<PAGE> 1
As filed with the Securities and Exchange Commission on January 29, 1998
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-4
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
-----------------------------
PHYCOR, INC.
(Exact Name of Registrant as Specified in its Charter)
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<S> <C> <C>
TENNESSEE 8099 62-1344801
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification Number)
Incorporation or Organization) Classification Code Number)
</TABLE>
30 BURTON HILLS BLVD., SUITE 400
NASHVILLE, TENNESSEE 37215
(615) 665-9066
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
JOSEPH C. HUTTS
CHAIRMAN OF THE BOARD,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
PHYCOR, INC.
30 BURTON HILLS BOULEVARD, SUITE 400
NASHVILLE, TENNESSEE 37215
(615) 665-9066
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
--------------------
WITH COPIES TO:
J. CHASE COLE, ESQ. DIANA M. HUDSON, ESQ.
WALLER LANSDEN DORTCH & DAVIS, MAYOR, DAY, CALDWELL & KEETON, L.L.P
A PROFESSIONAL LIMITED LIABILITY COMPANY 700 LOUISIANA, SUITE 1900
NASHVILLE CITY CENTER HOUSTON, TEXAS 77002-2778
511 UNION STREET, SUITE 2100 (713) 225-7000
NASHVILLE, TENNESSEE 37219
(615) 244-6380
--------------------
Approximate date of commencement of proposed sale to the public: As
soon as practicable after the effective date of this Registration Statement and
the effectiveness of the Merger described in the Prospectus included herewith.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering:
If this form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering:
[ ] ______________________________
CALCULATION OF REGISTRATION FEE
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====================================================================================================================================
Title of Each Class of Amount to be Proposed Maximum Offering Proposed Maximum Aggregate Amount of
Securities to be Registered Registered Price Per Share Offering Price(1) Registration Fee
- ------------------------------------------------------------------------------------------------------------------------------------
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Shares of Common Stock,
no par value 3,067,216 Shares Not applicable $108,680.49 $33.00
====================================================================================================================================
</TABLE>
(1) Estimated solely for purposes of determining the amount of the
registration fee in accordance with Rule 457(f)(2) under the Securities
Act of 1933. Based upon one-third of the aggregate par value of the
capital stock to be received by the Registrant in exchange for the
Common Stock registered, the issuer of such capital stock having an
accumulated deficit at September 30, 1997.
--------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SECTION 8(A), MAY DETERMINE.
================================================================================
<PAGE> 2
[FPC Letterhead]
___________________, 1998
Dear Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders
(the "Meeting") of First Physician Care, Inc. ("FPC") on ________________, 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 (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 0.247429
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 4.607016 shares of PhyCor Common Stock, each outstanding share
of FPC Class B Convertible Preferred Stock will be converted into the right to
receive 9.526966 shares of PhyCor Common Stock, and each outstanding share of
FPC Class C Convertible Preferred Stock will be converted into the right to
receive 2.474289 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, financial advisor to FPC in connection with the Merger, has
delivered to the FPC Board of Directors a written opinion dated December 19,
1997 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 Common Stock.
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
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
<PAGE> 3
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,
STEPHEN A. GEORGE, M.D.
Chairman, Chief Executive Officer and President
YOUR VOTE IS IMPORTANT
PLEASE SIGN, DATE AND RETURN YOUR PROXY
<PAGE> 4
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 ___________,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 (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 0.247429 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 4.607016 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 9.526966
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 2.474289 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 $20.00 closing sales price of PhyCor Common
Stock on January 28, 1998, the aggregate merger consideration to be paid by
PhyCor is $79.6 million (which includes net debt of approximately $9.6 million),
the FPC Common Stock Exchange Ratio is valued at $4.95 (an aggregate of $30.0
million), the FPC Class A Preferred Stock Exchange Ratio is valued at $92.14 (an
aggregate of $18.4 million), the FPC Class B Preferred Stock Exchange Ratio is
valued at $190.54 (an aggregate of $21.0 million) and the FPC Class C Preferred
Stock Exchange Ratio is valued at $49.49 (an aggregate of $0.6 million). 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, 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.
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 _________________, 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 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
<PAGE> 5
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 would be
entitled to cast had 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 84.36% of the votes attributable to the
outstanding shares of FPC Voting Stock and 100% 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,
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
__________, 1998
<PAGE> 6
PROSPECTUS AND PROXY STATEMENT
3,067,216 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
_____________________, 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, by and between 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 0.247429 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 4.607016 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 9.526966 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
2.474289 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 $20.00, 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 $20.00 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 84.36% of the votes
attributable to the outstanding shares of FPC Voting Stock and 100% of the
outstanding shares of FPC Class A Preferred Stock of record as of January 28,
1998) at the Special Meeting. The Merger is
<PAGE> 7
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. See "THE MERGER."
This Prospectus-Proxy Statement also constitutes a prospectus of PhyCor
for the issuance of up to 3,067,216 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 January 28, 1998, the closing sales
price for PhyCor Common Stock as reported on the Nasdaq National Market was
$20.00 per share. The aggregate merger consideration based on such closing price
is $79.6 million (which includes net debt of approximately $9.6 million).
This Prospectus-Proxy Statement and the form of Proxy are first being
mailed to holders of FPC Capital Stock on or about ___________________, 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 _____________, 1998.
2
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TABLE OF CONTENTS
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Page
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AVAILABLE INFORMATION............................................................................ 5
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE................................................ 5
SUMMARY.......................................................................................... 7
RISK FACTORS..................................................................................... 17
THE SPECIAL MEETING.............................................................................. 23
General..................................................................................... 23
Date, Place and Time........................................................................ 23
Record Date; Quorum......................................................................... 23
Votes Required.............................................................................. 23
Voting and Revocation of Proxies............................................................ 24
Solicitation of Proxies..................................................................... 24
THE MERGER....................................................................................... 25
Terms of the Merger......................................................................... 25
Background of the Merger.................................................................... 26
Reasons for the Merger; Recommendations of the Board of Directors........................... 28
Opinion of Donaldson, Lufkin & Jenrette Securities Corporation.............................. 29
Effective Time of the Merger................................................................ 34
Exchange of Certificates.................................................................... 34
Representations and Warranties.............................................................. 35
Conditions to the Merger.................................................................... 36
Regulatory Approvals........................................................................ 37
Certain Covenants........................................................................... 37
Waiver and Amendment........................................................................ 38
Termination................................................................................. 38
Break-up Fee; Third Party Bids.............................................................. 39
Interests of Certain Persons in the Merger; Approval of Change of Control Payments.......... 39
Accounting Treatment........................................................................ 41
Certain Federal Income Tax Consequences..................................................... 41
Resale of PhyCor Common Stock by Affiliates................................................. 43
No Solicitation of Transactions............................................................. 44
Nasdaq National Market Listing.............................................................. 44
APPRAISAL RIGHTS OF FPC STOCKHOLDERS............................................................. 44
MARKET PRICE DATA................................................................................ 47
FPC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........ 48
General..................................................................................... 48
Results of Operations....................................................................... 50
Nine Months Ended September 30, 1996 Compared to Nine Months Ended September 30, 1997....... 50
Year Ended December 31, 1995 Compared to Year Ended December 31, 1996....................... 51
Year Ended December 31, 1994 Compared to Year Ended December 31, 1995....................... 52
Liquidity and Capital Resources............................................................. 53
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3
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BUSINESS OF FPC.................................................................................. 54
Services.................................................................................... 54
Operations.................................................................................. 54
Properties.................................................................................. 55
Employees................................................................................... 55
Litigation.................................................................................. 56
PRINCIPAL STOCKHOLDERS........................................................................... 57
BUSINESS OF PHYCOR............................................................................... 59
COMPARISON OF RIGHTS OF FPC AND PHYCOR SHAREHOLDERS.............................................. 61
Classes and Series of Capital Stock......................................................... 61
Class A Common Stock........................................................................ 61
Class B Common Stock........................................................................ 61
Class A Preferred Convertible Stock......................................................... 62
Class B Convertible Preferred Stock......................................................... 62
Class C Convertible Preferred Stock......................................................... 62
Size and Election of the Board of Directors................................................. 63
Removal of Directors........................................................................ 63
Conversion, Dissolution and Redemption...................................................... 63
Amendment or Repeal of the Certificate of Incorporation or Charter and Bylaws............... 64
Special Meetings of Shareholders............................................................ 64
Liability of Directors...................................................................... 65
Indemnification of Directors and Officers................................................... 65
Change of Control........................................................................... 65
Shareholder Rights Agreement................................................................ 66
EXPERTS.......................................................................................... 67
LEGAL MATTERS.................................................................................... 67
ADDITIONAL INFORMATION........................................................................... 67
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. .......................... 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>
4
<PAGE> 10
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 for the fiscal year
ended December 31, 1996.
2. PhyCor's Quarterly Reports on Form 10-Q for the quarters
ended March 31, June 30, and September 30, 1997.
3. PhyCor's Current Report on Form 8-K filed February 3, 1997,
as amended by PhyCor's Current Report on Form 8-K/A filed February 26,
1997.
4. PhyCor's Current Report on Form 8-K filed October 31, 1997.
5
<PAGE> 11
5. PhyCor's Current Report on Form 8-K filed January 8, 1998.
6. PhyCor's Current Report on Form 8-K filed January 16, 1998.
7. The description of PhyCor Common Stock and associated
preferred stock purchase rights contained in PhyCor's Registration
Statements on Form 8-A dated January 8, 1992 and March 8, 1994,
respectively.
All documents filed by PhyCor pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus-Proxy Statement and
prior to termination of the offering of PhyCor Common Stock hereunder shall be
deemed to be incorporated by reference into this Prospectus-Proxy Statement and
to be made a part hereof from the date of the filing of such documents. Any
statement contained in a document incorporated by reference herein shall be
deemed to be modified or superseded for the purpose hereof to the extent that a
statement contained herein (or in any other subsequently filed document which
also is incorporated by reference herein) is modified or superseded by such
statement. Any statement so modified or superseded shall not be deemed to
constitute a part hereof except as so modified or superseded.
All information contained in this Prospectus-Proxy Statement or
incorporated herein by reference with respect to PhyCor 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 THERE HAS BEEN NO
CHANGE IN THE INFORMATION CONCERNING PHYCOR OR FPC CONTAINED IN THIS
PROSPECTUS-PROXY STATEMENT SINCE THE DATE OF SUCH INFORMATION. THIS
PROSPECTUS-PROXY STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO PURCHASE, ANY SECURITIES OTHER THAN THE SECURITIES
TO WHICH IT RELATES, OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO
PURCHASE, THE SECURITIES OFFERED BY THIS PROSPECTUS-PROXY STATEMENT IN ANY
JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION IS NOT LAWFUL.
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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 December 31, 1997,
PhyCor managed 55 clinics which employ approximately 3,860 physicians in 28
states and managed IPAs with over 19,000 physicians in 28 markets.
Physicians employed by clinics managed by PhyCor provide medical services to
approximately 1,140,000 members under prepaid health plans, including
approximately 177,000 Medicare members. The clinics managed by PhyCor provide
a wide range of primary and specialty physician care and ancillary services.
PhyCor acquires certain assets of established clinics and operates each clinic
under a long-term service agreement with an affiliated multi-specialty physician
group practicing exclusively through the clinic. Pursuant to the service
agreement, PhyCor generally manages all aspects of the clinic other than the
provision of medical services, which is controlled by the physician groups.
PhyCor, under the terms of the service agreement, provides the physician group
with the equipment and facilities used in their medical practices, manages
clinic operations, employs most of the clinic's non-physician employees, other
than certain diagnostic technicians, and receives a service fee. Under
substantially all of its service agreements, 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."
Since September 30, 1997, PhyCor has acquired four multi-specialty
clinics with an aggregate of approximately 263 physicians. In December 1997,
PhyCor announced an agreement to purchase Seattle-based CareWise, Inc., a
nationally recognized leader in the health care decision support industry. On
January 12, 1998, PhyCor announced that it anticipates recording, in the first
quarter of 1998, a pre-tax charge to earnings of approximately $15 million
relating to the termination of its proposed merger with MedPartners, Inc. PhyCor
also announced plans to restructure five of its multi-specialty clinic
operations with approximately 300 physicians and provide for the potential sale
or closure of two additional clinics with approximately 70 physicians. In
connection with these plans, PhyCor anticipates recording a pre-tax charge for
asset revaluation of approximately $83 million in the fourth quarter of 1997, of
which approximately $70 million represents intangible asset value. In addition,
PhyCor expects to incur approximately $22 million in the first quarter of 1998
in pre-tax restructuring charges relating to anticipated costs which are to
provide for consolidating facilities and clinic operations and to reduce
overhead costs. Exclusive of these non-recurring costs, these restructuring
plans are not expected to adversely affect PhyCor's earnings targets for either
1997 or 1998. The effect of these restructuring plans could vary from PhyCor's
expectations based upon continued developments, including the actual amount of
expenditures required in connection with PhyCor's restructuring plans and other
factors, risks and uncertainties applicable to PhyCor's business described
herein. See "RISK FACTORS."
At September 30, 1997, PhyCor had consolidated assets of approximately
$1.5 billion, consolidated shareholders' equity of approximately $744.3 million
and, employed directly or indirectly through wholly-owned subsidiaries,
approximately 18,000 persons.
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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 and one physician
group pursuant to an interim service agreement with an option to purchase the
group's assets. The physician groups are comprised of (i) 15 full-time and
part-time physicians at two sites in the St. Louis, Missouri/Alton, Illinois
market, (ii) 56 full-time and part-time physicians at 21 sites in the
Dallas/Fort Worth, Texas market, (iii) 10 full-time and part-time physicians at
two sites in the New York, New York market and (iv) 27 full-time and part-time
physicians at 10 sites in the Midland/Odessa, Texas market (together, the
"Managed Group Practices"). FPC also directly delivers primary care and certain
specialty medical services through three wholly-owned subsidiaries including (a)
a primary care group of 47 full-time and part-time physicians at 18 sites in the
Tampa and St. Petersburg, Florida markets, (b) a primary care and
multi-specialty group of 28 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 manages one IPA in the New York, New York market.
As of December 31, 1997, FPC employed 1,157 individuals, including 28
in its corporate office, 193 in the South Florida market group practices, 333 in
the Tampa Bay market group practices, 16 in the Atlanta market group practices,
135 in the St. Louis market group practices, 408 in the Dallas/Fort Worth market
group practices and 44 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 engages in no other business. The principal offices of
the Subsidiary are located at 30 Burton Hills Boulevard, Suite 400, Nashville,
Tennessee 37215, and its telephone number is (615) 665-9066.
RISK FACTORS
Certain risks and uncertainties relating to the Merger, PhyCor 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 of Directors 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 _____, 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
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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 January 28, 1998, there were
4,041,473 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 shares (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
January 28, 1998, the directors and executive officers of FPC and other
affiliates of FPC beneficially owned an aggregate of 3,181,925 shares of FPC
Voting Stock (excluding shares issuable upon exercise of options and convertible
securities), representing approximately 84.36% of the votes attributable to
shares of FPC Voting Stock and 100% of the shares of FPC Class A Preferred Stock
outstanding on such date. 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., 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 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. Such approval is also a condition to FPC's and
PhyCor's obligations to consummate the Merger. See "THE SPECIAL MEETING--Votes
Required," "THE MERGER--Conditions to the Merger" and "--Termination."
THE MERGER
Terms of the Merger. Pursuant to the Merger Agreement, 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 0.247429 shares
of PhyCor Common Stock, (ii) each outstanding share of FPC Class A Preferred
Stock will be converted into the right to receive 4.607016 shares of PhyCor
Common Stock, (iii) each outstanding share of FPC Class B Convertible Preferred
Stock will be converted into the right to receive 9.526966 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 2.474289 shares of
PhyCor Common Stock. The Exchange Ratios assume the
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<PAGE> 15
exercise as of or prior to the Effective Time of (i) options to purchase 233,676
shares of FPC Class A Common Stock, which options will be vested at the
Effective Time, (ii) options to purchase 121,928 shares of FPC Class A Common
Stock, which options will not be vested at the Effective Time and (iii) warrants
to purchase 41,869 shares of FPC Class A Common Stock. 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 1,627,197 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 Board of Directors of
FPC 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 Board
of Directors of FPC 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 Board of Directors of FPC its written opinion
dated December 19, 1997 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 and FPC Class B Common Stock, in the aggregate (together,
the "FPC Common Stock"). The full text of the written opinion of DLJ, which sets
forth the assumptions made, matters considered and limitations on the review
undertaken, is attached as Annex B to this Prospectus-Proxy Statement and should
be read carefully 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 Common Stock. 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 and FPC
will enter into an agreement with First National Bank of North Carolina (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
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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 expiration or termination of the waiting period
applicable to the consummation of the Merger under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"), (iii) the
absence of any material adverse change in the financial condition, business or
results of operations of the other party, other than as a result of changes
generally applicable to the industries in which both PhyCor and FPC operate,
(iv) the absence of any injunction prohibiting consummation of the Merger, (v)
in the case of FPC, the receipt of a legal opinion with respect to certain tax
consequences of the Merger and (vi) qualification of the Merger as a pooling of
interests. See "THE MERGER--Certain Federal Income Tax Consequences,"
"--Accounting Treatment" and "--Conditions to the Merger."
Regulatory Approvals. The HSR Act provides that certain business
mergers (including the Merger) may not be consummated until certain information
has been furnished to the Department of Justice (the "DOJ") and the Federal
Trade Commission (the "FTC") and certain waiting period requirements have been
satisfied. On January 22, 1998, PhyCor and FPC made their respective filings
with the DOJ and the FTC with respect to the Merger Agreement. Under the HSR
Act, the filings commenced a 30-day waiting period during which the Merger
cannot be consummated, which waiting period will expire on February 21, 1998.
Notwithstanding the expiration of the HSR Act waiting period, at any time before
or after the Effective Time, the FTC, the DOJ or others could take action under
the antitrust laws, including requesting additional information, seeking to
enjoin the consummation of the Merger or seeking the divestiture by PhyCor of
all or any part of the stock or assets of 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 Board of Directors of
FPC 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 Board of Directors of FPC 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 280,750 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
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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. Several other corporate
officers will be entitled to receive severance payments if their employment is
terminated following the Merger, and certain of such officers may be entitled to
bonus payments if they continue their employment for specified periods following
the Merger. 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).
See "THE MERGER--Interests of Certain Persons in the Merger; Approval of Change
of Control Payments" and "--Certain Covenants."
Termination. The Merger Agreement may be terminated at any time prior
to the Effective Time in a number of circumstances, which include, among others:
(a) by the mutual consent of 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 July 31,
1998, provided that the terminating party shall not have 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, (iv) the other party has materially
breached any representation, warranty, covenant or agreement contained in the
Merger Agreement or experienced a material adverse change which cannot be, or
has not been, cured within 30 days after written notice of such breach or (v)
the conditions to the obligations of such party shall be satisfied and such
obligations of the other party are not capable of being satisfied; (c) by FPC if
(i) the FPC Board of Directors, 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), (ii) the Closing Price of the PhyCor Common Stock is equal to or
less than $20.00 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 $20.00 times the number of shares to be received by
FPC's stockholders using the current Exchange Ratios or (iii) 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; or (d) by either party within ten days upon receipt of notice of the
occurrence of a subsequent event to the other party that would prevent such
other party from fulfilling its conditions to the Merger. See "THE
MERGER--Termination."
Break-Up Fee, Third Party Bids. In the event that the Merger Agreement
is terminated as a result of the Board of Directors of FPC, 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. 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 Welsh, Carson, Anderson & Stowe,
VI, L.P., who beneficially owned shares representing approximately 84.36% of the
votes attributable to outstanding FPC Voting Stock and 100% of the outstanding
shares of FPC Class A Preferred Stock as of January 28, 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.
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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. See "THE MERGER--Accounting Treatment."
Certain Federal Income Tax Consequences. The Merger is intended to
qualify for federal income tax purposes as a reorganization within the meaning
of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code").
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 (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. It
is a condition to the consummation of the Merger that FPC receive an opinion
from Mayor, Day, Caldwell & Keeton, L.L.P. to the effect that the Merger will be
treated as a reorganization within the meaning of Section 368(a) of the Code.
See "THE MERGER--Certain Federal Income Tax Consequences" for a more detailed
description of the above federal income tax matters and information with respect
to the applicability of the foregoing to certain taxpayers subject to special
treatment.
Resale Restrictions. All shares of PhyCor Common Stock received by
holders of 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. These differences result from differences
between Delaware and Tennessee law and differences between the governing
instruments of FPC and PhyCor. For a summary of certain differences between the
rights of FPC stockholders and the rights of PhyCor shareholders, see
"COMPARISON OF RIGHTS OF FPC AND PHYCOR SHAREHOLDERS."
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 January 28, 1998 was
$20.00. FPC is a privately-held Delaware corporation. There has been no
13
<PAGE> 19
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."
Based on the $26.88 closing sales price of PhyCor Common Stock on
December 19, 1997, the market value of the FPC Common Stock Exchange Ratio was
$6.65 (an aggregate of 40.3 million), the FPC Class A Preferred Stock Exchange
Ratio was $123.81 (an aggregate of $24.8 million), the FPC Class B Preferred
Stock Exchange Ratio was $256.04 (an aggregate of $28.2 million) and the FPC
Class C Preferred Stock Exchange Ratio was $66.50 (an aggregate of $0.8 million)
on such date. Based on the $20.00 closing sales price of PhyCor Common Stock on
January 28, 1998, the market value of the FPC Common Stock Exchange Ratio was
$4.95 (an aggregate of $30.0 million), the FPC Class A Preferred Stock Exchange
Ratio was $92.14 (an aggregate of $18.4 million), the FPC Class B Preferred
Stock Exchange Ratio was $190.54 (an aggregate of $21.0 million) and the FPC
Class C Preferred Stock Exchange Ratio was $49.49 (an aggregate of $0.6 million)
on such date. 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.
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.
The following information is not necessarily indicative of the combined
results of operations or combined financial position that would have resulted
had the Merger been consummated at the beginning of the periods indicated, nor
is it necessarily indicative of the combined results of operations in future
periods or future combined financial position.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30, 1997
--------------------------- --------------------------
1994 1995 1996 (UNAUDITED)
---- ---- ----
<S> <C> <C> <C> <C>
Net earnings (loss) per common share:
PhyCor historical $0.32 $0.41 $0.60 $0.61
PhyCor pro forma combined 0.23 0.31 0.46 0.58
FPC historical (1.25) (1.92) (2.69) (0.50)
FPC pro forma equivalent(1) 0.06 0.08 0.11 0.14
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996 SEPTEMBER 30, 1997
--------------------------- --------------------------
(UNAUDITED)
<S> <C> <C>
Book value (deficit) per common share:
PhyCor historical $8.24 $11.57
PhyCor pro forma combined 8.39 11.54
FPC historical (2.42) (2.04)
FPC pro forma equivalent(1) 2.07 2.86
</TABLE>
- -------------
(1) 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.
14
<PAGE> 20
SELECTED CONSOLIDATED FINANCIAL DATA--PHYCOR
The following table sets forth selected consolidated financial data
which have been derived from the consolidated financial statements of PhyCor as
of and for the years ended December 31, 1992 through 1996. The consolidated
financial statements as of and for the years ended December 31, 1992 through
1996 have been audited by KPMG Peat Marwick LLP. The selected consolidated
financial information as of and for the nine month periods ended September 30,
1996 and 1997 are derived from unaudited consolidated financial statements that,
in the opinion of PhyCor, reflect all adjustments necessary for a fair
presentation of the results of PhyCor for those periods. The consolidated
statements of operations data for the interim periods are not necessarily
indicative of results for subsequent periods or the full year. The information
set forth below should be read in conjunction with and are qualified in their
entirety by the consolidated financial statements and related notes which have
been incorporated by reference herein.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------------------- ---------------------
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenue $ 135,866 $ 167,381 $ 242,485 $ 441,596 $ 766,325 $ 535,562 $ 802,297
Net operating expenses 145,354 155,580 223,355 395,452 684,593 478,217 712,242
--------- --------- --------- --------- --------- --------- ---------
Earnings (loss) from operations (9,488) 11,801 19,130 46,144 81,732 57,345 90,055
Interest expense and minority
interests 3,852 3,569 2,629 10,347 22,577 16,398 23,073
--------- --------- --------- --------- --------- --------- ---------
Earnings (loss) before income taxes (13,340) 8,232 16,501 35,797 59,155 40,947 66,982
Income tax expense 405 1,092 4,826 13,923 22,775 15,765 25,929
--------- --------- --------- --------- --------- --------- ---------
Net earnings (loss) $ (13,745)(1) $ 7,140(2) $ 11,675(2) $ 21,874 $ 36,380 $ 25,182 $ 41,053
========= ========= ========= ========= ========= ========= =========
Net earnings (loss) per share
Primary $ (0.57)(1) $ 0.28(2) $ 0.32(2) $ 0.41 $ 0.60 $ 0.42 $ 0.61
========= ========= ========= ========= ========= ========= =========
Fully diluted $ -- $ -- $ 0.31 $ -- $ -- $ -- $ --
========= ========= ========= ========= ========= ========= =========
Weighted average shares outstanding
Primary 23,942 25,869 36,329 53,510 61,096 60,555 66,853
Fully diluted -- -- 43,427 -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------------- --------------
1992 1993 1994 1995 1996 1997
------ ------ ------ ------- ------- --------------
BALANCE SHEET DATA: (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Working capital 35,920 46,927 80,533 111,420 212,946 $ 235,161
Total assets 141,442 171,174 351,385 643,586 1,118,581 1,502,010
Long-term debt, less current
portion 54,087 69,014 94,653 140,633 474,600 464,825
Total stockholders' equity 53,879 70,005 184,125 388,822 451,703 744,263
</TABLE>
- ---------------
(1) Excluding the effect of the non-recurring pre-tax charge to earnings of
$18.6 million incurred in connection with the restructuring and sale of
assets of the Miller Medical Clinic, which was formerly affiliated with
PhyCor, and a net operating loss carryforward, PhyCor's net earnings
per share for 1992 would have been approximately $3.2 million and $0.14
per share, respectively.
(2) Excluding the effect of the utilization of a net operating loss
carryforward to reduce income taxes in 1993 and 1994, net earnings and
net earnings per share would have been $5.1 million, or $0.20 per
share, and $10.2 million, or $0.27 per share, in such years.
15
<PAGE> 21
SELECTED CONSOLIDATED FINANCIAL DATA -- FPC
The selected consolidated financial data presented below is as of and
for the nine months ended September 30, 1996 and 1997 and for the years ended
December 31, 1993, 1994, 1995 and 1996. 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 nine month periods
ended September 30, 1996 and 1997 and as of September 30, 1997 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 those periods. 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>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------- --------------------
1993 1994 1995 1996(1) 1996(1) 1997(2)
-------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue from owned FPC Group Practices $ -- $ 3,744 $ 19,718 $ 32,169 $ 23,062 $ 26,213
Total revenue from Managed Group Practices -- -- -- 5,422 1,371 31,894
-------- -------- -------- -------- -------- --------
Total Revenue -- 3,744 19,718 37,591 24,433 58,107
Less amounts retained by managed groups -- -- -- (2,355) (628) (11,975)
-------- -------- -------- -------- -------- --------
Net Revenue -- 3,744 19,718 35,236 23,805 46,123
Operating costs and expenses:
Cost of Medical Services -- 2,264 12,139 17,375 12,798 12,942
Clinic operations -- 2,303 9,042 19,558 12,233 30,376
Corporate, general and administrative 474 2,172 3,181 4,211 2,983 3,439
Depreciation and amortization 1 149 624 1,332 882 1,607
Loss on impairment of long-term assets -- -- -- 884 884
-------- -------- -------- -------- -------- --------
Total operating costs and expenses 474 6,888 24,986 43,360 29,780 48,364
Other (income) expense 5 (250) (293) (721) (497) (701)
-------- -------- -------- -------- -------- --------
Net loss $ (480) $ (2,894) $ (4,975) $ (7,403) $ (5,478) $ (1,531)
Cumulative dividends and accretion on Class
A Preferred Stock -- -- (109) (1,007) (650) (1,082)
-------- -------- -------- -------- -------- --------
Net loss attributable to common stockholders $ (480) $ (2,894) $ (5,084) $ (8,410) $ (6,128) $ (2,613)
======== ======== ======== ======== ======== ========
Net loss per common share $ (2.00) $ (1.25) $ (1.92) $ (2.69) $ (2.11) $ (0.50)
======== ======== ======== ======== ======== ========
Weighted average shares outstanding 240 2,321 2,655 3,126 2,898 5,265
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
-------------------------------------------- -------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $ 2,486 $ 4,072 $ 1,610 $ 3,437 $ 5,453
Total assets 2,844 10,626 12,738 32,451 35,423
Long-term debt -- 458 2,482 7,315 7,310
Total common stockholders' deficit (448) (3,306) (8,247) (12,259) (11,783)
</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> 22
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 and
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, 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. 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> 23
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. 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.
Certain 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
each clinic with such a right prior to consummation of the Merger; however,
there can be no assurance that each such clinic 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 such
clinics affiliated with PhyCor could have a material adverse effect on the
operations of PhyCor.
RISKS ASSOCIATED WITH CAPITATION; RELIANCE ON PHYSICIAN NETWORKS
Most of the payor contracts entered into by PhyCor IPAs are based on
capitated fee arrangements. Through its service agreements, PhyCor also shares
in capitation risk assumed by its affiliated physician groups. Under capitation
arrangements, health care providers bear the risk, generally subject to certain
loss limits, that the aggregate costs of providing medical services to the
members will exceed the premiums received. The management fees are based, in
part, upon a share of surplus,
18
<PAGE> 24
if any, of a capitated amount of revenue. Some agreements with payors also
contain "shared risk" provisions under which additional compensation can be
earned or economic penalties can be incurred based on utilization of hospital
services by members. Any such losses could have a material adverse effect on
PhyCor. The profitability of a capitated fee arrangement is dependent upon the
ability of the providers to effectively manage the per patient costs of
providing medical services and the level of utilization of medical services. The
management fees are also based upon a percentage of revenue. Any loss of revenue
as a result of losing affiliated physicians, the termination of third party
payor contracts or otherwise could have a material adverse effect on management
fees derived by PhyCor. Managed care providers and management entities such as
PhyCor 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 balance the
federal budget by reducing 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 health care
systems, which often provide fixed fee schedules or capitation payment
arrangements that are lower than standard charges. Future profitability in the
changing health care environment, with differing methods of payment for medical
services, is likely to be affected significantly by management of health care
costs, pricing of services and agreements with payors. Because PhyCor derives
its revenues from the revenues generated by its affiliated physician groups and
from managed IPAs, further reductions in payments to physicians generally or
other changes in payment for health care services could have a material adverse
effect on PhyCor.
ADDITIONAL REGULATORY RISKS
The health care industry and physicians' medical practices are highly
regulated at the state and federal levels. Many state laws restrict the
unlicensed practice of medicine, the splitting or sharing of fees with
non-physician entities and the enforcement of non-competition agreements.
Federal law prohibits the offer, payment, solicitation or receipt of any form of
remuneration in return for the referral of, or the arranging for the referral of
Medicare or state health program patients or patient care opportunities, or in
return for the purchase, lease or order of items or services that are covered by
Medicare or state health programs. In addition, federal law prohibits physicians
with
19
<PAGE> 25
certain financial relationships with health care providers from referring
certain types of Medicare or Medicaid reimbursed "designated health services" to
those providers unless the referral fits within an exception to the law. One of
the exceptions that is used most often requires that physician groups be
included within a definition of "group practice" in order to be permitted to
make referrals within the group. Federal antitrust law also prohibits conduct
that may result in price-fixing or other anticompetitive conduct. Because of the
structure of the relationships of PhyCor with its affiliated physician groups
and managed IPAs and the direct employment of physicians by FPC in the states of
Florida and Georgia, there can be no assurance that review of PhyCor's or FPC's
business by courts or health care, tax, labor or other regulatory authorities
will not result in determinations that could adversely affect the financial
condition or results of operations of PhyCor, or that the health care regulatory
environment will not change in a manner that would restrict PhyCor's 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.
INCREASED GOVERNMENT SCRUTINY OF HEALTH CARE ARRANGEMENTS
There is increasing scrutiny by law enforcement authorities, the Office
of Inspector General ("OIG") of the Department of Health and Human Services
("DHHS"), the courts, and the United States Congress of arrangements between
health care providers and potential referral sources to ensure that the
arrangements are not designed as a mechanism to exchange remuneration for
patient care referrals and opportunities. Investigators have also demonstrated a
willingness to look behind the documents evidencing a business transaction to
determine the underlying purpose of payments between health care providers and
potential referral sources. Enforcement actions have increased as evidenced by
recent highly publicized enforcement investigations of certain hospital
activities. Although, to their knowledge, PhyCor and 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. In
late 1995, prior to its association with PhyCor, Straub was served with a
federal search warrant in connection with an investigation into Straub's
billings and receivables practices, including with respect to Medicare, Medicaid
and CHAMPUS. The federal government recently accepted Straub's offer to resolve
the investigation, subject to certain conditions including negotiation of an
acceptable settlement agreement and corporate integrity program. PhyCor is
indemnified by the physician group affiliated with Straub against any
liabilities imposed as a result of the investigation or settlement thereof, and
PhyCor believes that such indemnity will be sufficient to satisfy any claims
made against PhyCor as a successor to Straub, although no assurance can be given
in that regard. In addition, the federal government could in certain
circumstances suspend or prevent Straub from participating in government
programs, which would adversely affect PhyCor's revenues under its service
agreement with Straub.
20
<PAGE> 26
TAX AUDIT
PhyCor has been subject to an audit by the Internal Revenue Service
(the "IRS") covering the years 1988 through 1993. The IRS has proposed
adjustments relating to the timing of recognition for tax purposes of certain
revenue and deductions relating to uncollectible accounts and PhyCor's
relationship with affiliated physician groups. PhyCor disagrees with the
positions asserted by the IRS including any recharacterization and is vigorously
contesting these proposed adjustments. PhyCor believes that any adjustments
resulting from resolution of this disagreement would not affect reported net
earnings of PhyCor but would defer tax benefits and change the levels of current
and deferred tax assets and liabilities. For the years under audit and,
potentially, for subsequent years, any such adjustments could result in material
cash payments by PhyCor. PhyCor does not believe the resolution of this matter
will have a material adverse effect on its financial condition, although there
can be no assurance as to the outcome of this matter.
APPLICABILITY OF INSURANCE REGULATIONS
PhyCor's managed IPAs enter into contracts and joint ventures with
licensed insurance companies, such as HMOs, whereby the IPAs may be paid on a
capitated fee basis. Under capitation arrangements, health care providers bear
the risk, subject to certain loss limits, that the aggregate costs of providing
medical services to members will exceed the premiums received. To the extent
that the IPAs subcontract with physicians or other providers for those
physicians or other providers to provide services on a fee-for-service basis,
the managed IPAs may be deemed to be in the business of insurance, and thus
subject to a variety of regulatory and licensing requirements applicable to
insurance companies or HMOs. In connection with multi-specialty medical clinic
acquisitions, PhyCor has and may continue to acquire HMOs previously affiliated
with such clinics. The HMO industry is highly regulated at the state level and
is highly competitive. Additionally, the HMO industry has been subject to
numerous legislative initiatives within the past several years. There can be no
assurance that developments in any of these areas will not have an adverse
effect on PhyCor's wholly-owned HMOs or on HMOs in which PhyCor has a partial
ownership interest or other financial involvement.
RISKS INHERENT IN PROVISION OF MEDICAL SERVICES
The physician groups with which PhyCor 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 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, in some cases, 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
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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.
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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 a proposal to
approve and adopt the Merger Agreement and 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
__________________, 1998 at 9:00 a.m., Eastern time.
RECORD DATE; QUORUM
The Board of Directors of FPC 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 in a class) and the FPC Class A Preferred Stock entitled to vote at the
Special Meeting will constitute a quorum at the Special Meeting.
VOTES REQUIRED
As of January 28, 1998, there were outstanding and entitled to vote
4,041,473 shares of FPC Class A Common Stock, 200,000 shares of FPC Class A
Preferred Stock, 110,000 shares of FPC Class B Convertible Preferred Stock and
12,000 shares of FPC Class C Convertible Preferred Stock. 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 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. 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 January 28, 1998, the directors and executive officers of FPC and
their affiliates beneficially owned an aggregate of 3,181,925 shares of FPC
Capital Stock (excluding shares issuable upon exercise of options and
convertible securities into FPC Class A Common Stock), representing
approximately 84.36% 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. The directors and executive officers
of FPC and their affiliates have indicated their intentions to vote the shares
of FPC Voting Stock beneficially owned by them in favor of approval and adoption
of the Merger Agreement. 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 (a director of FPC), Sprout Capital
VI, L.P., Sprout Growth II, L.P., DLJ Capital Corporation and Welsh, Carson,
Anderson & Stowe, VI, L.P. 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
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such shares for the adoption of the Merger Agreement and for the adoption 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."
By the unanimous vote of the members of the Board of Directors of FPC
at a special meeting held on December 19, 1997, the FPC Board of Directors
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 of Directors,
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. Such approval is also a condition to PhyCor's and
FPC's obligations to consummate the Merger. See "THE MERGER--Conditions to the
Merger" and "--Termination."
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
non-votes will, therefore, have the same effect as votes against approval of the
Merger Agreement and the Change of Control Payments with respect to the Special
Meeting.
The Board of Directors of FPC 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.
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. 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 0.247429 shares of PhyCor
Common Stock, (ii) each outstanding share of FPC Class A Preferred Stock will be
converted into the right to receive 4.607016 shares of PhyCor Common Stock,
(iii) each outstanding shares of FPC Class B Convertible Preferred Stock will be
converted into the right to receive 9.526966 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 2.474289 shares of PhyCor Common Stock. The
Exchange Ratios assume the exercise as of or prior to the Effective Time of (i)
options to purchase 233,676 shares of FPC Class A Common Stock, which options
will be vested at the Effective Time, (ii) options to purchase 121,928 shares of
FPC Class A Common Stock, which options will not be vested at the Effective Time
and (iii) warrants to purchase 41,869 shares of FPC Class A Common Stock.
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 1,627,197 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 Board of Directors of FPC (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 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, 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 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.
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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 is 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.
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 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, 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 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 Common Stock. See
"--Opinion of Donaldson, Lufkin & Jenrette Securities Corporation." 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 was fair to, and in the best interests
of, FPC and its
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stockholders and unanimously approved the Merger Agreement. The parties executed
the definitive Merger Agreement shortly after the conclusion of the FPC Board
Meeting on December 19, 1997.
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 including lower cost of capital,
greater purchasing power and overhead reduction.
FPC. On December 19, 1997, 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 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. 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. In calculating the Exchange Ratios, the
FPC Board considered the conversion rights and relative liquidation and dividend
rights of each class of FPC Capital Stock and the likely effective date of the
Merger.
(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.
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(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.
(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.
ACCORDINGLY, THE FPC BOARD UNANIMOUSLY CONCLUDED THE MERGER WAS FAIR
TO, AND IN THE BEST INTERESTS OF, FPC'S STOCKHOLDERS AND UNANIMOUSLY RECOMMENDS
THAT THE STOCKHOLDERS OF FPC VOTE "FOR" APPROVAL OF THE PROPOSAL TO ADOPT THE
MERGER AGREEMENT. IN ADDITION, 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 "--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 December
19, 1997, 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's Common Stock, in
the aggregate, 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 Common Stock,
in the aggregate, from a
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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 FPC stockholders, 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 Common Stock.
In arriving at its opinion, DLJ reviewed a draft of the Merger
Agreement dated December 17, 1997. DLJ also reviewed financial and other
information that was publicly 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
respective managements were certain financial projections for FPC and PhyCor
prepared by the respective managements. 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 (i) with respect to PhyCor, on the basis reflecting the best
currently available estimates and judgments of the management of PhyCor as to
the future operating and financial performance of PhyCor and (ii) with respect
to FPC, included 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 key analyses presented by DLJ to the
FPC Board at its December 19, 1997 meeting in connection with the preparation of
the DLJ Opinion. All analyses discussed below assume the Common Stock Exchange
Ratio of 0.247429 shares of PhyCor Common Stock per share of FPC Common Stock.
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; PhyMatrix Corp. ("PhyMatrix"); PhyCor; ProMedCo
Management Co. ("ProMedCo") and PHP Healthcare Corp. ("PHP") (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 December 19, 1997.
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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 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 estimated calendar year 1997 earnings per share ("EPS") and estimated
calendar year 1998 EPS. DLJ noted that as of December 19, 1997, the Selected
Companies were trading at implied multiples of enterprise value and earnings, as
the case may be, in (i) a range of 0.9x to 1.9x (with an average, excluding high
and low values (the "Average"), of 1.5x) LTM revenues; (ii) a range of 11.9x to
19.6x (with an Average of 13.3x) LTM EBITDA; (iii) a range of 15.6x to 33.7x
(with an Average of 19.1x) LTM EBIT; (iv) a range of 19.2x to 28.3x (with an
Average of 21.7x) estimated calendar year 1997 EPS; and (v) a range of 13.7x to
19.5x (with an Average of 16.1x) estimated calendar year 1998 EPS. The calendar
year 1997 and 1998 EPS estimates for the Selected Companies were based on
estimates provided by IBES, Inc. Based on the Common Stock Exchange Ratio and
assuming a $25.00 price for PhyCor Common Stock, the Merger consideration
represented a multiple of 1.4x FPC's LTM revenue and 22.7x FPC's estimated
calendar year 1998 EPS 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 and estimated calendar year 1997 EPS as
projected by FPC's management were negative.
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
Transactions 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) 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. The Selected Transactions
were comprised of the following 14 transactions announced during the period 1994
to 1997 (Target/Acquiror): PhyCor, Inc./MedPartners; 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 multiples of aggregate
transaction value and aggregate purchase price, as the case may be, for these
transactions were in (i) a range of 0.3x to 5.6x (with an Average of 1.5x) LTM
revenues; (ii) a range of 10.2x to 29.2x (with an Average of 16.3x) LTM EBITDA;
(iii) a range of 14.5x to 117.4x (with an Average of 24.0x) LTM EBIT; (iv) a
range of 21.3x to 31.1x (with an Average of 23.5x) estimated CY+1 EPS; (v) a
range of 15.8x to 24.6x (with an Average of 19.2x) estimated CY+2 EPS. Based on
the Common Stock Exchange Ratio and assuming a $25.00 price for PhyCor Common
Stock, the merger consideration represented a multiple of 1.4x LTM revenue and
22.7x estimated calendar year 1998 EPS 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 and estimated calendar year 1997 EPS
as projected by FPC's management were negative.
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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 FPC and other factors
that could affect the acquisition value of the companies to which they are being
compared. Mathematical analysis such as determining the average is not 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 two scenarios for 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 8.0x to 12.0x 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
$62.5 million to $139.1 million. Based on a PhyCor Common Stock price of $25.00
per share, the total consideration of the Merger represented an aggregate
transaction value of $97.1 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 (0.2%),
and (0.3%) assuming no synergies and accretive by 4.7% and 3.0%, assuming $7.4
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 and each of the calendar
years ending December 31, 1997 and 1998 (based on projections provided by FPC
and PhyCor management). Operations Measures reviewed in this analysis included
(i) LTM revenue, LTM EBITDA, LTM EBIT, LTM pretax income (defined as earnings
before taxes) and LTM net income (defined as earnings after taxes) and (ii)
estimated revenue, estimated EBITDA, estimated EBIT, estimated pretax income and
estimated net income for the calendar years ending December 31, 1997 and 1998.
This analysis was based on a number of assumptions, including, among other
things, the projected financial performance of FPC and PhyCor provided by their
respective managements. The analysis indicated that FPC contributed 5.5% of pro
forma LTM revenue. Other LTM Operations Measures were not meaningful since FPC's
LTM EBITDA, LTM EBIT, LTM pretax income and LTM net income as projected by FPC's
management were negative. The analysis also indicated that FPC would contribute
5.6% of pro forma 1997 revenue and 1.0% of pro forma 1997 EBITDA. Other 1997
multiples were not meaningful since FPC's 1997 EBIT, 1997 pretax income and 1997
net income as projected by FPC's management were negative. The analysis further
indicated that FPC would contribute (i) 5.8% of pro forma 1998 revenue; (ii)
3.5% of pro forma 1998 EBITDA; (iii) 3.9% of 1998 EBIT; (iv) 4.3% of 1998 pretax
income; and (v) 4.3% of 1998 net income. The Merger Agreement contemplates the
issuance of approximately 3.5 million shares of PhyCor Common Stock,
representing approximately 5.0% 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.
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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, PhyMatrix, ProMedCo and
PHP (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 December 19, 1997.
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 earnings ratios based on
estimated calendar year 1997 EPS and estimated calendar year 1998 EPS. DLJ noted
that as of December 19, 1997, the PhyCor Selected Companies were trading at
implied multiples of enterprise value and earnings, as the case may be, in (i) a
range of 1.1x to 1.9x (with an Average of 1.4x) LTM revenues; (ii) a range of
11.9x to 19.6x (with an Average of 14.1x) LTM EBITDA; (iii) a range of 15.9x to
33.7x (with an Average of 20.7x) LTM EBIT; (iv) a range of 19.2x to 23.4x (with
an Average of 21.4x) estimated calendar year 1997 EPS; and (v) a range of 13.7x
to 18.0x (with an Average of 15.2x) estimated calendar year 1998 EPS. The
calendar year 1997 and 1998 EPS estimates for the PhyCor Selected Companies were
based on estimates provided by IBES, Inc. PhyCor recently traded at a multiple
of 1.9x LTM revenue, 13.2x LTM EBITDA, 19.0x LTM EBIT, 28.3x estimated calendar
year 1997 EPS as projected by PhyCor's management and 19.5x estimated calendar
year 1998 EPS as projected by PhyCor's management assuming the consummation of
the MedPartners transaction.
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. 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 December 17, 1996 through December 17, 1997.
During that period, PhyCor Common Stock reached a high of $35.13 per share and a
low of $23.00 per share. On December 17, 1997, the closing price of PhyCor
Common Stock was $26.75 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 key 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.
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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 based on the aggregate
merger consideration less the amount previously paid pursuant to clause (i)
above. The total fees payable to DLJ would have equaled approximately $0.9
million and $0.7 million using the closing price of PhyCor Common Stock on
December 19, 1997 and January 22, 1998, respectively. 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
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 19.4% of the fully diluted common equity of FPC and (ii)
Class A Convertible 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 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. 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 and FPC 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.
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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 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 to which they may be entitled
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
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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) the other party shall have performed, in all material respects, all of its
obligations as contemplated by the Merger Agreement at or prior to the
consummation date of the Merger; (ii) the representations and warranties of the
other party set forth in the Merger Agreement shall be true and correct as of
the dates of the Merger Agreement and the Closing; (iii) 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; (iv) each party shall have
received an opinion of the other party's counsel substantially in the form
specified in the Merger Agreement; (v) each party shall have received a
certificate, executed by an authorized officer of the other party, certifying
the fulfillment of the conditions to the Merger; and (vi) PhyCor shall have
received letters from those persons deemed Affiliates (as 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 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 waiting period under the HSR Act shall have expired
or shall have been terminated; (iv) the Merger shall have been approved by the
affirmative vote of a majority of the outstanding shares of FPC Capital Stock
entitled to vote thereon; (v) the shares of PhyCor Common Stock to be issued in
connection with the Merger shall have been approved for listing on Nasdaq
National Market (or other such exchange 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; (vi) the Merger shall qualify for pooling of
interests accounting treatment; (vii) PhyCor and FPC shall have received all
consents, waivers, approvals and authorizations of third parties with respect to
all material contracts, leases, service agreements and management agreements
(except where failure to obtain such consent, approval or authorization would
not have a material adverse effect on the business of PhyCor); (viii) all
consents, authorizations, orders and approvals of (or filings or registrations
with) any governmental commission, board or other regulatory body required in
connection with the execution, delivery and performance of the Merger Agreement
shall have been obtained; and (ix) the Registration Statement shall have been
declared effective under the Securities Act and shall not be subject to any stop
order.
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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. Under the HSR Act, the filings commenced a
30-day waiting period during which the Merger can not be consummated, which
waiting period will expire on February 21, 1998. Notwithstanding the termination
of the HSR Act waiting period, at any time before or after the Effective Time,
the FTC, the DOJ or others could take action under the antitrust laws, including
requesting additional information, seeking to enjoin the consummation of the
Merger or seeking the divestiture by PhyCor of all or any part of the stock or
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.
As conditions precedent to the consummation of the Merger, the Merger
Agreement requires, among other things, (i) that the HSR Act waiting period has
expired or been terminated and (ii) that all other governmental approvals
required for the consummation of the Merger have been obtained.
PhyCor and FPC do not believe that the Merger violates the antitrust
laws, and each intends to resist vigorously any assertion to the contrary by the
FTC, the DOJ or others. Any such resistance could delay consummation of the
Merger, perhaps for a considerable period. Prior to the Merger, the FTC or the
DOJ could seek to enjoin the consummation of the Merger under the federal
antitrust laws or require that PhyCor or 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 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
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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
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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 July 31, 1998, provided that the terminating
party shall not have 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, (iv) the other
party has materially breached any representation, warranty, covenant or
agreement contained in the Merger Agreement or experienced a material adverse
change which cannot be, or has not been, cured within 30 days after written
notice of such breach or (v) 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; (c) by FPC if (i) the FPC Board of Directors, 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), (ii) the Closing Price of the PhyCor
Common Stock is equal to or less than $20.00, 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 $20.00 times the number
of shares to be received by FPC's stockholders using the current Exchange Ratios
or (iii) 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; or (d) by either party upon the occurrence of
a subsequent event to the other party that would give rise to a failure of such
other party's ability to fulfill its conditions to the Merger.
BREAK-UP FEE; THIRD PARTY BIDS
In the event that the Merger Agreement is terminated by action of the
Board of Directors of FPC, 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).
"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 members of FPC's management and 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 of Directors was aware of these interests
and considered them, among other matters, in approving the Merger Agreement and
the transactions contemplated thereby. Specifically, the officers and directors
of FPC own options to purchase 280,750 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. Several of the corporate officers will be entitled to severance
payments if their
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employment is terminated following the Merger and certain of such officers may
be entitled to bonus payments if they continue their employment for specified
periods 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 certain benefits to which certain other
persons will be entitled as a result of the Merger.
At the time of the execution of the Merger Agreement, PhyCor, FPC and
Dr. George entered into the Consulting Agreement, which was amended and restated
on January 29, 1998. During the term of such agreement (which commences at the
Effective Time and continues for three years 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 $1,188,750, $563,750
of which is payable on August 1, 1998 and the remainder of which is payable
in installments of $312,500 each on the first and second anniversaries of the
Effective Time. 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 a period of three years 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 or 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 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 (in the case of Dr. Adams) and six months (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
other members of FPC's corporate management as well as certain other officers
and members of its corporate staff in the event such persons are terminated
following the Merger. 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 Change of Control Payments payable to Dr. George are conditioned
upon 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. The FPC Board 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).
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.
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ACCOUNTING TREATMENT
It is intended, and a condition to the consummation of the Merger,
that the Merger qualify for pooling of interests accounting treatment 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.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a discussion of the material federal income tax
consequences generally 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 all aspects of federal income taxation
that may affect particular stockholders in light of their 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., dated the Closing
Date, addressed to FPC and in form and substance satisfactory to FPC, which
opinion will 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. There can be no assurance that the Internal Revenue
Service ("IRS") will not take a contrary view, 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 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
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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 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.
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
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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 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.
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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 Board of Directors of FPC
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 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.
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
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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.
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
45
<PAGE> 51
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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<PAGE> 52
MARKET PRICE DATA
PhyCor Common Stock is quoted on the Nasdaq National Market under the
symbol "PHYC". The following table sets forth the range of high and low sales
prices on the Nasdaq National Market for the period from January 1, 1996 through
January 22, 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 (through January 28, 1998)........... 28.50 18.88
</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 $20.00 on
January 28, 1998. As of such date there were approximately 3,165 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. The Board of Directors of
FPC 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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<PAGE> 53
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, merged with an existing practice management company in Texas
and entered into an interim management contract with a physician group in
Midland/Odessa, 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.
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 discretion 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 September
30, 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.
48
<PAGE> 54
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which is required to be adopted by FPC on
December 31, 1997. At that time, FPC will be required to change the method
currently used to compute earnings per share and to restate all prior periods.
Under the new requirements for calculating basic earnings per share, the
dilutive effect of stock options will be excluded. The impact of Statement No.
128 on the calculation of FPC's loss per share for the periods presented below
is not material as all common stock equivalents are currently anti-dilutive.
In November 1997, the Task Force reached a consensus on the criteria
for consolidation of management arrangements ("EITF Issue 97-2"). The consensus
does not affect FPC's financial reporting practices; however, the Commission
has indicated that it will not allow registrants to present revenues from, and
amounts retained by, managed physician groups separately on the face of the
consolidated statements of operations for financial statements issued for fiscal
years ending on or after December 15, 1998. However, the display method utilized
by FPC in its Consolidated Statements of Operations and related notes included
elsewhere herein is an acceptable method for financial statements for periods
ending before December 15, 1998.
49
<PAGE> 55
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
Total Revenue. Total Revenue increased from $24.4 million for the nine
months ended September 30, 1996 to $58.1 million for the nine months ended
September 30, 1997, an increase of 138%. This increase is attributable to
acquisitions closed subsequent to September 30, 1996 and the effects of a full
nine-month period's results for acquisitions closed during the nine-month period
ended September 30, 1996.
Amounts Retained by Managed Groups. Amounts payable to the Managed
Group Practices are classified as Amounts Retained by Managed Groups. These
amounts increased from $628,000 for the nine months ended September 30, 1996 to
$12.0 million for the nine months ended September 30, 1997. This increase is
attributable to the acquisitions of the Managed Groups in Illinois in August
1996, in Texas in December 1996 and New York in August 1997.
50
<PAGE> 56
Cost of Medical Services. The cost of medical services increased from
$12.8 million for the nine months ended September 30, 1996 to $12.9 million for
the nine months ended September 30, 1997, an increase of 1.1%. Decreases of
approximately $1.5 million in the cost of medical services resulting from the
conversion of a full risk managed care contract to a limited risk contract were
offset by increases in physician compensation and malpractice costs of $1.6
million attributable to acquisitions closed during the nine-month period ended
September 30, 1997 and the inclusion of the Doctors Walk-In Clinic operations,
which were acquired in June 1996, for a full nine months.
Clinic Operating Costs. Clinic operating costs increased from $12.2
million for the nine months ended September 30, 1996 to $30.4 million for the
nine months ended September 30, 1997, an increase of 149%. $18.0 million or 99%
of this increase is attributable to the acquisitions of the Managed Groups in
Illinois in August 1996, in Texas in December 1996 and in New York in August
1997, and the effect of a full nine months operations for the Doctors Walk-In
Clinic that was acquired in June 1996.
Corporate, General and Administration. Corporate, general and
administration costs increased from $3.0 million for the nine months ended
September 30, 1996 to $3.4 million for the nine months ended September 30, 1997,
an increase of 13.3%. 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 $881,000 for the nine months ended September 30, 1996 to $1.6 million for
the nine months ended September 30, 1997, an increase of 82%. This increase is
attributable to the Eastside Physician acquisition closed during the nine-month
period ended September 30, 1997 and the effects of a full nine months operations
for the Doctors Walk-In Clinic acquisition closed June 1996, the Riverbend
Physicians & Surgeons acquisition closed August of 1996 and the Physician
Capital Partners acquisition closed in December 1996 (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 acquisitions
closed during 1996 ("1996 Acquisitions") and the effects of a full year's
revenue recognition in 1996 related to acquisitions closed in 1995 (the "1995
Acquisitions").
Amounts Retained by Managed Groups. Amounts payable to the Managed
Group Practices in Illinois and Texas are classified as 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 impact 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.
51
<PAGE> 57
Depreciation and Amortization. Depreciation and amortization increased from
$624,000 for the year ended December 31, 1995 to $1.3 million for the year ended
December 31, 1996, an increase of $676,000 or 108% 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.
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
Net Revenue. Net Revenue increased from $3.7 million for the year
ended December 31, 1994 to $19.7 million for the year ended December 31, 1995,
an increase of 432%. Of this increase, $7.6 million or 48%, is attributable to
the 1995 Acquisitions, with the remainder primarily related to same store
growth, conversion from limited risk primary care capitation contracts to full
medical group risk contracts and acquisitions completed in 1994 (the "1994
Acquisitions") with a full year of operating results in 1995.
Cost 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 or 51%,
is attributable to the 1995 Acquisitions, with the remainder primarily related
to the addition of physicians at existing sites, conversion from limited risk
primary care capitation contracts to full medical group risk contracts and the
1994 Acquisitions with a full year of operating results in 1995.
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 1995 acquisitions, with the remainder
related to 1994 acquisitions with a full year of operating results in 1995 and
the addition of staff to 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 $149,000 for the year ended December 31, 1994 to $624,000 for the year
ended December 31, 1995, an increase of 319%. This increase was primarily due to
the purchase of computer equipment and software and the increased amortization
of 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.
52
<PAGE> 58
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,
Welsh, Carson, Anderson and Stowe VI, L.P. ("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 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. Each month the note holders earn warrants to
purchase shares of FPC Class A Common Stock based on a formula and the amount of
the loan outstanding. The warrants are exercisable at $.01 per share subject to
certain adjustments. At December 31, 1997, warrants to purchase 21,800 shares
had been earned by the note holders under this agreement.
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. FPC
intends to record the Subordinated Note as a long-term asset at a collectable
value of $600,000. If FPC exercises its option to purchase the assets of Primary
Management, the Subordinated Note will be canceled and the recorded value
$600,000 will be included in the purchase price.
At September 30, 1997, FPC had working capital of $5,453,000, a cash
balance of $2,406,000 and current liabilities of $8,096,000, including
$3,125,000 of long-term indebtedness and capital leases maturing by September
30, 1998.
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<PAGE> 59
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. Upon the acquisition of each FPC Group Practice or the execution of a
long-term management contract with a Managed Group Practice, FPC begins
immediately the implementation of the policies, procedures and systems necessary
to provide a broad range of management services. These services may include the
following: billing and collection of fees; accounting and financial services;
operating and capital budgeting services; employment, training and supervision
of non-medical personnel; purchase and maintenance of supplies and equipment;
negotiation of managed care contracts; preparation of management and planning
reports; and provision of certain management information systems.
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
FPC currently delivers medical services through the FPC Group
Practices 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 45 full-time and part-time
physicians and four physician extenders in 18 sites in the cities of Tampa, St.
Petersburg, Pinellas Park, Brandon and Clearwater, Florida. The South Florida
subsidiary retains 29 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,
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<PAGE> 60
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.
The table below sets forth certain information regarding group
practices of which FPC had purchased assets or has the option to purchase the
assets through September 30, 1997.
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF PHYSICIAN
LOCATION SITES PHYSICIANS(1) EXTENDERS(2) SPECIALTIES DATE ACQUIRED
-------- ----- ------------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Pinellas Park, FL 2 3 Primary Care February 1994
Atlanta, GA 2 3 Primary Care September 1994
St. Petersburg, FL 1 1 Primary Care March 1994
Boca Raton, FL 1 13 Primary Care September 1994
Tampa, FL 3 8 1 Primary Care October 1994
Tampa, FL 1 3 Primary Care April 1995
West Palm Beach, FL(3) 1 16 Primary Care and April 1995
Multi-Specialty
Brandon, FL 2 6 2 Primary Care January 1996
Tampa, FL 7 25 Primary Care June 1996
West Palm Beach, FL 1 1 Primary Care July 1996
Alton, IL (St. Louis area) 2 15 2 Primary Care and August 1996
Multi-Specialty
Dallas/Ft. Worth area, TX 21 56 17 Primary Care December 1996
Tampa, FL 1 1 Primary Care June 1997
Dallas/Ft. Worth area, TX 1 1 1 Primary Care May 1997
New York 2 10 Primary Care and July 1997
Multi-Specialty
Midland/Odessa area, TX(4) 10 27 1 Primary Care and August 1997
----- ----- ----- Multi-Specialty
58 189 24
</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.
(3) Site closed September 1997.
(4) The FPC subsidiary with respect to this area currently has a two-year
interim management service agreement with Primary Management in the
Midland/Odessa, Texas market and an option to purchase the assets of
Primary Management and certain of its affiliates.
In July 1997, FPC acquired Manhattan Physicians IPA in New York.
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.
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 December 31, 1997, FPC employed 1,157 individuals, including 28
in its corporate office, 193 in South Florida market group practices, 333 in
Tampa Bay market group practices, and 16 in Atlanta market group practices, 135
in St. Louis market group practices, 408 in Dallas/Fort Worth market
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<PAGE> 61
group practices and 44 in New York market group practices. The 200 employees of
the managed group practice in the Midland/Odessa, Texas market are employed by
an organization not affiliated with FPC and its subsidiaries. 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.
The court is expected to set a date for a hearing to determine whether
the dissenting stockholders are entitled to an appraisal of their shares. In the
event that the Court determines at such hearing that such an appraisal is
warranted, it will appoint appraisers who will accept evidence from FPC and from
the dissenting stockholders in appraising the value of the shares. 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. Although FPC believes that it will ultimately prevail,
there can be no assurance that it 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
physician groups could, however, have a material adverse effect on FPC and its
financial condition and results of operations.
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<PAGE> 62
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the FPC Capital Stock as of January 20, 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. 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
PhyCor
Common Percent of
Shares of FPC Capital Stock Percent of Outstanding Stock PhyCor
Beneficially Owned By Class FPC Capital Stock Beneficially Stock to be
------------------------------------ ------------------------------------ Owned Owned
Class A Preferred Convertible Class A Preferred Convertible After the After the
Name of Beneficial Owner Common A(1) Preferred B(2) Common A(1) Preferred B(2) Merger (3) Merger
- ------------------------ ------ --------- -------------- ------ --------- -------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stephen A. George, M D. (4) 850,000 -- 3,175 20.52% -- 2.89% 240,562 *
3200 Windy Hill Road,
Suite 400W
Atlanta, Georgia 30339
Donald B Smallwood (5) 255,000 -- 2,000 6.25 -- 1.82 82,148 *
3200 Windy Hill Road,
Suite 400W
Atlanta, Georgia 30339
Karl A Hardesty (5) 165,000 -- 2,000 4.05 -- 1.82 59,879 *
3200 Windy Hill Road,
Suite 400W
Atlanta, Georgia 30339
Andrew B. Adams, M.D., (6) 175,000 -- 2,000 4.20 -- 1.82 62,354 *
3200 Windy Hill Road,
Suite 400W
Atlanta, Georgia 30339
Kelly J. DeKeyser (7) 128,000 -- 200 3.14 -- 0.18 33,576 *
3200 Windy Hill Road,
Suite 400W
Atlanta, Georgia 30339
Michael A. Jutras, M.D. (8) 65,300 -- -- 1.62 -- -- 16,157 *
221 Bedford Road,
Suite 200
Bedford, Texas 76022
Patrick J. Welsh (9) 1,131,809 140,000 70,000 27.80 70.00% 63.64 1,591,912 2.47%
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 27.80 70.00% 63.64 1,591,912 2.47
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 27.80 70.00% 63.64 1,591,912 2.47
Welsh, Carson,
Anderson & Stowe
1 World Financial
Center, Suite 3601
New York, New York 10281
All directors and officers 2,770,109 140,000 79,375 62.79 70.00 72.16 2,086,590 3.23
as a group (12)
(9 persons)
Welsh, Carson, Anderson & 1,131,809 140,000 70,000 27.80 70.00 63.64 1,591,912 2.47
Stowe (13)
1 World Financial
Center, Suite 3601
New York, New York 10281
DLJ Capital 485,061 -- 30,000 11.96 -- 27.27 405,827 *
Corporation/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 10.37 30.00 25.66 649,390 1.01
277 Park Ave., 21st
Floor
New York, New York 10172
Sprout Growth II, L.P. (16) 420,493 60,000 28,228 10.37 30.00 25.66 649,390 1.01
277 Park Ave., 21st Floor
New York, New York 10172
</TABLE>
- ---------------
* Less than 1%
(1) The shares of Class A Preferred Stock are non-voting securities, but
are eligible to vote on the Merger at the Special Meeting.
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<PAGE> 63
(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 held by each stockholder as of January 20, 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 125,000 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 40,750 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. Includes 29,309 warrants which can be
issued at the request of the holders from time to time pursuant to the
June 1997 agreement among WCAS, the Sprout Group and FPC are expected
to be earned through the estimated date of closing. 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 remaining shares are
owned by WCAS or its affiliates. Includes 29,309 warrants which can be
issued at the request of the holders from time to time pursuant to the
June 1997 agreement among WCAS, the Sprout Group and FPC are expected
to be earned through the estimated date of closing. 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. Includes 29,309
warrants which can be issued at the request of the holders from time to
time pursuant to the June 1997 agreement among WCAS, the Sprout Group
and FPC and are expected to be earned through the estimated date of
closing. 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 340,750 shares of Class A Common Stock that will become
exercisable within 60 days of the date hereof. Includes 29,309 warrants
which can be issued at the request of the holders from time to time
pursuant to the June 1997 agreement among WCAS, the Sprout Group and
FPC and are expected to be earned through the estimated date of
closing.
(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. Includes 29,309 warrants which can be issued at
the request of the holders from time to time pursuant to the June 1997
agreement among WCAS, the Sprout Group and FPC and are expected to be
earned through the estimated date of closing.
(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. Includes 12,561 warrants which can be
issued at the request of the holders from time to time pursuant to the
June 1997 agreement among WCAS, the Sprout Group and FPC and are
expected to be earned through the estimated date of closing.
(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. Includes 12,561 warrants which can be issued at the
request of the holders from time to time pursuant to the June 1997
agreement among WCAS, the Sprout Group and FPC and are expected to be
earned through the estimated date of closing.
(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. Includes 12,561 warrants
which can be issued at the request of the holders from time to time
pursuant to the June 1997 agreement among WCAS, the Sprout Group and
FPC and are expected to be earned through the estimated date of
closing.
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<PAGE> 64
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. PhyCor
manages 55 clinics with approximately 3,860 physicians in 28 states. PhyCor
also manages IPAs, which are networks of independent physicians, that include
over 19,000 physicians in 28 markets. PhyCor's affiliated physicians provide
medical services to approximately 1,140,000 members under prepaid health
plans, including approximately 177,000 Medicare members.
PhyCor believes that primary care-oriented physician organizations are
a critical element of organized health care systems, because physician decisions
determine the cost and quality of care. PhyCor believes that physician-driven
organizations, including multi-specialty medical clinics, IPAs and the
combination of such organizations, present more attractive alternatives for
physician consolidation than hospital or insurer/HMO-controlled organizations.
The combination of PhyCor's multi-specialty medical clinic and IPA management
capabilities and new group-formation efforts enables PhyCor to offer physician
practice management services to substantially all types of physician
organizations.
Upon the acquisition by PhyCor of a clinic's operating assets, the
affiliated physician group simultaneously enters into a long-term service
agreement with PhyCor. PhyCor, under the terms of the service agreement,
provides the physician group with the equipment and facilities used in its
medical practice, manages clinic operations, employs most of the clinic's
non-physician personnel, other than certain diagnostic technicians, and receives
a service fee. Under substantially all of its service agreements, PhyCor
receives a service fee equal to the clinic expenses it has paid plus percentages
of operating income of the clinic (net clinic revenue less certain contractually
agreed upon clinic expenses before physician distributions) plus, in some cases,
percentages of net clinic revenue. As clinic operating income improves, whether
as a result of increased revenue or lower expenses, PhyCor's service fees
increase.
The affiliated physicians maintain full professional control over their
medical practices, determine which physicians to hire or terminate and set their
own standards of practice in order to promote high quality health care. Pursuant
to its service agreements with physician groups, PhyCor manages all aspects of
the clinic other than the provision of medical services, which is controlled by
the physician groups. At each clinic, a joint policy board equally 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
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<PAGE> 65
servicing managed care contracts and enable previously unaffiliated physicians
to assume and more effectively manage capitated risk.
Additional information concerning PhyCor is included in the reports,
proxy statements and other information of PhyCor filed with the Commission which
are incorporated by reference in this Prospectus-Proxy Statement. See
"INCORPORATION OF CERTAIN INFORMATION BY REFERENCE."
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<PAGE> 66
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 December 31, 1997, there were outstanding options under FPC
stock option plans to purchase an additional 986,954 shares of FPC Capital
Stock. An additional 1,004,801 shares of FPC Capital Stock were reserved for
future option grants under such plans. Additionally, there are warrants to
purchase 21,754 shares of FPC Class A Common Stock outstanding, and contractual
rights of certain physicians in the Managed Group practices to receive 1,627,197
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 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
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<PAGE> 67
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 the FPC therefrom, or such lessor amount
as will be sufficient, to redeem the outstanding shares of FPC Class A Preferred
Stock. FPC 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 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 December 31,
1997, there were approximately 64,530,000 shares of PhyCor Common Stock
outstanding. In addition, there were outstanding options under PhyCor stock
option plans to purchase an additional 13,476,000 shares of PhyCor Common Stock.
An additional 2,386,000 shares of PhyCor Common Stock were reserved for future
option grants under such plans. Furthermore, 7,909,000 shares are currently
reserved for issuance upon conversion of the 4.5% Convertible Subordinated
Debentures due 2003 and subordinated convertible notes payable to affiliated
physicians and physician groups, and 1,401,000
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<PAGE> 68
shares are reserved for issuance upon the exercise of outstanding warrants. The
Board of Directors of PhyCor has the authority to issue the PhyCor Preferred
Stock in one or more series and to fix the rights, preferences, privileges and
restrictions for each such series, without any further vote or action by the
Shareholders. As of December 31, 1997, there were no shares of PhyCor Preferred
Stock issued and outstanding, and the Board of Directors of PhyCor has no
present intention of issuing shares of PhyCor Preferred Stock.
SIZE AND ELECTION OF THE BOARD OF DIRECTORS
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 of Directors may be fixed by resolution of the FPC Board of Directors 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
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<PAGE> 69
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. 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 of Directors 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 of Directors 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 of Directors.
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.
64
<PAGE> 70
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 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
65
<PAGE> 71
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.
"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 of Directors to fix the number of directors at no more
than seven and nominate certain people as members of the FPC Board of Directors.
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
66
<PAGE> 72
not initially exercisable, but will become exercisable upon the acquisition by
any person of, or the announcement of the intention of any person to commence a
tender or exchange offer upon the successful consummation of which such person
would be the beneficial owner of, 15% or more of the shares of PhyCor Common
Stock then outstanding, without the prior approval of PhyCor's Board of
Directors. The PhyCor Rights are generally designed to deter coercive takeover
tactics and to encourage all persons interested in potentially acquiring control
of PhyCor to treat each Shareholder on a fair and equal basis.
EXPERTS
The consolidated financial statements of PhyCor as of December 31, 1996
and 1995, and for each of the years in the three-year period ended December 31,
1996, have been incorporated by reference herein and in the Prospectus-Proxy
Statement in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, incorporated 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 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 Board of Directors of FPC 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.
67
<PAGE> 73
Consolidated Financial Statements
First Physician Care, Inc.
Years ended December 31, 1996, 1995 and 1994
with Report of Independent Auditors
and
Nine Months ended September 30, 1997 and 1996 (unaudited)
F-1
<PAGE> 74
First Physician Care, Inc.
Consolidated Financial Statements
INDEX
<TABLE>
<S> <C>
Report of Independent Auditors.................................................................. F-3
Audited Consolidated Financial Statements:
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-2
<PAGE> 75
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, 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.
/s/ Ernst & Young LLP
Atlanta, Georgia
April 18, 1997
F-3
<PAGE> 76
FIRST PHYSICIAN CARE, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN 000'S EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996 1995
------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,406 $ 4,323 $ 2,163
Accounts receivable 10,628 8,589 2,025
Less allowance for doubtful accounts (1,357) (2,224) (442)
-------- -------- --------
Net accounts receivable 9,271 6,365 1,583
Prepaid expenses and other current assets 1,872 767 486
Notes receivable from employees -- -- 590
-------- -------- --------
Total current assets 13,549 11,455 4,822
Property and equipment:
Furniture, fixtures and equipment 7,454 6,021 2,377
Leasehold improvements 783 819 286
Accumulated depreciation and amortization (2,229) (1,184) (345)
-------- -------- --------
Net property and equipment 6,008 5,656 2,318
Intangible assets:
Goodwill 9,073 9,073 4,297
Management service agreements 5,882 5,017 --
Covenants not to compete 1,426 1,426 1,386
Accumulated amortization (1,730) (899) (414)
-------- -------- --------
Net intangible assets 14,651 14,617 5,269
Other assets 1,215 723 329
======== ======== ========
Total assets $ 35,423 $ 32,451 $ 12,738
======== ======== ========
</TABLE>
F-4
<PAGE> 77
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, --------------------
1997 1996 1995
-------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND COMMON STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 1,314 $ 1,552 $ 513
Accrued compensation and related expenses 2,336 3,120 2,060
Other accrued liabilities 888 656 259
Amounts due to related parties 433 592 --
Current portion of long-term obligations 3,125 2,098 380
-------- -------- --------
Total current liabilities 8,096 8,018 3,212
Long-term obligations:
Notes and other obligations payable to former physician owners
of medical groups and their related parties, less current
portion 2,276 2,606 1,587
Other notes payable, less current portion 4,257 3,767 --
Capital lease obligations, less current portion 777 942 895
Other liabilities 1,056 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,
175,000 and 40,000 at September 30, 1997 and December 31, 1996 and
1995, respectively; Redemption value - $22,198,000, $18,615,000 and
$4,100,000 at September 30, 1997 and December 31, 1996 and 1995,
respectively 2,398 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 and
108,134 at September 30, 1997 and December 31, 1996 and 1995,
respectively Redemption value - $11,000,000, $11,000,000 and $10,813,000
at September 30, 1997 and December 31, 1996 and 1995, respectively 110 110 108
Class C Convertible Redeemable Preferred Stock, $1.00 par value:
Authorized shares - 20,000 at September 30, 1997, none at
December 31, 1996 and 1995; issued and outstanding shares - none -- -- --
Additional paid-in capital on redeemable preferred stock 28,236 26,845 14,419
Common stockholders' deficit:
Class A Common Stock, $.001 par value:
Authorized shares -15,000,000; issued and outstanding
shares - 3,169,013, 2,977,641 and 1,873,590 at
September 30, 1997 and December 31, 1996 and 1995, respectively 3 3 2
Class A Common Stock to be issued, 1,729,763, and 1,216,965 shares at
September 30, 1997 and December 31, 1996,
respectively, none at December 30, 1995, $.001 par value 2,263 1,293 --
Class B Common Stock, convertible, non-voting, $.001 par value:
Authorized shares - 900,000; issued and outstanding shares - 872,460 at
September 30, 1997 and December 30, 1996 and
1995, respectively 1 1 1
Additional paid-in capital on common stock 3,233 2,196 99
Accumulated deficit (17,283) (15,752) (8,349)
-------- -------- --------
Total common stockholders' deficit (11,783) (12,259) (8,247)
======== ======== ========
Total liabilities, redeemable preferred stock and common
stockholders' deficit $ 35,423 $ 32,451 $ 12,738
======== ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 78
FIRST PHYSICIAN CARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN 000'S EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30 YEAR ENDED DECEMBER 31
-------------------- --------------------------------
1997 1996 1996 1995 1994
-------- -------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Total revenue from owned physician groups $ 26,213 $ 23,062 $ 32,169 $ 19,718 $ 3,744
Total revenue from managed physician groups 31,894 1,371 5,422 -- --
-------- -------- -------- -------- --------
58,107 24,433 37,591 19,718 3,744
Less amounts retained by managed physician groups (11,975) (628) (2,355) -- --
-------- -------- -------- -------- --------
Net revenue 46,132 23,805 35,236 19,718 3,744
Operating costs and expenses:
Cost of medical services 12,942 12,798 17,375 12,139 2,264
Clinic operations 30,376 12,233 19,558 9,042 2,303
Corporate, general and administrative 3,439 2,983 4,211 3,181 2,172
Depreciation and amortization 1,607 882 1,332 624 149
Loss on impairment of long-term assets -- 884 884 -- --
-------- -------- -------- -------- --------
Total operating costs and expenses 48,364 29,780 43,360 24,986 6,888
-------- -------- -------- -------- --------
Loss from operations (2,232) (5,975) (8,124) (5,268) (3,144)
Other income (expense):
Interest expense (507) (126) (222) (42) (33)
Interest income 30 102 129 160 171
Other 1,178 521 814 175 112
-------- -------- -------- -------- --------
Net loss (1,531) (5,478) (7,403) (4,975) (2,894)
Cumulative dividends and accretion on Class A Redeemable
Preferred Stock (1,082) (650) (1,007) (109) --
-------- -------- -------- -------- --------
Net loss attributable to common stockholders $ (2,613) $ (6,128) $ (8,410) $ (5,084) $ (2,894)
======== ======== ======== ======== ========
Net loss per common share $ (0.50) $ (2.11) $ (2.69) $ (1.92) $ (1.25)
======== ======== ======== ======== ========
Weighted average common shares outstanding 5,265 2,898 3,126 2,655 2,321
======== ======== ======== ======== ========
</TABLE>
See accompanying notes.
F-6
<PAGE> 79
FIRST PHYSICIAN CARE, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK
AND COMMON STOCKHOLDERS' DEFICIT
(Dollar amounts in 000's except per share amounts)
<TABLE>
<CAPTION>
REDEEMABLE PREFERRED STOCK
---------------------------------------------------------------------------
CLASS A CLASS B
---------------------------- ----------------------------
ADDITIONAL
PAR PAR PAID-IN
SHARES VALUE SHARES VALUE CAPITAL
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993 -- $ -- 30,775 $ 31,000 $ 2,957,000
Issuance of Class B Preferred
Stock at $100 per share, net
of issue costs of $26,000 -- -- 74,767 75,000 7,376,000
Issuance of common stock -- -- -- -- --
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1994 -- -- 105,542 106,000 10,333,000
Issuance of Class A Preferred
Stock at $100 per share, net
of issue costs of $13,100 40,000 40,000 -- -- 3,947,000
Issuance of Class B Preferred
Stock at $100 per share, net
of issue costs of $8,000 -- -- 2,692 2,000 258,000
Purchase of Class B Preferred
Stock at $100 per share -- -- (100) -- (10,000)
Subscribed stock -- -- -- --
Exchange of Class A Common Stock
for convertible non-voting
Class common stock -- -- -- --
Issuance of common stock -- -- -- --
Accretion of Series A preferred stock -- 109,000 -- -- (109,000)
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1995 40,000 149,000 108,134 108,000 14,419,000
Issuance of Class A Preferred
Stock at $100 per share, net
of issue costs of $27,000 135,000 135,000 -- -- 13,338,000
Issuance of Class B Preferred
Stock at $100 per share -- -- 1,866 2,000 95,000
Value of 1,216,965 Class A
Common shares to be issued at
specified future dates -- -- -- -- --
Issuance of common stock -- -- -- -- --
Accretion of Series A preferred
stock -- 1,007,000 -- -- (1,007,000)
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1996 175,000 1,291,000 110,000 110,000 26,845,000
Issuance of Series A preferred
stock at $100 per share, net
of issue costs of $2,407 25,000 25,000 -- -- 2,473,000
Value of 512,798 Class A common
shares to be issued at
specified future dates -- -- -- -- --
Issuance of common stock -- -- -- -- --
Warrants earned -- -- -- -- --
Accretion of Series A preferred
stock -- 1,082,000 -- -- (1,082,000)
Net Loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance, September 30, 1997 (Unaudited) 200,000 $ 2,398,000 110,000 $ 110,000 $ 28,236,000
============ ============ ============ ============ ============
<CAPTION>
COMMON STOCK
-------------------------------------------------------------------------
CLASS A CLASS B
------------------------------------------- ---------------------------
VALUE OF
PAR SHARES TO PAR
SHARES VALUE BE ISSUED SHARES VALUE
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993 2,275,000 $ 2,000 $ -- -- $ --
Issuance of Class B Preferred
Stock at $100 per share, net
of issue costs of $26,000 -- -- -- -- --
Issuance of common stock 359,800 1,000 -- -- --
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1994 2,634,800 3,000 -- -- --
Issuance of Class A Preferred
Stock at $100 per share, net
of issue costs of $13,100 -- -- -- -- --
Issuance of Class B Preferred
Stock at $100 per share, net
of issue costs of $8,000 -- -- -- -- --
Purchase of Class B Preferred
Stock at $100 per share
Subscribed stock 90,000 -- -- -- --
Exchange of Class A Common Stock
for convertible non-voting
Class common stock (872,460) (1,000) -- 872,460 1,000
Issuance of common stock 21,250 -- -- -- --
Accretion of Series A preferred stock -- -- -- -- --
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1995 1,873,590 2,000 -- 872,460 1,000
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 1,104,051 1,000 -- -- --
Accretion of Series A preferred stock -- -- -- -- --
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1996 2,977,641 3,000 1,293,000 872,460 1,000
Issuance of Series A preferred
stock at $100 per share, net
of issue costs of $2,407 -- -- -- -- --
Value of 512,798 Class A common
shares to be issued at
specified future dates -- -- 970,000 -- --
Issuance of common stock 191,372 -- -- -- --
Warrants earned -- -- -- -- --
Accretion of Series A preferred
stock -- -- -- -- --
Net Loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance, September 30, 1997 (Unaudited) 3,169,013 $ 3,000 $ 2,263,000 872,460 $ 1,000
============ ============ ============ ============ ============
<CAPTION>
ADDITIONAL TOTAL COMMON
PAID-IN ACCUMULATED STOCKHOLDERS'
CAPITAL DEFICIT DEFICIT
------------ ------------ ------------
<S> <C> <C> <C>
Balance, December 31, 1993 $ 30,000 $ (480,000) $ (448,000)
Issuance of Class B Preferred
Stock at $100 per share, net
of issue costs of $26,000 -- -- --
Issuance of common stock 35,000 -- 36,000
Net loss -- (2,894,000) (2,894,000)
------------ ------------ ------------
Balance, December 31, 1994 65,000 (3,374,000) (3,306,000)
Issuance of Class A Preferred
Stock at $100 per share, net
of issue costs of $13,100 -- -- --
Issuance of Class B Preferred
Stock at $100 per share, net
of issue costs of $8,000 -- -- --
Purchase of Class B Preferred
Stock at $100 per share
Subscribed stock 38,000 -- 38,000
Exchange of Class A Common Stock
for convertible non-voting
Class common stock (9,000) -- (9,000)
Issuance of common stock 5,000 -- 5,000
Accretion of Series A preferred
stock -- -- --
Net loss -- (4,975,000) (4,975,000)
------------ ------------ ------------
Balance, December 31, 1995 99,000 (8,349,000) (8,247,000)
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 2,097,000 -- 2,098,000
Accretion of Series A preferred stock -- -- --
Net loss -- (7,403,000) (7,403,000)
------------ ------------ ------------
Balance, December 31, 1996 2,196,000 (15,752,000) 12,259,000
Issuance of Series A preferred
stock at $100 per share, net
of issue costs of $2,407 -- -- --
Value of 512,798 Class A common
shares to be issued at
specified future dates -- -- 970,000
Issuance of common stock 1,009,000 -- 1,009,000
Warrants earned 28,000 -- 28,000
Accretion of Series A preferred stock -- -- --
Net Loss -- (1,531,000) (1,531,000)
------------ ------------ ------------
Balance, September 30, 1997 (Unaudited) $ 3,233,000 $(17,283,000) $(11,783,000)
============ ============ ============
</TABLE>
See accompanying notes.
F-7
<PAGE> 80
FIRST PHYSICIAN CARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN 000'S)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------- --------------------------------
1997 1996 1996 1995 1994
-------- -------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (1,531) $ (5,478) $ (7,403) $ (4,975) $ (2,894)
Adjustments:
Depreciation and Amortization 1,607 882 1,332 624 149
Loss on impairment of long-term assets -- 884 884 -- --
Change in operating assets and
liabilities:
Accounts receivable, net (1,930) (898) (487) (711) (78)
Prepaid expenses and other current (1,106) (250) 166 (227) (99)
assets
Accounts payable (238) 4 (174) 13 190
Accrued expenses and other liabilities (524) (33) 395 1,480 621
Amounts due to related parties (159) (324) (324) -- --
-------- -------- -------- -------- --------
Net cash used in operating activities (3,881) (5,213) (5,611) (3,796) (2,111)
INVESTING ACTIVITIES:
Cash paid for physician practices and
management services agreements, net of
cash acquired (2,034) (4,791) (4,880) (1,889) (733)
Purchases of property and equipment (587) (539) (683) (575) (216)
Other (610) (371) (300) (269) (18)
-------- -------- -------- -------- --------
Net cash used in investing activities (3,231) (5,701) (5,863) (2,733) (967)
FINANCING ACTIVITIES:
Notes receivable from employees -- (295) 590 (2) (588)
Payments on acquisition debt assumed (244) (55) (74) (1,426) (450)
Proceeds from other notes payable 3,500 -- 34 -- --
Payments on other notes payable (283) (295) (393) (107) (29)
Payments on capital lease obligations (273) (306) (336) (150) (22)
Purchase of treasury stock -- -- -- (10) --
Proceeds from issuance of stock 2,495 13,813 13,813 4,281 7,487
-------- -------- -------- -------- --------
Net cash provided by financing activities 5,195 12,862 13,634 2,586 6,398
-------- -------- -------- -------- --------
(Decrease) increase in cash and cash
equivalents (1,917) 1,948 2,160 (3,943) 3,320
Cash and cash equivalents, beginning of
year 4,323 2,163 2,163 6,106 2,786
-------- -------- -------- -------- --------
Cash and cash equivalents, end of year $ 2,406 $ 4,111 $ 4,323 $ 2,163 $ 6,106
======== ======== ======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for interest $ 470 $ 105 $ 140 $ 61 $ 24
======== ======== ======== ======== ========
</TABLE>
See accompanying notes.
F-8
<PAGE> 81
FIRST PHYSICIAN CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO SEPTEMBER 30, 1997 AND 1996 AND THE PERIODS
THEN ENDED IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
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
December 31, 1996, the Company operated 49 primary care and multi-specialty
physician clinics, of which 23 are owned by the Company and 26 are operated
under management services agreements (the "Managed Physician Groups"). As of
September 30, 1997, the Company operated 57 primary care and multi-specialty
physician clinics, of which 21 are owned by the Company and 36 are Managed
Physician Groups.
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 services
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 services 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 Company has no
authority over: (i) issues related to the practice of medicine; (ii) hiring
F-9
<PAGE> 82
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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 under long-term management agreements 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.
Accounting Developments
The Emerging Issues Task Force (the "Task Force") of the Financial Accounting
Standards Board is reviewing various accounting and reporting matters relating
to the physician practice management industry. Among other things, the Task
Force is addressing the consolidation of revenues of professional associations
with physician practice management companies and accounting for business
combinations. Although the Company believes that its accounting and reporting
practices are in conformity with generally accepted accounting principles and
common industry practice, there can be no assurance that the conclusions reached
by the Task Force, and ultimately adopted by the industry, will not have a
material impact on the Company's consolidated financial statements.
In November 1997, the Task Force reached a consensus on the criteria for
consolidation of management arrangements ("EITF Issue 97-2"). The consensus does
not impact the Company's financial reporting practices; however, the SEC has
indicated that it will not allow registrants to present revenues from, and
amounts retained by, managed physician groups separately on the face of the
consolidated statements of operations for financial statements issued for fiscal
years ending on or after December 15, 1998. However, the display method utilized
by the Company in the accompanying consolidated statements of operations is an
acceptable method for financial statements for periods ending before December
15, 1998.
F-10
<PAGE> 83
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. Contractual agreements with managed care and other
organizations to provide physician services remain at the physician group level
under the Company's management services agreements. 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.
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.
F-11
<PAGE> 84
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Intangible Assets
Intangible assets consist primarily of goodwill, management services 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 40 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 services agreements are amortized using the straight-line
method over the lives of the initial agreements, currently 40 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 services 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.
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") which the Company adopted effective January 1, 1996, 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.
F-12
<PAGE> 85
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 September 30, 1997
and the results of operations, redeemable preferred stock common stockholders'
deficit and cash flows for the nine month periods ended September 30, 1996 and
1997, as presented in the accompanying unaudited condensed consolidated
financial statements. Operating results for the nine month period ended
September 30, 1997 are not necessarily indicative of the results that may be
expected for the year 1997.
F-13
<PAGE> 86
2. MERGER AND ACQUISITIONS
During 1996, 1995, and 1994, and the nine month period ended September 30, 1997,
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") 5,080,000 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 15,1 995. 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 beginning April 1997.
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.
F-14
<PAGE> 87
2. MERGER AND ACQUISITIONS (CONTINUED)
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.
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
services agreements. Operating results of the acquired businesses and the
management services 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 and 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, 1996.
F-15
<PAGE> 88
2. MERGER AND ACQUISITIONS (CONTINUED)
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 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") made by 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 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.
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 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.
F-16
<PAGE> 89
2. MERGER AND ACQUISITIONS (CONTINUED)
<TABLE>
<CAPTION>
(in 000's except for per share amounts) 1996 1995
------- --------
<S> <C> <C>
Net revenues $54,216 $41,611
Net loss (7,512) (4,586)
Net loss attributable to common stockholders (8,519) (4,695)
Net loss per common share (2.07) (1.21)
</TABLE>
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 31%, 39%
and 38% of net revenue during 1996, 1995 and 1994, 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
September 30, 1997 and December 31, 1996 and 1995, substantially all of the
Company's cash and cash equivalents are invested in short-term money market and
commercial paper accounts for which the carrying values approximate fair values.
At September 30, 1997 and December 31, 1996 substantially all of the Company's
cash and cash equivalents are deposited with two financial institutions.
Notes and other obligations payable to former physician owners of medical groups
and their related parties with carrying values of $3,934,000 and $1,687,000 at
December 31, 1996 and 1995, respectively, are at fixed interest rates and, as a
result of applying current interest rates for similar debt instruments, have
fair values of $2,806,000 and
F-17
<PAGE> 90
3. FINANCIAL INSTRUMENTS (CONTINUED)
$1,138,000 at December 31, 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.
At September 30, 1997, $1,500,000 had been drawn under the Note Agreement and
the holders of the notes had earned warrants to purchase 6,800 shares of stock.
The fair value of the earned warrants was estimated using at Black-Scholes
option pricing model and is charged to interest expense at the time the warrants
are earned Subsequent to September 30, 1997, additional amounts totaling
$2,500,000 were drawn under the Note Agreement.
F-18
<PAGE> 91
4. DEBT (CONTINUED)
Notes and other obligations payable to former physician owners of medical groups
and their related parties consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Unsecured obligation payable, due annually through April 2003
commencing April 1997 $ 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 --
Unsecured notes payable, interest payable annually at 7%, principal
payable in three equal annual installments commencing August 1999 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 --
8% unsecured note payable, principal and interest payable monthly
through August 2001 147,000 171,000 --
Other 150,000 148,000 393,000
----------- ----------- -----------
3,604,000 3,934,000 1,687,000
Less current portion (1,328,000) (1,328,000) (100,000)
----------- ----------- -----------
$ 2,276,000 $ 2,606,000 $ 1,587,000
=========== =========== ===========
</TABLE>
Other notes payable consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Note payable to bank, interest at Eurodollar rate plus 0.5%
(5.5% at December 31, 1996 and 6.2% at September 30, 1997),
principal and interest due in monthly installments through
July 2000, first payment due October 15, 1997, secured by
substantially all of the assets in the Merger $ 4,000,000 $ 4,000,000 $ --
Subordinated Notes payable to WCAS, IV, LP, Sprout Capital
IV, LP and other stockholders, interest at 10%, principal and
interest due in July 2004, unsecured 1,500,000 -- --
Other 199,000 173,000 53,000
----------- ----------- -----------
5,699,000 4,173,000 53,000
Less current portion (1,442,000) (406,000) (53,000)
----------- ----------- -----------
$ 4,257,000 $ 3,767,000 $ --
=========== =========== ===========
</TABLE>
F-19
<PAGE> 92
4. DEBT (CONTINUED)
Aggregate future principal payments for all notes and other obligations payable
as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Year ending December 31,
<S> <C>
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>
SEPTEMBER 30, DECEMBER 31,
------------- --------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Furniture, fixtures and equipment $ 1,620,000 $ 1,620,000 $ 1,166,000
Less accumulated amortization (609,000) (384,000) (85,000)
----------- ----------- -----------
$ 1,011,000 $ 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.
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
F-20
<PAGE> 93
5. LEASES (CONTINUED)
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, 1996 are as follows:
<TABLE>
<CAPTION>
CAPITAL LEASES OPERATING 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 $466,000, $1,541,000 and $2,713,000 and sublease income
was $39,000, $112,000 and $111,000 during 1994, 1995 and 1996, respectively.
6. INCOME TAXES
A reconciliation of the provision (credit) for income taxes to the federal
statutory rate of 34% for 1996, 1995 and 1994 is:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Statutory federal income tax expense (benefit) $(2,517,000) $(1,692,000) $ (984,000)
State income taxes, net of federal benefit (206,000) (195,000) (114,000)
Other 152,000 28,000 11,000
Valuation allowance 2,571,000 1,859,000 1,087,000
----------- ----------- -----------
$ -- $ -- $ --
=========== =========== ===========
</TABLE>
F-21
<PAGE> 94
6. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 4,938,000 $ 2,575,000
Asset valuation allowances 226,000 168,000
Accrued liabilities 466,000 401,000
Other 232,000 42,000
----------- -----------
Gross deferred assets 5,862,000 3,186,000
Valuation allowance (5,699,000) (3,128,000)
----------- -----------
163,000 58,000
Deferred tax liabilities:
Depreciation 145,000 58,000
Other 18,000 --
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
At December 31, 1996, the Company had available net operating loss carryforwards
of approximately $12,996,000 for income tax purposes. The net operating loss
carryforwards expire beginning in 2008. Changes in ownership of the Company
could limit the future utilization of these carryforwards.
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. At September 30, 1997 no
class C Preferred Stock has been issued (see Note 2).
The holders of Class A Redeemable Preferred Stock ("Class A 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.
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, 1996 and September 30,
1997, 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.
F-22
<PAGE> 95
7. CAPITAL STOCK (CONTINUED)
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 prescribed formulas. At September 30, 1997, the conversion ratio is 38.5
shares and 10 shares of Class A Common Stock for each share of Class B and Class
C Preferred Stock, respectively. Under certain conditions, including the
completion of an underwritten public offering of the Company's Class A Common
Stock, shares of Class B and Class C Preferred Stock will automatically convert
at the then effective conversion rate.
The Class A, Class B and Class C Preferred Stock 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 C 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%.
F-23
<PAGE> 96
7. CAPITAL STOCK (CONTINUED)
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
non-voting and is convertible into an equal number of 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.
As of September 30, 1997 and December 31, 1996, the Company reserved a total of
7,818,790 shares and 9,186,148 shares, respectively, 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 December 31, 1996 and
September 30, 1997, 3,989,608 shares of Class A Common Stock are authorized
under the various stock plans.
F-24
<PAGE> 97
8. STOCK PLANS (CONTINUED)
A summary of the activity in the stock plans follows:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES EXERCISE EXERCISE STOCK EXERCISE EXERCISE
UNDER PRICE PER PRICE PER PURCHASE PRICE PER PRICE PER
OPTION SHARE SHARE RIGHTS SHARE SHARE
------ --------- --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 -- --
Granted 308,200 $.01 - $.43 $ .14 245,000 $.14 $.14
Exercised -- -- -- (245,000) $.14 $.14
Forfeited -- -- --
--------- --------
Balance, December 31, 1994 308,200 $.01 - $.43 $ .14 --
Granted 377,186 $.43 $ .43 90,000 $.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 155,600 $7.00 $7.00 --
Exercised (149,744) $.01 - $4.00 $4.21 --
Forfeited (75,358) $.01 - $7.00 $4.21 --
--------- --------
Balance, September 30, 1997 1,002,504 $.0 - $7.00 $4.75 --
========= ========
</TABLE>
The following table summarizes information concerning outstanding and
exercisable options at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- --------------------------------------------------------------------------------- ----------------------------------
WEIGHTED AVERAGE
REMAINING WEIGHTED WEIGHTED
RANGE OF EXERCISE CONTRACTUAL AVERAGE AVERAGE
PRICES NUMBER OUTSTANDING LIFE IN YEARS EXERCISE PRICE NUMBER EXERCISABLE EXERCISE 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.
F-25
<PAGE> 98
8. STOCK PLANS (CONTINUED)
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 1995 and 1996, respectively:
risk-free interest rates of 6.48% and 6.06%; no dividend yield; no volatility;
and a weighted average expected life of the options of 4.38 years and 5.05
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 1995 and 1996 was $4,998,000 and $7,387,000
respectively. The weighted-average fair value of options and rights granted in
1995 is $0.15. The weighted-average fair value of options granted in 1996 is
$0.25 for options granted with an exercise price equal to the fair values of the
underlying Common Stock, as determined by the Board of Directors, and zero for
options 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 contributions and Company profit
sharing contributions. The Company has not made any such contributions to the
plan through September 30, 1997.
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, 1995 and 1996, contributions by
employees to the plan aggregated $77,000 and $182,000, respectively.
F-26
<PAGE> 99
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 EVENT
SUBSEQUENT EVENTS
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. 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.
On January 20, 1998, 872,460 shares of Class B Common Stock were converted to
872,460 shares of Class A Common Stock.
F-27
<PAGE> 100
Annex A
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
PHYCOR, INC.
FALCON ACQUISITION SUB, INC.
AND
FIRST PHYSICIAN CARE, INC.
A-1
<PAGE> 101
AGREEMENT AND PLAN OF MERGER
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
SECTION 1. THE MERGER..................................................................................1
1.1. The Merger..................................................................................1
1.2. The Closing.................................................................................2
1.3. Effective Time..............................................................................2
1.4. Effect of the Merger........................................................................2
SECTION 2. EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT CORPORATIONS; EXCHANGE OF
CERTIFICATES................................................................................2
2.1. Effect on Capital Stock.....................................................................2
2.2. Exchange of Certificates....................................................................4
2.3. Certificate of Incorporation of Surviving Corporation.......................................7
2.4. Bylaws of the Surviving Corporation.........................................................7
2.5. Directors and Officers......................................................................7
2.6. Assets, Liabilities, Reserves and Accounts..................................................7
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY...............................................8
3.1. Organization and Existence of the Company...................................................8
3.2. Subsidiaries................................................................................8
3.3. Organization and Existence of Company Subsidiaries..........................................8
3.4. Foreign Qualifications......................................................................8
3.5. Affiliated Physician Groups.................................................................9
3.6. Capitalization..............................................................................9
3.7. Power and Authority; Non-Contravention......................................................9
3.8. Financial Statements........................................................................10
3.9. Contracts, etc..............................................................................11
3.10. Properties and Assets.......................................................................11
3.11. Legal Proceedings...........................................................................12
3.12. Subsequent Events...........................................................................12
3.13. Accounts Receivable.........................................................................13
3.14. Tax Returns.................................................................................13
3.15. Employee Benefit Plans; Employment Matters..................................................14
3.16. Compliance with Laws........................................................................17
3.17. Insurance; Malpractice......................................................................17
3.18. Environmental Matters.......................................................................17
3.19. Regulatory Approvals........................................................................18
3.20. Brokers.....................................................................................19
3.21. Vote Required...............................................................................19
3.22. Pooling Matters.............................................................................19
3.23. Company's Disclosure........................................................................19
</TABLE>
A-2
<PAGE> 102
<TABLE>
<S> <C> <C>
SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE PARENT AND THE SUBSIDIARY RELATED TO THE SUBSIDIARY...19
4.1. Organization, Existence and Capitalization of the Subsidiary................................19
4.2. Power and Authority; Non-Contravention......................................................20
4.3. Brokers.....................................................................................20
4.4. No Subsidiaries.............................................................................20
4.5. Legal Proceedings...........................................................................20
4.6. No Contracts or Liabilities.................................................................20
4.7. The Subsidiary's Disclosure.................................................................20
SECTION 5. REPRESENTATIONS AND WARRANTIES OF THE PARENT................................................21
5.1. Organization and Existence of the Parent....................................................21
5.2. Subsidiaries................................................................................21
5.3. Organization and Existence of Parent Subsidiaries...........................................21
5.4. Foreign Qualifications......................................................................22
5.5. Capitalization..............................................................................22
5.6. Parent Common Stock.........................................................................22
5.7. Power and Authority; Non-Contravention......................................................22
5.8. Parent Public Information...................................................................23
5.9. Contracts, etc..............................................................................23
5.10. Legal Proceedings...........................................................................24
5.11. Subsequent Events...........................................................................24
5.12. Tax Returns.................................................................................25
5.13. Compliance with Laws........................................................................25
5.14. Regulatory Approvals........................................................................25
5.15. Investment Intent...........................................................................26
5.16. Brokers.....................................................................................26
5.17. Pooling Matters.............................................................................26
5.18. The Parent's Disclosure.....................................................................26
SECTION 6. ACCESS TO INFORMATION AND DOCUMENTS.........................................................27
6.1. Access to Information.......................................................................27
6.2. Return of Records...........................................................................27
SECTION 7. COVENANTS...................................................................................27
7.1. Preservation of Business....................................................................27
7.2. Material Transactions.......................................................................27
7.3. Meeting of Shareholders.....................................................................28
7.4. Registration Statement......................................................................29
7.5. Exemption from State Takeover Laws..........................................................30
7.6. HSR Act Compliance..........................................................................30
7.7. Public Disclosures..........................................................................30
7.8. No Solicitations............................................................................31
7.9. Other Actions...............................................................................31
7.10. Accounting Methods..........................................................................31
7.11. Pooling and Tax-Free Reorganization Treatment...............................................31
7.12. Affiliate and Pooling Agreements............................................................32
</TABLE>
A-3
<PAGE> 103
<TABLE>
<S> <C> <C>
7.13. Cooperation.................................................................................32
7.14. Publication of Combined Results.............................................................32
7.15. Tax Opinion Certificates....................................................................32
7.16. Consents, Amendments, etc...................................................................33
7.17. Compensation Plans..........................................................................33
7.18. Insurance, Indemnification, Benefits........................................................33
7.19. Resignation of Company Directors............................................................34
7.20. Assignment of Certain Rights................................................................34
7.21. Notice of Subsequent Events.................................................................34
7.22. Conduct of Business by the Parent Pending the Merger........................................35
7.23. Tax Covenants Following the Effective Time..................................................35
SECTION 8. TERMINATION, AMENDMENT AND WAIVER...........................................................35
8.1. Termination.................................................................................35
8.2. Effect of Termination.......................................................................37
8.3. Amendment...................................................................................37
8.4. Extension; Waiver...........................................................................38
8.5. Procedure for Termination, Amendment, Extension or Waiver...................................38
8.6. Expenses; Break-up Fees.....................................................................38
SECTION 9. CONDITIONS TO CLOSING.......................................................................39
9.1. Mutual Conditions...........................................................................39
9.2. Conditions to Obligations of the Parent.....................................................40
9.3. Conditions to Obligations of the Company....................................................40
SECTION 10. MISCELLANEOUS...............................................................................41
10.1. Nonsurvival of Representations and Warranties...............................................41
10.2. Notices.....................................................................................41
10.3. Further Assurances..........................................................................42
10.4. Governing Law...............................................................................42
10.5. "Knowledge".................................................................................43
10.6. "Material adverse change" or "material adverse effect.".....................................43
10.7. "Hazardous Materials."......................................................................43
10.8. "Environmental Laws.".......................................................................43
10.9. Captions....................................................................................43
10.10. Entire Agreement............................................................................43
10.11. Counterparts................................................................................43
10.12. Binding Effect..............................................................................44
10.13. No Rule of Construction.....................................................................44
</TABLE>
A-4
<PAGE> 104
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
A-5
<PAGE> 105
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 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.
A-6
<PAGE> 106
(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 February18, 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.
(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
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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.
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(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 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
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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.
(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
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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.
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
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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
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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.
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.
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(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
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,
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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.
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(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.
(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
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\
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 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
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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
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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 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.
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(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.
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
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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 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
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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.
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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 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.
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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.
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
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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
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or breach thereunder or thereof would not, individually or in the
aggregate, have a material adverse effect on the Parent.
(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
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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.
(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
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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 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.
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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.
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(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
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
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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.
(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.
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(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.
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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 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.
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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.
(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.
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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 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
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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
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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.
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
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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
(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
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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
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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.
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.
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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.
(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.
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(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.
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):
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(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:
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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
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.
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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.
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.
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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
------------------------------------------
Name: Steven R. Adams
----------------------------------------
Title: Vice President
---------------------------------------
FALCON ACQUISITION SUB, INC.
By: /s/ Steven R. Adams
------------------------------------------
Name: Steven R. Adams
----------------------------------------
Title: Vice President
---------------------------------------
FIRST PHYSICIAN CARE, INC.
By: /s/ Stephen A. George, M.D.
------------------------------------------
Name: Stephen A. George, M.D.
Title: Chairman, President & Chief
Executive Officer
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Annex B
[LETTERHEAD OF DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION]
December 19, 1997
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
("Class A Common Stock"), and holders of Class B Common Stock, par value $.001
per share ("Class B Common Stock," and together with the Class A Common Stock,
the "Company Common Stock") of First Physician Care, Inc. (the "Company"), in
the aggregate, of the Exchange Ratio (as defined below) pursuant to the terms of
the Agreement and Plan of Merger, to be dated as of December 19, 1997 (the
"Agreement") among PhyCor, Inc. ("PhyCor"), Falcon Acquisition Sub, Inc.
("Falcon"), a wholly owned subsidiary of PhyCor, and the Company pursuant to
which Falcon will be merged (the "Merger") with and into the Company.
Pursuant to the Agreement, each share of Company Common Stock will be
converted, subject to certain exceptions, into the right to receive 0.247429
shares (the "Exchange Ratio") of common stock, no par value, of PhyCor ("PhyCor
Common Stock").
In arriving at our opinion, we have reviewed the draft dated December
17, 1997 of the Agreement. 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
respective managements 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 and certain financial projections of PhyCor for the
period beginning January 1, 1998 and ending December 31, 2002 prepared by the
management of PhyCor. 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. With respect to the financial projections supplied to us, we have assumed
that they
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December 19, 1997
The Board of Directors
First Physician Care, Inc.
have been reasonably prepared (i) with respect to PhyCor, on the basis
reflecting the best currently available estimates and judgments of the
management of PhyCor as to the future operating and financial performance of
PhyCor and (ii) with respect to the Company, include 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.
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 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 16% 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
$0.8 million). Additionally, the Sprout Group has a loan outstanding to the
Company in the aggregate principal amount of $1.2 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 Company
Common Stock, in the aggregate, from a financial point of view.
Very truly yours,
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By: /s/ CRAIG R. CALLEN
------------------------------
Craig R. Callen
Managing Director
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<PAGE> 150
Annex C
FIRST PHYSICIAN CARE, INC.
SPECIAL MEETING OF STOCKHOLDERS
___________________, 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 _______________, 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, 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 0.247429 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 4.607016 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
9.526966 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 2.474289 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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(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 will not be used to vote in
favor of adjournment.
Receipt of the Prospectus-Proxy Statement dated
______________, 1998, is hereby acknowledged.
Dated: __________, 1998
------------------------------------------------
Signature(s)
(Please sign exactly and as fully as your name
appears on your stock certificate. If shares are held
jointly, each stockholder should sign.)
PLEASE MARK, SIGN, DATE AND RETURN PROMPTLY, USING
THE ENCLOSED ENVELOPE. NO POSTAGE IS REQUIRED.
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Annex D
SS. 262. APPRAISAL RIGHTS
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to ss.228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value the shareholder's stock under the circumstances described in
subsections (b) and (c) of this section. As used in this section, the word
"stockholder" means a holder of record of stock in a stock corporation and also
a member of record of a non-stock corporation; the words "stock" and "share"
mean and include what is ordinarily meant by those words and also membership or
membership interest of a member of a non-stock corporation; and the words
"depository receipt" mean a receipt or other instrument issued by a depository
representing an interest in one or more shares, or fractions thereof, solely of
stock of a corporation, which stock 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 ss.251 (other than a merger effected pursuant to ss.251(g)
of this title), ss.252, ss.254, ss.257, ss.258, ss.263 or ss.264 of this title.;
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which stock,
or depository receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders;
and further provided that no appraisal rights shall be available for any shares
of stock of the constituent corporation surviving a merger if the merger did not
require for its approval the vote of the stockholders of the surviving
corporation as provided in subsection (f) of ss.251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series of
stock of a constituent corporation if the holders thereof are required by the
terms of an agreement of merger or consolidation pursuant to ss.ss.251, 252,
254, 257, 258, 263 and 264 of this title to accept for such stock anything
except:
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a. Shares of stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts in
respect thereof, which shares of stock (or depository receipts in respect
thereof) or depository receipts at the effective date of the merger or
consolidation will be either listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or held of record
by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock, depository receipts and cash
in lieu of fractional shares or fractional depository receipts described in the
foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under ss.253 of this title is not owned by the parent
corporation immediately prior to the merger, appraisal rights shall be available
for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation
that appraisal rights under this section shall be available for the shares of
any class or series of its stock as a result of an amendment to its certificate
of incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting, shall
notify each of its stockholders who was such on the record date for such meeting
with respect to shares for which appraisal rights are available pursuant to
subsection (b) or (c) hereof that appraisal rights are available for any or all
of the shares of the constituent corporations, and shall include in such notice
a copy of this section. Each stockholder electing to demand the appraisal of his
shares shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably
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informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of his shares. A proxy or
vote against the merger or consolidation shall not constitute such a demand. A
stockholder electing to take such action must do so by a separate written demand
as herein provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become effective;
or
(2) If the merger or consolidation was approved pursuant to ss.228 or
ss.253 of this title, each constituent corporation, either before the effective
date of the merger or consolidation or within ten days thereafter, shall notify
each of the holders of any class or series of stock of such constituent
corporation who are entitled to appraisal rights of the approval of the merger
or consolidation and that appraisal rights are available for any or all shares
of such class or series of stock of such constituent corporation, and shall
include in such notice a copy of this section; provided that, if the notice is
given on or after the effective date of the merger or consolidation, such notice
shall be given by the surviving or resulting corporation to all such holders of
any class or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective date
of the merger or consolidation, shall, also notify such stockholders of the
effective date of the merger or consolidation. Any stockholder entitled to
appraisal rights may, within 20 days after the date of mailing of such notice,
demand in writing from the surviving or resulting corporation the appraisal of
such holder's shares. Such demand will be sufficient if it reasonably informs
the corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of such holder's shares. If such notice
did not notify stockholders of the effective date of the merger or
consolidation, either (i) each such constituent corporation shall send a second
notice before the effective date of the merger or consolidation notifying each
of the holders of any class or series of stock of such constituent corporation
that are entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send such a
second notice to all such holders on or within 10 days after such effective
date; provided, however, that if such second notice is sent more than 20 days
following the sending of the first notice, such second notice need only be sent
to each stockholder who is entitled to appraisal rights and who has demanded
appraisal of such holder's shares in accordance with this subsection. An
affidavit of the secretary or assistant secretary or of the transfer agent of
the corporation that is required to give either notice that such notice has been
given shall, in the absence of fraud, be prima facie evidence of the facts
stated therein. For purposes of determining the stockholders entitled to receive
either notice, each
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constituent corporation may fix, in advance, a record date that shall be not
more than 10 days prior to the date the notice is given, provided, that if the
notice is given on or after the effective date of the merger or consolidation,
the record date shall be such effective date. If no record date is fixed and the
notice is given prior to the effective date, the record date shall be the close
of business on the day next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by
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the Court, and the costs thereof shall be borne by the surviving or resulting
corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with the provisions of this section and who have
become entitled to appraisal rights. The Court may require the stockholders who
have demanded an appraisal for their shares and who hold stock represented by
certificates to submit their certificates of stock to the Register in Chancery
for notation thereon of the pendency of the appraisal proceedings; and if any
stockholder fails to comply with such direction, the Court may dismiss the
proceedings as to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the
Court shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any other state.
(j) The costs of the proceeding may be determined by the Court and
taxed upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any
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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 29th of January, 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 Consulting and Non-Compete Agreement among FPC,
Parent and Consultant entered into on December 19, 1997. 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.
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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 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.
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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 three years 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 on August 1, 1998 and (ii) $312,500 on each of the first
and second anniversaries of the Effective Time, or a total of $1,188,750 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,
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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
thereafter during the Term of this Agreement, 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 ad 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 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. The provisions of Section 5(a) shall be of no further
force and effect upon termination of this Agreement.
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
E-5
<PAGE> 163
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. 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.
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,
E-6
<PAGE> 164
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 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.
E-7
<PAGE> 165
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
------------------------------------
FIRST PHYSICIAN CARE, INC.
By /s/ Stephen A. George
------------------------------------
Chairman, CEO and President
------------------------------------
STEPHEN A. GEORGE, M.D.
E-8
<PAGE> 166
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
(a) Article 8 of the Registrant's Amended Bylaws provides as follows:
The Corporation may indemnify, and upon request may advance expenses
to, any person (or the estate of any person) who was or is a party to,
or is threatened to be made a party to, any threatened, pending or
completed action, suit or proceeding, whether or not by or in the right
of the Corporation, and whether civil, criminal, administrative,
investigative or otherwise, by reason of the fact that such person is
or was a director, officer, employee or agent of the Corporation, or is
or was serving at the request of the Corporation as a director,
officer, partner, trustee, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other
enterprise, against any liability incurred in the action, suit or
proceeding, despite the fact that such person has not met the standard
of conduct set forth in Section 48-18-502(a) of the Tennessee Business
Corporation Act (the "Act") or would be disqualified for
indemnification under Section 48-18-502(d) of the Act, if a
determination is made by the person or persons enumerated in Section
48-18-502(b) of the Act that the director or officer seeking
indemnification is liable for (i) any breach of the duty of loyalty to
the Corporation or its shareholders, (ii) acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of
law or (iii) voting for or assenting to a distribution in violation of
the Act.
Section 7 of the Registrant's Restated Charter provides as follows:
The Corporation shall indemnify, and upon request shall advance
expenses to, in the manner and to the full extent permitted by law, any
person (or the estate of any person) who was or is a party to, or is
threatened to be made a party to, any threatened, pending or completed
action, suit or proceeding, whether or not by or in the right of the
Corporation, and whether civil, criminal, administrative, investigative
or otherwise, by reason of the fact that such person is or was a
director, officer, or employee of the Corporation, or is or was serving
at the request of the Corporation as a director, officer, partner,
trustee, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise (an "indemnitee"). The
indemnification provided herein shall not be deemed to limit the right
of the Corporation to indemnify any other person for any such expenses
to the full extent permitted by law, nor shall it be deemed exclusive
of any other rights to which any person seeking indemnification from
the Corporation may have or hereafter acquire under this Charter or the
Bylaws of the Corporation or under any agreement or vote of
shareholders or disinterested directors or otherwise, both as to action
in his official capacity and as to action in another capacity while
holding such office; provided, however, that the Corporation shall not
indemnify any such indemnitee in connection with a proceeding (or part
thereof) if a judgment or other final adjudication adverse to the
indemnitee establishes his liability (i) for any breach of the duty of
loyalty to the Corporation or its shareholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or
a knowing violation of law or (iii) under Section 48-18-304 of the
Tennessee Business Corporation Act.
(b) In addition to the foregoing provisions of the Amended Bylaws and
Restated Charter of the Registrant, directors, officers, employees and agents of
the Registrant may be indemnified by the Registrant, pursuant to the provisions
of Section 48-18-501 et seq. of the Tennessee Code Annotated.
(c) In addition, the Registrant maintains directors and officers
liability insurance.
II-1
<PAGE> 167
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
<S> <C> <C>
2 -- Agreement and Plan of Merger, dated as of December 19, 1997,
by and among the Registrant, Falcon Acquisition Sub, Inc. and
First Physician Care, Inc. (included as Annex A to the
Prospectus-- Proxy Statement filed as part of this
Registration Statement)
3.1 -- Restated Charter of the Registrant (a)
3.2 -- Amendment to Restated Charger of Registrant (b)
3.3 -- Amendment to Restated Charter of Registrant (c)
4.1 -- Amended Bylaws of the Registrant (a)
4.2 -- Form of Common Stock Certificate (d)
4.3 -- Shareholder Rights Agreement, dated February 18, 1994, between
the Registrant and First Union National Bank of North Carolina
(e)
5 -- Opinion of Waller Lansden Dortch & Davis, A Professional
Limited Liability Company
8 -- Opinion of Mayor, Day, Caldwell & Keeton, LLP as to tax matters
10 -- Amended and Restated Consulting and Non-Compete Agreement dated January 29, 1998
by and among First Physician Care, Inc., PhyCor, Inc. and
Stephen A. George, M.D. (included as Annex E to Prospectus - Proxy Statement)
23.1 -- Consent of KPMG Peat Marwick LLP
23.2 -- Consent of Ernst &Young LLP
23.3 -- Consent of Waller Lansden Dortch & Davis, A Professional
Limited Liability Company (included in Exhibit 5)
23.4 -- Consent of Mayor, Day, Caldwell & Keeton, LLP (included in Exhibit 8)
24 -- Power of Attorney (included on page II-5)
99 -- Form of Proxy (included as Annex C to the Prospectus - Proxy Statement)
</TABLE>
- ---------------
(a) Incorporated by reference to the exhibits filed with the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1994,
Commission No. 0-19786.
(b) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-3, Registration No. 33-93018.
(c) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-4, Registration No. 33-66210.
(d) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-1, Registration No. 33-44123
(e) Incorporated by reference to exhibits filed with the Registrant's
Annual Report on Form 8-K dated February 18, 1994, Commission No.
0-19786.
(b) Financial Statement Schedules
All financial statement schedules are incorporated herein by reference
to PhyCor's Annual Report on Form 10-K for the year ended December 31,
1996.
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act;
II-2
<PAGE> 168
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the Registration
Statement (or the most recent post-effective
amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the
information set forth in the Registration Statement.
Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the
total dollar value of securities offered would not
exceed that which was registered) and any deviation
from the low or high end of the estimated maximum
offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule
424(b), if, in the aggregate, the changes in volume
and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the
effective Registration Statement.
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in
the Registration Statement or any material change to
such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(4) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the Registrant's annual report pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report pursuant to
Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by
reference in the Registration Statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(5) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this Registration
Statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus
will contain the information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters, in addition to
the information called for by the other items of the applicable form.
(6) That every prospectus: (i) that is filed pursuant to the paragraph
immediately preceding, or (ii) that purports to meet the requirements of Section
10(a)(3) of the Securities Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as part of an amendment to the
Registration Statement and will not be used until such amendment is effective,
and that, for purposes of determining any liability under the Securities Act of
1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(7) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this
Form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means. This
includes information contained in documents filed subsequent to the effective
date of the Registration Statement through the date of responding to the
request.
II-3
<PAGE> 169
(8) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in the Registration Statement when it became
effective.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted against the
Registrant by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
II-4
<PAGE> 170
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Nashville,
State of Tennessee, on January 29, 1998.
PHYCOR, INC.
By: /s/ Joseph C. Hutts
------------------------------------
Joseph C. Hutts
Chairman of the Board, President and
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints each of Joseph C. Hutts and John K.
Crawford his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this Registration
Statement, and to file the same, with all exhibits thereto, and other documents
in connection therewith with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully and to all intents and purposes as each might or
could do in person hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ---- ----- ----
<S> <C> <C>
/s/ Joseph C. Hutts Chairman of the Board, President, Chief January 29, 1998
- ---------------------------------------- Executive Officer (Principal Executive
Joseph C. Hutts Officer) and Director
/s/ John K. Crawford Chief Financial Officer (Principal Financial January 29, 1998
- ---------------------------------------- and Accounting Officer)
John K. Crawford
/s/ Ronald B. Ashworth Director January 29, 1998
- ----------------------------------------
Ronald B. Ashworth
Director
- ----------------------------------------
Sam A. Brooks, Jr.
/s/ Thompson S. Dent Executive Vice President, Operations and January 29, 1998
- ---------------------------------------- Director
Thompson S. Dent
/s/ Winfield Dunn Director January 29, 1998
- ----------------------------------------
Winfield Dunn
/s/ C. Sage Givens Director January 29, 1998
- ----------------------------------------
C. Sage Givens
/s/ Joseph A. Hill, M.D. Director January 29, 1998
- ----------------------------------------
Joseph A. Hill, M.D.
</TABLE>
II-5
<PAGE> 171
<TABLE>
<S> <C> <C>
/s/ Kay Coles James Director January 29, 1998
- ----------------------------------------
Kay Coles James
/s/ James A. Moncrief, M.D. Director January 29, 1998
- ----------------------------------------
James A. Moncrief, M.D.
/s/ Derril W. Reeves Executive Vice President, Development and January 29, 1998
- ---------------------------------------- Director
Derril W. Reeves
/s/ Richard D. Wright Executive Vice President, Corporate Services January 29, 1998
- ---------------------------------------- and Director
Richard D. Wright
</TABLE>
II-6
<PAGE> 172
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
<S> <C> <C>
2 -- Agreement and Plan of Merger, dated as of December 19, 1997,
by and among the Registrant, Falcon Acquisition Sub, Inc. and
First Physician Care, Inc. (included as Annex A to the
Prospectus-- Proxy Statement filed as part of this
Registration Statement)
3.1 -- Restated Charter of the Registrant (a)
3.2 -- Amendment to Restated Charger of Registrant (b)
3.3 -- Amendment to Restated Charter of Registrant (c)
4.1 -- Amended Bylaws of the Registrant (a)
4.2 -- Form of Common Stock Certificate (d)
4.3 -- Shareholder Rights Agreement, dated February 18, 1994, between
the Registrant and First Union National Bank of North Carolina
(e)
5 -- Opinion of Waller Lansden Dortch & Davis, A Professional
Limited Liability Company
8 -- Opinion of Mayor, Day, Caldwell & Keeton, LLP as to tax matters
10 -- Amended and Restated Consulting and Non-Compete Agreement dated January 29, 1998
by and among First Physician Care, Inc., PhyCor, Inc. and
Stephen A. George, M.D. (included as Annex E to the Prospectus - Proxy Statement)
23.1 -- Consent of KPMG Peat Marwick LLP
23.2 -- Consent of Ernst &Young LLP
23.3 -- Consent of Waller Lansden Dortch & Davis, A Professional
Limited Liability Company (included in Exhibit 5)
23.4 -- Consent of Mayor, Day, Caldwell & Keeton, LLP (included in Exhibit 8)
24 -- Power of Attorney (included on page II-5)
99 -- Form of Proxy (included as Annex C to the Prospectus - Proxy Statement)
</TABLE>
- ---------------
(a) Incorporated by reference to the exhibits filed with the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1994,
Commission No. 0-19786.
(b) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-3, Registration No. 33-93018.
(c) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-4, Registration No. 33-66210.
(d) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-1, Registration No. 33-44123
(e) Incorporated by reference to exhibits filed with the Registrant's
Annual Report on Form 8-K dated February 18, 1994, Commission No.
0-19786.
<PAGE> 1
EXHIBIT 5
January 26, 1998
PhyCor, Inc.
30 Burton Hills Boulevard
Suite 400
Nashville, Tennessee 37215
Re: PhyCor, Inc.
Registration Statement on Form S-4
Ladies and Gentlemen:
We have acted as counsel to PhyCor, Inc., a Tennessee corporation (the
"Company"), in connection with the registration under the Securities Act of
1933 of an aggregate of 3,067,216 shares of the Company's Common Stock, no par
value per share (the "Shares") pursuant to a Registration Statement on Form S-4
(the "Registration Statement"). We have examined and relied upon such records,
documents and other instruments as in our judgment are necessary and
appropriate in order to express the opinions hereinafter set forth, and have
assumed the genuineness of all signatures, the authenticity of all documents
submitted to us as originals, and the conformity to original documents of all
documents submitted to us as certified or photostatic copies.
Based upon the foregoing, we are of the opinion that the Shares, when
issued and delivered in the manner and on the terms described in the
Registration Statement (after the Registration Statement is declared
effective), will be duly authorized, validly issued, fully paid and
non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and further consent to the reference to this firm under
the caption "Legal Matters" in the Prospectus.
Very truly yours,
/s/ Waller Lansden Dortch & Davis
A Professional Limited Liability Company
<PAGE> 1
FORM OF OPINION OF
MAYOR, DAY, CALDWELL & KEETON, L.L.P.
_____________, 1998
First Physician Care, Inc.
3200 Windy Hill Road
Atlanta, Georgia 30339
Gentlemen:
We have been requested by First Physician Care, Inc. ("Company") to
render this opinion in connection with the transactions described in the
letter from the Company which is attached to this letter as Exhibit A
("Company Tax Representation Letter"). Capitalized terms not otherwise defined
herein shall have the same meanings given to them in Exhibit A.
In connection with our opinion, we have examined and are familiar with
the Agreement and Plan of Merger among PhyCor, Inc. ("PhyCor"), Falcon
Acquisition Sub, Inc. ("Sub"), a wholly-owned subsidiary of PhyCor, and the
Company ("the Merger Agreement"), and such other documents as we have deemed
necessary or appropriate as a basis for the conclusions set forth below. We
have relied, as to matters of fact, upon representations by the Company
contained in the Company Tax Representation Letter and upon representations by
PhyCor contained in the PhyCor Tax Representation Letter which is attached to
this letter as Exhibit B and upon the assumptions contained herein. Without
such representations, we would not render this opinion.
In rendering the opinions set forth below, we have assumed that (1) the
Merger will be consummated in the manner described in the Merger Agreement,
(2) the representations made in the Company Tax Representation Letter and
PhyCor Tax Representation Letter are true and correct, and (3) all signatures
on all documents we examined are genuine, all documents submitted to us as
originals are authentic and all documents submitted to us as photostatic
copies are in conformity to the original documents.
Based on the assumptions set forth above and upon our examination of
the Merger Agreement and the relevant legal authorities, it is our opinion
that the merger of Sub into the Company with the stockholders of the Company
receiving PhyCor common stock will qualify as a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended
(the "Code"). Accordingly, for federal income tax purposes, the Company
stockholders will not recognize gain on their receipt of PhyCor common stock
pursuant to the Merger Agreement. However, any realized gain may be recognized
by the Company's stockholders to the extent of any cash received (or deemed
received) in the Merger or pursuant to the exercise of dissenters' rights.
<PAGE> 2
First Physician Care, Inc.
________________, 1998
Page 2
We do not express any opinion concerning the tax consequences of the
Merger other than those expressly set forth above. We express no opinion with
respect to the effect of any laws other than the federal income tax laws of
the United States of America.
This opinion is provided to you only and, without our prior consent,
may not be relied upon, used, circulated, quoted or otherwise referred to in
any manner by any person, firm, governmental authority or entity whatsoever
other than reliance thereon by you and the stockholders of the Company, to
whom you may provide a copy of this opinion letter. This opinion letter is
limited to the matters stated herein and no opinion is implied or may be
inferred beyond the matters expressly stated herein. This opinion letter shall
not be construed as or deemed to be a guaranty or insuring agreement.
The conclusions set forth above are based on our analysis of the law
and express what counsel believes a court should properly hold if presented
with such issue, but is not in any way binding on the Internal Revenue Service
("Service") or the courts. Our opinion is based on the Code and the
regulations promulgated thereunder as currently existing and in effect, and
court decisions and revenue rulings and procedures of the Service all as of
the date of this letter. Any of the foregoing authorities is subject to change
either prospectively or retroactively, and any such change could affect our
opinion. This opinion is rendered as of the date hereof based on the facts in
existence on the date hereof, and we undertake no, and hereby disclaim any,
obligation to advise you of any changes or any new developments, which may be
brought to our attention at a later date.
Sincerely,
MAYOR, DAY, CALDWELL & KEETON, L.L.P.
<PAGE> 1
EXHIBIT 23.1
The Board of Directors
PhyCor, Inc.:
We consent to the use of our report dated February 4, 1997, except for
note 12(a) which is as of March 7, 1997, incorporated by reference herein and
to the reference to our firm under the heading "Experts" and "Selected
Consolidated Financial Data - PhyCor" in the registration statement on Form S-4
of PhyCor, Inc.
/s/ KPMG PEAT MARWICK LLP
Nashville, Tennessee
January 29, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
First Physician Care, Inc.
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated April 18, 1997, with respect to the consolidated
financial statements of First Physician Care, Inc. included in the
Prospectus-Proxy Statement and Registration Statement (Form S-4) of PhyCor,
Inc. for the registration of Shares of its common stock.
/s/ Ernst & Young LLP
Atlanta, Georgia
January 29, 1998
