managed Group Practices are comprised of (i) 15 full-time and
part-time physicians at two sites in the St. Louis, Missouri/Alton, Illinois
market, (ii) 53 full-time and part-time physicians at 19 sites in the
Dallas/Fort Worth, Texas market and (iii) 10 full-time and part-time physicians
at one site in the New York, New York market. FPC also directly delivers primary
care and certain specialty medical services through three wholly-owned
subsidiaries including (a) a primary care group of 49 full-time and part-time
physicians at 15 sites in the Tampa and St. Petersburg, Florida markets, (b) a
primary care and multi-specialty group of 31 full-time and part-time physicians
at two sites in the Boca Raton and West Palm Beach, Florida markets and (c) a
primary care group of three full-time physicians at two sites in the Atlanta,
Georgia market (collectively, these groups are referred to herein as the "FPC
Group Practices"). FPC also owns one IPA in the New York, New York market.
As of June 24, 1998, FPC employed 1,115 individuals, including 27 in its
corporate office, 163 in the South Florida market group practices, 359 in the
Tampa Bay market group practices, 19 in the Atlanta market group practices, 124
in the St. Louis market group practices, 389 in the Dallas/Fort Worth market
group practices and 34 in the New York market group practices.
FPC's executive offices are located at 3200 Windy Hill Road, Suite 400
West, Atlanta, Georgia, 30339, and its telephone number is (770) 980-9800.
Falcon Acquisition Sub, Inc. The Subsidiary was incorporated on December
18, 1997 for purposes of the transactions contemplated by the Merger Agreement.
The Subsidiary currently provides management services to FPC pursuant to a
management agreement dated as of May 18, 1998. The Subsidiary manages the
day-to-day operations of FPC in exchange for a management fee equal to 15% of
FPC's pre-tax income. 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.
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RISK FACTORS
Certain risks and uncertainties relating to the Merger, PhyCor and the
health care industry should be considered carefully by the holders of FPC
Capital Stock in evaluating the Merger, including, but not limited to, the
businesses of PhyCor and FPC, 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."
SPECIAL MEETING
At the Special Meeting, the holders of FPC Voting Stock will consider and
vote upon the recommendation of the FPC Board to approve and adopt the Merger
and to approve the Change of Control Payments. Holders of record of FPC Class A
Common Stock, Class B Convertible Preferred Stock and Class C Convertible
Preferred Stock at the close of business on June 24, 1998 (the "Record Date")
are entitled to notice of, and to vote at, the Special Meeting and any
adjournment thereof. Holders of record of FPC Class A Preferred Stock at the
close of business on the Record Date are also entitled to notice of the Special
Meeting and to vote upon the approval and adoption of the Merger Agreement, but
are not entitled to vote on the Change of Control Payments, and may not be
entitled to vote with respect to any other matters as may properly come before
the Special Meeting. Holders of FPC Class B Convertible Preferred Stock and
Class C Convertible Preferred Stock are entitled to vote on the Merger based
upon the number of shares of Class A Common Stock that would result from the
conversion of the shares of each respective class of Preferred Stock. As of June
24, 1998, there were 4,221,068 shares of FPC Class A Common Stock issued and
outstanding, 200,000 shares of FPC Class A Preferred Stock issued and
outstanding, 110,000 shares of Class B Convertible Preferred Stock issued and
outstanding (which are entitled to vote as if converted into 4,235,425 shares of
Class A Common Stock) and 12,000 shares of Class C Convertible Preferred Stock
issued and outstanding (which are entitled to vote as if converted into 120,000
shares of Class A Common Stock). Each share of FPC Class A Common Stock is
entitled to one vote at the Special Meeting. Shares of FPC Class A Preferred
Stock are not entitled to vote on all matters, but will be entitled to vote at
the Special Meeting with respect to the proposal to approve and adopt the Merger
Agreement and will vote separately as a class. For additional information
relating to the Special Meeting, see "THE SPECIAL MEETING."
VOTES REQUIRED
Approval and adoption of the Merger Agreement by the stockholders of FPC
requires the affirmative vote of a majority of the outstanding shares of the FPC
Voting Stock (voting together as a class, with holders of the FPC Class B
Convertible Preferred Stock and FPC Class C Convertible Preferred Stock being
entitled to cast the same number of votes as they would be entitled to cast had
they converted such securities into FPC Class A Common Stock) and the
affirmative vote of 66 2/3% of the outstanding shares of FPC Class A Preferred
Stock. Approval of the Change of Control Payments requires the affirmative vote
of the holders of 75%, excluding those shares held by Dr. George, of the
outstanding FPC Voting Stock (voting together as a class, with holders of the
FPC Class B Convertible Preferred Stock and Class C Convertible Preferred Stock
being entitled to cast the same number of votes as they would be entitled to
cast had they converted such securities into Class A Common Stock). As of June
24, 1998, the directors and executive officers of FPC and other affiliates of
FPC beneficially owned an aggregate of 3,264,545 shares of FPC Capital Stock
(excluding shares issuable upon exercise of options and convertible securities),
representing approximately 83.56% of the votes attributable to shares of FPC
Voting Stock and 100.00% of the shares of FPC Class A Preferred Stock
outstanding on such date. As of such date, 103 non-affiliated stockholders held
the remaining shares of FPC Voting Stock. Stephen A. George, M.D., Andrew B.
Adams, M.D., Kelly J. DeKeyser, Donald B. Smallwood, Karl A. Hardesty, Michael
A. Jutras, M.D., Welsh, Carson, Anderson & Stowe, VI, L.P. ("WCAS"), Sprout
Capital VI, L.P., Sprout Growth II, L.P. and DLJ Capital Corporation each have
granted an irrevocable proxy to Joseph C. Hutts, Chairman, President and Chief
Executive Officer of PhyCor, and Steven R. Adams, Vice President of PhyCor, to
vote the shares of FPC Capital Stock beneficially owned by them at the Special
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Meeting. Messrs. Hutts and Adams intend to vote such shares in favor of approval
and adoption of the Merger Agreement and in favor of approval of the Change of
Control Payments.
In the event that the Merger Agreement is not approved and adopted by FPC's
stockholders, the Merger Agreement may be terminated by FPC or PhyCor in
accordance with its terms. See "THE SPECIAL MEETING -- Votes Required" and "THE
MERGER -- Termination."
THE MERGER
Terms of the Merger. Pursuant to the Merger Agreement, the Subsidiary will
merge with and into FPC at the effective time of the Merger (the "Effective
Time"), with FPC being the surviving corporation (the "Surviving Corporation").
The Subsidiary's Certificate of Incorporation, as amended and existing at the
Effective Time, and the Bylaws of Subsidiary in effect at the Effective Time,
will govern the Surviving Corporation until amended or repealed in accordance
with applicable law. At the Effective Time, (i) each outstanding share of FPC
Class A Common Stock will be converted into the right to receive 0.207179 shares
of PhyCor Common Stock, (ii) each outstanding share of FPC Class A Preferred
Stock will be converted into the right to receive 3.830839 shares of PhyCor
Common Stock, (iii) each outstanding share of FPC Class B Convertible Preferred
Stock will be converted into the right to receive 7.977189 shares of PhyCor
Common Stock and (iv) each outstanding share of FPC Class C Convertible
Preferred Stock will be converted into the right to receive 2.071790 shares of
PhyCor Common Stock. The Exchange Ratios assume the exercise as of or prior to
the Effective Time of (i) options to purchase 172,584 shares of FPC Class A
Common Stock, 76,084 of which are currently vested or are expected to vest prior
to the Effective Time and 96,500 of which will become vested at the Effective
Time as a result of the Merger and (ii) options to purchase 53,200 shares of FPC
Class A Common Stock, which options will not be vested at the Effective Time or
vest as a result of the Merger. The Exchange Ratios do not assume the exercise
as of or prior to the Effective Time of 428,095 options that are currently
vested or are expected to vest prior to the Effective Time or 242,750 options
which will become vested at the Effective Time as a result of the Merger because
the exercise prices of these options (as adjusted to give effect to the Exchange
Ratios) are, in each case, higher than the $17.94 closing sales price of the
PhyCor Common Stock on May 18, 1998 (the date of execution of the first
amendment to the Merger Agreement). Fractional shares of PhyCor Common Stock
will not be issuable in connection with the Merger. Holders of FPC 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, all options to purchase shares of FPC
Capital Stock which are outstanding at such time, whether or not then vested or
exercisable, will immediately become options to purchase PhyCor Common Stock,
and PhyCor will assume each such option and each stock option plan under which
it was issued, or, at the election of PhyCor, PhyCor will issue options under
PhyCor's stock option plans in substitution thereof. The number of shares of
PhyCor Common Stock subject to each stock option assumed, or substituted
therefor, and the exercise prices for such shares will be adjusted to give
effect to the Exchange Ratios. See "THE MERGER -- Certain Covenants." Further,
FPC is contractually obligated to deliver an aggregate of 1,547,200 shares of
its Class A Common Stock to physicians of certain Managed Group Practices at
specified future dates, and it is anticipated that such rights will become
rights to receive a number of shares of PhyCor Common Stock determined by giving
effect to the Common Stock Exchange Ratio.
Recommendations of the Board of Directors. The FPC Board has approved the
Merger Agreement and the Change of Control Payments and recommends a vote FOR
approval and adoption of the Merger Agreement and FOR approval of the Change of
Control Payments by the stockholders of FPC. The FPC Board believes that the
terms of the Merger are in the best interests of FPC and its stockholders.
Opinion of Financial Advisor. Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJ") has acted as financial advisor to FPC in connection with the
Merger and has delivered to the FPC Board its written opinion dated June 10,
1998 to the effect that, as of the date of such opinion and based upon and
subject to certain matters stated therein, the Common Stock Exchange Ratio was
fair, from a financial point of view, to the holders of FPC Class A Common
Stock. The full text of the written opinion of DLJ, which sets forth the
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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 and in its entirety. DLJ'S opinion is directed only to the fairness of
the Common Stock Exchange Ratio from a financial point of view, does not address
the fairness of the other Exchange Ratios or 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. FPC did not seek,
and DLJ did not deliver, an opinion with respect to the consideration to be paid
in the Merger to holders of FPC Capital Stock, other than the holders of FPC
Class A Common Stock. Affiliates of DLJ own approximately 12% of the outstanding
FPC Class A Common Stock, 30% of the outstanding FPC Class A Preferred Stock and
27% of the outstanding FPC Class B Convertible Preferred Stock, and, as a
result, DLJ is not independent. For its services in rendering its opinion, DLJ
is entitled to a fee that is based in part on the value of the Merger
consideration and would have equaled $0.9 million and $0.6 million using the
closing sales prices of the PhyCor Common Stock on December 19, 1997 and June
24, 1998, respectively. See "THE MERGER -- Opinion of Donaldson, Lufkin &
Jenrette Securities Corporation."
Effective Time of the Merger. The Merger will become effective upon the
filing by Subsidiary and FPC of a Certificate of Merger under the General
Corporation Law of the State of Delaware (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, Subsidiary and FPC. See "THE
MERGER -- Effective Time of the Merger" and "-- Conditions to the Merger."
Exchange of Certificates. At least two business days prior to the date FPC
provides notices to its stockholders of the Special Meeting, PhyCor will enter
into an agreement with First Union National Bank (the "Exchange Agent") which
will provide that PhyCor shall deposit with the Exchange Agent, for the holders
of FPC Capital Stock, for exchange pursuant to the Merger Agreement, through the
Exchange Agent, (i) as soon as practicable (but in any event within five
business days) after such agreement has been entered into, certificates
representing the shares of PhyCor Common Stock issuable pursuant to the Merger
Agreement and (ii) at least two business days prior to the Effective Time, cash
in an amount equal to the aggregate amount required to be paid to holders of FPC
Capital Stock in lieu of fractional interests of PhyCor Common Stock and any
dividends or distributions to which such holder is entitled pursuant to the
Merger. STOCKHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THEIR PROXY
CARDS. See "THE MERGER -- Exchange of Certificates."
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 FPC to consummate
the Merger are subject to the satisfaction of certain conditions, including,
among others, (i) obtaining the requisite approval of FPC's stockholders, (ii)
the absence of any injunction prohibiting consummation of the Merger, (iii) in
the case of FPC, the receipt of a legal opinion with respect to certain tax
consequences of the Merger and (iv) qualification of the Merger as a pooling of
interests. See "THE MERGER -- Federal Income Tax Consequences," "-- Accounting
Treatment" and "-- Conditions to the Merger." Each party may waive any of the
conditions to its obligations to consummate the Merger. In the event that the
waiver of a condition by FPC would materially and adversely affect the Merger
consideration, the tax consequences of the Merger to FPC's stockholders or any
other terms of the transaction, PhyCor would file an amendment to the
Registration Statement of which this Prospectus-Proxy Statement forms a part and
FPC would provide supplemental proxy information to its stockholders and, if the
Special Meeting has not been held, the opportunity to revoke previously
delivered proxies or, if the Special Meeting has been held, notice of another
Special Meeting to consider 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 22, 1998, PhyCor and FPC made their respective filings
with the DOJ and the FTC with respect to the Merger Agreement. On February 13,
1998, the DOJ and the FTC granted PhyCor and FPC
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early termination of the HSR Act waiting period. Notwithstanding the early
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 assets of FPC. 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 FPC 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 licenses for facilities
operated by FPC may be deemed to have been transferred, requiring the consents
or approvals of various state licensing and health planning agencies. In some
instances, new licenses may be required to be obtained. In addition, certain of
the arrangements between FPC 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; Approval of Change of Control
Payments. In considering the recommendation of the FPC Board with respect to
the Merger Agreement and the Change of Control Payments and the transactions
contemplated thereby, stockholders should be aware that certain members of the
management of FPC and the FPC Board have interests in the Merger that are in
addition to the interests of stockholders of FPC generally. Specifically, the
executive officers and directors own options to purchase 222,750 shares of FPC
Class A Common Stock that will become immediately exercisable as a result of the
Merger. Stephen A. George, M.D., Chairman, Chief Executive Officer and President
of FPC, has entered into an Amended and Restated Consulting and Non-Compete
Agreement (the "Consulting Agreement") with PhyCor that provides for services
and payments after the Merger. Additionally, pursuant to his employment
agreement with FPC, Dr. George will be entitled to receive $300,000 payable in
twelve monthly installments as a severance payment. The Change of Control
Payments payable to Dr. George are conditioned on the completion of the Merger
and will be due and owing if the Merger is approved. If the Merger is not
approved by FPC's stockholders, or is otherwise not completed, Dr. George will
not be entitled to the Change of Control Payments. FPC is taking steps,
including obtaining stockholder approval of the Change of Control Payments to
ensure that the Change of Control Payments do not result in excise tax liability
under Section 4999 of the Code. In the event, however, that any portion of the
Change of Control Payments do result in the imposition of such excise tax
liability, PhyCor will pay such amounts on behalf of Dr. George and will provide
additional compensation to him to offset the effect of such taxes. FPC has been
advised by legal counsel that tax liability under Section 4999 of the Code
should not be imposed if the Change of Control Payments are approved by the
holders of 75%, excluding those shares held by Dr. George, of the outstanding
FPC Voting Stock (voting together as a class, with holders of the FPC Class B
Convertible Preferred Stock and Class C Convertible Preferred Stock being
entitled to cast the same number of votes as they would be entitled to cast had
they converted such securities into Class A Common Stock). In addition to the
severance payments to Dr. George, PhyCor will make severance payments to each of
FPC's other executive officers. Andrew B. Adams, M.D., the Executive Vice
President of Managed Care Services of FPC, and Karl A. Hardesty, the Senior Vice
President and Chief Financial Officer of FPC, will be entitled under the terms
of their existing employment agreements to receive $200,000 and $73,500,
respectively, if they voluntarily terminate their employment following the
Merger. PhyCor has also agreed to pay Donald B. Smallwood, the Executive Vice
President of Managed Care Services of FPC, and Kelly J. DeKeyser, the Executive
Vice President of Clinic Operations of FPC, $82,500 and $60,000, respectively,
upon their involuntary termination of employment. See "THE MERGER -- Interests
of Certain Persons in the Merger," "-- Certain Covenants" and "PROPOSAL TO
APPROVE CHANGE OF CONTROL PAYMENTS."
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 FPC, the Subsidiary and PhyCor; (b) by either FPC
or PhyCor if (i) the adoption of the Merger Agreement and the approval of the
transactions contemplated thereby by the holders of FPC Capital Stock shall not
have been obtained, (ii) the Merger shall have not been consummated by June 30,
1999, provided that the terminating party shall not have willfully and
materially breached its obligations under the Merger Agreement, (iii) a court or
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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 conditions to the obligations
of such party shall be satisfied and such obligations of the other party are not
capable of being satisfied by June 30, 1999; (c) by FPC if (i) the FPC Board,
prior to approval of the Merger by the stockholders of FPC, in the exercise of
its good faith judgment as to its fiduciary duties to its stockholders imposed
by law, determines not to recommend the Merger to FPC's stockholders or shall
have withdrawn such recommendation or approval, or recommended or endorsed any
Acquisition Transaction (as defined hereinafter); or (ii) the Closing Price of
the PhyCor Common Stock is equal to or less than $11.00 unless PhyCor agrees to
increase the Exchange Ratios such that the aggregate value of the shares of
PhyCor Common Stock to be received by FPC's stockholders is equal to $11.00
times the number of shares to be received by FPC's stockholders using the
current Exchange Ratios. See "THE MERGER -- Termination."
In the event that the Closing Price of the PhyCor Common Stock is less than
$11.00 per share, the FPC Board intends to reconsider its determination that the
Merger is in the best interests of its stockholders. It is anticipated that such
reconsideration would include an analysis of the various factors set forth
herein under "THE MERGER -- Reasons for the Merger; Recommendation of the Board
of Directors" in light of then existing circumstances and market conditions, the
actual Closing Price and any information FPC may have received from its
stockholders in connection with the solicitation of proxies for the Special
Meeting. If the FPC Board continues to believe that the Merger is in the best
interests of its stockholders, PhyCor would amend the Registration Statement of
which this Prospectus-Proxy Statement forms a part, and FPC would provide its
stockholders with notice of another special meeting to consider the Merger. If
the FPC Board does not continue to believe the Merger is in the best interests
of its stockholders, FPC would exercise its termination right subject to
PhyCor's electing to increase the Exchange Ratios as discussed above. See "THE
MERGER -- Termination."
Break-Up Fee, Third Party Bids. In the event that the Merger Agreement is
terminated as a result of the FPC Board, in the exercise of its fiduciary duties
under applicable law, approving, recommending or endorsing an Acquisition
Transaction and within one year after the effective date of such termination,
FPC is the subject of an Acquisition Transaction with any Person (as defined in
Sections 3(a)(9) and 13(d)(3) of the Exchange Act), then at the time of the
execution by FPC of a definitive agreement with respect thereto, FPC shall pay
PhyCor a break-up fee of 3% of the aggregate consideration that PhyCor would
have paid to FPC if the Merger had been consummated. Such break-up fee would
have equaled approximately $1.9 million based on the $18.31 closing sales price
of PhyCor Common Stock on June 24, 1998. See "THE MERGER -- Break-Up Fee."
Irrevocable Proxies. As a condition to PhyCor entering into the Merger
Agreement, Stephen A. George, M.D., Andrew B. Adams, M.D., Kelly J. DeKeyser,
Donald B. Smallwood, Karl A. Hardesty, (each an executive officer of FPC),
Michael A. Jutras, M.D. (a director of FPC), Sprout Capital VI, L.P., Sprout
Growth II, L.P., DLJ Capital Corporation and WCAS, who beneficially owned shares
representing approximately 81.55% of the votes attributable to outstanding FPC
Voting Stock and 96.81% of the outstanding shares of FPC Class A Preferred Stock
as of June 24, 1998, granted irrevocable proxies to Messrs. Hutts and Adams to
vote their respective shares of FPC Capital Stock (and any other shares of FPC
Capital Stock acquired after the date of the Merger Agreement, including shares
acquired pursuant to the exercise of any rights to purchase or otherwise acquire
shares) at the Special Meeting.
Accounting Treatment. It is intended, and a condition to the consummation
of the Merger, that the Merger be accounted for as a pooling of interests;
provided, however, that if PhyCor or Subsidiary take or omit to take any action
that prevents the Merger from so qualifying, PhyCor will remain obligated to
consummate the Merger. See "THE MERGER -- Accounting Treatment."
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"). If the
Merger so qualifies, in general, no gain or loss will be recognized by a holder
of FPC Capital Stock who exchanges such stock for PhyCor Common Stock pursuant
to the Merger except that
9
<PAGE> 18
(i) gain or loss may be recognized to the extent of cash received in lieu of
fractional shares of PhyCor Common Stock and (ii) gain may be recognized to the
extent that PhyCor pays, on behalf of such holder, any "transfer taxes" imposed
on such holder by virtue of the Merger. Each FPC stockholder's aggregate tax
basis in the PhyCor Common Stock received in the Merger will be equal to his or
her aggregate tax basis in the FPC Capital Stock surrendered in the Merger, and
his or her holding period for the PhyCor Common Stock will include the holding
period for the FPC Capital Stock surrendered. It is the opinion of Mayor, Day,
Caldwell & Keeton, L.L.P. that the Merger will be treated as a reorganization
within the meaning of Section 368(a) of the Code and that the federal income tax
consequences of the Merger to FPC's stockholders will be as described herein.
See "THE MERGER -- Federal Income Tax Consequences" for a more detailed
description of the above federal income tax matters.
Resale Restrictions. All shares of PhyCor Common Stock received by holders
of FPC 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 FPC 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 FPC 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 DCGL, a copy of which is included herein as Annex D. See "APPRAISAL
RIGHTS OF FPC 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 FPC 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 FPC anticipate that these shares will qualify for
listing. It is a condition to the obligation of PhyCor and FPC 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."
COMPARISON OF RIGHTS OF FPC STOCKHOLDERS AND PHYCOR SHAREHOLDERS
Upon consummation of the Merger, FPC stockholders will become PhyCor
shareholders. There are differences between the rights of FPC stockholders and
the rights of PhyCor shareholders as a result of certain differences between
Delaware and Tennessee law and between the governing instruments of FPC and
PhyCor. The material differences include the following: (i) directors of PhyCor
are divided into three classes and serve staggered terms while directors of FPC
do not; (ii) holders of 75% of the shares of FPC Voting Securities are parties
to a voting agreement with respect to the election of directors and, as a
result, can control the composition of the FPC Board; (iii) directors of FPC can
be removed with or without cause while PhyCor directors can be removed only for
cause; (iv) special meetings of stockholders may be called by holders of 25% of
the outstanding shares of capital stock of FPC as compared to 10% of the
outstanding shares of capital stock of PhyCor; and (v) the ability of a third
party to effect a change of control of PhyCor may be somewhat more restricted as
a result, in part, of differences in Delaware and Tennessee law and the fact
that PhyCor has adopted a shareholder rights plan while FPC has not. See
"COMPARISON OF RIGHTS OF FPC AND PHYCOR SHAREHOLDERS."
10
<PAGE> 19
MARKET AND MARKET PRICE
PhyCor Common Stock is listed under the symbol "PHYC" on the Nasdaq
National Market. The closing sales prices of PhyCor Common Stock as reported on
the Nasdaq National Market on December 19, 1997, the last business day preceding
public announcement of the Merger, was $26.88, and on June 24, 1998 was $18.31.
The chart below shows the value of each Exchange Ratio based on these closing
sales prices and on $11.00, which is the price below which FPC has termination
rights pursuant to the Merger Agreement.
<TABLE>
<CAPTION>
EXPENSE RATIOS
----------------------------------------------------
CLASS B CLASS C
CLASS A CONVERTIBLE CONVERTIBLE
COMMON STOCK PREFERRED PREFERRED PREFERRED
------------ --------- ----------- -----------
<S> <C> <C> <C> <C>
Stock Price of:
$26.88
Single........................................ $ 5.57 $102.97 $214.43 $55.69
Aggregate(1).................................. 33.4 20.6 23.6 0.7
$18.31
Single........................................ 3.79 70.15 146.09 37.94
Aggregate(1).................................. 22.7 14.0 16.1 0.5
$11.00
Single........................................ 2.28 42.14 87.75 22.79
Aggregate(1).................................. 13.7 8.4 9.7 0.3
</TABLE>
- ---------------
(1) Dollars in millions.
FPC is a privately-held Delaware corporation. There has been no public
trading market in the securities of FPC and, therefore, there is no historical
per share price for FPC Capital Stock. See "MARKET PRICE DATA."
Holders of FPC Capital Stock are advised to obtain current market
quotations for PhyCor Common Stock. 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 FPC 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 FPC 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
FPC and the related notes thereto contained elsewhere herein or in documents
incorporated herein by reference. See "INCORPORATION OF CERTAIN INFORMATION BY
REFERENCE."
Neither PhyCor nor FPC has paid any cash dividends since inception. 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
11
<PAGE> 20
indicated, nor is it necessarily indicative of the combined results of
operations in future periods or future combined financial position.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
------------------------ ---------------
1995 1996 1997 1997 1998
------ ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net earnings (loss) per common share -- diluted:
PhyCor historical................................... $ 0.41 $ 0.60 $ 0.05 $ 0.19 $(0.12)
PhyCor pro forma combined........................... 0.31 0.46 (0.03) 0.18 (0.12)
FPC historical(1)................................... (1.93) (2.74) (1.07) (0.14) (0.16)
FPC pro forma equivalent(2)......................... 0.06 0.09 (0.01) (0.04) (0.02)
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
DECEMBER 31, 1997 (UNAUDITED)
----------------- --------------
<S> <C> <C>
Book value (deficit) per common share:
PhyCor historical......................................... $11.01 $11.11
PhyCor pro forma combined................................. 10.81 10.91
FPC historical(1)......................................... (2.93) (2.86)
FPC pro forma equivalent(2)............................... 2.22 2.24
</TABLE>
- ---------------
(1) FPC calculations for the year ended December 31, 1997 and three month
periods ended March 31, 1997 and March 31, 1998 are unaudited.
(2) FPC equivalent pro forma per share amounts are calculated by multiplying the
respective PhyCor pro forma combined per share amounts by the Common Stock
Exchange Ratio.
12
<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, 1993 through 1997. The consolidated financial
statements as of and for the years ended December 31, 1993 through 1997 have
been audited by KPMG Peat Marwick LLP. The selected consolidated financial
information as of and for the three month periods ended March 31, 1997 and 1998
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 statement of
operations data for the interim periods are not necessary 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>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------------- -------------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- ---------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Net revenue.......... $167,381 $242,485 $441,596 $766,325 $1,119,594 $250,652 $322,695
Net operating
expenses........... 155,580 223,355 395,452 684,593 1,078,429 222,631 323,845
-------- -------- -------- -------- ---------- -------- --------
Earnings (loss) from
operations......... 11,801 19,130 46,144 81,732 41,165 28,021 (1,105)
Interest expense..... 3,569 2,629 3,414 12,114 20,184 6,159 7,522
-------- -------- -------- -------- ---------- -------- --------
Earnings (loss)
before income taxes
and minority
interests.......... 8,232 16,501 42,730 69,618 20,981 22,915 (7,927)
Income tax (benefit)
expense and
minority
interests.......... 1,092 4,826 20,856 33,238 17,772 10,608 (429)
-------- -------- -------- -------- ---------- -------- --------
Net earnings
(loss)........... $ 7,140(1) $ 11,675(1) $ 21,874 $ 36,380 $ 3,209 $ 12,307 $ (7,498)
======== ======== ======== ======== ========== ======== ========
Earnings (loss) per
share(3)
Basic.............. $ 0.31(1) $ 0.35 $ 0.45 $ 0.67 $ 0.05 $ .21 $ (0.12)
======== ======== ======== ======== ========== ======== ========
Diluted............ $ 0.27 $ 0.32 $ 0.41 $ 0.60 $ 0.05(3) $ 0.19 $ (0.12)(3)
======== ======== ======== ======== ========== ======== ========
Diluted-before
nonrecurring
charge............. $ 0.27 $ 0.32 $ 0.41 $ 0.60 $ 0.85(3) $ 0.19 $ 0.24(3)
======== ======== ======== ======== ========== ======== ========
Weighted average
shares
outstanding(4)
Basic.............. 23,348 33,240 48,817 54,608 62,899 58,396 64,928
Diluted............ 26,571 43,427 53,662 61,096 66,934 63,549 64,928
</TABLE>
13
<PAGE> 22
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------- MARCH 31,
1993 1994 1995 1996 1997 1998
-------- -------- -------- ---------- ---------- -----------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............... $ 46,927 $ 80,533 $111,420 $ 182,553 $ 203,301 $ 199,824
Total assets........ 171,174 351,385 643,586 1,118,581 1,562,776 1,667,218
Long-term debt, less current
portion..................... 69,014 94,653 140,633 444,207 501,107 536,457
Total stockholders'
equity............ 70,005 184,125 388,822 451,703 710,488 737,011
</TABLE>
- ---------------
(1) Excluding the effect of the utilization of a net operating loss carryforward
to reduce income taxes in 1993 and 1994, net earnings and earnings per
share-diluted would have been $5.1 million, or $0.19 per share, and $10.2
million, or $0.28 per share, in such years.
(2) Excluding the effect of the nonrecurring pre-tax charge to earnings relating
to revaluation of assets of seven of the Company's affiliated clinics.
(3) Effective April 1, 1998, the Company adopted a maximum 25 years as the
useful life for amortization of its intangible assets. If these shorter
amortization periods had been applied as of January 1, 1997, the Company's
diluted earnings per share and diluted earnings per share before the
non-recurring charge would have been $(0.05) and $0.75 respectively, for
1997 and ($0.15) and $0.21, respectively for the three months ended March
31, 1998.
(4) Adjusted for the three-for-two stock splits effected in June 1996, September
1995 and December 1994.
14
<PAGE> 23
SELECTED CONSOLIDATED FINANCIAL DATA -- FPC
The selected consolidated financial data presented below is for the years
ended December 31, 1993, 1994, 1995, 1996 and 1997 and for the three months
ended March 31, 1997 and 1998. Information for the years ended December 31,
1993, 1994, 1995 and 1996 has been audited by Ernst & Young LLP. The selected
consolidated financial data presented for the year ended December 31, 1997 and
the three month periods ended March 31, 1997 and 1998 and as of December 31,
1997 and March 31, 1998 is derived from unaudited consolidated financial
statements that, in the opinion of FPC, reflect all adjustments necessary for a
fair presentation of the results of operations of FPC for the period. The
consolidated statements of operations data for 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 "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements, and related notes and other financial
information included elsewhere herein.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------------------------ -----------------
1993 1994 1995 1996(1) 1997(2) 1997 1998
------- -------- -------- -------- ----------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue from owned FPC
Group Practices.............. $ -- $ 3,744 $19,718 $32,169 $ 25,701 $ 8,959 $ 9,153
Total revenue from Managed
Group Practices.............. -- -- -- 5,422 52,267 10,655 11,573
------ ------- ------- ------- -------- ------- -------
Total Revenue........ -- 3,744 19,718 37,591 77,968 19,614 20,726
Less amounts retained by
managed groups............... -- -- -- (2,355) (15,610) (4,290) (4,074)
------ ------- ------- ------- -------- ------- -------
Net Revenue.................... -- 3,744 19,718 95,296 62,358 15,324 16,652
Operating costs and expenses:
Cost of Medical Service...... -- 2,264 12,189 17,375 17,357 4,284 4,641
Clinic operations............ -- 2,303 9,042 19,558 41,626 9,813 10,637
Corporate, general and
administrative............ 474 2,172 3,181 4,211 5,559 1,181 1,233
Depreciation and
amortization.............. 1 160 675 1,469 2,396 581 618
Loss on impairment of
long-term assets.......... -- -- -- 884 -- -- --
------ ------- ------- ------- -------- ------- -------
Total operating costs
and expenses....... 474 6,899 25,037 43,497 66,938 15,859 17,124
Other (income) expense......... 5 (250) (293) (721) (457) (200) 117
------ ------- ------- ------- -------- ------- -------
Net loss....................... $ (480) $(2,905) $(5,026) $(7,540) $ (4,123) $ (335) $ (589)
Cumulative dividends and
accretion on Class A
Preferred Stock.............. -- -- (109) (1,007) (1,595) (389) (324)
------ ------- ------- ------- -------- ------- -------
Net loss attributable to common
stockholders................. $ (480) $(2,905) $(5,135) $(8,547) $ (5,718) $ (724) $ (913)
====== ======= ======= ======= ======== ======= =======
Net loss per common share...... $(2.00) $ (1.25) $ (1.93) $ (2.74) $ (1.07) $ (.14) $ (.16)
------ ------- ------- ------- -------- ------- -------
Weighted average shares
outstanding.................. 240 2,321 2,655 3,126 5,331 5,071 5,672
</TABLE>
15
<PAGE> 24
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------- DECEMBER 31, MARCH 31,
1993 1994 1995 1996 1997 1998
------ ------- ------- -------- ------------ ---------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital...................... $2,486 $ 4,072 $ 1,610 $ 3,437 $ 4,714 $ 4,820
Total assets............... 2,844 10,615 12,676 32,252 34,392 34,680
Long-term debt....................... -- 458 2,482 7,315 9,274 9,975
Total common stockholders'
deficit.................. (448) (3,317) (8,309) (12,458) (15,644) (16,229)
</TABLE>
- ---------------
(1) Includes the operations of Doctors Walk-In Clinic from June 1, 1996,
Riverbend Physicians & Surgeons from August 1, 1996 and Physician Capital
Partners from December 1, 1996.
(2) Includes Eastside Physicians from August 1, 1997.
16
<PAGE> 25
RISK FACTORS
In addition to the other information in this Prospectus-Proxy Statement,
the following should be considered carefully by holders of FPC 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 included herein or
incorporated herein by reference. In particular, forward-looking statements
including, but not limited to, those regarding the integration of the operations
of FPC, 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 full benefits of a business combination of PhyCor and FPC will require
the integration of each company's operational management. There can be no
assurance that such actions will be successfully accomplished as rapidly as
currently expected, if at all. Moreover, although the primary purpose of such
actions will be to realize direct cost savings and other operating efficiencies,
synergies and benefits, which PhyCor estimates will total approximately $4.0
million annually, there can be no assurance of the extent to which or whether
such cost savings, efficiencies, synergies and benefits will be achieved.
Acquisitions of PPM companies and physician practices entail the risks that
such acquisitions will fail to perform in accordance with expectations and that
PhyCor will be unable to successfully integrate such acquired businesses and
physician practices into its operations. The profitability of PhyCor is largely
dependent on its ability to develop and integrate networks of physicians, to
manage and control costs and to realize economies of scale from acquisitions of
PPM companies and physician practices. The histories, geographic locations,
business models, including emphasis on managed care and fee-for-service, and
cultures of acquired PPM businesses and physician practices may differ from
PhyCor's past experiences. Dedicating management resources to the integration
process may detract attention from the day-to-day business of PhyCor. Moreover,
the integration of the acquired businesses and physician practices may require
substantial capital and financial investments. PhyCor estimates that the costs
of integrating the business operations will total approximately $6.4 million.
These, together with other risks described herein, could result in the
incurrence of substantial costs in connection with acquisitions that may never
achieve revenue and profitability levels comparable to PhyCor's existing
physician networks, which could have a material adverse effect on the operating
results and financial condition of PhyCor.
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.
17
<PAGE> 26
ADDITIONAL FINANCINGS
PhyCor's multi-specialty medical clinic acquisition and expansion program
and IPA development program 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 the 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
Common Stock or convertible 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 and FPC, 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 and FPC. 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 because of the loss of revenue from
such agreements and the loss of any funds previously loaned by PhyCor to such
clinics to cover the clinics expenses. 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.
Two of the clinics which are parties to service agreements with PhyCor and
certain of the group practices managed by FPC operate in overlapping geographic
areas. Each PhyCor service agreement restricts PhyCor's ability to provide
management services to other clinics within the geographic area served. If
PhyCor violates these provisions, the clinics have the right to terminate the
existing service agreement. PhyCor intends to seek the waiver and consent of
both of the clinics with a right to terminate prior to consummation of the
Merger; however, there can be no assurance that the clinics will consent or
grant a waiver to enable PhyCor to provide management services to a competing
FPC clinic. Failure to obtain such consents or the termination of service
agreements by the clinics affiliated with PhyCor is not expected to have a
material adverse effect on the operations of PhyCor.
DEPENDENCE ON OPERATING RESULTS OF AFFILIATED CLINICS
Substantially all of PhyCor's revenue is derived from the service fees it
receives pursuant to PhyCor's service agreements with its affiliated clinics.
The service fees are typically based on a percentage of the affiliated clinics'
operating income plus reimbursement of clinic expenses. Accordingly, if the
operating results of PhyCor's affiliated clinics are adversely affected,
PhyCor's revenue will also be adversely affected. Additionally, if PhyCor fails
to assist its affiliated clinics in achieving enhanced operating efficiencies as
a result of its services, the affiliated clinics may seek to terminate their
service agreements with PhyCor. Such terminations could have a material adverse
effect on PhyCor's operating results.
18
<PAGE> 27
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. 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 IPA management fees are based, in part, upon a share of the
remaining portion, if any, of a capitated amount of revenue. Some agreements
with payors also contain "shared risk" provisions under which the Company and
IPA can earn additional compensation and may be required to bear a portion of
any loss in connection with such shared risk provisions 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 collected by the
IPA. 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 and FPC 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, FPC 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
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 healthcare
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. At the state level, all state laws
restrict the unlicensed practice of medicine, and many states also prohibit the
splitting or sharing of fees with nonphysician entities and the enforcement of
noncompetition agreements against physicians. Many states also prohibit the
"corporate practice of medicine" by an
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unlicensed corporation or other nonphysician entity that employs physicians.
Florida and Georgia, the states in which FPC subsidiaries directly employ
physicians, do not, however, currently enforce any "corporate practice of
medicine" doctrine and direct employment of physicians by nonphysician entities
is permissible. In those states that do prohibit the corporate practice of
medicine, neither PhyCor nor FPC employ physicians. Instead PhyCor and FPC
manage physician groups, and the physicians continue to be employed at the group
level by professional associations or corporations, which are specifically
authorized under most state laws to employ physicians. Furthermore, most state
fee-splitting laws provide that it is a violation only if a physician shares
fees with a referral source. Neither PhyCor nor FPC is a referral source for
their managed groups, and therefore the fee-splitting laws in most states should
not restrict the payment of a management fee by the physician groups to PhyCor.
In Florida, however, the Board of Medicine has interpreted the Florida fee-
splitting law very broadly so as to arguably include the payment of any
percentage-based management fee, even to a management company that does not
refer patients to the managed group. That particular Board of Medicine opinion
is being appealed. Because of the structure of the relationships of PhyCor with
its affiliated physician groups and managed IPAs, and because of the recent
broad fee-splitting interpretation in the State of Florida, there can be no
assurance that review of PhyCor's or FPC's business by courts or other
regulatory authorities will not result in determinations that could adversely
affect the financial condition or results of operations of PhyCor.
If PhyCor or FPC were found to have violated the corporate practice of
medicine or fee-splitting statutes, possible consequences could include
revocation or suspension of the physicians' license, resulting in reduced
revenue to PhyCor. Courts could also refuse to uphold the service agreements
between PhyCor and its managed physicians on the grounds that PhyCor was
engaging in the unlicensed practice of medicine and that therefore its contracts
were invalid.
On the federal level, 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 other federal 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
other federal or state health programs. This law applies to non-health care
providers as well as providers. The Office of Inspector General ("OIG") of the
Department of Health and Human Services ("DHHA") has released an advisory
opinion (OIG Advisory Opinion No. 98-4) stating that a percentage based
management arrangement between a physician practice management company and a
physician group could violate the federal anti-kickback law if one purpose of
the management fee is intended to compensate the practice management company for
its efforts to "arrange for" referrals for the managed group. 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.
The PhyCor and FPC arrangements have been carefully structured so that the
physician groups being managed fit within the definition of "group practice",
and all referrals from those physicians to ancillary centers are structured to
fit within an applicable exception to federal law. In addition, PhyCor does not
make or influence or arrange for referrals to its managed or employed
physicians, and the compensation received by PhyCor is not directly related to
any referral levels between the parties, nor is it intended in any way to
compensate PhyCor for arranging for referrals to its affiliated physician
groups. Nevertheless, 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 or FPC's business by courts or healthcare, tax 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 and FPC'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.
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INCREASED GOVERNMENT SCRUTINY OF HEALTH CARE ARRANGEMENTS
There is increasing scrutiny by law enforcement authorities, the OIG, 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 FPC 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.
RISKS ASSOCIATED WITH PRIMECARE INTERNATIONAL, INC. ("PCI") TRANSACTION
In May 1998, PhyCor consummated its merger with PCI, a management company
that manages several IPAs and physician practices in California and also owns
and operates a hospital and other ancillary providers in California. In
addition, PrimeCare Medical Network, Inc. ("PrimeCare Network"), a subsidiary of
PCI, has applied for a Knox-Keene license from the California Department of
Corporations. Because hospitals are subject to extensive regulation on both the
federal and state levels, and Knox-Keene licenses are subject to extensive
regulation on the state level, PhyCor's operations in California could come
under increased governmental scrutiny. Moreover, although the Knox-Keene
application has been filed and is expected to be issued in the near future,
there can be no assurances that it will be issued. The failure of PrimeCare
Network to obtain a Knox-Keene license could have a material adverse effect on
its ability to enter into certain managed care and other payor contracts,
resulting in lower revenue to PhyCor.
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
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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 resulting in increased
costs to the managed IPAs, and corresponding reduced revenue to PhyCor. 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 that would pose additional liabilities
on HMOs for patient malpractice, thereby increasing costs to HMOs, which would
result in correspondingly lower revenue to PhyCor. 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 and FPC affiliate and the physicians
participating in networks developed and managed by PhyCor and FPC 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 and FPC typically
are indemnified under their service agreements for claims against the physician
groups, maintain liability insurance for themselves and negotiate liability
insurance for the physicians affiliated with their 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, PhyCor or FPC, 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 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. None of the protective measures discussed above are triggered by the
Merger.
RISKS TO NON-AFFILIATED FPC STOCKHOLDERS; INTERESTS OF CERTAIN PERSONS IN THE
MERGER
Certain beneficial owners of shares representing an aggregate of 81.55% of
the voting power of the FPC Voting Stock and 96.81% of the outstanding shares of
FPC Class A 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 Change of Control payments. As a result, approval thereof by
the FPC stockholders is assured. Non-affiliated stockholders of FPC who conclude
that the terms of the transaction or the consideration payable in connection
therewith is not adequate cannot exercise their votes to prevent approval of the
Merger Agreement or the Merger and must resort solely to the procedural and
substantive provisions
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under Delaware law for the perfection of appraisal rights and payment of fair
value for their shares. See "THE SPECIAL MEETING -- Votes Required" and
"-- Solicitation of Proxies."
Certain executive officers and directors of FPC have interests in the
Merger that are in addition to and potentially in conflict with the interests of
the holders of FPC Capital Stock generally. Certain of these persons
participated in the negotiation of the Merger Agreement. Specifically, the
executive officers and directors of FPC own options to purchase 222,500 shares
of FPC Class A Common Stock that will become immediately exercisable as a result
of the Merger. In addition, certain of such persons will be entitled to benefits
under their existing employment agreements or new consulting and severance
arrangements. See "THE MERGER -- Interests of Certain Persons in the Merger."
At the time of execution of the Merger Agreement, PhyCor, FPC, and Dr.
George entered into the Consulting Agreement, which was amended and restated on
January 29, 1998 and on May 18, 1998. During the term of such agreement (which
commences at the Effective Time and continues for 30 months thereafter), Dr.
George agrees to provide consulting services in connection with acquisitions by
PhyCor and FPC following the Merger and in connection with the consummation of
the transactions contemplated by the Merger Agreement. In consideration of such
services, PhyCor and FPC have agreed to pay Dr. George a consulting fee of
$986,663, $563,750 of which is payable at the Effective Time, and $312,500 and
$110,413 of which is payable on the first and second anniversaries of the
Effective Time, respectively. In the event of a change in control of PhyCor, all
of such payments would become immediately due and payable. In addition, Dr.
George is eligible to participate, at PhyCor's expense, during the term of the
Consulting Agreement and thereafter at his own expense, in certain of PhyCor's
employee benefit programs and is entitled to reimbursement of expenses incurred
by him in performing his services under the agreement. In addition, Dr. George
will receive continuation of certain health and welfare benefits at the expense
of FPC for the term of the Consulting Agreement and, thereafter, at his own
expense. Dr. George is also entitled to receive (i) reimbursement for up to
$50,000 per year for his expenses in retaining secretarial services, plus the
provision of certain health and welfare benefits for such secretary, (ii)
provision of up to 1,500 square feet of office space, including office equipment
and furnishings, and (iii) a fully vested option to purchase 25,000 shares of
PhyCor Common Stock at the fair market value of the Common Stock on the
effective date of the Merger. Under the Consulting Agreement, Dr. George agrees
not to compete with PhyCor or FPC during the term of the agreement and for six
months thereafter or for so long as he is entitled to receive any payments
thereunder and to maintain the confidentiality of such companies' non-public
information.
Dr. George, Andrew B. Adams, M.D. (the Executive Vice President of Medical
Affairs of FPC) and Karl A. Hardesty (the Senior Vice President and Chief
Financial Officer of FPC) are each parties to employment agreements with FPC
that provide them with certain benefits in the event of termination of their
employment upon or after the "change in control" that will occur upon
consummation of the Merger. Under Dr. George's employment agreement, FPC will be
required to pay Dr. George an amount equal to one year's base salary ($300,000)
in 12 equal monthly installments following the Effective Time. Dr. George will
also be entitled to continuation of his existing car allowance and to payments
for costs associated with continuing medical education and professional fees
incurred by him during the 12 month period following the Effective Time. Dr.
Adams' and Mr. Hardesty's employment agreements provide for severance pay in an
amount equal to one year ($200,000 in the case of Dr. Adams) and six months
($73,500 in the case of Mr. Hardesty) of their respective base salaries in the
event either of such persons voluntarily terminates their employment following
the Merger. In addition to these severance payments, PhyCor has agreed to make
severance payments to the two other executive officers, Donald B. Smallwood and
Kelly J. DeKeyser, of $82,500 and $60,000, respectively, and other members of
FPC's corporate management and staff upon their involuntary termination.
Assuming all such persons were terminated, these payments would aggregate $1.3
million (including the payments required under Dr. George's, Dr. Adams' and Mr.
Hardesty's employment agreements). Additionally, PhyCor has agreed to pay
bonuses to certain FPC employees who agree to continue their employment for
specified periods following the Merger. See "PROPOSAL TO APPROVE CHANGE OF
CONTROL PAYMENTS."
The Merger Agreement also includes certain provisions that may be deemed to
benefit its directors and executive officers, including provisions for the
continuation of the indemnification of, and director and officer
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<PAGE> 32
insurance for, such persons and for the continuation of benefits under specified
FPC employee benefit and compensation plans.
RISKS OF FPC FAILURE TO EXERCISE TERMINATION RIGHTS
The Merger Agreement may be terminated by FPC if the Closing Price of the
PhyCor Common Stock is equal to or less than $11.00 unless PhyCor agrees to
increase the Exchange Ratios such that the aggregate value of the shares of
PhyCor Common Stock to be received by FPC's stockholders is equal to $11.00
times the number of shares to be received by FPC's stockholders is equal to
$11.00 times the number of shares to be received by FPC's stockholders using the
current Exchange Ratios. In the event that the Closing Price of the PhyCor
Common Stock is less than $11.00 per share and the FPC Board determines not to
exercise FPC's right to terminate the Merger Agreement, FPC's stockholders who
have not exercised dissenters' rights of appraisal could receive shares of
PhyCor Common Stock having a market value at the Effective Time of less than
$11.00 per share. The trading prices for the PhyCor Common Stock will fluctuate,
and there can be no assurance regarding the trading prices of such stock after
the Effective Time. See "THE MERGER -- Termination."
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THE SPECIAL MEETING
GENERAL
This Prospectus-Proxy Statement is being furnished to holders of FPC
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 (i) a
proposal to approve and adopt the Merger Agreement and (ii) a proposal to
approve the Change of Control Payments 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 FPC
Capital Stock is accompanied by a form of Proxy to be used at the Special
Meeting.
This Prospectus-Proxy Statement is also furnished to holders of FPC 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 corporate offices of FPC located at
3200 Windy Hill Road, Suite 400 West, Atlanta, Georgia 30339, on July 24, 1998
at 9:00 a.m., Eastern time.
RECORD DATE; QUORUM
The FPC Board has fixed the close of business on the Record Date for the
determination of holders of FPC 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 each of the FPC Voting Stock (voting together as a
class) and the FPC Class A Preferred Stock entitled to vote at the Special
Meeting will constitute a quorum at the Special Meeting. Abstentions (but not
broker non-votes) will be counted for purposes of determining the presence of a
quorum at the Special Meeting.
VOTES REQUIRED
As of June 24, 1998, there were outstanding and entitled to vote 4,221,068
shares of FPC Class A Common Stock (held of record by 120 persons), 200,000
shares of FPC Class A Preferred Stock (held of record by 15 persons), 110,000
shares of FPC Class B Convertible Preferred Stock (held of record by 25 persons)
and 12,000 shares of FPC Class C Convertible Preferred Stock (held of record by
one person). As of such date, the directors and executive officers of FPC and
their affiliates beneficially owned an aggregate of 3,264,545 shares of FPC
Capital Stock (excluding shares issuable upon exercise of options and
convertible securities into FPC Class A Common Stock), representing
approximately 83.56% of the votes attributable to shares of FPC Voting Stock
outstanding on such date and 100% of the outstanding shares of FPC Class A
Preferred Stock outstanding on such date. Additionally, Stephen A. George, M.D.,
Andrew B. Adams, M.D., Kelly J. DeKeyser, Donald B. Smallwood, Karl A. Hardesty
(each an executive officer of FPC), Michael A. Jutras, M.D. (a director of FPC),
Sprout Capital VI, L.P., Sprout Growth II, L.P., DLJ Capital Corporation and
WCAS have granted to Joseph C. Hutts, Chairman, President and Chief Executive
Officer of PhyCor, and Steven R. Adams, Vice President of PhyCor, an irrevocable
proxy to vote all shares of FPC Capital Stock collectively owned by them at the
Special Meeting. Messrs. Hutts and Adams intend to vote such shares in favor of
approval and adoption of the Merger Agreement and in favor of approval of the
Change of Control Payments. As of the Record Date, neither PhyCor nor its
affiliates beneficially owned any shares of FPC Capital Stock. See "THE
MERGER--Interest of Certain Persons in the Merger" and "PROPOSAL TO APPROVE
CHANGE OF CONTROL PAYMENTS."
Merger Agreement. Approval and adoption of the Merger Agreement requires
the affirmative vote of a majority of the outstanding shares of FPC Voting Stock
(voting together as a class, with holders of the FPC Class B Convertible
Preferred Stock and FPC Class C Convertible Preferred Stock being entitled to
cast 38.504 and 10 votes per share, respectively, which is the same number of
votes as they would be entitled to cast had they converted such securities into
FPC Class A Common Stock) and the affirmative vote of 66 2/3% of the outstanding
shares of FPC Class A Preferred Stock, at the Special Meeting. Messrs. Hutts and
Adams intend to vote the shares for which they have received irrevocable proxies
for the adoption of the Merger
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Agreement. By the unanimous vote of the members of the FPC Board at a special
meeting held on June 10, 1998, the FPC Board determined that the proposed
Merger, and the terms and conditions of the Merger Agreement, were in the best
interests of FPC and its stockholders. The Merger Agreement was unanimously
adopted and approved by the FPC Board, which also unanimously recommended that
the holders of FPC 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
FPC stockholders, the Merger Agreement may be terminated by PhyCor or FPC in
accordance with its terms. See "THE MERGER--Termination."
Change of Control Payments. Approval of the Change of Control Payments
requires the affirmative vote of the holders of 75%, excluding those shares held
by Dr. George, of the outstanding FPC Voting Stock (voting together as a class,
with holders of the FPC Class B Convertible Preferred Stock and Class C
Convertible Preferred Stock being entitled to cast the same number of votes as
they would be entitled to cast had they converted such securities into Class A
Common Stock). Messrs. Hutts and Adams intend to vote the shares for which they
have received irrevocable proxies for the Change of Control Payments. See
"PROPOSAL TO APPROVE CHANGE OF CONTROL PAYMENTS."
VOTING AND REVOCATION OF PROXIES
The shares of FPC 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 FPC VOTING STOCK REPRESENTED BY THE PROXY WILL BE VOTED
FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT. 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 with the Secretary of FPC of an instrument revoking
it or of a duly executed Proxy bearing a later date, 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, the Change of Control
Payments or other matters constitute affirmative votes. Abstentions and broker
non-votes will, therefore, have the same effect as votes against approval of the
Merger Agreement and the Change of Control Payments at the Special Meeting.
The FPC Board 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. Discretionary authority will not be used to vote in favor of
adjournment of the Special Meeting. Votes against approval of the Merger
Agreement and the Change of Control Payments will not be voted for adjournment
of the Special Meeting.
SOLICITATION OF PROXIES
In addition to solicitation by mail, directors, officers and employees of
FPC, who will not be specifically compensated for such services, may solicit
proxies from the holders of FPC Capital Stock, personally or by telephone or
telegram or other form of communication. Nominees, fiduciaries and other
custodians will be requested to forward soliciting materials to beneficial
owners and will be reimbursed for their reasonable expenses incurred in doing
so.
FPC will bear its own expenses in connection with the solicitation of
proxies for its Special Meeting, except that PhyCor and FPC each will pay
one-half of the expenses incurred in printing this Prospectus-Proxy Statement.
See "THE MERGER -- Expenses."
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 provisions 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 FPC by PhyCor will be effected by means of the merger of
Subsidiary with and into FPC, with FPC being the Surviving Corporation and a
wholly-owned subsidiary of PhyCor. The Subsidiary's Certificate of
Incorporation, as amended and existing at the Effective Time, and the Bylaws of
Subsidiary in effect at the Effective Time, will govern the Surviving
Corporation until amended or repealed in accordance with applicable law.
At the Effective Time, (i) each outstanding share of FPC Class A Common
Stock will be converted into the right to receive 0.207179 shares of PhyCor
Common Stock, (ii) each outstanding share of FPC Class A Preferred Stock will be
converted into the right to receive 3.830839 shares of PhyCor Common Stock,
(iii) each outstanding share of FPC Class B Convertible Preferred Stock will be
converted into the right to receive 7.977189 shares of PhyCor Common Stock and
(iv) each outstanding share of FPC Class C Convertible Preferred Stock will be
converted into the right to receive 2.071790 shares of PhyCor Common Stock. The
Exchange Ratios assume the exercise as of or prior to the Effective Time of (i)
options to purchase 172,584 shares of FPC Class A Common Stock, 76,084 of which
are currently vested or are expected to vest prior to the Effective Time and
96,500 of which will become vested at the Effective Time as a result of the
Merger and (ii) options to purchase 53,200 shares of FPC Class A Common Stock,
which options will not be vested at the Effective Time or vest as a result of
the Merger. The Exchange Ratios do not assume the exercise as of or prior to the
Effective Time of 428,095 options that are currently vested or are expected to
vest prior to the Effective Time or 242,750 options which will become vested at
the Effective Time as a result of the Merger since the exercise prices of these
options (as adjusted to give effect to the Exchange Ratios) are, in each case,
higher than the $17.94 closing sales price of the PhyCor Common Stock on May 18,
1998 (the date of the first amendment to the Merger Agreement).
As of the Effective Time, all outstanding shares of FPC Capital Stock will
automatically be canceled and retired and will cease to exist, and each holder
of a certificate representing such shares will 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 FPC Capital Stock that is owned by FPC or any subsidiary of FPC will
automatically be canceled and retired and will cease to exist, and no
consideration will be delivered in exchange therefor.
The Merger Agreement provides that, at the Effective Time, all options to
purchase shares of FPC Class A Common Stock that are outstanding at such time,
whether or not then vested or exercisable, shall be converted into and become
rights with respect to PhyCor Common Stock, and PhyCor will assume each such
option in accordance with the terms of any stock option plan under which it was
issued, or, at the election of PhyCor, PhyCor will issue options under PhyCor's
stock option plans in substitution thereof. The number of shares of PhyCor
Common Stock subject to each stock option assumed, or substituted therefor, and
the exercise prices for such shares shall be adjusted to reflect the Exchange
Ratios. All warrants to purchase shares of FPC Capital Stock which are
outstanding at the Effective Time shall become warrants to purchase shares of
PhyCor Common Stock, and PhyCor shall assume all such warrants (with exercise
prices adjusted in accordance with the Exchange Ratios). Further, FPC is
contractually obligated to deliver an aggregate of 1,547,200 shares of its Class
A Common Stock to physicians of certain Managed Group Practices at specified
future dates, and it is anticipated that such rights will become rights to
receive a number of shares of PhyCor Common Stock determined by giving effect to
the Common Stock Exchange Ratio.
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BACKGROUND OF THE MERGER
Over the past few years, changes in the health care environment, including
the growth of managed care, have caused increased pressure on participants in
the PPM industry to grow and consolidate in order to maintain critical mass and
achieve economies of scale. PhyCor has pursued growth primarily through
development of its managed physician practices and, from time to time, has
evaluated other strategic acquisition opportunities.
In July 1997, the FPC Board created a sub-committee (the "Sub-Committee")
comprised of Stephen A. George, M.D., Chairman, Chief Executive Officer and
President of FPC, and three other members of the FPC Board to explore the
various options available to FPC to enhance stockholder value. The other members
of the Sub-Committee were Patrick J. Welsh, Andrew M. Paul and Paul Queally,
each of whom is a general partner of Welsh, Carson, Anderson & Stowe, which is
an affiliate of WCAS. WCAS owns 70% of the outstanding shares of FPC Class A
Preferred Stock, approximately 64% of the outstanding shares of FPC Class B
Convertible Preferred Stock and approximately 28% of the outstanding shares of
FPC Class A Common Stock, and WCAS previously has extended credit to FPC and has
exercised 29,309 warrants and subsequently purchased shares of FPC Class A
Common Stock in connection therewith. Michael Jutras, M.D., the only member of
the FPC Board who was not a member of the Sub-Committee, is the Medical Director
of one of the Managed Group Practices and owns approximately 1.5% of the
outstanding shares of FPC Class A Common Stock.
The key directives of the Sub-Committee included: (i) assisting management
and FPC's financial advisors in determining likely interested and qualified
potential buyers for a possible affiliation; (ii) reviewing acquisition
proposals from any potential buyers; (iii) consulting with senior management and
FPC's financial and legal advisors on strategy and negotiations; and (iv)
approving key decisions prior to final approval by the FPC Board.
On August 5, 1997, FPC engaged DLJ to advise FPC regarding potential
strategic opportunities to strengthen FPC's capital structure, to enable FPC to
grow its business and to enhance FPC stockholder value. DLJ discussed the
possibility of an initial public offering of the corporation's stock as well as
the sale of FPC. DLJ presented financial analyses comparing the potential values
that could be obtained for the FPC stockholders through an affiliation with a
larger company and those obtainable through an initial public offering of FPC
Class A Common Stock. The FPC Board and FPC management concluded that a merger
with an established public company would provide a greater opportunity than an
initial public offering for FPC to achieve its potential growth and for FPC
stockholders to obtain liquidity and enhanced stockholder value. After a review
of the companies active in the PPM industry, the FPC Board authorized DLJ to
approach a selected group of public companies (the "Potential Buyers"),
including PhyCor, to determine their interest in a possible transaction with
FPC.
During August 1997, DLJ prepared, with FPC's cooperation, a confidential
information memorandum ("CIM") containing information regarding FPC's
organizational and legal structure, growth history, current operations, and
historical and projected financial information to circulate to the Potential
Buyers. In early September 1997, after discussions with the Sub-Committee and
FPC senior management, DLJ called the representatives of the Potential Buyers to
determine their interest in pursuing a combination with FPC. In September 1997,
five Potential Buyers (all of which were large public companies), including
PhyCor, expressed interest and were sent copies of the CIM after executing
confidentiality agreements.
During September 1997, representatives from four Potential Buyers,
including PhyCor (which participated in a meeting held on September 18, 1997),
and their respective financial advisors, met at the FPC corporate offices in
Atlanta, Georgia with the FPC senior management personnel and their financial
advisors. During these meetings, the FPC senior management team along with their
financial advisors presented FPC's history, current financial position,
operating philosophy and the potential benefits of a merger with FPC to each
Potential Buyer. The Potential Buyers had the opportunity to ask questions about
the CIM and to discuss the benefits of a merger and other relevant issues
regarding a potential transaction. During these meetings, all four Potential
Buyers were asked to submit Preliminary Indications of Interest outlining
preliminary terms of a proposed transaction and to complete their preliminary
due diligence procedures during the next several
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weeks. In addition, the Potential Buyers were provided with a proposed draft
merger agreement prepared by FPC's legal advisors, asked to make their proposed
written comments to the document and submit the document with their Preliminary
Indications of Interest. Thereafter, Preliminary Indications of Interest were
received from three Potential Buyers.
Between September 27, 1997 and October 10, 1997 the Sub-Committee, FPC
senior management and representatives from FPC's financial advisors reviewed the
Preliminary Indications of Interest and evaluated the merits of each Potential
Buyer's proposal. DLJ was instructed to contact the three remaining Potential
Buyers, including PhyCor, to clarify the proposed terms and related assumptions
of each Preliminary Indication of Interest and to indicate that all final
proposals should be sent to FPC by October 24, 1997. During October 1997, the
three remaining Potential Buyers that attended management presentations in
Atlanta, including PhyCor, sent company representatives along with
representatives from their respective financial and legal advisors to the FPC
corporate offices in Atlanta, Georgia to conduct financial and legal due
diligence procedures. Two Potential Buyers, including PhyCor, submitted revised
proposals on October 24, 1997.
From October 25, 1997 through November 20, 1997, DLJ, at the direction of
the Sub-Committee, continued to negotiate the terms of the revised proposals
with PhyCor and the other Potential Buyer. On November 21, 1997, PhyCor
submitted a proposal that contemplated the issuance of 3,500,000 shares of
PhyCor Common Stock in exchange for all the outstanding FPC Capital Stock and
the assumption of FPC's net debt (which at such time was expected to be
approximately $9.6 million at the Effective Time of the Merger). PhyCor's
proposal also requested that FPC representatives and their financial and legal
advisors meet with PhyCor representatives and their financial and legal advisors
on November 25, 1997 and that FPC enter into exclusive negotiations with PhyCor.
On November 24, 1997, a telephonic meeting of the Sub-Committee was
conducted, with representatives of DLJ participating. The purpose of the meeting
was to review the offers that had been received from the two Potential Buyers,
review the status of the negotiations with the Potential Buyers and discuss
recent events in the PPM industry, including the proposed merger of PhyCor and
MedPartners, Inc. ("MedPartners") announced on October 29, 1997, and the effect
of the announcement of that transaction on the stock prices of the companies in
the PPM sector as a whole. After discussion and review, the Sub-Committee
concluded that the best course of action would be to pursue a potential
transaction with PhyCor. This decision was based on the view that the offer
received from PhyCor was superior to that of the other Potential Bidder in terms
of the market value at such time of the consideration offered as well as the
following factors:
(i) The Sub-Committee believed that, among the bidders, PhyCor's
physician and management culture was most compatible with and similar to
FPC's physician and management culture. This factor was significant to the
Sub-Committee because it believed the long-term interests of FPC's
physicians, including practice stability, growth, access to capital and
predominance in their respective markets, could best be addressed by a
company with similar physician and management culture. The Sub-Committee
believed addressing the long-term interests of FPC's physicians was in the
best interest of FPC's stockholders.
(ii) In the opinion of the Sub-Committee, PhyCor's basic model of
operations was most closely aligned with FPC's model, permitting more rapid
integration of the two companies.
(iii) The Sub-Committee recognized that PhyCor has a long history of
successfully managing its physician groups. It was the Sub-Committee's view
that the health care industry will continue to experience change in the
near and mid-term and that a company which has proven that it can
successfully navigate change would be more likely to maintain relationships
with physicians and continue to grow.
(iv) The Sub-Committee believed, among the bidders, PhyCor's Common
Stock had the most underlying stability and, based on industry research
reports, that PhyCor may have the best prospects.
On November 25, 1997, representatives from FPC and PhyCor and their
respective financial and legal advisors met in Atlanta, Georgia and executed an
exclusive negotiating agreement which was to expire on
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December 16, 1997. The agreement provided that, during the term of the
agreement, (i) FPC would negotiate a definitive agreement for PhyCor to acquire
the FPC Capital Stock, (ii) FPC would deal exclusively with PhyCor and (iii) FPC
would terminate all discussions with other parties. During the next three weeks,
representatives of PhyCor and FPC completed their respective financial and legal
due diligence and continued to negotiate the terms of the proposed transaction.
On the morning of December 19, 1997, the FPC Board met to consider approval
of the Merger Agreement. DLJ delivered its oral fairness opinion to the FPC
Board, subsequently confirmed in writing (and later superseded as described
below), that as of such date and based upon and subject to certain matters
stated therein, the common stock exchange ratio set forth in such agreement was
fair to the holders of FPC Class A Common Stock and FPC Class B Common Stock
(together, the "FPC Common Stock") from a financial point of view (the
"Pre-Amendment Opinion"). DLJ also presented and summarized for the FPC Board
certain financial analyses performed by DLJ in arriving at its opinion. FPC did
not seek, and DLJ did not deliver, an opinion with respect to the consideration
to be paid in the Merger to holders of FPC Capital Stock other than the holders
of FPC Common Stock. FPC's outside legal advisors with respect to the Merger
reviewed the legal terms of the Merger and advised the FPC Board of its
fiduciary duties in considering approval of the proposed transaction. After a
full discussion of all of the relevant issues and upon consideration of the
factors described below, the FPC Board concluded that the Merger Agreement (as
then in effect) was fair to, and in the best interests of, FPC and its
stockholders and unanimously approved the Merger Agreement. To the extent this
conclusion was based on the Pre-Amendment Opinion and on terms of the Merger
Agreement that were later amended, the conclusion was superseded by the FPC
Board's subsequent determination of fairness, which is described below. As a
result of their relationship with FPC or its affiliates, none of such directors
is independent. The parties executed the definitive Merger Agreement shortly
after the conclusion of the FPC Board Meeting on December 19, 1997.
During the last week of April 1998, representatives of PhyCor, including
Mr. Adams, contacted Dr. George to discuss certain concerns relating to the
business and operating performance of FPC. Mr. Adams asked Dr. George to
consider a reduction in the consideration to be paid by PhyCor in the Merger.
Representatives of PhyCor and FPC continued to have discussions concerning the
terms of the Merger over the course of the week. On May 4, 1998, Mr. Hutts,
Chief Executive Officer of PhyCor, called Russ Carson, a principal of WCAS, to
discuss amending the terms of the Merger. Over the course of the next two to
three days, PhyCor and FPC agreed to a revised proposal that (i) provided for
the issuance of approximately 2,910,330 shares of PhyCor Common Stock in
exchange for all the outstanding FPC Capital Stock and the assumption of FPC's
net debt, (ii) removed several of the existing conditions to the Merger, (iii)
removed several of the provisions allowing for early termination of the Merger
Agreement, (iv) required PhyCor through Subsidiary to provide management
services to FPC until the consummation of the Merger at the fair market value of
such services and (v) required both parties to execute a release of any existing
claims against the other related to the Merger (collectively, these terms are
referred to as the "Revised Proposal"). On May 12, 1998, Mr. Richard Wright,
Executive Vice President, Operations of PhyCor, and Dr. George had several
discussions to clarify the terms of the Revised Proposal. Representatives of
PhyCor and FPC then finalized the amendment to the Merger Agreement, including
the calculation of the revised Exchange Ratios, the management agreement and the
release.
During the afternoon of May 15, 1998, the FPC Board met to consider the
Revised Proposal. Dr. George addressed the Board and explained the events of the
previous weeks and the terms of the Revised Proposal. FPC's legal counsel
further clarified the terms of the Revised Proposal, including the revised
conditions and termination provisions. DLJ delivered its oral fairness opinion
to the FPC Board, subsequently confirmed in writing (and later superseded as
described below), that as of such date and based upon and subject to certain
matters stated therein, the Common Stock Exchange Ratio was fair to the holders
of FPC Class A Common Stock from a financial point of view (the "May 15
Opinion"). DLJ also presented and summarized for the FPC Board certain financial
analyses performed by DLJ in arriving at its opinion. FPC did not seek, and DLJ
did not deliver, an opinion with respect to the consideration to be paid in the
Merger to holders of FPC Capital Stock other than the holders of FPC Class A
Common Stock. While the FPC Board did not believe that PhyCor's concerns
relating to the business and operating performance of FPC were justified, it
believed that,
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in light of the expense and delay associated with a dispute with PhyCor
regarding these matters, DLJ's fairness opinion and market conditions generally,
the Exchange Ratios reflected in the amendment to the Merger were fair to the
holders of FPC Capital Stock from a financial point of view. Based on this
belief and after a full discussion of all other relevant issues and upon
consideration of the factors described below, the FPC Board concluded that the
Merger Agreement remained fair to, and in the best interest of, FPC and its
stockholders and unanimously approved the amendment to the Merger Agreement and
the proposed management agreement with the Subsidiary. To the extent this
conclusion was based on the May 15 Opinion and on the terms of the Merger
Agreement that were later amended, the conclusion was superseded by the FPC
Board's determination of fairness on June 10, 1998, which is described below. As
a result of their relationship with FPC or its affiliates, none of such
directors is independent. The parties executed the amendment to the Merger
Agreement and the management agreement between FPC and the Subsidiary on May 18,
1998.
During the afternoon of June 10, 1998, the FPC Board met to consider
reducing the price at which FPC would reconsider whether the Merger was in the
best interests of its stockholders from $16.00 to $11.00 in light of the market
conditions and recent performance of the PhyCor Common Stock. DLJ delivered its
oral fairness opinion to the FPC Board, subsequently confirmed in writing, that
as of such date and based upon and subject to certain matters stated therein the
Common Stock Exchange Ratio was fair to the holders of FPC Class A Common Stock
from a financial point of view. See "-- Opinion of Donaldson, Lufkin & Jenrette
Securities Corporation." DLJ also presented and summarized for the FPC Board
certain financial analyses performed by DLJ in arriving at its opinion. FPC did
not seek, and DLJ did not deliver, an opinion with respect to the consideration
to be paid in the Merger to holders of FPC Capital Stock other than the holders
of FPC Class A Common Stock. See "-- Opinion of Donaldson, Lufkin & Jenrette
Securities Corporation." FPC did not seek, and DLJ did not deliver, an opinion
with respect to the consideration to be paid in the Merger to holders of FPC
Capital Stock other than the holders of FPC Class A Common Stock. See
"-- Opinion of Donaldson, Lufkin & Jenrette Securities Corporation." The FPC
Board, considering the DLJ fairness opinion, market conditions and the factors
described below, determined that the Merger Agreement remained fair to, and in
the best interests of, FPC and its stockholders. The FPC Board unanimously
approved the second amendment to the Merger Agreement. As a result of their
relationship with FPC or its affiliates, none of such directors is independent.
The parties executed the second amendment to the Merger Agreement on June 10,
1998.
REASONS FOR THE MERGER; RECOMMENDATIONS OF THE BOARD OF DIRECTORS
PhyCor. PhyCor believes that FPC's Managed Group Practices and Group
Practices are located in markets which offer significant growth opportunities,
including Fort Worth/Dallas, Texas, Tampa/St. Petersburg Florida, New York, New
York and St. Louis, Missouri. In certain of these markets, PhyCor has existing
operations that are complementary to FPC's groups, and PhyCor believes it may be
able to achieve certain operating synergies totaling approximately $4.0 million
annually from corporate and regional overhead reductions.
FPC. On December 19, 1997 and May 15, 1998 and June 10, 1998 the FPC
Board, after consultation with its management and financial and legal advisors,
unanimously determined that the terms of the Merger Agreement and the
transactions contemplated thereby were in the best interests of FPC and its
stockholders. The FPC Board focused on the effect of the Merger on its
stockholders and determined, among other things, that the consideration to be
paid in the Merger was fair to the holders of FPC Capital Stock from a financial
point of view (which, as to the FPC Class A Common Stock only, was based, in
part on an opinion of DLJ delivered to the FPC Board (see "-- Opinion of
Donaldson, Lufkin & Jenrette Securities Corporation")) and provided all classes
of stockholders with liquidity for their holdings. In determining whether the
Merger was in the best interests of FPC and its stockholders, the FPC Board also
considered the effect of the Merger on FPC in light of current market
conditions, the relative strengths and weaknesses of FPC and PhyCor, the
increased market strength, the similarity of vision, strategy and organizational
structure, and the potential for savings and increased profits of the combined
companies.
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Although none of the directors of FPC is independent, none of such members
is affiliated with DLJ and, other than Dr. George, none has an interest in the
Merger other than as an affiliate of WCAS (in the cases of Messrs. Welch, Paul
and Queally) or as the medical director of a Managed Group Practice (in the case
of Dr. Jutras). While WCAS owns a substantial percentage of the outstanding
shares of FPC Class A Preferred Stock and FPC Class B Convertible Preferred
Stock, the Exchange Ratios for each class of FPC Capital Stock were determined
by FPC's Chief Financial Officer after discussion with DLJ, FPC's legal advisors
and representatives of WCAS in light of the relative liquidation and dividend
preferences of each class of FPC Capital Stock and the initial estimated
Effective Time of the Merger, as more fully described below. The FPC Board
considered the following factors, without limitation and without assigning
relative weights thereto (which represent all of the material factors considered
by the FPC Board):
(i) MERGER CONSIDERATION. Of primary concern to the FPC Board in
considering the Merger was the fair treatment of its stockholders as a
whole. The FPC Board sought advice from its financial and legal advisors as
to the customary and appropriate methods for determining an exchange ratio
for the various classes of FPC Capital Stock which include FPC Class A and
B Common Stock (the 872,460 shares of FPC Class B Common Stock were
converted to FPC Class A Common Stock on January 20, 1998), and FPC
Preferred Stock. The Exchange Ratios for the various classes of FPC stock
were calculated as set forth below. FPC used the same methodology to
calculate the Exchange Ratios as it used to calculate the exchange ratios
in effect prior to the amendment of the Merger Agreement. The prior
methodology was based on an assumed effective time of March 15, 1998 and on
the closing sales price of PhyCor Common Stock at the time the number of
shares of PhyCor Common Stock initially to be delivered in the Merger was
agreed to. If FPC had revised the methodology to assume a later Effective
Time and a closing sales price of the PhyCor Common Stock as of the date of
amendment of the Merger Agreement, the Exchange Ratios for FPC Common
Stock, Class B Preferred Stock and Class C Preferred Stock would have been
lower and the Exchange Ratio for the FPC Class A Preferred Stock would have
been higher.
FPC Class A Preferred Stock. The holders of FPC Class A Preferred Stock
have a priority claim over the other classes of Preferred and Common Stock. In a
merger, the holders of FPC Class A Preferred Stock are entitled to receive the
redemption value of $100 per share in cash plus accrued dividends. Because of
pooling of interest rules and because all of the FPC Class A Preferred Stock is
owned by persons who also own significant amounts of FPC Class A Common Stock
and Class B Convertible Preferred Stock, it was determined that the holders of
FPC Class A Preferred Stock must receive PhyCor Common Stock in exchange for
their FPC Class A Preferred Stock. To determine the FPC Class A Preferred Stock
Exchange Ratio, the following formula was applied:
1. The Effective Time was estimated to be March 15, 1998.
2. The FPC Class A Preferred Stock liquidation amount as of March 15,
1998 was calculated to be $23,035,079. Calculated as follows: (200,000
Class A Preferred Shares X $100 per share liquidation value) + (accrued
dividends of $3,035,070 through March 15, 1998).
3. To determine the number of shares of PhyCor Common Stock that the
holders of FPC Class A Preferred Stock would receive, the liquidation
amount was divided by the $25.00 closing sales price of PhyCor Common Stock
on November 21, 1997. November 21, 1997 is the date the final PhyCor offer
letter was received. The calculation is as follows:
$23,035,079/$25.00 = 921,403 shares of PhyCor Common Stock.
4. The amendment to the Merger Agreement reduced the number of PhyCor
shares from 3,500,000 to 2,910,330. This represents a reduction of 16.8477%
in the number of shares to be allocated to all classes of stockholders.
This reduction was applied to the number of shares of PhyCor Common Stock
previously allocated to the holders of Class A Preferred Stock. This
resulted in a reduction of 155,235 shares for a total of 766,148 PhyCor
shares calculated as follows: 921,403 - 155,235 = 766,168.
5. To determine the FPC Class A Preferred Stock Exchange Ratio, the
number of shares of PhyCor Common Stock allocated to the holders of FPC
Class A Preferred Stock as determined above were divided by the number of
FPC Class A Preferred shares outstanding. The calculation of the exchange
ratio is as follows: 766,168 PhyCor shares / 200,000 FPC Class A Common
Stock = 3.830839.
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FPC Class B and C Preferred Stock and FPC Class A and B Common Stock. The
FPC Class B and Class C Preferred shares and the FPC Class B Common shares are
convertible into FPC Class A Common shares at the following conversion rates:
FPC Class B Preferred Stock -- The holders of Class B Preferred Stock
are entitled to convert their shares into Class A Common Stock at the rate
of 38.50385 shares of Class A Common Stock for each share of Class B
Preferred Stock held.
FPC Class C Preferred Stock -- The holders of FPC Class C Preferred
Stock are entitled to convert their shares into FPC Class A Common Stock at
the rate of 10 shares of Class A Common Stock for each share of Class C
Preferred Stock held.
Class B Common Stock -- The holders of FPC Class B Common Stock are
entitled to convert their shares into Class A Common Stock at the rate of
one share of Class A Common Stock for each share of Class B Common Stock
held.
The Exchange Ratios for the FPC Class B Preferred Stock, Class C Preferred
Stock and the Class A Common Stock were determined as follows.
1. To determine the FPC Class B Preferred Stock Exchange Ratio and the
FPC Class C Preferred Stock Exchange Ratio, the number of shares of FPC
Class A Common Stock that would be issued for each class of preferred stock
upon conversion to FPC Class A Common Stock was considered. The 110,000
shares of FPC Class B Preferred Stock issued and outstanding are
convertible into 4,235,424 shares of FPC Class A Common Stock. The 12,000
shares of FPC Class C Preferred Stock are convertible into 120,000 shares
of FPC Class A Common Stock.
2. As of May 18, 1998, there were 4,047,198 shares of FPC Class A
Common Stock issued and outstanding.
3. As of May 18, 1998, there were 1,627,200 shares of FPC Class A
Common Stock that are to be issued and delivered at future dates.
4. As of May 18, 1998, there were unexercised options to purchase
277,634 shares of FPC Class A Common Stock at exercise prices less than
$4.00 per share.
5. As of May 18, 1998, the estimated number of warrants to purchase
shares of FPC Class A Common Stock to be earned in connection with the
Subordinated Debt was 41,869 shares.
6. The total number of shares of FPC Class A Common Stock estimated to
be outstanding at the Effective Date is 10,349,325, giving effect to the
conversion of the FPC Class B Common Stock, and Class B and C Preferred
Stock estimated to be outstanding, deliverable at future dates and
available under certain option or warrant agreements that are expected to
be exercised at the Effective Date.
7. The shares of PhyCor Common Stock to be allocated to the other
classes of FPC Capital Stock is calculated as follows: 2,910,330 total
PhyCor shares less 766,168 shares allocated to the FPC Class A Preferred
Stock equals 2,144,162 shares of PhyCor Common Stock to be allocated to the
other classes of FPC Capital Stock.
8. To determine the Exchange Ratio for the FPC Class A and B Common
Stock, the 2,144,162 remaining PhyCor shares available for the other
classes of FPC Capital Stock were divided by the total common stock
equivalents from paragraph 6 above of 10,349,325. The results are as
follows: 2,144,162/10,349,325 = .207179.
9. To determine the FPC Class B Preferred Stock Exchange Ratio, the
FPC Class A Common Exchange Ratio of .207179 was multiplied by the FPC
Class B conversion ratio of 38.50385. The result is 7.977189.
10. To determine the FPC Class C Preferred Stock Exchange Ratio the
FPC Class A Common Exchange Ratio of .207179 was multiplied by the FPC
Class C conversion ratio of 10. The result is 2.071790.
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(ii) COMPETITIVE POSITION OF FPC AND INDUSTRY CONSOLIDATION. A
significant objective of the FPC Board was to strengthen FPC's competitive
position and enhance its reputation among physicians and payors.
Additionally, the FPC Board was concerned with the increasingly competitive
pressures within the managed care sector of the health care industry and
the resulting trend towards consolidation among payors, providers and PPMs.
The FPC Board determined that FPC would be in a stronger competitive
position as part of a larger entity.
(iii) BENEFITS OF THE MERGER WITH PHYCOR. The FPC Board focused on
the specific benefits to be obtained in combining with PhyCor. The FPC
Board determined that the combined entity would be able to operate more
effectively and profitably based on size, geographic scope and expertise.
In addition, the FPC Board believed that there would be considerable cost
savings, synergies and economies of scale achieved by merging the
companies. In addition, FPC would benefit from access to national managed
care payor contracts, same-market integration of primary and specialty
referral opportunities and same-market momentum and growth. The FPC Board
also concluded that PhyCor offered the FPC stockholders the best long-term
value based on PhyCor's strong historical operational performance and
growth, its current growth plans, its strong reputation among the
investment community, providers, and payors, and its ability to generate
long-term earnings growth.
(iv) TERMS OF THE MERGER. The terms and conditions of the proposed
Merger, including the parties reciprocal representations, warranties and
covenants, conditions to FPC's obligations and the circumstances under
which FPC would be able to terminate the Merger Agreement were considered
by the FPC Board to be fair. In particular, the FPC Board believed that its
ability to terminate the Merger Agreement if the Closing Price of the
PhyCor Common Stock was below $11.00 or in the event of another superior,
bona fide proposal preserved the FPC Board's ability to reconsider, if
necessary, the fairness of the transaction. The FPC Board did not believe
the termination fee that would be payable in the event it terminated the
Merger Agreement to pursue another proposal would impede another bona fide,
superior proposal, and it believed such fee was consistent with fees
payable in other similar transactions.
(v) INTERESTS OF CERTAIN PERSONS. The FPC Board realized that certain
members of management had certain interests in the Merger in addition to
the interests of FPC stockholders generally. These interests arise from,
among other things, Dr. George's consulting agreement, certain employment
agreements, management retention programs, and provisions of the Merger
Agreement providing for the continuation of certain indemnification rights
and benefit plans. The FPC Board believed that these payments and
inducements to management (i) acted to align the interests of management
with those of FPC in negotiating and effectuating the Merger, (ii) provided
the necessary incentives for the key members of FPC's management team to
continue with FPC and PhyCor after the Merger is consummated and (iii)
after consultation with its advisors, were reasonable based on the size of
FPC and PhyCor and industry standards. See "Interests of Certain Persons in
the Merger."
(vi) POTENTIAL MERGER RISKS. In analyzing a combination with PhyCor,
in addition to the matters set forth under "RISK FACTORS," the FPC Board
considered the following: (a) the ability of PhyCor to maintain its current
growth strategy, growth rate and price/earnings multiple; (b) the effect of
PhyCor's then contemplated merger with MedPartners, whether or not
consummated; and (c) the amount of PhyCor's indebtedness in relation to its
stockholders' equity. In addition, the FPC Board reviewed the employment
agreements of the executive officers of FPC, the terms of the Consulting
Agreement to be entered into by Dr. George and other employee benefit
provisions described below under "-- Interests of Certain Persons in the
Merger." The FPC Board was aware of the risks associated with the Merger
and the interests of management and determined that, despite such factors,
FPC would be better positioned to fulfill its business plan as a combined
entity.
(vii) POTENTIAL RISKS TO NON-AFFILIATED STOCKHOLDERS. The FPC Board
considered the potential benefits and risks of the transaction to the
non-affiliated stockholders. The non-affiliated stockholders own
approximately 16.44% of FPC Voting Stock. The non-affiliated stockholders
of FPC consist primarily of (a) physicians employed by FPC Group Practices
and physicians employed by Managed Group Practices (representing 9.18% of
the FPC Voting Stock); (b) non-physician employees of FPC
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and its wholly owned subsidiaries (representing 2.60% of the FPC Voting
Stock); (c) a healthcare system (representing 3.26% of the FPC Voting
Stock); and (d) a venture capital firm (representing 1.40% of the FPC
Voting Stock). While evaluating the effect on physician and employee
stockholders, the FPC Board considered the physician practice management
reputation, philosophy, corporate culture and operating practices of
PhyCor. In addition, the FPC Board considered the benefits of expanded
employment opportunities for the physician stockholders and non-physician
stockholders. Although certain non-affiliated employee stockholders in the
FPC corporate offices are not expected to be retained permanently by
PhyCor, the FPC Board was of the view that the proposed corporate severance
policy would provide sufficient payments to allow these employees to seek
new employment opportunities. In total, the FPC Board determined that these
factors were predominately positive and did not pose any particular risk to
this stockholder group. The healthcare system stockholder is the primary
admitting hospital system for one of the managed physician groups. The FPC
Board believed that a medical group affiliated with PhyCor should benefit
the healthcare system because PhyCor can help the group grow at a faster
rate. This growth could cause increased admissions, HMO enrollment growth
and higher utilization of the healthcare systems facilities. The Board also
believed that the Merger will benefit the venture capital stockholder
(Pacific Capital White Pines Management) due to the liquidity available
from a publicly traded security.
With the exception of factors (v) and (vi), the FPC Board generally viewed
each of the foregoing factors as supporting its approval and recommendation of
the Merger Agreement. Factors (v) and (vi) were considered neutral by the FPC
Board in its decision to recommend approval of the Merger Agreement. The Board
generally viewed PhyCor, among all the potential bidders, as having the least
potential merger risks.
STOCKHOLDERS SHOULD BE AWARE THAT CERTAIN MEMBERS OF THE FPC BOARD AND
MANAGEMENT HAVE CERTAIN INTERESTS IN THE MERGER THAT ARE IN ADDITION TO THOSE OF
OTHER STOCKHOLDERS OF FPC. SEE "-- INTERESTS OF CERTAIN PERSONS IN THE MERGER."
OPINION OF DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
On August 5, 1997, FPC engaged DLJ as its exclusive financial advisor with
respect to advising FPC as to various strategic alternatives. On June 10, 1998,
DLJ delivered its written opinion (the "DLJ Opinion") to the FPC Board to the
effect that, as of such date, and based upon and subject to the assumptions,
limitations and qualifications set forth in such opinion, the Common Stock
Exchange Ratio was fair to the holders of FPC Class A Common Stock from a
financial point of view.
THE FULL TEXT OF THE DLJ OPINION IS SET FORTH AS ANNEX B TO THIS
PROSPECTUS-PROXY STATEMENT AND SHOULD BE READ CAREFULLY AND IN ITS ENTIRETY FOR
INFORMATION AS TO THE ASSUMPTIONS MADE, PROCEDURES FOLLOWED, OTHER MATTERS
CONSIDERED AND LIMITS OF THE REVIEW BY DLJ.
The DLJ Opinion was prepared for the FPC Board and addresses only the
fairness of the Common Stock Exchange Ratio to the holders of FPC Class A Common
Stock from a financial point of view and does not constitute a recommendation to
any stockholder of FPC as to how such stockholder should vote on the proposed
transaction. The DLJ Opinion does not constitute an opinion as to the price at
which PhyCor Common Stock will actually trade at any time. DLJ was not requested
by the FPC Board to make, nor did DLJ make, any recommendation as to the Common
Stock Exchange Ratio to be received by the holders of FPC Class A Common Stock,
which determination was reached through negotiations between FPC and PhyCor, in
which negotiations DLJ advised FPC. No restrictions or limitations were imposed
upon DLJ with respect to the investigations made or procedures followed by DLJ
in rendering its opinion. FPC did not seek, and DLJ did not deliver, an opinion
with respect to the consideration to be paid in the Merger to holders of FPC
Capital Stock, other than the holders of FPC Class A Common Stock.
In arriving at its opinion, DLJ reviewed the Merger Agreement dated
December 19, 1997, the first amendment dated May 18, 1998 to such Merger
Agreement and a draft dated June 10, 1998 of the second amendment to such Merger
Agreement. DLJ also reviewed financial and other information that was publicly
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available or furnished to it by FPC or PhyCor, including information provided
during discussions with their respective managements. Included in the
information provided during discussions with the management of FPC were certain
financial projections for FPC for the period beginning January 1, 1998 and
ending December 31, 2002 prepared by the management of FPC. In addition, DLJ
compared certain financial and securities data of FPC and PhyCor with that of
various other companies whose securities are traded in public markets, reviewed
the historical stock prices and trading volumes of the PhyCor Common Stock,
reviewed prices paid in certain other business combinations and conducted such
other financial studies, analyses and investigations as DLJ deemed appropriate
for purposes of rendering its opinion.
In rendering its opinion, DLJ relied upon and assumed the accuracy and
completeness of all of the financial and other information that was available to
it from public sources, that was provided to it by FPC or PhyCor or their
respective representatives, or that was otherwise reviewed by DLJ. With respect
to the financial projections supplied to DLJ, DLJ assumed that they were
reasonably prepared on the basis reflecting the best currently available
estimates and judgments of the management of FPC as to the future operating and
financial performance of FPC. DLJ assumed no responsibility for making an
independent evaluation of any assets or liabilities or for making any
independent verification of any of the information reviewed by it. DLJ relied as
to certain legal matters on advice of counsel to FPC. For purposes of its
opinion, DLJ assumed that the Merger would be accounted for as a pooling of
interests.
The DLJ Opinion is necessarily based on economic, market, financial and
other conditions as they exist on, and on information made available to DLJ as
of, the date of its opinion. DLJ does not have any obligation to update, revise
or reaffirm its opinion.
The following is a summary of the analyses performed by DLJ in connection
with the preparation of the DLJ Opinion. All analyses discussed below assume the
Common Stock Exchange Ratio of 0.205067 shares of PhyCor Common Stock per share
of FPC Common Stock. The analyses performed by DLJ in connection with the
preparation of the DLJ Opinion are substantially identical to those used in
connection with the preparation of the Pre-Amendment Opinion and the May 15
Opinion, although each such opinion was based on economic, market, financial and
other conditions as they existed on, and on information made available to DLJ as
of, the respective dates of the opinions. Since the date of the Pre-Amendment
Opinion, the historical and projected financial results (which form the basis of
a number of DLJ's analyses) for FPC, PhyCor and certain other selected companies
changed. In particular, projected financial results declined significantly for
FPC and certain other selected companies. Additionally, the trading prices for
certain companies used by DLJ in several of its analyses declined, and in some
cases such declines were significant. In that regard, the closing prices of the
common stock of the Selected Companies referred to below were, on average,
approximately 40% lower on the date of the DLJ Opinion than on the date of the
Pre-Amendment Opinion. These changes in historical and projected financial
results, combined with the significant declines in the trading prices of certain
Selected Companies, among other factors, all demonstrate the significant changes
in facts and circumstances between the dates of DLJ's opinions. DLJ reached its
June 10 fairness conclusion based on the then-current facts and circumstances
and did not make an express comparison of the results of its analyses on the
dates of its opinions in its presentation to the FPC Board. For additional
information concerning developments resulting in the execution of the June 10,
1998 amendment to the Merger Agreement, see "-- Background of the Merger" and
"-- Reasons for the Merger; Recommendations of the Board of Directors."
Selected Public Company Analysis. To provide contextual data and
comparative market information, DLJ analyzed the operating performance of FPC
relative to certain companies whose securities are publicly traded and that were
deemed by DLJ to be reasonably similar to FPC, including FPA Medical Management,
Inc. ("FPA"); MedPartners; PHP Healthcare Corp. ("PHP"); PhyMatrix Corp.
("PhyMatrix"); PhyCor; and ProMedCo Management Co. ("ProMedCo") (collectively,
the "Selected Companies"). Historical financial information used in connection
with the ratios provided below with respect to the Selected Companies was
derived from the most recent financial statements publicly available for each
company as of June 5, 1998.
DLJ examined certain publicly available financial data of the Selected
Companies, including (i) enterprise value (defined as the market value of common
equity plus book value of total debt and preferred
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stock less cash) as a multiple of latest 12 months ("LTM") revenues, LTM EBITDA
(defined as earnings before interest, taxes, depreciation and amortization but
not including non-recurring items) and LTM EBIT (defined as earnings before
interest and taxes but not including non-recurring items), and (ii) price to
earnings ratios based on LTM earnings per share ("EPS") and estimated calendar
year 1998 and calendar year 1999 EPS. DLJ noted that as of June 5, 1998, the
Selected Companies were trading at implied enterprise value and price multiples,
as the case may be, in (i) a range of 0.4x to 2.4x (with an average, excluding
high and low values (the "Average"), of 0.9x) LTM revenues; (ii) a range of 4.1x
to 16.2x (with an Average of 7.1x) LTM EBITDA; (iii) a range of 5.4x to 21.2x
(with an Average of 9.8x) LTM EBIT; (iv) a range of 4.9x to 19.8x (with an
Average of 13.5x) LTM EPS; (v) a range of 10.0x to 17.3x (with an Average of
12.8x) estimated calendar year 1998 EPS and (vi) a range of 3.9x to 14.0x (with
an Average of 10.8x) estimated calendar year 1999 EPS. The calendar year 1998
and 1999 EPS estimates for the Selected Companies were based on estimates
provided by IBES, Inc. ("IBES"). Based on the Common Stock Exchange Ratio and
assuming a $16.19 price for PhyCor Common Stock, the Merger consideration
represented a multiple of 0.7x FPC's LTM revenue and 26.5x FPC's estimated
calendar year 1999 EPS (fully taxed, before all preferred dividends) as
projected by FPC's management prior to the consideration of any potential
synergies. Other multiples were not meaningful since FPC's LTM EBITDA, LTM EBIT,
LTM EPS and estimated calendar year 1998 EPS as projected by FPC's management
were negative or, in the case of estimated calendar year 1998 EPS, were
negligible.
No company utilized in the selected public company analysis is identical to
FPC. Accordingly, an analysis of the results of the foregoing necessarily
involves complex considerations and judgments concerning differences in
financial and operating characteristics of the Selected Companies and FPC and
other factors that could affect the public trading value of the Selected
Companies. Mathematical analysis such as determining the average is not in
itself a meaningful method of using selected company data.
Selected Transaction Analysis. DLJ performed an analysis of FPC based on
selected merger and acquisition transactions in the PPM industry set forth below
(the "Selected Transactions"). Multiples reviewed in the selected transaction
analysis included (i) aggregate transaction value (defined as the equity value
of the offer plus book value of total debt and preferred stock less cash) as a
multiple of (when available) LTM revenues, LTM EBITDA and LTM EBIT, and (ii)
aggregate purchase price (defined as the equity value of the offer) as a
multiple of (when available) LTM EPS and estimated calendar year EPS for the
first and second calendar years ("CY+1" and "CY+2", respectively) immediately
ended subsequent to the announcement of each transaction. For all analyses
involving the Selected Transactions, LTM refers to the latest 12 month period
prior to the announcement of each such transaction for which financial
statements were publicly available. The Selected Transactions were comprised of
the following 13 transactions announced during the period 1994 to 1997
(Target/Acquiror): MedPartners/Talbert Medical Management Holdings Corporation;
Laidlaw, Inc./EmCare Holdings, Inc.; MedPartners/InPhyNet Medical Management,
Inc.; FPA/AHI Healthcare Systems, Inc.; Physician Resource Group, Inc./American
Ophthalmic, Inc.; FPA/ Foundation Health Systems, Inc.; FPA/Sterling Healthcare
Group, Inc.; MedPartners/Caremark International, Inc.; MedPartners/Pacific
Physicians Services, Inc.; Equivision, Inc./Colkitt Oncology Group, Inc.;
Physician Resource Group/Eyecorp, Inc.; MedPartners/Mullikin, Inc. and Caremark
International, Inc./ Friendly Hills Healthcare Network. DLJ noted that the
implied aggregate transaction value and aggregate purchase price multiples, as
the case may be, for these transactions were in (i) a range of 0.3x to 5.6x
(with an Average of 1.6x) LTM revenues; (ii) a range of 10.2x to 29.2x (with an
Average of 16.5x) LTM EBITDA; (iii) a range of 14.5x to 47.8x (with an Average
of 20.8x) LTM EBIT; (iv) a range of 23.0x to 47.3x (with an Average of 28.9x)
LTM EPS; (v) a range of 21.3x to 31.1x (with an Average of 23.6x) estimated CY+1
EPS; and (vi) a range of 15.8x to 24.6x (with an Average of 19.5x) estimated
CY+2 EPS. Based on the Common Stock Exchange Ratio and assuming a $16.19 price
for PhyCor Common Stock, the merger consideration represented a multiple of 0.7x
LTM revenue and 26.5x estimated calendar year 1999 EPS (fully taxed, before all
preferred dividends) as projected by FPC's management prior to the consideration
of any potential synergies. Other multiples were not meaningful since FPC's LTM
EBITDA, LTM EBIT, LTM EPS and estimated calendar year 1998 EPS as projected by
FPC's management were negative or, in the case of estimated calendar year 1998
EPS, were negligible.
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No transaction utilized in the selected transaction analysis is identical
to the Merger. Accordingly, an analysis of the results of the foregoing
necessarily involves complex considerations and judgments concerning differences
in financial and operating characteristics of the target companies in the
Selected Transactions and FPC and other factors that could affect the
acquisition value of the target companies in the Selected Transactions.
Mathematical analysis such as determining the average is not in itself a
meaningful method of using selected transaction data.
Discounted Cash Flow Analysis. DLJ performed a discounted cash flow
("DCF") analysis for the five-year period commencing January 1, 1998 and ending
December 31, 2002 based on the projected stand-alone unlevered free cash flows
of FPC provided by FPC's management. Unlevered free cash flows were calculated
as the after-tax operating earnings of FPC, plus depreciation and amortization
and other non-cash items, plus (or minus) net changes in working capital, minus
capital expenditures. DLJ calculated terminal values by applying a range of
estimated EBITDA multiples of 7.0x to 11.0x to the projected EBITDA of FPC in
2002. The unlevered free cash flows and terminal values were then discounted to
the present using a range of discount rates of 13.0% to 17.0%. Based on this
analysis, DLJ derived a summary valuation range for FPC of $37.0 million to
$60.6 million. Based on a PhyCor Common Stock price of $16.19 per share, the
total consideration of the Merger represented an aggregate transaction value of
$57.6 million.
EPS Impact Analysis. DLJ also analyzed the pro forma effects resulting
from the Merger on the projected EPS of PhyCor including, without independent
verification, an assumed level of synergies projected by the management of FPC
for each of the years ending December 31, 1998 and 1999. This analysis was based
on a number of assumptions, including, among other things, estimated amounts and
timing of the synergies and the projected financial performance of PhyCor and
FPC. The analysis assumed that the Merger would be consummated on January 1,
1998. The analysis indicated that the Merger, accounted for as a pooling
transaction, would be dilutive to PhyCor's stand-alone EPS estimates by (2.4%)
and (1.5%), assuming no synergies, and accretive by 1.7% and 1.6%, assuming $4.8
million of recurring annual synergies, for the years ending December 31, 1998
and 1999, respectively.
Contribution Analysis. DLJ also analyzed the pro forma relative
contributions of FPC to certain PhyCor operations measures (the "Operations
Measures") resulting from the Merger for the LTM period ended March 31, 1998 and
for the projected calendar year ending December 31, 1998 (based on projections
provided by FPC and publicly available information regarding PhyCor). Operations
Measures reviewed in this analysis included (i) revenue, EBITDA, EBIT, pretax
income (defined as earnings before taxes), net income (defined as earnings after
taxes) and end of period assets for the LTM period ended March 31, 1998 and (ii)
estimated revenue, estimated EBITDA, estimated EBIT, estimated pretax income and
estimated net income for the projected calendar year ending December 31, 1998.
This analysis was based on a number of assumptions, including, among other
things, the projected financial performance of FPC and PhyCor. The analysis
indicated that FPC would contribute 5.2% of pro forma LTM revenue; 0.1% of pro
forma LTM EBITDA; (1.6%) of pro forma LTM EBIT; (5.3%) of pro forma LTM pretax
income; (4.8%) of pro forma LTM net income; and 2.0% of pro forma assets as of
March 31, 1998. The analysis further indicated that FPC would contribute 5.2% of
pro forma 1998 revenue; 2.1% of pro forma 1998 EBITDA; 1.5% of pro forma 1998
EBIT; 0.7% of pro forma 1998 pretax income; and 0.7% of pro forma 1998 net
income. The Merger Agreement contemplates the issuance of 2.9 million shares of
PhyCor Common Stock, representing approximately 4.1% of the total pro forma
shares of PhyCor Common Stock, in exchange for the total equity value of FPC
including all classes of FPC Capital Stock.
PhyCor Comparison. To provide contextual data and comparative market
information, DLJ analyzed the operating performance of PhyCor relative to
certain companies whose securities are publicly traded and that were deemed by
DLJ to be reasonably similar to PhyCor, including FPA, MedPartners, PHP,
PhyMatrix and ProMedCo (collectively, the "PhyCor Selected Companies").
Historical financial information used in connection with the ratios provided
below with respect to PhyCor Selected Companies was derived from the most recent
financial statements publicly available for each company as of May 8, 1998.
DLJ examined certain publicly available financial data of the PhyCor
Selected Companies, including (i) enterprise value as a multiple of LTM
revenues, LTM EBITDA and LTM EBIT, and (ii) price to
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earnings ratios based on LTM EPS and estimated calendar year 1998 and calendar
year 1999 EPS. DLJ noted that as of June 5, 1998, the PhyCor Selected Companies
were trading at implied enterprise value and price multiples, as the case may
be, in (i) a range of 0.4x to 2.4x (with an Average of 0.7x) LTM revenues; (ii)
a range of 4.1x to 16.2x (with an Average of 6.7x) LTM EBITDA; (iii) a range of
5.4x to 21.2x (with an Average of 8.9x) LTM EBIT; (iv) a range of 4.9x to 19.8x
(with an Average of 8.4x) LTM EPS; (v) a range of 10.0x to 17.3x (with an
Average of 11.0x) estimated calendar year 1998 EPS and (vi) a range of 3.9x to
14.0x (with an Average of 10.2x) estimated calendar year 1999 EPS. The calendar
year 1998 and 1999 EPS estimates for the PhyCor Selected Companies were based on
estimates provided by IBES. PhyCor recently traded at a multiple of 1.3x LTM
revenue, 7.8x LTM EBITDA, 11.8x LTM EBIT, 18.6x LTM EPS, 16.4x estimated
calendar year 1998 EPS as projected by IBES and 12.6x estimated calendar year
1999 EPS as projected by IBES.
No company utilized in the selected public company analysis is identical to
PhyCor. Accordingly, an analysis of the results of the foregoing necessarily
involves complex considerations and judgments concerning differences in
financial and operating characteristics of the PhyCor Selected Companies and
PhyCor and other factors that could affect the public trading value of the
PhyCor Selected Companies or PhyCor. Mathematical analysis such as determining
the average is not in itself a meaningful method of using selected company data.
Common Stock Performance Analysis. DLJ'S analysis of the performance of
PhyCor Common Stock consisted of a historical analysis of closing prices and
trading volumes for the period from June 6, 1997 through June 8, 1998. During
that period, PhyCor Common Stock reached a high closing price of $35.13 per
share and a low closing price of $15.13 per share. On June 5, 1998, the closing
price of PhyCor Common Stock was $16.19 per share.
The summary set forth above does not purport to be a complete description
of the analyses performed by DLJ, but describes, in summary form, the principal
elements of the analyses contained in the materials presented by DLJ to the FPC
Board in connection with DLJ rendering its opinion. The preparation of a
fairness opinion involves various determinations as to the most appropriate and
relevant methods of financial analysis and the application of these methods to
the particular circumstances and, therefore, such an opinion is not readily
summarized. Each of the analyses conducted by DLJ was carried out in order to
provide a different perspective on the Merger and to add to the information
available to the FPC Board. DLJ did not form a conclusion as to whether any
individual analysis, considered in isolation, supported or failed to support an
opinion as to fairness from a financial point of view. Rather, in reaching its
conclusion, DLJ considered the results of the analyses in light of each other
and ultimately reached its opinion based on the results of the analyses taken as
a whole. DLJ did not place particular reliance or weight on any individual
factor, but instead concluded that its analyses, taken as a whole, supported its
determination. Accordingly, notwithstanding the separate factors summarized
above, DLJ believes that its analyses must be considered as a whole and that
selecting portions of its analysis and the factors considered by it, without
considering all analyses and factors, could create an incomplete or misleading
view of the evaluation process underlying its opinion. The analyses performed by
DLJ are not necessarily indicative of actual values or future results, which may
be significantly more or less favorable than suggested by such analyses.
DLJ was selected to render an opinion in connection with the Merger based
upon DLJ'S qualifications, expertise and reputation, including the fact that
DLJ, as part of its investment banking services, is regularly engaged in the
valuation of businesses and securities in connection with mergers, acquisitions,
underwritings, sales and distributions of listed and unlisted securities,
private placements and valuations for corporate and other purposes.
Pursuant to a letter agreement between FPC and DLJ dated August 5, 1997
(the "DLJ Engagement Letter"), DLJ is entitled to (i) a fee of $0.3 million for
the delivery of the DLJ Opinion and (ii) a percentage fee equal to 0.9% of the
value of the aggregate merger consideration less the amount previously paid
pursuant to clause (i) above. The total fees payable to DLJ would have equaled
approximately $0.6 million using the closing sales price of PhyCor Common Stock
on June 24, 1998. In addition, FPC has agreed to reimburse DLJ for certain
out-of-pocket expenses incurred by DLJ in connection with its engagement
thereunder, whether or not the Merger is consummated, and to indemnify DLJ for
certain liabilities and expenses arising
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out of the Merger or the transactions in connection therewith, including
liabilities under federal securities laws. The terms of the fee arrangement with
DLJ, which DLJ and FPC believe are customary for transactions of this nature,
were negotiated at arm's length between FPC and DLJ, and the FPC Board was aware
of such arrangement.
DLJ provides a full range of financial, advisory and brokerage services and
in the course of its normal trading activities may from time to time effect
transactions and hold positions in the securities or options on the securities
of PhyCor for its own account or for the account of customers. As of the date of
this Prospectus-Proxy Statement, DLJ, through its affiliate the Sprout Group,
owned (i) approximately 14.8% of the fully diluted common equity of FPC and (ii)
Class A Preferred Stock of FPC with a liquidation preference of $6.0 million
(plus accrued but unpaid dividends of $0.9 million). Additionally, as of the
date of this Proxy Statement-Prospectus, DLJ, through its affiliate the Sprout
Group, had a loan outstanding to FPC in the aggregate principal amount of $1.5
million.
EFFECTIVE TIME OF THE MERGER
The Merger will become effective upon the filing by the Subsidiary and FPC
of the Certificate of Merger under the DCGL, 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, Subsidiary and FPC. It is currently
anticipated that such filing will be made as soon as reasonably practicable
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
At least two business days prior to the date FPC provides notices to its
stockholders of the Special Meeting, PhyCor will enter into an agreement with
the Exchange Agent which will provide that PhyCor shall deposit with the
Exchange Agent, for the holders of FPC Capital Stock, for exchange pursuant to
the Merger Agreement, through the Exchange Agent, (i) as soon as practicable
(but in any event within five business days) after such agreement has been
entered into, certificates representing the shares of PhyCor Common Stock
issuable pursuant to the Merger Agreement and (ii) at least two business days
prior to the Effective Time, cash in an amount equal to the aggregate amount
required to be paid to holders of FPC Capital Stock in lieu of fractional
interests of PhyCor Common Stock and any dividends or distributions to which
such holder is entitled pursuant to the Merger.
Prior to the Effective Time, holders of FPC Capital Stock will be entitled
to tender the stock certificates representing outstanding shares of FPC Capital
Stock to the Exchange Agent conditioned upon consummation of the Merger. From
and after the Effective Time, each holder of a stock certificate, which
immediately prior to the Effective Time represented outstanding shares of FPC
Capital Stock (the "Certificates"), will be entitled to receive in exchange
therefor, upon surrender thereof to the Exchange Agent, a certificate or
certificates representing the number of whole shares of PhyCor Common Stock into
which such holder's Certificates 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.
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 FPC 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 Closing
Price. See "-- Terms of the Merger."
The certificates representing shares of PhyCor Common Stock, the fractional
share payment (if any) which any holder of shares of FPC 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 FPC Capital Stock until the Certificates are
delivered to PhyCor through the Exchange
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Agent; provided, however, that holders of stock certificates representing FPC
Capital Stock who tendered Certificates to the Exchange Agent at least ten
business days prior to the Effective Time shall be entitled to receive
certificates representing shares of PhyCor Common Stock at the Effective Time.
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 FPC Capital Stock immediately prior to
the Effective Time will cease to be, and shall have no rights as, holders of FPC
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 they may be entitled to under the Merger
Agreement (or, with respect to holders properly exercising appraisal rights, to
receive the fair value of such person's shares of FPC Capital Stock). Holders of
shares of FPC Capital Stock (other than those who have exercised appraisal
rights) 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 FPC will be liable to any holder of shares of FPC
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,
Subsidiary and FPC include, but are not limited to, representations as to: (i)
the organization and existence of each of PhyCor, Subsidiary and FPC, as
applicable, (ii) the capitalization of each of PhyCor, Subsidiary and FPC, 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 organization, existence and foreign qualification of the
FPC subsidiaries and PhyCor significant subsidiaries (as defined in the Merger
Agreement), (v) the name of each physician group and the number of physicians in
such group with which FPC is affiliated, (vi) the power and authority of each
party to execute, deliver and perform the Merger Agreement, (vii) the fact that
PhyCor has furnished FPC with a true and complete copy of each report, schedule,
registration statement and proxy statement filed by PhyCor with the Commission
and FPC has provided PhyCor with its audited financial statements, (viii) the
legal proceedings against each party, (ix) the validity of PhyCor's or FPC's
material contracts, as applicable, (x) the conduct of business, since September
30, 1997, in the ordinary course and the absence of certain changes or material
adverse effects, (xi) certain tax matters, (xii) FPC's employee benefit plans
and employment matters, (xiii) FPC's compliance with laws in general, (xiv) each
party's regulatory approvals, (xv) the commissions and fees paid by each party,
(xvi) FPC's stockholder votes required to approve the Merger Agreement, (xvii)
the pooling of interests of the Merger, (xviii) FPC's ownership and good title
to its properties and assets, (xix) the validity of FPC's accounts receivables,
(xx) FPC's compliance with environmental regulations and (xxi) FPC's insurance
and malpractice coverage.
CONDITIONS TO THE MERGER
The obligations of each of PhyCor and FPC to consummate the Merger are
subject to, among others, the fulfillment of each of the following conditions:
(i) FPC shall have received the opinion of its counsel that the Merger will be
treated as a reorganization within the meaning of Section 368(a) of the Code;
(ii) each party shall have received an opinion of the other party's counsel
substantially in the form specified in the Merger Agreement; and (iii) PhyCor
shall have received letters from those persons deemed Affiliates (as such term
is defined under the Securities Act).
The respective obligations of PhyCor and FPC 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 FPC
or which would have a material
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adverse effect on FPC 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
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
on 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 or Blue Sky laws; (iv) the Merger shall
qualify for pooling of interests accounting treatment unless the acts or
omissions of PhyCor or Subsidiary make pooling of interests accounting treatment
unavailable, in such case PhyCor shall not be relieved of its obligation to
consummate the Merger; and (v) 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 22, 1998, PhyCor and
FPC made their respective filings with the DOJ and the FTC with respect to the
Merger Agreement. On February 13, 1998, the DOJ and the FTC granted PhyCor and
FPC early termination of the HSR Act waiting period. 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 assets of FPC. 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.
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 FPC 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 FPC,
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, 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. FPC 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 FPC 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 FPC and
third-party payors may be deemed to have been transferred, which may require the
approval and consent of such payors. In addition, a number of the facilities
operated by FPC may be deemed to have been transferred, which may require the
consents or approvals of various state licensing and/or health regulatory
agencies. In some instances, new licenses may be required to be obtained. It is
anticipated that, prior to the time this Prospectus-Proxy Statement is mailed to
the stockholders of FPC, 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
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 FPC will conduct
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their respective businesses in the usual, regular and ordinary course in
substantially the same manner as previously conducted, and each of FPC 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 physicians, patients,
suppliers and others having business relations with them and their respective
subsidiaries.
Material Transaction. Under the Merger Agreement, FPC, its subsidiaries,
partnerships 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 PhyCor, (i) encumber
any asset or enter into transaction relating to the properties, assets or
business of FPC other than in ordinary course, (ii) except for physician
employment agreements and certain terminable agreements, enter into any
employment agreement with compensation in excess of $75,000 or for greater than
a one year term, (iii) except in ordinary course, enter into a contract which
cannot be performed within three months or which involves expenditure of over
$250,000, (iv) issue or sell, or agree to issue or sell, any shares of capital
stock of FPC or its subsidiaries, except upon exercise of currently outstanding
options or warrants or conversion of the FPC Class B Convertible Preferred Stock
or the FPC Class C Convertible Preferred Stock, (v) make any payment or
distribution to the trustee under any bonus, pension, profit-sharing or
retirement plan or incur any obligation relating to any such plan, create or
terminate any such plan, except in ordinary course, (vi) extend credit to
anyone, except in ordinary course, (vii) guaranty the obligation of any person,
firm or corporation except in ordinary course, (viii) amend its Certificate of
Incorporation or Bylaws, (ix) take any action that would cause certain material
changes in FPC or (x) enter into any transaction, agreement or contract for the
purchase of substantially all of the stock or assets of another company.
Both PhyCor and FPC have agreed to cooperate in the prompt preparation and
filing of certain documents under federal and state securities laws with
applicable governmental entities.
Stock Option Plans and Stock Options. At the Effective Time, all options
to purchase shares of FPC Capital Stock which are outstanding at such time,
whether or not then vested or exercisable, will immediately become options to
purchase PhyCor Common Stock. The number of shares of PhyCor Common Stock
subject to each stock option assumed and the exercise prices for such shares
shall be adjusted to give effect to the Exchange Ratios. PhyCor shall deliver to
the holders of FPC stock options appropriate notices setting forth such holders'
rights pursuant to any stock option plans which such FPC stock options were
issued. PhyCor will either adopt the stock option plans of FPC in connection
with the Merger or will issue new options under the existing PhyCor option plans
in order to continue the options previously granted by FPC, as described herein.
WAIVER AND AMENDMENT
The Merger Agreement provides that, at any time prior to the Effective
Time, PhyCor and FPC 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 FPC 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 FPC 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 FPC, the Subsidiary and PhyCor; (b) by either FPC or PhyCor if
(i) the adoption of the Merger Agreement and the approval of the transactions
contemplated thereby by the holders of FPC Capital Stock shall not have been
obtained, (ii) the Merger shall have not been consummated by June 30, 1999,
provided that the terminating party shall not have
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willfully and materially breached its obligations under the Merger Agreement,
(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) 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 by June 30, 1999; (c) by FPC if
(i) the FPC Board, prior to approval of the Merger by the stockholders of FPC,
in the exercise of its good faith judgment as to its fiduciary duties to its
stockholders imposed by law, determines not to recommend the Merger to FPC's
stockholders or shall have withdrawn such recommendation or approval or
recommended or endorsed any Acquisition Transaction (as defined below), or (ii)
the Closing Price of the PhyCor Common Stock is equal to or less than $11.00,
unless PhyCor agrees to increase the Exchange Ratios such that the aggregate
value of shares of PhyCor Common Stock to be received by FPC's stockholders is
equal to $11.00 times the number of shares to be received by FPC's stockholders
using the current Exchange Ratios.
BREAK-UP FEE; THIRD PARTY BIDS
In the event that the Merger Agreement is terminated by action of the FPC
Board, in the exercise of its fiduciary duties under applicable law, approving,
recommending or endorsing an Acquisition Transaction and within one year after
the effective date of such termination, FPC is the subject of an Acquisition
Transaction with any Person (as defined in Sections 3(a)(9) and 13(d)(3) of the
Exchange Act), then at the time of the execution by FPC of a definitive
agreement with respect thereto, FPC shall pay to PhyCor in immediately available
funds a break-up fee of 3% of the aggregate consideration that PhyCor would have
paid to FPC if the Merger had been consummated (determined as it would have been
calculated on the effective date of termination of the Merger Agreement,
substituting the effective date of such termination for the Effective Time of
the Merger for purposes of calculating the aggregate value of PhyCor Common
Stock that would have been issued to holders of FPC Capital Stock), the break-up
fee would have equaled approximately $1.9 million based on the June 24, 1998
closing sales price of PhyCor Common Stock.
"Acquisition Transaction" is defined in the Merger Agreement as any bona
fide superior proposal to acquire all or any significant portion of the equity
securities of FPC or of the assets of FPC upon a merger, purchase of assets,
purchase of or tender offer for shares of FPC Capital Stock or similar
transaction.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain FPC executive officers and members of its Board of Directors have
interests in the Merger that are in addition to their interests as stockholders
of FPC generally. Certain of these persons participated in the negotiation of
the Merger Agreement. The FPC Board was aware of these interests and considered
them, among other matters, in approving the Merger Agreement and the
transactions contemplated thereby. Specifically, the executive officers and
directors of FPC own options to purchase 222,500 shares of FPC Class A Common
Stock that will become immediately exercisable as a result of the Merger.
Stephen A. George, Chairman, Chief Executive Officer and President of FPC, has
entered into a Consulting Agreement with PhyCor that provides for services and
payments after the Merger. Each of the executive officers may be entitled to
severance payments if their employment is terminated following the Merger.
Described below are the material provisions of the Consulting Agreement.
The following description is qualified in its entirety by reference to the
complete text of the agreement, a copy of which is attached hereto as Annex E.
Also described below are other payments to which FPC's executive officer may be
entitled and which certain other persons will be entitled as a result of the
Merger.
At the time of execution of the Merger Agreement, PhyCor, FPC and Dr.
George entered into the Consulting Agreement, which was amended and restated on
January 29, 1998 and May 18, 1998. During the term of such agreement (which
commences at the Effective Time and continues for 30 months thereafter), Dr.
George agrees to provide consulting services in connection with acquisitions by
PhyCor and FPC following the Merger and in connection with the consummation of
the transactions contemplated by the Merger Agreement. In consideration of such
services, PhyCor and FPC have agreed to pay Dr. George a consulting fee of
$986,663, $563,750 of which is payable at the Effective Time, and $312,500 and
$110,413 of which is
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payable on the first and second anniversaries of the Effective Time,
respectively. In the event of a change in control of PhyCor, all of such
payments would become immediately due and payable. In addition, Dr. George is
eligible to participate, at PhyCor's expense, during the term of the Consulting
Agreement and thereafter at his own expense, in certain of PhyCor's employee
benefit programs and is entitled to reimbursement of expenses incurred by him in
performing his services under the agreement. In addition, Dr. George will
receive continuation of certain health and welfare benefits at the expense of
FPC during the term of the Consulting Agreement and, thereafter, at his own
expense. Dr. George is also entitled to receive (i) reimbursement for up to
$50,000 per year for his expenses in retaining secretarial services, plus the
provision of certain health and welfare benefits for such secretary, (ii)
provision of up to 1,500 square feet of office space, including office equipment
and furnishings, and (iii) a fully vested option to purchase 25,000 shares of
PhyCor Common Stock at the fair market value of the Common Stock on the
effective date of the Merger. Under the Consulting Agreement, Dr. George agrees
not to compete with PhyCor or FPC during the term of the agreement and for six
months thereafter or for as long as he is entitled to receive any payments
thereunder and to maintain the confidentiality of such companies' non-public
information.
Dr. George, Andrew B. Adams, M.D. (the Executive Vice President of Medical
Affairs of FPC) and Karl A. Hardesty (the Senior Vice President and Chief
Financial Officer of FPC) are each parties to employment agreements with FPC
that provide them with certain benefits in the event of termination of their
employment upon or after the "change in control" that will occur upon
consummation of the Merger. Under Dr. George's employment agreement, FPC will be
required to pay Dr. George an amount equal to one year's base salary ($300,000)
in 12 equal monthly installments following the Effective Time. Dr. George will
also be entitled to continuation of his existing car allowance and to payments
for costs associated with continuing medical education and professional fees
incurred by him during the 12 month period following the Effective Time. Dr.
Adams' and Mr. Hardesty's employment agreements provide for severance pay in an
amount equal to one year ($200,000 in the case of Dr. Adams) and six months
($73,500 in the case of Mr. Hardesty) of their respective base salaries in the
event either of such persons voluntarily terminates their employment following
the Merger. In addition to these severance payments, PhyCor has agreed to make
severance payments to the two other executive officers, Donald B. Smallwood and
Kelly J. DeKeyser, of $82,500 and $60,000, respectively, and other members of
FPC's corporate management and staff upon their involuntary termination.
Assuming all such persons were terminated, these payments would aggregate $1.3
million (including the payments required under Dr. George's, Dr. Adams' and Mr.
Hardesty's employment agreements). Additionally, PhyCor has agreed to pay
bonuses to certain FPC employees who agree to continue their employment for
specified periods following the Merger.
The Merger Agreement also includes certain provisions that may be deemed to
benefit its directors and executive officers, including provisions for the
continuation of the indemnification of, and director and officer insurance for,
such persons and for the continuation of benefits under specified FPC employee
benefit and compensation plans.
ACCOUNTING TREATMENT
It is intended, and a condition to the consummation of the Merger, that the
Merger qualify for pooling of interests accounting treatment unless the acts or
omissions of PhyCor or Subsidiary make pooling of interests accounting treatment
unavailable, in such case PhyCor shall not be relieved of its obligation to
consummate the Merger. PhyCor and FPC 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 FPC 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 FPC 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 FPC as if the Merger had taken place prior to the periods covered
by such financial statements.
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FPC Class A Preferred Stock is non-convertible and votes as a separate
class on certain matters. FPC Class B Convertible Preferred Stock may be
converted into FPC Class A Common Stock at the rate of 38.504 shares of Class A
Common Stock for each share of Class B Convertible Preferred held. FPC Class C
Convertible Preferred Stock may be converted into FPC Class A Common Stock at
the rate of 10 shares of Class A Common for each share of Class C Convertible
Preferred held. The holders of Class B and Class C Convertible Preferred Stock
are entitled to vote on matters as if they had converted such securities into
FPC Class A Common Stock. The Class B Convertible Preferred Stock and Class C
Convertible Preferred Stock is automatically converted into FPC Class A Common
Stock under certain events. In addition the Class B Convertible Preferred and
Class C Convertible Preferred Shareholders may convert to Class A Common Stock
at any time at the option of the shareholder. See "COMPARISON OF RIGHTS OF FPC
AND PHYCOR SHAREHOLDERS -- CLASS B CONVERTIBLE PREFERRED STOCK AND CLASS C
CONVERTIBLE PREFERRED STOCK". The voting interests of the Class B Convertible
Preferred and Class C Convertible Preferred Stockholders will not change as a
result of a conversion to Class A Common Stock or as a result of the Merger in
which the Class B Convertible Preferred and Class C Convertible Preferred
Shareholders will receive the same number of PhyCor shares as if they had
converted their securities into FPC Class A Common Stock. It is not anticipated
that any of the holders of Class B or Class C Convertible Preferred Stock will
convert any outstanding preferred shares into FPC Class A Common prior to the
Effective Time. At the Effective Time, the holders of Class B Convertible
Preferred and Class C Convertible Preferred Stock will receive the same number
of PhyCor shares as if they had converted their securities into FPC Class A
Common Stock based upon their respective conversion ratios. The exchange ratio
for the Class A Preferred Stock was determined based upon the redemption price
per share plus accrued and unpaid dividends as of the estimated Effective Time.
See "COMPARISON OF RIGHTS OF FPC AND PHYCOR SHAREHOLDERS -- CLASS A PREFERRED
STOCK" and "MERGER CONSIDERATION." The exchange ratio for the Class B and Class
C Convertible Preferred Stock was determined based upon the conversion ratio of
each class of preferred stock to the FPC Class A Common Stock. See "MERGER
CONSIDERATION."
FEDERAL INCOME TAX CONSEQUENCES
The following is a discussion of the material federal income tax
consequences applicable to holders of FPC Capital Stock who, pursuant to the
Merger, exchange their FPC Capital Stock solely for PhyCor Common Stock. The
summary does not purport to deal with aspects of federal income taxation that
may uniquely affect particular stockholders in light of their particular
individual circumstances and is not intended for holders of FPC Capital Stock
subject to special treatment under the federal income tax law (including
insurance companies, tax-exempt organizations, financial institutions,
broker-dealers, foreign persons or entities, holders of FPC Capital Stock who
hold their stock as part of a hedge, straddle or conversion transaction, holders
of FPC Capital Stock who do not hold their stock as capital assets and holders
of FPC Capital Stock who have acquired their stock upon the exercise of assets
and holders of FPC Capital Stock who have acquired their stock upon the exercise
of employee options or otherwise as compensation). In addition, this discussion
does not consider the effect of any applicable state, local or foreign tax laws.
Accordingly, each FPC stockholder is strongly urged to consult with his tax
advisor to determine the tax consequences of the Merger.
The following summary is based upon current provisions of the Code,
currently applicable Treasury regulations, and judicial and administrative
decisions and rulings. Future legislative, judicial or administrative changes or
interpretations could alter or modify the statements and conclusions set forth
herein, and any such changes or interpretations could be retroactive and could
affect the tax consequences to the stockholders of FPC.
Tax Opinion. Consummation of the Merger is conditioned upon the receipt by
FPC of an opinion of Mayor, Day, Caldwell & Keeton, L.L.P., addressed to FPC and
in form and substance satisfactory to FPC, which opinion may be based on certain
representations of PhyCor and FPC, to the effect that the Merger will be treated
as a reorganization within the meaning of Section 368(a) of the Code. In
satisfaction of such condition, Mayor, Day, Caldwell & Keeton, L.L.P. has
delivered its opinion, dated April 8, 1998, to the effect
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that (i) the Merger will qualify as a reorganization within the meaning of
Section 368(a) of the Code, (ii) FPC stockholders will not recognize gain or
loss on their receipt of PhyCor Common Stock pursuant to the Merger Agreement,
except that gain may be recognized to the extent of any cash received (or deemed
received) in the Merger or pursuant to the exercise of dissenters' rights, (iii)
provided that the FPC stock was held as a capital asset, a FPC stockholder can
include its holding period for the FPC stock in its holding period for the
PhyCor Common Stock received in the Merger, (iv) a FPC stockholder's basis in
the PhyCor Common Stock received in the Merger will equal its aggregate basis in
the FPC stock surrendered in the Merger, (v) no gain or loss will be recognized
by FPC, PhyCor or the Subsidiary in the Merger and (vi) provided the PhyCor
Common Stock is held as a capital asset, any gain or loss realized upon a
taxable disposition of PhyCor Common Stock received in the Merger will be
capital gain or loss. In rendering such opinions, Mayor, Day, Caldwell & Keeton,
L.L.P. assumed that the Merger will be consummated in the manner described in
the Merger Agreement and that certain representations made by PhyCor and FPC are
true and correct and made certain other assumptions customary for opinions
generally. The representations made by PhyCor and FPC are the same
representations that the parties would be required to make if they were seeking
a private ruling from the IRS regarding tax treatment of the Merger.
There can be no assurance that the Internal Revenue Service ("IRS") will
not take a contrary view with respect to matters opined to by Mayor, Day,
Caldwell & Keeton, L.L.P., and no ruling from the IRS has been or will be sought
concerning the federal income tax consequences of the Merger. An opinion of
counsel expresses what counsel believes a court should properly hold if
presented with the issue which is the subject of the opinion. An opinion is not
a guarantee of a certain tax treatment and is not binding on the IRS or the
courts. The following discussion assumes that the Merger will be treated in the
manner described in the opinion of Mayor, Day, Caldwell & Keeton, L.L.P.
Treatment of PhyCor, Subsidiary and FPC. No gain or loss will be
recognized by PhyCor, the Subsidiary or FPC in the Merger.
Treatment of Holders of FPC Capital Stock. Except as discussed below under
"-- Cash in Lieu of Fractional Shares" and "-- Transfer Taxes," a holder of FPC
Capital Stock who, pursuant to the Merger, exchanges FPC Capital Stock for
PhyCor Common Stock generally will not recognize gain or loss upon such
exchange. Such holder's aggregate tax basis in the PhyCor Common Stock received
pursuant to the Merger will be equal to its aggregate tax basis in the FPC
Capital Stock surrendered in the exchange (reduced by any tax basis allocable to
fractional shares exchanged for cash) and its holding period for the PhyCor
Common Stock will include its holding period for the FPC Capital Stock
surrendered.
A holder of FPC Capital Stock who exercises his appraisal rights under DGCL
and solely receives cash in exchange for his FPC Capital Stock will recognize
taxable gain or loss equal to the difference between the amount of cash received
and his adjusted basis in his FPC Capital Stock. Provided the FPC Capital Stock
was held as a capital asset, the gain or loss will be a capital gain or loss and
if the FPC Capital Stock has a holding period of more than one year, but not
more than 18 months, the gain or loss will be mid-term capital gain or loss and
if the FPC Capital Stock has a holding period of more than 18, the gain or loss
will be long-term capital gain or loss. Reduced rates are imposed on mid-term
and long-term capital gains with the rate being determined by the length of the
taxpayer's holding period and certain other factors. This discussion assumes
that all of the holder's FPC Capital Stock under the rules regarding the
constructive ownership of stock owned by family members and related entities.
Cash in Lieu of Fractional Shares. No fractional shares of PhyCor Common
Stock will be issued upon the surrender for exchange of certificates
representing shares of FPC Capital Stock. A holder of FPC Capital Stock who
receives cash in lieu of fractional shares of PhyCor Common Stock will be
treated as having received such fractional shares pursuant to the Merger and
then as having exchanged such fractional shares for cash in a redemption by
PhyCor. Any gain or loss attributable to fractional shares generally will be
capital gain or loss. The amount of such gain or loss will be equal to the
difference between the portion of the tax basis of the FPC Capital Stock
surrendered in the Merger that is allocated to such fractional shares and the
cash received in lieu thereof. Any such capital gain or loss will constitute
long-term capital gain or loss if the FPC Capital Stock has been held by the
holder for more than one year at the Effective Time. Capital gain on assets
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held for more than one year recognized by certain non-corporate stockholders is
subject to federal income tax at preferential capital gains rates, and such gain
recognized with respect to an asset with a holding period of more than 18 months
is generally subject to federal income tax at further reduced capital gains
rates.
Transfer Taxes. Certain state and local taxing authorities may impose
certain taxes on the direct or indirect transfer of an interest in real property
(including leases) located within such jurisdiction ("Transfer Taxes"). Transfer
Taxes may also be imposed in connection with certain direct or indirect
ownership changes of an entity owning a real property interest located within
such jurisdiction. PhyCor will pay any Transfer Taxes that arise from the
Merger. In certain circumstances, such payments may be considered for federal
income tax purposes to be additional consideration paid to each holder of FPC
Capital Stock. In that event, each such holder would be treated as if it
received cash equal to the amount of Transfer Taxes paid on its behalf, which
could result in additional taxable gain to such holder and a corresponding
increase in tax basis of such holder's shares of PhyCor Common Stock.
Reporting Requirements. Each holder of FPC Capital Stock that receives
PhyCor Common Stock in the Merger will be required to retain records and file
with such holder's federal income tax return a statement setting forth certain
facts relating to the Merger.
Taxation of FPC Stockholders upon Disposition of PhyCor Stock. In general,
any gain or loss realized upon a taxable disposition of PhyCor Common Stock
received in the Merger will be capital gain or loss, provided the PhyCor Common
Stock is held as a capital asset. For individuals, capital gain is taxed at
ordinary income rates if the gain is from the sale of an asset held one year or
less, at a maximum rate of 28% if the asset was held more than one year, but not
more than 18 months and at a maximum rate of 20% if the asset was held more than
18 months. Each FPC stockholder can include in his holding period for the PhyCor
Common Stock his holding period for FPC stock surrendered in the Merger. If a
capital loss is recognized, such loss may be offset against a taxpayer's capital
gains and to the extent the loss exceeds the taxpayer's capital gains, may be
offset against an individual's ordinary income up to $3,000 per year. Any unused
capital loss may be carried forward and used in subsequent years subject to the
same limitations.
Backup Withholding. Unless an exemption applies under the applicable law
and regulations, the Exchange Agent may be required to withhold, and, if
required, will withhold, 31% of any cash payments to a holder of FPC Capital
Stock in the Merger unless such holder provides the appropriate form. A holder
should complete and sign the Substitute Form W-9 enclosed with the letter of
transmittal sent by the Exchange Agent, so as to provide the information
(including the holder's taxpayer identification number) and certification
necessary to avoid backup withholding, unless an applicable exemption exists and
is proved in a manner satisfactory to the Exchange Agent.
THE FOREGOING SUMMARY OF CERTAIN MATERIAL FEDERAL INCOME TAX CONSEQUENCES
OF THE MERGER WITH RESPECT TO HOLDERS OF FPC CAPITAL STOCK IS WITHOUT REFERENCE
TO THE PARTICULAR FACTS AND CIRCUMSTANCES OF ANY PARTICULAR HOLDER. IN ADDITION,
THE FOREGOING SUMMARY DOES NOT ADDRESS ANY NON-INCOME TAX OR ANY FOREIGN, STATE
OR LOCAL TAX CONSEQUENCES OF THE MERGER NOR DOES IT ADDRESS THE TAX CONSEQUENCES
OF ANY TRANSACTION OTHER THAN THE MERGER OR ANY ASPECT OF THE MERGER NOT
INVOLVING THE EXCHANGE OF FPC CAPITAL STOCK. ACCORDINGLY, EACH HOLDER OF FPC
CAPITAL STOCK IS STRONGLY URGED TO CONSULT WITH SUCH HOLDER'S TAX ADVISOR TO
DETERMINE THE PARTICULAR UNITED STATES FEDERAL, STATE, LOCAL OR FOREIGN INCOME
OR OTHER TAX CONSEQUENCES OF THE MERGER TO SUCH HOLDER.
RESALE OF PHYCOR COMMON STOCK BY AFFILIATES
The shares of PhyCor Common Stock to be issued to holders of shares of FPC
Capital Stock in connection with the Merger have been registered under the
Securities Act. PhyCor Common Stock received by the holders of shares of FPC
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 FPC or PhyCor within the meaning of Rule 145
under the Securities Act. "Affiliates" are generally
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<PAGE> 57
defined as persons who control, are controlled by, or are under common control
with, FPC 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 FPC 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 FPC and PhyCor have agreed to use its reasonable, good faith
efforts to cause each holder of shares of FPC Capital Stock deemed to be an
Affiliate of FPC 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 30 days of post-Merger combined operations of PhyCor and FPC have been
published. PhyCor has agreed that it shall publish the combined results within
60 days of the Effective Time on a Current Report on Form 8-K, which shall be
filed with the SEC.
NO SOLICITATION OF TRANSACTIONS
FPC has agreed that it, its subsidiaries and affiliates will not, and FPC
will direct each officer, director, employee, representative and agent of FPC
not to, directly or indirectly, encourage, solicit, participate in or initiate
discussions or negotiations with, or provide any information to, any
corporation, partnership, person or other entity or group (other than PhyCor or
an affiliate, or representative of PhyCor) concerning any merger, sale of
assets, sale of or tender offer for its shares or similar transactions involving
all or any significant portion of the equity securities of FPC or the assets of
FPC or its subsidiaries. Notwithstanding the foregoing, FPC may furnish
information concerning its business, properties or assets to a person or group,
and may participate in discussions and negotiations with such person or group
concerning an Acquisition Transaction if the FPC Board determines, in its good
faith judgment in the exercise of its fiduciary duties, after consultation with
legal counsel and its financial advisors, that such action is appropriate in
furtherance of the best interests of FPC's stockholders. FPC shall promptly
notify PhyCor if FPC enters into a confidentiality agreement with any third
party in response to an unsolicited request for information and access in
connection with a possible Acquisition Transaction. Additionally, FPC shall
notify PhyCor within two business days of determining to provide information to
any party in connection with any possible Acquisition Transaction.
The Merger Agreement provides that all costs and expenses incurred in
connection with the Merger Agreement and the transactions contemplated thereby
shall be paid by the party incurring such expense.
NASDAQ NATIONAL MARKET LISTING
An application for listing of additional shares will be filed with the
Nasdaq National Market to list the shares of PhyCor Common Stock to be issued to
holders of shares of FPC 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 FPC anticipate that these shares will
qualify for listing on the Nasdaq
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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
the Nasdaq National Market upon official notice of issuance at the Effective
Time.
PROPOSAL TO APPROVE CHANGE OF CONTROL PAYMENTS
At the time of execution of the Merger Agreement, PhyCor, FPC and Dr.
George entered into the Consulting Agreement, which was amended and restated on
January 29, 1998 and on May 18, 1998. During the term of such agreement (which
commences at the Effective Time and continues for 30 months thereafter), Dr.
George agrees to provide consulting services in connection with acquisitions by
PhyCor and FPC following the Merger and in connection with the consummation of
the transactions contemplated by the Merger Agreement. In consideration of such
services, PhyCor and FPC have agreed to pay Dr. George a consulting fee of
$986,663, $563,750 of which is payable at the Effective Time, and $312,500 and
$110,413 of which is payable on the first and second anniversaries of the
Effective Time, respectively. In the event of a change in control of PhyCor, all
of such payments would become immediately due and payable. In addition, Dr.
George is eligible to participate, at PhyCor's expense, during the term of the
Consulting Agreement and thereafter at his own expense, in certain of PhyCor's
employee benefit programs and is entitled to reimbursement of expenses incurred
by him in performing his services under the agreement. In addition, Dr. George
will receive continuation of certain health and welfare benefits at the expense
of FPC during the term of the agreement and, thereafter, at his own expense. Dr.
George is also entitled to receive (i) reimbursement for up to $50,000 per year
for his expenses in retaining secretarial services, plus the provision of
certain health and welfare benefits for such secretary, (ii) provision of up to
1,500 square feet of office space, including office equipment and furnishings,
and (iii) a fully vested option to purchase 25,000 shares of PhyCor Common Stock
at the fair market value of the Common Stock on the effective date of the
Merger. Under the Consulting Agreement, Dr. George agrees not to compete with
PhyCor or FPC during the term of the agreement and for six months thereafter or
for as long as he is entitled to receive any payments thereunder and to maintain
the confidentiality of such companies' non-public information.
Under Dr. George's employment agreement, FPC will be required to pay Dr.
George an amount equal to one year's base salary ($300,000) in 12 equal monthly
installments following the Effective Time. Dr. George will also be entitled to
continuation of his existing car allowance and to payments for costs associated
with continuing medical education and professional fees incurred by him during
the 12 month period following the Effective Time.
The Change of Control Payments payable to Dr. George are conditioned on the
completion of the Merger and will be due and owing if the Merger is approved. If
the Merger is not approved by FPC's stockholders, or is otherwise not completed,
Dr. George will not be entitled to the Change of Control Payments. FPC is taking
steps, including obtaining stockholder approval of the Change of Control
Payments to ensure that the Change of Control Payments do not result in excise
tax liability under Section 4999 of the Code. In the event, however, that any
portion of the Change of Control Payments do result in the imposition of such
excise tax liability, PhyCor will pay such amounts on behalf of Dr. George and
will provide additional compensation to him to offset the effect of such taxes.
FPC has been advised by legal counsel that tax liability under Section 4999 of
the Code should not be imposed if the Change of Control Payments are approved by
the holders of 75%, excluding those shares held by Dr. George, of the
outstanding FPC Voting Stock (voting together as a class, with holders of the
FPC Class B Convertible Preferred Stock and Class C Convertible Preferred Stock
being entitled to cast the same number of votes as they would be entitled to
cast had they converted such securities into Class A Common Stock).
Approval of the Change of Control Payments requires the affirmative vote of
the holders of 75%, excluding those shares held by Dr. George, of the
outstanding FPC Voting Stock (voting together as a class, with holders of the
FPC Class B Convertible Preferred Stock and Class C Convertible Preferred Stock
being entitled to cast the same number of votes as they would be entitled to
cast had they converted such securities into Class A Common Stock). Messrs.
Hutts and Adams intend to vote the shares for which they have received
irrevocable proxies for the Change of Control Payments.
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THE FPC BOARD HAS UNANIMOUSLY APPROVED THE AGREEMENTS AUTHORIZING THE
CHANGE OF CONTROL PAYMENTS AND UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF
FPC VOTE "FOR" THE PROPOSAL TO APPROVE THE CHANGE OF CONTROL PAYMENTS.
STOCKHOLDERS SHOULD BE AWARE THAT CERTAIN MEMBERS OF THE FPC BOARD AND
MANAGEMENT HAVE CERTAIN INTERESTS IN THE MERGER THAT ARE IN ADDITION TO THOSE OF
OTHER STOCKHOLDERS OF FPC. SEE "THE MERGER -- INTERESTS OF CERTAIN PERSONS IN
THE MERGER."
APPRAISAL RIGHTS OF FPC STOCKHOLDERS
Holders of FPC Capital Stock as of the Record Date (the "Record Holders")
are entitled to appraisal rights under Section 262 of the DGCL ("Section 262")
for such securities. The following discussion represents a summary of the
material provisions of Section 262. For additional information, reference is
made to the full text of Section 262, which is reprinted in its entirety as
Annex D to this Prospectus-Proxy Statement. A person having a beneficial
interest in FPC Capital Stock as of the Record Date held of record in the name
of another person, such as a nominee, must act promptly to cause the Record
Holder to follow the steps summarized below properly and in a timely manner to
perfect the appraisal rights provided under Section 262.
Under Section 262, when a merger is to be submitted for approval at a
meeting of stockholders, as in the case of the Special Meeting, not less than 20
days prior to the meeting, a constituent corporation must notify each of the
holders of its capital stock for which appraisal rights are available that such
appraisal rights are available and include in each such notice a copy of Section
262. THIS PROSPECTUS-PROXY STATEMENT SHALL CONSTITUTE SUCH NOTICE TO THE RECORD
HOLDERS OF FPC COMMON STOCK AND FPC PREFERRED 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.
Under the DGCL, a Record Holder of FPC Capital Stock who makes the demand
described below with respect to such shares, who continuously is the record
holder of such shares through the Effective Time, who otherwise complies with
the statutory requirements set forth in Section 262 and who neither votes in
favor of approval of the Merger Agreement and the Merger nor consents thereto in
writing will be entitled to have his or her FPC Capital Stock appraised by the
Delaware Court of Chancery and to receive payment of the "fair value" of such
shares as described below. Such holders are, in such circumstances, entitled to
appraisal rights because they hold shares of a constituent corporation to the
Merger and may be required by the Merger Agreement to accept the Merger
Consideration.
A Record Holder of FPC Capital Stock wishing to exercise his or her
appraisal rights must deliver to the Secretary of FPC, before the vote on the
Merger Agreement at the Special Meeting, a written demand for appraisal of his
or her FPC Capital Stock. Merely voting or delivering a proxy directing a vote
against approval of the Merger Agreement and the Merger will not constitute a
demand for appraisal. A written demand is essential. Such written demand must
reasonably inform FPC of the identity of the Record Holder and that such holder
intends thereby to demand appraisal of the holder's shares. All written demands
for appraisal of FPC Capital Stock should be sent or delivered to FPC at 3200
Windy Hill Road, Suite 400W, Atlanta, Georgia, 30339, Attention: Corporate
Secretary. In addition, a Record Holder of FPC Capital Stock wishing to exercise
his or her appraisal rights must hold such shares of record on the date the
written demand for appraisal is made and must hold such shares continuously
through the Effective Time. Stockholders who hold their FPC Capital Stock in
nominee form and who wish to exercise appraisal rights must take all necessary
steps in order that a demand for appraisal is made by the record holder of such
shares and are urged to consult with their nominee to determine the appropriate
procedures for the making of a demand for appraisal by the record holder.
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Within ten days after the Effective Time of the Merger, FPC, as the
Surviving Corporation in the Merger, must send a notice as to the effectiveness
of the Merger to each person who has satisfied the appropriate provisions of
Section 262 and who is entitled to appraisal rights under Section 262. Within
120 days after the Effective Time, any Record Holder of FPC Capital Stock who
has complied with the requirements for exercise of appraisal rights will be
entitled, upon written request, to receive from the Surviving Corporation a
statement setting forth (i) the aggregate number of shares of each class of FPC
Capital Stock not voted in favor of the Merger Agreement and with respect to
which demands for appraisal have been received and (ii) the aggregate number of
holders of such shares. Any such statement must be mailed within ten days after
a written request therefor has been received by the Surviving Corporation.
Within 120 days after the Effective Time, but not thereafter, the Surviving
Corporation or any Record Holder of FPC Capital Stock who has complied with the
foregoing procedures and who is entitled to appraisal rights under Section 262
may file a petition in the Delaware Court of Chancery demanding a determination
of the "fair value" of such shares. The Surviving Corporation is not under any
obligation to file a petition with respect to the appraisal of the "fair value"
of the FPC Capital Stock, and neither PhyCor nor FPC currently intends that the
Surviving Corporation file such a petition. Accordingly, it is the obligation of
the stockholders to initiate all necessary action to perfect their appraisal
rights within the time prescribed in Section 262. A Record Holder of FPC Capital
Stock will fail to perfect, or effectively lose, his or her right to appraisal
if no petition for appraisal of shares of FPC Capital Stock is filed within 120
days after the Effective Time.
If a petition for an appraisal is timely filed, after a hearing on such
petition, the Delaware Court of Chancery will determine the holders of FPC
Capital Stock entitled to appraisal rights and will appraise the "fair value" of
the FPC Capital Securities, exclusive of any element of value arising from the
accomplishment or expectation of the Merger. Stockholders considering seeking
appraisal should be aware that the "fair value" of their FPC Capital Stock as
determined under Section 262 could be more than, the same as, or less than the
value of the Merger Consideration they would have received if they did not seek
appraisal. The Delaware Supreme Court has stated that "proof of value by any
techniques or methods which are generally considered acceptable in the financial
community and otherwise admissible in court" should be considered in the
appraisal proceedings. In addition, Delaware courts have decided that the
statutory appraisal remedy, depending on factual circumstances, may or may not
be a dissenter's exclusive remedy.
The Delaware Court of Chancery will determine the amount of interest, if
any, to be paid upon the amounts to be received by persons whose FPC Capital
Stock have been appraised. The costs of the action may be determined by which
court and imposed upon the parties as the court deems equitable. The Delaware
Court of Chancery may also order that all or a portion of the expenses incurred
by any holder of FPC Capital Stock in connection with an appraisal, including
without limitation, reasonable attorneys' fees and the fees and expenses of
experts utilized in the appraisal proceeding, be charged pro rata against the
value of all of the FPC Capital Stock entitled to appraisal.
If any Record Holder of FPC Capital Stock who demands appraisal of his or
her shares under Section 262 fails to perfect, or effectively withdraws or
loses, his or her right to appraisal, as provided in the DGCL, the FPC Capital
Stock of such stockholder will be deemed to receive Merger Consideration in
accordance with the Merger Agreement. A holder may withdraw his or her demand
for appraisal by delivering to the Surviving Corporation a written withdrawal of
his or her demand for appraisal and acceptance of the Merger, except that any
such attempt to withdraw made more than 60 days after the Effective Time will
require the written approval of the Surviving Corporation. Failure to follow the
steps required by Section 262 of the DGCL for perfecting appraisal rights may
result in the loss of such rights.
Any Record Holder of FPC Capital Stock who has duly demanded an appraisal
in compliance with Section 262 will not, after the Effective Time, be entitled
to vote the FPC Capital Stock subject to such demand for any purpose or be
entitled to the payment of dividends or other distributions on those shares
(except dividends or other distributions payable to holders of record of shares
of FPC Capital Stock as of a date prior to the Effective Time).
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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
June 24, 1998, as reported by Nasdaq:
<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 22.88
1998
First Quarter............................................. 28.50 18.88
Second Quarter (through June 24, 1998).................... 23.81 14.13
</TABLE>
The closing sales price for PhyCor Common Stock as reported by the Nasdaq
National Market was $26.88 on December 19, 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 $18.31 on June
24, 1998. As of such date there were approximately 3,140 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.
FPC is a privately held Delaware corporation. There has been no public
trading market in the securities of FPC and, therefore, there is no historical
per share price for such securities for any period. As of June 24, 1998, there
were approximately 120 holders of record of FPC Class A Common Stock. The FPC
Board believes that consideration to be paid by PhyCor in connection with the
Merger Agreement is fair, based upon, among other factors, the DLJ Opinion. See
"THE MERGER -- Reasons for the Merger; Recommendations of the Board of
Directors" and "-- Opinion of Donaldson Lufkin & Jenrette Securities
Corporation."
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. FPC has never declared or paid a dividend on any shares of FPC Capital
Stock.
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FPC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with FPC's
Consolidated Financial Statements and related notes and "Selected Consolidated
Financial Data" included elsewhere herein.
GENERAL
FPC delivers primary care and certain specialty care medical services
through the FPC Group Practices in Georgia and Florida. In addition, FPC
provides management services pursuant to service agreements to the Managed Group
Practices in Illinois, Texas and New York and to an IPA in New York, and is
pursuing opportunities to provide management services in other select geographic
areas. FPC derives its revenues directly from services performed by the
physicians in the FPC Group Practices and through management fees collected from
the Managed Group Practices and the IPA. FPC believes that offering physician
groups a wide range of affiliation structures, from limited management services
to practice acquisition and comprehensive management services, enhances its
ability to attract and affiliate with high quality primary care and multi-
specialty physicians and group practices.
FPC (either directly or through subsidiaries) has acquired the assets of 14
primary care and multi-specialty groups in Georgia, Florida, Illinois, Texas and
New York and merged with an existing practice management company in Texas. The
acquisitions of the FPC Group Practices in Florida and Georgia were structured
as asset purchases in which FPC purchased the furniture, fixtures and equipment,
accounts receivable, cash, and other tangible and intangible assets of each of
the Group Practices. In connection with the FPC Group Practice acquisitions, FPC
or its subsidiaries entered into employment agreements, generally for five-year
terms, with the physicians practicing in such groups which contained, among
other provisions, restrictive covenants including non-solicitation and
non-compete provisions. In connection with the acquisitions of the Managed Group
Practices, FPC entered into 40 year agreements to provide management services to
the Managed Group Practices. The Managed Group Practices entered into employment
agreements with each of the physicians practicing in the groups. FPC also
entered into a two year management agreement with an option to purchase the
assets of a group in Midland/Odessa, Texas, which agreement was terminated by
FPC in April 1998.
Under the long-term management service agreements, FPC provides exclusive
management and administration of the Managed Group Practices day-to-day business
operations. Services provided by FPC include: (i) billing and collection of
patient accounts and other accounting and finance functions; (ii) the provision
of all non-physician employees to the Managed Group Practices; (iii) negotiation
of all participation agreements with third party payors; (iv) preparation of
operating and capital budgets for approval by the executive committees; and (v)
other administrative and management services. Executive committees, with equal
membership by the FPC and the Managed Group Practices, are responsible for the
review and approval of operating and capital budgets and establishing strategic
plans and overall policy for the Managed Group Practices. Managed Group
Practices have authority over (a) issues related to the practice of medicine,
(b) hiring and retention of physicians or (c) allocation of distributions to the
physicians. Each management service agreement has an initial term of 40 years
with provisions for extensions beyond the initial term.
The management fee earned by FPC is typically based upon a percentage
(15-20%) of the net operating income of the practice after clinic operating
costs and corporate, general and administration costs, but before the cost of
medical services. Two management service agreements, which represent
approximately 14.6% and 17.6%, respectively, of 1997 annualized Net Revenues,
provide for minimum management fees (in the aggregate, approximately $1.2
million) that must be paid without regard to the net operating income of the
medical practice. In addition, FPC is entitled to a performance bonus if the net
operating income exceeds a predetermined threshold. In these two management
service agreements, the performance bonus may be earned if the net operating
income of the practice after clinic operating costs and corporate, general and
administration costs, but before the cost of medical services exceeds the
predetermined threshold. The amount of such performance bonus is based upon a
percentage (15-20%) of the net operating income in excess of the predetermined
threshold. In one of these management service agreements, the performance bonus
may also be
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earned if Net Clinic Revenue exceeds a predetermined amount. The amount of such
performance bonus is based upon a percentage (5-10%) of the Net Clinic Revenue
in excess of the predetermined threshold. FPC's ability to manage the
profitability of medical practice results from its ability to directly manage
clinic operating costs, providing attractive clinics to grow patient volume and
its ability to effectively negotiate managed care and preferred provider
organization contracts. FPC also manages profitability indirectly by supporting
physician productivity through operational enhancements, staff management and
patient management reporting systems.
Contractual agreements with managed care and other organizations to provide
physician services are contracted directly by the Company for owned physician
groups and thus the Company retains the risk related to these contracts.
However, all contractual agreements involving physician groups related to the
Company's management service agreements remain at the physician group level;
risk related managed care contracts involving those groups are shared by the
physician group and the Company through the management fee. Capitation revenue
under HMO contracts is recognized during the period in which the Company is
obligated to provide services.
FPC acquires the capitated contracts or the rights to capitated contracts
through the acquisition of owned practices or through the acquisition of
management services agreements with the Managed Group Practices. Additional
capitated contracts and associated enrollment are typically added to both owned
and Managed Group Practices after the date FPC assumes management of the medical
practice. The terms of the capitated contracts contain various risk-sharing
arrangements that are designed to promote appropriate utilization management of
the capitated members. FPC monitors the performance of these contracts through
various financial and other indicators. Profitability under the capitated
contracts historically has been superior to traditional fee for service
arrangements. Revenue recognized under capitated agreements was approximately
$26,666,000, $18,651,000 and $12,374,000 for the years ended December 31, 1997,
1996 and 1995, respectively. Revenue recognized under capitated agreements was
approximately $7,142,000 and $6,865,000 for the three-month periods ended March
31, 1998 and 1997, respectively.
FPC is currently in the process of evaluating its computer software and
databases to ensure that any modifications required to be year 2000 compliant
are made in a timely manner. Management does not expect the financial impact of
such modifications to be material to FPC's financial position or results of
operations in any given year.
Dividends on the FPC Preferred Stock are payable at the direction of the
Board of Directors. Dividends on the FPC Class B Convertible Preferred Stock and
FPC Class C Convertible Preferred Stock are not cumulative. As of December 31,
1997, no dividends have been declared on the FPC Class A Preferred Stock, the
FPC Class B Convertible Preferred Stock or the Class C Convertible Preferred
Stock. The FPC Class A Preferred Stock restricts FPC from paying dividends or
making other distributions on the FPC Class B Convertible Preferred Stock, FPC
Class C Convertible Preferred Stock or FPC Common Stock unless full cumulative
dividends on the FPC Class A Preferred Stock through the most recent June 30 or
December 31 have been declared and paid. Additionally, the outstanding shares of
the FPC Class B Convertible Preferred Stock restrict FPC from paying dividends
or making other distributions on the FPC Class C Convertible Preferred Stock or
FPC Common Stock, and the outstanding shares of FPC Class C Convertible
Preferred Stock restrict FPC from paying dividends or making other distributions
on the FPC Common Stock.
On November 20, 1997, the Emerging Issues Task Force (EITF) of the
Financial Accounting Standards Board reached a consensus concerning certain
matters relating to the physician practice management industry with respect to
the requirements which must be met to consolidate a managed professional
corporation and the accounting for business combinations involving professional
corporations. In accordance with the EITF's guidance, FPC will discontinue use
of the "display method" to report revenues from management contracts in
financial statements for periods ending after December 15, 1998. Thus, after
December 15, 1998, fees from management contracts for all periods presented will
be reported as a single line item ("Net revenue") in the Company's statements of
operations.
In connection with the amendment to the Merger Agreement on May 18, 1998,
FPC, PhyCor and the Subsidiary entered into a management agreement (the
"Management Agreement") providing for the
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Subsidiary's management of the day-to-day operations of FPC, including the
performance of executive, administrative, organizational and management
functions at each FPC location. The Subsidiary does not have authority under the
Management Agreement to perform any medical function, make any decisions on
behalf of FPC with respect to the Merger Agreement, receive any advice from
FPC's advisors in connection with the Merger or participate in the solicitation
of FPC's stockholders in connection with the Special Meeting. As part of
performing its management services, the Subsidiary is required to provide all
personnel necessary for the conduct of FPC's business (with the exception of
medical professionals) and to provide FPC with sufficient working capital for
the conduct of its business, which may be in the form of a loan. In
consideration of the management services, the Subsidiary is entitled to receive
a fee of 15% of FPC's positive pre-tax income, payable 45 days after each
calendar quarter, provided that the initial payment is calculated from May 18,
1998 to September 30, 1998. Unless sooner terminated in accordance with its
terms, the Management Agreement will expire on June 30, 1999.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31,
1998
Total Revenue. Total revenue increased from $19.6 million for the three
months ended March 31, 1997 to $20.7 million for the three months ended March
31, 1998, an increase of 6%. This increase is attributable to the New York
acquisition in July 1997 and the effect of related revenues recognized in the
quarter ended March 31, 1998.
Amounts Retained by Managed Groups. These amounts decreased from $4.3
million for the three months ended March 31, 1997 to $4.1 million for the three
months ended March 31, 1998. This 5% decrease is attributable principally to
certain physicians who left the Texas managed group practice after the quarter
ended March 31, 1997.
Cost of Medical Services. Cost of medical services increased from $4.3
million for the three months ended March 31, 1997 to $4.6 million for the three
months ended March 31, 1998, an increase of 7%. This increase is attributable
principally to specialists' fees under a full risk contract in the South Florida
region beginning May 1997.
Clinic Operating Costs. Clinic operating costs increased from $9.8 million
for the three months ended March 31, 1997 to $10.6 million for the three months
ended March 31, 1998, an increase of 8%. This increase is attributable
principally to the New York acquisition in July 1997.
Depreciation and Amortization. Depreciation and amortization increased
from $581,000 for the three months ended March 31, 1997 to $613,000 for the
three months ended March 31, 1998, an increase of 6%. This increase is
attributable principally to the New York acquisition in July 1997.
Other (Income) Expense. Other income decreased from $335,000 for the three
months ended March 31, 1997 to $274,000 for the three months ended March 31,
1998, principally as a result of winding down the operations of a subsidiary in
the claims processing business. Interest expense increased from $152,000 for the
three months ended March 31, 1997 to $395,000 for the three months ended March
31, 1998. This increase resulted from borrowings under the credit facility
established in July 1997 See "-- Liquidity and Capital Resources."
Year Ended December 31, 1996 Compared to Year Ended December 31, 1997
Total Revenue. Total revenue increased from $37.6 million for the year
ended December 31, 1996 to $78.0 million for the year ended December 31, 1997,
an increase of 107%. This increase is attributable to an acquisition closed
during 1997 (the "1997 Acquisition") and the effect of a full year's revenue
recognition in 1997 related to acquisitions closed in 1996 (the "1996
Acquisitions").
Amounts Retained by Managed Group Practices. Amounts payable to the
Managed Group Practices are classified as Amounts Retained by Managed Groups.
These amounts increased from $2.4 million for the year ended December 31, 1996
to $15.6 million for the year ended December 31, 1997, an increase of 563%.
56
<PAGE> 65
This increase is attributable to the 1997 Acquisition and to a full year's
effect of acquisitions of Managed Group Practices completed in 1996.
Cost of Medical Services. The cost of medical services remained consistent
at $17.4 million for the years ended December 31, 1996 1997. A decrease of
approximately $1.8 million in the cost of medical services resulting from the
conversion of a full risk managed care contract to a limited risk contract was
offset by increases in physician compensation, fees and malpractice costs of
$1.8 million attributable to the 1997 Acquisition and the full year's effect of
the 1996 Acquisitions.
Clinic Operating Costs. Clinic operating costs increased from $19.6
million for the year ended December 31, 1996 to $41.6 million for the year ended
December 31, 1997, an increase of 113%. Of this increase, $18.4 million or 94%
is attributable to a full years effect of the 1996 Acquisitions with the
remainder attributable to the 1997 Acquisition.
Corporate, General and Administration. Corporate, general and
administration costs increased from $4.2 million for the year ended December 31,
1996 to $5.6 million for the year ended December 31, 1997, an increase of 33%.
This increase is primarily attributable to the addition of corporate personnel,
increases in travel costs, and increases in legal and consulting costs
associated with the increased size of FPC.
Depreciation and Amortization. Depreciation and amortization increased
from $1.5 million for the year ended December 31, 1996 to $2.4 million for the
year ended December 31, 1997, an increase of 60%. This increase is primarily due
to the increased amortization of intangible assets resulting from the 1997
Acquisition and the 1996 Acquisitions.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1996
Total Revenue. Total revenue increased from $19.7 million for the year
ended December 31, 1995 to $37.6 million for the year ended December 31, 1996,
an increase of 91%. This increase is primarily attributable to the 1996
Acquisitions and the effect of a the a full year's revenue recognition in 1996
related to acquisitions closed in 1995 (the "1995 Acquisitions").
Amounts Retained by Managed Groups. Amounts retained by managed groups
totaled $2.4 million for the year ended December 31, 1996. FPC had not entered
into any such arrangements during the year ended December 31, 1995.
Cost of Medical Services. Cost of medical services increased from $12.1
million for the year ended December 31, 1995 to $17.4 million for the year ended
December 31, 1996, an increase of 43%. Of this increase, $2.5 million or 47%, is
attributable to the 1996 Acquisitions, with the remainder related to the full
year effect of the 1995 Acquisitions.
Clinic Operating Costs. Clinic operating costs increased from $9.0 million
for the year ended December 31, 1995 to $19.6 million for the year ended
December 31, 1996, an increase of 121%. Of this increase, $8.5 million or 77%,
is attributable to the 1996 Acquisitions, with the remainder related to the full
year effect of the 1995 Acquisitions.
Corporate, General and Administration. Corporate, general and
administration costs increased from $3.2 million for the year ended December 31,
1995 to $4.2 million for the year ended December 31, 1996, an increase of 31%.
This increase was primarily due to the employment of additional corporate
personnel, increased occupancy costs and increased legal costs associated with
development activities.
Depreciation and Amortization. Depreciation and amortization increased
from $675,000 for the year ended December 31, 1995 to $1.5 million for the year
ended December 31, 1996, an increase of $825,000 or 122%. This increase was
primarily due to the increased amortization of goodwill and other intangibles
resulting from the 1995 Acquisitions and the 1996 Acquisitions.
Loss on Impairment of Long-Term Assets. The loss on impairment of
long-term assets in 1996 was the result of the writedown of goodwill associated
with acquisitions for which the undiscounted cash flows are estimated to be
negative.
57
<PAGE> 66
Other (Income) Expense. Other income increased from $293,000 for the year
ended December 31, 1995 to $721,000 for the year ended December 31, 1996, an
increase of 146%. The majority of this increase is attributable to the 1996
Acquisitions.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1995
Total Revenue. Total revenue increased from $3.7 million for the year
ended December 31, 1994 to $19.7 million for the year ended December 31, 1994,
an increase of 432%. Of this increase, $7.6 million was attributable to the 1995
Acquisitions, and the remainder of such increase is attributable to a full
year's revenue recognition in 1995 the acquisitions closed in 1994 (the "1994
Acquisitions").
Costs of Medical Services. Cost of medical services increased from $2.3
million for the year ended December 31, 1994 to $12.1 million for the year ended
December 31, 1995, an increase of 426%. Of this increase, $5.0 million is
attributable to the 1995 Acquisitions and the remainder of such increase is
attributable to the full year's effect of the 1994 Acquisitions.
Clinic Operating Costs. Clinic operating costs increased from
approximately $2.3 million for the year ended December 31, 1994 to $9.0 million
for the year ended December 31, 1995, an increase of 291%. Of this increase, 3.7
million or 55% is attributable to the 1995 Acquisitions, with the remainder
related to the 1994 Acquisitions with a full year of operating results in 1995
and the addition to staff support additional physicians.
Corporate, General and Administration. Corporate, general and
administration costs increased from $2.2 million for the year ended December 31,
1994 to $3.2 million for the year ended December 31, 1995, an increase of 46%.
This increase was primarily due to the employment of additional corporate
personnel and increased occupancy costs due to the expansion of the corporate
office space to pursue FPC's growth and operational strategy.
Depreciation and Amortization. Depreciation and amortization increased
from $160,000 for the year ended December 31, 1994 to $675,000 for the year
ended December 31, 1995, an increase of 322%. This increase was primarily due to
the purchase of computer equipment and software and the increased amortization
and goodwill and other intangibles resulting from the 1994 Acquisitions and the
1995 Acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
Historically, FPC has satisfied its acquisition, working capital and
capital expenditure needs through leasing arrangements, seller financing in the
form of deferred payment arrangements and subordinated notes, and private equity
financing. FPC's acquisition, working capital and capital expenditure needs are
expected to increase as FPC pursues its growth and operational improvement
strategies.
During 1994, FPC issued a total of 74,767 shares of FPC Class B Convertible
Preferred Stock to officers of FPC and FPC's principal investors, WCAS and each
of DLJ Capital Corporation, Sprout Capital VI, L.P. and Sprout Growth II, L.P.
(collectively, the "Sprout Group"). These sales were at $100 per share and
resulted in net proceeds to FPC of $7,451,000 after issuance costs. The proceeds
were used to finance the acquisition of certain of the Group Practices and for
working capital and capital expenditure needs through August 1995.
In August 1995, FPC sold 40,000 shares of FPC Class A Preferred Stock in a
private transaction to WCAS and the Sprout Group at $100 per share, resulting in
net proceeds to FPC of $3,947,000 after issuance costs. These proceeds were used
to fund acquisitions, working capital requirements and capital expenditure
requirements.
In February 1996, FPC sold 50,000 shares of FPC Class A Preferred Stock to
WCAS and the Sprout Group at $100 per share in a private transaction, resulting
in net proceeds to FPC of $4,975,000 after issuance costs. In June 1996, FPC
sold an additional 60,000 shares of FPC Class A Preferred Stock to WCAS and the
Sprout Group at $100 per share in a private transaction, resulting in net
proceeds to FPC of $5,975,000 after issuance costs. In September 1996, FPC sold
an additional 25,000 shares of FPC Class A Preferred Stock to
58
<PAGE> 67
WCAS and the Sprout Group at $100 per share, resulting in net proceeds to FPC of
$2,485,000 after issuance costs. In each case, these proceeds were used to fund
acquisitions, working capital requirements and capital expenditure requirements.
In January 1997, FPC sold 25,000 shares of FPC Class A Preferred Stock to
WCAS and the Sprout Group at $100 per share, resulting in net proceeds to FPC of
$2,495,000 after issuance costs. These proceeds were used to fund acquisitions,
working capital requirements and capital expenditure requirements.
In July of 1997, FPC entered into a $5 million credit facility with WCAS,
the Sprout Group and other FPC stockholders, all of which has been drawn by FPC
as of January 15, 1998. Amounts drawn under the credit facility bear interest at
10% per annum and are repayable in seven years. Each month the note holders earn
warrants to purchase a number of shares of FPC Class A Common Stock based on the
following formula: (i) the average daily principal amount outstanding under the
credit facility during such month, divided by (ii) $1,000,000 and multiplied by
(iii) 1,667. The warrants are exercisable at $.01 per share subject to certain
adjustments. At March 31, 1998, warrants to purchase 41,869 shares had been
earned by the note holders under this agreement. In connection with the Merger
Agreement, WCAS and the Sprout Group agreed to forego earning warrants after
March 15, 1998.
On December 3, 1997, FPC issued 12,000 shares of FPC Class C Convertible
Preferred Stock to Pacific Capital, L. P. in connection with the purchase of a
$3,000,000 Subordinated Note from Primary Management, Inc. ("Primary
Management"), a PPM company in the Midland/Odessa, Texas area.
At December 31, 1997, FPC had working capital of $5,295,000, a cash balance
of $2,431,000 and current liabilities of $8,360,000, including $3,046,000 of
long-term indebtedness and capital leases maturing by December 31, 1998. In the
years ending December 31, 1998 and 1999, FPC will have aggregate principal
payments for notes to former owners and other notes payable of $2,692,000 and
$2,040,000, respectively. Also in the years ending December 31, 1998 and 1999,
FPC will have aggregate minimum capital lease commitments including interest of
$431,000 and $383,000, respectively, and aggregate minimum operating lease
commitments for all non-cancelable leases of $4,316,000 and $3,714,000,
respectively. The sources of funds for these amounts are expected to come from
the cash flows generated by FPC. In addition, FPC may consider various financing
sources, such as commercial lending institutions and additional private sales of
equity, but no assurance can be given that such financing will be available on
terms satisfactory to FPC. At March 31, 1998, FPC had working capital of
$4,820,000, a cash balance of $1,383,000 and current liabilities of $8,318,000,
including $2,053,000 of long-term debt and capital leases maturing by March 31,
1999.
On March 12, 1998, FPC entered into a revolving credit agreement with a
commercial bank to be used for general working capital purposes. FPC may draw
amounts under the agreement totaling $1.8 million. The agreement expires on
August 31, 1998 and is guaranteed severally by WCAS and Sprout Growth II, L.P.,
which are stockholders of FPC. Borrowings bear interest at the then applicable
prime rate as published by the bank or LIBOR dependent on the type of loan
selected. As of June 24, 1998, there were borrowings of $450,000 under the loan
agreement.
On May 18, 1998 FPC entered into a management agreement with Subsidiary,
pursuant to which Subsidiary provides FPC with working capital. As of June 24,
1998 there were borrowings of $1,000,000 under the promissory notes which bear
interest at LIBOR plus 75 basis points (the "Notes"). Borrowing under the Notes
will be used for working capital purposes and are due and payable in twelve
monthly installments commencing on June 30, 1999.
59
<PAGE> 68
BUSINESS OF FPC
SERVICES
FPC currently provides management services to the FPC Group Practices and
the Managed Group Practices. FPC's provision of management services is designed
to relieve physicians of many administrative burdens, thereby allowing them to
focus on the delivery of high quality medical care, and to enable FPC and the
physician groups to take advantage of the operating efficiencies and economics
of scale resulting from the provisions of similar services to a number of
groups.
Under the long-term management service agreements, FPC provides exclusive
management and administration of the Managed Group Practices' day-to-day
business operations. Services provided by FPC include: (i) billing and
collection of patient accounts and other accounting and finance functions; (ii)
the provision of all non-physician employees to the Managed Group Practices;
(iii) negotiation of all participation agreements and third party payors; (iv)
preparation of operating and capital budgets for approval by the executive
committees formed pursuant to the management service agreements; and (v) other
administrative and management services. The executive committees, with equal
membership by FPC and the Managed Group Practices, are responsible for the
review and approval of operating and capital budgets and strategic plans and
overall policy setting for the Managed Group Practices. FPC has no authority
over: (a) issues related to the practice of medicine; (b) hiring and retention
of physicians; and (c) allocation of distributions to the physicians. Each
management service agreement has an initial term of 40 years with provisions for
extensions beyond the initial term.
Many physician groups do not have the capital to invest in or the expertise
to manage or develop the sophisticated management information systems FPC
believes are required to succeed in a capitated payment environment. FPC
believes that to manage capitated patient populations effectively, it must
assemble and make easily accessible clinical and financial information to
physicians, other providers, support personnel and management. FPC is currently
in the process of implementing its management information system. The basic FPC
management information system, which has been implemented in each FPC Group
Practice site may include, depending on the needs of the site, the following
practice management functions: patient management, appointment scheduling,
collections management, cashiering, report writing, chart tracking, lab order
entry and radiology order entry.
OPERATIONS
The FPC Group Practices currently deliver medical services in the Tampa
Bay, Florida market; the South Florida market, and the Atlanta, Georgia market.
Each of the FPC Group Practices derives its revenue from the delivery of primary
care and, in some cases, specialty medical services to the local community. Each
of the FPC Group Practices employs physicians, and the Tampa Bay and South
Florida subsidiaries also retain physician extenders such as physician
assistants and nurse practitioners. Each of the FPC Group Practices also employs
support and administrative personnel, such as medical assistants, nurses,
ancillary service technicians, office managers, billing clerks and
receptionists, to provide operational support to the physicians and other
providers. The Tampa Bay subsidiary retains 49 full-time and part-time
physicians and six physician extenders in 15 sites in the cities of Tampa, St.
Petersburg, Pinellas Park, Brandon and Clearwater, Florida. The South Florida
subsidiary retains 31 full-time and part-time physicians in three sites in the
cities of Boca Raton and West Palm Beach, Florida. Although the FPC Group
Practices at each of the South Florida sites focus on primary care, the FPC
Group Practice at West Palm Beach site also retains physicians specialized in
dermatology, cardiology, ophthalmology, orthopedic surgery, general surgery and
urology. The Atlanta, Georgia subsidiary employs three full-time physicians in
two sites in the cities of Lithia Springs and Douglasville, Georgia.
60
<PAGE> 69
The table below sets forth certain information regarding group practices of
which FPC had purchased assets as of June 24, 1998.
<TABLE>
<CAPTION>
NUMBER OF OWNED
NUMBER OF PHYSICIAN OR DATE
LOCATION SITES PHYSICIANS(1) EXTENDERS(2) MANAGED SPECIALTIES ACQUIRED
- ---------------------------- ----- ------------- ------------ ------- ---------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Pinellas Park, FL........... 2 4 Owned Primary Care February 1994
Atlanta, GA................. 2 3 Owned Primary Care September 1994
St. Petersburg, FL.......... 1 1 Owned Primary Care March 1994
Boca Raton, FL.............. 1 14 Owned Primary Care September 1994
Tampa, FL................... 2 7 1 Owned Primary Care October 1994
Tampa, FL................... 1 3 Owned Primary Care April 1995
West Palm Beach, FL......... 1 17 Owned Primary Care and April 1995
Multi-Specialty
Brandon, FL................. 2 6 3 Owned Primary Care January 1996
Tampa, FL................... 7 28 2 Owned Primary Care June 1996
Alton, IL (St. Louis
area)..................... 2 15 2 Managed Primary Care and August 1996
Multi-Specialty
Dallas/Ft. Worth area, TX... 18 52 21 Managed Primary Care December 1996
Dallas/Ft. Worth area, TX... 1 1 1 Managed Primary Care May 1997
New York.................... 1 10 Managed Primary Care and July 1997
Multi-Specialty
-- --- --
41 161 31
</TABLE>
- ---------------
(1) Includes physicians added to practices subsequent to their acquisition by
FPC.
(2) As used herein, the term "Physician Extenders" means nurse practitioners and
physician assistants.
In July 1997, FPC acquired Manhattan Physicians IPA (the "IPA") in New
York. As of March 1998, the IPA had contracts to provide managed care
contracting and administrative services to 395 physicians in Manhattan
representing 5,285 members. The IPA maintains provider contracts with Aetna U.S.
Healthcare, Inc. and United Healthcare, Inc./Metra. FPC believes that as IPAs
encounter the increasing challenges of capitated payment systems and the
associated increased capital requirements, such groups will seek to be acquired
by, or to enter into long-term management agreements with, entities such as FPC.
FPC does not employ the physicians of the Managed Group Practices or the
IPA and does not control the practice of medicine by physicians employed by the
FPC Group Practices. Accordingly, FPC believes that it is not in violation of
applicable state laws prohibiting the unauthorized practice of medicine. FPC or
its subsidiaries employ physicians in the states of Florida and Georgia.
Accordingly, FPC is a provider of designated health services and subject to the
federal laws regulating such providers. Neither Florida or Georgia currently
enforce any "corporate practice of medicine" doctrine and the direct employment
of physicians by nonphysician entities is permissible, therefore FPC believes
that it is in compliance with applicable state laws.
In connection with the amendment to the Merger Agreement on May 18, 1998,
FPC, PhyCor and the Subsidiary entered into a management agreement (the
"Management Agreement") providing for the Subsidiary's management of the
day-to-day operations of FPC, including the performance of executive,
administrative, organizational and management functions at each FPC location.
The Subsidiary does not have authority under the Management Agreement to perform
any medical function, make any decisions on behalf of FPC with respect to the
Merger Agreement, receive any advice from FPC's advisors in connection with the
Merger or participate in the solicitation of FPC's stockholders in connection
with the Special Meeting. As part of performing its management services, the
Subsidiary is required to provide all personnel necessary for the conduct of
FPC's business (with the exception of medical professionals) and to provide FPC
with sufficient working capital for the conduct of its business, which may be in
the form of a loan. In consideration of the management services, the Subsidiary
is entitled to receive a fee of 15% of FPC's positive pre-tax income, payable 45
days after each calendar quarter, provided that the initial payment is
calculated from May 18, 1998
61
<PAGE> 70
to September 30, 1998. Unless sooner terminated in accordance with its terms,
the Management Agreement will expire on June 30, 1999.
PROPERTIES
FPC leases approximately 18,300 square feet at 3200 Windy Hill Road,
Atlanta, Georgia, 30339, for its corporate headquarters. FPC also leases or
subleases the facilities for the FPC Group Practices and for certain other of
its regional operations. The leases and subleases have various terms ranging
from one to eleven years and monthly rents ranging from $1,000 to $36,000. FPC
does not currently own any real property.
EMPLOYEES
As of June 24, 1998, FPC employed 1,115 individuals, including 27 in its
corporate office, 163 in South Florida market group practices, 359 in Tampa Bay
market group practices, and 19 in Atlanta market group practices, 124 in St.
Louis market group practices, 389 in Dallas/Fort Worth market group practices
and 34 in New York market group practices. None of FPC's employees is a member
of a labor union, and FPC considers its relations with its employees to be good.
LITIGATION
In connection with FPC's transaction with its Managed Group Practice in the
Dallas/Fort Worth area, several of the stockholders of Physician Capital
Partners Corp. ("PCP"), a Texas corporation that was the former manager of the
Managed Group Practice in Dallas/Fort Worth, voted against the merger between
PCP and FPC and asserted their rights as dissenting stockholders under Section
5.11 of the Texas Business Corporation Act ("Texas Act").
On February 10, 1997, 11 of the dissenting stockholders filed suit in Texas
State District Court in Tarrant County, Texas, alleging that they are entitled
to have the PCP shares owned by them appraised and are further entitled to
receive from FPC such appraised value for their shares. FPC has responded to
such assertion in compliance with Section 5.12 of the Texas Act. The dissenting
stockholders have alleged that each share of PCP owned by them had a value at
the date of the merger of $5.76. FPC has offered the dissenting stockholders
$0.21 per PCP share, its valuation of such shares. The dissenting stockholders
who are party to the suit own, in the aggregate, approximately 1,033,052 shares
of PCP and are therefore alleging that they are entitled to a payment from FPC
in excess of $5,950,000. FPC has offered an aggregate payment of $216,941 for
the PCP shares owned by such dissenting stockholders.
On June 4, 1998, the court determined that the dissenters had met the
statutory notice requirements under the laws of the State of Texas and appointed
an appraiser to review the evidence from FPC and from the dissenting
stockholders and to submit a recommendation to the court regarding the value of
the shares. The appraiser selected by the court was recommended by FPC. He is a
Partner with the firm Value Management Services in Dallas, Texas and has
previous experience appraising health care organizations. FPC expects the
appraiser to present his report to the court in July or August, 1998. This
appraised value subsequently may be contested by any party to the litigation in
an appropriate judicial proceeding. FPC does not consider the dissenting
stockholders' valuation of their PCP shares to be accurate and is vigorously
defending this matter. There can be no assurance, however, that FPC will
ultimately prevail or that the court will not ultimately determine that the
shares of PCP owned by the dissenting stockholders should be valued in excess of
FPC's valuation of such shares. If this litigation is adversely determined it
could have a material, adverse affect on FPC's financial condition.
In addition, the provision of medical services by the affiliated physicians
with which FPC contracts entails an inherent risk of professional liability
claims. Further, from time to time FPC is party to certain claims, suits and
complaints, which primarily arise in the ordinary course of business. Although
there are currently no such claims, suits or complaints which, in the opinion of
management, would have a material adverse effect on FPC's financial position or
results of operations, there can be no assurances that such claims will not be
asserted against FPC in the future. FPC maintains insurance coverage that it
believes to be adequate both as to risks and amounts. Successful malpractice or
other claims asserted against FPC or one of its affiliated
62
<PAGE> 71
physician groups could, however, have a material adverse effect on FPC and its
financial condition and results of operations.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the FPC Capital Stock as of June 24, 1998, by (i) each director and
executive officer of FPC, (ii) all directors and executive officers as a group
and (iii) each stockholder known by FPC to be the beneficial owner of more than
5% of the outstanding FPC Capital Stock other than the FPC Class C Convertible
Preferred Stock, information as to which is set forth below the table. Except as
otherwise indicated, the persons or entities listed below have sole voting and
investment power with respect to all shares shown to be beneficially owned by
them, except to the extent such power is shared by a spouse under applicable
law.
<TABLE>
<CAPTION>
SHARES OF FPC CAPITAL STOCK PERCENT OF FPC CAPITAL STOCK
BENEFICIALLY OWNED BY CLASS BENEFICIALLY OWNED BY CLASS PERCENT OF
----------------------------------- --------------------------------- OUTSTANDING
CONVERTIBLE CONVERTIBLE VOTING STOCK
CLASS A PREFERRED PREFERRED CLASS A PREFERRED PREFERRED BENEFICIALLY
NAME OF BENEFICIAL OWNER COMMON A(1) B(2) COMMON A(1) B(2) OWNED
- ------------------------ --------- --------- ----------- ------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Stephen A. George, M.D.(4)...... 850,000 -- 3,175 19.67% -- 2.89% 11.21%
3200 Windy Hill Road,
Suite 400W
Atlanta, Georgia 30339
Donald B. Smallwood(5).......... 255,000 -- 2,000 5.99 -- 1.82 3.85
3200 Windy Hill Road,
Suite 400W
Atlanta, Georgia 30339
Karl A. Hardesty(5)............. 165,000 -- 2,000 3.87 -- 1.82 2.81
3200 Windy Hill Road,
Suite 400W
Atlanta, Georgia 30339
Andrew B. Adams, M.D.,(6)....... 175,000 2,000 4.05 -- 1.82 2.90
3200 Windy Hill Road,
Suite 400W
Atlanta, Georgia 30339
Kelly J. DeKeyser(7)............ 128,000 -- 200 3.01 -- 0.18 1.58
3200 Windy Hill Road,
Suite 400W
Atlanta, Georgia 30339
Michael A. Jutras, M.D.(8)...... 65,300 -- -- 1.55 -- -- 0.76
221 Bedford Road,
Suite 200
Bedford, Texas 76022
Patrick J. Welsh(9)............. 1,131,809 140,000 70,000 26.81 70.00% 63.64 44.62
Welsh, Carson, Anderson &
Stowe
1 World Financial Center,
Suite 3601
New York, New York 10281
Andrew M. Paul(10).............. 1,131,809 140,000 70,000 26.81 70.00 63.64 44.62
Welsh, Carson, Anderson &
Stowe
1 World Financial Center,
Suite 3601
New York, New York 10281
Paul B. Queally(11)............. 1,131,809 140,000 70,000 26.81 70.00 63.64 44.62
Welsh, Carson, Anderson & Stowe
1 World Financial Center,
Suite 3601
New York, New York 10281
All directors and officers as a
group (12) (9 persons)......... 2,770,109 140,000 79,375 61.27 70.00 72.16 65.64
<CAPTION>
SHARES OF PERCENT
PHYCOR OF
COMMON PHYCOR
STOCK STOCK
BENEFICIALLY TO BE
OWNED OWNED
AFTER THE AFTER THE
NAME OF BENEFICIAL OWNER MERGER(3) MERGER
- ------------------------ ------------ ---------
<S> <C> <C>
Stephen A. George, M.D.(4)...... 201,430 *
3200 Windy Hill Road,
Suite 400W
Atlanta, Georgia 30339
Donald B. Smallwood(5).......... 68,785 *
3200 Windy Hill Road,
Suite 400W
Atlanta, Georgia 30339
Karl A. Hardesty(5)............. 50,138 *
3200 Windy Hill Road,
Suite 400W
Atlanta, Georgia 30339
Andrew B. Adams, M.D.,(6)....... 52,210 *
3200 Windy Hill Road,
Suite 400W
Atlanta, Georgia 30339
Kelly J. DeKeyser(7)............ 28,114 *
3200 Windy Hill Road,
Suite 400W
Atlanta, Georgia 30339
Michael A. Jutras, M.D.(8)...... 13,528 *
221 Bedford Road,
Suite 200
Bedford, Texas 76022
Patrick J. Welsh(9)............. 1,329,208 1.9%
Welsh, Carson, Anderson &
Stowe
1 World Financial Center,
Suite 3601
New York, New York 10281
Andrew M. Paul(10).............. 1,329,208 1.9
Welsh, Carson, Anderson &
Stowe
1 World Financial Center,
Suite 3601
New York, New York 10281
Paul B. Queally(11)............. 1,329,208 1.9
Welsh, Carson, Anderson & Stowe
1 World Financial Center,
Suite 3601
New York, New York 10281
All directors and officers as a
group (12) (9 persons)......... 1,743,415 2.5
</TABLE>
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<PAGE> 72
<TABLE>
<CAPTION>
SHARES OF FPC CAPITAL STOCK PERCENT OF FPC CAPITAL STOCK
BENEFICIALLY OWNED BY CLASS BENEFICIALLY OWNED BY CLASS PERCENT OF
----------------------------------- --------------------------------- OUTSTANDING
CONVERTIBLE CONVERTIBLE VOTING STOCK
CLASS A PREFERRED PREFERRED CLASS A PREFERRED PREFERRED BENEFICIALLY
NAME OF BENEFICIAL OWNER COMMON A(1) B(2) COMMON A(1) B(2) OWNED
- ------------------------ --------- --------- ----------- ------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Welsh, Carson, Anderson & Stowe,
VI, L.P.(13)................... 1,131,809 140,000 70,000 26.81 70.00 63.64 44.62
1 World Financial Center,
Suite 3601
New York, New York 10281
DLJ Capital Corporation/........ 485,061 60,000 30,000 11.49 30.00 27.27 19.12
Sprout Group(14)
277 Park Ave., 21st Floor
New York, New York 10172
Sprout Capital VI, L.P.(15)..... 420,493 60,000 28,228 9.96 30.00 25.66 17.58
277 Park Ave., 21st Floor
New York, New York 10172
Sprout Growth II, L.P.(16)...... 420,493 60,000 28,228 9.96 30.00 25.66 17.58
277 Park Ave., 21st Floor
New York, New York 10172
<CAPTION>
SHARES OF PERCENT
PHYCOR OF
COMMON PHYCOR
STOCK STOCK
BENEFICIALLY TO BE
OWNED OWNED
AFTER THE AFTER THE
NAME OF BENEFICIAL OWNER MERGER(3) MERGER
- ------------------------ ------------ ---------
<S> <C> <C>
Welsh, Carson, Anderson & Stowe,
VI, L.P.(13)................... 1,329,208 1.9
1 World Financial Center,
Suite 3601
New York, New York 10281
DLJ Capital Corporation/........ 569,661 *
Sprout Group(14)
277 Park Ave., 21st Floor
New York, New York 10172
Sprout Capital VI, L.P.(15)..... 542,148 *
277 Park Ave., 21st Floor
New York, New York 10172
Sprout Growth II, L.P.(16)...... 542,148 *
277 Park Ave., 21st Floor
New York, New York 10172
</TABLE>
- ---------------
* Less than 1%
** All 12,000 shares of the FPC Class C Convertible Preferred Stock that are
outstanding are owned by Pacific Capital/White Pines Management, 2401
Plymouth Road, Suite B, Ann Arbor, Michigan 48105. Such shares represent
1.43% of the outstanding FPC Voting Stock and the holder thereof would own
24,608 shares (less than 1%) of PhyCor Common Stock after the Merger.
(1) The shares of Class A Preferred Stock are non-voting securities, but are
eligible to vote on the Merger at the Special Meeting.
(2) The Class B Convertible Preferred Stock is initially convertible, at the
option of the stockholder, into a number of Class A Common Shares
determined by a prescribed formula. The conversion ratio is 38.50386 shares
of Class A Common Stock for each share of Class B Convertible Preferred
Stock. The holders are entitled to vote the number of Common Shares into
which their shares are convertible.
(3) Based upon the product of the number of shares of FPC Class A Common Stock,
Class A Preferred Stock and Class B Convertible Preferred Stock held by
each stockholder as of June 24, 1998 and the Exchange Ratios. In the event
the number of shares of PhyCor Common Stock issuable to the holders of FPC
Class A Common Stock is adjusted pursuant to the terms of the Merger
Agreement, these share amounts will be adjusted accordingly.
(4) Class A Common Stock includes options to purchase 100,000 shares that will
become exercisable within 60 days of the date hereof. The shares of Class B
Convertible Preferred Stock are convertible into 122,249 shares of Class A
Common Stock.
(5) Class A Common Stock includes options to purchase 37,500 shares that will
become exercisable within 60 days of the date hereof. The shares of Class B
Convertible Preferred Stock are convertible into 77,008 shares of Class A
Common Stock.
(6) Class A Common Stock includes options to purchase 100,000 shares that will
become exercisable within 60 days of the date hereof. The shares of Class B
Convertible Preferred Stock are convertible into 77,008 shares of Class A
Common Stock.
(7) Class A Common Stock includes options to purchase 25,000 shares that will
become exercisable within 60 days of the date hereof. The shares of Class B
Convertible Preferred Stock are convertible into 7,701 shares of Class A
Common Stock.
(8) Excludes 65,300 shares of Class A Common Stock that are to be delivered on
December 11, 1999.
(9) Includes 6,475 shares of Class A Common Stock and 416 shares of Class B
Convertible Preferred Stock, convertible into 16,018 shares of Class A
Common Stock, owned individually by Mr. Welsh. The remaining shares are
owned by WCAS or its affiliates. Mr. Welsh is a general partner of WCAS and
shares voting and dispositive power with respect to such shares.
(10) Includes 1,540 of Class A Common Stock and 100 shares of Class B
Convertible Preferred Stock, convertible into 3,850 shares of Class A
Common Stock, owned individually by Mr. Paul. The
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<PAGE> 73
remaining shares are owned by WCAS or its affiliates. Mr. Paul is a general
partner of WCAS and shares voting and dispositive power with respect to
such shares.
(11) Represents shares owned by WCAS or its affiliates. Mr. Queally is a general
partner of WCAS and shares voting and dispositive power with respect to
such shares.
(12) Includes 79,375 shares of Class B Convertible Preferred Stock, convertible
into 3,056,245 shares of Class A Common Stock, and options to purchase
300,000 shares of Class A Common Stock that will become exercisable within
60 days of the date hereof.
(13) Represents shares owned by WCAS or its affiliates. The shares of Class B
Convertible Preferred Stock are convertible into 2,695,270 shares of Class
A Common Stock.
(14) Includes 407,932 shares of Class A Common Stock and 11,055 shares of Class
B Convertible Preferred Stock, convertible into 425,660 shares of Class A
Common Stock, owned by Sprout Capital Vl, L.P. and 17,173 shares of Class B
Convertible Preferred Stock, convertible into 661,227 shares of Class A
Common Stock, owned by Sprout Growth II, L.P., affiliates of DLJ Capital
Corp.
(15) Includes 407,932 shares of Class A Common Stock and 11,055 shares of Class
B Convertible Preferred Stock convertible into 425,660 shares of Class A
Common Stock owned by Sprout Capital Vl, L.P. The remaining shares are
owned by Sprout Growth II, L.P., an affiliate of Sprout Capital Vl, L.P.
(16) Includes 17,173 shares of Class B Convertible Preferred Stock, convertible
into 661,227 shares of Class A Common Stock owned by Sprout Growth II, L.P.
The remaining shares are owned by Sprout Capital Vl, L.P., an affiliate of
Sprout Growth II, L.P.
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<PAGE> 74
BUSINESS OF PHYCOR
PhyCor is a PPM company that acquires and manages 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. As of
March 31, 1998, PhyCor operated 55 clinics with approximately 3,800 physicians
in 28 states and managed IPAs with over 21,500 physicians in 34 markets. As of
such date, PhyCor's affiliated physicians provided medical services to
approximately 1,227,000 members under prepaid health plans, including
approximately 184,000 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 compromised
of physician 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.
PhyCor has assessed its practice management systems, managed care
information systems, business information systems and other clinic systems for
compliance with the Year 2000 issue. In general, the Year 2000 issue exists
because many computer systems and applications currently use two-digit date
fields to designate a year. As the century date change occurs, date-sensitive
systems may not recognize the year 2000. PhyCor is in its normal process of
standardizing the various systems utilized by its clinics and IPAs. This
standardization includes implementation of Year 2000 compliant systems. PhyCor
has performed an assessment of its various clinics and IPAs to identify which
systems specifically require replacement or upgrade due to the Year 2000 issue
in order to ensure timely upgrade or installation. PhyCor believes it has a
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<PAGE> 75
replacement strategy in place such that the Year 2000 issue will not have a
significant effect on its operations. Total capital costs to implement new
systems and to address the Year 2000 issue are expected to be less than $20
million.
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."
COMPARISON OF RIGHTS OF FPC AND PHYCOR SHAREHOLDERS
PhyCor is incorporated in Tennessee and FPC is incorporated in Delaware.
Holders of the shares of FPC Capital Stock, whose rights are currently governed
by Delaware corporate law and the Certificate of Incorporation, as amended, of
FPC (the "FPC Certificate"), and the Bylaws of FPC (the "FPC Bylaws"), will have
their rights and obligations as shareholders of PhyCor after the Merger governed
by Tennessee law and the PhyCor Charter and Amended Bylaws of PhyCor (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 FPC Shareholder under Delaware law, the FPC
Certificate and FPC's 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 FPC
Certificate and the FPC Bylaws.
CLASSES AND SERIES OF CAPITAL STOCK
FPC. Pursuant to the FPC Certificate, the authorized capital stock of FPC
consists of 15,000,000 shares of Class A Common Stock, par value $.001 per
share, 900,000 shares of Class B Common Stock, par value $.001 per share,
200,000 shares of Class A Preferred Stock, par value $1.00 per share, 110,000
shares of Class B Convertible Preferred Stock, par value $1.00 per share, and
20,000 shares of Class C Convertible Preferred Stock, par value $1.00 per share.
In addition, as of March 31, 1998, there were outstanding options under FPC
stock option plans to purchase an additional 969,004 shares of FPC Capital
Stock. An additional 1,019,001 shares of FPC Capital Stock were reserved for
future option grants under such plans. Additionally, there are contractual
rights of certain physicians in the Managed Group practices to receive 1,547,200
shares of FPC Class A Common Stock at specified future dates.
The following description of the FPC Capital Stock is a summary, does not
purport to be complete or to give effect to applicable statutory or common law
and is subject in all respects to the applicable provisions of the FPC
Certificate, and the information herein is qualified in its entirety by this
reference.
CLASS A COMMON STOCK
Holders of Class A Common Stock are entitled to one vote per share in the
election of directors and on all other matters on which the shareholders are
entitled or permitted to vote. Holders of Class A Common Stock are not entitled
to cumulative voting rights. Therefore, holders of a majority of the shares
voting for the election of directors can elect all the directors. The preferred
stock purchase agreements and management plan prohibit FPC from declaring or
paying cash dividends or other distributions on the Class A Common Stock. Upon
liquidation or dissolution, holders of Class A Common Stock are entitled to
share ratably in all net assets available for distribution to stockholders after
payment of any liquidation preferences to holders of Preferred Stock. Holders of
Class A Common Stock have no redemption, conversion or preemptive rights.
CLASS B COMMON STOCK
The Class B Common Stock is non-voting and is convertible into an equal
number of Class A Common shares, at the option of the holder, provided that
subsequent to such conversion any one shareholder does not have direct or
beneficial voting control over, in the aggregate, more than 49% of the voting
securities of the Company outstanding at the time of conversion or immediately
after the conversion. The preferred stock purchase agreements and Management
Plan prohibit the Company from declaring or paying cash dividends or
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<PAGE> 76
other distributions on the Class B Common Stock. Upon liquidation or
dissolution, holders of Class B Common Stock are entitled to share ratably in
all net assets available for distribution to stockholders after payment of any
liquidation preferences to holders of Preferred Stock. Holders of Class B Common
Stock have no redemption, conversion or preemptive rights. All of the
outstanding shares of FPC Class B Common Stock were converted into shares of FPC
Class A Common Stock on January 20, 1998.
CLASS A PREFERRED STOCK
The holders of Class A Preferred shares do not have voting rights, except
as described herein and are entitled to receive dividends at the annual rate of
$8 per share. Dividends are cumulative. The Class A Preferred shares restrict
the Company's ability to pay dividends or make other distributions on FPC Class
B and C Convertible Preferred or FPC Common Stock. The Class A Preferred Stock
holders are entitled to a liquidation preference over the holders of FPC Class B
and C Convertible Preferred Stock and FPC Common Stock equal to the purchase
price of such preferred stock plus declared but unpaid dividends, if any.
Stockholders of each series of preferred stock are entitled to certain
preferences in liquidation over stockholders of previously issued series or
preferred stock in order of issuance. In the event of certain changes of 50% of
the voting power of FPC or the sale of substantially all of the properties and
assets of FPC, and in any case, no later than December 9, 2003, the holders of
FPC Class A Preferred Stock and FPC Class B Convertible Preferred Stock are
entitled to redeem their outstanding shares at a redemption price per share
equal to $100 plus any declared but unpaid dividends. Additionally, upon the
completion of an underwritten public offering of FPC's common stock, FPC will
apply 25% of the net proceeds to FPC therefrom, or such lessor amount as will be
sufficient, to redeem the outstanding shares of FPC Class A Preferred Stock. FPC
may, at any time, redeem the FPC Class A Preferred Stock at the redemption price
noted above.
CLASS B CONVERTIBLE PREFERRED STOCK
The holders of FPC Class B Convertible Preferred Stock are entitled to vote
the number of common shares into which their shares are convertible, based on a
prescribed formula. Under certain conditions, shares of FPC Class B Convertible
Preferred Stock will automatically convert at the then effective conversion
price upon the completion of an underwritten public offering of the Company's
common stock. Dividends on FPC Class B Convertible Preferred Stock are payable,
when, as and if declared by the Board of Directors and are not cumulative. The
FPC Class B Convertible Preferred Stock holders are entitled to a liquidation
preference over the holders of FPC Class C Convertible Preferred Stock and FPC
Common Stock equal to the purchase price of such preferred stock plus declared
but unpaid dividends, if any.
CLASS C CONVERTIBLE PREFERRED STOCK
The holders of FPC Class C Convertible Preferred Stock are entitled to vote
the number of common shares into which their shares are convertible, based on a
prescribed formula. Under certain conditions, shares of FPC Class C Convertible
Preferred Stock will automatically convert at the then effective conversion
price upon the completion of an underwritten public offering of the Company's
common stock. Dividends on FPC Class C Convertible Preferred Stock are payable,
when, as and if declared by the Board of Directors and are not cumulative. The
FPC Class C Convertible Preferred Stock holders are entitled to a liquidation
preference over the holders of FPC Common Stock equal to the purchase price of
such preferred stock plus declared but unpaid dividends, if any.
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 PhyCor Preferred Stock, no par value per share. As of June 8, 1998,
there were 71,020,000 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 601,000
shares of PhyCor Common Stock were reserved for future option grants under such
plans. Furthermore, 6,924,000 shares are currently reserved for issuance upon
conversion of the 4.5% Convertible Subordinated Debentures due 2003 and
subordinated convertible notes payable to affiliated physicians and physician
groups, and 1,396,000 shares are reserved for issuance upon the exercise of
outstanding warrants.
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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 March 31, 1998, 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
FPC. The FPC Bylaws provide that the FPC Board shall consist of at least
one member and not more than seven members and that the size of the FPC Board
may be fixed by resolution of the FPC Board or the FPC Stockholders. The FPC
Board are elected by a plurality of the votes cast at the annual meeting of FPC
stockholders and their terms expire at the next annual FPC stockholders'
meeting. Holders of shares representing approximately 75% of the votes
attributable to the outstanding shares of FPC Capital Stock are parties to a
voting agreement in which such persons have agreed to vote their shares of FPC
Capital Stock so as to cause the FPC Board to fix the number of directors at no
more than seven and to nominate (i) Stephen A. George, M.D. so long as he is
chief executive officer of FPC, (ii) two individuals designated by WCAS, (iii)
two individuals designated by Sprout Capital VI, L.P. and up to two additional
individuals mutually agreeable to the parties thereto. Vacancies in the FPC
Board, including any vacancies resulting from an increase in the number of
directors, are filled by the FPC Stockholders, the FPC Board, or, if the
directors remaining in office constitute fewer than a quorum of the FPC Board,
by the affirmative vote of a majority of all the directors on the FPC Board
remaining in office.
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
FPC. The FPC Bylaws provide that a director may be removed from office,
with or without cause, at any meeting of FPC Stockholders with respect to which
notice of such purpose has been given if the number of votes cast to remove a
director exceed, the number of votes cast not to remove such director.
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, DISSOLUTION AND REDEMPTION
FPC. The FPC Class A Common Stock and FPC Class A Preferred Stock have no
conversion rights. Each share of FPC Class B Common Stock is convertible into
one share of Class A Common Stock. Each share of FPC Class B Convertible
Preferred Stock is convertible into such number of shares of FPC Class A Common
Stock as is obtained by multiplying the number of shares of FPC Class B
Convertible Preferred Stock to be converted by $100 and dividing the result by
$2.59714 per share or the adjusted conversion price as of the date such shares
are surrendered for conversion (the "Conversion Price"). Each share of FPC Class
C Convertible Preferred Stock is convertible into such number of FPC Class A
Common Stock as is obtained by multiplying the number of shares to be converted
by $100 per share and dividing the result by $10 per share or the adjusted
conversion price as of the date such shares are surrendered for conversion. The
conversion prices of the FPC Class B Convertible Preferred Stock and FPC Class C
Convertible Preferred
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Stock are subject to adjustment in accordance with the terms of customary
antidilution provisions applicable to such securities (i.e., change in FPC's
capital structure, stock splits, reverse stock splits, etc.). Upon a firm
commitment underwritten public offering pursuant to a registration statement on
Form S-1 by which FPC Class A Common Stock is sold at a price of at least $7.71
per share resulting in proceeds of not less than $10,000,000, each share of FPC
Class B Convertible Preferred Stock is automatically converted into shares of
FPC Class A Common Stock at the Conversion Price in effect at such time. In the
event of dissolution of FPC, (i) holders of FPC Class A Preferred Stock are
entitled to certain payments prior to any payments made upon any FPC Common
Stock, FPC Class B Convertible Preferred Stock or FPC Class C Convertible
Preferred Stock, (ii) holders of FPC Class B Convertible Preferred Stock are
entitled to certain payments prior to any payments made upon any FPC Common
Stock and FPC Class C Convertible Preferred Stock, and (iii) holders of FPC
Class C Convertible Preferred Stock are entitled to certain payments prior to
any payments made upon any FPC Common Stock. The FPC Class A Preferred Stock is
subject to mandatory redemption on December 9, in each of the years 2001, 2002
and 2003. The FPC Class B Convertible Preferred Stock is subject to mandatory
redemption on December 9, 2003. The FPC Class C Convertible Preferred Stock is
subject to optional redemption at any time.
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 AND BYLAWS
FPC. The FPC Certificate provides that FPC may amend, alter, change or
repeal any provisions contained in the FPC Certificate. The DGCL requires (i)
the FPC Board to adopt a resolution declaring the proposed amendment advisable
and (ii) the approval of the amendment by a majority of the outstanding stock
entitled to vote thereon and a majority of the outstanding stock of each class
entitled to vote thereon as a class. The FPC Certificate provides that the FPC
Board may make, alter or repeal the FPC Bylaws, subject to the power of the FPC
Stockholders to alter any bylaw made by the FPC Board.
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
FPC. The FPC Bylaws provide that a special meeting of the FPC Stockholders
may be called by a "majority" of the FPC Board or by the holders of at least 25%
of the outstanding shares of capital stock of FPC entitled to vote on any issue
proposed to be considered at the proposed special 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
FPC. The FPC Certificate provides that the directors shall not be
personally liable to FPC or its stockholders for monetary damages for breach of
a fiduciary duty by such director as a director to the fullest extent permitted
by the DGCL. A director shall be liable (i) for any breach of the director's
duty of loyalty to FPC or its Shareholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or
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a knowing violation of law, (iii) under Section 174 of the DGCL or (iv) for any
transaction from which the director derived improper personal benefit.
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
FPC. The FPC Bylaws provide that FPC will indemnify, and upon the request
of the FPC Board, shall advance expenses to any officer or director of FPC and
any officer or director of any subsidiary of FPC who was or is a party to, or is
threatened to be made a party to, any action because such person is or was a
director or officer of FPC or is or was serving at the request of FPC as a
director, officer, employee or agent of another corporation or of a partnership,
joint venture, trust, employee benefit plan or other enterprise.
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 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.
The Merger Agreement provides that all rights to indemnification for acts
or omissions occurring prior to the Effective Time of the Merger now existing in
favor of the current or former directors or officers of FPC as provided by the
DGCL or in FPC Certificate or Bylaws shall survive the Merger.
CHANGE OF CONTROL
FPC. Section 203 of the DGCL restricts a wide range of transactions
("business combinations") between a corporation and an interested stockholder.
An "interested stockholder" is, generally, any person who beneficially owns,
directly or indirectly, 15% or more of the corporation's outstanding voting
stock. Business combinations are broadly defined to include (i) mergers or
consolidations with (ii) sales or other dispositions of more than 10% of the
corporation's assets to, (iii) certain transactions resulting in the issuance or
transfer of any stock of the corporation or any subsidiary to, (iv) certain
transactions which would result in increasing the proportionate share of stock
of the corporation or any subsidiary owned by the corporation, or (v) receipt of
the benefit (other than proportionately as a stockholder) of any loans, advances
or other financial benefits by, an interested stockholder. Section 203 provides
that an interested stockholder may not engage in a business combination with the
corporation for a period of three years from the time of becoming an interested
stockholder unless (i) the board of directors approved either the business
combination or the transaction which resulted in the person becoming an
interested stockholder prior to the time such person became an interested
stockholder; (ii) upon consummation of the transaction which resulted in the
person becoming an interested stockholder, that person owned at least 85% of the
corporation's voting stock (excluding shares owned by persons who are officers
and also directors and shares owned by certain employee stock plans); or (iii)
the business combination is approved by the board of directors and authorized by
the affirmative vote of at least 66 2/3% of the outstanding voting stock not
owned by the interested stockholder. The restrictions on business combinations
with interested stockholder contained in Section 203 do not apply to a
corporation whose certificate of incorporation contains a provision expressly
electing not to be governed by Section 203. The FPC Certificate does not contain
a provision electing to "opt-out" 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.
71
<PAGE> 80
"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 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
FPC. The FPC Shareholders have not entered into a Shareholder Rights
Agreement, but holders of shares representing approximately 75% of the votes
attributable to the outstanding shares of FPC Voting Stock are subject to a
Voting Agreement in which certain FPC Stockholders agree to vote their shares so
as to cause the FPC Board to fix the number of directors at no more than seven
and nominate certain people as members of the FPC Board.
PhyCor. 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, 1997 and
1996, and for each of the years in the three-year period ended December 31,
1997, 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 by reference herein, and upon the
authority of said firm as experts in accounting and auditing.
The consolidated financial statements of FPC at December 31, 1996 and 1995,
and for each of the three years ended December 31, 1996, appearing in this
Prospectus-Proxy Statement and Registration Statement have been audited by Ernst
& Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included herein in reliance upon such report
given upon the authority of such 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 FPC pursuant to the Merger will be passed upon by Waller Lansden
Dortch & Davis, A Professional Limited Liability
72
<PAGE> 81
Company. The federal income tax treatment of the Merger to the FPC stockholders
will be passed upon by Mayor, Day, Caldwell & Keeton, LLP.
ADDITIONAL INFORMATION
The FPC Board does not know of any matter to be brought before its Special
Meeting other than described in the Notice of Special Meeting accompanying this
Prospectus-Proxy Statement mailed to the Shareholders of such company. If any
other matter comes before such 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.
73
<PAGE> 82
(This page intentionally left blank)
74
<PAGE> 83
FIRST PHYSICIAN CARE, INC.
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
AND
YEAR ENDED DECEMBER 31, 1997 (UNAUDITED)
AND
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors.............................. F-3
Consolidated Balance Sheets................................. F-4
Consolidated Statements of Operations....................... F-6
Consolidated Statements of Redeemable Preferred Stock and
Common Stockholders' Deficit.............................. F-7
Consolidated Statements of Cash Flows....................... F-8
Notes to Consolidated Financial Statements.................. F-9
</TABLE>
F-1
<PAGE> 84
(This page intentionally left blank)
F-2
<PAGE> 85
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
First Physician Care, Inc.
We have audited the accompanying consolidated balance sheets of First
Physician Care, Inc. as of December 31, 1996 and 1995, and the related
consolidated statements of operations, redeemable preferred stock and common
stockholders deficit and cash flows for each of the three years in the 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 principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
First Physician Care, Inc. at December 31, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
April 18, 1997
F-3
<PAGE> 86
FIRST PHYSICIAN CARE, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN 000'S EXCEPT FOR PER SHARE AMOUNT)
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, --------------------------------
1998 1997 1996 1995
----------- ----------- -------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,383 $ 2,431 $ 4,323 $ 2,163
Accounts receivable....................................... 12,381 11,203 8,589 2,025
Less allowance for doubtful accounts...................... (2,724) (2,424) (2,224) (442)
-------- -------- -------- -------
Net accounts receivable................................... 9,657 8,779 6,365 1,583
Prepaid expenses and other current assets................. 1,698 1,270 767 486
Due from related parties.................................. -- 370 -- --
Notes receivable from employees........................... -- -- -- 590
Notes receivable.......................................... 400 -- -- --
-------- -------- -------- -------
Total current assets............................... 13,138 12,850 11,455 4,822
Property and equipment:
Furniture, fixtures and equipment......................... 8,098 7,821 6,021 2,377
Leasehold improvements.................................... 808 808 819 286
-------- -------- -------- -------
8,906 8,629 6,840 2,663
Accumulated depreciation and amortization................. (3,028) (2,618) (1,184) (345)
-------- -------- -------- -------
5,878 6,011 5,656 2,318
Intangible assets:
Goodwill.................................................. 9,167 9,149 9,073 4,297
Management service agreements............................. 6,115 5,908 5,017 --
Covenants not to compete.................................. 1,399 1,411 1,426 1,386
-------- -------- -------- -------
16,681 16,468 15,516 5,683
Accumulated amortization.................................. (2,164) (1,967) (1,098) 476
-------- -------- -------- -------
14,517 14,501 14,418 5,207
Other assets................................................ 1,147 1,030 723 329
-------- -------- -------- -------
Total assets....................................... $ 34,680 $ 34,392 $ 32,252 $12,676
======== ======== ======== =======
</TABLE>
See accompanying notes.
F-4
<PAGE> 87
FIRST PHYSICIAN CARE, INC.
CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
(DOLLAR AMOUNTS IN 000'S EXCEPT FOR PER SHARE AMOUNT)
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, --------------------------------
1998 1997 1996 1995
----------- ----------- -------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND COMMON STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ 1,719 $ 1,252 $ 1,552 $ 513
Accrued compensation and related expenses................. 3,229 3,188 3,120 2,060
Other accrued liabilities................................. 754 552 656 259
Amounts due to related parties............................ 375 -- 592 --
Current portion of long-term obligations.................. 2,053 3,044 2,098 380
-------- -------- -------- -------
Total current liabilities.......................... 8,130 8,036 8,018 3,212
Notes and other obligations payable to former physician
owners of medical groups and their related parties, less
current portion........................................... 2,212 2,212 2,606 1,587
Other notes payable, less current portion................... 7,000 6,377 3,767 --
Capital lease obligations, less current portion............. 763 687 942 895
Other liabilities........................................... 1,341 1,351 1,131 615
Commitments and contingencies
Redeemable preferred stock:
Class A Redeemable Preferred Stock, $8.00 cumulative,
$1.00 par value:
Authorized shares -- 200,000; issued and outstanding
shares -- 200,000, 200,000, 175,000 and 40,000 at
March 31, 1998 and December 31, 1997, 1996 and 1995,
respectively
Redemption value -- $23,035,000, $22,711,000,
$18,615,000 and $4,110,000 at March 31, 1998 and
December 31,1997, 1996 and 1995, respectively......... 3,035 2,911 1,291 149
Class B Convertible Redeemable Preferred Stock, $1.00 par
value:
Authorized shares -- 110,000; issued and outstanding
shares -- 110,000, 110,000, 110,000 and 108,134 at
March 31, 1998 and December 31, 1997, 1996 and 1995,
respectively
Redemption value -- $11,000,000, $11,000,000,
$11,000,000 and $10,813,000 at March 31, 1998 and
December 31, 1997, 1996 and 1995, respectively........ 110 110 110 108
Class C Convertible Redeemable Preferred Stock, $1.00 par
value:
Authorized shares -- 20,000; issued and outstanding
shares -- 12,000 at March 31, 1998 and December 31,
1997, none at December 31, 1996 and 1995.............. 12 12 -- --
Additional paid-in capital on redeemable preferred
stock................................................... 28,306 28,340 26,845 14,419
Common stockholders' deficit:
Class A common stock, $.001 par value:
Authorized shares -- 15,000,000; issued and outstanding
shares -- 4,045,223 3,169,013, 2,977,641 and 1,873,590
at March 31, 1998 and December 31, 1997, 1996 and
1995, respectively.................................... 4 3 3 2
Class A common stock to be issued, 1,627,200, 1,627,200
and 1,216,965 shares at March 31, 1998 and December
31, 1997 and 1996, respectively, none at December 31,
1995, $.001 par value................................. 1,870 1,870 1,293 --
Class B common stock, convertible, non-voting $.001 par
value:
Authorized shares -- 900,000; issued and outstanding
shares -- none at March 31, 1998, 872,460 at December
31, 1997, 1996 and 1995, respectively................. -- 1,000 1,000 1,000
Additional paid-in capital on common stock................ 2,560 2,556 2,196 99
Accumulated deficit....................................... (20,663) (20,074) (15,951) (8,411)
-------- -------- -------- -------
Total common stockholders' deficit................. (16,229) (15,644) (12,458) (8,309)
-------- -------- -------- -------
Total liabilities, redeemable preferred stock and
common stockholders' deficit..................... $ 34,680 $ 34,392 $ 32,252 $12,676
======== ======== ======== =======
</TABLE>
See accompanying notes.
F-5
<PAGE> 88
FIRST PHYSICIAN CARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN 000'S EXCEPT FOR PER SHARE AMOUNT)
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
--------------------------------------- ---------------------------
1998 1997 1997 1996 1995 1994
----------- ----------- ----------- ------- ------- -------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Total revenue from owned physician
groups.............................. $ 9,153 $ 8,959 $25,701 $32,169 $19,718 $ 3,744
Total revenue from Managed Physician
Groups.............................. 11,573 10,655 52,267 5,422 -- --
------- ------- ------- ------- ------- -------
20,726 19,614 77,968 37,591 19,718 3,744
Less amounts retained by Managed
Physician Groups.................... (4,074) (4,290) (15,610) (2,355) -- --
------- ------- ------- ------- ------- -------
Net revenue.................... 16,652 15,324 62,358 35,236 19,718 3,744
Operating costs and expenses:
Cost of medical services............... 4,641 4,284 17,357 17,375 12,139 2,264
Clinic operations...................... 10,637 9,813 41,626 19,558 9,042 2,303
Corporate, general and
administrative...................... 1,233 1,181 5,559 4,211 3,181 2,172
Depreciation and amortization.......... 613 581 2,396 1,469 675 160
Loss on impairment of long-term
assets.............................. -- -- -- 884 -- --
------- ------- ------- ------- ------- -------
Total operating costs and
expenses..................... 17,124 15,859 66,938 43,497 25,037 6,899
------- ------- ------- ------- ------- -------
Loss from operations..................... (472) (535) (4,580) (8,261) (5,319) (3,155)
Other income (expense):
Interest expense....................... (395) (152) (804) (222) (42) (33)
Interest income........................ 4 17 32 129 160 171
Other.................................. 274 335 1,229 814 175 112
------- ------- ------- ------- ------- -------
Net loss....................... (589) (335) (4,123) (7,540) (5,026) (2,905)
------- ------- ------- ------- ------- -------
Cumulative dividends and accretion on
Class A redeemable preferred stock..... (324) (389) (1,595) (1,007) (109) --
------- ------- ------- ------- ------- -------
Net loss attributable to common
stockholders................. (913) (724) (5,718) (8,547) (5,135) (2,905)
======= ======= ======= ======= ======= =======
Basic and diluted loss per common
share.................................. $ (.16) $ (.14) $ (1.07) $ (2.74) $ (1.93) $ (1.25)
======= ======= ======= ======= ======= =======
Weighted average common share
outstanding............................ 5,672 5,071 5,331 3,126 2,655 2,321
======= ======= ======= ======= ======= =======
</TABLE>
See accompanying notes.
F-6
<PAGE> 89
FIRST PHYSICIAN CARE, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK
AND COMMON STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
REDEEMABLE PREFERRED STOCK
---------------------------------------------------------------
CLASS A CLASS B CLASS C
--------------------- ------------------- -----------------
PAR PAR PAR
SHARES VALUE SHARES VALUE SHARES VALUE
-------- ---------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994..................... -- $ -- 105,542 $106,000 -- $ --
Issuance of Class A preferred stock at $100
per share, net of issue costs of $13,000.... 40,000 40,000 -- -- -- --
Issuance of Class B preferred stock at $100
per share, net of issue costs of $8,000..... -- -- 2,692 2,000 -- --
Repurchase of Class B preferred stock at $100
per share................................... -- -- (100) -- -- --
Subscribed stock.............................. -- -- -- -- -- --
Exchange of Class A common stock for
convertible non-voting Class B common
stock....................................... -- -- -- -- -- --
Issuance of common stock...................... -- -- -- -- -- --
Accretion of Class A preferred stock.......... -- 109,000 -- -- -- --
Net loss................................ -- -- -- -- -- --
-------- ---------- -------- -------- ------- -------
Balance, December 31, 1995..................... 40,000 149,000 108,134 108,000 -- --
Issuance of Class A preferred stock at $100
per share, net of issue costs of $27,000.... 135,000 135,000 -- -- -- --
Issuance of Class B preferred stock at $100
per share................................... -- -- 1,866 2,000 -- --
Value of 1,216,965 Class A common shares to be
issued at specified future dates............ -- -- -- -- -- --
Issuance of common stock...................... -- -- -- -- -- --
Accretion of Class A preferred stock.......... -- 1,007,000 -- -- -- --
Net loss................................ -- -- -- -- -- --
-------- ---------- -------- -------- ------- -------
Balance, December 31, 1996..................... 175,000 1,291,000 110,000 110,000 -- --
Issuance of Class A preferred stock at $100
per share, net of issue costs of $2,407..... 25,000 25,000 -- -- -- --
Issuance of Class C preferred stock at $100
per share................................... -- -- -- -- 12,000 12,000
Value of 410,235 Class A common shares to be
issued at specified future dates............ -- -- -- -- -- --
Issuance of common stock...................... -- -- -- -- -- --
Warrants earned............................... -- -- -- -- -- --
Accretion of Class A preferred stock.......... -- 1,595,000 -- -- -- --
Net loss................................ -- -- -- -- -- --
-------- ---------- -------- -------- ------- -------
Balance, December 31, 1997 (unaudited)......... 200,000 $2,911,000 110,000 $110,000 12,000 $12,000
Exchange of Convertible non-voting Class B
Common Stock for Class A Common Stock....... -- -- -- -- -- --
Issuance of common stock...................... -- -- -- -- -- --
Warrants earned............................... -- -- -- -- -- --
Accretion of Class A preferred stock.......... -- 124,000 -- -- -- --
Net Loss................................ -- -- -- -- -- --
======== ========== ======== ======== ======= =======
Balance, March 31, 1998 (unaudited)............ 200,000 $3,035,000 110,000 $110,000 12,000 $12,000
======== ========== ======== ======== ======= =======
<CAPTION>
REDEEMABLE PREFERRED STOCK COMMON STOCK
----------- ------------------------------------------------------------------
CLASS A CLASS B
-------------------------------- ------------------
VALUE OF
ADDITIONAL SHARES ADDITIONAL
PAID-IN PAR TO BE PAR PAID-IN
CAPITAL SHARES VALUE ISSUED SHARES VALUE CAPITAL
----------- --------- ------- ---------- -------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994..................... $10,333,000 2,634,800 $ 3,000 $ -- -- $ -- $ 65,000
Issuance of Class A preferred stock at $100
per share, net of issue costs of $13,000.... 3,947,000 -- -- -- -- -- --
Issuance of Class B preferred stock at $100
per share, net of issue costs of $8,000..... 258,000 -- -- -- -- -- --
Repurchase of Class B preferred stock at $100
per share................................... (10,000) -- -- -- -- -- --
Subscribed stock.............................. -- 90,000 -- -- -- -- 38,000
Exchange of Class A common stock for
convertible non-voting Class B common
stock....................................... -- (872,460) (1,000) -- 872,460 1,000 (9,000)
Issuance of common stock...................... -- 21,250 -- -- -- -- 5,000
Accretion of Class A preferred stock.......... (109,000) -- -- -- -- -- --
Net loss................................ -- -- -- -- -- -- --
----------- --------- ------- ---------- -------- ------- ----------
Balance, December 31, 1995..................... 14,419,000 1,873,590 2,000 -- 872,460 1,000 99,000
Issuance of Class A preferred stock at $100
per share, net of issue costs of $27,000.... 13,338,000 -- -- -- -- -- --
Issuance of Class B preferred stock at $100
per share................................... 95,000 -- -- -- -- -- --
Value of 1,216,965 Class A common shares to be
issued at specified future dates............ -- -- -- 1,293,000 -- -- --
Issuance of common stock...................... -- 1,104,051 1,000 -- -- -- 2,097,000
Accretion of Class A preferred stock.......... (1,007,000) -- -- -- -- -- --
Net loss................................ -- -- -- -- -- -- --
----------- --------- ------- ---------- -------- ------- ----------
Balance, December 31, 1996..................... 26,845,000 2,977,641 3,000 1,293,000 872,460 1,000 2,196,000
Issuance of Class A preferred stock at $100
per share, net of issue costs of $2,407..... 2,464,000 -- -- -- -- -- --
Issuance of Class C preferred stock at $100
per share................................... 528,000 -- -- -- -- -- --
Value of 410,235 Class A common shares to be
issued at specified future dates............ -- -- -- 577,000 -- -- --
Issuance of common stock...................... 98,000 191,372 -- -- -- -- 360,000
Warrants earned............................... -- -- -- -- -- -- --
Accretion of Class A preferred stock.......... (1,595,000) -- -- -- -- -- --
Net loss................................ -- -- -- -- -- -- --
----------- --------- ------- ---------- -------- ------- ----------
Balance, December 31, 1997 (unaudited)......... $28,340,000 3,169,013 3,000 1,870,000 872,460 1,000 2,556,000
Exchange of Convertible non-voting Class B
Common Stock for Class A Common Stock....... -- 872,460 1,000 -- (872,460) (1,000) --
Issuance of common stock...................... -- 3,750 -- -- -- -- 4,000
Warrants earned............................... 90,000 -- -- -- -- -- --
Accretion of Class A preferred stock.......... (124,000) -- -- -- -- -- --
Net Loss................................ -- -- -- -- -- -- --
=========== ========= ======= ========== ======== ======= ==========
Balance, March 31, 1998 (unaudited)............ $28,306,000 4,045,223 $ 4,000 $1,870,000 -- $ -- $2,560,000
=========== ========= ======= ========== ======== ======= ==========
<CAPTION>
COMMON STOCK
----------------------------
TOTAL
COMMON
ACCUMULATED STOCKHOLDERS'
DEFICIT DEFICIT
------------ -------------
<S> <C> <C>
Balance, December 31, 1994..................... $(3,385,000) $ (3,317,000)
Issuance of Class A preferred stock at $100
per share, net of issue costs of $13,000.... -- --
Issuance of Class B preferred stock at $100
per share, net of issue costs of $8,000..... -- --
Repurchase of Class B preferred stock at $100
per share................................... -- --
Subscribed stock.............................. -- 38,000
Exchange of Class A common stock for
convertible non-voting Class B common
stock....................................... -- (9,000)
Issuance of common stock...................... -- 5,000
Accretion of Class A preferred stock.......... -- --
Net loss................................ (5,026,000) (5,026,000)
------------ ------------
Balance, December 31, 1995..................... (8,411,000) (8,309,000)
Issuance of Class A preferred stock at $100
per share, net of issue costs of $27,000.... -- --
Issuance of Class B preferred stock at $100
per share................................... -- --
Value of 1,216,965 Class A common shares to be
issued at specified future dates............ -- 1,293,000
Issuance of common stock...................... -- 2,098,000
Accretion of Class A preferred stock.......... -- --
Net loss................................ (7,540,000) (7,540,000)
------------ ------------
Balance, December 31, 1996..................... (15,951,000) (12,458,000)
Issuance of Class A preferred stock at $100
per share, net of issue costs of $2,407..... -- --
Issuance of Class C preferred stock at $100
per share................................... -- --
Value of 410,235 Class A common shares to be
issued at specified future dates............ -- 577,000
Issuance of common stock...................... -- 360,000
Warrants earned............................... -- --
Accretion of Class A preferred stock.......... -- --
Net loss................................ (4,123,000) (4,123,000)
------------ ------------
Balance, December 31, 1997 (unaudited)......... (20,074,000) (15,644,000)
Exchange of Convertible non-voting Class B
Common Stock for Class A Common Stock....... -- --
Issuance of common stock...................... -- 4,000
Warrants earned............................... -- --
Accretion of Class A preferred stock.......... -- --
Net Loss................................ (589,000) (589,000)
============ ============
Balance, March 31, 1998 (unaudited)............ $(20,663,000) $(16,229,000)
============ ============
</TABLE>
See accompanying notes.
F-7
<PAGE> 90
FIRST PHYSICIAN CARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN 000'S)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------------- -----------------------------------------
1998 1997 1997 1996 1995 1994
----------- ----------- ----------- ------- ------- -------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................................... $ (589) $ (335) $(4,123) $(7,540) $(5,026) (2,905)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization............ 613 581 2,396 1,469 675 160
Loss on impairment of long-term assets... -- -- 540 884 -- --
Change in operating assets and
liabilities:
Accounts receivable (net).............. (878) (1,099) (1,401) (487) (711) (78)
Prepaid expenses and other current
assets............................... (399) (160) (498) 166 (227) (99)
Accounts payable and accrued
expenses............................. 800 (1,660) (239) 221 1,493 811
Amounts due to related parties......... 745 746 (962) (324) -- --
------- ------- ------- ------- ------- -------
Net cash (used in) provided by
operating activities............ 292 (1,927) (4,287) (5,611) (3,796) (2,111)
------- ------- ------- ------- ------- -------
INVESTING ACTIVITIES
Cash paid for physician practices and
management service agreements, net of
cash acquired............................ -- -- (1,448) (4,88) (1,889) (733)
Purchases of property and equipment........ (277) (137) (945) (683) (575) (216)
Other assets............................... (771) (109) (672) (300) (269) (18)
------- ------- ------- ------- ------- -------
Net cash used in investing
activities...................... (1,048) (246) (3,065) (5,863) (2,733) (967)
------- ------- ------- ------- ------- -------
FINANCING ACTIVITIES
Notes receivable from employees............ -- -- -- 590 (2) (588)
Proceeds from notes payable................ 1,000 160 4,000 34 -- --
Payments on notes payable and capital
leases................................... (1,292) (403) (1,092) (803) (1,683) (501)
Purchase of treasury stock................. -- -- -- -- (10) --
Proceeds from issuance of preferred
stock.................................... -- 2,520 2,489 13,570 4,247 7,451
Proceeds from issuance of common stock..... -- -- 63 243 34 36
------- ------- ------- ------- ------- -------
Net cash (used in) provided by
financing activities............ (292) 2,277 5,460 13,634 2,586 6,398
------- ------- ------- ------- ------- -------
(Decrease) increase in cash and cash
equivalents.............................. (1,048) 104 (1,892) 2,160 (3,943) 3,320
Cash and cash equivalents, beginning of
period................................... 2,431 4,346 4,323 2,163 6,106 2,786
------- ------- ------- ------- ------- -------
Cash and cash equivalents, end of period... $ 1,383 $ 4,450 $ 2,431 $ 4,323 $ 2,163 $ 6,106
======= ======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for interest..................... $ 95 $ 150 $ 542 $ 140 $ 61 $ 24
======= ======= ======= ======= ======= =======
</TABLE>
See accompanying notes.
F-8
<PAGE> 91
FIRST PHYSICIAN CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO PERIODS SUBSEQUENT TO DECEMBER 31, 1996 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS AND AGREEMENT AND PLAN OF MERGER
First Physician Care, Inc. was incorporated in Delaware in June 1993. The
Company and its subsidiaries (collectively, the "Company") operate and manage a
system of regional networks of primary care and multi-specialty physician
groups. Medical services are delivered through multi-sited group practices
staffed by interdisciplinary teams of physicians and allied professionals. As of
March 31, 1998, the Company operated 57 primary care and multi-specialty
physician clinics, of which 21 are owned by the Company and 36 are operated
under long-term management service agreements (the "Managed Physician Groups").
On December 19, 1997, the Company executed an Agreement and Plan of Merger
with PhyCor Inc. ("PhyCor") under which PhyCor would acquire all of the capital
stock of the Company's outstanding and to be issued capital stock and certain
unexercised stock options in exchange for the issuance of shares and options as
to an aggregate of 3,500,000 shares of PhyCor Common Stock. Subsequently, the
parties entered into amendments to the Agreement and Plan of Merger dated May
18, 1998 and June 10, 1998 pursuant to which the number of shares to be issued
were reduced to approximately 2,910,000 and certain other conditions to closing
were changed. The consummation of the merger is subject to regulatory approvals
and certain closing conditions. The merger is expected to be accounted for as a
pooling of interests.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of First
Physician Care, Inc. and its wholly-owned and majority-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
The Company or its subsidiaries have entered into long-term management
service agreements with the Managed Physician Groups having initial terms of 40
years, which renew automatically and perpetually for successive 10-year periods
and may be terminated only for cause. The Company entered into one management
services agreement in August, 1997 with a 27-physician group with a 2-year
initial term which may be extended for an additional two years. Under the
long-term management service agreements, the Company provides exclusive
management and administration of the Managed Physician Groups' day-to-day
business operations. Services provided by the Company include: (i) billing and
collection of patient accounts and other accounting and finance functions; (ii)
the provision of all non-physician employees to the Managed Physician Groups;
(iii) negotiation of all participation agreements with third party payors; (iv)
preparation of operating and capital budgets for approval by the Executive
Committees; and (v) other administrative and management services. Executive
Committees, with equal membership by the Company and the Managed Physician
Groups, are responsible for the review and approval of operating and capital
budgets and strategic plans and overall policy setting for the Managed Physician
Groups. The Managed Physician Groups have full authority over: (i) issues
related to the practice of medicine; (ii) hiring and retention of physicians;
and (iii) allocation of distributions to the physicians. The Company does not
consolidate the accounts or operating results of the Managed Physician Groups.
The management fee earned by the Company is typically based on a percentage
(15-20%) of the net operating income of the practice after clinic operating
costs but before the cost of medical services. Two of the management service
agreements also provide for a minimum management fee that must be paid without
regard to the net operating income of the medical practice plus a performance
bonus paid to the Company if the net operating income exceeds a predetermined
threshold. The Company's ability to manage the profitability of the medical
practice depends on its effectiveness in directly managing clinic operating
costs, providing for attractive clinics to grow patient volume and its ability
to negotiate profitable managed care and preferred provider organization
contracts. The Company also manages profitability indirectly by supporting
F-9
<PAGE> 92
FIRST PHYSICIAN CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
physician productivity through operational enhancements, staff management and
patient management reporting systems.
The laws of many states, including some of the states in which the Company
presently has management services agreements, prohibit business corporations
from practicing medicine or exercising control over the medical judgments or
decisions of physicians and from engaging in certain financial arrangements with
physicians. The Company intends that, pursuant to the management services
agreements, it will not exercise any responsibility on behalf of affiliated
physicians that could be construed as affecting the practice of medicine.
Accordingly, the Company believes that its operations do not violate applicable
state laws relating to the corporate practice of medicine.
Although the Company does not consolidate the Managed Physician Groups, for
presentation purposes, and in order to appropriately reflect the nature of the
Company's operations and its relationship to the Managed Physician Groups, the
accompanying consolidated statements of operations include net revenue from
Managed Physician Groups equal to the gross billings of the Managed Physician
Groups (less contractual allowances) less amounts retained by Managed Physician
Groups (primarily physician compensation). Operating costs and expenses include
all other operating costs related to the Managed Physician Groups ("display
method").
ACCOUNTING DEVELOPMENTS
On November 20, 1997 the Emerging Issues Task Force (the "EITF") reached a
consensus concerning certain matters relating to the physician practice
management industry with respect to the requirements which must be met to
consolidate a managed professional corporation and the accounting for business
combinations involving professional corporations. In accordance with EITF's
guidance, the Company will discontinue use of the "display method" to report
revenues from management contracts in financial statements for periods ending
after December 15, 1998. Thus, after December 15, 1998, fees from management
contracts for all periods presented will be reported as a single line item ("Net
revenue") in the Company's statements of operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NET REVENUE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Net revenue includes fees for medical services provided by the Company's
clinics under capitated contracts with health maintenance organizations ("HMO
contracts"), fee-for-service arrangements and other reimbursement arrangements
with third party payors. Capitation revenue under HMO contracts is recognized
during the period in which the Company is obligated to provide services. Net
revenue under fee-for-service and other reimbursement arrangements is recorded
at established billing rates reduced by an allowance for contractual
adjustments. Contractual adjustments arise due to the terms of certain
reimbursement and managed care contracts which reduce revenue to amounts
estimated to be reimbursable by Medicare, Medicaid, preferred provider
organizations and other third party-payors. Such adjustments are recognized in
the period the services are rendered. Certain HMO contracts contain provisions
under which the Company shares in risk fund surpluses and deficits based on the
management of medical expenditures. Estimates of fund settlements are recorded
during the period earned. Differences in estimates recorded and final
settlements are reported during the period final settlements are made.
Contractual agreements with managed care and other organizations to provide
physician services are contracted directly by the Company for owned physician
groups and thus the Company retains the risk related
F-10
<PAGE> 93
FIRST PHYSICIAN CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to these contracts. However, all contractual agreements involving physician
groups related to the Company's management services agreements remain at the
physician group level; risk related managed care contracts involving those
groups are shared by the physician group and the Company through the management
fee. Capitation revenue under HMO contracts is recognized during the period in
which the Company is obligated to provide services. Revenue recognized under
capitated agreements were approximately $26,666,000, $18,651,000, $12,374,000
and $2,644,000 for the years ended December 31, 1997, 1996, 1995 and 1994,
respectively, and $7,142,000 and $6,865,000 for the three month periods ended
March 31, 1998 and 1997, respectively.
An allowance for doubtful accounts is established for revenue estimated to
be uncollectible and is adjusted periodically based upon management's evaluation
of current economic conditions, historical collection experience, and other
relevant factors which, in the opinion of management, deserve recognition in
estimating such allowance.
CASH AND CASH EQUIVALENTS
The Company classifies short-term highly liquid investments, with
maturities of three months or less at the date of purchase, as cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives (generally five years)
for furniture, fixtures and equipment and the lease terms for leasehold
improvements.
INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill, management service
agreements and covenants not to compete.
Goodwill represents the excess of cost over the market value of net
tangible and identifiable intangible assets acquired and is amortized using the
straight-line method over 25 years. The carrying value of goodwill is reviewed
if facts and circumstances suggest that it may be impaired. When this review
indicates the goodwill is not recoverable, as determined based on undiscounted
cash flows over the remaining amortization period, the Company's carrying value
of the goodwill is reduced by the estimated shortfall of discounted cash flows.
Long-term management service agreements are amortized using the
straight-line method over the lives of the initial agreements, currently 25
years. Management service agreements represent the exclusive right to operate
the Managed Physician Groups during the terms of such agreements. In the event
of a termination of a management service agreement for cause by the Company, the
related physician group is required to purchase all clinic assets, including the
unamortized portion of related intangible assets, generally at their net book
values.
Covenants not to compete obtained from the physicians of the acquired
physician groups and the Managed Physician Groups are amortized using the
straight-line method over the lives of the agreements, which are generally five
to seven years.
INCOME TAXES
Deferred tax assets and liabilities are determined based on temporary
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when differences are expected to reverse. Tax benefits from loss carryforwards
are recognized for financial reporting purposes when the Company can reasonably
expect to realize the benefits of such losses.
F-11
<PAGE> 94
FIRST PHYSICIAN CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CARRYING VALUE OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
In accordance with FASB Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of ("Statement No.
121"), the Company records impairment losses on long-lived assets used in
operations when events and circumstances indicate that such assets might be
impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' net book values. Statement No. 121 also
addresses the accounting for long-lived assets that are expected to be disposed
of. Except as discussed in Note 2, based on the Company's estimate of future
undiscounted cash flows, the Company expects to recover the carrying amounts of
its long-lived assets. Nonetheless, it is reasonably possible that estimates of
undiscounted cash flows may change in the near term resulting in the need to
write-down certain assets to their fair values.
BASIC AND DILUTED LOSS PER COMMON SHARE
In February 1997 the Financial Accounting Standards Board ("FASB") issued
Statement No. 128, Earnings Per Share ("Statement 128"). Statement 128 replaced
the calculation of primary and fully diluted income (loss) per share with basic
and diluted income (loss) per share. Unlike primary income (loss) per share, the
calculation of basic loss per share excludes any dilutive effects of options,
warrants, and convertible securities. Diluted income (loss) per share is very
similar to the previously reported fully diluted income (loss) per share.
The Company's per share amounts for all periods have been presented in
accordance with Statement 128 requirements. Basic and diluted loss per share are
computed based on the weighted average number of common shares outstanding.
Common share equivalents (which may consist of options, warrants and convertible
debentures) are excluded from the computation of diluted loss per share since
the effect would be antidilutive.
STOCK OPTIONS AND STOCK PURCHASE RIGHTS
The Company accounts for stock option and stock purchase right grants in
accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees and related Interpretations in accounting ("APB No. 25")
and, accordingly, recognizes no compensation expense in connection with its
stock option and stock purchase right grants. Information regarding pro forma
adjustments to net loss, as required by FASB Statement No. 123, Accounting for
Stock-Based Compensation ("Statement No. 123"), which was adopted commencing
January 1, 1995, is included in Note 8.
UNAUDITED FINANCIAL STATEMENTS
The Company has made all adjustments it considers necessary for a fair
presentation of the financial position of the Company as of March 31, 1998 and
December 31, 1997 and the results of operations, redeemable preferred stock,
common stockholders' deficit, and cash flows for the three month periods ended
March 31, 1998 and 1997 and year ended December 31, 1997 as presented in the
accompanying unaudited condensed consolidated financial statements. Operating
results for the three month period ended March 31, 1998 are not necessarily
indicative of the results that may be expected for the year 1998.
F-12
<PAGE> 95
FIRST PHYSICIAN CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. MERGER, ACQUISITIONS AND MANAGEMENT AGREEMENT
During 1997, 1996, 1995 and 1994, and for the three month period ended
March 31, 1998, the Company acquired substantially all the assets and assumed
certain liabilities of each of the following primary care and multi-specialty
physician groups and merged with a physician practice management company:
<TABLE>
<CAPTION>
PURCHASE PRICE ACQUISITION DATE
-------------- ------------------
<S> <C> <C>
Adler & Associates, P.A............................. $1,100,000 September 1, 1994
Boca Raton Medical Group, P.A. and the individual
physician practices of Boca Raton Medical Group,
P.A............................................... 1,609,000 September 30, 1994
Family Physicians of Tampa, P.A..................... 615,000 April 1, 1995
PBMG, Inc. and the individual physicians of PBMG,
Inc. ("PBMG")..................................... 3,636,000 April 29, 1995
Brandon Family Practice, P.A........................ 609,000 January 2, 1996
Doctors Walk In Clinics, Inc........................ 4,394,000 June 1, 1996
Riverbend Physicians and Surgeons, S.C.
("Riverbend")..................................... 2,445,000 August 1, 1996
Physician Capital Partners Corporation ("PCP")...... 3,292,000 December 11, 1996
East Side Physicians, P.C. ("ESP").................. 1,947,000 July 29, 1997
</TABLE>
Included in the purchase price of Adler & Associates, P.A. are 5.6%
unsecured notes payable totaling $1,050,000 which were paid January 15, 1995.
Included in the purchase price of Boca Raton Medical Group, P.A. are obligations
to pay a total of $1,009,000 which were satisfied on September 1996.
During 1994, the Company completed certain other acquisitions with an
aggregate purchase price of $573,000 including cash paid at closing, assumption
of certain liabilities, and issuance of a promissory note which was paid in
February 1996.
The purchase price of PBMG included obligations to pay a total of
$1,294,000 in seven equal annual installments through April 2003.
Under certain conditions through January 2001, the purchase price of
Brandon Family Practice, P.A. may be increased by up to $426,000. The Company
will record additional goodwill for any such payments made.
The purchase price of Doctors Walk In Clinics, Inc. included promissory
notes of $1,220,000, a note payable of $630,000 convertible into 90,000 shares
of the Company's Class A common stock, and 160,000 shares of Class A common
stock to be delivered at specified future dates valued at $134,000.
The purchase price of Riverbend included promissory notes payable of
$471,000 and 165,000 shares of Class A common stock to be delivered at specified
future dates valued at $136,000. In connection with this acquisition, the
Company and Riverbend entered into a long-term management services agreement.
Effective December 11, 1996, the Company completed a merger (the "Merger")
with PCP, a physician practice management company. Under the related agreement,
the Company acquired all of PCP's outstanding shares of common stock in exchange
for 891,992 shares of the Company's Class A common stock valued at $1,855,000
and delivered on the date of the Merger and an additional 891,965 shares of
Class A common stock to be delivered at a specified future date valued at
$1,023,000. In connection with the Merger, the Company also entered into a
long-term management services agreement with an affiliate of PCP; Health
Partners Medical Group P.A., a physician group with 23 primary care physician
clinics. (See Note 10.)
During 1996, the Company completed certain other acquisitions with an
aggregate purchase price of $743,000, including cash paid at closing and the
assumption of certain liabilities.
F-13
<PAGE> 96
FIRST PHYSICIAN CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The purchase price of ESP included 512,798 shares of Class A common stock
to be delivered at specified future dates valued at $970,116. In connection with
this acquisition, the Company and ESP entered into a long-term management
services agreement.
Each of the acquisitions and the Merger have been recorded using the
purchase method of accounting, and accordingly, the purchase price has been
allocated to the assets acquired and liabilities assumed based on their
estimated fair values as of the respective dates of acquisition. The purchase
prices include cash paid at closing, assumption of certain liabilities and the
issuance of promissory notes payable. The excess of such prices over the fair
values of net tangible and identifiable intangible assets acquired, including
the values of the related management services agreements, are classified as
goodwill or management service agreements. Operating results of the acquired
businesses and the management service agreements are included in the Company's
consolidated statements of operations from the effective dates of the
acquisitions.
The values of the shares of the Company's Class A common stock issued and
to be issued in connection with each of the acquisitions and the Merger were
determined by management, in the absence of readily available trading market
values, using a discounted cash flow approach. These values have been
corroborated by an independent valuation of the Company's Class A common stock
as of each of the acquisition dates and the Merger dates through December 31,
1996. The shares to be issued at specified future dates were valued at a
discount from estimated fair values of deliverable shares after considering
relevant factors, including normal discounts for marketability due to the time
delay in delivery of the shares and estimates of the fair values of the
Company's Class A common stock which were issued in the relevant acquisition or
Merger. The shares of Class A common stock to be issued are generally
deliverable on specified transaction anniversary dates, generally over a period
of three to four years. The discounts for such shares range from 39% to 45%,
with a weighted average discount of 44% for all transactions through December
31, 1997 and were corroborated by an independent valuation.
Class A common stock to be issued is non-voting until issuance. Under
certain employment agreements with physician stockholders, the Company's
obligation to issue undelivered shares may be canceled to offset some or all of
the liquidated damages related to the early termination of employment as
specified in such employment agreement.
In 1996, due to recurring operating losses in certain of the Company's
owned physician practices and subsidiaries, the Company evaluated the ongoing
values of the long-lived assets held by such practices and subsidiaries to
determine the extent of impairment in the carrying values of those long-lived
assets, if any. Based on the evaluations, the Company determined the fair values
of certain assets with carrying values aggregating $884,000 were nominal and
wrote such assets (consisting primarily of goodwill previously recorded upon the
acquisition of those physician practices and subsidiaries) down to zero.
Management's determinations of fair values were based on estimated future cash
flows to be generated by those physician practices and subsidiaries, discounted
at a market rate of interest.
The following unaudited pro forma information for the years ended December
31, 1996 and 1995 is presented as if Doctors Walk In Clinics, Inc. and PCP had
been acquired on January 1, 1996 and 1995, respectively. The other 1997, 1996
and 1995 acquisitions did not have a significant impact on a pro forma basis.
This information does not purport to be indicative of the results that would
have actually been obtained if the acquisitions had occurred on such dates.
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Net revenue................................................. $54,216,000 $41,611,000
Net loss.................................................... (7,649,000) (4,637,000)
Net loss attributable to common stockholders................ (8,656,000) (4,746,000)
Net loss per common share................................... (2.10) (1.23)
</TABLE>
F-14
<PAGE> 97
FIRST PHYSICIAN CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company entered into a two-year management services agreement with
Primary Management, Inc. ("Primary") in June 1997 and executed an option to
purchase the operating assets of Primary in August 1997. On December 3, 1997,
the Company issued 12,000 shares of Class C Convertible, Redeemable Preferred
Stock ("Class C Preferred Stock") to Pacific Capital, L.P. in exchange for a
$3,000,000 Subordinated Note (the "Subordinated Note") due from Primary. The
Class C Preferred Stock is convertible at any time into 120,000 shares of Class
A Common Stock of the Company. The Note is subordinated to a bank Note and is
collateralized by certain real estate, personal property and accounts receivable
owned by Primary. The Subordinated Note includes warrant rights to purchase
50,000 shares of Primary's common stock which can be increased under certain
conditions. Primary is currently in default on the Subordinated Note due to
nonpayment of interest and principal.
In October and December 1997, the Company made cash advances to, and
entered into notes receivable from Primary totaling $250,000 to be used for
general working capital purposes. The note bears interest at 12% per annum and
is due upon demand.
In early 1998, as a result of analyzing Primary's 1997 and subsequent
operations, the Company concluded that realizations of the net assets of
$1,500,000 attributable to Primary at December 31, 1997 (consisting principally
of capitalized acquisition costs, loans receivable and management fees
receivable) were not probable, and, accordingly, such net assets were written
off as of December 31, 1997. On April 1, 1998 the Company notified Primary of
the termination of its management services agreement with Primary to take effect
April 11, 1998.
3. FINANCIAL INSTRUMENTS
Concentration of Credit Risk
Financial instruments which potentially subject the Company to significant
concentrations of credit risk consist principally of cash equivalents and
accounts and notes receivable.
Substantially all revenue is earned in the Southeastern United States,
Texas and Illinois. The Company generally does not require collateral or other
security in extending credit to patients; however, the Company routinely obtains
assignments of (or is otherwise entitled to receive) benefits receivable under
the health insurance programs, plans or policies of patients (i.e., Medicare,
Medicaid and commercial insurance providers).
Management believes concentrations of credit risk with respect to accounts
receivable are limited due to the large number of entities comprising the
Company's revenue base. However, the Company has contracts with one third party
payor with initial terms of five years which represented approximately 15%, 31%
and 39% of net revenue during 1997, 1996 and 1995, respectively. The Company had
another contract with a third party payor which represented approximately 13% of
net revenue during 1997, respectively.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company maintains cash and cash equivalents with various financial
institutions. These financial institutions are located throughout the
Southeastern United States, Texas and Illinois and the Company's policy is
designed to limit its exposure at any one institution. The Company performs
periodic evaluations of the relative credit standings of those financial
institutions that are considered in the Company's investment strategy. At March
31, substantially all of the company's cash and cash equivalents are invested in
non-interest bearing depository cash accounts.
Notes and other obligations payable to former physician owners of medical
groups and their related parties with carrying values of $3,562,000, $3,934,000
and $1,687,000 at December 31, 1997, 1996 and 1995, respectively, are at fixed
interest rates and, as a result of applying current interest rates for similar
debt
F-15
<PAGE> 98
FIRST PHYSICIAN CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
instruments, have fair values of $2,458,000, $2,806,000 and $1,138,000 at
December 31, 1997, 1996 and 1995, respectively. The carrying amounts for
accounts and notes receivable, accounts payable and accrued liabilities and
other notes payable approximate their fair values.
4. DEBT
On July 10, 1997, the Company entered into a $5 million subordinated note
purchase agreement (the "Note Agreement") with Welsh, Carson, Anderson, & Stowe,
VI, L.P., Sprout Capital VI, L.P. and several other shareholders of the Company.
The notes bear interest at 10% and are due with accrued interest seven years
from the note issuance dates. The Note Agreement provides that the holders of
the notes earn warrants to purchase the Company's Class A Common Stock for $.01
per share based upon the amount outstanding under the Note Agreement each month.
As part of the merger agreement, the issuer has agreed to forgo earning warrants
after March 15, 1998. At March 31, 1998 and December 31, 1997, $5,000,000 and
$4,000,000, respectively, had been drawn under the Note Agreement and the
holders of the notes had earned warrants to purchase 41,869 and 38,479 shares of
stock, respectively. The fair value of the earned warrants was estimated using a
Black-Scholes option pricing model and is charged to interest expense at the
time the warrants are earned.
Notes and other obligations payable to former physician owners of medical
groups and their related parties consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, --------------------------------------
1998 1997 1996 1995
----------- ----------- ----------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Unsecured obligation payable, due annually
through April 2003 commencing April 1997.... $ 986,000 $ 986,000 $ 1,294,000 $1,294,000
Notes payable, interest payable quarterly at
7%, principal due January 1998, secured by
assets acquired............................. -- 1,000,000 1,000,000 --
Convertible notes payable, interest payable
annually at 5.7% commencing June 1997,
convertible at the option of the noteholder
into 90,000 shares of Class A common stock
after July 1997, principal payable in five
annual installments commencing June 1999,
secured by the assets acquired.............. 630,000 630,000 630,000 --
Unsecured notes payable, interest payable
annually at 7%, principal payable in three
equal annual installments commencing August
1999........................................ 471,000 471,000 471,000 --
Notes payable, interest payable quarterly at
7% commencing September 1996, principal
payable quarterly commencing September 1998,
secured by the assets acquired.............. 220,000 220,000 220,000 --
8% unsecured note payable, principal and
interest payable monthly through August
2001........................................ 131,000 139,000 171,000 --
Other......................................... 99,000 116,000 148,000 393,000
---------- ----------- ----------- ----------
2,537,000 3,562,000 3,934,000 1,687,000
Less current portion.......................... (325,000) (1,350,000) (1,328,000) (100,000)
---------- ----------- ----------- ----------
$2,212,000 $ 2,212,000 $ 2,606,000 $1,587,000
========== =========== =========== ==========
</TABLE>
F-16
<PAGE> 99
FIRST PHYSICIAN CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ------------------------------------
1998 1997 1996 1995
----------- ----------- ----------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Note payable to bank, interest at Eurodollar
rate plus 0.5% (5.5% at December 31, 1996),
principal and interest due in monthly
installments through July 2000, secured by
substantially all of the assets acquired in
the Merger................................... $ 3,333,000 $ 3,667,000 $4,000,000 $ --
Subordinated notes payable to WCAS, IV, Sprout
Capital IV, LP and other stockholders,
interest at 10%, principal and interest due
in July 2004, unsecured...................... 5,000,000 4,000,000 173,000 53,000
Other.......................................... 43,000 49,000 -- --
----------- ----------- ---------- --------
8,376,000 7,716,000 4,173,000 53,000
Less current portion........................... (1,376,000) (1,339,000) (406,000) (53,000)
----------- ----------- ---------- --------
$ 7,000,000 $ 6,377,000 $3,767,000 $ --
=========== =========== ========== ========
</TABLE>
Aggregate future principal payments for notes and other obligations payable
as of December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997
-----------
<S> <C>
Year ending December 31,
1998....................... $ 2,692,000
1999....................... 2,040,000
2000....................... 1,557,000
2001....................... 509,000
2002....................... 323,000
Thereafter................. 4,157,000
-----------
$11,278,000
===========
</TABLE>
<TABLE>
<CAPTION>
1996
-----------
<S> <C>
Year ending December 31,
1997....................... $ 1,734,000
1998....................... 1,686,000
1999....................... 1,999,000
2000....................... 1,660,000
2001....................... 561,000
Thereafter................. 467,000
-----------
$ 8,107,000
===========
</TABLE>
5. LEASES
The Company rents office space and office equipment under non-cancelable
operating leases through March 2001 and under month-to-month rental agreements.
The Company also leases computer equipment under capital leases which are
secured by the related assets. Property and equipment include the following
assets held under capital leases:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
----------------------- -----------------------
1998 1997 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Furniture, fixtures and equipment....... $1,885,000 $1,620,000 $1,620,000 $1,166,000
Less accumulated amortization........... (759,000) (684,000) (384,000) (85,000)
---------- ---------- ---------- ----------
$1,126,000 $ 936,000 $1,236,000 $1,081,000
========== ========== ========== ==========
</TABLE>
In May 1995, the Company entered into a non-cancelable, 70-month operating
lease commencing June 1995 for corporate office space approximating 14,000
square feet and increasing to 18,000 square feet in June 1996. The lease
agreement provides for an initial base lease rate of $13 per square foot,
increasing to $22 per square foot over the term of the lease. The lease has one
five-year renewal option.
F-17
<PAGE> 100
FIRST PHYSICIAN CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Effective with the purchase of the assets of PBMG, the Company entered into
a sublease arrangement with Triangle Medical Office Building, Ltd. (the
"Partnership") to lease land and medical office building space for initial
annual lease payments of $416,000. The majority of the PBMG physician employees
are limited partners in the Partnership. The Company also entered into
agreements with three of the PBMG physician employees to purchase their
partnership interests for a total of $112,000 should the physicians voluntarily
retire from the practice of medicine subsequent to April 1996. In October 1996,
the Partnership sold the building to an unrelated third party and the Company
entered into a new 150-month lease agreement with this third party for the land
and medical office space. Initial annual lease payments under the new lease are
$434,000 and are subject to adjustment based on changes in the Consumer Price
Index. The new lease is renewable for an additional 60-month period.
Future minimum lease commitments for all non-cancelable leases as of
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
---------- -----------
<S> <C> <C>
Year ending December 31,
1998...................................................... $ 431,000 $ 4,316,000
1999...................................................... 383,000 3,714,000
2000...................................................... 325,000 3,318,000
2001...................................................... 42,000 2,207,000
2002...................................................... -- 1,310,000
Thereafter................................................ -- 5,963,000
---------- -----------
Total minimum lease payments...................... 1,181,000 $20,828,000
===========
Amount representing interest................................ (139,000)
----------
Present value of minimum payments under capital lease
obligations............................................... 1,042,000
Less current portion........................................ (355,000)
----------
$ 687,000
==========
</TABLE>
Future minimum lease commitments for all non-cancelable leases as of
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
---------- -----------
<S> <C> <C>
Year ending December 31,
1997...................................................... $ 486,000 $ 4,118,000
1998...................................................... 409,000 4,619,000
1999...................................................... 361,000 4,512,000
2000...................................................... 302,000 4,184,000
2001...................................................... 20,000 3,054,000
Thereafter................................................ -- 14,713,000
---------- -----------
Total minimum lease payments...................... 1,578,000 $35,200,000
===========
Amount representing interest.............................. (272,000)
----------
Present value of minimum payments under capital lease
obligations............................................ 1,306,000
Less current portion........................................ (364,000)
----------
$ 942,000
==========
</TABLE>
Total rent expense was $4,501,000, $2,713,000, $1,541,000 and $466,000 and
sublease income was $97,000, $111,000, $112,000 and $39,000 during 1997, 1996,
1995 and 1994, respectively.
F-18
<PAGE> 101
FIRST PHYSICIAN CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES
A reconciliation of the provision (credit) for income taxes to the federal
statutory rate of 34% for 1997, 1996, 1995 and 1994 is:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Statutory federal income tax expense
(benefit)......................... $(1,402,000) $(2,564,000) $(1,709,000) $ (988,000)
State income taxes, net of federal
benefit........................... (165,000) (302,000) (201,000) (116,000)
Other............................... (1,494,000) 243,000 32,000 (169,000)
Valuation allowance................. (3,061,000) 2,623,000 1,878,000 (1,273,000)
----------- ----------- ----------- -----------
$ -- $ -- $ -- $ --
=========== =========== =========== ===========
</TABLE>
Significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------
1997 1996 1995 1994
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards...... $7,733,000 $5,013,000 $2,598,000 $1,058,000
Asset valuation allowances............ 573,000 226,000 168,000 93,000
Accrued liabilities................... 598,000 466,000 401,000 135,000
Other................................. 199,000 232,000 42,000 7,000
---------- ---------- ---------- ----------
Gross deferred assets................. 9,103,000 5,937,000 3,209,000 1,293,000
Valuation allowance................... (8,835,000) (5,774,000) (3,151,000) (1,273,000)
---------- ---------- ---------- ----------
268,000 163,000 58,000 20,000
Deferred tax liabilities:
Depreciation.......................... 232,000 145,000 58,000 20,000
Other................................. 36,000 18,000 -- --
---------- ---------- ---------- ----------
$ -- $ -- $ -- $ --
========== ========== ========== ==========
</TABLE>
At December 31, 1997 and 1996, the Company had available net operating loss
carryforwards of approximately $19,300,000 and $12,500,000, respectively, for
income tax purposes. The net operating loss carryforwards expire beginning in
2009. Changes in ownership of the Company could limit the future utilization of
these carryforwards. As certain of the net operating loss carryforwards are
utilized by the reduction of the deferred tax asset should be charged against
goodwill. Some of the net operating loss carryforwards are subject to certain
restrictions and limitations.
7. CAPITAL STOCK
PREFERRED STOCK
In August 1997 the Company's Board of Directors and stockholders approved
for issuance 20,000 shares of Class C Preferred Stock. On December 3, 1997 the
Company issued 12,000 shares of the Class C Preferred Stock.
The holders of Class A Redeemable Preferred Stock ("Class A Preferred
Stock") preferred stock do not have voting rights. The holders of Class B
Convertible Redeemable Preferred Stock ("Class B Preferred Stock") and Class C
Preferred Stock are entitled to vote the number of common shares into which
their shares are convertible.
F-19
<PAGE> 102
FIRST PHYSICIAN CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Dividends on Class A, Class B and Class C Preferred Stock are payable,
when, as and if declared by the Board of Directors. Dividends on Class B and
Class C Preferred Stock are not cumulative. As of December 31, 1997 and March
31, 1998, no dividends have been declared on Class A, Class B or Class C
Preferred Stock. The Class A Preferred Stock restricts the Company from paying
dividends or making other distributions on Class B and Class C Preferred Stock
or common stock unless full cumulative dividends on the Class A Preferred Stock
through the most recent June 30 or December 31 have been declared and paid.
Additionally, any outstanding shares of Class B and Class C Preferred Stock
restrict the Company from paying dividends or making other distributions on
common stock.
The Class B and Class C Preferred Stock is initially convertible, at the
option of the stockholder, into a number of shares of Class A common stock
determined by a prescribed formula. At March 31, 1998, the conversion ratio is
38.5 shares and 10 shares of Class A Common Stock for each share of Class B
Preferred Stock, respectively. Under certain conditions, including the
completion of an underwritten public offering of the Company's Common Stock,
shares of Class B Preferred Stock will automatically convert at the then
effective conversion rate.
The Class A, Class B and Class C Preferred Stockholders are entitled to a
liquidation preference, in order of issuance by series, over the holders of
Common Stock equal to the original purchase price of such preferred stock plus
unpaid (only if declared in the case of Class B and Class Preferred Stock)
dividends, if any.
In the event of certain changes of 50% or more of the voting power of the
Company or the sale of substantially all of the properties and assets of the
Company, and in any case no later than December 9, 2003, the holders of Class A,
Class B and Class C Preferred Stock are entitled to redeem their outstanding
shares at a redemption price equivalent to the liquidation preference.
Additionally, upon the completion of an underwritten public offering of the
Company's Class A Common Stock, the Company will apply 25% of the net proceeds
to the Company therefrom, or such lessor amount as will be sufficient, to redeem
the then outstanding shares of Class A Preferred Stock. The Company may at any
time, at its option, redeem the Class A preferred stock at the redemption price
noted above.
The Company entered into Preferred Stock purchase agreements with certain
of the holders of Class A and Class B Preferred Stock (the "Stockholders") which
obligated the Stockholders to purchase 200,000 shares of Class A Preferred Stock
at $100 per share (the "Obligation"). The Stockholders have the right of
approval for all acquisitions to be financed from the sale of Class A Preferred
Stock. The Stockholders purchased 40,000 and 135,000 shares of Class A Preferred
Stock at $100 per share pursuant to the Obligation in 1995 and 1996,
respectively. On January 9, 1997, the Stockholders purchased the remaining
25,000 shares of Class A Preferred Stock at $100 per share.
The Company has a Management Stock Purchase Plan (the "Stock Purchase
Plan"), pursuant to which the Company has issued 10,000 shares of Class B
Preferred Stock to certain members of management at a purchase price of $100 per
share. The shares issued pursuant to the Stock Purchase Plan generally vest over
a period of four years and are restricted as to transferability and sale.
Additionally, the Company has the right to repurchase vested and unvested shares
upon termination of the stockholders' employment.
In connection with the May 1996 sale of 900 shares of Class B Preferred
Stock, the Company received a note payable from an executive officer totaling
$90,000. The note is due December 31, 1998 and bears interest at 5.68%.
COMMON STOCK
In 1995 the Board of Directors authorized 900,000 shares of Class B common
stock and designated the 8,100,000 previously authorized shares of common stock
as Class A Common Stock. During 1996 the Board of Directors increased the
authorized Class A Common Stock to 15,000,000 shares. Class B Common Stock is
F-20
<PAGE> 103
FIRST PHYSICIAN CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
non-voting and is convertible into an equal number shares of Class A Common
Stock, at the option of the holder, provided that, subsequent to such
conversion, any one stockholder does not have direct or beneficial voting
control, in the aggregate, of more than 49% of the Company's voting power at the
time of conversion or immediately after the conversion. In August 1995, the
Company reacquired and canceled 872,460 shares of Class A Common Stock in
exchange for 872,460 shares of Class B Common Stock.
All common shares have been issued at their fair values and all options and
stock purchase rights have been granted at exercise prices which equal or exceed
such fair values as determined by the Board of Directors in the absence of
readily available trading market values.
The Company has reserved a total of 7,818,790 shares of Class A Common
Stock for future issuance upon the conversion of Preferred Stock, the exercise
of stock options and Common Stock purchase rights, the conversion of notes
payable and the delivery of shares to be issued at specified future dates in
accordance with the terms of the Merger and the acquisitions described in Note
2.
8. STOCK PLANS
The Company has stock option and stock purchase plans under which the Board
of Directors may, at its sole discretion, grant or authorize the issuance of:
(i) non-qualified and incentive stock options to acquire Class A Common Stock;
(ii) rights to purchase Class A Common Stock on a restricted basis; (iii) Class
A Common Stock on a restricted basis, subject to certain limitations, to
officers, physicians and certain other employees of the Company; and (iv) Class
A Common Stock to non-employees and directors of the Company. The purchase price
of the shares subject to incentive stock options granted is not to be less than
100% of the fair market value of such shares at the date of grant, as determined
by the Board of Directors. The purchase price of shares subject to non-qualified
stock options and rights to purchase Class A Common Stock on a restricted basis
will be determined by the Board of Directors. Each stock plan terminates ten
years from its effective date. Options generally vest over four years and expire
on the tenth anniversary of the date of grant. Rights to purchase restricted
shares of Class A Common Stock generally vest over four years. At March 31,
1998, 3,989,608 shares of Class A Common Stock are authorized under the various
stock plans.
A summary of the activity in the stock plans follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE STOCK WEIGHTED AVERAGE
SHARES UNDER EXERCISE PRICE EXERCISE PRICE PURCHASE EXERCISE PRICE EXERCISE PRICE
OPTION PER SHARE PER SHARE RIGHTS PER SHARE PER SHARE
------------ -------------- ---------------- -------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994...... 308,200 $ .01 - $ .43 $ .14 90,000 $.43 $.43
Granted....................... 377,186 .43 .43 --
Exercised..................... (21,250) .01 - .43 .11 --
Forfeited..................... (56,050) .01 - .43 .28 --
---------
Balance, December 31, 1995 608,086 .01 - .43 .32 90,000 .43 .43
Granted....................... 802,750 1.00 - 7.00 4.99 --
Exercised..................... (162,059) .01 - .43 .26 (90,000) .43 .43
Forfeited..................... (176,771) .01 - 1.00 .77 --
---------
Balance, December 31, 1996...... 1,072,006 .01 - 7.00 3.74 --
Granted....................... 158,300 7.00 7.00
Exercised..................... (149,744) .01 - 4.00 .42
Forfeited..................... (93,608) .01 - 7.00 4.26
---------
Balance, December 31, 1997...... 986,954 .01 - 7.00 4.68
Granted....................... -- -- --
Exercised..................... (3,750) 1.00 1.00
Forfeited..................... (14,200) .43 - 7.00 6.96
---------
Balance, March 31, 1998......... 969,004 .01 - 7.00 4.70
=========
</TABLE>
F-21
<PAGE> 104
FIRST PHYSICIAN CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information concerning outstanding and
exercisable options at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- --------------------------------------------- ---------------------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE IN YEARS PRICE EXERCISABLE PRICE
- ------------- ----------- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ .01 - $ .43 203,659 7.01 $ .32 26,100 $ .29
1.00 - 7.00 783,295 8.88 5.90 154,860 5.74
------- -------
986,954 8.49 4.68 180,960 4.91
======= =======
</TABLE>
The following table summarizes information concerning outstanding and
exercisable options at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- --------------------------------------------- ---------------------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE IN YEARS PRICE EXERCISABLE PRICE
- ------------- ----------- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ .01 - $ .43 346,356 7.97 $ .30 36,000 $ .23
1.00 - 7.00 725,650 9.74 5.39 3,125 4.00
--------- ------
1,072,006 9.17 3.74 39,125 .32
========= ======
</TABLE>
The Company has elected to follow APB No. 25 for its stock options and
stock purchase rights because, as discussed below, the alternative fair value
accounting provided for under Statement No. 123 requires the use of option
valuation models that were not developed for use in valuing employee stock
options and rights. Under APB No. 25, because the exercise price of the
Company's stock options and rights generally equals or exceeds the market price
of the underlying stock on the date of the grant, no compensation expense is
recognized.
Pro forma information regarding net income is required by Statement No.
123, which also requires that the information be determined as if the Company
has accounted for its employee stock options and rights granted subsequent to
December 31, 1994 under the fair value method. The fair value for these options
and the rights was estimated at the date of grant using the minimum value method
with the following weighted-average assumptions for 1997, 1996 and 1995,
respectively: risk-free interest rates of 6.24%, 6.06%, and 6.48%; no dividend
yield; no volatility; and a weighted average expected life of the options of
8.05, 5.05, and 4.38 years.
For purposes of pro forma disclosures, the estimated fair values of the
options and the rights are amortized to expense over the related vesting
periods. The Company's pro forma net loss for 1997, 1996 and 1995 was
$4,124,000, $7,524,000 and $5,045,000, respectively. The weighted-average fair
value of options and rights granted in 1996 and 1995 is $0.25 and $0.15,
respectively. The weighted-average fair value of all options granted in 1997 is
$.08 as all options granted during the year were granted with an exercise price
in excess of the fair values of the underlying common stock, as determined by
the Board of Directors.
Since Statement No. 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until 2000.
9. RETIREMENT PLAN
The Company has a defined contribution 401(k) plan. The plan is for the
benefit of generally all employees 21 years of age or older with at least three
months of employment and permits voluntary employee
F-22
<PAGE> 105
FIRST PHYSICIAN CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
contributions and Company profit sharing contributions. The Company has not made
any such contributions to the plan through March 31, 1998.
10. COMMITMENTS AND CONTINGENCIES
The Company maintains professional liability coverage on a claims-made
basis for its medical professional employees. Should the claims-made policies
not be renewed or replaced with equivalent insurance, claims based on
occurrences during the term of the respective policies, but asserted
subsequently, would be uninsured. Management intends to renew the existing or
similar claims-made policies annually and expects to be able to reasonably
obtain such coverage. The Company accrues the estimated cost of incurred but not
reported claims.
Effective January 1, 1995, the Company adopted a deferred compensation plan
which permits eligible officers and other key employees to defer a portion of
their compensation. Contributions to the plan are held in a Rabbi Trust, which
is subject to the claims of the Company's creditors, and administered by the
Company or its designee. At December 31, 1997, 1996 and 1995, contributions by
employees to the plan aggregated $304,000, $182,000 and $77,000, respectively.
In connection with the Merger described in Note 2, as permitted under the
Texas Business Corporation Act (the "TBCA"), eleven former shareholders of PCP,
owning an aggregate of 2.47% of PCP's common shares, exercised dissenters'
rights of appraisal and demanded that, in lieu of receiving shares of the
Company's Class A common stock, the Company pay them the fair value of their PCP
common shares in cash. The Company's position is that the value ascribed by the
dissenting PCP shareholders to their shares significantly exceeds the fair value
of such shares as determined by the Company. In the event the Company and the
dissenting PCP shareholders are unable to agree on the fair value of such
shares, either the Company or the dissenting shareholders may file a petition in
court asking for a finding and determination of the fair value of the shares.
Thereafter, the court would determine which dissenting PCP shareholders have
properly exercised their dissenters' rights and appoint one or more qualified
appraisers to determine fair value. The Company believes the claims made by the
dissenting PCP shareholders are without merit and the final outcome will not
have a material impact on the Company's financial position. Negotiations with
the dissenting PCP shareholders are ongoing and any additional amounts paid to
the dissenting PCP shareholders will be treated as additional purchase price.
11. SUBSEQUENT EVENTS
On January 20, 1998, 872,460 shares of Class B Common Stock were converted
to 872,460 shares of Class A Common Stock.
The Company entered into a revolving credit agreement with a commercial
bank on March 12, 1998 to be used for general working capital purposes. The
Company may draw amounts under the agreement totaling $1,779,000. The agreement
expires on August 31, 1998 and is guaranteed severally by WCAS VI, L.P. and
Sprout Growth II, L.P., which are stockholders of the Company. Borrowings bear
interest at the then applicable prime rate as published by the bank or LIBOR
dependent on the type of loan selected. As of June 24, 1998, there were
borrowings of $450,000 under the loan agreement.
The Company has borrowed a total of $1,000,000 from PhyCor through June 24,
1998 under a working capital loan made available through the Management
Agreement among the parties dated May 18, 1998. Under the Management Agreement
PhyCor must provide sufficient working capital for the Company to conduct its
business in the form of a loan. The loan bears interest at LIBOR plus 75 basis
points and is due in 12 equal monthly installments commencing on June 30, 1999.
F-23
<PAGE> 106
ANNEX A
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
PHYCOR, INC.
FALCON ACQUISITION SUB, INC.
AND
FIRST PHYSICIAN CARE, INC.
A-1
<PAGE> 107
AGREEMENT AND PLAN OF MERGER
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
SECTION 1. THE MERGER.................................................. A-5
1.1. The Merger.................................................. A-5
1.2. The Closing................................................. A-5
1.3. Effective Time.............................................. A-6
1.4. Effect of the Merger........................................ A-6
SECTION 2. EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT
CORPORATIONS; EXCHANGE OF CERTIFICATES...................... A-6
2.1. Effect on Capital Stock..................................... A-6
2.2. Exchange of Certificates.................................... A-7
2.3. Certificate of Incorporation of Surviving Corporation....... A-9
2.4. Bylaws of the Surviving Corporation......................... A-9
2.5. Directors and Officers...................................... A-9
2.6. Assets, Liabilities, Reserves and Accounts.................. A-10
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY............... A-10
3.1. Organization and Existence of the Company................... A-10
3.2. Subsidiaries................................................ A-10
3.3. Organization and Existence of Company Subsidiaries.......... A-10
3.4. Foreign Qualifications...................................... A-10
3.5. Affiliated Physician Groups................................. A-10
3.6. Capitalization.............................................. A-11
3.7. Power and Authority; Non-Contravention...................... A-11
3.8. Financial Statements........................................ A-11
3.9. Contracts, etc.............................................. A-12
3.10. Properties and Assets....................................... A-12
3.11. Legal Proceedings........................................... A-12
3.12. Subsequent Events........................................... A-13
3.13. Accounts Receivable......................................... A-13
3.14. Tax Returns................................................. A-14
3.15. Employee Benefit Plans; Employment Matters.................. A-14
3.16. Compliance with Laws........................................ A-17
3.17. Insurance; Malpractice...................................... A-17
3.18. Environmental Matters....................................... A-17
3.19. Regulatory Approvals........................................ A-17
3.20. Brokers..................................................... A-18
3.21. Vote Required............................................... A-18
3.22. Pooling Matters............................................. A-18
3.23. Company's Disclosure........................................ A-18
SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE PARENT AND THE
SUBSIDIARY RELATED TO THE SUBSIDIARY........................ A-18
4.1. Organization, Existence and Capitalization of the
Subsidiary.................................................. A-18
4.2. Power and Authority; Non-Contravention...................... A-19
4.3. Brokers..................................................... A-19
4.4. No Subsidiaries............................................. A-19
4.5. Legal Proceedings........................................... A-19
4.6. No Contracts or Liabilities................................. A-19
4.7. The Subsidiary's Disclosure................................. A-19
</TABLE>
A-2
<PAGE> 108
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
SECTION 5. REPRESENTATIONS AND WARRANTIES OF THE PARENT................ A-19
5.1. Organization and Existence of the Parent.................... A-19
5.2. Subsidiaries................................................ A-19
5.3. Organization and Existence of Parent Subsidiaries........... A-20
5.4. Foreign Qualifications...................................... A-20
5.5. Capitalization.............................................. A-20
5.6. Parent Common Stock......................................... A-20
5.7. Power and Authority; Non-Contravention...................... A-21
5.8. Parent Public Information................................... A-21
5.9. Contracts, etc.............................................. A-21
5.10. Legal Proceedings........................................... A-22
5.11. Subsequent Events........................................... A-22
5.12. Tax Returns................................................. A-23
5.13. Compliance with Laws........................................ A-23
5.14. Regulatory Approvals........................................ A-23
5.15. Investment Intent........................................... A-23
5.16. Brokers..................................................... A-23
5.17. Pooling Matters............................................. A-23
5.18. The Parent's Disclosure..................................... A-23
SECTION 6. ACCESS TO INFORMATION AND DOCUMENTS......................... A-24
6.1. Access to Information....................................... A-24
6.2. Return of Records........................................... A-24
SECTION 7. COVENANTS................................................... A-24
7.1. Preservation of Business.................................... A-24
7.2. Material Transactions....................................... A-24
7.3. Meeting of Shareholders..................................... A-25
7.4. Registration Statement...................................... A-25
7.5. Exemption from State Takeover Laws.......................... A-26
7.6. HSR Act Compliance.......................................... A-26
7.7. Public Disclosures.......................................... A-26
7.8. No Solicitations............................................ A-26
7.9. Other Actions............................................... A-27
7.10. Accounting Methods.......................................... A-27
7.11. Pooling and Tax-Free Reorganization Treatment............... A-27
7.12. Affiliate and Pooling Agreements............................ A-27
7.13. Cooperation................................................. A-27
7.14. Publication of Combined Results............................. A-28
7.15. Tax Opinion Certificates.................................... A-28
7.16. Consents, Amendments, etc................................... A-28
7.17. Compensation Plans.......................................... A-28
7.18. Insurance, Indemnification, Benefits........................ A-28
7.19. Resignation of Company Directors............................ A-29
7.20. Assignment of Certain Rights................................ A-29
7.21. Notice of Subsequent Events................................. A-29
7.22. Conduct of Business by the Parent Pending the Merger........ A-29
7.23. Tax Covenants Following the Effective Time.................. A-30
7.24. Consulting Agreement........................................ A-30
7.25. Supplemental Company Disclosure Schedule.................... A-30
</TABLE>
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<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
SECTION 8. TERMINATION, AMENDMENT AND WAIVER........................... A-30
8.1. Termination................................................. A-30
8.2. Effect of Termination....................................... A-31
8.3. Amendment................................................... A-31
8.4. Extension; Waiver........................................... A-32
8.5. Procedure for Termination, Amendment, Extension or Waiver... A-32
8.6. Expenses; Break-up Fees..................................... A-32
SECTION 9. CONDITIONS TO CLOSING....................................... A-32
9.1. Mutual Conditions........................................... A-32
9.2. Conditions to Obligations of the Parent..................... A-33
9.3. Conditions to Obligations of the Company.................... A-34
SECTION 10. MISCELLANEOUS............................................... A-34
10.1. Nonsurvival of Representations and Warranties............... A-34
10.2. Notices..................................................... A-34
10.3. Further Assurances.......................................... A-35
10.4. Governing Law............................................... A-35
10.5. "Knowledge"................................................. A-35
10.6. "Material adverse change" or "material adverse effect."..... A-35
10.7. "Hazardous Materials."...................................... A-35
10.8. "Environmental Laws."....................................... A-35
10.9. Captions.................................................... A-35
10.10. Entire Agreement............................................ A-36
10.11. Counterparts................................................ A-36
10.12. Binding Effect.............................................. A-36
10.13. No Rule of Construction..................................... A-36
</TABLE>
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AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of December 19, 1997 (the
"Agreement"), among PHYCOR, INC., a Tennessee corporation (the "Parent"), FALCON
ACQUISITION SUB, INC., a Delaware corporation (the "Subsidiary"), and FIRST
PHYSICIAN CARE, INC., a Delaware corporation (the "Company").
WHEREAS, the Boards of Directors of the Parent, the Company and the
Subsidiary have approved the merger of the Subsidiary with and into the Company
(the "Merger"), upon the terms and conditions set forth in this Agreement,
whereby each share of Class A Common Stock, par value $.001 per share, of the
Company (the "Company Class A Common Stock"), each share of Class B Common
Stock, par value $.001 per share, of the Company (the "Company Class B Common
Stock" and together with the Company Class A Common Stock, the "Company Common
Stock"), each share of Class A Preferred Stock, par value $1.00 per share, of
the Company (the "Company Class A Preferred Stock"), each share of Class B
Convertible Preferred Stock, par value $1.00 per share, of the Company (the
"Company Class B Preferred Stock") and each share of Class C Convertible
Preferred Stock, par value $1.00 per share, of the Company (the "Company Class C
Preferred Stock" and together with the Company Class A Preferred Stock and the
Company Class B Preferred Stock, the "Company Preferred Stock"), not owned
directly or indirectly by the Company, the Parent, or by any subsidiary of the
Company or the Parent, will be converted into the right to receive the merger
consideration provided for herein (the Company Common Stock and Company
Preferred Stock may be sometimes hereinafter referred to as the "Company Capital
Stock" or the "Company Shares");
WHEREAS, each of the Parent, the Subsidiary and the Company desire to make
certain representations, warranties, covenants and agreements in connection with
the Merger and also to prescribe various conditions to the Merger;
WHEREAS, for federal income tax purposes, it is intended that the Merger
(as defined herein) shall qualify as a reorganization under the provisions of
Section 368 of the Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, for accounting purposes, it is intended that the Merger shall be
accounted for as a "pooling of interests."
NOW, THEREFORE, in consideration of the premises, and the mutual covenants
and agreements contained herein, the parties hereto do hereby agree as follows:
SECTION 1. THE MERGER
1.1. The Merger. Upon the terms and subject to the conditions set forth in
this Agreement, and in accordance with the General Corporation Law of the State
of Delaware (the "DGCL"), the Subsidiary shall be merged with and into the
Company at the Effective Time (as defined in Section 1.3). Following the
Effective Time, the separate corporate existence of the Subsidiary shall cease
and the Company shall continue as the surviving corporation (the "Surviving
Corporation") as a business corporation incorporated under the laws of the State
of Delaware under the name "First Physician Care, Inc." and shall succeed to and
assume all the rights and obligations of the Subsidiary in accordance with the
DGCL.
1.2. The Closing. The closing of the Merger (the "Closing") will take
place at 10:00 a.m. local time on a date to be specified by the parties (the
"Closing Date"), which shall be no later than the second business day after the
satisfaction or waiver of the conditions set forth in Sections 9.1, 9.2 and 9.3,
at the offices of Waller Lansden Dortch & Davis, A Professional Limited
Liability Company, Nashville, Tennessee, unless another date or place is agreed
to in writing by the parties hereto.
1.3. Effective Time. Subject to the provisions of this Agreement, the
Company and the Subsidiary shall file a Certificate of Merger (the "Certificate
of Merger") executed in accordance with the relevant provisions of the DGCL and
shall make all other filings or recordings required under the DGCL to effect the
Merger as soon as practicable on or after the Closing Date. The Merger shall
become effective at such time as the Certificate of Merger is duly filed with
the Secretary of State of the State of Delaware, or at such other time as
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the Parent, the Subsidiary and the Company shall agree should be specified in
the Certificate of Merger (the "Effective Time").
1.4. Effect of the Merger. The Merger shall have the effects set forth in
the DGCL. Without limiting the generality of the foregoing, and subject thereto
and to any other applicable laws, at the Effective Time, all the properties,
rights, privileges, powers and franchises of the Company and the Subsidiary
shall vest in the Surviving Corporation, and all debts, liabilities,
restrictions, disabilities and duties of the Company and the Subsidiary shall
become the debts, liabilities, restrictions, disabilities and duties of the
Surviving Corporation.
SECTION 2. EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT
CORPORATIONS; EXCHANGE OF CERTIFICATES
2.1. Effect on Capital Stock. As of the Effective Time, by virtue of the
Merger and without any action on the part of any holder of the Company Shares:
(a) Subsidiary Common Stock. Each share of Common Stock, par value
$.01 per share, of the Subsidiary issued and outstanding immediately prior
to the Effective Time shall be converted into one share of Common Stock,
par value $.01 per share, of the Surviving Corporation.
(b) Cancellation of Certain Shares of Company Capital Stock. Each
share of Company Capital Stock that is owned by the Company, the Parent or
by any subsidiary of the Company or the Parent (other than such shares
owned by the Subsidiary pursuant to the conversion described in Section
2.1(a) hereof) shall automatically be canceled and retired and shall cease
to exist, and none of the Common Stock, no par value, of the Parent (the
"Parent Common Stock"), cash or other consideration shall be delivered in
exchange therefor.
(c) Conversion of the Company Shares. As of the Effective Time, each
share of Company Common Stock (other than the shares to be canceled in
accordance with Section 2.1(b)) outstanding as of the Effective Time
(including shares issuable as a result of the exercise of stock options
that become vested in accordance with their terms as of the Effective Time)
shall be converted into the right to receive .2474 shares of Parent Common
Stock (the "Common Stock Exchange Ratio"); each share of Company Class A
Preferred Stock (other than any shares to be canceled in accordance with
Section 2.1(b)) issued and outstanding immediately prior to the Effective
Time shall be converted into the right to receive 4.6070 shares of Parent
Common Stock (the "Class A Preferred Exchange Ratio"); each share of
Company Class B Preferred Stock (other than any shares to be canceled in
accordance with Section 2.1(b)) issued and outstanding immediately prior to
the Effective Time shall be converted into the right to receive 9.5270
shares of Parent Common Stock (the "Class B Preferred Exchange Ratio"); and
each share of Company Class C Preferred Stock (other than any shares to be
canceled in accordance with Section 2.1(b)) issued and outstanding
immediately prior to the Effective Time shall be converted into the right
to receive 2.4743 shares of Parent Common Stock (the "Class C Preferred
Exchange Ratio" and, together with the Common Stock Exchange Ratio, the
Class A Preferred Exchange Ratio and the Class B Preferred Exchange Ratio,
the "Exchange Ratios"). All such shares of Parent Common Stock (including
the corresponding rights associated therewith issued pursuant to the terms
of the Rights Agreement dated as of February 18, 1994 between Parent and
First Union National Bank of North Carolina) shall be fully paid and
nonassessable and are hereinafter sometimes referred to as the "Parent
Shares." Upon such conversion, all such Company Shares shall be canceled
and cease to exist, and each holder thereof shall cease to have any rights
with respect thereto other than the right to receive the Parent Shares
issued in exchange therefor and cash in lieu of fractional Parent Shares in
accordance with the terms provided herein. The Exchange Ratios set forth in
this Section 2.1 (c) assume the exercise as of or prior to the Effective
Time of all of the Exercisable Options (as defined below), options to
purchase 121,928 shares of Company Common Stock, which options will not be
vested as of the Effective Time and for which it is expected that the
exercise price per share multiplied by the Common Stock Exchange Ratio will
be less than the value of Parent Common Stock per share as of the Effective
Time and warrants to purchase 41,869 shares of Company Common Stock.
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(d) Stock Options. With respect to each unexpired and unexercised
option to purchase Company Common Stock ("Company Options"), as listed on
Schedule 2.1(d) to the Disclosure Schedule delivered to the Parent by the
Company at the time of the execution and delivery of this Agreement (as so
delivered and as thereafter amended or supplemented pursuant to Section
7.25, the "Company Disclosure Schedule"), the Company shall use its
reasonable efforts to cause holders of Company Options that will be vested
as of the Effective Time, for which it is expected that the exercise price
per share multiplied by the Common Stock Exchange Ratio will be less than
the value of Parent Common Stock per share at the Effective Time, to
exercise such Company Options (the "Exercisable Options") as of or prior to
the Effective Time. At the Effective Time, all rights with respect to
Company Common Stock pursuant to any Company Options which are outstanding
at the Effective Time, whether or not then vested or exercisable, shall be
converted into and become rights with respect to Parent Common Stock, and
Parent shall assume each Company Option in accordance with the terms of any
stock option plan under which it was issued and any stock option agreement
by which it is evidenced or, at the election of Parent, provide options
under Parent's stock option plans in substitution thereof in a manner that
will result in a transaction to which Section 424 of the Code applies. Each
Company Option so assumed or substituted therefor shall be exercisable for
that number of shares of Parent Common Stock equal to the number of shares
of Company Common Stock subject thereto multiplied by the Common Stock
Exchange Ratio, and shall have an exercise price per share equal to such
Company Option's exercise price divided by the Common Stock Exchange Ratio.
It is intended that the foregoing provision shall be undertaken in a manner
that will not constitute a "modification" as defined in Section 424(h) of
the Code as to any Company Option which is an "incentive stock option."
(e) Adjustment of Exchange Ratios. If after the date hereof and prior
to the Effective Time the Parent shall have declared a stock split
(including a reverse split) of Parent Common Stock or a dividend payable in
Parent Common Stock or any other distribution of securities or dividend (in
cash or otherwise but excluding regularly declared cash dividends) to
holders of Parent Common Stock with respect to their Parent Common Stock
(including without limitation such a distribution or dividend made in
connection with a recapitalization, reclassification, merger,
consolidation, reorganization or similar transaction) then the Exchange
Ratios shall be appropriately adjusted to reflect such stock split,
dividend or other distribution of securities.
2.2. Exchange of Certificates.
(a) Exchange Agent. As soon as practicable after the date hereof, but
in any event prior to two business days in advance of the date the Company
provides notice to its stockholders of the Shareholder Meeting (as defined
in Section 7.3 hereof), the Parent and the Company shall enter into an
agreement with First Union National Bank of North Carolina (the "Exchange
Agent"), which provides that the Parent shall deposit with the Exchange
Agent, for the benefit of the holders of the Company Shares, for exchange
in accordance with this Section 2.2 and the Certificate of Merger, through
the Exchange Agent, (i) as soon as practicable (but in any event within
five business days) after such agreement has been entered into,
certificates representing the shares of the Parent Common Stock issuable
pursuant to Section 2.1 and (ii) at least two business days prior to the
Effective Time, cash in an amount equal to the aggregate amount required to
be paid in lieu of fractional interests of Parent Common Stock pursuant to
Section 2.2(e) (such shares of the Parent Common Stock, together with any
dividends or distributions with respect thereto with a record date after
the Effective Time, and together with the cash referred to in clause (ii)
of this Section 2.2(a), being hereinafter referred to as the "Exchange
Fund") in exchange for outstanding Company Shares. The Parent agrees to use
its best efforts to cause the Exchange Agent to comply with the terms of
this Section 2.2.
(b) Exchange Procedures. As soon as practicable after the execution
of the agreement between the Parent, the Company and the Exchange Agent,
the Company will deliver to the Parent and the Exchange Agent a list of
each person who the Company believes will be a holder of record of a
certificate or certificates which immediately prior to the Effective Time
would represent outstanding Company Shares (the "Certificates") along with
the number of Company Shares expected to be held by such holder, and the
Parent will deliver to the Company for inclusion in the notice of the
Shareholder Meeting
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sufficient copies of (i) a letter of transmittal, in such form reasonably
satisfactory to the Company, the Parent and the Exchange Agent, which shall
(A) specify that delivery shall be effected, and risk of loss and title to
the Certificates shall pass, only upon delivery of the Certificates to the
Exchange Agent and (B) permit holders of Certificates to tender such
Certificates to the Exchange Agent in advance of the Effective Time but
conditioned on consummation of the Merger and (ii) instructions for use by
holders of Certificates in effecting the surrender of the Certificates in
exchange for certificates representing shares of Parent Common Stock. The
Company shall deliver a copy of such letter and instructions to each such
expected holder of record of the Certificates. Upon surrender of a
Certificate for cancellation to the Exchange Agent or to such other agent
or agents as may be appointed by the Parent, together with such letter of
transmittal, duly executed, and such other documents as may reasonably be
required by the Exchange Agent, the Exchange Agent shall promptly prepare a
certificate representing that number of whole shares of Parent Common Stock
which such holder has the right to receive (assuming the consummation of
the Merger) pursuant to the provisions of Sections 2.1 and 2.2. The former
holder of such Certificate so surrendered shall be entitled to receive,
upon the earlier of (i) the Effective Time or, (ii) if such surrender
occurs not earlier than ten (10) business days prior to the Effective Time,
as soon as reasonably practicable but in all events within ten (10)
business days after such surrender, in exchange therefor a certificate
representing that number of whole shares of Parent Common Stock and cash
which such holder has the right to receive pursuant to the provisions of
Sections 2.1 and 2.2, and the Certificate so surrendered shall forthwith be
canceled. If any cash or any certificate representing the Parent Shares is
to be paid to or issued in a name other than that in which the Certificate
surrendered in exchange therefor is registered, a certificate representing
the proper number of shares of the Parent Common Stock may be issued to a
person other than the person in whose name the Certificate so surrendered
is registered, if such Certificate shall be properly endorsed or otherwise
be in proper form for transfer and the person requesting such payment shall
pay to the Exchange Agent any transfer or other taxes required by reason of
the issuance of shares of the Parent Common Stock to a person other than
the registered holder of such Certificate or establish to the satisfaction
of the Exchange Agent that such tax has been paid or is not applicable.
Until surrendered as contemplated by this Section 2.2, each Certificate
shall be deemed at any time after the Effective Time to represent only the
right to receive upon such surrender the certificate representing shares of
the Parent Common Stock and cash in lieu of any fractional shares of the
Parent Common Stock as contemplated by this Section 2.2. No interest will
be paid or will accrue on any cash payable in lieu of any fractional shares
of the Parent Common Stock. To the extent permitted by law, former
shareholders of record of the Company shall be entitled to vote after the
Effective Time at any meeting of the Parent's shareholders the number of
whole shares of Parent Common Stock into which their respective Company
Shares are converted, regardless of whether such holders have exchanged
their Certificates for certificates representing Parent Common Stock in
accordance with this Section 2.2.
(c) Distribution with Respect to Unexchanged Shares. No dividends or
other distributions with respect to Parent Common Stock with a record date
after the Effective Time shall be paid to the holder of any unsurrendered
Certificate with respect to the shares of Parent Common Stock represented
thereby and no cash payment in lieu of fractional shares shall be paid to
any such holder pursuant to Section 2.2(e) until the surrender of such
Certificate in accordance with this Section 2.2. 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
Parent Common Stock issued in exchange therefor, without interest, (i) at
the time of such surrender, the amount of any cash payable in lieu of a
fractional share of Parent Common Stock to which such holder is entitled
pursuant to Section 2.2(e) and the amount of dividends or other
distributions with a record date after the Effective Time theretofore paid
with respect to such whole shares of Parent Common Stock, 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 such surrender and
with a payment date subsequent to such surrender payable with respect to
such whole shares of Parent Common Stock. If any holder of converted
Company Shares shall be unable to surrender such holder's Certificates
because such Certificates shall have been lost or destroyed, such holder
may deliver in lieu thereof an affidavit and indemnity bond in form and
substance and with surety reasonably satisfactory to the Parent.
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(d) No Further Ownership Rights in Company Shares. All shares of
Parent Common Stock issued upon the surrender for exchange of Certificates
in accordance with the terms of this Section 2 (including any cash paid
pursuant to Section 2.2(c) or 2.2(e)) shall be deemed to have been issued
(and paid) in full satisfaction of all rights pertaining to the Company
Shares theretofore represented by such Certificates. If, after the
Effective Time, Certificates are presented to the Surviving Corporation or
the Exchange Agent for any reason, they shall be canceled and exchanged as
provided in this Section 2, except as otherwise provided by law.
(e) No Fractional Shares. No certificates representing fractional
shares of Parent Common Stock shall be issued upon the surrender for
exchange of Certificates, and such fractional share interests will not
entitle the owner thereof to vote or to any rights of a shareholder of the
Parent. Notwithstanding any other provision of this Agreement, each holder
of Company Shares exchanged pursuant to the Merger who would otherwise have
been entitled to receive a fraction of a share of Parent Common Stock
(after taking into account all Certificates delivered by such holder) shall
receive, in lieu thereof, cash (without interest) in an amount equal to
such fractional part of a share of Parent Common Stock multiplied by the
per share closing price on the Nasdaq Stock Market (or such other exchange
on which the Parent Common Stock is then listed) of Parent Common Stock on
the date of the Effective Time (or, if shares of the Parent Common Stock do
not trade on the Nasdaq Stock Market (or such other exchange) on such date,
the first date of trading of the Parent Common Stock on the Nasdaq Stock
Market (or such other exchange) after the Effective Time).
(f) Termination of Exchange Fund. Any portion of the Exchange Fund
which remains undistributed to the holders of the Certificates for six
months after the Effective Time shall be delivered to the Parent, upon
demand, and any holders of the Certificates who have not theretofore
complied with this Section 2 shall thereafter look only to the Parent for
payment of Parent Common Stock, any cash in lieu of fractional shares of
Parent Common Stock and any dividends or distributions with respect to the
Parent Common Stock.
(g) No Liability. None of the Parent, the Subsidiary, the Company or
the Exchange Agent shall be liable to any person in respect to any shares
of Parent Common Stock (or dividends or distributions with respect thereto)
or cash from the Exchange Fund delivered to a public official pursuant to
any applicable abandoned property, escheat or similar law. If any
Certificates shall not have been surrendered prior to the end of the
applicable period after the Effective Time under escheat laws (or
immediately prior to such earlier date on which any shares of Parent Common
Stock, any cash in lieu of fractional shares of Parent Common Stock or any
dividends or distributions with respect to Parent Common Stock in respect
of such Certificates would otherwise escheat to or become the property of
any governmental entity), any such shares, cash, dividends or distributions
in respect of such Certificates shall, to the extent permitted by
applicable law, become the property of the Surviving Corporation, free and
clear of all claims or interest of any person previously entitled thereto.
(h) Investment of Exchange Fund. The Exchange Agent shall invest any
cash included in the Exchange Fund, as directed by the Parent, on a daily
basis. Any interest and other income resulting from such investments shall
be paid to the Parent.
2.3. Certificate of Incorporation of Surviving Corporation. The
Certificate of Incorporation of the Subsidiary, effective immediately following
the Effective Time, shall be the Certificate of Incorporation of the Surviving
Corporation from and after the Effective Time and until thereafter amended as
provided by law.
2.4. Bylaws of the Surviving Corporation. The Bylaws of the Subsidiary
shall be the Bylaws of the Surviving Corporation from and after the Effective
Time and until thereafter altered, amended or repealed in accordance with the
DGCL, the Certificate of Incorporation of the Surviving Corporation and the
Bylaws.
2.5. Directors and Officers. The directors and officers of the Subsidiary
immediately prior to the Effective Time shall be the directors and officers of
the Surviving Corporation, each to hold office in accordance with the
Certificate of Incorporation and Bylaws of the Surviving Corporation.
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2.6. Assets, Liabilities, Reserves and Accounts. At the Effective Time,
the assets, liabilities, reserves and accounts of each of the Subsidiary and the
Company shall be taken up on the books of the Surviving Corporation at the
amounts at which they respectively shall be carried on the books of said
corporations immediately prior to the Effective Time, except as otherwise set
forth in this Agreement and subject to such adjustments, or elimination of
intercompany items, as may be appropriate in giving effect to the Merger in
accordance with generally accepted accounting principles.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to the Parent and the Subsidiary
as follows:
3.1. Organization and Existence of the Company. The Company is a
corporation duly organized and validly existing under the laws of the State of
Delaware. The Company has all necessary corporate power and authority to own or
lease its properties and assets and to carry on its business as presently
conducted. The Company is not, and has not been within the two years immediately
preceding the date of this Agreement, a subsidiary or division of another
corporation, nor has the Company within such time owned, directly or indirectly,
any shares of the Parent Common Stock.
3.2. Subsidiaries. Attached as Schedule 3.2 to the Company Disclosure
Schedule is a list of all corporations, partnerships, joint ventures or other
business associations or entities in which the Company owns any interest (such
corporations, partnerships, joint ventures or other business entities of which
the Company owns, directly or indirectly, greater than fifty percent of the
shares of capital stock or other equity interests (including partnership
interests) entitled (without regard to the occurrence of any contingency) to
cast at least a majority of the votes that may be cast by all shares or equity
interest having ordinary voting power for the election of directors or other
governing body of such entity are hereinafter referred to as the "Company
Subsidiaries").
3.3. Organization and Existence of Company Subsidiaries. Each Company
Subsidiary is duly organized and validly existing under the laws of its state of
organization, except where the failure to be so organized or validly existing
would not have a material adverse effect on the Company. Each Company Subsidiary
has all necessary power to own or lease its properties and assets and to carry
on its business as presently conducted, except where the failure to have such
power would not have a material adverse effect on the Company. All of the
outstanding shares of capital stock of, or other ownership interests in, each of
the Company Subsidiaries owned by the Company or a Company Subsidiary are owned
by the Company or by a Company Subsidiary free and clear of any liens, claims,
charges or encumbrances. There are not any voting trust, standstill or
stockholder agreements or understandings to which the Company or any Company
Subsidiary is a party or is bound with respect to the voting of the capital
stock of any of the Company Subsidiaries.
3.4. Foreign Qualifications. The Company and each Company Subsidiary that
is not a general partnership is qualified to do business as a foreign
corporation or foreign limited partnership or other entity, as the case may be,
and is validly existing in each jurisdiction where the nature or character of
the property owned, leased or operated by it or the nature of the business
transacted by it makes such qualification necessary, except where the failure to
be so qualified would not have a material adverse effect on the Company.
Schedule 3.4 to the Company Disclosure Schedule sets forth each jurisdiction in
which each Company Subsidiary is qualified to do business.
3.5. Affiliated Physician Groups. Schedule 3.5 to the Company Disclosure
Schedule sets forth each physician group or entity with which the Company or any
of the Company Subsidiaries is affiliated, either through a management or
service agreement or other arrangement (the "Company Affiliated Physician
Groups"). To the best of the Company's knowledge, the Company Disclosure
Schedule also sets forth the number of physicians and other providers employed
or affiliated with each such Company Affiliated Physician Group as of December
17, 1997. The Company has made available to the Parent true and correct copies
of the material documents by which each Company Affiliated Physician Group
became affiliated with the Company or one of the Company Subsidiaries.
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3.6. Capitalization. The Company's authorized capital stock consists of
(i) 200,000 shares of Class A Preferred Stock, $1.00 par value, all of which are
issued and outstanding, (ii) 110,000 shares of Class B Convertible Preferred
Stock, $1.00 par value, all of which are issued and outstanding, (iii) 20,000
shares of Class C Convertible Preferred Stock, $1.00 par value, 12,000 shares of
which are issued and outstanding, (iv) 15,000,000 shares of Company Class A
Common Stock, $.001 par value, of which, as of November 30, 1997, 3,169,013
shares were issued and outstanding, (v) 900,000 shares of Company Class B Common
Stock, of which, as of November 30, 1997, 872,460 shares were issued and
outstanding. All of the issued and outstanding Company Shares have been duly and
validly issued and are fully paid and nonassessable. Except as disclosed in the
Financial Statements (as hereinafter defined), or described in Schedule 3.6 to
the Company Disclosure Schedule, there are no options, warrants or similar
rights granted by the Company or any other agreements to which the Company is a
party providing for the issuance or sale by it of any additional securities.
There is no liability for dividends declared or accumulated but unpaid with
respect to any shares of the Company Common Stock. Except as disclosed on
Schedule 3.6 to the Company Disclosure Schedule, there are no obligations,
contingent or otherwise, of the Company or any Company Subsidiary to repurchase,
redeem or otherwise acquire any shares of Company Capital Stock or the capital
stock of or other equity interest in any Company Subsidiary.
3.7. Power and Authority; Non-Contravention.
(a) Subject to the satisfaction of the conditions precedent set forth
herein, the Company has all necessary corporate power and authority to
execute, deliver and perform this Agreement and all agreements and other
documents executed and delivered or to be executed and delivered by it
pursuant to this Agreement, and, subject to the satisfaction of the
conditions precedent set forth herein, has taken all action required by its
Certificate of Incorporation, Bylaws or otherwise, to authorize the
execution, delivery and performance of this Agreement and such related
documents. The Agreement has been duly and validly executed and delivered
by the Company and, assuming the due authorization, execution and delivery
by the Parent and the Subsidiary, constitutes the legal, valid and binding
obligation of the Company enforceable against the Company in accordance
with its terms.
(b) Except as set forth in Schedule 3.7(b) to the Company Disclosure
Schedule, the execution and delivery of this Agreement by the Company does
not and, subject to the receipt of required shareholder and regulatory
approvals and any other required third-party consents or approvals, the
consummation of the Merger will not, violate any provisions of the
Certificate of Incorporation or Bylaws of the Company or any provisions of,
or result in the acceleration of any obligation under, any mortgage, lien,
lease, agreement, instrument, order, arbitration award, judgment or decree,
to which the Company or any Company Subsidiary is a party, or by which any
of them is bound, which, if violated or accelerated would have a material
adverse effect on the Company.
3.8. Financial Statements. The Company has furnished to the Parent (i) the
Company's consolidated audited financial statements for each of the years ended
December 31, 1994, 1995 and 1996, consisting of a balance sheet, the related
statement of operations, cash flows and stockholders' equity, together with a
report thereon by Ernst & Young LLP (the "Company Audited Financial Statements")
and (ii) the Company's unaudited financial statements for the ten-month period
ended October 31, 1997, consisting of a balance sheet and the related statement
of operation, cash flows and stockholders' equity (the "Company Unaudited
Financial Statements" and, together with the Audited Financial Statements, the
"Financial Statements"). Except as set forth in Schedule 3.8 to the Company
Disclosure Schedule, and, with respect to the Company Unaudited Financial
Statements, except for the omission of footnotes, preparation in summary or
condensed form and the effect of normal, recurring year-end adjustments, the
Financial Statements have been prepared in accordance with generally accepted
accounting principles, consistently applied, and the Financial Statements (i)
are true, complete and correct in all material respects as of the respective
dates and for the respective periods above stated and (ii) fairly present the
financial position of Company at such dates and the results of its operations
for the periods ended on such dates. Except as set forth in Schedule 3.8 to the
Company Disclosure Schedule, the Financial Statements reflect all of the
liabilities and obligations of the Company that are required to be reflected or
disclosed therein in accordance with generally accepted
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accounting principles, consistently applied. For purposes of this Agreement, the
balance sheet of the Company included in the Company Unaudited Financial
Statements is referred to as the "Company Balance Sheet."
3.9. Contracts, etc.
(a) To the knowledge of the Company, all material contracts, leases,
agreements and arrangements to which the Company or any of the Company
Subsidiaries is a party (collectively, the "Company Material Contracts")
are legally valid and binding in accordance with their terms and in full
force and effect. The Company has not taken any action or permitted any
circumstance to exist that has caused any Company Material Contract to
cease being legally valid and binding in accordance with its terms and in
full force and effect. Except as disclosed in Schedule 3.9 or 3.11 to the
Company Disclosure Schedule, to the knowledge of the Company, all parties
to the Company Material Contracts have complied with the provisions of such
contracts, and to the knowledge of the Company, no party is in default
thereunder, and no event has occurred which, but for the passage of time or
the giving of notice or both, would constitute a default thereunder,
except, in each case, where the noncompliance with or invalidity of the
Company Material Contracts or the default or breach thereunder or thereof
would not, individually or in the aggregate, have a material adverse effect
on the Company, and the Company has not received any notice of termination
or cancellation or a request to renegotiate any of the Company Material
Contracts.
(b) Except as set forth in Schedule 3.9(b) to the Company Disclosure
Schedule, no Company Material Contract will, by its terms, terminate as a
result of the transactions contemplated hereby or require any consent from
any obligor thereto in order to remain in full force and effect immediately
after the Effective Time.
(c) Except as set forth in Schedule 3.9(c) to the Company Disclosure
Schedule, none of the Company or any Company Subsidiary has granted any
right of first refusal or similar right in favor of any third party with
respect to any material portion of its properties or assets (excluding
liens described in Section 3.10).
(d) Schedule 3.9(d) to the Company Disclosure Schedule sets forth each
agreement that either the Company or a Company Subsidiary is a party to or
bound by that requires expenditures or provides for receipts of more than
$250,000 in any calendar year.
(e) Except as set forth on Schedule 3.9(e) to the Company Disclosure
Schedule, neither the Company nor any Company Subsidiary is a party to any
agreement or contract that limits the rights of the Company or any of its
affiliates to engage in any business or to compete with any person.
3.10. Properties and Assets. The Company (including, as applicable, the
Company Subsidiaries) owns and has good and marketable title to all of the real
property and personal property included in the Company Balance Sheet (except
assets recorded under capital lease obligations and such property as has been
disposed of during the ordinary course of the Company's business since the date
of the Company Balance Sheet), free and clear of any liens, claims, charges,
exceptions or encumbrances, except for those (i) if any, which in the aggregate
are not material and which do not materially affect continued use of such
property or (ii) which are set forth in Schedule 3.10 to the Company Disclosure
Schedule.
3.11. Legal Proceedings. Except as listed in Schedule 3.11 to the Company
Disclosure Schedule, there are no actions, injunctions, orders, arbitrations,
suits, proceedings, or, to the knowledge of the Company, governmental
investigations or inquiries pending against the Company on any Company
Subsidiary or, to the knowledge of the Company, threatened against the Company
or any Company Subsidiary or pending or threatened against any Company
Affiliated Physician Group, at law or in equity, before any court, arbitration
tribunal or governmental agency, relating to or affecting the Company, any
Company Subsidiary or any Company Affiliated Physician Group.
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3.12. Subsequent Events. Except as set forth in Schedule 3.12 to the
Company Disclosure Schedule, the Company (including the Company Subsidiaries)
has not, since the date of the Company Balance Sheet:
(a) Suffered any material adverse effect.
(b) Incurred, discharged or satisfied any material lien or
encumbrance, or paid or satisfied any material obligation or liability
(absolute, accrued, contingent or otherwise), which discharge or
satisfaction would have a material adverse effect on the Company, other
than (i) liabilities shown or reflected on the Company Balance Sheet or
(ii) liabilities incurred since the date of the Company Balance Sheet in
the ordinary course of business in individual amounts less than $250,000.
(c) Incurred any material indebtedness or increased or established any
reserve for taxes or any other liability on its books or otherwise provided
therefor, except as may have been required with respect to income or
operations of the Company since the date of the Company Balance Sheet and
except in the ordinary course of business.
(d) Mortgaged, pledged or subjected to any lien, charge or other
encumbrance any of the assets, tangible or intangible, which assets are
material to the consolidated business or financial condition of the
Company.
(e) Sold or transferred any of the assets material to the consolidated
business of the Company, canceled any material debts or claims or waived
any material rights, except in the ordinary course of business.
(f) Except for annual increases in the base rates of compensation and
bonuses of officers and employees in the ordinary course of business,
granted any general or uniform increase in the rates of pay of employees.
Schedule 3.12(f) to the Company Disclosure Schedule sets forth all 1997
bonuses to be paid pursuant to the bonus plan adopted by the Board of
Directors of the Company for key executives of the Company.
(g) Except for this Agreement and any other agreement executed and
delivered pursuant to this Agreement, entered into any material transaction
other than in the ordinary course of business or permitted under this
Agreement.
(h) Issued any stock, bonds or other securities or any options or
rights to purchase any of its securities (other than stock issued upon (i)
the exercise of outstanding options under the Company's stock option plans
or stock purchase plans (ii) the exercise of outstanding warrants on (iii)
the conversion of the Company Class B Preferred Stock or Company Class C
Preferred Stock).
(i) Declared, set aside or paid any dividend or made any other
distribution or payment with respect to any shares of its capital stock or
directly or indirectly redeemed, purchased or otherwise acquired any
shares of its capital stock or the capital stock or equity interests
of any Company Subsidiary.
(j) Changed in any material respect the accounting methods or
practices followed by the Company, including any material change in any
assumption underlying, or method of calculating, any bad debt, contingency
or other reserve, except as may be required by changes in generally
accepted accounting principles.
(k) Amended, terminated or received notice of termination of any of
the Company Material Contracts.
(l) Canceled or failed to maintain reasonably necessary insurance
coverage.
3.13. Accounts Receivable.
(a) All of the Company's accounts receivable as of the date of this
Agreement constitute, and as of the Closing Date will constitute, valid
claims which arose in the ordinary course of the business of the Company.
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(b) Since the date of the Company Balance Sheet, the Company has not
changed any principle or practice with respect to the recordation of
accounts receivable or the calculation of reserves therefor, or any
material collection, discount or write-off policy or procedure, except as
may be required by changes in generally accepted accounting principles.
(c) The Company (including the Company Subsidiaries) is in compliance
with the terms and conditions of all third-party payor arrangements
relating to its accounts receivable, except to the extent that such
noncompliance would not have a material adverse effect on the Company.
Without limiting the generality of the foregoing, neither the Company nor
any Company Subsidiary has received notice from any government authority
alleging that the Company or any Company Subsidiary is in violation of any
Medicare and Medicaid provider agreements to which it is a party.
3.14. Tax Returns. The Company has delivered to the Parent true and
correct copies of all tax returns relating to income or franchise taxes filed by
or on behalf of the Company since 1994. The Company has timely filed all tax
returns required to be filed by it or requests for extensions to file such
returns or reports have been timely filed and granted and have not expired,
except to the extent that such failures to file, taken together, do not have a
material adverse effect on the Company. The Company has made all payments shown
as due on such returns. The Company has paid all taxes and other charges,
whether or not reflected on a tax return, claimed to be due from it by any
Federal, state or local taxing authority, except for matters the Company is
contesting in good faith and has disclosed on Schedule 3.14 to the Company
Disclosure Schedule. Except as reflected in Schedule 3.14 to the Company
Disclosure Schedule, the Company has not been notified that any tax returns of
the Company are currently under audit by the Internal Revenue Service ("IRS") or
any state or local tax agency or, to the knowledge of the Company, that there
are any pending or threatened questions or examinations relating to, or claims
asserted for taxes or assessments against, the Company. The Company is not a
party to any agreement for the extension of time or the waiver of the statute of
limitations for the assessment or payment of any federal, state, or local taxes.
The Company has withheld and paid all taxes required to have been withheld and
paid in connection with amounts paid or owing to any employee, independent
contractor, creditor or shareholder. The disallowance of a deduction under
Section 280G of the Code for employee renumeration will not apply to any amount
paid or payable by the Company or any Company Subsidiary under any contract, any
benefit plan, program, arrangement or understanding currently in effect. The
Company is not a party to any tax allocation or sharing agreement. The Company
is not and has never been a member of an affiliated group within the meaning of
Section 1504 of the Code, except for the affiliated group of which the Company
is the parent. The Company's reserve for taxes reflected on the Company Balance
Sheet is adequate to cover all tax liabilities as of the Balance Sheet Date.
3.15. Employee Benefit Plans; Employment Matters.
(a) Except as disclosed in the Financial Statements or as set forth in
Schedule 3.15(a) to the Company Disclosure Schedule, neither the Company
nor any Company Subsidiary has established or maintains or is obligated to
make contributions to or under or otherwise participate in (i) any bonus or
other type of incentive compensation plan, program, agreement, policy,
commitment, contract or arrangement, (whether or not set forth in a written
document), (ii) any pension, profit-sharing, retirement or other similar
plan, fund, program or arrangement, or (iii) any other employee benefit
plan, fund, program of arrangement, including but not limited to, those
described in Section 3(3) of ERISA. All such plans, funds, programs and
arrangements described in clauses (i)-(iii) of the immediately preceding
sentence and disclosed in the Financial Statements or listed in Schedule
3.15(a) (individually, a "Company Plan" and collectively, the "Company
Plans") have been operated and administered in all material respects in
accordance with, as applicable, ERISA, the Code, Title VII of the Civil
Rights Act of 1964, as amended, the Equal Pay Act of 1967, as amended, the
Age Discrimination in Employment Act of 1967, as amended, the Family
Medical Leave Act of 1993, as amended, and other applicable laws and the
related rules and regulations adopted by those agencies responsible for the
administration of such laws.
(b) The Company has made available to the Parent true, complete and
correct copies of (i) each Company Plan, including, without limitation,
participating employer agreements (or, in the case of any
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unwritten Company Plans, descriptions thereof), (ii) the three annual
reports on Form 5500 most recently filed with the IRS and the related
summary annual report distributed to participants with respect to each
Company Plan (if such report was required), (iii) all minutes of meetings
of any committee established to administer any Company Plan other than
minutes that would be subject to privacy laws relating to disclosure of
medical information, (iv) the most recent actuarial report for each Company
Plan for which an actuarial report is required by ERISA or other applicable
law, (v) all summary plan descriptions for each Company Plan for which
summary plan description is required by ERISA or other applicable law and
each summary of material modifications prepared, as required by ERISA or
other applicable law, (vi) each trust agreement relating to any Company
Plan, (vii) all applications, including all attachments, submitted to the
IRS by the Company for IRS determination letters or rulings with respect to
Company Plans and the IRS determination letters or rulings issued as a
result of such applications and all other material correspondence for the
last three consecutive years prior to the Closing Date with the IRS or the
United States Department of Labor (the "DOL") relating to plan
qualification, filing of required forms, or pending, contemplated and
announced plan audits, (viii) descriptions of all claims filed and pending
(other than for benefits in the normal course), lawsuits pending,
grievances pending and similar actions pending with respect to Company
Plans, (ix) a listing of all employees or former employees receiving
long-term disability benefits under a Company Plan, (x) a listing of all
prior mergers, consolidations or transfers of Company Plan assets or
liabilities described in Section 414(i) of the Code or the regulations
thereunder that have occurred within the last three years prior to the
Closing Date, (xi) copies of all collective bargaining agreements (and any
related side letters of understanding) that relate to any Company Plan, and
(xii) a listing of all the Company's employees indicating date of birth,
date of commencement of service, job title or brief job description, the
amount of the employee's salary and bonus, if applicable, the date of the
last salary increase for each salaried employee, any material commitments,
arrangements, promises or understandings with the employee as to salary or
bonus, if applicable, and any other contract or payment agreement between
the Company and the employee.
(c) Neither the Company nor any Company Subsidiary is a party to any
oral or written union, guild or collective bargaining agreement which
agreement covers employees in the United States (nor is it aware of any
union organizing activity currently being conducted in respect to any of
its employees).
(d) Each Company Plan that is intended to be qualified under Section
401(a) of the Code has a current favorable determination letter that covers
such plan and any amendments thereto and no event has occurred which, to
the knowledge of the Company, could cause the Company Plan to become
disqualified for purposes of section 401(a) of the Code. All Company Plans
have been operated in accordance with their terms.
(e) All required reports, notices and descriptions of the Company
Plans (including IRS Form 5500 annual reports, summary annual reports and
summary plan descriptions) have been timely filed with the IRS, the DOL and
any other governmental agency or other authority, as applicable, and, as
appropriate, provided to participants in the Company Plans.
(f) There are no pending claims, lawsuits or actions relating to any
Company Plan (other than ordinary course claims for benefits) and, to the
knowledge of the Company and any Company Subsidiary, none are threatened.
(g) No written or oral representations have been made to any employee
or former employee of the Company or any Company Subsidiary promising or
guaranteeing any employer payment or funding, and no Company Plans provide,
for the continuation of medical, dental, life or disability insurance
coverage for any former employee of the Company or any Company Subsidiary
for any period of time beyond the end of the current plan year (except to
the extent of coverage required under Title I, Part 6, of ERISA). Except as
set forth on Schedule 3.15(g), the consummation of the transactions
contemplated by this Agreement will not accelerate the time of vesting, of
payment, or increase the amount, of compensation to any employee, officer,
former employee or former officer of the Company or any Company Subsidiary.
No Company Plans or other contracts or arrangements provide for payments
that would be triggered by
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the consummation of the transactions contemplated by this Agreement that
would subject any person to excise tax under Section 4999 of the Code
(i.e., "golden parachute" taxes). All compensation amounts that have been
paid or are payable are or will become deductible by the Parent or the
Subsidiary pursuant to Section 162 of the Code. Any stock options granted
by the Company and not exercised by the Effective Time shall be subject to
Section 2.1. (g).
(h) The Company and each Company Subsidiary and other entities that
are required to be aggregated with the Company under Section 414 of the
Code ("ERISA Affiliates") have complied with the continuation coverage
provisions of Title I, Part 6, of ERISA ("COBRA") with respect to all
current employees and former employees. Schedule 3.15(h) to the Company
Disclosure Schedule lists all of the former employees of the Company and
each Company Subsidiary and their beneficiaries who have elected or are
eligible to elect COBRA continuation of health insurance coverage under the
Company's group health plan and who are so covered as of the date hereof,
and as of the Closing Date.
(i) No act or failure to act by the Company, any Company Subsidiary or
any officer, director or employee thereof, or to the knowledge of the
Company, by any other person, has resulted in a "prohibited transaction"
(as defined in Section 4975 of the Code or Sections 406 or 407 of ERISA)
with respect to Company Plans that is not subject to a statutory or
regulatory exemption. Neither the Company nor any other employer who has
participated or is participating in any Company Plan (a "Sponsor") has
incurred any liability to the DOL or the IRS or any other governmental
agency or other authority in connection with any of the Company Plans, and
no condition exists that presents a risk to the Company or any Sponsor of
incurring any liability to the DOL, the IRS or any other governmental
agency or other authority.
(j) Neither the Company nor any Company Subsidiary has been liable at
any time for contributions to a plan that is subject to Title IV of ERISA.
Neither the Company nor any Company Subsidiary has previously made, is
currently making, has previously been obligated or is currently obligated
in any way to make any contributions to any multi-employer plans within the
meaning of Section 3(37) or Section 4001(a)(3) of ERISA.
(k) Full payment has been made of all amounts which are required under
the terms of each Company Plan and related funding arrangement to have been
paid as of the due date for such payments that have occurred on or before
the date of this Agreement, and no accumulated funding deficiency (as
defined in Section 302 of ERISA and Section 412 of the Code) has been
incurred with respect to such Company Plan, whether or not waived.
(l) Neither the Company nor any ERISA Affiliate has any liability, nor
will the transactions contemplated under this Agreement result in any
liability (i) for the termination of or withdrawal from any plan under
Sections 4062, 4063 or 4064 of ERISA, (ii) for any lien imposed under
Section 302(f) of ERISA or Section 412(n) of the Code, (iii) for any
interest payments required under Section 302(e) of ERISA or Section 412(m)
of the Code, (iv) for any excise tax imposed by Section 4971 of the Code,
(v) for any minimum funding contributions under Section 302(c)(11) of ERISA
or Section 412(c)(11) of the Code, or (vi) for withdrawal from any
multi-employer plan (as defined in Section 3(37) or 4001(a)(3) of ERISA)
under Section 4201 and related provisions of ERISA.
(m) Except as set forth on Schedule 3.15(m), any Company Plan that
provides for severance payments to employees after termination of
employment is in writing, has been operated in compliance with ERISA, and
expressly provides that no severance benefits are payable as the result of
a termination of employment to an employee who is hired by a successor
entity, or who otherwise continues employment with a successor, in
connection with a merger or acquisition transaction.
(n) Each Company Plan may be amended or terminated without liability
(other than with respect to benefits that are otherwise payable in the
ordinary course of business) to the Company or any Company Subsidiary on or
at any time after the consummation of the transactions that are
contemplated by this Agreement without contravening the terms of such plan
or any law or agreement that pertains to the Company or any Company
Subsidiary.
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3.16. Compliance with Laws. Except as set forth in Schedule 3.16 to the
Company Disclosure Schedule, neither the Company nor any Company Subsidiary nor,
to the knowledge of the Company, any Company Affiliated Physician Group has
received any notices, written or oral, of violations of any federal, state or
local laws, regulations and ordinances relating to its business and operations,
including, without limitation, the Occupational Safety and Health Act, the
Americans with Disabilities Act, the applicable Medicare or Medicaid statutes
and regulations, including the Anti-Fraud and Abuse Amendments to the Medicare
and Medicaid statutes and any state or Federal physician self-referral laws,
except where such violation would not have a material adverse effect on the
Company, and no written notice of any pending inspection or inquiries or
violation of any such law, regulation or ordinance has been received by the
Company or any Company Subsidiary or, to the knowledge of the Company, Company
Affiliated Physician Group which, if it were determined that a violation had
occurred, would have a material adverse effect on the Company.
3.17. Insurance; Malpractice. Schedule 3.17(a) to the Company Disclosure
Schedule contains 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 Effective Time.
Schedule 3.17(b) to the Company Disclosure Schedule contains a description of
all malpractice liability insurance policies of the Company since the date the
Company first acquired or began management of any physician group. Except as set
forth on Schedule 3.17(c) to the Company Disclosure Schedule, since the date the
Company first acquired or began management of any physician group, (i) the
Company has never filed a written application for any insurance coverage which
has been denied by an insurance agency or carrier, and (ii) the Company has been
continuously insured for professional malpractice claims. Schedule 3.17(c) also
sets forth a list of all claims for any insured loss in excess of $100,000 per
occurrence filed by the Company during the three year period immediately
preceding the Effective Time, including but not limited to worker's
compensation, general liability, environmental liability and professional
malpractice liability claims. The Company is not in material default with
respect to any provisions 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.
3.18. Environmental Matters. To the knowledge of the Company, the Company,
the Company Subsidiaries and its Affiliated Physician Groups are 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 Materials. To the knowledge of the Company, except as
disclosed on Schedule 3.18 to the Company Disclosure Schedule, the Company, the
Company Subsidiaries and its Affiliated Physician Groups have not engaged in any
storage, holding, release, emission, discharge, generation, processing,
disposition, handling, or transportation of any Hazardous Materials, except in
the ordinary course of the Company's business.
3.19. Regulatory Approvals. Except as disclosed in Schedule 3.19 to the
Company Disclosure Schedule, the Company and each Company Subsidiary and, to the
knowledge of the Company, each Company Affiliated Physician Group, as
applicable, holds all licenses, permits, certificates of need and other
regulatory approvals required or necessary to be applied for or obtained in
connection with its business as presently conducted or as proposed to be
conducted except where the failure to obtain or hold such license, permit,
certificate of need or regulatory approval would not have a material adverse
effect on the Company. All such licenses, permits, certificates of need and
other regulatory approvals related to the business, operations and facilities of
the Company and each Company Subsidiary and, to the knowledge if the Company,
each Company Affiliated Physician Group, are in full force and effect, except
where any failure of such license, certificate of need or regulatory approval to
be in full force and effect would not have a material adverse effect on the
Company. Any and all past litigation concerning such licenses, certificates of
need and regulatory approvals, and all claims and causes of action raised
therein, has been finally adjudicated. No such license, certificate of need or
regulatory approval has been revoked, conditioned (except as may be customary),
limited or restricted, and no action (equitable, legal or administrative),
arbitration or other process is pending, or to the best knowledge of the
Company, threatened, which in any way challenges the validity of, or seeks to
revoke, condition or restrict any such license, permit, certificate of need, or
regulatory approval. Where
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applicable, the Company, the Company Subsidiaries and, to the knowledge of the
Company, the Company Affiliated Physician Groups have current valid provider
contracts with both Medicare and Medicaid. The Company is not aware of any
reasons why the Company, the Company Subsidiaries or the Company Affiliated
Physician Groups would be prevented from participating in such programs. Subject
to compliance with applicable securities laws and the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended ("HSR Act"), the consummation of
the Merger will not violate any law or restriction to which the Company is
subject which, if violated, would have a material adverse effect on the Company.
3.20. Brokers. Except for fees payable to Donaldson, Lufkin & Jenrette
pursuant to the engagement letter, dated August 5, 1997, there are no valid
claims for brokerage commissions or finder's or similar fees in connection with
the transactions contemplated by this Agreement which may be now or hereafter
asserted against the Parent or the Company or any subsidiary or other controlled
entity of the Parent or the Company resulting from any action taken by the
Company or its officers, directors or agents, or any of them.
3.21. Vote Required. The affirmative vote of the holders of a majority of
the outstanding Company Shares entitled to vote thereon, voting as a single
class, is the only vote of the holders of any class or series of the Company
capital stock necessary for the Company to approve this Agreement, the Merger
and the transactions contemplated thereby.
3.22. Pooling Matters. To the best knowledge of the Company, neither the
Company nor any of its affiliates has taken or agreed to take any action that
(without giving effect to any actions taken or agreed to be taken by the Parent
or any of its affiliates) would prevent the Parent from accounting for the
business combination to be effected by the Merger as a pooling of interests for
financial reporting purposes.
3.23. Company's Disclosure. No representations, warranties or disclosures
of information made by the Company, including disclosures made in any Exhibit,
Schedule or certificate or other writing delivered or to be delivered in
connection with the transactions contemplated hereby, contains or will contain
any untrue statement of a material fact or omits to state any material fact
which is necessary in order to make the disclosure not misleading. The
Disclosure Schedule to this Agreement shall be deemed part of the
representations and warranties, and any disclosure on any schedule shall be
deemed to be a disclosure on all other applicable schedules.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE PARENT AND THE SUBSIDIARY
RELATED TO THE SUBSIDIARY
The Subsidiary and the Parent, jointly and severally, hereby represent and
warrant to the Company as follows:
4.1. Organization, Existence and Capitalization of the Subsidiary. The
Subsidiary is a corporation duly organized and validly existing under the laws
of the State of Delaware. The Subsidiary's authorized capital consists of 1,000
shares of Common Stock, par value $.01 per share, all of which shares are issued
and registered in the name of and owned by the Parent. The Subsidiary has not,
within the two years immediately preceding the date of this Agreement, owned,
directly or indirectly, any Company Shares.
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4.2. Power and Authority; Non-Contravention.
(a) The Subsidiary has all necessary corporate power and authority to
execute, deliver and perform this Agreement and all agreements and other
documents executed and delivered, or to be executed and delivered, by it
pursuant to this Agreement, and subject to the satisfaction of the
conditions precedent set forth herein, has taken all actions required by
law, its Certificate of Incorporation, its Bylaws or otherwise, to
authorize the execution and delivery of this Agreement and such related
documents. The Agreement has been duly and validly executed and delivered
by the Subsidiary and, assuming the due authorization, execution and
delivery by the Company, constitutes the legal, valid and binding
obligation of the Subsidiary in accordance with its terms.
(b) The execution and delivery of this Agreement does not and, subject
to the receipt of required regulatory approvals and any other required
third-party consents or approvals, the consummation of the Merger
contemplated hereby will not, violate any provisions of the Certificate of
Incorporation or Bylaws of the Subsidiary, or any agreement, instrument,
order, judgment or decree to which the Subsidiary is a party or by which it
is bound, violate any restrictions of any kind to which the Subsidiary is
subject, or result in the creation of any lien, charge, or encumbrance upon
any of the property or assets of the Subsidiary.
4.3. Brokers. There are no claims for brokerage commissions, investment
banker's fees or finder's fees in connection with the transaction contemplated
by this Agreement resulting from any action taken by the Subsidiary or any of
its officers, directors or agents.
4.4. No Subsidiaries. The Subsidiary does not own stock in, and does not
control directly or indirectly, any other corporation, association or business
organization. The Subsidiary is not a party to any joint venture or partnership.
4.5. Legal Proceedings. There are no actions, suits or proceedings pending
or threatened against the Subsidiary, at law or in equity, relating to or
affecting the Subsidiary, including the Merger. The Subsidiary does not know or
have any reasonable grounds to know of any justification for any such action,
suit or proceeding.
4.6. No Contracts or Liabilities. The Subsidiary was formed solely for the
purpose of engaging in the transactions contemplated hereby, has engaged in no
other business activities and has conducted its operations only as contemplated
hereby. Other than the obligations created under this Agreement, the Subsidiary
has no obligations or liabilities (contingent or otherwise) under any contracts,
claims, leases, loans or otherwise.
4.7. The Subsidiary's Disclosure. No representations, warranties or
disclosures of information made by the Subsidiary, including disclosures made in
any Exhibit, Schedule or certificate or other writing delivered or to be
delivered in connection with the transactions contemplated hereby, contains or
will contain any untrue statement of a material fact or omits to state any
material fact which is necessary in order to make the disclosure not misleading.
Any disclosure on any schedule shall be deemed to be a disclosure on all other
applicable schedules.
SECTION 5. REPRESENTATIONS AND WARRANTIES OF THE PARENT
The Parent hereby represents and warrants to the Company as follows:
5.1. Organization and Existence of the Parent. The Parent is a corporation
duly organized and validly existing under the laws of the State of Tennessee.
The Parent has all necessary corporate power to own or lease its properties and
assets and to carry on its business as presently conducted. The Parent is not,
and has not been within the two years immediately preceding the date of this
Agreement, a subsidiary or division of another corporation, nor has the Parent
within such time owned, directly or indirectly, any of the Company Shares.
5.2. Subsidiaries. Attached as Schedule 5.2 to the Disclosure Schedule
delivered to the Company by the Parent at the time of the execution and delivery
of this Agreement (the "Parent Disclosure Schedule") is a list of all
corporations, partnerships, joint ventures or other business associations or
entities in which the
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Parent owns any interest (such corporations, partnerships, joint ventures or
other business entities of which the Parent owns, directly or indirectly,
greater than fifty percent of the shares of capital stock or other equity
interests (including partnership interests) entitled (without regard to the
occurrence of any contingency) to cast at least a majority of the votes that may
be cast by all shares or equity interest having ordinary voting power for the
election of directors or other governing body of such entity are hereinafter
referred to as the "Parent Subsidiaries"). Schedule 5.2 to the Parent Disclosure
Schedule also indicates each Parent Subsidiary that meets any of the following
conditions: (i) the Parent's and the Parent Subsidiaries' investments in and
advances to such subsidiary exceed 10% of the total assets of the Parent and the
Parent Subsidiaries consolidated as of the end of the most recently completed
fiscal year, (ii) the Parent's and its other Parent Subsidiaries' proportionate
share of the total assets (after intercompany eliminations) of such subsidiary
exceeds 10% of the total assets of the Parent and the Parent Subsidiaries
consolidated as of the end of the most recently completed fiscal year, or (iii)
the Parent's and its other Parent Subsidiaries' equity in the income from
continuing operations before income taxes, extraordinary items and cumulative
effect of a change in accounting principle of such subsidiary exceeds 10% of
such income of the Parent and its Parent Subsidiaries consolidated as of the end
of the most recently completed fiscal year (the "Parent Significant
Subsidiaries").
5.3. Organization and Existence of Parent Subsidiaries. Each Parent
Significant Subsidiary is duly organized and validly existing under the laws of
its state of organization, except where the failure to be so organized or
validly existing would not have a material adverse effect on the Company. Each
Parent Significant Subsidiary has all necessary power to own its properties and
assets and to carry on its business as presently conducted, except where the
failure to have such power would not have a material adverse effect on the
Company. All of the outstanding shares of capital stock of, or other ownership
interests in, each of the Parent Subsidiaries owned by the Parent or a Parent
Subsidiary are owned by the Parent or by a Parent Subsidiary free and clear of
any liens, claims, charges or encumbrances. There are not any voting trust,
standstill or stockholder agreements or understandings to which the Parent or
any Parent Subsidiary is a party or is bound with respect to the voting of the
capital stock of any of the Parent Subsidiaries.
5.4. Foreign Qualifications. The Parent and each Parent Significant
Subsidiary that is not a general partnership is qualified to do business as a
foreign corporation or foreign limited partnership or other entity, as the case
may be, and is validly existing in each jurisdiction where the nature or
character of the property owned, leased or operated by it or the nature of the
business transacted by it makes such qualification necessary, except where the
failure to be so qualified would not have a material adverse effect on the
Parent.
5.5. Capitalization. The Parent's authorized capital stock consists of
250,000,000 shares of Common Stock, no par value, of which 64,530,414 shares
were issued and outstanding as of the close of business on December 11, 1997,
and no shares are held in treasury, and 10,000,000 shares of Preferred Stock, no
par value, of which no shares are issued and outstanding, and no shares are held
in treasury. All of the issued and outstanding shares of the Parent Common Stock
have been duly and validly issued and are fully paid and nonassessable. Except
as disclosed in the Parent Documents (as herein defined), or described in
Schedule 5.5 to the Parent Disclosure Schedule, there are no options, warrants
or similar rights granted by the Parent or any other agreements to which the
Parent is a party providing for the issuance or sale by it of any additional
securities. There is no liability for dividends declared or accumulated but
unpaid with respect to any shares of the Parent Common Stock. Except as shown on
Schedule 5.5 to the Parent Disclosure Schedule, there are no obligations,
contingent or otherwise, of the Parent or any Parent Subsidiary to repurchase,
redeem or otherwise acquire any shares of Parent Common Stock or the capital
stock of or other equity interest in any Parent Subsidiary.
5.6. Parent Common Stock. On the Closing Date, the Parent will have a
sufficient number of authorized but unissued and/or treasury shares of its
Common Stock available for issuance to the holders of the Company Shares in
accordance with the provisions of this Agreement. The Parent Common Stock to be
issued pursuant to this Agreement will, when so delivered, be (i) duly and
validly issued, fully paid and nonassessable, and (ii) listed on the Nasdaq
Stock Market (or such other exchange on which the Parent Common Stock is then
listed), upon official notice of issuance.
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5.7. Power and Authority; Non-Contravention.
(a) Subject to the satisfaction of the conditions precedent set forth
herein, the Parent has all necessary corporate power and authority to
execute, deliver and perform this Agreement and all agreements and other
documents executed and delivered, or to be executed and delivered, by it
pursuant to this Agreement, and, subject to the satisfaction of the
conditions precedent set forth herein has taken all actions required by
law, its Certificate of Incorporation, its Bylaws or otherwise, to
authorize the execution and delivery of this Agreement and such related
documents. This Agreement has been duly and validly executed and delivered
by the Parent and, assuming the due authorization, execution and delivery
by the Company, constitutes the legal, valid and binding obligation of the
Parent enforceable against the Parent in accordance with its terms.
(b) Except as disclosed on Schedule 5.7 (c) to the Parent Disclosure
Schedule and subject to the filings, permits, authorizations, consents and
approvals as may be required under, and other applicable requirements of,
the Securities Act of 1933, as amended (the "Securities Act"), the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), the HSR
Act and the DGCL, the execution and delivery of this Agreement does not,
and the consummation of the Merger contemplated hereby will not, violate
any provisions of the Restated Charter or Amended Bylaws of the Parent, or
any provision of, or result in the acceleration of any obligation under,
any mortgage, lien, lease, agreement, instrument, order, arbitration award,
judgment, decree, statute or law to which the Parent or any Parent
Subsidiary is a party or by which it is bound, or violate any restrictions
to which the Parent is subject which, if violated or accelerated, would
have a material adverse effect on the Parent.
5.8. Parent Public Information. The Parent has heretofore made available
to the Company a true and complete copy of each report, schedule, registration
statement and definitive proxy statement filed by it with the Securities and
Exchange Commission ("SEC") (as any such documents have since the time of their
original filing been amended, the "Parent Documents") since January 1, 1995,
which are all the documents (other than preliminary material) that it was
required to file with the SEC since such date. As of their respective dates, the
Parent Documents did not contain any untrue statements of material facts or omit
to state material facts required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. As of their respective dates, the Parent Documents complied in
all material respects with the applicable requirements of the Securities Act and
the Exchange Act and the rules and regulations promulgated under such statutes.
The financial statements contained in the Parent Documents, together with the
notes thereto, have been prepared in accordance with generally accepted
accounting principles consistently followed throughout the periods indicated
(except as may be indicated in the notes thereto, or, in the case of the
unaudited financial statements, as permitted by Form 10-Q), reflect all known
liabilities of the Parent, fixed or contingent, required to be stated therein,
and present fairly the financial condition of the Parent at said dates and the
consolidated results of operations and cash flows of the Parent for the periods
then ended. The consolidated balance sheet of the Parent at September 30, 1997,
included in the Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 1997 of the Parent is herein sometimes referred to as the "Parent
Balance Sheet."
5.9. Contracts, etc.
(a) To the knowledge of Parent, all material contracts, leases,
agreements and arrangements to which the Parent or any of the Parent
Subsidiaries is a party (collectively, the "Parent Material Contracts") are
legally valid and binding in accordance with their terms and in full force
and effect. The Parent has not taken any action or permitted any
circumstances to exist that has caused any Parent Material Contract to
cease being legally valid and binding in accordance with its terms and in
full force and effect. To the knowledge of the Parent, all parties to the
Parent Material Contracts have complied with the provisions of such
Contracts, and to the knowledge of the Parent, no party is in default
thereunder, and no event has occurred which, for the passage of time or the
giving of notice or both, would constitute a default thereunder, except, in
each case, where the noncompliance with or invalidity of the Parent
Material Contract or the default or breach thereunder or thereof would not,
individually or in the aggregate, have a material adverse effect on the
Parent.
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(b) Except as set forth in Schedule 5.9 to the Parent Disclosure
Schedule, no Parent Material Contract will by its terms terminate as a
result of the transactions contemplated hereby or require any consent from
any obligor thereto in order to remain in full force and effect immediately
after the Effective Time.
5.10. Legal Proceedings. Except as listed in Schedule 5.10 to the Parent
Disclosure Schedule, there are no actions, suits or proceedings pending against
the Parent or any Parent Subsidiary or, to the knowledge of the Parent,
threatened against the Parent or any Parent Subsidiary at law or in equity,
relating to or affecting the Parent or any Parent Subsidiary, including the
Merger, which individually or in the aggregate, could reasonably be expected to
have a material adverse effect on the Parent, or a material adverse effect on
the ability of the Parent to consummate the transactions contemplated hereby. To
the knowledge of the Parent, there are no pending or threatened actions, suits
or proceedings that would be required to be disclosed under the Securities Act
or the Exchange Act that have not previously been disclosed in the Parent
Documents.
5.11. Subsequent Events. Except as set forth on Schedule 5.11 to the
Parent Disclosure Schedule, the Parent (including the Parent Subsidiaries) has
not, since the date of the Parent Balance Sheet:
(a) Suffered any material adverse effect.
(b) Discharged or satisfied any material lien or encumbrance, or paid
or satisfied any material obligation or liability (absolute, accrued,
contingent or otherwise), which discharge or satisfaction would have a
material adverse effect on the Parent, other than (i) liabilities shown or
reflected on the Parent Balance Sheet or (ii) liabilities incurred since
the date of the Parent Balance Sheet in the ordinary course of business.
(c) Incurred any material indebtedness or increased or established any
reserve for taxes or any other liability on its books or otherwise provided
therefor which would have a material adverse effect on the Parent, except
as may have been required with respect to income or operations of the
Parent since the date of the Parent Balance Sheet.
(d) Mortgaged, pledged or subjected to any lien, charge or other
encumbrance any of the assets, tangible or intangible, which assets are
material to the consolidated business or financial condition of the Parent.
(e) Sold or transferred any of the assets material to the consolidated
business of the Parent, canceled any material debts or claims or waived any
material rights, except in the ordinary course of business.
(f) Except for annual increases in the base rates of compensation and
bonuses of officers and employees in the ordinary course of business,
granted any general or uniform increase in the rates of pay of employees or
any material increase in salary payable or to become payable by the Parent
to any officer, director, employee, group of employees, consultant or agent
(other than normal increases consistent with past practice), or by means of
any bonus or pension plan, contract or other commitment, increased in a
material respect the compensation of any officer, director, employee, group
of employees, consultant or agent.
(g) Except for this Agreement and any other agreement executed and
delivered pursuant to this Agreement, entered into any material transaction
other than in the ordinary course of business or permitted under other
Sections of this Agreement.
(h) Issued any stock, bonds or other securities or any options or
rights to purchase any of its securities (other than stock issued upon the
exercise of outstanding options under the Parent's stock option plans,
stock options granted under such plans and shares of Parent Common Stock or
other securities issued pursuant to contractual obligations or in
connection with the acquisition of businesses).
(i) Declared, set aside or paid any dividend or made any other
distribution or payment with respect to any shares of its capital stock or
directly or indirectly redeemed, purchased or otherwise acquired any shares
of its capital stock or the capital stock or equity interests of any Parent
Subsidiary.
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(j) Changed in any material respect the accounting methods or
practices followed by the Parent, including any material change in any
assumption underlying, or method of calculating any bad debt, contingency
or other reserve, except as may be required by changes in generally
accepted accounting principles.
5.12. Tax Returns. The Parent has filed all tax returns required to be
filed by it or requests for extensions to file such returns or reports have been
timely filed and granted and have not expired, except to the extent that such
failures to file, taken together, do not have a material adverse effect on the
Parent. The Parent has made all payments shown as due on such returns.
5.13. Compliance with Laws. Except as set forth on Schedule 5.13 to the
Parent Disclosure Schedule, neither the Parent nor any Parent Subsidiary nor to
the knowledge of the Parent any Parent Affiliated Physician Group has received
any notices of violations of any federal, state and local laws, regulations and
ordinances relating to its business and operations, including, without
limitation, the Occupational Safety and Health Act, the Americans with
Disabilities Act, Medicare or applicable Medicaid statutes and regulations and
any Environmental Laws, and no notice of any pending inspection or violation of
any such law, regulation or ordinance has been received by the Parent or any
Parent Subsidiary or, to the knowledge of the Parent, any Parent Affiliated
Physician Group which, if it were determined that a violation had occurred,
would have a material adverse effect on the Parent.
5.14. Regulatory Approvals. Except as disclosed in the Parent Documents or
in Schedule 5.14 to the Parent Disclosure Schedule, the Parent and each Parent
Significant Subsidiary and to the knowledge of the Parent each Parent Subsidiary
and each Parent Affiliated Physician Group, as applicable, holds all licenses,
certificates of need and other regulatory approvals required or necessary to be
applied for or obtained in connection with its business as currently conducted
or as proposed to be conducted, except where the failure to obtain or hold such
license, certificate of need or regulatory approval would not have a material
adverse effect on the Parent. All such licenses, certificates of need and other
regulatory approvals relating to the business, operations and facilities of the
Parent and each Parent Significant Subsidiary and to the knowledge of the Parent
each Parent Subsidiary and each Parent Affiliated Physician Group are in full
force and effect, except where any failure of such license, certificate of need
or regulatory approval to be in full force and effect would not have a material
adverse effect on the Parent. Any and all past litigation concerning such
licenses, certificates of need and regulatory approvals, and all claims and
causes of action raised therein, have been finally adjudicated. No such license,
certificate of need or regulatory approval has been revoked, conditioned (except
as may be customary) or restricted, and no action (equitable, legal or
administrative), arbitration or other process is pending, or to the best
knowledge of the Parent, threatened, which in any way challenges the validity
of, or seeks to revoke, condition or restrict any such license, certificate of
need, or regulatory approval, except as would not have a material adverse effect
on Parent.
5.15. Investment Intent. The Parent is acquiring the Company Shares
hereunder for its own account and not with a view to the distribution or sale
thereof, and the Parent has no understanding, agreement or arrangement to sell,
distribute, partition or otherwise transfer or assign all or any part of the
Company Shares to any other person, firm or corporation.
5.16. Brokers. Except for the fee payable to Equitable Securities
Corporation, there are no valid claims for brokerage commissions, finder's fees
or similar fees in connection with the transactions contemplated by this
Agreement which may be now or hereafter asserted against the Parent or the
Company or any subsidiary or other controlled entity of the Parent or the
Company resulting from any action taken by the Parent or any of its officers,
directors or agents or any of them.
5.17. Pooling Matters. To the best knowledge of the Parent, neither the
Parent nor any of its affiliates has taken or agreed to take any action that
(without giving effect to any actions taken or agreed to be taken by the Company
or any of its affiliates) would prevent the Company from accounting for the
business combination to be effected by the Merger as a pooling of interests for
financial reporting purposes.
5.18. The Parent's Disclosure. No representations, warranties or
disclosures of information made by the Parent, including disclosures made in any
Exhibit, Schedule or certificate or other writing delivered or to be
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delivered in connection with the transactions contemplated hereby, contains or
will contain any untrue statement of a material fact or omits to state any
material fact which is necessary in order to make the disclosure not misleading.
The Disclosure Schedule to this Agreement shall be deemed part of the
representations and warranties, and any disclosure on any schedule shall be
deemed to be a disclosure on all other applicable schedules.
SECTION 6. ACCESS TO INFORMATION AND DOCUMENTS
6.1. Access to Information. Between the date hereof and the Closing Date,
each of the Company and the Parent will give to the other party and its counsel,
accountants and other representatives reasonable access to all the properties,
documents, contracts, personnel files and other records of such party and shall
furnish the other party with copies of such documents and with such information
with respect to the affairs of such party as the other party may from time to
time reasonably request. Each party will disclose and make available to the
other party and its representatives all books, contracts, accounts, personnel
records, letters of intent, papers, records, communications with regulatory
authorities and other documents relating to the business and operations of such
party.
6.2. Return of Records. If the transactions contemplated hereby are not
consummated and this Agreement terminates, each party agrees to promptly return
all documents, contracts, records or properties of the other party and all
copies thereof furnished pursuant to this Section 6 or otherwise. All
information disclosed by any party or other affiliate or representative of any
party shall be deemed to be "Evaluation Material" under the terms of the
Confidentiality Agreement, dated September 10, 1997, between the Company and the
Parent (the "Confidentiality Agreement").
SECTION 7. COVENANTS
7.1. Preservation of Business. Except as contemplated by this Agreement,
each of the Company and the Parent will use its reasonable best efforts to
preserve its business organization intact, to keep available to the Parent and
the Surviving Corporation the services of their present employees, and to
preserve for the Parent and the Surviving Corporation the goodwill of the
suppliers, customers and others having business relations with them and their
respective subsidiaries.
7.2. Material Transactions. Except as contemplated by this Agreement or as
disclosed on Schedule 7.2 to the Company Disclosure Schedule, prior to the
Effective Time, neither the Company nor any Company Subsidiary will (other than
as required pursuant to the terms of this Agreement and the related documents),
without first obtaining the written consent of the Parent:
(a) Encumber any asset or enter into any transaction or make any
contract or commitment relating to the properties, assets and business of
the Company or the Company Subsidiaries, other than in the ordinary course
of business or as otherwise disclosed herein.
(b) Enter into any employment contract or similar agreement in which
the cash compensation is in excess of $75,000 per annum, or the term is
greater than one year, which is not terminable upon notice of 90 days or
less, at will, and without penalty to the Company or such Company
Subsidiary, other than physician employment contracts entered into in the
ordinary course of business.
(c) Enter into any contract or agreement (i) which cannot be performed
within three months or less, or (ii) which involves the expenditure of over
$250,000, in either case other than in the ordinary course of business.
(d) Issue or sell, or agree to issue or sell, any shares of capital
stock or other securities of the Company or such Company Subsidiary, except
upon exercise of currently outstanding stock options and warrants or upon
conversion of the Company Class B Preferred Stock or Company Class C
Preferred Stock.
(e) Make any payment or distribution to the trustee under any bonus,
pension, profit-sharing or retirement plan or incur any obligation to make
any such payment or contribution which is not in
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accordance with the Company's usual past practice, or make any payment or
contributions or incur any obligation pursuant to or in respect of any
other plan or contract or arrangement providing for bonuses, executive
incentive compensation, pensions, deferred compensation, retirement
payments, profit-sharing or the like except as contemplated by such plans,
contracts or arrangements or establish or enter into any such plan,
contract or arrangement, or terminate any plan.
(f) Extend credit to anyone, except in the ordinary course of business
consistent with prior practices.
(g) Guarantee the obligation of any person, firm or corporation,
except in the ordinary course of business consistent with prior practices.
(h) Amend its Certificate or Articles of Incorporation or Bylaws.
(i) Take any action of a character described in Section 3.12(a) to
3.12(j), inclusive.
(j) Enter into any transaction, agreement or contract for the purchase
of substantially all of the stock or assets of another entity or enter into
any other material transaction.
Notwithstanding the foregoing, it is expressly agreed that the Company may
enter into acquisition transactions or affiliation transactions in which the
aggregate value of the consideration paid therein does not exceed $100,000 and
that all or a portion of such consideration may consist of Company Capital Stock
or non-convertible debt securities of the Company.
7.3. Meeting of Shareholders. The Company will take all steps necessary in
accordance with its Certificate of Incorporation and Bylaws to call, give notice
of, convene and hold meetings of its shareholders (the "Shareholder Meeting") as
soon as practicable after the effectiveness of the Registration Statement (as
defined in Section 7.4 hereof), for the purpose of approving and adopting this
Agreement and the transactions contemplated hereby and for such other purposes
as may be necessary. Unless this Agreement shall have been validly terminated as
provided herein, the Board of Directors of the Company (subject to the
provisions of Section 8.1(d) hereof) will (i) recommend to its shareholders the
approval and adoption of this Agreement, the transactions contemplated hereby
and any other matters to be submitted to the shareholders in connection
therewith, to the extent that such approval is required by applicable law in
order to consummate the Merger, and (ii) use its reasonable, good faith efforts
to obtain the approval by its shareholders of this Agreement and the
transactions contemplated hereby.
7.4. Registration Statement.
(a) The Parent shall prepare and file with the SEC and any other
applicable regulatory bodies, as soon as reasonably practicable, a
Registration Statement on Form S-4 with respect to the shares of the Parent
Common Stock to be issued in the Merger (the "Registration Statement"), and
will otherwise proceed promptly to satisfy the requirements of the
Securities Act, including Rule 145 thereunder. The Parent shall use its
best efforts to cause the Registration Statement to be declared effective
and to maintain such effectiveness until all of the shares of the Parent
Common Stock covered thereby have been distributed. The Parent shall
promptly amend or supplement the Registration Statement to the extent
necessary in order to make the material statements therein not misleading
or to correct any material statements which have become false or
misleading. The Parent shall provide the Company with copies of all filings
made pursuant to this Section 7.4 and shall consult with the Company on
responses to any comments made by the Staff of the SEC with respect
thereto.
(b) The information specifically designated as being supplied by the
Company for inclusion or incorporation by reference in the Registration
Statement shall not, at the time the Registration Statement is declared
effective, at the time of the Shareholder Meeting and at the Effective
Time, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make
the statements therein, not misleading. If any time prior to the Effective
Time, any event or circumstance relating to the Company, or its officers or
directors, should be discovered by the Company which should be set forth in
an amendment to the Registration Statement, the Company shall promptly
inform the Parent.
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(c) The information specifically designated as being supplied by the
Parent for inclusion or incorporation by reference in the Registration
Statement shall not, at the time the Registration Statement is declared
effective, at the time of the Shareholder Meeting and at the Effective
Time, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make
the statements therein, not misleading. If at any time prior to the
Effective Time any event or circumstance relating to the Parent or its
officers or Directors, should be discovered by the Parent which should be
set forth in an amendment to the Registration Statement, the Parent shall
promptly inform the Company and shall promptly file such amendment to the
Registration Statement. All documents that the Parent is responsible for
filing with the SEC in connection with the transactions contemplated herein
will comply as to form and substance in all material respects with the
applicable requirements of the Securities Act and the rules and regulations
thereunder and the Exchange Act and the rules and regulations thereunder.
(d) Prior to the Closing Date, the Parent shall use its best efforts
to cause the shares of Parent Common Stock to be issued pursuant to the
Merger to be registered or qualified under all applicable securities or
Blue Sky laws of each of the states and territories of the United States,
and to take any other actions which may be necessary to enable the Parent
Common Stock to be issued pursuant to the Merger to be distributed in each
such jurisdiction.
(e) Prior to the Closing Date, the Parent shall file a Notification
Form for Listing Additional Shares with the Nasdaq Stock Market (or such
notice as required by such other exchange on which the Parent Common Stock
is then listed) relating to the shares of the Parent Common Stock to be
issued in connection with the Merger, and shall cause such shares of the
Parent Common Stock to be listed on the Nasdaq Stock Market (or such other
exchange), upon official notice of issuance, prior to the Closing Date.
(f) The Company shall furnish all information to the Parent with
respect to the Company and the Company Subsidiaries as the Parent may
reasonably request for inclusion in the Registration Statement and shall
otherwise cooperate with the Parent in the preparation and filing of such
document.
7.5. Exemption from State Takeover Laws. The Company shall take all
reasonable steps necessary to exempt the Merger from the requirements of any
state takeover statute or other similar state law which would prevent or impede
the consummation for the transactions contemplated hereby, by action of the
Company's Board of Directors or otherwise.
7.6. HSR Act Compliance. The Parent and the Company shall promptly make
their respective filings, and shall thereafter use their reasonable best efforts
to promptly make any required submissions, under the HSR Act with respect to the
Merger and the transactions contemplated hereby. The Parent and the Company will
use their reasonable best efforts to obtain necessary approvals under the HSR
Act to allow the consummation of the Merger and the transactions contemplated
hereby, including without limitation promptly responding to any objection to the
Merger made by the Federal Trade Commission or the Department of Justice under
the HSR Act. The Parent and the Company will use their respective reasonable
best efforts to obtain all other permits, authorizations, consents and approvals
from third parties and governmental authorities necessary to consummate the
Merger and the transactions contemplated hereby.
7.7. Public Disclosures. The Parent and the Company will consult with each
other before issuing any press release or otherwise making any public statement
with respect to the transactions contemplated by this Agreement, and shall not
issue any such press release or make any such public statement without the
written consent of the other party except as may be required by applicable law
or requirements of the Nasdaq Stock Market (or such other exchange on which the
Parent Common Stock is then listed). The parties shall issue a joint press
release, mutually acceptable to the Parent and the Company, promptly upon
execution and delivery of this Agreement.
7.8. No Solicitations. The Company may, directly or indirectly, furnish
information and access, in response to unsolicited requests therefor, to the
same extent permitted by Section 6.1, to any corporation, partnership, person or
other entity or group, pursuant to appropriate confidentiality agreements, and
may
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participate in discussions and negotiate with such corporation, partnership,
person or other entity or group concerning any bona fide, superior proposal to
acquire all or any significant portion of the equity securities of the Company
or of the assets of the Company and the Company Subsidiaries upon a merger,
purchase of assets, purchase of or tender offer for shares of Company Capital
Stock or similar transaction (an "Acquisition Transaction"), if the Board of
Directors of the Company determines in its good faith judgment in the exercise
of its fiduciary duties, after consultation with legal counsel and its financial
advisors, that such action is appropriate in furtherance of the best interest of
its shareholders. Except as set forth above, the Company shall not, and will
direct each officer, director, employee, representative and agent of such party
not to, directly or indirectly, encourage, solicit, participate in or initiate
discussions or negotiations with or provide any information to any corporation,
partnership, person or other entity or group (other than the Parent or an
affiliate or associate or agent of the Parent) concerning any merger, sale of
assets, sale of or tender offer for its shares or similar transactions involving
all or any significant portion of the equity securities of the Company or of the
assets of the Company and the Company Subsidiaries. The Company shall promptly
notify the Parent if it shall, on or after the date hereof, have entered into a
confidentiality agreement with any third party in response to any unsolicited
request for information and access in connection with a possible Acquisition
Transaction. In addition, the Company shall notify the Parent within two
business days of determining to provide information to any corporation,
partnership, person or other entity or group in connection with any possible
Acquisition Transaction.
7.9. Other Actions. Subject to the provisions of Section 7.8 hereof, none
of the Company, the Parent and the Subsidiary shall knowingly or intentionally
take any action, or omit to take any action, if such action or omission would,
or reasonably might be expected to, result in any of its representations and
warranties set forth herein being or becoming untrue in any material respect, or
in any of the conditions to the Merger set forth in this Agreement not being
satisfied, or (unless such action is required by applicable law) which would
materially adversely affect the ability of the Company or the Parent to obtain
any consents or approvals required for the consummation of the Merger without
imposition of a condition or restriction which would have material adverse
effect on the Surviving Corporation or which would otherwise materially impair
the ability of the Company or the Parent to consummate the Merger in accordance
with the terms of this Agreement or materially delay such consummation.
7.10. Accounting Methods. Neither the Parent nor the Company shall change,
in any material respect, its methods of accounting in effect at its most recent
fiscal year end, except as required by changes in generally accepted accounting
principles as concurred by such parties' independent accountants.
7.11. Pooling and Tax-Free Reorganization Treatment. Neither the Parent
nor the Subsidiary nor the Company shall intentionally take or cause to be taken
any action, whether on or before the Effective Time, which would disqualify the
Merger as a "pooling of interests" for accounting purposes or as a
"reorganization" within the meaning of Section 368(a) of the Code.
7.12. Affiliate and Pooling Agreements. The Parent and the Company will
each use their respective reasonable best efforts to cause each of their
respective directors and executive officers and each of their respective
"affiliates" (within the meaning of Rule 145 under the Securities Act) to
execute and deliver to the Parent as soon as practicable an agreement in the
form attached hereto as Exhibit 7.12 relating to the disposition of shares of
the Company Capital Stock and shares of the Parent Common Stock held by such
person and the shares of the Parent Common Stock issuable pursuant to this
Agreement.
7.13. Cooperation.
(a) The Parent and the Company shall together, or pursuant to an
allocation of responsibility agreed to between them, (i) cooperate with one
another in determining whether any filings required to be made or consents
required to be obtained in any jurisdiction prior to the Effective Time in
connection with the consummation of the transactions contemplated hereby
and cooperate in making any such filings promptly and in seeking to obtain
timely any such consents, (ii) use their respective best efforts to cause
to be lifted any injunction prohibiting the Merger, or any part thereof, or
the other transactions contemplated hereby, and (iii) furnish to one
another and to one another's counsel all such information as may be
required to effect the foregoing actions.
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(b) Subject to the terms and conditions herein provided, and unless
this Agreement shall have been validly terminated as provided herein, each
of the Parent and the Company shall use all reasonable efforts (i) to take,
or cause to be taken, all actions necessary to comply promptly with all
legal requirements which may be imposed on such party (or any subsidiaries
or affiliates of such party) with respect to this Agreement and to
consummate the transactions contemplated hereby, subject, in the case of
the Company, to the vote of its shareholders described above, and (ii) to
obtain (and to cooperate with the other party to obtain) any consent,
authorization, order or approval of, or any exemption by, any governmental
entity which is required to be obtained or made by such party or any of its
subsidiaries or affiliates in connection with this Agreement and the
transactions contemplated hereby. Each of the Parent and the Company will
promptly cooperate with and furnish information to the other in connection
with any such burden suffered by, or requirement imposed upon, either of
them or any of their subsidiaries or affiliates in connection with the
foregoing.
7.14. Publication of Combined Results. The Parent agrees that within sixty
(60) days after the Effective Time, the Parent shall cause publication of the
combined results of operations of the Parent and the Company on Form 8-K which
shall be filed with the SEC. For purposes of this Section 7.14, the term
"publication" shall have the meaning provided in SEC Accounting Series Release
No. 135.
7.15. Tax Opinion Certificates. Each of the Parent and the Company agrees
that it shall provide certificates containing reasonable representations to
counsel for the Parent in connection with such counsel rendering of its opinion
as to the federal income tax consequences of the Merger provided for in Section
9 of this Agreement.
7.16. Consents, Amendments, etc.
(a) The Parent, the Subsidiary and the Company shall use their
reasonable best efforts, consistent with sound business judgment, to obtain
all material consents, approvals and authorizations of third parties with
respect to all material agreements to which such parties are parties, which
consents, approvals and authorizations are required of such third parties
by such documents, in form and substance acceptable to the Parent or the
Company, as the case may be, except where the failure to obtain such
consent, approval or authorization would not have a material adverse effect
on the business of the Surviving Corporation.
(b) The Parent, the Subsidiary and the Company shall use their
reasonable best efforts to obtain, or obtain the transfer of, any licenses
and other regulatory approvals necessary to allow the Surviving Corporation
to operate the Company's business, unless the failure to obtain such
transfer or approval would not have a material adverse effect on the
Company.
7.17. Compensation Plans. The Parent confirms that the consummation of the
Merger constitutes a "Change in Control" or "Changes of Control" of the Company
for all purposes within the meaning of all the Company Plans and any other plans
or agreements of the Company with or relating to its officers, directors,
employees or affiliated physicians or personnel.
7.18. Insurance, Indemnification, Benefits.
(a) From and after the Effective Time, the Parent and the Surviving
Corporation shall indemnify, defend and hold harmless each present and
former officer, director and employee of the Company or of any of the
Company Subsidiaries (the "Indemnified Parties") who was, is or becomes a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he is or was a
director, officer, employee or agent of the Company or a Company
Subsidiary, or is or was serving at the request of the Company or a Company
Subsidiary as a director, officer, trustee, fiduciary, administrator,
employee or agent of another corporation, partnership, joint venture,
trust, employee benefit plan or arrangement or other enterprise, from and
against any expenses (including attorney's fees), damages, claims,
liabilities, judgments, fines and amounts paid in settlement in connection
with any such action, suit or proceeding arising out of or pertaining to
any action or omission occurring prior to or at the Effective Time
(including, without limitation, any action, suit or preceding which arises
out of or relates to the
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transactions contemplated hereby) to the fullest extent permitted or
required under applicable law, provided, however that the requirement to
advance expenses shall be limited to those instances in which, if required
by applicable law, the indemnified party undertakes to repay such amount if
it shall ultimately be determined that he is not entitled to be indemnified
under applicable law. The Parent agrees that all rights to indemnification
existing in favor of the directors, officers and employees of the Company
and the Company Subsidiaries as provided in the Company's or the Company's
Subsidiaries' Certificate of Incorporation or Bylaws, as applicable and as
in effect as of the date hereof, with respect to matters occurring through
the Effective Time, shall survive the Merger and shall continue in full
force and effect from and after the Effective Time, and the Parent shall,
and shall cause the Surviving Corporation to, indemnify and hold harmless
such persons to the extent so provided. In the event of any actual or
threatened claim, action, suit, proceeding or investigation in respect to
any indemnifiable matter under this Section 7.18, (i) the Parent shall
cause the Surviving Corporation to pay the reasonable fees and expenses of
counsel selected by the Indemnified Party in advance of the final
disposition of any such action to the fullest extent permitted by
applicable law, upon receipt of any undertaking required by applicable law,
and (ii) the Parent shall cause the Surviving Corporation to cooperate and
assist in the defense of any such matter.
(b) The Parent covenants and agrees that, following the Effective
Time, it will, or it will cause the Surviving Corporation to, (i) honor in
accordance with their terms all benefits accrued or vested under the
Company Plans as of the Effective Time, (ii) honor in accordance with their
terms all contracts, arrangements, commitments, or understandings described
in Schedule 3.15(b) to the Company Disclosure Schedule and (iii) maintain
in effect the Company's Key Physician and Executive Deferred Compensation
Plan in accordance with its terms.
(c) The provisions of this Section 7.18 and Section 7.17 shall survive
the Merger, and are intended to be for the benefit of, and shall be
enforceable by, any officer, director, employee, trustee, fiduciary,
administrator or agent of the Company (or any Company Subsidiary), and such
person's heirs or representatives (the expenses, including reasonable
attorneys' fees, that may be incurred thereby in enforcing such provisions
to be paid by the Parent).
7.19. Resignation of Company Directors. On or prior to the Closing Date,
the Company shall deliver to the Parent evidence satisfactory to the Parent of
the resignations of Directors of the Company, such resignations to be effective
immediately after the Effective Time.
7.20. Assignment of Certain Rights. On or prior to the Closing Date,
Stephen A. George shall have assigned all his stock of, all his rights to
acquire stock of, and all his positions, appointments and obligations in
relation to, any physician practice managed by the Company to an appropriate
person specified by Parent, and such person shall have executed an agreement
reasonably satisfactory to the Company accepting such assignment, such
assignment to be effective immediately upon the Effective Time. In connection
with the preparation and execution of such agreement, the parties shall prepare
all necessary governmental filings to effectuate such assignment, and the Parent
shall, as soon as practicable after the Effective Time, file such filings with
the appropriate governmental entities.
7.21. Notice of Subsequent Events. The Parent and the Company shall notify
each other of any changes or events occurring after the date hereof which would
cause any material adverse change or material adverse effect with respect to the
notifying party, promptly after obtaining knowledge of the same.
7.22. Conduct of Business by the Parent Pending the Merger. Prior to the
Effective Time, unless the Company shall otherwise agree in writing or except as
otherwise required by this Agreement, the Parent shall not, nor shall it permit
any of the Parent Subsidiaries to, amend its Certificate of Incorporation,
except to increase the authorized number of shares of capital stock of the
Parent, or amend its Bylaws in any manner which would have an adverse effect on
the Merger or the rights under Section 7.18 of the persons identified in clause
(c) thereof. In addition, during the period from the date hereof to the
Effective Time, the Subsidiary shall not engage in any activities of any nature
except as provided in or contemplated by this Agreement.
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7.23. Tax Covenants Following the Effective Time. Following the Effective
Time, the Parent shall not intentionally, and shall cause the Surviving
Corporation not intentionally to, take any action following the Effective Time
which could disqualify the Merger as a "reorganization" within the meaning of
Section 368(a) of the Code.
7.24. Consulting Agreement. The Parent shall offer a consulting agreement
to Stephen A. George as of the Effective Time which contains terms and
conditions substantially similar to those agreed to by the parties at the
signing of this Agreement.
7.25. Supplemental Company Disclosure Schedule. At least two business days
prior to the Closing Date, the Company shall be entitled to deliver to the
Parent an amended or supplemented Company Disclosure Schedule. If the amendments
or supplements to the Company Disclosure Schedule reflect a material adverse
change with respect to the Company or developments which are reasonably likely
to have a material adverse effect on the Company, then the Parent shall have the
right to either (i) accept the Company Disclosure Schedule and close the Merger
subject to such disclosures or (ii) reject the Company Disclosure Schedule and
exercise its right to terminate this Agreement pursuant to Section 8.1 of this
Agreement.
SECTION 8. TERMINATION, AMENDMENT AND WAIVER
8.1. Termination. This Agreement may be terminated at any time prior to
the Effective Time, whether before or after approval of matters presented in
connection with the Merger by the holders of the Company Capital Stock:
(a) by mutual written consent of the Parent, the Subsidiary and the
Company;
(b) by either the Parent or the Company:
(i) if, upon a vote at a duly held meeting of shareholders or any
adjournment thereof, any required approval of the holders of the Company
Capital Stock shall not have been obtained;
(ii) if the Merger shall not have been consummated on or before
July 31, 1998, unless the failure to consummate the Merger is the result
of a willful and material breach of this Agreement by the party seeking
to terminate this Agreement; provided, however, that the passage of such
period shall be tolled for any part thereof (but not exceeding 60 days
in the aggregate) during which any party shall be subject to a nonfinal
order, decree, ruling or action restraining, enjoining or otherwise
prohibiting the consummation of the Merger or the calling or holding of
a meeting of shareholders;
(iii) if a United States federal or state court of competent
jurisdiction or other United States federal or state governmental entity
shall have issued an order, decree or ruling or taken any other action
permanently enjoining, restraining or otherwise prohibiting the Merger
and such order, decree, ruling or other action shall have become final
and nonappealable; provided, that the party seeking to terminate this
Agreement shall have used all reasonable efforts to remove such order,
decree, ruling or other action; or
(iv) in the event of a material breach by the other party of any
representation, warranty, covenant or other agreement contained in this
Agreement which (A) would give rise to the failure of a condition set
forth in Section 9.2(a) or (b) or Section 9.3(a) or (b), as applicable,
and (B) cannot be or has not been cured within 30 days after the
occurrence or discovery of such breach by the breaching party, whichever
is later (a "Material Breach"), provided that the terminating party is
not then in Material Breach of any representation, warranty, covenant or
other agreement contained in this Agreement; or
(c) by either the Parent or the Company in the event that (i) all of
the conditions to the obligation of such party to effect the Merger set
forth in Section 9.1 shall have been satisfied and (ii) any condition to
the obligation of such party to effect the Merger set forth in Section 9.2
(in the case of the Parent) or Section 9.3 (in the case of the Company) is
not capable of being satisfied prior to the end of the period referred to
in Section 8.1(b)(ii); or
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(d) by the Company, if the Company's Board of Directors shall have (i)
determined in the exercise of its fiduciary duties under applicable law,
not to recommend the Merger to the holders of Company Shares or shall have
withdrawn such recommendation or (ii) approved, recommended or endorsed any
Acquisition Transaction (as defined in Section 7.8) other than this Merger
or (iii) resolved to do any of the foregoing; or
(e) by the Company, if the average of the last per share sale price of
the Parent Common Stock for the ten consecutive trading days ending on the
second trading day immediately preceding the date set for the Shareholder
Meeting as reported on the Nasdaq Stock Market (or such other exchange on
which the Parent Common Stock is then listed) is equal to or less than $20
(the "Lower Limit"), unless the Parent agrees to adjust the Exchange Ratios
such that the aggregate number of shares to be received by the Company's
stockholders shall be increased to arrive at a transaction value equal to
that of the Lower Limit times the number of shares that would be received
by the Company's stockholders using the current Exchange Ratios set forth
in Section 2.1(c) hereof; or
(f) by the Company, if the Registration Statement has not been
declared effective or if the waiting period (and any extension thereof)
under the HSR Act has not expired or been terminated by April 30, 1998;
provided, however, the Company shall be entitled to terminate this
Agreement pursuant to this Section 8.1(f) only if the Company has (i) used
its reasonable best efforts to cause the Registration Statement to be
declared effective, including, without limitation, supplying on or before
January 31, 1998 all information relating to the Company required under the
Securities Act to be included in the Registration Statement and (ii)
complied with its obligations under Section 7.6 hereof.
(g) by the Company upon the occurrence of a change or event requiring
the Parent to give notice pursuant to Section 7.21 that (x) would give rise
to the failure of a condition set forth in Section 9.3(b) and (y) is not
capable of being cured prior to the end of the period referred to in
Section 8.1(b)(ii); provided, that the Company shall only be permitted to
terminate the Agreement within ten days after receipt of any such notice
and the information reasonably requested by it in order to evaluate the
significance of such change or event; and provided, further, that if the
Company does not give the Parent written notice of termination within such
ten day period, the Company shall be deemed to have consented to such
change or event and shall not be entitled thereafter to assert that such
change or event gives rise to a failure of a condition set forth in Section
9.3(b); or
(h) by the Parent, upon the occurrence of a change or event requiring
the Company to give notice pursuant to Section 7.21 that (x) would give
rise to the failure of a condition set forth in Section 9.2(b) and (y) is
not capable of being cured prior to the end of the period referred to in
Section 8.1(b)(ii); provided, that the Parent shall only be permitted to
terminate the Agreement within ten days after receipt of any such notice
and the information reasonably requested by it in order to evaluate the
significance of such change or event; and provided, further, that if the
Parent does not give the Company written notice of termination within such
ten day period, the Parent shall be deemed to have consented to such change
or event and shall not be entitled thereafter to assert that such change or
event gives rise to a failure of a condition set forth in Section 9.2(b).
8.2. Effect of Termination. In the event of termination of this Agreement
as provided in Section 8.1, this Agreement shall forthwith become void and have
no effect, without any liability or obligation on the part of any party, other
than the provisions of Sections 6.2, 7.7, and 8.6, and except to the extent that
such termination results from the willful and material breach by a party of any
of its representations, warranties, covenants or other agreements set forth in
this Agreement.
8.3. Amendment. This Agreement may be amended by the parties at any time
before or after any required approval of matters presented in connection with
the Merger by the holders of the Company Shares; provided, however, that after
such approval, there shall be made no amendment that pursuant to Section 251(d)
of the DGCL requires further approval by such shareholders without such further
approval. This Agreement may not be amended except by an instrument in writing
signed on behalf of each of the parties.
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8.4. Extension; Waiver. At any time prior to the Effective Time, the
parties may (a) extend the time for the performance of any of the obligations or
other acts of the other parties, (b) waive any inaccuracies in the
representations and warranties contained in this Agreement or in any other
document delivered pursuant to this Agreement or (c) subject to the proviso of
Section 8.3, waive compliance with any of the agreements or conditions contained
in this Agreement. Any agreement on the part of a party to any such extension or
waiver shall be valid only if set forth in an instrument in writing signed on
behalf of such party. The failure of any party to this Agreement to assert any
of its rights under this Agreement or otherwise shall not constitute a waiver of
such rights.
8.5. Procedure for Termination, Amendment, Extension or Waiver. A
termination of this Agreement pursuant to Section 8.1, an amendment of this
Agreement pursuant to Section 8.3, or an extension or waiver pursuant to Section
8.4 shall, in order to be effective, require in the case of each of the Parent,
the Subsidiary and the Company, action by its Board of Directors or the duly
authorized designee of the Board of Directors.
8.6. Expenses; Break-up Fees.
(a) All costs and expenses incurred in connection with this Agreement
and the transactions contemplated hereby shall be paid by the party
incurring such expense, including any brokers fees pursuant to Section 3.20
and 5.17.
(b) In the event of a termination of this Agreement by the Company
pursuant to Section 8.1(d) as a result of the Board of Directors approving,
recommending, or endorsing an Acquisition Transaction and within one year
after the effective date of such termination, the Company is the subject of
an Acquisition Transaction with any Person (as defined in Sections 3(a)(9)
and 13(d)(3) of the Exchange Act) (other than a party hereto), then at the
time of the execution by the Company of a definitive agreement with respect
thereto, the Company shall pay to the Parent a break-up fee of 3% of the
aggregate consideration that would have been paid by Parent if the Merger
had been consummated (determined as it would have been calculated on the
effective date of termination of this Agreement, substituting the effective
date of such termination for the Effective Time of the Merger for purposes
of calculating the aggregate value of the Parent Common Stock issued to the
stockholders of the Company in the Merger) in immediately available funds.
Each of the Parent and the Company acknowledges that the provisions for the
payment of the break-up fee and the allocation of expenses contained in
this Section 8.6 are an integral part of the transactions contemplated by
this Agreement, and that without these provisions the Parent would not have
entered into this Agreement. The obligations of the Company under this
Section 8.6 shall survive any termination of this Agreement.
SECTION 9. CONDITIONS TO CLOSING
9.1. Mutual Conditions. The respective obligations of each party to effect
the Merger shall be subject to the satisfaction, at or prior to the Closing Date
of the following conditions (any of which may be waived in writing by the
Parent, the Subsidiary and the Company):
(a) None of the Parent, the Subsidiary or the Company nor any of their
respective subsidiaries shall be subject to any order, decree or injunction
by a United States Federal or state court of competent jurisdiction which
(i) prevents the consummation of the Merger or (ii) would impose any
material limitation on the ability of the Parent effectively to exercise
full rights of ownership of the Common Stock of the Surviving Corporation
or any material portion of the assets or business of the Company and the
Company Subsidiaries, taken as a whole.
(b) No statute, rule or regulation shall have been enacted by the
government (or any governmental agency) of the United States or any state
that makes the consummation of the Merger and any other transaction
contemplated hereby illegal.
(c) Any waiting period (and any extension thereof) applicable to the
consummation of the Merger under the HSR Act shall have expired or been
terminated.
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(d) The holders of shares of the Company Capital Stock shall have
approved the adoption of this Agreement and any other matters submitted to
them for the purpose of approving the transactions contemplated hereby.
(e) The shares of the Parent Common Stock to be issued in connection
with the Merger shall have been listed on the Nasdaq Stock Market (or such
other exchange on which the Parent Common Stock is then listed), upon
official notice of issuance, and shall have been issued in transactions
qualified or exempt from registration under applicable securities or Blue
Sky laws of such states and territories of the United States as may be
required.
(f) The Merger shall qualify for "pooling of interests" accounting
treatment, and the Parent and the Company shall have received a letter,
dated the Closing Date, from each of KPMG Peat Marwick and Ernst & Young
LLP, respectively, as to their concurrence with the Parent and the Company
to that effect if the Merger is consummated in accordance with the terms
and provisions of this Agreement.
(g) Parent and the Company shall have received all consents, waivers,
approvals and authorizations of third parties with respect to all material
contracts, leases, service agreements and management agreements to which
such entities are parties, which consents, waivers, approvals and
authorizations are required of such third parties by such documents, in
form and substance acceptable to Parent and the Company, as the case may
be, except where the failure to obtain such consent, approval or
authorization would not have a material effect on the business of Parent or
the Company.
(h) All consents, authorizations, orders and approvals of (or filings
or registrations with) any governmental commission, board or other
regulatory body required to execute, deliver and perform this Agreement
shall have been obtained or made, except for fillings in connection with
the Merger and any other documents required to be filed after the Effective
Time.
(i) The Registration Statement shall have been declared effective and
no stop order with respect to the Registration Statement shall be in
effect.
9.2. Conditions to Obligations of the Parent. The obligations of the
Parent to consummate the Merger and the other transactions contemplated hereby
shall be subject to the satisfaction, at or prior to the Closing Date, of the
following conditions (any of which may be waived by the Parent):
(a) The agreements of the Company to be performed at or prior to the
Closing Date pursuant to the terms hereof shall have been duly performed in
all material respects, and the Company shall have performed, in all
material respects, all of the acts required to be performed by it at or
prior to the Closing Date by the terms hereof.
(b) The representations and warranties of the Company set forth in
this Agreement that are qualified as to materiality shall be true and
correct, and those that are not so qualified shall be true and correct in
all material respects, as of the date of this Agreement and as of the
Closing as though made at and as of such time, except to the extent such
representations and warranties expressly relate to an earlier date (in
which case such representations and warranties that are qualified as to
materiality shall be true and correct, and those that are not so qualified
shall be true and correct in all material respects, as of such earlier
date); provided, however, that the Company shall not be deemed to be in
breach of any such representations or warranties by taking any action
permitted (or approved by the Parent) under this Agreement. The Parent and
the Subsidiary shall have been furnished with a certificate, executed by a
duly authorized officer of the Company, dated the Closing Date, certifying
as to the fulfillment of the foregoing condition.
(c) The Parent shall have received an opinion from Mayor, Day,
Caldwell & Keeton, L.L.P., in form and substance reasonably satisfactory to
the Parent as to the matters set forth in Exhibit 9.2(d) hereto.
(d) The Parent shall have received "Affiliate Letters" as provided in
Section 7.12 herein from the shareholders of the Company.
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9.3. Conditions to Obligations of the Company. The obligations of the
Company to consummate the Merger and the other transactions contemplated hereby
shall be subject to the satisfaction, at or prior to the Closing Date, of the
following conditions (any of which may be waived by the Company):
(a) The agreements of the Parent and the Subsidiary to be performed at
or prior to the Closing Date pursuant to the terms hereof shall have been
duly performed, in all material respects, and the Parent and the
Subsidiaries shall have performed, in all material respects, all of the
acts required to be performed by them at or prior to the Closing Date by
the terms hereof.
(b) The representations and warranties of the Parent and the
Subsidiary set forth in this Agreement that are qualified as to materiality
shall be true and correct, and those that are not so qualified shall be
true and correct in all material respects, as of the date of this Agreement
and as of the Closing as though made at and as of such time, except to the
extent such representations and warranties expressly relate to an earlier
date (in which case such representations and warranties that are qualified
as to materiality shall be true and correct, and those that are not so
qualified shall be true and correct in all material respects, as of such
earlier date). The Company shall have been furnished with a certificate,
executed by duly authorized officers of the Parent and the Subsidiary,
dated the Closing Date, certifying in such detail as the Company may
reasonably request as to the fulfillment of the foregoing condition.
(c) The Company shall have received an opinion from Mayor, Day,
Caldwell & Keeton, L.L.P., to the effect that the Merger will constitute a
reorganization with the meaning of Section 368(a) of the Code which opinion
may be based upon reasonable representations of fact provided by officers
of the Parent, the Company and the Subsidiary.
(d) The Company shall have received an opinion from Waller Lansden
Dortch & Davis, A Professional Limited Liability Company, in form and
substance reasonably satisfactory to the Company as to the matters set
forth in Exhibit 9.3(d) hereto.
SECTION 10. MISCELLANEOUS
10.1. Nonsurvival of Representations and Warranties. Unless expressly
provided otherwise, none of the representations and warranties in this Agreement
or in any instrument delivered pursuant to this Agreement shall survive the
Effective Time. All covenants and agreements set forth in this Agreement shall
survive in accordance with their terms.
10.2. Notices. Any communications required or desired to be given
hereunder shall be deemed to have been properly given if sent by hand delivery
or by facsimile and overnight courier to the parties hereto at the following
address, or at such other address as either party may advise the other in
writing from time to time:
If to the Parent or the Subsidiary:
PhyCor, Inc.
30 Burton Hills Blvd., Suite 400
Nashville, Tennessee 37215
Attention: President
Fax: (615) 665-9088
with a copy to:
Waller Lansden Dortch & Davis, PLLC
511 Union Street, Suite 2100
Nashville, Tennessee 37219-8966
Attention: J. Chase Cole, Esq.
Fax: (615) 244-6804
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If to the Company:
First Physician Care, Inc.
3200 Windy Hill Road, Suite 400
Atlanta, Georgia 30339
Attention: President
Fax: (770) 980-0054
and with a copy to:
Mayor, Day, Caldwell & Keeton, L.L.P.
700 Louisiana, Suite 1900
Houston, Texas 77002-2778
Attention: Diana M. Hudson
Fax: (713) 225-7047
All such communications shall be deemed to have been delivered on the
date of hand delivery or on the next business day following the deposit
of such communications with the overnight courier.
10.3. Further Assurances. Each party hereby agrees to perform any further
acts and to execute and deliver any documents which may be reasonably necessary
to carry out the provisions of the Agreement.
10.4. Governing Law. This Agreement shall be interpreted, construed and
enforced with the laws of the State of Delaware, applied without giving effect
to any conflicts-of-law principles.
10.5. "Knowledge." "To the knowledge," "to the best knowledge," or any
other similar phrase shall be deemed to refer to the knowledge of the executive
officers of a party and to include the assurance that such knowledge is based
upon a reasonable investigation, unless otherwise expressly provided.
10.6. "Material adverse change" or "material adverse effect." "Material
adverse change" or "material adverse effect" means, when used in connection with
the Company or the Parent, any change, effect, event or occurrence having
individually or in the aggregate, a material adverse impact on the business or
financial position of such party and its subsidiaries and other controlled
entities, taken as a whole; provided however that "material adverse change" and
"material adverse effect" shall be deemed to exclude the impact of (i) changes
in generally accepted accounting principles, (ii) changes in applicable law,
(iii) changes in general economic or market conditions or in conditions
affecting the healthcare or physician practice management industries in general
and (iv) any changes resulting from any restructuring or other similar charges
or write-offs taken by the Company with the consent of the Parent; provided,
however, that no such charges or write-offs will be taken if such would
adversely affect pooling-of-interests accounting treatment for the Merger.
10.7. "Hazardous Materials." "Hazardous Materials" means any toxic or
hazardous wastes, pollutants or substances, including, without limitation,
asbestos, radon, PCBs, petroleum products and byproducts, substances defined or
listed as "hazardous waste," "hazardous substance," "hazardous air substance,"
"toxic substance," "toxic pollutant," "hazardous air pollutant," "medical
waste," "infectious waste," or similarly identified substance or mixture, in or
pursuant to any federal, state or local law.
10.8. "Environmental Laws." The term "Environmental Laws" means any
federal, state, or local statute, regulation, rule or ordinance, and any
judicial or administrative interpretation thereof, regulating the use,
generation, handling, storage, transportation, discharge, emission, spillage or
other release or threatened release of Hazardous Materials or relating to the
protection of the environment.
10.9. Captions. The captions or headings in this Agreement are made for
convenience and general reference only and shall not be construed to describe,
define or limit the scope or intent of the provisions of this Agreement.
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10.10. Entire Agreement. This Agreement, the Company Disclosure Schedule,
the Parent Disclosure Schedule, the Appendices attached hereto and the
Confidentiality Agreement contain the entire agreement of the parties and
supersede any and all prior or contemporaneous agreements between the parties,
written or oral, with respect to the transactions contemplated hereby.
10.11. Counterparts. This Agreement may be executed in several
counterparts, each of which, when so executed, shall be deemed to be an
original, and such counterparts shall, together, constitute and be one an the
same instrument.
10.12. Binding Effect. This Agreement shall be binding on, and shall inure
to the benefit of, the parties hereto, and their respective successors and
assigns, and, except as expressly provided in Section 7.18(c), no other person
shall acquire or have any right under or by virtue of this Agreement. No party
may assign any right or obligations hereunder without the prior written consent
of the other parties.
10.13. No Rule of Construction. The parties agree that, because all
parties participated in negotiating and drafting this Agreement, no rule of
construction shall apply to this Agreement which construes ambiguous language in
favor of or against any party by reason of that party's role in drafting this
Agreement.
IN WITNESS WHEREOF, the Parent, the Subsidiary and the Company have caused
this Agreement to be executed by their respective duly authorized officers, all
as of the day and year first above written.
PHYCOR, INC.
By: /s/ STEVEN R. ADAMS
------------------------------------
Steven R. Adams
Vice President
FALCON ACQUISITION SUB, INC.
By: /s/ STEVEN R. ADAMS
------------------------------------
Steven R. Adams
Vice President
FIRST PHYSICIAN CARE, INC.
By: /s/ STEPHEN A. GEORGE, M.D.
------------------------------------
Stephen A. George, M.D.
Chairman, President & Chief
Executive Officer
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<PAGE> 142
AMENDMENT TO
AGREEMENT AND PLAN OF MERGER
This Amendment dated May 18, 1998 is an amendment to the Agreement and Plan
of Merger dated as of December 19, 1997 (the "Merger Agreement") by and among
PhyCor, Inc., Tennessee corporation ("Parent"), Falcon Acquisition Sub, Inc., a
Delaware corporation ("Subsidiary") and First Physician Care, Inc., a Delaware
corporation (the "Company").
WHEREAS, the parties have entered the Merger Agreement;
WHEREAS, the parties hereby agree to amend the Merger Agreement as stated
herein;
WHEREAS, the parties wish to set forth their understanding in respect to
the terms and conditions relating to the Amendment.
NOW THEREFORE, in consideration of the provisions hereof and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereby agree as follows:
1. Amendment of Stock Exchange Ratios. Section 2.1(c) of the Merger
Agreement is hereby amended to read in its entirety as follows:
As of the Effective Time, each share of Company Common Stock (other
than the shares to be canceled in accordance with Section 2.1(b))
outstanding as of the Effective Time (including shares issuable as a
result of the exercise of stock options that become vested in accordance
with their terms as of the Effective Time) shall be converted into the
right to receive 0.207179 shares of Parent Common Stock (the "Common
Stock Exchange Ratio"); each share of Company Class A Preferred Stock
(other than any shares to be canceled in accordance with Section 2.1(b))
issued and outstanding immediately prior to the Effective Time shall be
converted into the right to receive 3.830839 shares of Parent Common
Stock (the "Class A Preferred Exchange Ratio"); each share of Company
Class B Preferred Stock (other than any shares to be canceled in
accordance with Section 2.1(b)) issued and outstanding immediately prior
to the Effective Time shall be converted into the right to receive
7.977189 shares of Parent Common Stock (the "Class B Preferred Exchange
Ratio") and each share of Company Class C Preferred Stock (other than
any shares to be canceled in accordance with Section 2.1(b)) issued and
outstanding immediately prior to the Effective Time shall be converted
into the right to receive 2.071790 shares of Parent Common Stock (the
"Class C Preferred Exchange Ratio") and, together with the Common Stock
Exchange Ratio, the Class A Preferred Exchange Ratio and the Class B
Preferred Exchange Ratio, the "Exchange Ratios"). All such shares of
Parent Common Stock (including the corresponding rights associated
therewith issued pursuant to the terms of the Rights Agreement dated as
of February 18, 1994 between Parent and First Union National Bank of
North Carolina) shall be fully paid and nonassessable and are
hereinafter sometimes referred to as the "Parent Shares." Upon such
conversion, all such Company Shares shall be canceled and cease to
exist, and each holder thereof shall cease to have any rights with
respect thereto other than the right to receive the Parent Shares issued
in exchange therefor and cash in lieu of fractional Parent Shares in
accordance with the terms provided herein. The Exchange Ratios set forth
in this Section 2.1 (c) assume the exercise as of or prior to the
Effective time of (i) all of the Exercisable Options (as defined below),
(ii) options to purchase 53,200 shares of Company Common Stock, which
options will not be vested as of the Effective Time and for which it is
expected that the exercise price per share multiplied by the Common
Stock Exchange Ratio will be less than the value of Parent Common Stock
per share as of the Effective Time and (iii) warrants to purchase 41,869
shares of Company Common Stock.
2. Cooperation. Section 7.13 of the Merger Agreement is hereby amended to
add the following Section 7.13(c)
"(c) Parent, Subsidiary and the Company agree that time is of the
essence in consummating the transactions contemplated by this Agreement.
Parent, Subsidiary and the Company agree to use their
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best efforts to consummate or cause the Merger to be consummated as
provided by this Agreement no later than July 15, 1998."
3. Termination Provisions. The following amendments are hereby made to
Section 8.1 of the Merger Agreement.
(a) Section 8.1 is hereby amended to delete subsections 8.1(b)(iv),
8.1(f), 8.1(g) and 8.1(h) in their entirety.
(b) Subsection 8.1(b)(ii) is hereby amended to delete the date "July
31, 1998" and insert the date "June 30, 1999".
(c) Subsection 8.1(e) is hereby deleted in its entirety and replaced
with the following:
"(e) by the Company, if the average of the last per share sale price
of the Parent Common Stock for the ten consecutive trading days ending on
the second trading day immediately preceding the date set for the
Shareholder Meeting as reported on the Nasdaq Stock Market is equal to or
less than $16.00 (the "Lower Limit"), unless the Parent agrees to adjust
the Exchange Ratios such that the number of shares to be received by the
Company's stockholders shall be increased to arrive at a transaction value
equal to that of the Lower Limit times the number of shares that would be
received by the Company's stockholders using the current Exchange Ratios
set forth in Section 2.1(c) hereof; or"
4. Conditions of Closing. The following amendments are hereby made to
Section 9 of the Merger Agreement:
(a) Sections 9.1(c), (d), (g) and (h) of the Agreement are hereby
deleted in their entirety.
(b) Section 9.1(f) of the Agreement is amended as follows:
The following language is added to the last sentence of the
Section:
"; provided, however, that if any failure to qualify for
"pooling of interests" accounting treatment is attributable, directly
or indirectly, to actions or omissions of the Parent or the
Subsidiary subsequent to May 18, 1998, then the obligation of the
Parent and Subsidiary to effect the Merger shall not be subject to
satisfaction of the conditions set forth in this clause (f)."
(c) Sections 9.2(a) and (b) of the Agreement are hereby deleted in
their entirety.
(d) Section 9.2(c) of the Agreement is hereby amended to read in its
entirety as follows:
"(c) The Parent shall have received an opinion from Mayor, Day,
Caldwell & Keeton, L.L.P. as to the matters set forth in Exhibit 9.2(d)
hereto."
(e) Sections 9.3 (a) and (b) of the Agreement are hereby deleted in
their entirety.
(f) Section 9.3(d) of the Agreement is hereby amended to read in its
entirety as follows:
"(d) The Company shall have received an opinion from Waller Lansden
Dortch & Davis, A Professional Limited Liability Company as to the
matters set forth in Exhibit 9.3(d) hereto."
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<PAGE> 144
5. Representations, Acknowledgment and Waiver of Parent. Parent hereby
represents, warrants and covenants to Company that:
(a) This Amendment has been duly and validly approved and authorized
by the respective Boards of Directors of the Parent and Subsidiary and by
all other necessary actions required by law, by their respective
organizational documents or otherwise, has been duly and validly executed
by Parent and the Subsidiary and, assuming the due authorization, execution
and delivery by the Company, constitutes the legal, valid and binding
obligation of the Parent enforceable against the Parent in accordance with
its terms.
(b) Parent has completed all due diligence required in connection with
the Merger and the transactions contemplated by the Merger Agreement and
has had full opportunity to satisfy itself and its advisors as to the
fairness of the Merger and such transactions in every respect. Parent
hereby waives any inaccuracies in the representations and warranties of the
Company contained in the Merger Agreement and in any other document
delivered to date, pursuant to or in connection with the Merger Agreement.
Parent further waives any defaults by Company to date in the observance or
performance of any of its covenants under the Merger Agreement.
6. Representations, Acknowledgment and Waiver of Company. Company hereby
represents, warrants and covenants to Parent that:
(a) This Amendment has been duly and validly approved and authorized
by the Company's Board of Directors and by all other necessary actions
required by law, by its certificate of incorporation and bylaws or
otherwise, has been duly and validly executed by Company and, assuming the
due authorization, execution and delivery by Parent, constitutes the legal,
valid and binding obligation of the Company enforceable against the Company
in accordance with its terms.
(b) Company has completed all due diligence required in connection
with the Merger and the transactions contemplated by the Merger Agreement
and has had full opportunity to satisfy itself and its advisors as to the
fairness of the Merger and such transactions in every respect. Company
hereby waives any inaccuracies in the representations and warranties of the
Parent contained in the Merger Agreement and in any other document
delivered to date, pursuant to or in connection with the Merger Agreement.
Company further waives any defaults by Parent to date in the observance or
performance of any of its covenants under the Merger Agreement.
7. Amendment and Ratification. The Parties agree that the Merger Agreement
is hereby amended in accordance with the foregoing provisions of this Amendment.
The Parties agree that the Merger Agreement, as amended as provided herein,
shall remain in full force and effect.
8. Defined Terms. Capitalized terms used in this Amendment shall have the
same meanings as in the Merger Agreement unless otherwise defined herein.
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<PAGE> 145
IN WITNESS WHEREOF, the parties hereto have signed this Amendment to the
Merger Agreement on the date first above written.
PHYCOR, INC.
By: /s/ STEVEN R. ADAMS
------------------------------------
Steven R. Adams
Vice President
FALCON ACQUISITION SUB, INC.
By: /s/ STEVEN R. ADAMS
------------------------------------
Steven R. Adams
Vice President
FIRST PHYSICIAN CARE, INC.
By: /s/ STEPHEN A. GEORGE, M.D.
------------------------------------
Stephen A. George, M.D.
Chairman, President and Chief
Executive Officer
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<PAGE> 146
SECOND AMENDMENT TO
AGREEMENT AND PLAN OF MERGER
This Amendment dated June 10, 1998 is the second amendment to the Agreement
and Plan of Merger dated as of December 19, 1997, as amended May 18, 1998 (the
"Merger Agreement"), by and among PhyCor, Inc., Tennessee corporation
("Parent"), Falcon Acquisition Sub, Inc., a Delaware corporation ("Subsidiary")
and First Physician Care, Inc., a Delaware corporation (the "Company").
WHEREAS, the parties have entered the Merger Agreement;
WHEREAS, the parties hereby agree to amend the Merger Agreement as stated
herein;
WHEREAS, the parties wish to set forth their understanding in respect to
the terms and conditions relating to the Amendment.
NOW THEREFORE, in consideration of the provisions hereof and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereby agree as follows:
1. Termination Provisions. The following amendment is hereby made to
Section 8.1 of the Merger Agreement.
Subsection 8.1(e) is hereby deleted in its entirety and replaced
with the following:
"(e) by the Company, if the average of the last per share sale
price of the Parent Common Stock for the ten consecutive trading days
ending on the second trading day immediately preceding the date set
for the Shareholder Meeting as reported on the Nasdaq Stock Market is
equal to or less than $11.00 (the "Lower Limit"), unless the Parent
agrees to adjust the Exchange Ratios such that the number of shares
to be received by the Company's stockholders shall be increased to
arrive at a transaction value equal to that of the Lower Limit times
the number of shares that would be received by the Company's
stockholders using the current Exchange Ratios set forth in Section
2.1(c) hereof.
2. Representations, Acknowledgment and Waiver of Company. Company
hereby represents, warrants and covenants to Parent that:
This Amendment has been duly and validly approved and authorized by
the Company's Board of Directors and by all other necessary actions
required by law, by its certificate of incorporation and bylaws or
otherwise, has been duly and validly executed by Company and, assuming the
due authorization, execution and delivery by Parent, constitutes the legal,
valid and binding obligation of the Company enforceable against the Company
in accordance with its terms.
3. Amendment and Ratification. The parties agree that the Merger
Agreement is hereby amended in accordance with the foregoing provisions of
this Amendment. The parties agree that the Merger Agreement, as amended as
provided herein, shall remain in full force and effect.
4. Defined Terms. Capitalized terms used in this Amendment shall have
the same meanings as in the Merger Agreement unless otherwise defined
herein.
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<PAGE> 147
IN WITNESS WHEREOF, the parties hereto have signed this Amendment to the
Merger Agreement on the date first above written.
PHYCOR, INC.
By: /s/ STEVEN R. ADAMS
------------------------------------
Steven R. Adams
Vice President
FALCON ACQUISITION SUB, INC.
By: /s/ STEVEN R. ADAMS
------------------------------------
Steven R. Adams
Vice President
FIRST PHYSICIAN CARE, INC.
By: /s/ STEPHEN A. GEORGE, M.D.
------------------------------------
Stephen A. George, M.D.
Chairman, President and Chief
Executive Officer
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<PAGE> 148
ANNEX B
June 10, 1998
The Board of Directors
First Physician Care, Inc.
3200 Windy Hill Road
Suite 400 West
Atlanta, Georgia 30339
Gentlemen:
You have requested our opinion as to the fairness from a financial point of
view to the holders of Class A Common Stock, par value $.001 per share ("FPC
Class A Common Stock"), of First Physician Care, Inc. (the "Company") of the
Exchange Ratio (as defined below) contemplated by the terms of the Agreement and
Plan of Merger, dated December 19, 1997 (the "Original Agreement"), by and among
PhyCor, Inc. ("PhyCor"), Falcon Acquisition Sub, Inc. ("Falcon"), a wholly owned
subsidiary of PhyCor, and the Company, as amended by an amendment thereto (the
"First Amendment") dated May 18, 1998 and as further amended by an amendment
thereto (the "Second Amendment") to be dated June 10, 1998 (as so amended, the
"Merger Agreement"), pursuant to which Falcon will be merged (the "Merger") with
and into the Company.
Pursuant to the Merger Agreement, each share of FPC Class A Common Stock
will be converted, subject to certain exceptions, into the right to receive
0.205067 shares (the "Exchange Ratio") of common stock, no par value, of PhyCor
("PhyCor Common Stock").
In arriving at our opinion, we have reviewed the Original Agreement dated
December 19, 1997, the First Amendment dated May 18, 1998 and a draft of the
Second Amendment dated June 10, 1998. We also have reviewed financial and other
information that was publicly available or furnished to us by the Company or
PhyCor, including information provided during discussions with their respective
managements. Included in the information provided during discussions with the
management of the Company were certain financial projections of the Company for
the period beginning January 1, 1998 and ending December 31, 2002 prepared by
the management of the Company. In addition, we have compared certain financial
and securities data of the Company and PhyCor with various other companies whose
securities are traded in public markets, reviewed the historical stock prices
and trading volumes of the PhyCor Common Stock, reviewed prices paid in certain
other business combinations and conducted such other financial studies, analyses
and investigations as we deemed appropriate for purposes of this opinion.
In rendering our opinion, we have relied upon and assumed the accuracy and
completeness of all of the financial and other information that was available to
us from public sources, that was provided to us by the Company or PhyCor or
their respective representatives, or that was otherwise reviewed by us. In
particular, we have relied upon the estimates of the management of the Company
of the operating synergies achievable as a result of the Merger. With respect to
the financial projections supplied to us by the Company, we have assumed that
they have been reasonably prepared on the basis reflecting the best currently
available estimates and judgments of the management of the Company as to the
future operating and financial performance of the Company. We have not assumed
any responsibility for making an independent evaluation of any assets or
liabilities or for making any independent verification of any of the information
reviewed by us. We have relied as to certain legal matters on advice of counsel
to the Company. For purposes of our opinion, we assumed that the Merger would be
accounted for as a pooling of interests.
Our opinion is necessarily based on economic, market, financial and other
conditions as they exist on, and on the information made available to us as of,
the date of this letter. It should be understood that, although subsequent
developments may affect this opinion, we do not have any obligation to update,
revise or reaffirm this opinion. We are expressing no opinion herein as to the
prices at which PhyCor Common Stock will
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<PAGE> 149
actually trade any time. Our opinion does not constitute a recommendation to any
stockholder as to how such stockholder should vote on the proposed transaction.
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), as part of its
investment banking services, is regularly engaged in the valuation of businesses
and securities in connection with mergers, acquisitions, underwritings, sales
and distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. DLJ, through its affiliate the
Sprout Group, owns approximately 14.8% of the fully diluted common equity of the
Company and Class A Preferred Stock of the Company with a liquidation preference
of $6.0 million (plus accrued but unpaid dividends of $0.9 million).
Additionally, the Sprout Group has a loan outstanding to the Company in the
aggregate principal amount of $1.5 million.
Based upon the foregoing and such other factors as we deem relevant, we are
of the opinion that the Exchange Ratio is fair to the holders of FPC Class A
Common Stock, from a financial point of view.
Very truly yours,
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By: /s/ E. FRANKLIN HARRIS
------------------------------------
E. Franklin Harris
Vice President
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<PAGE> 150
ANNEX C
FIRST PHYSICIAN CARE, INC.
SPECIAL MEETING OF STOCKHOLDERS
JUNE 25, 1998
PROXY
THIS PROXY IS SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS OF FIRST PHYSICIAN CARE, INC.
The undersigned hereby appoints Stephen A. George and Karl A. Hardesty and
each of them, with full power of substitution, attorneys and proxies of the
undersigned to vote the shares of Class A Common Stock, par value $.001 per
share, Class A Preferred Stock, par value $1.00 per share, Class B Convertible
Preferred Stock, par value $1.00 per share, and Class C Convertible Preferred
Stock, par value $1.00 per share, of First Physician Care, Inc. ("FPC"), which
the undersigned could vote, and with all power the undersigned would possess, if
personally present at the Special Meeting of Stockholders of FPC to be held at
the corporate office of FPC located at 3200 Windy Hill Road, Suite 400 West,
Atlanta, Georgia 30339 on July 24, 1998, at 9:00 a.m., Eastern time, and any
adjournment thereof:
1. To approve and adopt the Plan and Agreement of Merger, dated as of
December 19, 1997, as amended May 18, 1998 and June 10, 1998, attached as
Annex A to the Prospectus-Proxy Statement that has been transmitted in
connection with the Special Meeting, pursuant to which FPC will merge with
and into Falcon Acquisition Sub, Inc., a Delaware corporation and
wholly-owned subsidiary of PhyCor, Inc. ("PhyCor"), and stockholders of FPC
will receive 0.207179 shares of Common Stock of PhyCor for each share of
Common Stock of FPC owned by them, holders of FPC Class A Preferred Stock
will be entitled to receive 3.830839 shares of PhyCor Common Stock for each
FPC share of Class A Preferred Stock held, holders of FPC Class B
Convertible Preferred Stock will be entitled to receive 7.977189 shares of
PhyCor Common Stock for each share of Class B Convertible Preferred Stock
held and holders of FPC Class C Convertible Preferred Stock shall be
entitled to receive 2.071790 shares of PhyCor Common Stock for each share
of Class C Convertible Preferred Stock held, all as described in said
Prospectus-Proxy Statement.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
(CONTINUED AND TO BE DATED AND SIGNED ON OTHER SIDE)
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<PAGE> 151
(CONTINUED FROM OTHER SIDE)
2. To consider and vote upon a proposal to approve certain payments to
Stephen A. George, M.D. that will result from the Merger under the terms of
(i) FPC's employment agreement with Dr. George, and (ii) the Amended and
Restated Consulting and Non-Compete Agreement among Dr. George, FPC and
PhyCor, and (iii) FPC's stock option plans (collectively, the "Change of
Control Payments"). The Change of Control Payments are more completely
described in the accompanying Prospectus-Proxy Statement and a copy of The
Consulting Agreement is attached as Annex E.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
3. 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 ITEMS 1 AND 2 ABOVE. Any holder who wishes to withhold the
discretionary authority referred to in Item 3 above should mark a line through
the entire Item. Discretionary authority and votes against approval of the
Merger Agreement and the Change of Control Payments will not be used to vote in
favor of adjournment.
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.
C-2
<PAGE> 152
ANNEX D
SEC. 262. APPRAISAL RIGHTS
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to sec. 228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value 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 is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to sec. 251 (other than a merger effected pursuant to
sec. 251(g) of this title), sec. 252, sec. 254, sec. 257, sec. 258, sec. 263 or
sec. 264 of this title.;
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of sec. 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
sec.sec. 251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
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 sec. 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate
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<PAGE> 153
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 informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to sec. 228
or sec. 253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given, provided, that
if the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the
day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise
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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 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.
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(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all 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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ANNEX E
AMENDED AND RESTATED
CONSULTING AND NON-COMPETE AGREEMENT
(STEPHEN A. GEORGE, M.D.)
This AMENDED AND RESTATED CONSULTING AND NON-COMPETE AGREEMENT (the
"Agreement"), entered into this 18th of May, 1998, by and among First Physician
Care, a Delaware corporation ("FPC"), PhyCor, Inc., a Tennessee corporation
("Parent"), and Stephen A. George, M.D. (the "Consultant") amends and restates
in its entirety the Amended and Restated Consulting and Non-Compete Agreement
among FPC, Parent and Consultant entered into on January 29, 1998. Capitalized
terms not defined herein shall have the meaning assigned to them in the Merger
Agreement or Section 3 hereof.
WHEREAS, Parent intends to acquire FPC pursuant to the terms and conditions
of the Agreement and Plan of Merger, dated as of December 19, 1997, by and among
Parent, Falcon Acquisition Sub, Inc. and FPC (the "Merger Agreement"), and is
engaged in the provision of health care services in various locations;
WHEREAS, the Companies recognize that the reputation, knowledge and
experience of Consultant represent a significant asset to FPC and Parent and its
stockholders;
WHEREAS, Section 7.24 of the Merger Agreement calls for the Companies to
offer this Consulting Agreement to Consultant;
WHEREAS, FPC and Consultant have entered into an Employment Agreement,
dated as of July 1, 1996, (the "Employment Agreement"), providing for, among
other things, the terms of Consultant's termination of employment with FPC;
WHEREAS, the obligations of FPC under the Employment Agreement will be an
obligation of the surviving corporation upon the consummation of the merger
contemplated by the Merger Agreement;
WHEREAS, the Companies and Consultant wish to set forth their understanding
in respect to the terms and conditions relating to the Services to be performed
by Consultant hereunder.
NOW, THEREFORE, in consideration of the provisions hereof, and for other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereby agree as follows:
1. Termination of Employment/Duties of Consultant. The Companies and
Consultant acknowledge that at the Effective Time, Consultant's employment
with FPC will have been terminated entitling Consultant to the payments and
benefits provided for in Section 6.3 of the Employment Agreement. In
addition, the Companies acknowledge that the Merger Agreement requires
Parent to honor all benefits accrued or vested under the Company Plans and
to maintain FPC's Key Physician and Executive Deferred Compensation Plan in
effect in accordance with the current terms thereof.
During the Term of this Agreement, Consultant shall be retained by the
Companies as a consultant in connection with the Companies' business.
Consultant shall report directly to the Chairman and Chief Executive
Officer of Parent (the "CEO") and shall provide such consulting services as
shall from time to time be requested by the CEO in writing or otherwise. In
performing such services, Consultant shall be retained by the Companies as
a consultant in connection with the Companies' acquisitions and in
connection with the consummation of the transactions contemplated by the
Merger Agreement. Consultant agrees to assist the Companies in the
integration of the businesses acquired by Parent at the Effective Time in
connection with consummation of the transactions contemplated by the Merger
Agreement and with the development and implementation of plans and actions
to realize synergies for the Companies in connection with the Merger. In
such regard, Consultant shall consult with the CEO in identifying possible
acquisitions, representing the Companies in negotiations related to
proposed acquisitions, including placing phone calls and writing letters as
necessary, and using all other contacts and other resources of Consultant
to consummate proposed acquisitions, identifying areas of potential synergy
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between the Companies and any such businesses generally. Consultant shall
also consult with the CEO with respect to the Companies' development and
implementation of plans of action to realize such synergies for the
Companies, including cross-selling opportunities and consolidating of
certain functional areas.
It is understood and agreed by the parties to this Agreement that the
consulting services to be requested of and provided as set forth herein are
intended to help the Companies in their efforts to integrate the businesses
of the companies combined pursuant to the Merger Agreement and that the
benefit to be obtained under the Agreement by the Companies is the benefit
of Consultant's knowledge, experience and contacts gained over the years in
the operation of FPC's business and in the healthcare industry generally.
The amount of time to be spent by Consultant in carrying out the duties to
be requested of him herein is not critical to his performance of his duties
hereunder, and it is agreed that it is the Companies' intention that the
Consultant be requested to provide consulting services hereunder on less
than a full-time basis, as contemplated by this paragraph. Consultant shall
be provided with reasonable notice as to the services requested hereunder,
in no event less than three days notice except in an emergency, and such
services shall only be requested to be provided during normal business
hours, except where unavoidable. Consultant shall keep written records of
work performed by Consultant pursuant to this Agreement, a copy of which
will be provided to Parent within ten business days of the end of each
month during the Term of this Agreement.
The Companies and Consultant acknowledge that the compensation to be
paid to Consultant pursuant to this Agreement is less than the total
compensation paid to Consultant when Consultant was a full-time employee,
but if calculated as an hourly rate, could be greater than Consultant's
prior compensation. The Companies and Consultant acknowledge that this
difference, if any, is a result of arm's length negotiations between
Consultant and the Companies and reflects the Companies' desire to have
access to Consultant's unique skills and abilities and Consultant's
agreement to make his services available to the Companies on the basis
described herein.
Consultant may serve as a director or trustee of other health care
companies, subject to the reasonable approval of the Board on a case by
case basis and provided that such service does not violate Section 5
hereof.
2. Term of Agreement. Unless terminated sooner in accordance with the
provisions of this Agreement, the Companies shall engage Consultant, and
Consultant accepts such engagement, under the terms and conditions set
forth herein for a Term beginning at the Effective Time and ending upon the
close of business on the date that is 30 months after the Effective Time.
3. Definitions. The following terms shall have the meanings set forth
below:
"Affiliate" shall mean any person controlling, controlled by or
under common control with another person.
"Board" shall mean the Board of Directors of Parent.
"Companies" shall mean both FPC and Parent.
"Consulting Fee" shall mean the consulting fee provided for in
Paragraph 4(a) hereof.
"Services" shall mean the services to be performed by Consultant
pursuant to this Agreement, as further described in Section 1 hereof.
"Term of this Agreement" shall mean the period of time specified in
Paragraph 2 hereof.
"Termination of Services" shall mean the termination of
Consultant's Services for any reason whatsoever, including death.
4. Consultants Rights From and After the Closing Date.
(a) Consulting Fee. Consultant shall be paid a consulting fee by
Parent (the "Consulting Fee"), as follows, and in each case in
immediately available funds: (i) $563,750 at the Effective
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Time, (ii) $312,500 on the first anniversary of the Effective Time and
(iii) $110,413 on the second anniversary of the Effective Time, or a
total of $986,663 during the Term of this Agreement. Each portion of the
Consulting Fee shall be deemed fully earned as of the date Parent
becomes obligated to pay such portion. In no event shall any payment
under this Agreement be made prior to the date that such payment is due
under this Agreement.
(b) Independent Contractor. Consultant shall be an independent
contractor of both Companies and not an employee of either of the
Companies, and Consultant shall not be authorized to bind or act on
behalf of the Companies.
(c) Employee Benefit Program. During the Term of this Agreement,
Consultant and his dependents shall be eligible to participate, at the
Companies' expense, in all health, medical, dental, prescription drug
benefit, life insurance and long term disability benefit plans and
programs available, from time to time, to employees and dependents of
employees of the Companies. In the event Consultant dies during the Term
of this Agreement, Consultant's spouse and other dependents will be
entitled to receive these benefits, at the Companies' expense, for the
remainder of the Term of this Agreement. Following the Term of this
Agreement and until Consultant has attained age 65 (or, in the event of
Consultant's earlier death, until Consultant's spouse shall have
attained age 65), Consultant and his dependents will remain eligible to
participate in such group benefits at Consultant's expense on either a
continuous or periodic basis.
(d) Office and Secretarial Support. From the Effective Time and
for three years thereafter, Parent agrees to provide Consultant with an
adequate private office in the Atlanta, Georgia area (or in such other
city as Consultant may maintain his principal residence), consisting of
up to 1,500 square feet of space in commercial "A" space, located at a
premises other than any of the Companies offices, furnished with the
furniture and cabinetry currently in Consultant's office, as well as a
telephone, facsimile machine and access to secretarial services at
Parent's expense for production and completion of tasks associated with
the performance of Consultant's Services hereunder.
In connection with the obligation to provide secretarial services
as provided in the previous paragraph, it is understood that Linda
Norman currently acts as Consultant's executive assistant as a FPC
employee at an annual compensation of $50,000 per annum. During the Term
of this Agreement, the Companies shall reimburse Consultant an amount
equal to Ms. Norman's current annual compensation (so long as she shall
be engaged by Consultant), and, in the event Ms. Norman is not engaged
by Consultant during the Term of this Agreement, the Companies shall
reimburse Consultant for the salary cost of an executive assistant at a
salary level consistent with the market conditions then in effect, but
in no event less than $50,000. So long as Ms. Norman shall be so engaged
during the Term of this Agreement, she will be eligible for the health,
medical, dental, prescription drug benefit, life insurance and long-term
disability benefits available under the same plans the Companies make
available to Consultant as provided in Section 4(c) above and any
executive assistant thereafter employed by Consultant during the term of
this Agreement will be eligible for such benefits on the same basis.
(e) Expense Reimbursement. During the Term of this Agreement,
Consultant shall be entitled to reimbursement of reasonable expenses,
including travel and lodging expenses, incurred by Consultant in
performance of his Services hereunder consistent with the Companies'
policies and practices applicable to members of senior management at the
time.
(f) At the Effective Time, Parent shall grant to Consultant a
nonqualified, fully vested option to purchase 25,000 shares of Parent's
common stock, which option shall specify a per share exercise price
equal to the fair market value of a share of Parent's common stock on
the date of the Effective Time. The term of such option will be ten
years from the date of grant; provided, however, that the option shall
not be exercisable after the expiration of 30 days from the date this
Agreement is terminated by the Companies for cause pursuant to Section 6
hereof.
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5. Confidentiality and Competition Restrictions. During the Term of
this Agreement and for six months thereafter or so long as Consultant is
entitled to receive any payments hereunder, Consultant shall not, without
prior written consent of the Board or pursuant to and consistent with the
order of any court, legislative body or regulatory agency: (a) engage
directly or indirectly (including, by way of example only, as a principal,
partner, joint venturer, employee, consultant or agent), nor have any
direct or indirect interest, in any primary care group practice business
which competes with the Companies in any material respect; or (b) disclose
to any third party, either directly or indirectly, any non-public
information regarding the Companies' business, customers, financial
conditions, strategies or operations, the disclosure of which could
possibly harm the Companies in any material respect. Clause (a) above shall
not apply to any investment by Consultant in the stock of a publicly-traded
corporation, provided such investment constitutes less than five percent of
such corporation's total outstanding common stock.
6. Termination. The Companies may terminate this Agreement for cause.
For purposes of the preceding sentence, cause shall be deemed to exist if
(i) Consultant violates the provisions of Section 5 of this Agreement, or
(ii) the Board shall have determined, in its reasonable discretion, that
Consultant has materially breached his obligations under this Agreement or
shall have otherwise engaged in conduct that has had or is reasonably
likely to have a material adverse affect on the Companies. No such
termination shall be effective unless Parent shall have first given
Consultant written notice at least 30 days prior to the time it intends to
terminate this Agreement, detailing the reason for such termination.
Consultant shall then have that 30-day period to cure the reasons for such
termination. It is agreed that no such termination shall be effected so
long as Consultant is making a good faith effort in all the circumstances
to fulfill his obligations hereunder. Consultant may terminate this
Agreement upon 30 days written notice to the Companies. Termination of this
Agreement by the Companies for cause or by Consultant voluntarily shall
extinguish all further obligations of payment and performance hereunder.
Termination of this Agreement by the Companies other than for cause shall
not extinguish Consultant's right to receive any remaining payments or
reimbursements provided for herein.
This Agreement shall also terminate simultaneously with any
termination of the Merger Agreement, and termination in such event shall
extinguish all further obligations of the parties hereunder.
7. Acceleration. In the event of a "Change of Control" involving
Parent, all payments and other amounts due to Consultant hereunder shall
accelerate and be immediately due and payable. As used herein, the term
"Change in Control" shall mean (i) the acquisition by any person or entity
(including a "group" as defined in Section 13(d)(3) of the Securities
Exchange Act of 1934, as amended) of beneficial ownership of, or voting
control over, 50% or more of the Parent's outstanding common stock; or (ii)
approval by the Parent's shareholders of a definitive agreement (A) to
merge or consolidate Parent with or into another corporation, in which
Parent is not the continuing or surviving corporation or pursuant to which
the shares of common stock of Parent would be converted into cash,
securities or other property of another corporation, other than a merger of
Parent in which holders of Parent's common stock immediately prior to the
merger hold more than 50% of the common stock of the surviving corporation
and have, as among holders of Parent's common stock immediately prior
thereto, the same proportionate ownership of common stock of the surviving
corporation immediately after the merger as immediately before, or (B) to
sell or otherwise dispose of all or substantially all of the assets of
Parent, or (iii) approval by the Parent's shareholders of any plan or
proposal for the liquidation or dissolution of Parent.
8. Successors. Except as provided below, the rights and duties of a
party hereunder shall not be assignable by that party; provided, however,
that this Agreement shall be binding upon and shall inure to the benefit of
any successor of either or both of the Companies, and any such successor
shall be deemed substituted for either or both of the Companies under the
terms of this Agreement. The term "successor" as used herein shall include
any person which at any time, by merger, purchase or otherwise, acquires
substantially all of the assets of either or both of the Companies. The
rights and benefits of Consultant under this Agreement shall be assignable
to and inure to the benefit of Consultant's heirs, devisees and legal
representatives. In addition, Consultant shall be entitled to assign his
rights under this Agreement (other than Section 4(c)) and his obligations
to provide Services to a corporation wholly-owned by
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Consultant, provided that any such assignment shall not relieve Consultant
of his obligations hereunder, including without limitation, the provisions
of Section 5 hereof.
9. Attorneys' Fees. In any action at law or in equity brought by any
party hereto to enforce any of the provisions or rights under this
Agreement which results in a judgment against the defaulting party, the
defaulting party, in addition to bearing its own expenses, shall pay to the
other party all costs, expenses and reasonable attorneys' fees incurred
therein by the other party (including without limitation such costs,
expenses and fees on any appeals).
10. Entire Agreement. With respect to the matters specified herein,
this Agreement, together with the Employment Agreement, contains the entire
agreement between the Companies and Consultant and supersedes all prior
written agreements, understandings and commitments between the Companies
and Consultant. No amendments to this Agreement may be made except through
a written document designed by Consultant and approved in writing by the
Board.
11. Validity. In the event that any provisions of this Agreement are
held to be invalid, void or unenforceable, the same shall not affect, in
any respect whatsoever, the validity of any other provision of this
Agreement.
12. Sections and Other Headings. Sections and other headings
contained in this Agreement are for reference purposes only and shall not
affect in any way the meaning or interpretation of this Agreement.
13. Notice. Any notice or demand required or permitted to be given
under this Agreement shall be made in writing and shall be deemed effective
upon the personal delivery thereof if delivered or, if mailed, 72 hours
after having been deposited in the United States mail, postage prepaid, and
addressed in the case of the Companies to the attention of the Board at
Parent's then principal place of business, currently 30 Burton Hills Blvd.,
Suite 400, Nashville, Tennessee 37215, and in the case of Consultant to 100
Jett Forest Court N.W., Atlanta, Georgia 30327. Either party may change the
address to which such notices are to be addressed by giving the other party
notice of such change in the manner herein set forth.
14. Right of Employment. Nothing stated in or implied by this
Agreement shall prevent the Companies from terminating the Services of
Consultant at any time nor prevent Consultant from voluntarily terminating
his Services at any time, on the terms and conditions provided herein.
Consultant's rights and benefits upon any such termination shall be as
provided in Section 6 hereof.
15. Withholding Taxes and Other Deductions. To the extent required by
law, Parent or FPC, as applicable, shall withhold from any payments due
Consultant under this Agreement any applicable federal, state or local
taxes and such other deductions as are prescribed by law.
16. Excise Tax. If at any time, as a result of the receipt by
Consultant of any benefits or payments under this Agreement, Consultant is
subject to the excise tax imposed by Section 4999 of the Internal Revenue
Code of 1986, as amended, the Companies will pay to Consultant an amount
(the "Gross-up Amount") equal to the amount of excise tax imposed on
Consultant (including the excise tax on the Gross-up Amount) plus the
amount of federal and state income tax imposed on the amounts payable to
Consultant under this Section 16, assuming Consultant is taxed at the
highest stated tax rates.
17. Applicable Law. To the full extent controllable by stipulation of
the Companies and Consultant, this Agreement shall be interpreted and
enforced under Delaware law.
18. Cooperation. Consultant acknowledges and agrees that following
the termination of Consultant's services with the Companies, Consultant may
be contacted by the Companies or their legal counsel concerning various
lawsuits or other legal matters about which Consultant may have knowledge.
Consultant agrees to cooperate with all reasonable requests for assistance
from the Companies in this regard. Consultant further agrees to notify the
Companies if Consultant is served with a subpoena or other legal process,
or otherwise contacted by or asked to provide information to, any other
party (including government agencies) concerning investigations, lawsuits
or other legal proceedings involving either or both of the Companies. The
Companies agree to reimburse Consultant for all reasonable
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expenses incurred by Consultant following the termination of this Agreement
in fulfilling these obligations. These obligations are subject to any and
all personal rights and privileges that Consultant may have concerning any
of these matters.
19. Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, FPC and Parent have caused this Consulting and
Non-Compete Agreement to be executed by their duly authorized representatives
and Consultant has executed this Agreement as of the date first above written.
PHYCOR, INC.
By: /s/ STEVEN R. ADAMS
------------------------------------
Steven R. Adams
Vice President
FIRST PHYSICIAN CARE, INC.
By: /s/ STEPHEN A. GEORGE, M.D.
------------------------------------
Stephen A. George, M.D.
Chairman, CEO and President
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