<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchanges Act of 1934 for the quarterly period ended June 30, 1999.
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Transition period from _____________ to
_____________.
COMMISSION FILE NUMBER: 0-19786
PHYCOR, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
TENNESSEE 62-1344801
- ---------------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
30 BURTON HILLS BLVD., SUITE 400
NASHVILLE, TENNESSEE 37215
- ---------------------------------------- -------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (615) 665-9066
--------------
NOT APPLICABLE
- --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
As of August 12, 1999, 76,069,497 shares of the Registrant's Common
Stock were outstanding.
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PHYCOR, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 1999 (unaudited) and December 31, 1998
(All amounts are expressed in thousands)
<TABLE>
<CAPTION>
ASSETS 1999 1998
- ------- ----------- -----------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 74,520 $ 74,314
Accounts receivable, net 342,511 378,732
Inventories 17,567 19,852
Prepaid expenses and other current assets 82,911 55,988
Assets held for sale 72,387 41,225
----------- -----------
Total current assets 589,896 570,111
Property and equipment, net 232,162 241,824
Intangible assets, net 937,166 981,537
Other assets 62,696 53,067
----------- -----------
Total assets $ 1,821,920 $ 1,846,539
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Current installments of long-term debt $ 4,742 $ 4,810
Current installments of obligations under capital leases 4,107 5,687
Accounts payable 58,418 50,972
Due to physician groups 53,489 51,941
Purchase price payable 50,564 73,736
Salaries and benefits payable 37,701 37,077
Incurred but not reported claims payable 51,712 59,333
Other accrued expenses and current liabilities 117,904 98,701
----------- -----------
Total current liabilities 378,637 382,257
Long-term debt, excluding current installments 397,834 388,644
Obligations under capital leases, excluding current installments 4,100 6,018
Purchase price payable 10,640 8,967
Deferred tax credits and other liabilities 2,984 8,663
Convertible subordinated notes payable to physician groups 18,672 47,580
Convertible subordinated debentures 200,000 200,000
----------- -----------
Total liabilities 1,012,867 1,042,129
----------- -----------
Shareholders' equity:
Preferred stock, no par value; 10,000 shares authorized: -- --
Common stock, no par value; 250,000 shares authorized; issued
and outstanding, 76,231 shares in 1999 and 75,824 shares in 1998 851,589 850,657
Accumulated deficit (42,536) (46,247)
----------- -----------
Total shareholders' equity 809,053 804,410
----------- -----------
Total liabilities and shareholders' equity $ 1,821,920 $ 1,846,539
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 3
PHYCOR, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Three months and six months ended June 30, 1999 and 1998
(All amounts are expressed in thousands, except for earnings per share)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenue $ 393,488 $ 371,450 $ 810,032 $ 694,145
Operating expenses:
Cost of provider services 49,520 26,024 106,612 26,024
Salaries, wages and benefits 126,927 126,980 260,015 247,691
Supplies 57,994 56,543 118,594 109,649
Purchased medical services 9,084 9,337 19,325 18,573
Other expenses 59,811 53,657 118,043 102,559
General corporate expenses 7,010 7,685 15,653 15,141
Rents and lease expense 30,591 31,650 63,305 61,713
Depreciation and amortization 24,118 22,835 48,888 41,010
Provision for asset revaluation
and clinic restructuring 14,375 -- 23,888 22,000
Merger expenses -- -- -- 14,196
--------- --------- --------- ---------
Net operating expenses 379,430 334,711 774,323 658,556
--------- --------- --------- ---------
Earnings from operations 14,058 36,739 35,709 35,589
Other (income) expense:
Interest income (1,089) (747) (2,102) (1,492)
Interest expense 10,122 9,281 19,987 16,803
--------- --------- --------- ---------
Earnings before income taxes and
minority interest 5,025 28,205 17,824 20,278
Income tax expense 554 8,993 5,791 5,738
Minority interest in earnings of
consolidated partnerships 3,548 3,899 8,322 6,725
--------- --------- --------- ---------
Net earnings $ 923 $ 15,313 $ 3,711 $ 7,815
========= ========= ========= =========
Earnings per share:
Basic $ .01 $ .22 $ .05 $ .12
Diluted .01 .22 .05 .11
========= ========= ========= =========
Weighted average number of shares and dilutive
share equivalents outstanding:
Basic 76,034 68,779 75,989 67,516
Diluted 77,457 70,857 77,509 70,024
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
PHYCOR, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three months and six months ended June 30, 1999 and 1998
(All amounts are expressed in thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- ---------------------
1999 1998 1999 1998
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 923 $ 15,313 $ 3,711 $ 7,815
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 24,118 22,835 48,888 41,010
Minority interests 3,548 3,899 8,322 6,725
Provision for asset revaluation and clinic restructuring 14,375 -- 23,888 22,000
Merger expenses -- -- -- 14,196
Increase (decrease) in cash, net of effects
of acquisitions, due to changes in:
Accounts receivable 22,631 (991) 4,978 (22,122)
Inventories 522 (260) 737 22
Prepaid expenses and other current assets (5,133) (5,731) (17,578) (8,811)
Accounts payable 1,410 (2,107) 8,231 (2,732)
Due to physician groups (6,158) (2,278) 3,049 5,038
Incurred but not reported claims payable (6,786) (1,555) (4,592) 245
Other accrued expenses and current liabilities (7,839) 8,718 (8,153) 11,026
-------- --------- -------- ---------
Net cash provided by operating activities 41,611 37,843 71,481 74,412
-------- --------- -------- ---------
Cash flows from investing activities:
Payments for acquisitions, net (4,607) (105,455) (35,500) (139,994)
Purchase of property and equipment (9,487) (17,815) (23,836) (37,970)
Payments to acquire other assets (1,860) (821) (4,953) (11,133)
-------- --------- -------- ---------
Net cash used by investing activities (15,954) (124,091) (64,289) (189,097)
-------- --------- -------- ---------
Cash flows from financing activities:
Net proceeds from issuance of stock 400 9,497 1,270 16,460
Proceeds from long-term borrowings -- 103,000 26,000 139,000
Repayment of long-term borrowings (18,799) (2,136) (22,030) (9,056)
Repayment of obligations under capital leases (1,667) (1,131) (3,813) (1,898)
Distributions of minority interests (4,613) (3,190) (7,628) (4,369)
Loan costs incurred (14) (276) (785) (276)
-------- --------- -------- ---------
Net cash provided (used) by financing activities (24,693) 105,764 (6,986) 139,861
-------- --------- -------- ---------
Net increase in cash and cash equivalents 964 19,516 206 25,176
Cash and cash equivalents - beginning of period 73,556 43,820 74,314 38,160
-------- --------- -------- ---------
Cash and cash equivalents - end of period $ 74,520 $ 63,336 $ 74,520 $ 63,336
======== ========= ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
PHYCOR, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Three months and six months ended June 30, 1999 and 1998
(All amounts are expressed in thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
1999 1998 1999 1998
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
SUPPLEMENTAL SCHEDULE OF INVESTING ACTIVITIES:
Effects of acquisitions, net:
Assets acquired, net of cash $ 24,533 $ 207,365 $ 33,588 $ 292,946
Liabilities paid (assumed), including deferred
purchase price payments (12,058) (16,212) 9,420 (41,730)
Issuance of convertible subordinated notes payable -- -- -- (1,317)
Reduction (issuance) of common stock and warrants -- (84,517) 360 (105,974)
Cash received from disposition of clinic assets (7,868) (1,181) (7,868) (3,931)
-------- --------- -------- ---------
Payments for acquisitions, net $ 4,607 $ 105,455 $ 35,500 $ 139,994
======== ========= ======== =========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations incurred to acquire
equipment $ 98 $ 258 $ 114 $ 438
======== ========= ======== =========
Conversion of subordinated notes payable
to common stock $ -- $ -- $ 22 $ 2,000
======== ========= ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
PHYCOR, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
Three months and six months ended June 30, 1999 and 1998
(1) BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial reporting and in accordance with Rule 10-01 of Regulation S-X.
In the opinion of management, the unaudited interim financial statements
contained in this report reflect all adjustments, consisting of only
normal recurring accruals, that are necessary for a fair presentation of
the financial position and the results of operations for the interim
periods presented. The results of operations for any interim period are
not necessarily indicative of results for the full year.
These financial statements, footnote disclosures and other information
should be read in conjunction with the financial statements and the notes
thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998.
(2) ACQUISITION PRO FORMA INFORMATION
The unaudited consolidated pro forma net revenue, net earnings and per
share amounts of the Company assuming the PrimeCare International, Inc.
(PrimeCare), The Morgan Health Group, Inc. (MHG), Carewise, Inc.
(Carewise) and First Physician Care, Inc. (FPC) acquisitions had been
consummated on January 1, 1998 are as follows (in thousands, except for
earnings per share):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1998
----------------- -----------------
<S> <C> <C>
Net revenue $ 410,571 $ 819,440
Net earnings 13,991 4,532
Earnings per share:
Basic 0.18 0.06
Diluted 0.18 0.06
</TABLE>
The consolidated statements of operations include the results of the
above businesses from the dates of their respective acquisitions.
(3) NET REVENUE
Net revenue of the Company is comprised of net clinic service agreement
revenue, IPA management revenue, net hospital revenue and other operating
revenues. Clinic service agreement revenue is equal to the net revenue of
the clinics, less amounts retained by physician groups. Net clinic
revenue recorded by the physician groups and net hospital revenue are
recorded at established rates reduced by provisions for doubtful accounts
and contractual adjustments. Contractual adjustments arise as a result of
the terms of certain reimbursement and managed care contracts. Such
adjustments represent the difference between charges at established rates
and estimated recoverable amounts and are recognized in the period the
services are rendered. Any differences between estimated contractual
adjustments and actual final settlements under reimbursement contracts
are recognized as contractual adjustments in the year final settlements
are determined. With the exception of the Company's wholly owned
subsidiary, PrimeCare, and certain clinics acquired as a part of the FPC
acquisition, the physician groups, rather than the Company, enter into
managed care contracts. Through calculation of its service fees, the
Company shares indirectly in any capitation risk assumed by its
affiliated physician groups.
(Continued)
6
<PAGE> 7
PHYCOR, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
IPA management revenue is equal to the difference between the amount of
capitation and risk pool payments payable to the IPAs managed by the
Company less amounts retained by the IPAs. The Company has not
historically been a party to capitated contracts entered into by the
IPAs, but is exposed to losses to the extent of its share of deficits, if
any, of the capitated revenue of the IPAs. Through the PrimeCare and MHG
acquisitions, the Company became a party to certain managed care
contracts. Accordingly, the cost of provider services for the PrimeCare
and MHG contracts is not included as a deduction to net revenue of the
Company but is reported as an operating expense.
The following represent amounts included in the determination of net
revenue (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------------
1999 1998 1999 1998
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Gross physician group, hospital and other revenue $876,812 $878,837 $1,786,481 $1,720,638
Less:
Provisions for doubtful accounts
and contractual adjustments 377,633 350,605 761,227 689,894
-------- -------- ---------- ----------
Net physician group, hospital
and other revenue 499,179 528,232 1,025,254 1,030,744
IPA revenue 279,781 181,197 548,941 300,478
-------- -------- ---------- ----------
Net physician group, hospital, IPA
and other revenue 778,960 709,429 1,574,195 1,331,222
Less amounts retained by physician
groups and IPAs:
Physician groups 173,692 187,030 356,316 363,063
Clinic technical employee compensation 22,155 23,567 45,445 46,795
IPAs 189,625 127,382 362,402 227,219
-------- -------- ---------- ----------
Net revenue $393,488 $371,450 $ 810,032 $ 694,145
======== ======== ========== ==========
</TABLE>
(4) BUSINESS SEGMENTS
The Company has two reportable segments: physician clinics and IPAs. The
physician clinics have been subdivided into multi-specialty and group
formation clinics for purposes of disclosure. The Company derives its
revenues primarily from operating multi-specialty medical clinics and
managing IPAs (See Note 3). In addition, the Company provides health care
decision-support services and operates two hospitals that do not meet the
quantitative thresholds for reportable segments.
(Continued)
7
<PAGE> 8
PHYCOR, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
The Company evaluates performance based on earnings from operations
before asset revaluation and clinic restructuring charges, merger
expenses, minority interest and income taxes. The following is a
financial summary by business segment for the periods indicated (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Multi-specialty clinics:
Net revenue $ 278,951 $ 281,618 $ 573,369 $ 551,381
Operating expenses(1) 252,171 250,284 518,782 487,877
Interest income (349) (383) (684) (569)
Interest expense 19,365 18,366 38,435 35,361
Earnings before taxes and minority interest(1) 7,764 13,351 16,836 28,712
Depreciation and amortization 17,094 17,961 36,079 32,951
Segment Assets 1,290,950 1,360,420 1,290,950 1,360,420
Group formation clinics:
Net revenue 10,946 30,173 23,523 63,661
Operating expenses(1) 10,075 27,732 21,454 57,317
Interest (income) expense (280) 32 (421) 57
Interest expense 1,092 3,784 2,482 7,306
Earnings (loss) before taxes and minority interest(1) 59 (1,375) 8 (1,019)
Depreciation and amortization 855 2,422 1,539 4,089
Segment Assets 65,500 193,144 65,500 193,144
IPAs:
Net revenue 90,156 53,815 186,539 73,259
Operating expenses(1) 82,314 44,101 167,493 57,548
Interest income (601) (536) (1,245) (629)
Interest expense 2,795 2,760 5,516 3,796
Earnings before taxes and minority interest(1) 5,648 7,490 14,775 12,544
Depreciation and amortization 4,025 1,923 6,998 2,861
Segment Assets 333,204 252,266 333,204 252,266
Corporate and other(2):
Net revenue 13,435 5,844 26,601 5,844
Operating expenses(1) 20,495 12,594 42,706 19,618
Interest (income) expense 141 140 248 (351)
Interest income (13,130) (15,629) (26,446) (29,660)
Earnings before taxes and minority interest(1) 5,929 8,739 10,093 16,237
Depreciation and amortization 2,144 529 4,272 1,109
Segment Assets 132,266 86,516 132,266 86,516
</TABLE>
----------------------------
(1) Amounts exclude provision for asset revaluation and clinic
restructuring and merger expenses.
(2) This segment includes corporate costs and all real estate holdings
as well as the results for CareWise and the hospitals managed by
the Company.
(Continued)
8
<PAGE> 9
PHYCOR, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(5) ASSET REVALUATION AND CLINIC RESTRUCTURING
Asset revaluation charges totaling $13.7 million were recorded in the
second quarter of 1999. These charges related to adjustments of the
carrying value of the Company's assets at three clinics as a result of
the sale or pending agreements to sell certain assets associated with the
related service agreements.
Additionally, restructuring charges totaling $675,000 were recorded in
the second quarter of 1999 with respect to operations that are being
sold or closed. These charges were comprised of approximately $165,000 in
facility and lease termination costs, $383,000 in severance costs and
$127,000 in other exit costs. During the second quarter and first six
months of 1999, the Company paid approximately $464,000 and $704,000,
respectively, in facility and lease termination costs, $1,233,000 and
$1,674,000, respectively, in severance costs and $1,525,000 and
$3,616,000, respectively, in other exit costs. At June 30, 1999, accrued
expenses payable included remaining reserves for clinics to be
restructured and exit costs for disposed clinic operations of
approximately $8,299,000, which included $1,573,000 in facility and lease
termination costs, $3,695,000 in severance costs and $3,031,000 in other
exit costs.
Clinic net assets expected to be disposed of during the remainder of 1999
totaled approximately $72.4 million at June 30, 1999, and consisted of
current assets, property and equipment, other assets and current
liabilities which will be assumed from two clinics associated with the
fourth quarter 1998 asset revaluation charge, one clinic associated with
the second quarter 1999 asset revaluation charge and two additional
clinics for which no asset revaluation charge has been taken as of June
30, 1999.
Net revenue and pre-tax income (losses) from the clinics and the IPA
(MHG) disposed of or to be disposed of and included in assets held for
sale at June 30, 1999, totaled $28.6 million and ($60,000), respectively,
for the three months ended June 30, 1999 and $83.0 million and $100,000,
respectively, for the first six months of 1999. Net revenue and pre-tax
income from the clinics and the IPA disposed of or to be disposed of and
included in assets held for sale at June 30, 1999, totaled $59.8 million
and $1.6 million, respectively, for the three months ended June 30, 1998
and $126.2 million and $3.1 million, respectively, for the first six
months of 1998.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
PhyCor, Inc. ("PhyCor" or the "Company") is a medical network
management company that operates multi-specialty medical clinics, develops and
manages independent practice associations ("IPAs") and provides health care
decision-support services, including demand management and disease management
services, to managed care organizations, health care providers, employers and
other group associations. In connection with multi-specialty clinic operations,
the Company manages and operates two hospitals and four health maintenance
organizations. As of June 30, 1999, the Company operated 52 medical groups with
3,308 physicians in 25 states and managed IPAs with approximately 26,000
physicians in 34 markets. On such date, the Company's affiliated physicians
provided medical services under capitated contracts to approximately 1,555,000
patients, including approximately 326,000 Medicare/Medicaid eligible patients.
The Company also provided health care decision-support services to approximately
3.0 million individuals within the United States and an additional 500,000 under
foreign country license agreements.
The Company's strategy is to position its affiliated multi-specialty
medical groups and IPAs to be the physician component of organized health care
systems. PhyCor believes that physician organizations are a critical element of
organized health care systems because physician decisions determine the cost and
quality of care.
A substantial majority of the Company's revenue in the first six months
of 1999 and 1998 was earned under service agreements with multi-specialty
clinics. Revenue earned under substantially all of the service agreements is
equal to the net revenue of the clinics, less amounts retained by physician
groups. The service agreements contain financial incentives for the Company to
assist the physician groups in increasing clinic revenues and controlling
expenses.
To increase clinic revenue, the Company works with the affiliated
physician groups to recruit additional physicians, merge other physicians
practicing in the area into the affiliated physician groups, negotiate contracts
with managed care organizations and provide additional ancillary services. To
reduce or control expenses, among other things, PhyCor utilizes national
purchasing contracts for key items, reviews staffing levels to make sure they
are appropriate and assists the physicians in developing more cost-effective
clinical practice patterns.
The Company has increased its focus on the development of IPAs to
enable the Company to provide services to a broader range of physician
organizations, to enhance the operating performance of existing clinics and to
further develop physician relationships. The Company develops IPAs that include
affiliated clinic physicians to enhance the clinics' attractiveness as providers
to managed care organizations.
The Company continues to seek additional affiliations with
multi-specialty clinics and IPAs, however, the Company anticipates that its
acquisition growth will continue to be slower than in previous years. During the
first six months of 1999, the Company affiliated with several smaller medical
practices, made deferred acquisition payments to certain physician groups
pursuant to the terms of their respective agreements and completed purchase
accounting for acquisitions consummated within the last twelve months, adding a
total of approximately $25.0 million in assets. The principal asset acquired was
service agreement rights, which is an intangible asset. The consideration for
the acquisitions consisted of approximately 53% cash and 47% liabilities
assumed. The cash portion of the aggregate purchase price was funded by a
combination of operating cash flow and borrowings under the Company's bank
credit facility.
10
<PAGE> 11
The Company has historically amortized goodwill and other intangible
assets related to its service agreements over the periods during which the
agreements are expected to be effective, ranging from 25 to 40 years. Effective
April 1, 1998, the Company adopted a maximum of 25 years as the useful life for
amortization of its intangible assets, including those acquired in prior years.
Had this policy been in effect for the first quarter of 1998, amortization
expense would have increased by approximately $3.3 million. Applying the
Company's historical tax rate, diluted earnings per share would have been
reduced by $.03 in the first quarter of 1998.
RESULTS OF OPERATIONS
The following table shows the percentage of net revenue represented by
various expenses and other income items reflected in the Company's Consolidated
Statements of Operations:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net revenue 100.0% 100.0% 100.0% 100.0%
Operating expenses
Cost of provider services 12.6 7.0 13.2 3.7
Salaries, wages and benefits 32.3 34.2 32.1 35.7
Supplies 14.7 15.2 14.6 15.8
Purchased medical services 2.3 2.5 2.4 2.7
Other expenses 15.2 14.4 14.6 14.8
General corporate expenses 1.8 2.1 1.9 2.2
Rents and lease expense 7.8 8.5 7.8 8.9
Depreciation and amortization 6.1 6.2 6.0 5.9
Provision for asset revaluation
and clinic restructuring 3.6 -- 3.0 3.2
Merger expenses -- -- -- 2.0
------ ------ ------ ------
Net operating expenses 96.4 (A) 90.1 95.6 (A) 94.9 (A)
------ ------ ------ ------
Earnings from operations 3.6 (A) 9.9 4.4 (A) 5.1 (A)
Interest income (0.3) (0.2) (0.3) (0.2)
Interest expense 2.6 2.5 2.5 2.4
------ ------ ------ ------
Earnings before income taxes
and minority interest 1.3 (A) 7.6 2.2 (A) 2.9 (A)
Income tax expense 0.2 (A) 2.4 0.7 (A) 0.8 (A)
Minority interest 0.9 1.1 1.0 1.0
------ ------ ------ ------
Net earnings 0.2%(A) 4.1% 0.5%(A) 1.1%(A)
====== ====== ====== ======
</TABLE>
(A) Excluding the effect of the provision for asset revaluation and clinic
restructuring and merger expenses in 1999 and 1998, net operating expenses,
earnings from operations, earnings before income taxes and minority interest,
income tax expense and net earnings, as a percentage of net revenue, would have
been 92.8%, 7.2%, 4.9%, 1.5% and 2.5%, respectively, for the three months ended
June 30, 1999, 92.6%, 7.4%, 5.2%, 1.6% and 2.6%, respectively, for the six
months ended June 30, 1999, and 89.7%, 10.3%, 8.1%, 2.6% and 4.5%, respectively,
for the six months ended June 30, 1998.
1999 Compared to 1998
Net revenue increased $22.0 million, or 5.9%, from $371.5 million for
the second quarter of 1998 to $393.5 million for the second quarter of 1999, and
from $694.1 million for the first six months of 1998 to $810.0 million for the
first six months of 1999, an increase of 16.7%. Net revenue from multi-specialty
and group formation clinics
11
<PAGE> 12
("Clinic Net Revenue") decreased in the second quarter of 1999 from the second
quarter of 1998 by $21.9 million, which was comprised of (i) a $21.5 million
decrease in service fees for reimbursement of clinic expenses incurred by the
Company and (ii) a $400,000 decrease in the Company's fees from clinic operating
income and net physician group revenue. Increases in Clinic Net Revenue of $10.0
million from clinics acquired during or subsequent to the second quarter of 1998
were offset by reductions in Clinic Net Revenue, as a result of clinic
operations disposed of in 1998 and 1999, of $31.8 million from the second
quarter of 1998 to 1999. Clinic Net Revenue decreased in the first six months of
1999 from the first six months of 1998 by $18.2 million, which was comprised of
(i) a $24.5 million decrease in service fees for reimbursement of clinic
expenses incurred by the Company and (ii) a $6.3 million increase in the
Company's fees from clinic operating income and net physician group revenue.
Increases in Clinic Net Revenue of $34.8 million from clinics acquired during
1998 were offset by reductions in Clinic Net Revenue, as a result of clinic
operations disposed of in 1998 and 1999, of $55.3 million from the first six
months of 1998 to 1999. Net revenue from IPAs increased $36.4 million, or 67.7%,
from $53.8 million for the second quarter of 1998 to $90.2 million for the
second quarter of 1999, and from $73.3 million for the first six months of 1998
to $186.5 million for the first six months of 1999, an increase of 154.4%. These
increases were driven by net revenues from the acquisitions of PrimeCare
International, Inc. ("PrimeCare") and The Morgan Health Group, Inc. ("MHG") in
1998, additional IPA markets entered into subsequent to the first quarter of
1998 and internal growth of existing IPA markets. Net revenue from the 40
service agreements (excluding clinics being restructured or related assets sold)
and 23 IPA markets in effect for the second quarter of 1999 and 1998 increased
by $19.0 million, or 7.5%, for the second quarter of 1999 and $44.5 million, or
8.6%, for the six months ended June 30, 1999, compared with the same periods in
1998. Same market growth resulted from the addition of new physicians, increases
in IPA enrollment, the expansion of ancillary services and increases in patient
volume and fees.
During the second quarter and first six months of 1999, most categories
of operating expenses decreased as a percentage of net revenue when compared to
the same periods in 1998. The addition of cost of provider services is a result
of the acquisitions of PrimeCare and MHG in 1998. PrimeCare and MHG own and
manage IPAs, and each is a party to certain managed care contracts, resulting in
the Company presenting such revenue on a "grossed-up basis." Under this method,
the cost of provider services (payments to physicians and other providers under
compensation, sub-capitation and other reimbursement contracts) is not included
as a deduction to net revenue of the Company but is reported as an operating
expense. This revenue reporting has an impact on the Company's operating
expenses as a percentage of net revenue. Excluding the impact of PrimeCare's and
MHG's revenue reporting, supplies expense, other expenses, depreciation and
amortization and interest expense increased as a percentage of net revenue in
1999 over the same period in 1998. The increase in supplies expense is a result
of the continued increases in costs of drugs and medications. Other expenses
increased as a result of acquisitions completed during the second quarter of
1998 with higher levels of these expenses compared to the existing base of
operations. In addition, during the second quarter of 1999 the Company incurred
costs associated with information systems conversions in some of its IPA markets
that caused other expenses to increase when compared to the same period in 1998.
The increase in depreciation and amortization expense resulted from the impact
of 1998 acquisitions. Excluding the impact of PrimeCare's and MHG's revenue
reporting, rents and lease expense decreased as a percentage of net revenue in
1999 over the same period in 1998. This decrease is a result of the disposition
of certain of the Company's group formation clinics during 1998. These clinics'
rents and lease expense as a percentage of net revenue was higher than the
current base of clinics.
In the second quarter of 1999, the Company recorded a pre-tax asset
revaluation and clinic restructuring charge of approximately $14.4 million
related to the sale or pending sale of its clinic operating assets and the
termination of its related agreements in Birmingham, Alabama, Kingsport,
Tennessee and Palm Beach, Florida, which is a First Physician Care, Inc. ("FPC")
clinic. For additional discussion, see "Liquidity and Capital Resources."
The provision for clinic restructuring of approximately $9.5 million in
the first quarter of 1999 related to three of the Company's clinics, certain FPC
clinics and MHG that were being restructured or disposed of and included
facility and lease termination costs, severance costs and other exit costs. In
the fourth quarter of 1998, the Company recorded a pre-tax charge of $110.4
million related to asset revaluation at primarily these same clinics and MHG.
For additional discussion, see "Liquidity and Capital Resources."
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The provision for clinic restructuring of $22.0 million in the first
quarter of 1998 related to seven of the Company's clinics that were being
restructured or disposed of and included facility and lease termination costs,
severance and other exit costs. In the fourth quarter of 1997, the Company
recorded a pre-tax charge of $83.4 million related to asset revaluation at these
same clinics. The charges addressed operating issues that developed in four of
the Company's multi-specialty clinics that represent the Company's earliest
developments of such clinics through the formation of new groups. Three other
clinics included in the 1997 charge represent clinics disposed of during 1998
because of a variety of negative operating and market-specific issues. For
additional discussion, see "Liquidity and Capital Resources."
Net revenue and pre-tax losses from operations disposed of as of June
30, 1999 were $1.4 million and $100,000 for the three months ended June 30,
1999, and $33.2 million and $400,000 for the three months ended June 30, 1998,
respectively. Net revenue and pre-tax losses from operations disposed of as of
June 30, 1999 were $19.0 million and $100,000 for the six months ended June 30,
1999, and $74.3 million and $300,000 for the six months ended June 30, 1998,
respectively. The Company recorded no gain or loss resulting from the
disposition of these clinics based on adjusted asset values. Net revenue and
pre-tax income from the remaining operations to be disposed of were $27.2
million and $40,000 for the three months ended June 30, 1999, and $26.6 million
and $2.0 million for the three months ended June 30, 1998, respectively. Net
revenue and pre-tax income from the remaining operations to be disposed of were
$64.0 million and $200,000 for the six months ended June 30, 1999, and $51.9
million and $3.4 million for the six months ended June 30, 1998, respectively.
For additional discussion, see "Liquidity and Capital Resources."
The Company also recorded a pre-tax charge to earnings of approximately
$14.2 million in the first quarter of 1998 relating to the termination of its
merger agreement with MedPartners, Inc. This charge represents PhyCor's share of
investment banking, legal, travel, accounting and other expenses incurred during
the merger negotiation process.
The Company expects an effective tax rate of approximately 37.5% in
1999 before the tax benefit of the provision for asset revaluation and clinic
restructuring discussed above as compared to a rate of 37.6% in 1998.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Company had $211.3 million in working capital,
compared to $187.9 million as of December 31, 1998. Also, the Company generated
$41.6 million of cash flow from operations for the second quarter of 1999
compared to $37.8 million for the second quarter of 1998 and $71.5 million for
the first six months of 1999 compared to $74.4 million for the same period in
1998. At June 30, 1999, net accounts receivable of $342.5 million amounted to 61
days of net clinic revenue compared to $378.7 million and 64 days at the end of
1998.
In conjunction with its securities repurchase program, the Company
repurchased approximately 2.6 million shares of common stock for approximately
$12.6 million in 1998. The Company has repurchased 441,300 shares of common
stock for approximately $2.0 million to date in 1999.
During the second quarter of 1999, the Company announced a definitive
agreement allowing for a strategic investment in the Company of up to $200.0
million by funds managed by E.M. Warburg, Pincus and Co., LLC ("Warburg,
Pincus"). Under the terms of the agreement, Warburg, Pincus will purchase zero
coupon convertible subordinated notes for $127.5 million which will accrete to a
maturity value of approximately $404.5 million on the fifteenth anniversary of
the issuance date. The Company intends to use approximately $30.0 million of the
proceeds to repurchase shares of the Company's common stock or convertible
subordinated debentures, and the remainder, net of offering costs, will be used
for repayment of indebtedness under the Company's bank credit facility. In
addition, Warburg, Pincus intends to acquire up to $72.5 million of the
Company's common stock in the open market, through privately negotiated
transactions, or otherwise depending on market conditions and subject to the
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receipt of any required regulatory approvals. The Company has received approval
from its lenders to amend its bank credit facility to provide for the pending
issuance of the zero coupon notes and related matters. The amendment will be
effective upon completion of the Warburg, Pincus transaction, which is pending
certain state insurance regulatory approvals. The Company currently estimates it
will receive the appropriate regulatory approvals in the third quarter of 1999.
Option exercises, other issuances of common stock and net earnings for
the first six months of 1999 resulted in an increase of $4.6 million in
shareholders' equity compared to December 31, 1998.
Capital expenditures during the first six months of 1999 totaled $23.8
million. The Company is responsible for capital expenditures at its affiliated
clinics under the terms of its service agreements. The Company expects to make
approximately $40.0 million in additional capital expenditures during the
remainder of 1999.
Deferred acquisition payments are payable to physician groups in the
event such physician groups attain predetermined financial targets during
established periods of time following the acquisitions. If each group satisfied
its applicable financial targets for the periods covered, the Company would be
required to pay an aggregate of approximately $48.1 million of additional
consideration over the next five years, of which a maximum of $8.4 million would
be payable during the next twelve months.
In the fourth quarter of 1997, PhyCor recorded a pre-tax charge to
earnings of $83.4 million related to the revaluation of assets of seven of the
Company's multi-specialty clinics. In the first quarter of 1998, the Company
also recorded an additional charge of $22.0 million relating to these clinics
that are being restructured or disposed of including facility and lease
termination, severance and other exit costs. These pre-tax charges were
partially in response to issues that arose in four of the Company's
multi-specialty clinics that represented the Company's earliest developments of
such clinics through the formation of new groups. The clinics were considered to
have an impairment of certain current assets, property and equipment, other
assets and intangible assets because of certain groups of physicians within a
larger clinic terminating their relationship with the medical group affiliated
with the Company and therefore affecting future cash flows. Three other clinics
included in the charge represented clinics being disposed of because of a
variety of negative operating and market issues, including those related to
market position and clinic demographics, physician relations, physician
departure rates, declining physician incomes, physician productivity, operating
results and ongoing viability of the existing medical group. Although these
factors have been present individually from time to time in various affiliated
clinics and could occur in future clinic operations, the combined effect of the
existence of these factors at the clinics disposed of resulted in clinic
operations that made it difficult for the Company to effectively manage the
clinics. One of these clinics was sold in the first quarter of 1998 and the
second sale was completed April 1, 1998. The remaining clinic was disposed of in
July 1998. These clinics were sold below book value because of the reasons noted
above, and given such facts, a sale at a discount to carrying value was
considered more cost effective than a closure which would subject the Company to
additional costs.
In the third quarter of 1998, the Company recorded a net pre-tax asset
revaluation charge of $92.5 million, which is comprised of a $103.3 million
charge less the reversal of certain restructuring charges recorded in the first
quarter of 1998. This charge related to deteriorating negative operating trends
for three group formation clinic operations which were included in the fourth
quarter 1997 asset revaluation charge and the corresponding decision to dispose
of those assets. Additionally, this charge provided for the disposition of
assets of two group formation clinics that were not included in the fourth
quarter 1997 asset revaluation charge and the revaluation of primarily
intangible assets at an additional group formation clinic that will be disposed.
The third quarter 1998 asset revaluation charge included current assets,
property and equipment, other assets and intangible assets of $4.2 million, $3.8
million, $6.7 million and $77.8 million, respectively. Amounts received upon the
dispositions of the assets approximated the post-charge net carrying value.
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In the fourth quarter of 1998, the Company recorded a pre-tax asset
revaluation charge of $110.4 million. Approximately $26.0 million of this charge
related to adjustments of the carrying value of the Company's assets at
Holt-Krock Clinic ("Holt-Krock") and Burns Clinic Medical Center ("Burns") as a
result of agreements to sell certain assets associated with these service
agreements. In addition, this charge provided for the write-off of $31.6 million
of goodwill recorded in connection with the MHG acquisition. Subsequent to the
completion of this acquisition, MHG received claims from its major payor for
costs arising before the acquisition that revealed that MHG's costs
significantly exceeded its revenues under the payor contract prior to the date
of acquisition. PhyCor continued to fund losses under this payor contract while
attempting to renegotiate payment terms with the payor to allow for this payor
contract to be economically viable. A mutually beneficial agreement could not be
reached. The payor contract terminated by mutual agreement on April 30, 1999.
PhyCor commenced closing its MHG operation effective April 30, 1999 and is
attempting to recover its investment in MHG from the sellers of MHG, but there
can be no assurance of a recovery.
Also included in the fourth quarter 1998 pre-tax charge is $18.1
million related to certain FPC clinics that were experiencing significant
negative operating results. PhyCor recorded the asset revaluation charge
primarily to write down goodwill from the FPC acquisition to recognize the
expected decline in future cash flows of the investment. The Company is selling
certain FPC clinic assets and discontinuing the related clinic operations. The
Company completed the termination of its agreements with the FPC clinic in Fort
Worth, Texas in the second quarter of 1999. Also, the Company had invested
significantly in the operation of the Lexington Clinic to support the growth and
expansion of the Lexington Clinic and its affiliated HMO. Lexington Clinic's
financial performance has been negatively impacted by the combination of poor
financial performance at a number of satellite locations, a challenging and
extended information system conversion, a potential loss arising from a dispute
with one of the HMO's payors and the repayment of funds used to finance the
Lexington Clinic's and the HMO's growth. In light of the existing circumstances,
realization of certain of PhyCor's assets related to the Lexington Clinic was
unlikely. Accordingly, the Company recorded an asset revaluation pre-tax charge
in the fourth quarter of 1998 of approximately $34.7 million to reduce to net
realizable value its investments in numerous satellite operations and to provide
a reserve for amounts owed by Lexington Clinic based upon expected future cash
flows. There can be no assurance that the Company will realize the full carrying
value of its remaining investment in the Lexington Clinic operation of
approximately $87.7 million as of June 30, 1999. The fourth quarter 1998 asset
revaluation charge included current assets, property and equipment, other assets
and intangible assets of $3.7 million, $3.7 million, $27.0 million and $76.0
million, respectively. The pre-tax restructuring charge of approximately $9.5
million in the first quarter of 1999 related to facility and lease termination,
severance and other exit costs associated primarily with the clinics mentioned
above and MHG. Additionally, asset recoveries on clinics disposed of totaling
$1.9 million were used to revalue certain assets associated with the FPC clinics
in the first quarter of 1999.
In the second quarter of 1999, the Company recorded a pre-tax asset
revaluation charge of $13.7 million. This charge related to the sale or pending
sale of its clinic operating assets and the termination of its related
agreements in Birmingham, Alabama, Kingsport, Tennessee and an FPC clinic in
Palm Beach, Florida. The second quarter 1999 asset revaluation charge included
current assets, property and equipment, and intangible assets of $2.0 million,
$1.5 million and $10.2 million, respectively. The pre-tax restructuring charge
of $675,000 in the second quarter of 1999 related to facility and lease
termination, severance and other exit costs associated with selling the FPC
clinic in Palm Beach, Florida and closing a small IPA.
During the second quarter of 1999, the Company received approximately
$7.9 million related to the sale of assets associated with clinics, in addition
to certain liabilities being assumed by the purchasers. The amounts received
upon disposition of the assets approximated the post-charge net carrying value.
One of the clinics sold will continue to participate in the Company's IPA
operations.
At June 30, 1999, the Company had a total of four group formation
clinics and one FPC clinic that have characteristics similar to group formation
clinics. The total assets of the remaining four group formation clinics and
similar FPC clinic were $46.3 million, including net intangible assets of $20.4
million at June 30, 1999. Net revenue and pre-tax income (losses) from the group
formation and similar FPC clinics were $11.5 million and ($1.1 million),
respectively, for the three months ended June 30, 1999, and $11.7 million and
$200,000, respectively, for the three
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months ended June 30, 1998. Net revenue and pre-tax income (losses) from the
group formation and similar FPC clinics were $24.0 million and ($1.6 million),
respectively, for the six months ended June 30, 1999, and $22.9 million and
$600,000, respectively, for the six months ended June 30, 1998.
At June 30, 1999, net assets currently expected to be sold during the
remainder of 1999 totaled approximately $72.4 million after taking into account
the charges discussed above relating to clinics with which the Company intends
to terminate its affiliation. These net assets consisted of current assets,
property and equipment, other assets and current liabilities which will be
assumed. The Company intends to recover these amounts during 1999 as the asset
sales occur. However, there can be no assurance that the Company will recover
this entire amount. Subsequent to June 30, 1999, the Company completed the sale
of two clinics and received approximately $32.8 million on those assets held for
sale, with the purchasers assuming certain liabilities. Amounts received upon
the disposition of the assets approximated the post-charge net carrying value,
with the exception of Holt-Krock. An additional $1.4 million in proceeds related
to the sale of assets to Sparks Regional Medical Center ("Sparks") is being held
in escrow pending the resolution of certain disputed matters. The Company also
intends to seek recovery of certain of its remaining assets through litigation
against several physicians formerly affiliated with Holt-Krock who did not join
Sparks.
The Company continues to evaluate strategic options with certain
affiliated medical groups that may involve the potential sale or disposition of
certain clinic operations. These discussions are in the preliminary stages, but
depending on their outcome, the Company's financial results could be impacted.
The Company currently anticipates potential sales in the third quarter of 1999
involving up to $35.2 million in clinic operating assets related to two
additional medical groups comprised of 136 physicians as of June 30, 1999. The
Company expects to use the proceeds from these sales to repay amounts
outstanding under its bank credit facility. Depending on the form and amount of
proceeds from these sales, the expected interest savings from the use of such
proceeds may not adequately offset the current earnings contribution of these
clinic operations, and the financial results of the Company may be negatively
affected. Any gain or loss on these potential transactions or restructuring
charges, if necessary, will be recorded when an estimate of such amounts can be
determined.
For various reasons, including legal and regulatory issues, the Company
has not been able to consummate its long-term affiliation agreement with the
Guthrie Clinic in Sayre, Pennsylvania and has been operating under an interim
agreement since 1995. The Company does not currently expect the Guthrie Clinic
to renew or extend this interim agreement beyond November 1999. As a result, the
Company believes that through existing agreements it is entitled to recover the
value of its accumulated Guthrie Clinic assets at their current carrying value
and receive repayment of loans made to the Guthrie Clinic, which aggregated
approximately $37.7 million at June 30, 1999. There can be no assurance that the
Guthrie Clinic will fully comply with the terms of its agreements with the
Company.
There can be no assurance that in the future a similar combination of
negative characteristics will not develop at a clinic affiliated with the
Company and result in the termination of the service agreement or that in the
future additional clinics will not terminate their relationships with the
Company in a manner that may materially adversely affect the Company. For
additional discussion, see "Results of Operations - 1999 Compared to 1998".
The Company recorded a pre-tax charge to earnings of approximately
$14.2 million in the first quarter of 1998 relating to the termination of its
merger agreement with MedPartners, Inc. This charge represented PhyCor's share
of investment banking, legal, travel, accounting and other expenses incurred
during the merger negotiation process.
During the second quarter of 1999, the Company appears to have
favorably resolved its outstanding Internal Revenue Service ("IRS") examinations
for the years 1988-1995. The IRS had proposed adjustments relating to the timing
of recognition for tax purposes of certain revenue and deductions related to
accounts receivable, the Company's relationship with affiliated physician
groups, and various other timing differences. The tax years 1988 through 1995
have been closed, pending final IRS documents, with respect to all issues
without a material financial impact, and the Company is currently not under
examination by the IRS for any other taxable year, except for two subsidiaries
which are currently under examination for the 1995 tax year.
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The Company acquired the stock of these subsidiaries during 1996. The Company
believes that it is indemnified by the sellers for any and all tax liabilities
resulting from such examinations and does not believe the resolution of these
examinations will have a material adverse effect on its financial condition. In
August 1999, the Company received a $13.7 million tax refund as a result of
applying the 1998 loss carryback to recover taxes paid in 1996 and 1997.
The Company modified its bank credit facility in March 1999. The
Company's bank credit facility, as amended, provides for a five-year, $500.0
million revolving line of credit for use by the Company prior to April 2003 for
acquisitions, working capital, capital expenditures and general corporate
purposes. The total drawn cost under the facility is either (i) the applicable
eurodollar rate plus .625% to 1.50% per annum or (ii) the agent's base rate plus
.40% to .65% per annum. The total weighted average drawn cost of outstanding
borrowings at June 30, 1999 was 6.53%. The amended bank credit facility also
provides for an increase from $25 million to $50 million for the aggregate
amount of letters of credit which may be issued by the Company relating to its
IPA operations and provides that in the event of a reduced rating by certain
rating agencies, the Company would be required to pledge as security for
repayment of the credit facility the capital stock the Company holds in certain
of its subsidiaries. The March 1999 amendment provides for acquisitions without
bank approval of up to $25 million individually or $150 million in the aggregate
during any 12-month period and limits the amount of its securities the Company
may repurchase based upon certain financial ratios.
The Company modified its synthetic lease facility in March 1999. The
Company's synthetic lease facility, as amended, provides off-balance sheet
financing of $60 million with an option to purchase leased facilities at the end
of the lease term. The total drawn cost under the synthetic lease facility is
.50% to 1.25% above the applicable eurodollar rate. At June 30, 1999, of the $60
million available under the synthetic lease facility, an aggregate of
approximately $26.3 million was drawn under the synthetic lease facility and
$26.0 million had been committed to lease properties associated with two of the
Company's affiliated clinics. The amended synthetic lease facility is not
project specific but is expected to be used for, among other projects, the
construction or acquisition of certain medical office buildings related to the
Company's operations.
The Company has received approval from its lenders to amend its bank
credit facility and synthetic lease facility to provide for the pending issuance
of the zero coupon subordinated convertible notes and related matters associated
with the Warburg, Pincus transaction. The total drawn cost under the amended
bank credit facility will be either (i) the applicable eurodollar rate plus
.875% to 1.75% per annum or (ii) the agent's base rate plus .175% to .40% per
annum. The amended bank credit facility will provide for an increase from $50
million to $75 million for the aggregate amount of letters of credit which may
be issued by the Company. The bank credit facility amendment will allow $30
million of the net proceeds from the zero coupon notes to be used for securities
repurchases, with a remaining allowance of $35 million for future securities
repurchases. The total drawn cost under the amended synthetic lease facility
will be .875% to 1.75% above the applicable eurodollar rate. These amendments
will be effective upon completion of the Warburg, Pincus transaction, which is
pending certain state insurance regulatory approvals that are expected to be
received during the third quarter of 1999.
The Company's bank credit facility and synthetic lease facility contain
covenants which, among other things, require the Company to maintain certain
financial ratios and impose certain limitations or prohibitions on the Company
with respect to (i) the incurring of certain indebtedness, (ii) the creation of
security interests on the assets of the Company, (iii) the payment of cash
dividends on, and the redemption or repurchase of, securities of the Company,
(iv) investments and (v) acquisitions.
At June 30, 1999, notional amounts under interest rate swap agreements
totaled $210.2 million. Fixed interest rates range from 5.14% to 5.78% relative
to the one month or three month floating LIBOR. Up to an additional $15.8
million may be fixed at 5.28% as additional amounts are drawn under the
synthetic lease facility prior to April 28, 2000. The swap agreements mature at
various dates from July 2003 to April 2005. The lender may elect to terminate
the agreement covering $100 million beginning September 2000 and another $100
million beginning October 2000. The FASB has issued Statement of Financial
Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments
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and Hedging Activities, which will require the Company to mark certain of its
interest rate swap agreements to market due to lender optionality features
included in those swap agreements. SFAS No. 133 was amended by the issuance of
Statement of Financial Accounting Standards (SFAS) No. 137, Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133 - an amendment of FASB Statement No. 133, which defers
the required date of adoption by the Company to the first quarter of 2001. Had
the Company adopted the requirements of SFAS No. 133 for the six months ended
June 30, 1999, the Company estimates it would have recorded a pre-tax non-cash
charge to earnings of $378,000. The Company has historically not engaged in
trading activities in its interest rate swap agreements and does not intend to
do so in the future.
At June 30, 1999, the Company had cash and cash equivalents of
approximately $74.5 million and at August 12, 1999, approximately $126.0 million
available under its current bank credit facility. In addition, proceeds from the
Warburg, Pincus transaction, net of the $30.0 million expected to be used for
securities repurchases and transaction costs, of approximately $92.5 million are
expected to be received during the third quarter of 1999. The Company believes
that these proceeds and the combination of funds available under the Company's
bank credit facility and synthetic lease facility, together with cash reserves,
cash flow from other transactions, operations and asset dispositions should be
sufficient to meet the Company's current planned acquisition, expansion, capital
expenditure and working capital needs over the next year. In addition, in order
to provide the funds necessary for the continued pursuit of the Company's
long-term acquisition and expansion strategy, the Company may continue to incur,
from time to time, additional short-term and long-term indebtedness and to issue
equity and debt securities, the availability and terms of which will depend upon
market and other conditions. There can be no assurance that such additional
financing will be available on terms acceptable to the Company. The outcome of
certain pending legal proceedings described in Part II, Item 1 hereof may have
an impact on the Company's liquidity and capital resources.
Year 2000
The Following Material is Designated as Year 2000 Readiness Disclosure
for Purposes of the Year 2000 Information and Readiness Disclosure Act.
PhyCor has developed a program designed to identify, assess, and
remediate potential malfunctions and failures that may result from the inability
of computers and embedded computer chips within the Company's information
systems and equipment to appropriately identify and utilize date-sensitive
information relating to periods subsequent to December 31, 1999. This issue is
commonly referred to as the "Year 2000 issue" and affects not only the Company,
but virtually all companies and organizations with which the Company does
business. The Company is dependent upon Year 2000 compliant information
technology systems and equipment in applications critical to the Company's
business. The Company's information technology systems ("IT systems") can be
broadly categorized into the following areas: (i) practice management, (ii)
managed care information, (iii) consumer decision support system that supports
the operations of CareWise, (iv) ancillary information systems, including
laboratory, radiology, pharmacy and clinical ancillary systems, and (v) other
administrative information systems including accounting, payroll, human resource
and other desktop systems and applications.
The Company generally owns and provides to its various affiliated
multi-specialty clinics the IT systems in use at those locations, and such
systems represent a variety of vendors. In addition, the Company generally owns
and provides biomedical equipment (laboratory equipment, radiology equipment,
diagnostic equipment and medical treatment equipment) for use by its affiliated
physician groups and by its Company-owned hospitals, as well as other equipment
in use at Company-owned or leased facilities such as telephone and HVAC systems.
Such non-information technology ("Non-IT") equipment often contains embedded
computer chips that could be susceptible to failure or malfunction as a result
of the Year 2000 issue.
To address the Year 2000 issue, the Company formed a Year 2000
committee comprised of representatives from a cross-section of the Company's
operations as well as the Company's senior management. Beginning in August
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1997, the committee, with the assistance of outside consultants, developed a
comprehensive plan to address the Year 2000 issue within all facets of the
Company's operations. The plan includes processes to inventory, assess,
remediate or replace as necessary, and test the Company's IT and Non-IT systems
and equipment. In addition, the Company has appointed local project coordinators
at all Company-owned facilities who are responsible for overseeing and
implementing the comprehensive project management activities at the local
subsidiary level. Each project coordinator is responsible for developing a local
project plan that includes processes to inventory, assess, remediate or replace
as necessary, and test the Company's IT and Non-IT systems and equipment. Each
local project coordinator is also responsible for assessing the compliance of
the electronic trading partners and business critical vendors for that location.
However, the compliance of certain vendors providing business critical IT
systems in wide use within the Company is being addressed by the Company's
senior management.
The Company has completed the inventory and assessment phase of
business critical IT systems and is in the process of upgrading or replacing
those business critical IT systems found not to be compliant, either internally
or through the upgrades provided by the Company's vendors. In certain cases, the
Company's plan provides for verification of Year 2000 compliance of
vendor-supplied IT systems by obtaining warranties and legal representations of
the vendors. Much of the remediation is being accomplished as a part of the
Company's normal process of standardizing various IT systems utilized by its
affiliated clinics and IPAs, although in certain cases the standardization
process is moving at an accelerated pace as a result of the Year 2000 issue. As
of June 30, 1999, management believed approximately 80% of the Company's
business critical IT systems at the Company and its subsidiaries to be Year 2000
compliant as a result of upgrades, replacements or testing. The Company
anticipates that all remediation and testing of its business critical IT systems
will be completed by November 1999.
The Company is in the process of completing the inventory and
assessment phase of its Non-IT systems and equipment, which are comprised
primarily of medical equipment with embedded chip technology that are located
throughout the subsidiaries' facilities. The Company is relying primarily on its
local project coordinators and on the equipment vendors' representations in
order to complete the inventory and assessment phase and either remediate or
replace non-compliant equipment. As of June 30, 1999, substantially all of the
Company's subsidiaries had completed the inventory and assessment phase, and
those facilities had completed approximately 75% of the remediation and testing
of Non-IT systems and equipment. The Company estimates that substantially all of
its subsidiaries will have substantially completed remediation and testing of
Non-IT systems and medical equipment by November 1999.
The Company is substantially dependent on a wide variety of third
parties to operate its business. These third parties include medical equipment
and IT software and hardware vendors, medical claims processors that act as
intermediaries between the Company's medical practice subsidiaries and the
payors of such claims, and the payors themselves, which includes the Health Care
Financing Administration ("HCFA"). HCFA paid to the Company Medicare claims that
comprised approximately 15% of the Company's net revenue during the first six
months of 1999. In most cases, these third party relationships originate and are
managed at the local clinic level. The Company estimates that information
concerning the Year 2000 readiness of the most significant third parties will be
received and analyzed by the Company by October 1999. Together with its trade
associations and other third parties, the Company is monitoring the status and
progress of HCFA's Year 2000 compliance. HCFA has represented that its systems
are or will soon be Year 2000 compliant. Effective April 5, 1999, HCFA began
requiring all Medicare providers that submit Medicare claims electronically to
do so in an approved Year 2000 compliant format. The process of billing and
collecting for Medicare claims involves a number of third parties that the
Company does not control, including intermediaries and HCFA independent
contractors. The Company believes that most of these third parties are able to
comply with HCFA billing requirements. The Company is in the process of
verifying the Year 2000 compliance of third parties upon which the Company
relies to process claims, including significant third party payors.
The Company currently is working at the parent company level and with
local project coordinators in each of its subsidiary locations to develop
contingency plans for business critical IT systems and Non-IT medical equipment
to minimize business interruptions and avoid disruption to patient care as a
result of Year 2000 related issues. The
19
<PAGE> 20
Company anticipates that contingency plans for non-compliant business critical
IT systems and non-compliant Non-IT medical equipment will be completed by
November 1999.
There are a number of risks arising out of Year 2000 related failure,
any of which could have a material adverse effect on the Company's financial
condition or results of operations. These risks include (i) failures or
malfunctions in practice management applications that could prevent automated
scheduling, accounts receivable management and billing and collection on which
each of the subsidiary locations is substantially dependent, (ii) failures or
malfunctions of claims processing intermediaries or payors that may result in
substantial payment delays that could negatively impact cash flows, or (iii) the
failure of certain critical pieces of medical equipment that could result in
personal injury or misdiagnosis of patients treated at the Company's affiliated
clinics or hospitals. The Company has a number of ongoing obligations that could
be materially adversely impacted by one or more of the above described risks. If
the Company has insufficient cash flow to meet its expenses as a result of a
Year 2000 related failure, it will need to borrow available funds under its
credit lines or obtain additional financing. There can be no assurance that such
funds or any other additional financing will be available in the future when
needed.
To date, the Company estimates that it has spent approximately $23.0
million on the development and implementation of its Year 2000 compliance plan.
The Company believes that it will need to spend an additional $5.0 million for a
total of approximately $28 million to complete all phases of its plan, which
amounts will be funded from cash flows from operations and, if necessary, with
borrowings under the Company's primary credit facility. Of those costs, an
estimated $24 million, the majority of which has already been spent, is expected
to be incurred to acquire replacement systems and equipment, including amounts
spent in connection with standardizing certain of the Company's IT systems that
it would have spent regardless of the Year 2000 initiative.
The foregoing estimates and conclusions regarding the Company's Year
2000 plan contain forward looking statements and are based on management's best
estimates of future events. Risks to completing the Year 2000 plan include the
availability of resources, the Company's ability to discover and correct
potential Year 2000 problems that could have a serious impact on specific
systems, equipment or facilities, the ability of material third party vendors
and trading partners to achieve Year 2000 compliance, the proper functioning of
new systems and the integration of those systems and related software into the
Company's operations. Some of these risks are beyond the Company's control.
Forward-looking statements of PhyCor included herein or incorporated by
reference including, but not limited to, those regarding future business
prospects, the acquisition of additional clinics, the development of additional
IPAs, the adequacy of PhyCor's capital resources, the adequacy of recent and
proposed asset impairment and restructuring charges, 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,
uncertainties, and other factors described in the Company's Annual Report on
Form 10-K for the year ended December 31, 1998.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
During the six months ended June 30, 1999, there were no material
changes to the Company's quantitative and qualitative disclosures about the
market risks associated with financial instruments as described in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company and certain of its current and former officers and
directors, Joseph C. Hutts, Derril W. Reeves, Richard D. Wright (who is no
longer with the Company), Thompson S. Dent, and John K. Crawford have been named
20
<PAGE> 21
defendants in securities fraud class action lawsuits filed in state and federal
courts. The factual allegations of the complaints in all lawsuits are
substantially identical and assert that during various periods between April 22,
1997 and September 22, 1998, the defendants issued false and misleading
statements which materially misrepresented the earnings and financial condition
of the Company and its clinic operations and misrepresented and failed to
disclose various other matters concerning the Company's operations in order to
conceal the alleged failure of the Company's business model. Plaintiffs further
assert that the alleged misrepresentations caused the Company's securities to
trade at inflated levels while the individual defendants sold shares of the
Company's stock at such levels. In each of the lawsuits, the plaintiff seeks to
be certified as the representative of a class of all persons similarly situated
who were allegedly damaged by the defendants' alleged violations during the
"class period." Each of the lawsuits seeks damages in an indeterminate amount,
interest, attorneys' fees and equitable relief, including the imposition of a
trust upon the profits from the individual defendants' trades. The federal court
class action lawsuits have been consolidated in the U.S. District Court for the
Middle District of Tennessee. Defendants' motion to dismiss is pending before
that court. On June 24, 1999, a lawsuit was filed in that court on behalf of
investors in the Company's debt securities. It is anticipated that this lawsuit
will be consolidated with the shareholder suits. The state court class action
lawsuits have been consolidated in Davidson County, Tennessee. After the Court
granted the defendants' motion to dismiss, the plaintiffs filed an amended
complaint on July 20, 1999 naming KPMG LLP, the Company's certified public
accounting firm, as an additional defendant. Defendants intend to file a motion
to dismiss the amended complaint. The Company believes that it has meritorious
defenses to all of the claims, and intends to defend vigorously against these
actions. There can be no assurance, however, that such defenses will be
successful or that the lawsuits will not have a material adverse effect on the
Company. The Company's Restated Charter provides that the Company shall
indemnify the officers and directors for any liability arising from these suits
unless a final judgment establishes liability (a) for a breach of the duty of
loyalty to the Company or its shareholders, (b) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of law
or (c) for an unlawful distribution.
On January 23, 1999, the Company and Holt-Krock Clinic, P.L.C.
("Holt-Krock") entered into a settlement agreement with Sparks Regional Medical
Center and Sparks Regional Medical Center Foundation (collectively, "Sparks") to
resolve their lawsuits and all related claims between the parties and certain
former Holt-Krock physicians. Effective as of August 1, 1999, Holt-Krock, Sparks
and PhyCor consummated the transactions contemplated in the settlement agreement
and mutually dismissed their lawsuits and related claims between the parties.
A portion of the proceeds related to the sale of assets to Sparks is being held
in escrow pending the resolution of certain disputed matters as to those
assets. The Company also intends to seek recovery of certain of its remaining
assets through litigation against several physicians formerly affiliated with
Holt-Krock who did not join Sparks.
On February 2, 1999, Prem Reddy, M.D., the former majority shareholder
of PrimeCare International, Inc., a medical network management company acquired
by the Company in May 1998, filed suit against the Company and certain of its
current and former directors and executive officers in United States District
Court for the Central District of California. The complaint asserts fraudulent
inducement relating to the PrimeCare transaction and that the defendants issued
false and misleading statements which materially misrepresented the earnings and
financial condition of the Company and its clinic operations and misrepresented
and failed to disclose various other matters concerning the Company's operations
in order to conceal the alleged failure of the Company's business model. The
Court has recently granted a motion to dismiss the action with respect to all
the officers and directors of the Company in their individual capacities,
however, the plaintiff has leave to amend his complaint. The Company believes
that it has meritorious defenses to all of the claims and intends to vigorously
defend this suit, however, there can be no assurance that if the Company is not
successful in litigation, that this suit will not have a material adverse effect
on the Company.
On February 6, 1999, White-Wilson Medical Center, P.A. ("White -
Wilson") filed suit against PhyCor of Fort Walton Beach, Inc., the PhyCor
subsidiary with which it is a party to a service agreement, in the United States
District Court for the Northern District of Florida. White-Wilson is seeking a
declaratory judgment regarding the enforceability of the fee arrangement in
light of an opinion of the Florida Board of Medicine and OIG Advisory Opinion
98-4. This action has been stayed pending negotiations by the parties.
Additionally, on March 17, 1999, the Clark-Holder Clinic, P.A. filed suit
against PhyCor of LaGrange, Inc., the PhyCor subsidiary with which it is a party
to a service agreement, in Georgia Superior Court for Troup County, Georgia
similarly questioning the enforceability of the fee arrangement in
21
<PAGE> 22
light of OIG Advisory Opinion 98-4. On April 27, 1999, the Company filed a
motion to remove the case to the federal district court in Georgia. The terms of
the service agreements provide that the agreements shall be modified if the laws
are changed, modified or interpreted in a way that requires a change in the
agreements. PhyCor intends to vigorously defend the enforceability of the
structure of the management fee against these suits, however, there can be no
assurance that if the Company is not successful in such litigation, that these
suits will not have a material adverse effect on the Company.
Certain litigation is pending against the physician groups affiliated
with the Company and IPAs managed by the Company. The Company has not assumed
any liability in connection with such litigation. Claims against the physician
groups and IPAs could result in substantial damage awards to the claimants that
may exceed applicable insurance coverage limits. While there can be no assurance
that the physician groups and IPAs will be successful in any such litigation,
the Company does not believe any such litigation will have a material adverse
effect on the Company. Certain other litigation is pending against the Company
and certain subsidiaries of the Company, none of which management believes would
have a material adverse effect on the Company's financial position or results of
operations on a consolidated basis.
The U.S. Department of Labor (the "Department") is conducting an
investigation of the administration of the PhyCor, Inc. Savings and Profit
Sharing Plan (the "Plan"). The Department has not completed its investigation,
but has raised questions involving certain administrative practices of the Plan
in early 1998. The Department has not recommended enforcement action against
PhyCor, nor has it identified an amount of liability or penalty that could be
assessed against PhyCor. Based on the nature of the investigation, PhyCor
believes that its financial exposure is not material. PhyCor intends to
cooperate with the Department's investigation. There can be no assurance,
however, that PhyCor will not have a monetary penalty imposed against it.
The Company's forward-looking statements relating to the
above-described litigation reflect management's best judgment based on the
status of the litigation to date and facts currently known to the Company and
its management and, as a result, involve a number of risks and uncertainties,
including the possible disclosure of new facts and information adverse to the
Company in the discovery process and the inherent uncertainties associated with
litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The annual meeting of shareholders of the Company was held on May 25, 1999. At
this meeting, the following matters were voted upon by the Company's
shareholders:
(A) ADOPTION OF THE COMPANY'S 1999 INCENTIVE STOCK PLAN
The shareholders of the Company ratified the adoption of the Company's 1999
Incentive Stock Plan.
<TABLE>
<CAPTION>
Votes Cast in Favor Votes Cast Against Abstentions
------------------- ------------------ -----------
<S> <C> <C>
29,934,052 12,942,664 285,608
</TABLE>
22
<PAGE> 23
(B) ELECTION OF CLASS II DIRECTORS
Sam A. Brooks, Jr., Thompson S. Dent, Dr. James A. Moncrief and Kay Coles James
were elected to serve as Class II directors of the Company. The vote was as
follows:
<TABLE>
<CAPTION>
Votes Cast Votes Cast Against
Name in Favor or Withheld
---- ---------- -------------------
<S> <C> <C>
Sam A. Brooks, Jr. 61,425,473 1,307,110
Thompson S. Dent 58,537,234 4,195,349
Dr. James A. Moncrief 61,451,955 1,280,628
Kay Coles James 58,140,461 4,592,122
</TABLE>
(C) SELECTION OF AUDITORS
The shareholders of the Company ratified the appointment of KPMG LLP as the
Company's independent auditors for the year ended December 31, 1999, by the
following vote:
<TABLE>
<CAPTION>
Votes Cast in Favor Votes Cast Against Abstentions
------------------- ------------------ -----------
<S> <C> <C>
61,871,951 762,842 97,790
</TABLE>
ITEM 5. OTHER INFORMATION.
The deadline for delivering to the Company notice of shareholder proposals,
other than proposals to be included in the proxy statement, for the 2000 Annual
Meeting of Shareholders will be March 8, 2000, pursuant to Rule 14a-4. The
persons named as proxies in the proxy statement may exercise discretionary
authority to vote on any proposals received after such date.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------ -----------------------
<S> <C>
3.1 -- Restated Charter of PhyCor (1)
3.2 -- Amendment to Restated Charter of PhyCor (2)
3.3 -- Amendment to Restated Charter of PhyCor (3)
3.4 -- Amended Bylaws of PhyCor (1)
4.1 -- Specimen of Common Stock Certificate (4)
4.2 -- Shareholder Rights Agreement, dated February 18, 1994, between PhyCor
and First Union National Bank of North Carolina (5)
10.1 -- PhyCor, Inc. 1999 Incentive Stock Plan (6)
10.2 -- Securities Purchase Agreement for Zero Coupon Convertible
Subordinated Notes due 2014, dated as of June 15, 1999 (7)
10.3 -- Employment Agreement between PhyCor and John K. Crawford, dated as of
April 20, 1999 (7)
27 -- Financial Data Schedule (for SEC use only)
</TABLE>
- -------------
(1) Incorporated by reference to exhibits filed PhyCor's Annual Report on Form
10-K for the year ended December 31, 1994, Commission No. 0-19786.
23
<PAGE> 24
(2) Incorporated by reference to exhibits filed with PhyCor's Registration
Statement on Form S-3, Registration No. 33-93018.
(3) Incorporated by reference to exhibits filed with PhyCor's Registration
Statement on Form S-3, Registration No. 33-98528.
(4) Incorporated by reference to exhibits filed with PhyCor's Registration
Statement on Form S-1, Registration No. 33-44123.
(5) Incorporated by reference to exhibits filed with PhyCor's Current Report on
Form 8-K dated February 18, 1994, Commission No. 0-19786.
(6) Incorporated by reference to exhibits filed with PhyCor's Registration
Statement on Form S-8, Registration No. 333-58709.
(7) Filed herewith.
(B) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed by the Company for the quarter ended
June 30, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHYCOR, INC.
By: /s/ John K. Crawford
------------------------------------
John K. Crawford
Executive Vice President and
Chief Financial Officer
Date: August 16, 1999
24
<PAGE> 25
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------ -----------------------
<S> <C>
3.1 -- Restated Charter of PhyCor (1)
3.2 -- Amendment to Restated Charter of PhyCor (2)
3.3 -- Amendment to Restated Charter of PhyCor (3)
3.4 -- Amended Bylaws of PhyCor (1)
4.1 -- Specimen of Common Stock Certificate (4)
4.2 -- Shareholder Rights Agreement, dated February 18, 1994, between PhyCor
and First Union National Bank of North Carolina (5)
10.1 -- PhyCor, Inc. 1999 Incentive Stock Plan (6)
10.2 -- Securities Purchase Agreement for Zero Coupon Convertible
Subordinated Notes due 2014, dated as of June 15, 1999 (7)
10.3 -- Employment Agreement between PhyCor and John K. Crawford, dated as of
April 20, 1999 (7)
27 -- Financial Data Schedule (for SEC use only)
</TABLE>
- -------------
(1) Incorporated by reference to exhibits filed with PhyCor's Annual Report on
Form 10-K for the year ended December 31, 1994, Commission No. 0-19786.
(2) Incorporated by reference to exhibits filed with PhyCor's Registration
Statement on Form S-3, Registration No. 33-93018.
(3) Incorporated by reference to exhibits filed with PhyCor's Registration
Statement on Form S-3, Registration No. 33-98528.
(4) Incorporated by reference to exhibits filed with PhyCor's Registration
Statement on Form S-1, Registration No. 33-44123.
(5) Incorporated by reference to exhibits filed with PhyCor's Current Report on
Form 8-K dated February 18, 1994, Commission No. 0-19786.
(6) Incorporated by reference to exhibits filed with PhyCor's Registration
Statement on Form S-8, Registration No. 333-58709.
(7) Filed herewith.
<PAGE> 1
EXECUTION COPY
EXHIBIT 10.2
================================================================================
PHYCOR, INC.
- --------------------------------------------------------------------------------
SECURITIES PURCHASE AGREEMENT
- --------------------------------------------------------------------------------
Zero Coupon Convertible Subordinated Notes due 2014
Dated as of June 15, 1999
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
1. ISSUANCE OF NOTES..............................................................................................1
1.1. Authorization; Conversion of Notes into Common Stock; Etc.....................................1
1.2. Purchase and Sale of Notes; the Closing.......................................................1
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY..................................................................2
2.1. Organization, Qualification, Authorization....................................................2
2.2. Capital Stock.................................................................................3
2.3. Incorporation, Good Standing and Ownership of Subsidiaries....................................3
2.4. Consents and Approvals........................................................................4
2.5. SEC Reports; Financial Statements.............................................................5
2.6. Absence of Changes............................................................................6
2.7. No Undisclosed Liabilities....................................................................6
2.8. Absence of Defaults, etc......................................................................7
2.9. Material Contracts............................................................................7
2.10. Litigation and Orders.........................................................................7
2.11. Compliance with Law...........................................................................8
2.12. Taxes........................................................................................10
2.13. Title to Properties..........................................................................10
2.14. Compliance with ERISA........................................................................10
2.15. Private Offering.............................................................................11
2.16. Investment Company Act and Holding Company Status, Etc.......................................11
2.17. Environmental Matters........................................................................11
2.18. Insurance....................................................................................13
2.19. Registration Rights..........................................................................13
2.20. Brokerage....................................................................................13
2.21. Takeover Statute; Rights Plan................................................................13
2.22. Y2K Compliance...............................................................................13
3. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS...............................................................14
3.1. Purchase of Notes............................................................................14
3.2. Organization, Qualification, Authorization...................................................14
3.3. Accredited Investor Status, etc..............................................................14
3.4. Brokerage....................................................................................15
4. INVESTOR CLOSING CONDITIONS...................................................................................15
4.1. Representations and Warranties; No Default...................................................15
4.2. Injunction...................................................................................15
4.3. Counsel's Opinion............................................................................15
4.4. Adverse Development..........................................................................16
4.5. Election of Directors........................................................................16
4.6. Consents and Approvals.......................................................................16
4.7. Secretary's Certificate......................................................................16
4.8. Officer's Certificate........................................................................16
4.9. Registration Rights Agreement................................................................17
4.10. Amendments to Bank Debt......................................................................17
4.11. Approval of Proceedings......................................................................17
</TABLE>
(i)
<PAGE> 3
<TABLE>
<S> <C> <C>
5. COMPANY CLOSING CONDITIONS....................................................................................17
5.1. Representations and Warranties...............................................................17
5.2. Injunction...................................................................................17
5.3. Consents and Approvals.......................................................................18
5.4. Investors' Certificate.......................................................................18
5.5. Amendments to Bank Debt......................................................................18
6. COVENANTS.....................................................................................................18
6.1. Resale of Securities.........................................................................18
6.2. Covenants Pending Closing....................................................................19
6.3. Board Nominees...............................................................................19
6.4. Use of Proceeds..............................................................................19
6.5. Standstill...................................................................................20
6.6. Additional Purchases of Common Stock.........................................................21
6.7. Restrictions on Transfer.....................................................................22
6.8. Reasonable Efforts; Cooperation..............................................................24
6.9. Financial and Business Information...........................................................24
6.10. Inspection...................................................................................26
6.11. Confidentiality..............................................................................26
6.12. Takeover Statute.............................................................................27
6.13. Rights Agreement Inapplicable................................................................28
6.14. Hart-Scott Filings...........................................................................28
6.15. Conduct of Business; Negative Covenants......................................................28
7. TERMS OF NOTES; PREPAYMENTS OF NOTES; PURCHASE OF NOTES.......................................................29
7.1. General Terms of Notes.......................................................................29
7.2. Optional Redemption by the Company...........................................................29
7.3. Repurchase at Option of the Holder Upon a Change in Control..................................31
7.4. Purchase of Notes at the Option of the Holder................................................32
7.5. Further Conditions for Purchase at the Option of Holders Upon a Change in Control
and Purchase of Notes at the Option of the Holder........................................38
7.6. Conversion of Notes..........................................................................39
7.7. Adjustments to Conversion Rate...............................................................41
7.8. Miscellaneous Provisions Relating to Conversion..............................................49
8. DEFINITIONS...................................................................................................52
8.1. Definitions..................................................................................52
8.2. Accounting Terms.............................................................................61
9. EVENTS OF DEFAULT; REMEDIES...................................................................................61
9.1. Events of Default; Acceleration of Maturity and Rescission...................................61
9.2. Suits for Enforcement........................................................................63
9.3. Remedies Cumulative..........................................................................64
9.4. Remedies Not Waived..........................................................................64
</TABLE>
(ii)
<PAGE> 4
<TABLE>
<S> <C> <C>
10. SUBORDINATION OF NOTES.......................................................................................64
10.1. Securities Subordinated to Senior Indebtedness...............................................64
10.2. Notes Subordinated to Prior Payment of All Senior Indebtedness on Dissolution,
Liquidation, Reorganization, etc., of the Company........................................64
10.3. Holders of Notes to be Subrogated to Right of Holders of Senior Indebtedness.................66
10.4. Obligations of the Company Unconditional.....................................................66
10.5. Company Not to Make Payment with Respect to Notes in Certain Circumstances...................67
10.6. Subordination Rights Not Impaired by Acts or Omissions of Company or Holders of
Senior Indebtedness......................................................................68
10.7. Section 10 Not to Prevent Events of Default..................................................68
11. REGISTRATION, TRANSFER AND EXCHANGE OF NOTES; RESTRICTIVE LEGENDS TRANSFER RESTRICTIONS......................69
12. LOST, ETC., NOTES............................................................................................70
13. AMENDMENT AND WAIVER.........................................................................................70
14. TERMINATION..................................................................................................71
15. PAYMENTS.....................................................................................................71
16. CERTAIN TAXES................................................................................................72
17. MISCELLANEOUS................................................................................................72
17.1. Expenses.....................................................................................72
17.2. Reliance on and Survival of Representations..................................................72
17.3. Successors and Assigns.......................................................................72
17.4. Communications...............................................................................72
17.5. Consent to Jurisdiction; Service of Process; Waiver of Jury Trial............................73
17.6. Indemnification..............................................................................74
17.7. Governing Law................................................................................74
17.8. Headings.....................................................................................74
17.9. Counterparts.................................................................................74
</TABLE>
(iii)
<PAGE> 5
SCHEDULE I -- Names and Addresses of Purchasers
EXHIBIT A -- FORM OF NOTE
EXHIBIT B -- FORM OF OPINION OF SPECIAL COUNSEL
TO THE COMPANY
EXHIBIT C -- FORM OF REGISTRATION RIGHTS AGREEMENT
EXHIBIT D -- FORM OF OFFICERS' CERTIFICATE OF THE COMPANY
SCHEDULE 2.2B -- LIENS ON SHARES ISSUED UPON CONVERSION OF THE NOTES
SCHEDULE 2.2C -- OUTSTANDING CONVERTIBLE SECURITIES,
OPTIONS, ETC.
SCHEDULE 2.3 -- SIGNIFICANT SUBSIDIARIES
SCHEDULE 2.4 -- CONSENTS AND APPROVALS
SCHEDULE 2.6 -- ABSENCE OF CHANGES
SCHEDULE 2.7 -- UNDISCLOSED LIABILITIES
SCHEDULE 2.9 -- MATERIAL AGREEMENTS; SENIOR INDEBTEDNESS
SCHEDULE 2.10 -- LITIGATION
SCHEDULE 2.11 -- COMPLIANCE WITH LAW
SCHEDULE 2.13 -- TITLE TO PROPERTIES
SCHEDULE 2.14 -- COMPLIANCE WITH ERISA
SCHEDULE 2.17 -- ENVIRONMENTAL MATTERS
SCHEDULE 2.19 -- REGISTRATION RIGHTS
SCHEDULE 2.20 -- BROKERAGE
SCHEDULE 4.10 -- AMENDMENTS TO BANK DEBT
SCHEDULE 6.3 -- LIST OF APPROVED NOMINEES
SCHEDULE 7.7 -- SUBJECT LITIGATION
(iv)
<PAGE> 6
PHYCOR, INC.
30 Burton Hills Boulevard
Suite 400
Nashville, TN 37215
SECURITIES PURCHASE AGREEMENT
As of June 15, 1999
TO THE INVESTORS WHOSE NAMES
APPEAR ON THE SIGNATURE PAGES HERETO
Ladies and Gentlemen:
PHYCOR, INC., a Tennessee corporation (the "COMPANY"), hereby
agrees with you as follows:
1. ISSUANCE OF NOTES.
1.1. AUTHORIZATION; CONVERSION OF NOTES INTO COMMON STOCK; ETC.
The Company has duly authorized the issue and sale of Zero Coupon
Convertible Subordinated Notes due 2014 (the "NOTES"), each such Note to be
substantially in the form of Exhibit A attached hereto. As used herein, the term
"NOTES" means all notes originally issued pursuant to this Agreement and all
notes delivered in substitution or exchange for any such notes and, where
applicable, includes the singular number as well as the plural. Certain
capitalized and other terms used in this Agreement are defined in Section 8.
As provided in Section 7, the Notes are convertible into shares
of Common Stock, no par value, of the Company (the "COMMON STOCK").
1.2. PURCHASE AND SALE OF NOTES; THE CLOSING.
Subject to the terms and conditions hereof, the Company hereby
agrees to sell to each Investor, and each Investor agrees to purchase from the
Company, Notes in the aggregate Principal Amount at Final Maturity as set forth
opposite such Investor's name in Schedule I attached hereto. Each Note will be
issued at an issue price of $315.24 per $1,000 Principal Amount at Final
Maturity. The closing of such purchase shall be held at 10:00 A.M., New York
time, on the third Business Day following the satisfaction or waiver of the
conditions set forth in Sections 4 and 5 hereto or on such later Business Day as
may be agreed to by you and the Company (the "CLOSING DATE"), at the offices of
Willkie Farr & Gallagher, 787 Seventh Avenue, New York, NY 10019.
-1-
<PAGE> 7
On the Closing Date, the Company will deliver to each Investor one or more
Notes, dated the Closing Date and registered in such Investor's name or in the
name of one or more of such Investor's nominees, in any denominations (in a
minimum amount of $500,000) and in the aggregate principal amount to be
purchased by the Investors, all as the Investors may specify by timely notice to
the Company (or, in the absence of such notice, one Note registered in each
Investor's name), in each case against delivery to the Company of immediately
available funds in the amount of the purchase price of such Notes, such delivery
to be by wire transfer to such account as the Company may direct in writing.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants, as of the date hereof and as
of the Closing Date, to each of the Investors as follows:
2.1. ORGANIZATION, QUALIFICATION, AUTHORIZATION.
A. The Company is a corporation duly incorporated and validly
existing under the laws of the State of Tennessee and has the corporate power
and authority to own or hold under lease the property it owns or holds under
lease, to transact the business it transacts, to execute and deliver this
Agreement, the Notes and the Registration Rights Agreement and to perform the
provisions hereof and thereof. The Company is duly qualified as a foreign
corporation and is in good standing as a foreign corporation in each
jurisdiction in which the character of the properties owned or held under lease
by it or the nature of the business transacted by it requires such
qualification, except where the failure to be so qualified individually and in
the aggregate would not have a Material Adverse Effect.
B. The execution and delivery by the Company of the Transaction
Documents, the issuance of the Notes, the performance by the Company of its
obligations hereunder and thereunder and the consummation by the Company of the
transactions contemplated hereby and thereby have been duly authorized by all
necessary action on the part of the Company. This Agreement is, and the Notes
and the Registration Rights Agreement when executed and delivered by the Company
will be, legal, valid and binding obligations of the Company enforceable against
the Company in accordance with their respective terms, except as enforceability
may be limited by bankruptcy, insolvency or other similar laws relating to or
affecting the enforcement of creditors' rights generally and by general
principles of equity (regardless of whether such enforceability is considered in
a proceeding in equity or at law), and except as enforceability of the indemnity
provisions contained in the Registration Rights Agreement may be limited by
public policy considerations.
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2.2. CAPITAL STOCK.
A. The authorized capital stock of the Company consists of
250,000,000 shares of its Common Stock, no par value per share (the "COMMON
STOCK") and 10,000,000 shares of preferred stock, no par value per share,
500,000 shares of which have been designated "Series A Junior Participating
Preferred Stock". As of June 10, 1999, (i) 76,292,550 shares of Common Stock
were issued and outstanding, (ii) no shares of preferred stock were issued and
outstanding, (iii) 15,167,218 shares of Common Stock were issuable upon exercise
of stock options and (iv) 5,172,413 shares of Common Stock were issuable for
issuance upon conversion of the Existing Convertible Debentures and (v) 611,127
shares of Common Stock were issuable upon conversion of other promissory notes
of the Company. As of the date hereof, there are no bonds, debentures, notes or
other evidences of indebtedness having the right to vote on any matters on which
the Company's shareholders may vote issued or outstanding.
B. All the outstanding shares of capital stock of the Company
have been duly and validly issued and are fully paid and non-assessable, and
were issued in accordance with the registration or qualification requirements of
the Securities Act and any relevant state securities laws or pursuant to valid
exemptions therefrom. Upon their issuance in accordance with the terms of this
Agreement and the Notes, the shares of Common Stock issuable upon conversion of
the Notes will be duly authorized, validly issued, fully paid and non-assessable
shares of the capital stock of the Company, free and clear of any Lien, except
for those provided for herein or set forth on Schedule 2.2B and other than
restrictions on transfer imposed by federal or state securities laws. The
Company has reserved for issuance the number of shares of Common Stock initially
issuable upon conversion of the Notes.
C. Except as set forth in Section 2.2A or on Schedule 2.2C and
except for the Notes, on the Closing Date there will be no shares of Common
Stock or any other equity security of the Company issuable upon conversion or
exchange of any security of the Company or any Subsidiary of the Company nor
will there be any rights, options, calls or warrants outstanding or other
agreements to acquire shares of Common Stock nor will the Company be
contractually obligated to purchase, redeem or otherwise acquire any of its
outstanding shares. No shareholder of the Company is entitled to any preemptive
or similar rights to subscribe for shares of capital stock of the Company.
2.3. INCORPORATION, GOOD STANDING AND OWNERSHIP OF SUBSIDIARIES.
A. Schedule 2.3 is a list of the Significant Subsidiaries of the
Company, showing, as to each Significant Subsidiary, the correct name thereof,
the jurisdiction of its
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<PAGE> 9
organization and the percentage of shares of each class of securities of such
Significant Subsidiary owned by the Company and each other Subsidiary of the
Company. All of the outstanding shares of each of the Significant Subsidiaries
shown in Schedule 2.3 as being owned by the Company and its Significant
Subsidiaries have been validly issued, are fully paid and nonassessable and,
except as set forth in Schedule 2.3, are owned by the Company or another
Subsidiary free and clear of any Lien. No shares of the Company are owned by any
of its Significant Subsidiaries.
B. Each Significant Subsidiary is a corporation duly
incorporated, validly existing and in good standing under the laws of the
jurisdiction of its incorporation and is duly qualified as a foreign corporation
and is in good standing as a foreign corporation in each jurisdiction in which
the character of the properties owned or held under lease by it or nature of the
business transacted by it requires such qualification, except where the failure
to be so qualified individually and in the aggregate would not have a Material
Adverse Effect. Each Significant Subsidiary has the corporate power and
authority to own or hold under lease the property it owns or holds under lease
and to transact the business it transacts.
2.4. CONSENTS AND APPROVALS.
A. Except as set forth in Schedule 2.4, the execution and
delivery by the Company of the Transaction Documents, the issuance of the Notes,
the performance by the Company of its obligations hereunder and thereunder and
the consummation by the Company of the transactions contemplated hereby and
thereby do not require the Company or any of its Subsidiaries to obtain any
consent, approval, clearance or action of, or make any filing, submission or
registration with, or give any notice to, any Governmental Body or any other
Person, except where the failure to obtain such consents, approvals, clearance
or action would not have a Material Adverse Effect.
B. Except as set forth in Schedule 2.4, the execution and
delivery by the Company of the Transaction Documents, the issuance of the Notes,
the performance by the Company of its obligations hereunder and thereunder and
the consummation by the Company of the transactions contemplated hereby and
thereby will not: (i) conflict with the Restated Charter or Amended Bylaws of
the Company or any Subsidiary; (ii) result in any breach of, or constitute a
default under, or result in the creation of any Lien in respect of any property
of the Company or any Subsidiary under, any Material Agreement to which the
Company or any Subsidiary is a party or by which their respective properties may
be bound or affected; or (iii) conflict with or result in a breach of any of the
terms, conditions or provisions of any Order of any court, arbitrator or
Governmental Body applicable to the Company or any Subsidiary or violate any
provision of any law,
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<PAGE> 10
statute, rule or regulation of any Governmental Body applicable to the Company
or any Subsidiary which, in the case of clauses (ii) or (iii) would have a
Material Adverse Effect.
C. The execution and delivery by the Company of the Transaction
Documents, the issuance of the Notes, the performance by the Company of its
obligations hereunder and thereunder and the consummation by the Company of the
transactions contemplated hereby and thereby will not result in, pursuant to the
terms of any contractual arrangement, (i) the acceleration of the vesting of any
outstanding option, warrant, call, commitment, agreement, conversion right,
preemptive right or other right to subscribe for, purchase or otherwise acquire
any of the shares of the capital stock of the Company or any of the stock of the
Company or any of its Subsidiaries, or debt securities of the Company or any of
its Subsidiaries (collectively "COMMITMENTS", and each individually a
"COMMITMENT"), (ii) any obligation of the Company to grant, extend or enter into
any Commitment, or (iii) any right in favor of any Person to terminate or cancel
any Material Agreement.
2.5. SEC REPORTS; FINANCIAL STATEMENTS.
A. The Company has furnished the Investors with complete copies
of the Company's (i) Annual Reports on Form 10-K for the fiscal years ended
December 31, 1996, December 31, 1997 and December 31, 1998, as filed with the
Commission, (ii) Quarterly Report on Form 10-Q for the quarter ended March 31,
1999, as filed with the Commission, (iii) proxy statements related to all
meetings of its shareholders (whether annual or special) held since January 1,
1997, and (iv) all other reports filed with or registration statements declared
effective by the Commission since January 1, 1997, except registration
statements on Form S-8 relating to employee benefit plans, which are all the
documents (other than preliminary material) that the Company was required to
file with the Commission since that date (clauses (i) through (iv) being
referred to herein collectively as the "COMPANY SEC REPORTS"). As of their
respective dates of filing, the Company SEC Reports were duly filed and complied
in all material respects with the requirements of the Securities Act or the
Exchange Act, as the case may be, and the rules and regulations of the
Commission thereunder applicable to such Company SEC Reports. As of their
respective dates of filing, the Company SEC Reports filed with the Commission
after January 1, 1999 and through the date hereof did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, except for such
statements or omissions, if any, as have been modified by or included in
subsequent filings with the Commission prior to the date hereof.
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<PAGE> 11
B. The audited consolidated financial statements and unaudited
interim financial statements of the Company included in the Company SEC Reports
comply as to form in all material respects with applicable accounting
requirements of the Securities Act and with the published rules and regulations
of the Commission with respect thereto. The financial statements included in the
Company SEC Reports (i) have been prepared in accordance with GAAP applied on a
consistent basis (except as may be indicated therein or in the notes thereto),
(ii) present fairly, in all material respects, the financial position of the
Company and its Subsidiaries as at the dates thereof and the results of their
operations and cash flow for the periods then ended subject, in the case of the
unaudited interim financial statements, to normal year-end audit adjustments and
any other adjustments described therein and the fact that certain information
and notes have been condensed or omitted in accordance with the Exchange Act and
the rules promulgated thereunder, and (iii) are in all material respects, in
accordance with the books of account and records of the Company except as
indicated therein.
2.6. ABSENCE OF CHANGES.
Except as disclosed in the Company SEC Reports or on Schedule
2.6, since December 31, 1998, there has been no (i) change or event which would
have a Material Adverse Effect, (ii) declaration, setting aside or payment of
any dividend or other distribution with respect to the capital stock of the
Company, (iii) issuance of capital stock (other than pursuant to the exercise of
options, warrants, or convertible securities outstanding at such date) or
options, warrants or rights to acquire capital stock (other than the rights
granted to the Investors hereunder), (iv) material loss, destruction or damage
to any material amount of property of the Company or any Subsidiary, that was
not insured, (v) acceleration or prepayment of any indebtedness of the Company
for borrowed money or the refunding of any such indebtedness, (vi) loan or
extension of credit to any officer or employee of the Company or any Subsidiary
other than advances for travel-related expenses and similar advances to officers
and employees of the Company in the ordinary course of business or (vii)
acquisition or disposition of any material assets (or any contract or
arrangement therefor), or any other material transaction by the Company or any
Subsidiary otherwise than for fair value in the ordinary course of business. No
event that would constitute an Event of Default has occurred and is continuing.
2.7. NO UNDISCLOSED LIABILITIES.
Except as set forth on Schedule 2.7, neither the Company nor any
of its Subsidiaries has any debt, obligation or liability (whether accrued,
absolute, contingent, liquidated or otherwise, or whether due or to become due)
including, without
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limitation, unfunded past service liabilities under any pension, profit sharing
or similar plan, except liabilities disclosed in the Company SEC Reports,
liabilities incurred in the ordinary course of business since December 31, 1998,
and obligations under Material Agreements to which the Company or any of its
Subsidiaries are a party or agreements entered into by the Company or any of its
Subsidiaries, in the usual and ordinary course of business, other than debts,
obligations or liabilities which (individually or in the aggregate) would not
have a Material Adverse Effect.
2.8. ABSENCE OF DEFAULTS, ETC.
Neither the Company nor any of its Subsidiaries is in default
under or in violation of (and no event has occurred and no condition exists
which, upon notice or the passage of time (or both), would constitute a default
under) (i) its Restated Charter or Amended Bylaws, (ii) any Material Agreement
to which the Company or any Subsidiary is a party or by which their respective
properties may be bound or affected, or (iii) any order, writ, injunction or
decree of any court or any Federal, state, municipal or other domestic or
foreign governmental department, commission, board, bureau, agency or
instrumentality except, in the case of clause (ii), for defaults or violations
which would not have a Material Adverse Effect.
2.9. MATERIAL CONTRACTS.
A. All Material Agreements to which the Company or any of its
Subsidiaries is a party are set forth on Schedule 2.9 or have been filed as
exhibits to the Company SEC Reports. Each Material Agreement that is currently
in effect is valid, binding and enforceable against the Company or such
Subsidiary and, to the Company's knowledge, the other parties thereto, in
accordance with its terms, and in full force and effect on the date hereof.
B. Schedule 2.9 is a list of all Senior Indebtedness as of the
date hereof.
2.10. LITIGATION AND ORDERS.
Except as set forth on Schedule 2.10 or as disclosed in the
Company SEC Reports, there is no action, suit, arbitration or other legal,
administrative or other governmental investigation, inquiry or proceeding
(whether federal, state, local or foreign) pending or, to the Company's
knowledge, threatened against the Company or any Subsidiary or any of their
respective properties, assets or businesses, except for actions, suits,
arbitrations, investigation, inquiries or proceedings that would not have a
Material Adverse Effect. To the Company's knowledge, there is no fact not known
to the Investors which might result in or form the basis for any such action,
suit, arbitration, investigation, inquiry or other proceeding which would have a
Material Adverse
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Effect. Neither the Company nor any Subsidiary is subject to any Order which
would have a Material Adverse Effect.
2.11. COMPLIANCE WITH LAW.
A. The Company and each of its Subsidiaries are in compliance in
all material respects with, and are not in violation or default in any material
respect under, all federal, state and local laws, ordinances, government rules
and regulations applicable to their business operations, properties, or assets,
including without limitation laws or regulations relating to: occupational
health and safety; insurance companies; HMOs; third party administrators; the
provision or arrangement for the provision of health services; work place
safety; equal employment opportunity and race; and religious, sex and age
discrimination, except where the failure to comply, individually or in the
aggregate, would not have a Material Adverse Effect. No material expenditures,
to the Company's knowledge, are or will be required in order to cause the
current operations or properties of the Company or any of its Subsidiaries to
comply with any applicable laws, ordinances, governmental rules or regulations
at either Closing.
B. The Company and each of its Subsidiaries have all licenses,
permits, franchises or other governmental authorizations ("APPROVALS") necessary
to the ownership of their property and to the operation of their respective
businesses, which if violated or not obtained would have a Material Adverse
Effect. Neither the Company nor any Subsidiary has finally been denied any
application for any such Approvals necessary for their property or for the
operation of their business. There is no action pending, or to the knowledge of
the Company, threatened by appropriate state or federal agencies having
jurisdiction thereof, to either revoke, withdraw, or suspend any such Approvals,
or which would materially affect such Approvals, or to terminate the
participation of any of the Company's Subsidiaries in Medicare, Medicaid, or
other government program, or any decision not to renew any such Approvals, which
action or decision not to renew would have a Material Adverse Effect.
C. Except as set forth on Schedule 2.11, to the extent applicable
to them, the Company and its Subsidiaries have complied in all material respects
with all laws, rules, conditions of participation, and regulations governing all
Medicare, Medicaid, and any other arrangements with any Governmental Body and
have filed all returns, cost reports and other filings in any manner prescribed
thereby except where the failure to so comply, together with all other such
failures, would not have a Material Adverse Effect. All returns, cost reports
and other filings made by the Company and its Subsidiaries since January 1, 1997
to Medicare, Medicaid or any other Governmental Entity or third party payor are
true and complete except where the failure to be so true and complete,
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<PAGE> 14
together with all other such failures, would not have a Material Adverse Effect.
D. In each state in which the Company or any of its Subsidiaries
operates HMOs, PPOs, point of service plans, insurance plans or other health
care plans, the Company and each of its Subsidiaries has filed copies of its (i)
standard employer and other individual and group subscriber agreements, (ii)
contracts with physicians, hospitals and other health care entities, and (iii)
contracts for management and administrative services with the applicable state
authorities to the extent required by law, including, but not limited to
contracts required to be filed with the state Departments of Insurance,
Departments of Health or the agencies responsible for each state's Medicaid
program. The Company and each of its Subsidiaries are not providing services
under any such agreements that have not been filed and approved by the state
regulatory authorities except where the failure to so file would not have a
Material Adverse Effect.
E. The Company and each of its Subsidiaries has filed all
reports, filings and notices required to be filed with all applicable
Departments of Insurance, Departments of Health and HMO regulatory bodies since
January 1, 1995 except where the failure to so file would not have a Material
Adverse Effect (as such documents have since the time of their filing been
amended, the "DOI Reports"). As of their respective dates, the DOI Reports
complied in all material respects with the requirements of the laws, rules and
regulations applicable to such DOI Reports, and none of the DOI Reports
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the material statements
therein, in light of the circumstances under which they were made, not
misleading, except for such statements, if any, as have been modified by
subsequent filings prior to the date hereof.
F. Neither the Company nor any of its Subsidiaries, nor the
officers, directors, employees or agents of the Company or any of its
Subsidiaries has received any written notice alleging that it has engaged in any
activities which are prohibited, or are cause for civil penalties or mandatory
or permissive exclusion from Medicare or Medicaid, under ss.ss. 1320a-7,
1320a-7a, 1320a-7b, or 1395nn of Title 42 of the United States Code, the federal
CHAMPUS statute, or the regulations promulgated pursuant to such statutes or
regulations or related state or local statutes or, to the Company's knowledge,
which are prohibited by any private accrediting organization from which the
Company or any of its Subsidiaries seeks accreditation which would have a
Material Adverse Effect.
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2.12. TAXES.
The Company and its Subsidiaries have filed all material tax
returns in all jurisdictions in which such returns are required to have been
filed by them and have paid all taxes, assessments, fees and governmental
charges due and payable with respect to such returns to the extent the same have
become due and payable and before they have become delinquent, other than those
being contested in good faith and with respect to which the Company or a
Subsidiary, as the case may be, has set aside on its books adequate reserves in
conformity with GAAP.
2.13. TITLE TO PROPERTIES.
Except as disclosed in the Company SEC Reports or on Schedule
2.13, the Company and each Subsidiary has good and marketable title to their
respective real properties and own free and clear of any Liens their respective
other properties reflected in the consolidated balance sheet as at March 31,
1999, or acquired by the Company or such Subsidiary after said date (other than
properties and assets disposed of in the ordinary course of business), except
for such imperfections of title and encumbrances as would not be individually or
in the aggregate Material.
2.14. COMPLIANCE WITH ERISA.
A. Except as set forth on Schedule 2.14, the Company and each
ERISA Affiliate have operated and administered each Plan in compliance with all
applicable laws except for such instances of noncompliance as have not resulted
in and would not result in a Material Adverse Effect. Except as set forth on
Schedule 2.14, neither the Company nor any ERISA Affiliate has incurred any
liability pursuant to Title I or IV of ERISA or the penalty or excise tax
provisions of the Code relating to any Plan other than such liabilities as would
not be individually or in the aggregate Material, and to the Company's
knowledge, no event, transaction or condition has occurred or exists that could
reasonably be expected to result in the incurrence of any such liability by the
Company or any ERISA Affiliate, or in the imposition of any Lien on any of the
rights, properties or assets of the Company or any ERISA Affiliate, in either
case pursuant to Title I or IV of ERISA or to such penalty or excise tax
provisions or to Section 401(a)(29) or 412 of the Code, other than such
liabilities or Liens as would not be individually or in the aggregate Material.
B. Except as set forth on Schedule 2.14, the Company and its
ERISA Affiliates have not incurred withdrawal liabilities under Section 4201 of
ERISA and are not subject to contingent withdrawal liabilities under section
4201 or 4204 of ERISA in respect of Multiemployer Plans that individually or in
the aggregate are Material.
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2.15. PRIVATE OFFERING.
Neither the Company nor anyone acting on its behalf has offered
the Notes or any similar securities for sale to, or solicited any offer to buy
any of the same from, or otherwise approached or negotiated in respect thereof
with, any Person other than the Investors. Neither the Company nor anyone acting
on its behalf has taken, or will take, any action which would cause an exemption
from the registration requirements of Section 5 of the Securities Act to be
inapplicable to the issuance or sale of the Notes or the shares of Common Stock
issuable upon conversion of the Notes. Based upon the representations of the
Investors set forth in Section 3, the offer, issuance and sale of the Notes are
and will be exempt from the registration and prospectus delivery requirements of
the Securities Act, and have been registered or qualified (or are exempt from
registration and qualification) under the registration, permit or qualification
requirements of all applicable state securities laws.
2.16. INVESTMENT COMPANY ACT AND HOLDING COMPANY STATUS, ETC.
Neither the Company nor any Subsidiary is subject to regulation
under the Investment Company Act of 1940, as amended, the Public Utility Holding
Company Act of 1935, as amended, or the Federal Power Act, as amended.
2.17. ENVIRONMENTAL MATTERS.
A. The operations of the Company and its Subsidiaries comply with
all applicable Environmental Laws, except where the failure so to comply
individually and in the aggregate would not have a Material Adverse Effect.
B. In addition and without limitation to the foregoing, except as
set forth on Schedule 2.17:
(1) during the ownership or occupation by the Company or any
Subsidiary, neither the Company nor any Subsidiary, nor any property
or operations currently owned or leased by the Company or any
Subsidiary, is subject to any Order from or agreement with any court,
arbitrator or Governmental Body of competent jurisdiction or subject
to any judicial or docketed administrative proceeding respecting (x)
any Environmental Law or any other environmental or health or safety
Requirement of Law, (y) any action required to clean up, remove, treat
or in any other way address Contaminants in the environment or (z) any
written claim under any Environmental Law arising from the release or
threatened release of a Contaminant into the environment, which
individually or in the aggregate would have a Material Adverse Effect;
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<PAGE> 17
(2) all necessary authorizations, consents, permissions,
licenses and agreements required by Environmental Laws (collectively
"ENVIRONMENTAL CONSENTS") have been lawfully obtained by the Company
and its Subsidiaries except Environmental Consents the failure of
which to obtain would not have a Material Adverse Effect, and all
Environmental Consents are valid and are in full force and effect;
(3) to the Company's knowledge, the Company and its
Subsidiaries have complied in all material respects with all
conditions attaching to Environmental Consents and there are no
circumstances which would render it impossible for the Company or any
Subsidiary to comply with such conditions in the future;
(4) neither the Company nor any Subsidiary has received any
written notice, Order, correspondence or written communication from
any Governmental Body concerning any Environmental Consent revoking,
suspending, modifying or varying the same, or threatening to do so,
and the Company does not know of any reason for any Environmental
Consent to be revoked, suspended, modified or varied;
(5) neither the Company nor any Subsidiary has received any
written communication in any form from any Governmental Body
concerning any violation of any Environmental Law; and the Company is
not aware of any circumstances which would be reasonably expected to
give rise to such a communication being received, or of any intention
on the part of any competent authority to deliver any such
communication;
(6) to the Company's knowledge, no site owned or occupied by
the Company or any Subsidiary has been used for the deposit of waste
during the ownership or occupation of the Company or any Subsidiary
except for such usage in accordance with Environmental Law or pursuant
to all requisite material consents thereunder;
(7) to the Company's knowledge, all Contaminants produced in
the course of the businesses of the Company and its Subsidiaries have
been lawfully disposed of; and
(8) to the Company's knowledge, the Company and its
Subsidiaries have at all times supplied to the competent authorities
such information as is required by Environmental Laws, and all such
information given was correct at the time such information was
supplied.
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2.18. INSURANCE.
The Company and its Subsidiaries and their respective properties
are insured in such amounts, against such losses and with such insurers as are
prudent when considered in light of the nature of the properties and businesses
of the Company and its Subsidiaries and customary in light of the Company's
exposure. No notice of any termination or threatened termination of any of such
policies has been received.
2.19. REGISTRATION RIGHTS.
Except as set forth in Schedule 2.19 and as contemplated by this
Agreement and the Registration Rights Agreement, no Person has the right to
cause the Company to effect the registration under the Securities Act of any
shares of Common Stock or any other securities (including securities evidencing
debt) of the Company.
2.20. BROKERAGE.
Except as set forth on Schedule 2.20, there are no claims for
brokerage commissions or finder's fees or similar compensation in connection
with the transactions contemplated by this Agreement based on any arrangement
made by or on behalf of the Company and the Company agrees to indemnify and hold
the Investors harmless against any costs or damages incurred as a result of any
such claim.
2.21. TAKEOVER STATUTE; RIGHTS PLAN.
None of the Investors is, as a result of its execution and
delivery of this Agreement, the performance of its obligations hereunder or the
acquisition of any Notes or shares of Common Stock contemplated by this
Agreement, an "interested shareholder" prohibited from entering into a business
combination with the Company or any subsidiary pursuant to Section 48-103-205 of
the Business Combination Act of the State of Tennessee or an "Acquiring Person"
within the meaning of the Rights Agreement. A "Distribution Date" (as defined in
the Rights Agreement) shall not be deemed to have occurred and the Rights (as
defined in the Rights Agreement) shall not separate from the Common Stock as a
result of any of the transactions contemplated hereby. No other Takeover Statute
is applicable to the transactions contemplated hereby.
2.22. Y2K COMPLIANCE.
Except as set forth in the Company SEC Reports, the Company has
established and is implementing an enterprise-wide program intended to provide
(x) that the change of the year from 1999 to the year 2000 would not have a
Material Adverse Effect and (y) that the impacts of such change on the material
vendors
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<PAGE> 19
and customers of the Company and the Subsidiaries would not have a Material
Adverse Effect.
3. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS.
Each of the Investors represents and warrants to the Company as
follows:
3.1. PURCHASE OF NOTES.
It is acquiring the Notes for its own account for investment and
not with a view towards the resale, transfer or distribution thereof, nor with
any present intention of distributing the Notes, but subject, nevertheless, to
any requirement of law that the disposition of such Investor's property shall at
all times be within such Investor's control, and without prejudice to such
Investor's right at all times to sell or otherwise dispose of all or any part of
such securities under a registration under the Securities Act or under an
exemption from said registration available under the Securities Act.
3.2. ORGANIZATION, QUALIFICATION, AUTHORIZATION.
A. It is a validly existing limited partnership, duly organized
under the laws of its jurisdiction of organization.
B. It has full power and legal right to execute and deliver this
Agreement and to perform its obligations hereunder.
C. It has taken all partnership action necessary for the
authorization, execution, delivery, and performance of this Agreement and its
obligations hereunder. This Agreement is, and the Registration Rights Agreement
when executed and delivered by it will be, legal, valid and binding obligations
of such Investor enforceable against such Investor in accordance with their
respective terms, except as enforceability may be limited by bankruptcy,
insolvency or other similar laws relating to or affecting the enforcement of
creditors' rights generally and by general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or at law),
and except as enforceability of the indemnity provisions contained in the
Registration Rights Agreement may be limited by public policy considerations.
3.3. ACCREDITED INVESTOR STATUS, ETC.
A. It has such knowledge and experience in financial and business
matters that it is capable of evaluating the merits and risks of its investment
in the Company as contemplated by this Agreement, and is able to bear the
economic risk of such investment for an indefinite period of time. It has been
furnished access to such information and documents as it has
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requested and has been afforded an opportunity to ask questions of and receive
answers from representatives of the Company concerning the terms and conditions
of this Agreement and the purchase of the Notes and the shares of Common Stock
contemplated hereby.
B. It is an "accredited investor" as defined under Regulation D
of the Securities Act.
3.4. BROKERAGE.
Except for BT Alex. Brown Incorporated (whose fees and expenses
will be paid by the Investors), there are no claims for brokerage commissions or
finder's fees or similar compensation in connection with the transactions
contemplated by this Agreement based on any arrangement made by or on behalf of
the Investors and the Investors agree to indemnify and hold the Company harmless
against any costs or damages incurred as a result of any such claim.
4. INVESTOR CLOSING CONDITIONS.
The Investors obligation to purchase and pay for the Notes to be
purchased by them hereunder is subject to the satisfaction on or before the
Closing Date of the following conditions:
4.1. REPRESENTATIONS AND WARRANTIES; NO DEFAULT.
The representations and warranties contained in Section 2 shall
(except as expressly affected by the transactions contemplated hereby) be true
and correct in all material respects on and as of the Closing Date as if made on
and as of the Closing Date; the Company shall have performed in all material
respects all agreements to be performed by it under this Agreement on or before
the Closing Date; and there shall exist on the Closing Date no Default or Event
of Default.
4.2. INJUNCTION.
There shall be no effective injunction, writ, preliminary
restraining order or any order of any nature issued by a court of competent
jurisdiction directing that the transactions provided for herein or any of them
not be consummated as herein provided.
4.3. COUNSEL'S OPINION.
Each of the Investors shall have received from the Company's
counsel, Waller Lansden Dortch & Davis, A Professional Limited Liability
Company, an opinion, dated the Closing Date, substantially in the form of
Exhibit B hereto.
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4.4. ADVERSE DEVELOPMENT.
There shall have been no developments in the business of the
Company or any of its Subsidiaries which since the date of this Agreement have
had or are reasonably likely to have a Material Adverse Effect.
4.5. ELECTION OF DIRECTORS.
Two directors designated by the Investors in accordance with
Section 6.3 shall have been elected to the Board of Directors to serve as Class
1 and Class 3 directors, respectively, effective upon the Closing Date.
4.6. CONSENTS AND APPROVALS.
All consents, waivers, authorizations, licenses, permits,
certificates and approvals of any Person required in connection with the
execution, delivery and performance of this Agreement, including, without
limitation, the approval of each entity set forth on Schedule 2.4 hereto shall
have been duly obtained and shall be in full force and effect on the Closing
Date.
4.7. SECRETARY'S CERTIFICATE.
Each Investor shall have received a certificate, dated the
Closing Date, of the Secretary of the Company attaching (i) a true and complete
copy of the Restated Charter of the Company as filed with the Secretary of State
of the State of Tennessee, with all amendments thereto, (ii) true and complete
copies of the Company's Amended Bylaws in effect as of such date, (iii)
certificates of good standing of the appropriate officials of the jurisdictions
of incorporation of the Company and of each state in which the Company is
qualified to do business as a foreign corporation and (iv) resolutions of the
Board of Directors authorizing the execution and delivery of this Agreement and
the Transaction Documents and the transactions contemplated hereby and thereby,
the issuance of the Notes and the reservation for issuance of the shares of
Common Stock into which the Notes are initially convertible, and the election of
the directors as provided by Section 4.5.
4.8. OFFICER'S CERTIFICATE.
Each of the Investors shall have received a certificate, dated
the Closing Date, signed by each of the President and the Chief Financial
Officer of the Company, certifying that the conditions specified in the
foregoing Sections 4.1, 4.4, 4.5, and 4.6 hereof have been fulfilled.
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4.9. REGISTRATION RIGHTS AGREEMENT.
A Registration Rights Agreement, substantially in the form of
Exhibit C attached hereto (the "REGISTRATION RIGHTS AGREEMENT"), shall have been
executed and delivered by the Company and shall be in full force and effect.
4.10. AMENDMENTS TO BANK DEBT.
The Bank Credit Agreement (as defined in the Existing Indenture)
shall have been amended to provide for the terms set forth on Schedule 4.10, and
otherwise on terms reasonably acceptable to the Company, and the Investors shall
have been furnished evidence reasonably acceptable to them of such amendments.
4.11. APPROVAL OF PROCEEDINGS.
All proceedings to be taken in connection with the transactions
contemplated by this Agreement, and all documents incident thereto, shall be
reasonably satisfactory in form and substance to the Investors and their special
counsel, Willkie Farr & Gallagher; and the Investors shall have received copies
of all documents or other evidence which they and Willkie Farr & Gallagher may
reasonably request in connection with such transactions and of all records of
corporate proceedings in connection therewith in form and substance reasonably
satisfactory to the Investors and Willkie Farr & Gallagher.
5. COMPANY CLOSING CONDITIONS.
The Company's obligation to issue and deliver the Notes to the
Investors is subject to the satisfaction on or before the Closing Date of the
following conditions:
5.1. REPRESENTATIONS AND WARRANTIES.
The representations and warranties contained in Section 3 shall
(except as expressly affected by the transactions contemplated hereby) be true
and correct in all material respects on and as of the Closing Date as if made on
and as of the Closing Date; and each of the Investors shall have performed in
all material respects all agreements to be performed by it under this Agreement
on or before the Closing Date.
5.2. INJUNCTION.
There shall be no effective injunction, writ, preliminary
restraining order or any order of any nature issued by a court of competent
jurisdiction directing that the transactions provided for herein or any of them
not be consummated as herein provided.
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5.3. CONSENTS AND APPROVALS.
All consents, waivers, authorizations, licenses, permits,
certificates and approvals of any Person required in connection with the
execution, delivery and performance of this Agreement, including, without
limitation, the approval of each entity set forth on Schedule 2.4 hereto shall
have been duly obtained and shall be in full force and effect on the Closing
Date.
5.4. INVESTORS' CERTIFICATE.
The Company shall have received a certificate from each of the
Investors, dated the Closing Date, signed by a duly authorized representative of
such Investor, certifying that the conditions specified in the foregoing Section
5.1 hereof have been fulfilled.
5.5. AMENDMENTS TO BANK DEBT.
The Bank Credit Agreement (as defined in the Existing Indenture)
shall have been amended on terms reasonably acceptable to the Company.
6. COVENANTS.
6.1. RESALE OF SECURITIES.
A. Each of the Investors severally covenants that it will not
sell or otherwise transfer the Securities except pursuant to an effective
registration under the Securities Act, or pursuant to Rule 144 under the
Securities Act, or in a transaction which complies with the provisions of
Section 6.7.
B. Until such time as the Securities are sold pursuant to an
effective registration statement under the Securities Act or pursuant to Rule
144 under the Securities Act, the Securities will bear substantially the
following legend reflecting the foregoing restrictions on the transfer of such
securities:
"The securities evidenced hereby have not been registered under
the Securities Act of 1933, as amended (the "Securities Act"), or
any state securities law, and may not be sold, transferred or
otherwise disposed of except pursuant to an effective
registration under the Act or in a transaction which, in the
opinion of counsel reasonably acceptable to the Company, is
exempt from such registration."
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6.2. COVENANTS PENDING CLOSING.
From the date hereof through the Closing Date, the Company will
conduct and will cause its Subsidiaries to conduct their respective businesses
in the ordinary course, and will not, and will not permit any of its
Subsidiaries to, without the prior written consent of the Investors, take any
action which would result in any of the representations or warranties contained
in this Agreement not being true in all material respects at and as of the time
immediately after such action, or in any of the covenants contained in this
Agreement becoming incapable of performance in all material respects. The
Company will promptly advise the Investors of any action or event of which it
becomes aware which has the effect of making incorrect in any material respect
any of such representations or warranties or which has the effect of rendering
any of such covenants incapable of performance in any material respect.
6.3. BOARD NOMINEES.
For so long as the Notes are outstanding and owned by one or more
of the Investors, the Company will nominate and use its best efforts to elect
and to cause to remain as directors on the Board of Directors two individuals
designated by the Investors who are either (i) general partners of WP listed on
Schedule 6.3 or (ii) otherwise reasonably acceptable to the Company ("APPROVED
DESIGNEES"). For so long as the Investors, individually or in the aggregate, own
beneficially (within the meaning of Rule 13d-3 under the Exchange Act) at least
10.0% of the outstanding shares of Common Stock, the Company will nominate and
use its best efforts to elect and to cause to remain as directors on the Board
of Directors at least one individual designated by the Investors, who shall be
an Approved Designee; provided, however, that in the event the Investors,
individually or in the aggregate, own beneficially (within the meaning of Rule
13d-3 under the Exchange Act) more than 10% but less than 12.5% of the
outstanding shares of Common Stock, the Investors shall only be entitled to
designate an Approved Designee pursuant to this sentence if the Investors,
individually or in the aggregate, own at least 50% of the shares of Common Stock
beneficially owned (within the meaning of Rule 13d-3 under the Exchange Act) by
them on the date six months following the Closing Date. Any vacancy created by
the death, disability, retirement or removal of any such individual may be
filled by the Investors.
6.4. USE OF PROCEEDS.
The Company will use the proceeds of the issuance of the Notes to
repay existing debt, to repurchase shares of Common Stock and for general
corporate purposes; provided, however, that any repurchases of shares of Common
Stock hereunder (i) will be approved by the Board of Directors, (ii) will be
made in compliance with all applicable law, (iii) will be made within
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twelve months of the Closing Date and (iv) will not exceed $27,500,000 in the
aggregate; and provided further that nothing herein shall prohibit, restrict or
otherwise limit the Company's ability to effect its $75,000,000 securities
repurchase program previously adopted by the Company as long as such securities
repurchase program is completed within 24 months of the Closing Date. Except as
set forth in the immediately preceding sentence, no part of the proceeds from
the sale of the Notes hereunder will be used, and no part of the proceeds of
such existing debt was used, directly or indirectly, for the purpose of buying
or carrying any margin stock within the meaning of Regulation U of the Board of
Governors of the Federal Reserve System (12 CFR 221, as amended), or for the
purpose of buying or carrying or trading in any securities under such
circumstances as to involve the Company in a violation of Regulation X of said
Board (12 CFR 224) or to involve any broker or dealer in a violation of
Regulation T of said Board (12 CFR 220). As used in this Section 6.4, the terms
"MARGIN STOCK" and "PURPOSE OF BUYING OR CARRYING" shall have the meanings
assigned to them in the aforementioned Regulation U.
6.5. STANDSTILL.
A. Each of the Investors and Warburg, Pincus & Co., the sole
general partner of each of the Investors ("WP"), hereby agree that, for a period
of five years from the date of this Agreement, neither WP, the Investors nor any
Controlled Subsidiary or others with whom WP is acting in concert will, directly
or indirectly, and WP will not, for its own account, without the prior written
consent of the Board:
(1) acquire or agree to acquire, publicly offer, or make any
public proposal with respect to the possible acquisition of (A)
beneficial ownership (within the meaning of Rule 13d-3 under the
Exchange Act) of any securities of the Company in excess of the
Maximum Amount, (B) any Company business or any substantial part of
the Company's assets, or any subsidiary or division thereof or
successor to the Company, or (C) any rights or options to acquire any
of the foregoing from any Person;
(2) make, or in any way participate, directly or indirectly,
in any "solicitation" of "proxies" to vote (as such terms are used in
the rules under the Exchange Act), or seek to advise or influence any
person or entity with respect to the voting of any voting securities
of the Company;
(3) make any public announcement with respect to any
transaction or proposed or contemplated transaction between the
Company or any of its security holders and the Investors or WP,
including, without limitation, any tender or exchange
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offer, merger or other business combination or acquisition of a
material portion of the assets of the Company;
(4) publicly propose or publicly disclose an intent to
propose any form of business combination, acquisition, restructuring,
recapitalization or other similar transaction relating to the Company;
(5) enter into any discussions, negotiations, arrangements or
understandings with any third party with respect to the Company in
connection with any of matters referred to in clauses (1)-(4) above;
(6) publicly disclose any intention, plan or arrangement
inconsistent with the foregoing;
(7) publicly request the Company, directly or indirectly, to
amend or waive any provisions of this Section 6.5; or
(8) take any action which would be reasonably likely to require
the Company to make a public announcement regarding a possible
transaction involving the Company.
B. Each of the Investors and WP acknowledge that money damages
would not be sufficient remedy for any breach of this Agreement by it and that
in addition to all other remedies the Company shall be entitled to specific
performance and injunctive and other equitable relief as a remedy for any such
breach, and each of the Investors and WP further agree to waive any requirement
for the securing or posting of any bond in connection with such remedy.
C. The letter from WP to the Company, dated March 8, 1999, shall
terminate and have no further force or effect following the Closing Date.
6.6. ADDITIONAL PURCHASES OF COMMON STOCK.
A. The Investors currently intend to acquire additional shares of
Common Stock in open-market purchases or otherwise ("PERMITTED ACQUISITIONS").
The actual timing and amount of such purchases will depend on the receipt of all
required regulatory approvals and prevailing market conditions at the time of
such purchases.
B. The Company has agreed to permit the Investors to make the
Permitted Acquisitions provided that (i) the Permitted Acquisitions are made no
later than six (6) months after the Closing Date, (ii) the aggregate
consideration for such Permitted Acquisitions does not exceed $72,500,000
(excluding transaction costs and expenses and brokerage commissions) and (iii)
the number of shares of Common Stock acquired pursuant to this
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Section 6.6 shall not exceed 15,000,000 (subject to appropriate adjustment for
any stock split or similar event).
6.7. RESTRICTIONS ON TRANSFER.
A. No Investor shall Transfer any of the Securities owned by it
unless the Investor desiring to make the Transfer (hereinafter referred to as
the "TRANSFEROR") shall have first made the offers to sell to the Company
contemplated by this Section 6.7, and such offers shall not have been accepted.
B. Copies of the Transferor's offer shall be given to the Company
and shall consist of an offer to sell to the Company all of the Securities then
proposed to be transferred by the Transferor (the "SUBJECT SECURITIES") and the
proposed terms (including the price for the Subject Securities) of such Transfer
(a "SALE NOTICE").
C. Within 10 Business Days after the receipt of the offer
described in Section 6.7B, the Company may, at its option, elect to purchase
all, but not less than all, of the Subject Securities. The Company shall
exercise such option by giving written notice thereof to the Transferor within
such 10-Business Day period (the "EXERCISE NOTICE"). The Exercise Notice shall
specify a date for the closing of the purchase which shall not be more than 30
days after the date of the giving of such Exercise Notice.
D. The purchase price per share for the Subject Securities shall
be the price specified by the Transferor in the Sale Notice. If the offer of
Subject Shares under this Section 6.7 is for consideration other than cash or
cash plus deferred payments of cash, the Company shall pay the present value
cash equivalent of such other consideration. If the Transferor and the Company
cannot agree on the amount of such cash equivalent within 10 days after the
beginning of the 10-Business Day period referred to above, any of such parties
may, by three days' written notice to the other, initiate appraisal proceedings
under Section 6.7E for determination of such cash equivalent.
E. If any party shall initiate an appraisal procedure to
determine the amount of the present value cash equivalent of any consideration
for Subject Securities under Section 6.7D, then the Transferor, on the one hand,
and the Company, on the other hand, shall each promptly appoint as an appraiser
an individual who shall be a member of a nationally-recognized investment
banking firm. Each appraiser shall, within 30 days of appointment, separately
investigate the value of the consideration for the Subject Securities as of the
proposed transfer date and shall submit a notice of an appraisal of that value
to each party. Each appraiser shall be instructed to determine such value
without regard to income tax consequences to the Transferor as a result of
receiving cash rather than other
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consideration. If the appraised values of such consideration (the "EARLIER
APPRAISALS") vary by less than ten percent (10%), the average of the two
appraisals on a per share basis shall be controlling as the amount of the cash
equivalent. If the appraised values vary by more than ten percent (10%), the
appraisers, within 10 days of the submission of the last appraisal, shall
appoint a third appraiser who shall be member of a nationally recognized
investment banking firm. The third appraiser shall, within 30 days of his
appointment, appraise the value of the consideration for the Subject Securities
(without regard to the income tax consequences to the Transferor as a result of
receiving cash rather than other consideration) as of the proposed transfer date
and submit notice of his appraisal to each party. The value determined by the
third appraiser shall be controlling as the amount of the present value cash
equivalent unless the value is greater than the two Earlier Appraisals, in which
case the higher of the two Earlier Appraisals will control, and unless that
value is lower than the two Earlier Appraisals, in which case the lower of the
two Earlier Appraisals will control. If any party fails to appoint an appraiser
or if one of the two initial appraisers fails after appointment to submit his
appraisal within the required period, the appraisal submitted by the remaining
appraiser shall be controlling. The Transferor and the Company shall each bear
the cost of its respective appointed appraiser. The cost of the third appraisal
shall be shared one-half by the Transferor and one-half by the Company.
F. The closing of the purchase shall take place at the office of
the Company or such other location as shall be mutually agreeable and the
purchase price, to the extent comprised of cash, shall be paid at the closing,
and cash equivalents and documents evidencing any deferred payments of cash
permitted pursuant to Section 6.7D above shall be delivered at the closing. At
the closing, the Transferor shall deliver to the Company the instruments or
certificates evidencing the Subject Securities to be conveyed, duly endorsed and
in negotiable form with all the requisite documentary stamps affixed thereto.
G. If the offer to sell is not accepted by the Company, the
Transferor may make a bona fide Transfer to any Person in accordance with the
terms set forth in the Sale Notice, provided that (A) such Transfer shall be
made only in accordance with the terms therein stated and (B) if the transferee
would own beneficially (within the meaning of Rule 13d-3 under the Exchange Act)
more than 10% of the outstanding Common Stock, the transferee agrees, in
writing, to be bound by the provisions of Section 6.5 and this Section 6.7. If
the Transferor shall fail to make such Transfer within 180 days following the
expiration of the time hereinabove provided for the election by the Company,
such Subject Securities shall again become subject to all the restrictions of
this Section 6.7.
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H. The provisions of this Section 6.7 shall not apply to (i)
Transfers of Securities made after the seventh anniversary of the Closing Date,
(ii) Transfers of Securities by one Investor to an Affiliate of such Investor
(provided such Affiliate agrees in writing to be bound by the terms of this
Agreement), (iii) pro rata distributions of Securities by any Investors to its
partners by Investors, (iv) underwritten sales of Securities made pursuant to an
effective registration under the Securities Act, (v) sales of Securities made
pursuant to Rule 144 under the Securities Act, (vi) Transfers of Securities made
pursuant to a merger, consolidation or similar transaction approved by the Board
of Directors, or (vii) Transfers of Securities to any Person if, after giving
effect to such Transfer, such Person would not own beneficially (within the
meaning of Rule 13d-3 under the Exchange Act) more than 5% of the outstanding
Common Stock.
6.8. REASONABLE EFFORTS; COOPERATION.
Upon the terms and subject to the conditions hereof, each of the
parties hereto shall use all reasonable best efforts to obtain and furnish in a
timely manner all necessary waivers, consents and approvals and notices and to
effect all necessary notifications, registrations and filings (including,
without limitation, all necessary applications and notifications to any
insurance regulatory authority), and to use all reasonable efforts to take, or
cause to be taken, all other actions and to do, or cause to be done, all other
things necessary, proper or advisable to consummate and make effective as
promptly as practicable the transactions contemplated by this Agreement.
6.9. FINANCIAL AND BUSINESS INFORMATION.
From and after the date hereof, the Company shall deliver to the
Investors so long as the Investors, individually or in the aggregate,
beneficially own (within the meaning of Rule 13d-3 under the Exchange Act) at
least 15% of the outstanding shares of Common Stock:
(1) Monthly and Quarterly Statements - as soon as practicable,
and in any event within 30 days after the close of each month of each
fiscal year of the Company other than at the end of a fiscal quarter
of the Company in the case of monthly statements and 45 days after the
close of each of the first three fiscal quarters of each fiscal year
of the Company in the case of quarterly statements, a consolidated
balance sheet, statement of income and statement of cash flows of the
Company and any Subsidiaries as at the close of such month or quarter
and covering operations for such month or quarter, as the case may be,
and the portion of the Company's fiscal year ending on the last day of
such month or quarter, all in reasonable detail and prepared in
accordance with GAAP, subject to audit and year-end adjustments,
setting forth in each case in comparative form
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the figures for the comparable period of the previous fiscal year.
(2) Annual Statements - as soon as practicable after the end of
each fiscal year of the Company, and in any event within 90 days
thereafter, duplicate copies of:
(a) consolidated and consolidating balance sheets of the
Company and any Subsidiaries at the end of such year; and
(b) consolidated and consolidating statements of income,
shareholders' equity and cash flows of the Company and any
Subsidiaries for such year, setting forth in each case in
comparative form the figures for the previous fiscal year, all in
reasonable detail and accompanied by an opinion thereon of a "Big
5" public accounting firm selected by the Company, which opinion
shall state that such financial statements fairly present the
financial position of the Company and any Subsidiaries on a
consolidated basis and have been prepared in accordance with GAAP
(except for changes in application in which such accountants
concur) and that the examination of such accountants in
connection with such financial statements has been made in
accordance with generally accepted auditing standards, and
accordingly included such tests of the accounting records and
such other auditing procedures as were considered necessary in
the circumstances.
(c) Annual Budget - no later than 30 days before the end of
each fiscal year of the Company, an annual budget for the Company
in a form consistent with the Company's past practice.
(d) Audit Reports - promptly upon receipt thereof, one copy
of each other financial report and internal control letter
submitted to the Company by independent accountants in connection
with any annual, interim or special audit made by them of the
books of the Company.
(e) Other Reports - promptly upon their becoming available,
one copy of each financial statement, report, notice or proxy
statement sent by the Company to shareholders generally, of each
financial statement, report, notice or proxy statement sent by
the Company or any of its Subsidiaries to the Commission or any
successor agency, if applicable, of each regular or periodic
report and any registration statement, prospectus or written
communication (other than transmittal letters) in respect thereof
filed by the Company or any Subsidiary with, or received by such
Person in connection therewith from, any domestic or
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foreign securities exchange, the Commission or any successor
agency or any foreign regulatory authority performing functions
similar to the Commission, of any press release issued by the
Company or any Subsidiary, and of any material of any nature
whatsoever prepared by the Commission or any successor agency
thereto or any state blue sky or securities law commission which
relates to or affects in any way the Company or any Subsidiary.
(3) Requested Information - with reasonable promptness, the
Company shall furnish the Investors with such other data and
information as from time to time may be reasonably requested.
(4) Compliance Certificate - concurrently with each delivery
of financial statements or reports required to be furnished pursuant
to (1) and (2) above, a certificate of a Senior Financial Officer
stating that, based upon such examination or investigation and review
of this Agreement as in the opinion of the signer is necessary to
enable the signer to express an informed opinion with respect thereto,
no Default or Event of Default has occurred during such period, or, if
any Default or Event of Default shall have occurred, specifying all of
the same and the nature and period of existence thereof and what
action the Company has taken, is taking or proposes to take with
respect thereto.
6.10. INSPECTION.
As long as the Investors, individually or in the aggregate,
beneficially own (within the meaning of Rule 13d-3 under the Exchange Act) at
least 15% of the outstanding shares of Common Stock, the Company shall permit
the Investors and their representatives and agents to visit and inspect any of
the properties of the Company and its Subsidiaries, to examine all its books of
account, records, reports and other papers not contractually required of the
Company to be confidential or secret, to make copies and extracts therefrom, and
to discuss its affairs, finances and accounts with its officers, directors, key
employees and independent public accountants or any of them (and by this
provision the Company authorizes said accountants to discuss with the Investors
and their representatives and agents the finances and affairs of the Company and
any Subsidiaries), all at such reasonable times and as often as may be
reasonably requested.
6.11. CONFIDENTIALITY.
As to so much of the information and other material furnished
under or in connection with this Agreement (whether furnished before, on or
after the date hereof) as constitutes or contains confidential business,
financial or other information of
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the Company or any Subsidiary, each of the Investors covenants for itself and
its directors, officers and partners that neither it nor its officers,
directors, partners, employees, counsel, accountants and other representatives
will disclose such information to Persons other than their respective authorized
employees, counsel, accountants, shareholders, partners, limited partners and
other authorized representatives; provided, however, that each Investor may
disclose or deliver any information or other material disclosed to or received
by it should such Investor be advised by its counsel that such disclosure or
delivery is required by law, regulation or judicial or administrative order but
only after so much prior written notice as is reasonably practicable under the
circumstances to the Company that it proposes to make such disclosures. In the
event of any termination of this Agreement prior to either Closing Date, each
Investor shall return to the Company all confidential material previously
furnished to such Investor or its officers, directors, partners, employees,
counsel, accountants and other representatives in connection with this
transaction. The obligations set forth in this Section 6.11 shall survive the
termination of this Agreement and shall remain in effect until the information
and other material furnished under or in connection with this Agreement becomes
generally available to the public other than through a violation of the terms of
this Agreement or two years from the date of this Agreement, whichever occurs
first. The previously executed Confidentiality Agreement between the Company and
E.M. Warburg, Pincus & Co., LLC shall terminate as of the Closing Date.
6.12. TAKEOVER STATUTE.
If any Takeover Statute shall become applicable to the
transactions contemplated hereby, the Company shall grant such approvals and
take such actions as are necessary so that the transactions contemplated hereby,
including without limitation the transactions contemplated by Section 6.6 or the
conversion of the Notes, may be consummated as promptly as practicable on the
terms contemplated hereby and otherwise act to eliminate or minimize the effects
of such statute or regulation on the transactions contemplated hereby. If any
takeover statute of any state other than the State of Tennessee shall become
applicable to the transactions contemplated hereby, the Company shall use its
reasonable efforts to grant such approvals and take such actions as are
necessary so that the transactions contemplated hereby, including without
limitation the transactions contemplated by Section 6.6 or the conversion of the
Notes, may be consummated as promptly as practicable on the terms contemplated
hereby and otherwise act to eliminate or minimize the effects of such statute or
regulation on the transactions contemplated hereby.
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6.13. RIGHTS AGREEMENT INAPPLICABLE.
If the transactions contemplated hereby, including without
limitation the transactions contemplated by Section 6.6 or the conversion of any
of the Notes, would (a) result in the occurrence of a "Distribution Date" under
the Rights Agreement, (b) cause any Investor to become an "Acquiring Person" as
defined in the Rights Agreement or (c) otherwise cause the exercise of any
"Right" issued pursuant to the Rights Agreement or the issuance or exercise of
any "Rights Certificate" under the Rights Agreement, the Company will promptly
cause the Rights Agreement to be duly amended to prevent any such
characterization.
6.14. HART-SCOTT FILINGS.
At the request of any of the Investors, the Company will promptly
prepare and file, or cause to be prepared and filed, any notification or
response to any request for additional information required to be filed under
the HSR Act with respect to the conversion of the Notes.
6.15. CONDUCT OF BUSINESS; NEGATIVE COVENANTS.
For as long as the Notes are outstanding, unless the prior
written consent of the Investors shall have been obtained:
A. The Company will continue to engage in business of the same
general type as now conducted by it, and preserve, renew and keep in full force
and effect its corporate existence and take all reasonable action to maintain
all rights, privileges, licenses and franchises necessary or desirable in the
normal conduct of its business.
B. The Company and its Subsidiaries will comply in all material
respects with all applicable laws, rules, regulations and orders except where
the failure to comply would not have a Material Adverse Effect.
C. The Company will maintain insurance with responsible and
reputable insurance companies or associations in such amounts and covering such
risks as is usually carried by companies of similar size and credit standing
engaged in similar business and owning similar properties, provided that such
insurance is and remains available to the Company at commercially reasonable
rates.
D. The Company will keep proper books of record and account, in
which full and correct entries shall be made of all financial transactions and
the assets and business of the Company and its Subsidiaries in accordance with
GAAP.
E. The Company will not, and will not permit any Subsidiary to,
directly or indirectly, (i) declare or pay any
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dividend or make any distribution on or in respect of, or make any distribution
to the holders of, Capital Stock of the Company, (ii) purchase, redeem or
otherwise acquire or retire for value any Capital Stock of the Company, other
than purchases of Common Stock made in accordance with the provisions of Section
6.4, or (iii) declare or pay any dividend or make any distribution on or in
respect of, or make any distribution to holders of, Capital Stock of any
Subsidiary (other than with respect to any such Capital Stock held by the
Company or any Wholly Owned Subsidiary) or purchase, redeem or otherwise acquire
or retire for value any Capital Stock of any Subsidiary (other than such Capital
Stock held by the Company or any Wholly Owned Subsidiary).
7. TERMS OF NOTES; PREPAYMENTS OF NOTES; PURCHASE OF NOTES.
7.1. GENERAL TERMS OF NOTES.
A. The form of Note is attached hereto as Exhibit A. The
aggregate Principal Amount at Final Maturity of the Notes to be issued hereunder
is $404,451,562.
B. The aggregate Principal Amount at Final Maturity of the Notes
shall be payable on the Final Maturity Date unless earlier repaid or converted
in accordance with this Agreement.
C. The Notes shall be issued at an Issue Price of $315.24 per
$1,000 Principal Amount at Final Maturity. There shall be no periodic payments
of interest on the Notes. The calculation of the accrual of Original Issue
Discount in the period during which each Note remains outstanding shall be on an
annual basis using a 360-day year composed of twelve 30-day months, and such
accrual shall commence on the Closing Date. In the event of the maturity,
conversion, purchase by the Company at the option of a Holder or redemption of a
Note, Original Issue Discount, if any, shall cease to accrue on such Note, under
the terms and subject to the conditions of this Agreement and the Notes.
D. All amounts payable in connection with the Notes shall be
denominated and payable in the lawful currency of the United States.
E. The Notes shall be payable and may be presented for
conversion, registration of transfer and exchange, without service charge, at
the principal executive office of the Company.
7.2. OPTIONAL REDEMPTION BY THE COMPANY.
A. Right to Redeem. The Company, at its option, may redeem the
Notes in accordance with the provisions of paragraphs 5 and 7 of the Notes. If
the Company elects to redeem Notes pursuant to paragraph 5 of the Notes, it
shall notify the Holders
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in writing of the Redemption Date, the Principal Amount at Final Maturity of
Notes to be redeemed and the Redemption Price.
B. Selection of Notes to be Redeemed. If any Note selected for
partial redemption is thereafter surrendered for conversion in part before
termination of the conversion right with respect to the portion of the Note so
selected, the converted portion of such Note shall be deemed (so far as may be),
solely for purposes of determining the aggregate Principal Amount at Final
Maturity of Notes to be redeemed by the Company, to be the portion selected for
redemption. Notes which have been converted during a selection of Notes to be
redeemed may be treated by the Company as outstanding for the purpose of such
selection. Nothing in this Section 7.2B shall affect the right of any Holder to
convert any Note pursuant to Sections 7.6, 7.7 and 7.8 before the termination of
the conversion right with respect thereto.
C. Notice of Redemption. At least 30 days but not more than 60
days before a Redemption Date, the Company shall mail or cause to be mailed a
notice of redemption by first-class mail to each Holder of Notes to be redeemed
at such Holder's address as it appears on the Note Register.
The notice shall identify the Notes to be redeemed and shall state:
(a) the Redemption Date;
(b) the Redemption Price;
(c) the then current Conversion Rate;
(d) that Notes called for redemption must be presented and
surrendered to the Company to collect the Redemption Price;
(e) that the Notes called for redemption may be converted at any
time before the close of business on the Redemption Date;
(f) that Holders who wish to convert Notes must satisfy the
requirements in paragraph 9 of the Notes;
(g) that, unless the Company defaults in making the payment of
the Redemption Price on the Redemption Date, the only remaining right of the
Holder shall be to receive payment of the Redemption Price upon presentation and
surrender to the Company of the Notes;
(h) if fewer than all the outstanding Notes are to be redeemed,
the certificate number and Principal Amounts at Final Maturity of the particular
Notes to be redeemed; and
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(i) that Original Issue Discount on Notes called for redemption
shall immediately cease to accrue on and after the Redemption Date; and
D. Effect of Notice of Redemption. Once notice of redemption is
mailed, Notes called for redemption become due and payable on the Redemption
Date and at the Redemption Price stated in the notice, except for Notes that are
converted in accordance with the provisions of Sections 7.6, 7.7 or 7.8. Upon
presentation and surrender to the Company, Notes called for redemption shall be
paid at the Redemption Price.
E. Sinking Fund. There shall be no sinking fund provided for the
Notes.
7.3. REPURCHASE AT OPTION OF THE HOLDER UPON A CHANGE IN CONTROL.
A. If a Change in Control shall occur at any time prior to the
Final Maturity Date, each Holder of Notes shall have the right, at such Holder's
option, to require the Company to purchase such Holder's Notes on the date (the
"CHANGE IN CONTROL PURCHASE DATE") (or if such date is not a Business Day, the
next succeeding Business Day) that is 35 days after the date of the Change in
Control. The Notes shall be repurchased in integral multiples of $l,000 of
Principal Amount at Final Maturity. The Company shall purchase such Notes for
cash at a price (the "CHANGE IN CONTROL PURCHASE PRICE") equal to the Issue
Price plus accrued Original Issue Discount to the Change in Control Purchase
Date. No Notes may be repurchased at the option of the Holders due to a Change
in Control if there has occurred and is continuing an Event of Default (other
than a default in the payment of the Change in Control Purchase Price with
respect to such Notes).
B. The Company shall mail to all Holders a notice (a "COMPANY
CHANGE IN CONTROL NOTICE") of the occurrence of a Change in Control and of the
repurchase right arising as a result thereof on or before the tenth day after
the occurrence of such Change in Control.
C. For a Note to be so repurchased at the option of the Holder,
the Company must receive such Note with the form entitled "Change in Control
Purchase Notice" on the reverse thereof duly completed, together with such Note
duly endorsed for transfer, on or before the Change in Control Purchase Date.
All questions as to the validity, eligibility (including time of receipt) and
acceptance of any Note for redemption shall be determined by the Company, whose
determination shall be final and binding.
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7.4. PURCHASE OF NOTES AT THE OPTION OF THE HOLDER.
A. General. On the tenth anniversary of the Closing Date (the
"PURCHASE DATE"), at the purchase price specified in paragraph 6 of the Notes
(the "PURCHASE PRICE"), a Holder of Notes shall have the option to require the
Company to purchase any outstanding Notes held by such Holder, upon:
(1) delivery to the Company by the Holder of a written notice of
purchase (a "PURCHASE NOTICE") at any time from the opening of
business on the date that is 20 Business Days prior to the Purchase
Date until the close of business on the Business Day prior to such
Purchase Date, stating:
(a) the certificate numbers of the Notes which the Holder shall
deliver to be purchased;
(b) the portion of the Principal Amount at Final Maturity of the
Notes which the Holder shall deliver to be purchased, which portion
must be $1,000 in Principal Amount at Final Maturity or a multiple
thereof;
(c) that such Notes shall be purchased pursuant to the terms and
conditions specified in paragraph 6 of the Notes and in this
Agreement; and
(d) if the Company elects, pursuant to a Company Notice, to pay
the Purchase Price to be paid as of such Purchase Date, in whole or in
part, in Common Stock but such portion of the Purchase Price shall
ultimately be payable to such Holder in cash because any of the
conditions to the payment of the Purchase Price in Common Stock are
not satisfied prior to or on the Purchase Date, as set forth in
Section 7.4D, whether such Holder elects (x) to withdraw such Purchase
Notice as to some or all of the Notes to which such Purchase Notice
relates (stating the Principal Amount at Final Maturity and
certificate numbers of the Notes as to which such withdrawal shall
relate), or (y) to receive cash in respect of the entire Purchase
Price for all Notes (or portions thereof) to which such Purchase
Notice relates; and
(2) delivery or book-entry transfer of such Notes to the Company
prior to, on or after the Purchase Date (together with all necessary
endorsements) at the offices of the Company, such delivery or transfer
being a condition to receipt by the Holder of the Purchase Price
therefor; provided, however, that such Purchase Price shall be so paid
pursuant to this Section 7.4 only if the Note so delivered or
transferred to the Company shall conform in all respects to the
description thereof in the related Purchase Notice. All questions as
to the validity, eligibility (including time of receipt) and
acceptance of any Note for repurchase
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shall be determined by the Company, whose determination shall be final
and binding.
If a Holder, in such Holder's Purchase Notice (and in any written
notice of withdrawal of a portion of a Holder's Notes previously submitted for
purchase pursuant to a Purchase Notice, the portion that remains subject to the
Purchase Notice), fails to indicate such Holder's choice with respect to the
election set forth in clause (d) of Section 7.4A(1), such Holder shall be deemed
to have elected to receive cash in respect of all Notes subject to such Purchase
Notice in the circumstances set forth in such clause (d).
The Company shall purchase from the Holder thereof, pursuant to
this Section 7.4, a portion of a Note if the Principal Amount at Final Maturity
of such portion is $1,000 or a multiple of $1,000. Provisions of this Agreement
that apply to the purchase of all of a Note also apply to the purchase of such
portion of such Note.
Any purchase by the Company contemplated pursuant to the
provisions of this Section 7.4 shall be consummated by the delivery of the
consideration to be received by the Holder promptly following the later of the
Purchase Date, the Deferred Purchase Date (if applicable) and the time of
delivery of the Note.
Notwithstanding anything herein to the contrary, any Holder
delivering to the Company the Purchase Notice contemplated by this Section 7.4A
shall have the right at any time prior to the close of business on the Purchase
Date (or the Deferred Purchase Date, if applicable) to withdraw such Purchase
Notice (in whole or in part) by delivery of a written notice of withdrawal to
the Company in accordance with Section 7.5A.
B. Company's Right to Elect Manner of Payment of Purchase Price.
The Company may elect to pay the Purchase Price in respect of the Notes to be
purchased pursuant to Section 7.5A as of the Purchase Date, in cash or Common
Stock, or in any combination of cash and Common Stock, subject to the conditions
set forth in Sections 7.4C and 7.4D. The Company shall designate, in the Company
Notice delivered pursuant to Section 7.4E, whether the Company shall purchase
the Notes for cash or Common Stock, or, if a combination thereof, the
percentages of the Purchase Price of Notes in respect of which it shall pay in
cash and/or Common Stock; provided that the Company shall pay cash for
fractional interests in Common Stock. For purposes of determining the existence
of potential fractional interests, all Notes subject to purchase by the Company
held by a Holder shall be considered together (no matter how many separate
certificates are to be presented). Each Holder whose Notes are purchased
pursuant to this Section 7.4 shall receive the same percentage of cash and/or
Common Stock in payment of the Purchase Price for such Notes, except (a) as
provided in Section 7.4D with regard to
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the payment of cash in lieu of fractional interests in Common Stock and (b) in
the event that the Company is unable to purchase the Notes of a Holder or
Holders for Common Stock because any necessary qualifications or registrations
of the Common Stock under applicable federal or state securities laws cannot be
obtained, the Company may purchase the Notes of such Holder or Holders for cash.
Once the Company has given its Company Notice to Holders, the Company may not
change its election with respect to the consideration (or components or
percentages of components thereof) to be paid except pursuant to this Section
7.4B or Section 7.4D.
C. Purchase with Cash. At the option of the Company, the Purchase
Price of Note in respect of which a Purchase Notice pursuant to Section 7.4A has
been given, or a specified percentage thereof, may be paid by the Company with
cash equal to the aggregate Purchase Price, or such specified percentage
thereof, as the case may be, of such Notes. No Notes may be purchased at the
option of the Holders with cash if there has occurred and is continuing an Event
of Default (other than a default in the payment of the Purchase Price with
respect to such Notes).
D. Payment by Issuance of Common Stock. At the option of the
Company, the Purchase Price of Notes in respect of which a Purchase Notice
pursuant to Section 7.4A has been given, or a specified percentage thereof, may
be paid by the Company by the issuance of a number of shares of Common Stock
equal to the quotient obtained by dividing (a) the amount of cash to which the
Holders would have been entitled had the Company elected to pay all or such
specified percentage, as the case may be, of the Purchase Price of such Notes in
cash by (b) the Market Price of a share of Common Stock on the date specified by
the Company pursuant to Section 7.4E(1)(a), subject to the next succeeding
paragraph.
The Company shall not issue a fractional share of Common Stock in
payment of the Purchase Price. Instead the Company shall pay cash for the
current market value of the fractional share. The current market value of a
fraction of a share shall be determined by multiplying the Market Price by such
fraction and rounding the product to the nearest whole cent. It is understood
that if a Holder elects to have more than one Note purchased, the number of
shares of Common Stock shall be based on the aggregate amount of Notes to be
purchased.
The Company's right to exercise its election to purchase the
Notes pursuant to Section 7.4 through the issuance of shares of Common Stock
shall be conditioned upon:
(1) the Company having given timely written notice in accordance
with Section 7.4E to the Holders of its election to purchase all or a
specified percentage of the Notes with Common Stock as provided
herein;
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(2) (i) the registration of the shares of Common Stock to be
issued in respect of the payment of the specified percentage of the
Purchase Price under the Securities Act or (ii) the issuance of the
shares of Common Stock in a transaction which is exempt from the
registration requirements of the Securities Act and which will not
result in such shares of Common Stock being deemed "restricted
securities" under the Securities Act or otherwise;
(3) any necessary qualification or registration under applicable
state securities laws or the availability of an exemption from such
qualification and registration; and
(4) the receipt by the Holders of an Officers' Certificate in the
form attached as Exhibit D and an opinion of outside counsel to the
Company each stating that (i) the terms of the issuance of the Common
Stock are in conformity with this Agreement and (ii) the shares of
Common Stock to be issued by the Company in payment of the specified
percentage of the Purchase Price in respect of Notes have been duly
authorized and, when issued and delivered pursuant to the terms of
this Agreement in payment of the specified percentage of the Purchase
Price in respect of Notes, shall be validly issued, fully paid and
nonassessable, and, in the case of such Officers' Certificate, stating
that conditions (1), (2) and (3) above have been satisfied and, in the
case of such opinion of counsel, stating that conditions (2) and (3)
above have been satisfied.
Such Officers' Certificate shall also set forth the number of
shares of Common Stock to be issued for each $1,000 Principal Amount at Final
Maturity of Notes and the Sale Price of a share of Common Stock on each Trading
Day during the period during which the Market Price is calculated. The Company
may elect to pay the Purchase Price (or any portion thereof) in Common Stock
only if the information necessary to calculate the Market Price is reported in a
daily newspaper of national circulation. If any of the conditions set forth in
this Section 7.4D are not satisfied with respect to a Holder or Holders prior to
or on the Purchase Date and the Company elected to purchase the Notes to be
purchased as of such Purchase Date pursuant to this Section 7.4 through the
issuance of shares of Common Stock, the Company shall pay the entire Purchase
Price in respect of such Notes of such Holder or Holders in cash.
Upon determination of the actual number of shares of Common Stock
which the Holder of each $1,000 Principal Amount at Final Maturity of the Notes
shall receive, the Company shall provide written notice of such determination to
the Holders.
E. Notice of Election. The Company's notices of election to
purchase with cash or Common Stock, or any combination thereof (each a "COMPANY
NOTICE"), shall be sent to
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the Holders at their addresses shown in the Note Register not less than 20
Business Days and not more than 40 Business Days prior to the Purchase Date (the
"COMPANY NOTICE DATE"). Such Company Notices shall state the manner of payment
elected and shall contain the following information:
(1) In the event the Company has elected to pay a Purchase Price
(or a specified percentage thereof) with Common Stock, the Company
Notice shall:
(a) state that each Holder shall receive Common Stock with a
Market Price determined as of the fifth Trading Day before the Company
Notice Date equal to such specified percentage of the Purchase Price
of the Notes held by such Holder (except any cash amount to be paid in
lieu of fractional share); and
(b) set forth the method of calculating the Market Price.
(2) In any case, each Company Notice shall include a form of
Purchase Notice to be completed by a Holder and shall state:
(a) the Purchase Price and Conversion Rate;
(b) that Notes as to which a Purchase Notice has been given may
be converted only if the applicable Purchase Notice has been withdrawn
in accordance with the terms of this Agreement;
(c) that Notes must be surrendered to the Company to collect
payment;
(d) that the Purchase Price for any Note as to which a Purchase
Notice has been given and not withdrawn shall be paid promptly
following the later of the Purchase Date and the time of surrender of
such Note, provided, however, that in the event the Company elects to
purchase Notes with cash, the Company may defer payment for a period
of up to 90 days following the Purchase Date (the date on which such
deferred payment is made is herein referred to as the "DEFERRED
PURCHASE DATE"), in which case Original Issue Discount shall continue
to accrue through the Deferred Purchase Date;
(e) the procedures the Holder must follow under Section 7.4;
(f) briefly, the conversion rights of the Notes; and
(g) the procedures for withdrawing a Purchase Notice (including,
without limitation, for a conditional withdrawal pursuant to the terms
of Section 7.4A(1)(d)).
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F. Covenants of the Company. All shares of Common Stock delivered
upon conversion or purchase of the Notes shall be newly issued shares or
treasury shares, shall be fully paid and nonassessable and shall be free from
preemptive rights and free of any Lien or adverse claim.
The Company shall cause to have listed or quoted all such shares
of Common Stock on each United States national securities exchange or over-the
counter or other domestic market on which the Common Stock is then listed or
quoted.
G. Procedure Upon Purchase. Payment of the Purchase Price for the
Notes to be purchased pursuant to this Section 7.4 shall be made as soon as
practicable following the later of the Purchase Date (or the Deferred Purchase
Date, if applicable) or the delivery of such Note. If the Company is delivering
Common Stock, the Company shall deliver to each Holder entitled to receive
Common Stock a certificate for the number of full shares of Common Stock, as
applicable, issuable in payment of such Purchase Price and cash in lieu of any
fractional interests. The Person in whose name the certificate for Common Stock
is registered shall be treated as a holder of record following the Purchase
Date. Subject to Section 7.4D, no payment or adjustment shall be made for
dividends on the Common Stock the Record Date for which occurred on or prior to
the Purchase Date. On the Business Day following the Purchase Date (or the
Deferred Purchase Date, if applicable), such Note shall cease to be outstanding
and Original Issue Discount on such Note shall cease to accrue, whether or not
such Note is delivered to the Company, and all other rights of the Holder shall
terminate (other than the right to receive the Purchase Price upon delivery or
transfer of the Note), unless the Company shall default in the payment of the
Purchase Price in accordance with the terms of this Section 7.4.
H. Taxes. If a Holder of a Note is paid in Common Stock, the
Company shall pay any documentary, stamp or similar issue or transfer tax due on
such issue of shares of Common Stock. However, the Holder shall pay any such tax
which is due because the Holder requests the shares of Common Stock to be issued
in a name other than the Holder's name. The Company may refuse to deliver the
certificates representing the Common Stock being issued in a name other than the
Holder's name until the Company receives a sum sufficient to pay any tax which
shall be due because the shares of Common Stock are to be issued in a name other
than the Holder's name. Nothing herein shall preclude any income tax withholding
required by law or regulations.
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7.5. FURTHER CONDITIONS FOR PURCHASE AT THE OPTION OF HOLDERS UPON A
CHANGE IN CONTROL AND PURCHASE OF NOTES AT THE OPTION OF THE
HOLDER.
A. Effect of Purchase Notice or Change in Control Purchase
Notice. Upon receipt by the Company of the Purchase Notice or Change in Control
Purchase Notice specified in Section 7.4A or Section 7.3C, as applicable, the
Holder of the Note in respect of which such Purchase Notice or Change in Control
Purchase Notice, as the case may be, was given shall (unless such Purchase
Notice or Change in Control Purchase Notice is withdrawn as specified in the
following two paragraphs) thereafter be entitled to receive solely the Purchase
Price or Change in Control Purchase Price, as the case may be, with respect to
such Note. Such Purchase Price or Change in Control Purchase Price shall be paid
to such Holder promptly following the later of (x) the Purchase Date, the
Deferred Purchase Date or the Change in Control Purchase Date, as the case may
be, with respect to such Note (provided the conditions in Section 7.4A or
Section 7.3C, as applicable, have been satisfied) and (y) the time of delivery
of such Note to the Company by the Holder thereof in the manner required by
Section 7.4A or Section 7.3C, as applicable. Notes in respect of which a
Purchase Notice or Change in Control Purchase Notice, as the case may be, has
been given by the Holder thereof may not be converted for shares of Common Stock
on or after the date of the delivery of such Purchase Notice (or Change in
Control Purchase Notice, as the case may be), unless such Purchase Notice (or
Change in Control Purchase Notice, as the case may be) has first been validly
withdrawn as specified in the following two paragraphs.
A Purchase Notice or Change in Control Purchase Notice, as the
case may be, may be withdrawn by means of a written notice of withdrawal
delivered to the Company at any time prior to the close of business on the
Purchase Date (or the Deferred Purchase Date, if applicable) or the Change in
Control Purchase Date, as the case may be, to which it relates specifying:
(1) the certificate number of the Note in respect of which such
notice of withdrawal is being submitted,
(2) the Principal Amount at Final Maturity of the Note with
respect to which such notice of withdrawal is being submitted, and
(3) the Principal Amount at Final Maturity, if any, of such Note
which remains subject to the original Purchase Notice or Company
Change in Control Notice, as the case may be, and which has been or
shall be delivered for purchase by the Company.
A written notice of withdrawal of a Purchase Notice may be in the
form of (i) a conditional withdrawal contained in a
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Purchase Notice pursuant to the terms of Section 7.4A(1)(d) or (ii) a
conditional withdrawal containing the information set forth in Section
7.4A(1)(d) and the preceding paragraph and contained in a written notice of
withdrawal delivered to the Company as set forth in the preceding paragraph.
There shall be no purchase of any Notes pursuant to Section 7.4
(other than through the issuance of Common Stock in payment of the Purchase
Price, including cash in lieu of any fractional shares) or redemption pursuant
to Section 7.3 if there has occurred prior to, on or after, as the case may be,
the giving, by the Holders of such Notes, of the required Purchase Notice (or
Change in Control Purchase Notice, as the case may be) and is continuing an
Event of Default (other than a default in the payment of the Purchase Price or
Change in Control Purchase Price, as the case may be, with respect to such
Notes).
B. Notes Purchased in Part. Any Note that is to be purchased only
in part shall be surrendered at the office of the Company (with, if the Company
so requires, due endorsement by, or a written instrument of transfer in form
satisfactory to the Company duly executed by, the Holder thereof or such
Holder's attorney duly authorized in writing) and the Company shall execute and
deliver to the Holder of such Note, without service charge, a new Note or Notes,
of any authorized denomination as requested by such Holder in aggregate
Principal Amount at Final Maturity equal to, and in exchange for, the portion of
the Principal Amount at Final Maturity of the Note so surrendered which is not
purchased or redeemed.
7.6. CONVERSION OF NOTES.
A. Right to Convert. A Holder of a Note may convert such Note for
Common Stock at any time during the period stated in paragraph 9 of the Notes.
The number of shares of Common Stock issuable upon conversion of a Note per
$1,000 of Principal Amount at Final Maturity (the "CONVERSION RATE") shall be
that set forth in paragraph 9 in the Notes, subject to adjustment as herein set
forth.
A Holder may convert a portion of the Principal Amount at Final
Maturity of a Note if the portion is $1,000 or a multiple of $1,000. Provisions
of this Agreement that apply to conversion of all of a Note also apply to
conversion of a portion of a Note.
B. Conversion Procedures. To convert a Note a Holder must satisfy
the requirements in paragraph 9 of the Notes. The date on which the Holder of
Notes satisfies all those requirements is the conversion date (the "CONVERSION
DATE"). As soon as practicable, but in no event later than the seventh Business
Day, after the Conversion Date the Company shall deliver to the Holder a
certificate for the number of full shares of
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Common Stock issuable upon the conversion and cash in lieu of any fractional
share determined pursuant to Section 7.6C. The Person in whose name the
certificate is registered shall be treated as a shareholder of record on and
after the Conversion Date; provided, however, that no surrender of a Note on any
date when the stock transfer books of the Company shall be closed shall be
effective to constitute the Person or Persons entitled to receive the shares of
Common Stock upon such conversion as the record holder or holders of such shares
of Common Stock on such date, but such surrender shall be effective to
constitute the Person or Persons entitled to receive such shares of Common Stock
as the record holder or holders thereof for all purposes at the close of
business on the next succeeding day on which such stock transfer books are open;
such conversion shall be at the Conversion Rate in effect on the date that such
Note shall have been surrendered for conversion, as if the stock transfer books
of the Company had not been closed. Upon conversion of a Note, such Person shall
no longer be a Holder of such Note.
No payment or adjustment shall be made for dividends on or other
distributions with respect to any Voting Stock except as provided in Section
7.7. On conversion of a Note, that portion of accrued Original Issue Discount
attributable to the period from the Issue Date of the Note to the Conversion
Date with respect to the converted Note shall not be canceled, extinguished or
forfeited, but rather shall be deemed to be paid in full to the Holder thereof
through delivery of the Common Stock (together with the cash payment, if any, in
lieu of fractional shares) in exchange for the Note being converted pursuant to
the provisions hereof.
If a Holder converts more than one Note at the same time, the
number of shares of Common Stock issuable upon the conversion shall be based on
the total Principal Amount at Final Maturity of the Notes converted.
Upon surrender of a Note that is converted in part, the Company
shall execute and deliver to the Holder a new Note in an authorized denomination
equal in Principal Amount at Final Maturity to the unconverted portion of the
Note surrendered.
If the last day on which a Note may be converted is not a
Business Day, the Note may be surrendered on the next succeeding Business Day.
C. Cash Payments in Lieu of Fractional Shares. The Company shall
not issue a fractional share of Common Stock upon conversion of a Note. Instead
the Company shall deliver cash for the current market value of the fractional
share. The current market value of a fractional share shall be determined to the
nearest 1/10,000th of a share by multiplying the Market Price of a full share of
Common Stock by the fractional amount and rounding the product to the nearest
whole cent.
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D. Taxes on Conversion. If a Holder converts a Note, the Company
shall pay any documentary, stamp or similar issue or transfer tax due on the
issue of shares of Common Stock upon the conversion. However, the Holder shall
pay any such tax which is due because the Holder requests the shares to be
issued in a name other than the Holder's name. The Company may refuse to deliver
the certificates representing the Common Stock being issued in a name other than
the Holder's name until the Company receives a sum sufficient to pay any tax
which shall be due because the shares are to be issued in a name other than the
Holder's name. Nothing herein shall preclude any tax withholding required by law
or regulations.
E. Company to Provide Stock. The Company shall, prior to issuance
of any Notes hereunder, and from time to time as may be necessary, reserve out
of its authorized but unissued Common Stock a sufficient number of shares of
Common Stock to permit the conversion of the Notes.
All shares of Common Stock delivered upon conversion of the Notes
shall be newly issued shares or treasury shares, shall be duly and validly
issued and fully paid and nonassessable and shall be free from preemptive rights
and free of any Lien or adverse claim.
The Company shall endeavor promptly to comply with all federal
and state securities laws regulating the order and delivery of shares of Common
Stock upon the conversion of Notes, if any, and shall cause to have listed or
quoted all such shares of Common Stock on each United States national securities
exchange or over-the counter or other domestic market on which the Common Stock
is then listed or quoted.
7.7. ADJUSTMENTS TO CONVERSION RATE.
The Conversion Rate shall be adjusted from time to time by the
Company as follows:
A. In case the Company shall (a) pay a dividend, or make a
distribution, in shares of its Voting Stock, on its Voting Stock, (b) subdivide
its outstanding Voting Stock into a greater number of shares, or (c) combine its
outstanding Voting Stock into a smaller number of shares, the Conversion Rate in
effect immediately prior thereto shall be adjusted so that the holder of any
Note thereafter surrendered for conversion shall be entitled to receive the
number of shares of Common Stock of the Company which such holder would have
owned or have been entitled to receive after the happening of any of the events
described above had such Note been converted immediately prior to the happening
of such event. If any dividend or distribution of the type described in clause
(a) above is not so paid or made, the Conversion Rate shall again be adjusted to
the Conversion Rate which would then be in effect if such dividend or
distribution
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had not been declared. An adjustment made pursuant to this Section
7.7 shall become effective immediately after the Record Date in the case of a
dividend and shall become effective immediately after the effective date in the
case of subdivision or combination.
B. In order to prevent dilution of the right granted hereunder,
the Conversion Rate shall be subject to adjustment from time to time in
accordance with this Section 7.7. For purposes of this Section 7.7, the term
"NUMBER OF COMMON SHARES DEEMED OUTSTANDING" at any given time shall mean the
sum of (x) the number of shares of Common Stock outstanding at such time, and
(y) the number of shares of the Common Stock deemed to be outstanding under
Sections 7.7B(1) to (7), inclusive, at such time.
Except as provided in Section 7.7A, 7.7C, 7.7D or 7.7E, if and
whenever on or after either Closing Date, the Company shall issue or sell, or
shall in accordance with Sections 7.7B(1) to (7), inclusive, be deemed to have
issued or sold any shares of its Common Stock for a consideration per share less
than the average Market Price for the 10 Trading Days immediately preceding such
issuance or sale, then forthwith upon such issue or sale (the "TRIGGERING
TRANSACTION"), the Conversion Rate shall, subject to Section 7.7B(1) to (7), be
adjusted so that the same shall equal the Conversion Rate determined by
multiplying the Conversion Rate in effect immediately prior to the Triggering
Transaction by a fraction, the numerator of which shall be the sum of (x) the
Number of Shares Deemed Outstanding immediately prior to such Triggering
Transaction plus (y) the number of additional shares of Common Stock offered or
sold and the denominator of which shall be the sum of (x) the Number of Shares
Deemed Outstanding immediately prior to such Triggering Transaction plus (y) the
number of shares of Common Stock which the aggregate consideration received by
the Company upon such Triggering Transaction would purchase at the Market Price
immediately preceding such Triggering Transaction.
For purposes of determining the adjusted Conversion Rate under
this Section 7.7, the following subsections (1) to (7), inclusive, shall be
applicable:
(1) In case the Company at any time shall in any manner
grant (whether directly or by assumption in a merger or
otherwise) any rights to subscribe for or to purchase, or any
options for the purchase of, Common Stock or any stock or other
securities convertible into or exchangeable for Common Stock
(such rights or options being herein called "OPTIONS" and such
convertible or exchangeable stock or securities being herein
called "CONVERTIBLE SECURITIES"), whether or not such Options or
the right to convert or exchange any such Convertible Securities
are immediately exercisable
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and the price per share for which the Common Stock is issuable
upon exercise, conversion or exchange (determined by dividing (x)
the total amount, if any, received or receivable by the Company
as consideration for the granting of such Options, plus the
aggregate amount of additional consideration payable to the
Company upon the exercise of all such Options, plus, in the case
of such Options which relate to Convertible Securities, the
aggregate amount of additional consideration, if any, payable
upon the issue or sale of such Convertible Securities and upon
the conversion or exchange thereof, by (y) the total maximum
number of shares of Common Stock issuable upon the exercise of
such Options or the conversion or exchange of such Convertible
Securities) shall be less than the Market Price in effect
immediately prior to the time of the granting of such Option,
then the total maximum amount of Common Stock issuable upon the
exercise of such Options or in the case of Options for
Convertible Securities, upon the conversion or exchange of such
Convertible Securities, shall (as of the date of granting of such
Options) be deemed to be outstanding and to have been issued and
sold by the Company for such price per share. No adjustment of
the Conversion Price shall be made upon the actual issue of such
shares of Common Stock or such Convertible Securities upon the
exercise of such Options, except as otherwise provided in
subparagraph (3) below.
(2) In case the Company at any time shall in any manner
issue (whether directly or by assumption in a merger or
otherwise) or sell any Convertible Securities, whether or not the
rights to exchange or convert thereunder are immediately
exercisable, and the price per share for which Common Stock is
issuable upon such conversion or exchange (determined by dividing
(x) the total amount received or receivable by the Company as
consideration for the issue or sale of such Convertible
Securities, plus the aggregate amount of additional
consideration, if any, payable to the Company upon the conversion
or exchange thereof, by (y) the total maximum number of shares of
Common Stock issuable upon the conversion or exchange of all such
Convertible Securities) shall be less than the Market Price in
effect immediately prior to the time of such issue or sale, then
the total maximum number of shares of Common Stock issuable upon
conversion or exchange of all such Convertible Securities shall
(as of the date of the issue or sale of such Convertible
Securities) be deemed to be outstanding and to have been issued
and sold by the Company for such price per share. No adjustment
of the Conversion Price shall be made upon the actual issue of
such Common Stock upon exercise of the rights to exchange or
convert under such
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Convertible Securities, except as otherwise provided in
subparagraph (3) below.
(3) If the purchase price provided for in any Options
referred to in subparagraph (1), the additional consideration, if
any, payable upon the conversion or exchange of any Convertible
Securities referred to in subparagraphs (1) or (2), or the rate
at which any Convertible Securities referred to in subparagraph
(1) or (2) are convertible into or exchangeable for Common Stock
shall change at any time (other than under or by reason of
provisions designed to protect against dilution of the type set
forth in this Section 7.7), the Conversion Rate in effect at the
time of such change shall forthwith be readjusted to the
Conversion Rate that would have been in effect at such time had
such Options or Convertible Securities still outstanding provided
for such changed purchase price, additional consideration or
conversion rate, as the case may be, at the time initially
granted, issued or sold. If the purchase price provided for in
any Option referred to in subparagraph (1) or the rate at which
any Convertible Securities referred to in subparagraphs (1) or
(2) are convertible into or exchangeable for Common Stock, shall
be reduced at any time under or by reason of provisions with
respect thereto designed to protect against dilution, then in
case of the delivery of Common Stock upon the exercise of any
such Option or upon conversion or exchange of any such
Convertible Security, the Conversion Rate then in effect
hereunder shall forthwith be adjusted to such respective amount
as would have been obtained had such Option or Convertible
Security never been issued as to such Common Stock and had
adjustments been made upon the issuance of the shares of Common
Stock delivered as aforesaid, but only if as a result of such
adjustment the Conversion Rate then in effect hereunder is hereby
reduced.
(4) On the expiration of any Option or the termination of
any right to convert or exchange any Convertible Securities, the
Conversion Rate then in effect hereunder shall forthwith be
increased to the Conversion Rate which would have been in effect
at the time of such expiration or termination had such Option or
Convertible Securities, to the extent outstanding immediately
prior to such expiration or termination, never been issued.
(5) In case any Options shall be issued in connection with
the issue or sale of other securities of the Company, together
comprising one integral transaction in which no specific
consideration is allocated to such Options by the parties
thereto, such
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Options shall be deemed to have been issued without
consideration.
(6) In case any shares of Common Stock, Options or
Convertible Securities shall be issued or sold or deemed to have
been issued or sold for cash, the consideration received therefor
shall be deemed to be the amount received by the Company
therefor. In case any shares of Common Stock, Options or
Convertible Securities shall be issued or sold for a
consideration other than cash, the amount of the consideration
other than cash received by the Company shall be the fair value
of such consideration as determined in good faith by the Board of
Directors. In case any shares of Common Stock, Options or
Convertible Securities shall be issued in connection with any
merger in which the Company is the surviving corporation, the
amount of consideration therefor shall be deemed to be the fair
value of such portion of the net assets and business of the
non-surviving corporation as shall be attributed by the Board of
Directors in good faith to such Common Stock, Options or
Convertible Securities, as the case may be as determined in good
faith by the Board of Directors.
(7) The number of shares of Common Stock outstanding at any
given time shall not include shares owned or held by or for the
account of the Company, and the disposition of any shares so
owned or held shall be considered an issue or sale of Common
Stock for the purpose of this Section 7.7.
C. In case the Company shall, by dividend or otherwise,
distribute to all holders of any class or series of its Voting Stock (excluding
any distribution in connection with the liquidation, dissolution or winding up
of the Company, whether voluntary or involuntary) any shares of any class of
capital stock of the Company (other than Voting Stock) or evidences of its
indebtedness or assets (other than cash) or rights or warrants to subscribe for
or purchase any of its Notes (excluding those referred to in Section 7.7B
hereof) (any of the foregoing hereinafter in this Section 7.7C called the
"DISTRIBUTED SECURITIES"), then, the Conversion Rate shall be adjusted so that
the same shall equal the Conversion Rate determined by multiplying the
Conversion Rate in effect immediately prior to the date of such distribution by
a fraction of which the numerator shall be the Market Price of the Common Stock
on the Record Date mentioned below, and the denominator shall be the Market
Price of the Common Stock on such Record Date less the fair market value on such
Record Date (as determined by the Board of Directors of the Company, whose
determination shall be conclusive) of the Distributed Securities so distributed
applicable to one share of Voting Stock. Such adjustment shall
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become effective immediately after the Record Date for the determination of
shareholders entitled to receive such distribution. Notwithstanding the
foregoing, in the event the then fair market value (as so determined) of the
portion of the Distributed Securities so distributed applicable to one share of
Voting Stock is equal to or greater than the Market Price of the Common Stock on
the Record Date, in lieu of the foregoing adjustment, adequate provision shall
be made so that each Holder shall have the right to receive upon conversion the
amount of Distributed Securities such Holder would have received had such Holder
converted each Note on such Record Date. In the event that such distribution is
not so paid or made, the Conversion Rate shall again be adjusted to the
Conversion Rate which would then be in effect if such distribution had not been
declared.
Notwithstanding the foregoing provisions of this Section 7.7C, no
adjustment shall be made thereunder for any distribution of Distributed
Securities if the Company makes proper provision so that each Holder of a Note
who converts such Note (or any portion thereof) after the Record Date for such
distribution shall be entitled to receive upon such conversion, in addition to
the shares of Common Stock issuable upon such conversion, the amount and kind of
Distributed Securities that such Holder would have been entitled to receive if
such Holder had, immediately prior to such Record Date, converted such Note for
Common Stock; provided that, with respect to any Distributed Securities that are
convertible, exchangeable or exercisable, the foregoing provision shall only
apply to the extent (and so long as) the Distributed Securities receivable upon
conversion of such Note would be convertible, exchangeable or exercisable, as
applicable, without any loss of rights or privileges for a period of at least 60
days following conversion of such Note.
D. In case the Company shall, by dividend or otherwise,
distribute to all holders of any class of its Voting Stock cash (excluding any
cash that is distributed upon a merger or consolidation to which Section 7.8F
applies or as part of a distribution referred to in Section 7.7C) in an
aggregate amount that, combined together with (i) the aggregate amount of any
other such distributions to all holders of any class of its Voting Stock made
exclusively in cash within the 12 months preceding the date of payment of such
distribution, and in respect of which no adjustment pursuant to this Section
7.7D has been made, and (ii) the aggregate of any cash plus the fair market
value (as determined by the Board of Directors, whose determination shall be
conclusive and described in a resolution of the Board of Directors) of
consideration payable in respect of any tender offer by the Company for all or
any portion of any class of its Voting Stock concluded within the 12 months
preceding the date of payment of such distribution, and in respect of which no
adjustment pursuant to Section 7.7E has been made, exceeds 10% of the product of
the Market Price of the Common Stock on the Record Date with respect to such
distribution and the number of shares of Voting Stock outstanding on such
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date, then, and in each such case, immediately after the close of business on
such date, the Conversion Rate shall be increased so that the same shall equal
the Conversion Rate determined by multiplying the Conversion Rate in effect
immediately prior to the record date by a fraction of which the numerator shall
be such Market Price of the Common Stock and the denominator shall be the Market
Price of the Common Stock on such Record Date less the amount of cash so
distributed (and not excluded as provided above) applicable to one share of
Voting Stock, such increase to be effective immediately prior to the opening of
business on the day following such Record Date; provided, however, that, if the
portion of the cash so distributed applicable to one share of Voting Stock is
equal to or greater than the Market Price of the Common Stock on such Record
Date, in lieu of the foregoing adjustment, adequate provision shall be made so
that each Holder shall have the right to receive upon conversion the amount of
cash such Holder would have received had such Holder converted such Note
immediately prior to such Record Date. If such dividend or distribution is not
so paid or made, the Conversion Rate shall again be adjusted to be the
Conversion Rate which would then be in effect if such dividend or distribution
had not been declared. If any adjustment is required to be made as set forth in
this Section 7.7D as a result of a distribution that is a quarterly dividend,
such adjustment shall be based upon the amount by which such distribution
exceeds the amount of the quarterly cash dividend permitted to be excluded
pursuant hereto. If an adjustment is required to be made as set forth in this
Section 7.7D above as a result of a distribution that is not a quarterly
dividend, such adjustment shall be based upon the full amount of the
distribution.
E. In case a tender offer made by the Company or any of its
subsidiaries for all or any portion of any class of its Voting Stock expires and
such tender offer (as amended upon the expiration thereof) requires the payment
to shareholders (based on the acceptance (up to any maximum specified in the
terms of the tender offer) of Purchased Shares) of an aggregate consideration
having a fair market value (as determined by the Board of Directors, whose
determination shall be conclusive and described in a resolution of the Board of
Directors) that, combined together with (a) the aggregate of the cash plus the
fair market value (as determined by the Board of Directors, whose determination
shall be conclusive and described in a resolution of the Board of Directors), as
of the expiration of such tender offer, of consideration payable in respect of
any other tender offers, by the Company or any of its subsidiaries for all or
any portion of any class of its Voting Stock expiring within the 12 months
preceding the expiration of such tender offer and in respect of which no
adjustment pursuant to this Section 7.7E has been made, and (b) the aggregate
amount of any distributions to all holders of the Voting Stock made exclusively
in cash within 12 months preceding the expiration of such tender offer and in
respect of which no adjustment pursuant to Section 7.7D has been made, exceeds
10% of the product of the Market Price of the
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Common Stock as of the last time (the "EXPIRATION TIME") tenders could have been
made pursuant to such tender offer (as it may be amended) and the number of
shares of Voting Stock outstanding (including any tendered shares) at the
Expiration Time, then, and in each such case, immediately prior to the opening
of business on the day after the date of the Expiration Time, the Conversion
Rate shall be increased so that the same shall equal the Conversion Rate
determined by multiplying the Conversion Rate in effect immediately prior to the
Expiration Time by a fraction of which the numerator shall be the product of the
number of shares of Voting Stock outstanding (less any Purchased Shares) on the
Expiration Time and the Market Price of the Common Stock on the Trading Day next
succeeding the Expiration Time and the denominator shall be (x) the number of
shares of Voting Stock outstanding (including any tendered or exchanged shares)
on the Expiration Time multiplied by the Market Price of the Common Stock on the
Trading Day next succeeding the Expiration Time less (y) the fair market value
(determined as aforesaid) of the aggregate consideration payable to shareholders
based on the acceptance (up to an maximum specified in the terms of the tender
or exchanged offer) of all shares validly tendered or exchanged and not
withdrawn as of the Expiration Time (the shares deemed so accepted, up to any
such maximum, being referred to as the "PURCHASED SHARES"), such increase to
become effective immediately prior to the opening of business on the day
following the Expiration Time. If the Company is obligated to purchase shares
pursuant to any such tender offer, but the Company is permanently prevented by
applicable law from effecting any such purchases or all such purchases are
rescinded, the Conversion Rate shall again be adjusted to be the Conversion Rate
which would then be in effect if such tender offer had not been made.
F. In the event the litigation referred to in Schedule 7.7 (the
"SUBJECT LITIGATION") is settled by the Company or a final judgment is entered
against the Company or the Company otherwise is liable to make payments (whether
pursuant to indemnification arrangements or otherwise), which payments shall
include fees and expenses payable by the Company, in an amount in excess of $30
million on a pre-tax basis (the "ADJUSTMENT THRESHOLD"), without regard to
insurance coverage which may be available to the Company (a "SPECIAL ADJUSTMENT
EVENT"), then the Conversion Rate then in effect shall be further adjusted
pursuant to this Section 7.7F. Upon the occurrence of a Special Adjustment
Event, the Conversion Rate shall be adjusted to the Conversion Rate obtained by
dividing $315.24 by the New Factor. For purposes hereof, the "NEW FACTOR" shall
be equal to the difference between (x) the quotient obtained by dividing $315.24
by the Conversion Rate in effect immediately prior to the Special Adjustment
Event and (y) the Adjustment Factor. For purposes hereof, the "Adjustment
Factor" shall equal $0.0111 for each $1 million in after-tax costs or expense
payable by the Company in connection with the Special Adjustment Event in excess
of the
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Adjustment Threshold, plus $0.006568 for every 1,000,000 shares of Common Stock
acquired by the Investors pursuant to Section 6.6 within six months of the
Closing Date (with adjustments to the Adjustment Factor by linear interpolation
for amounts greater or less than $1 million or 1,000,000, as the case may be).
G. For purposes of this Section 7.7, the number of shares of
Voting Stock at any time outstanding shall not include shares held in the
treasury of the Company but shall include shares issuable in respect of scrip
certificates issued in lieu of fractions of shares of Voting Stock. The Company
shall not pay any dividend or make any distribution on shares of Voting Stock
held in the treasury of the Company.
H. The provisions of this Section 7.7 shall not apply to any
Common Stock issued, issuable or deemed outstanding under Sections 7.7B(1) to
(7) inclusive: (i) to any person pursuant to any stock option, stock purchase or
similar plan or arrangement for the benefit of employees, consultants or
directors of the Company or its Subsidiaries in effect on the Closing Dates or
thereafter adopted by the Board of Directors (or physicians or providers
contracting with the Company or any of its Subsidiaries), (ii) pursuant to
options, warrants and conversion rights in existence on the Closing Dates, (iii)
on conversion of a Note or (iv) in connection with underwritten public offerings
for cash pursuant to a registration statement filed under the Securities Act
relating to Common Stock, Options or Convertible Securities.
7.8. MISCELLANEOUS PROVISIONS RELATING TO CONVERSION.
A. When Adjustment May be Deferred. No adjustment in the
Conversion Rate need be made unless the adjustment would require an increase or
decrease of at least 1% in the Conversion Rate then in effect provided that any
adjustment that would otherwise be required to be made shall be carried forward
and taken into account in any subsequent adjustment. All calculations under
Sections 7.6, 7.7 and 7.8 shall be made to the nearest cent or to the nearest
1/10,000th of a share, as the case may be.
B. When No Adjustment Required. No adjustment need be made for
rights to purchase Voting Stock pursuant to a Company plan for reinvestment of
dividends or interest. No adjustment need be made for a change in the par value
or no par value of the Voting Stock. To the extent the Notes become convertible
into cash, assets, property or Notes (other than capital stock of the Company),
no adjustment need be made thereafter as to the cash, assets, property or such
Notes. Interest shall not accrue on the cash.
C. Notice of Adjustment. Whenever the Conversion Rate is
adjusted, the Company shall promptly mail to Holders a
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notice of the adjustment. The certificate shall, absent manifest error, be
conclusive evidence that the adjustment is correct.
D. Voluntary Increase. The Company may make such increases in the
Conversion Rate, in addition to those required by Section 7.7, as the Board of
Directors considers to be advisable to avoid or diminish any income tax to
holders of Voting Stock or rights to purchase Voting Stock resulting from any
dividend or distribution of stock (or rights to acquire stock) or from any event
treated as such for income tax purposes. Whenever the Conversion Rate is so
increased, the Company shall mail to Holders a notice of such increase.
E. Notice to Holders Prior to Certain Actions. In case:
(1) the Company shall declare a dividend (or any other
distribution) on its Voting Stock that would require an adjustment in
the Conversion Rate pursuant to Section 7.7;
(2) the Company shall authorize the granting to all or
substantially all the Holders of its Voting Stock of rights or
warrants to subscribe for or purchase any share of any class or any
other rights or warrants;
(3) of any reclassification or reorganization of the Voting Stock
of the Company (other than a subdivision or combination of its
outstanding Voting Stock, or a change in par value, or from par value
to no par value, or from no par value to par value), or of any
consolidation or merger to which the Company is a party and for which
approval of any shareholders of the Company is required, or of the
sale or transfer of all or substantially all of the assets of the
Company; or
(4) of the voluntary or involuntary dissolution, liquidation or
winding-up of the Company,
the Company shall cause to be mailed to each Holder of Notes at his address
appearing on the Note Register, as promptly as possible but in any event at
least 15 days prior to the applicable date hereinafter specified, a notice
stating (x) the date on which a record is to be taken for the purpose of such
dividend, distribution or rights or warrants, or, if a record is not to be
taken, the date as of which the holders of Voting Stock of record to be entitled
to such dividend, distribution, or rights or warrants are to be determined, or
(y) the date on which such reclassification, consolidation, merger, sale,
transfer, dissolution, liquidation or winding-up is expected to become effective
or occur, and the date as of which it is expected that holders of Voting Stock
of record shall be entitled to exchange their Voting Stock for securities or
other property deliverable upon such reclassification, consolidation, merger,
sale, transfer, dissolution, liquidation or winding-up. Failure to
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give such notice, or any defect therein, shall not affect the legality or
validity of such dividend, distribution, reclassification, consolidation,
merger, sale, transfer, dissolution, liquidation or winding-up.
F. Effect of Reclassification, Consolidation, Merger or Sale. If
any of the following events occur, namely (a) any reclassification or change of
outstanding shares of Voting Stock (other than a change in par value, or from
par value to no par value, or from no par value to par value, or as a result of
a subdivision or combination), (b) any consolidation, merger or combination of
the Company with another corporation as a result of which holders of Voting
Stock shall be entitled to receive stock, Notes or other property or assets
(including cash) with respect to or in exchange for such Voting Stock, or (c)
any sale or conveyance of the properties and assets of the Company as, or
substantially as, an entirety to any other corporation as a result of which
holders of Voting Stock shall be entitled to receive stock, Notes or other
property or assets (including cash) with respect to or in exchange for such
Voting Stock, then the Company or the successor or purchasing corporation, as
the case may be, shall make adequate provision so that each Note shall be
convertible into the kind and amount of shares of stock and other Notes or
property or assets (including cash) receivable upon such reclassification,
change, consolidation, merger, combination, sale or conveyance by a holder of a
number of shares of Voting Stock issuable upon conversion of such Notes
immediately prior to such reclassification, change, consolidation, merger,
combination, sale or conveyance. Such adequate provision shall include an
undertaking on the part of the Company, the surviving corporation or the
purchaser, as the case may be, to make adjustments which shall be as nearly
equivalent as may be practicable to the adjustments provided for in this
Section 7.8F.
The above provisions of this Section shall similarly apply to
successive reclassifications, changes, consolidations, mergers, combinations,
sales and conveyances.
If this Section 7.8F applies to any event or occurrence, Section
7.7 shall not apply.
G. Simultaneous Adjustments. In the event that Sections 7.6, 7.7
or 7.8 require adjustments to the Conversion Rate under more than one of
Sections 7.7A, 7.7B, 7.7C or 7.7D, and the Record Dates for the distributions
giving rise to such adjustments shall occur on the same date, then such
adjustments shall be made by applying, first, the provisions of Section 7.7C,
second, the provisions of Section 7.7D, third, the provisions of Section 7.7A,
and fourth, the provisions of Section 7.7B.
H. Successive Adjustments. After an adjustment to the Conversion
Rate under Sections 7.6, 7.7 or 7.8, any subsequent event requiring an
adjustment under Sections 7.6, 7.7
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or 7.8 shall cause an adjustment to the Conversion Rate as so adjusted.
I. General Considerations. Whenever successive adjustments to the
Conversion Rate are called for pursuant to Sections 7.6, 7.7 or 7.8, such
adjustments shall be made to the Market Price as may be necessary or appropriate
to effectuate the intent of Sections 7.6, 7.7 or 7.8 and to avoid unjust or
inequitable results as determined in good faith by the Board of Directors.
8. DEFINITIONS.
8.1. DEFINITIONS.
Except as otherwise specified or as the context may otherwise
require, the following terms shall have the respective meanings set forth below
whenever used in this Agreement and shall include the singular as well as the
plural:
"AFFILIATE" of any specified Person means any other Person which
directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, such Person. Notwithstanding the
foregoing, in no event shall the Investors or any of their Affiliates or any
other holder of any Notes be deemed to be an Affiliate of the Company solely by
reason of the ownership of the Notes or the shares of Common Stock acquired upon
the conversion of the Notes.
"BOARD OF DIRECTORS" means the Board of Directors of the Company
or any committee of directors lawfully exercising the relevant powers of said
Board or Directors.
"BUSINESS DAY" means any day other than a Saturday or Sunday or a
day on which commercial banks are required or authorized by law to be closed in
New York, New York.
"CAPITAL STOCK" means, with respect to any corporation, any and
all shares, interests, rights to purchase, warrants, options, participations or
other equivalents of or interests (however designated) in stock issued by that
corporation.
"CHANGE IN CONTROL" means such time as
(i) a "person" or "group" (within the meaning of Sections 13(d)
and 14(d)(2) of the Exchange Act), other than any of the Investors or
a "group" which includes any of the Investors, (A) becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act)
of more than 50% of the total then outstanding voting power of the
Voting Stock of the Company or (B) has the right or the ability by
voting
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right, contract or otherwise to elect or designate for election a
majority of the entire Board of Directors;
(ii) (A) the Company consolidates with or merges into any other
Person or conveys, transfers, sells or leases all or substantially all
of its assets as an entirety to any Person or (B) any Person merges
into the Company, in either event pursuant to a transaction in which
Voting Stock of the Company representing more than 50% of the total
voting power of the Company outstanding immediately prior to the
effectiveness thereof is reclassified or changed into or exchanged for
cash, securities or other property; provided that any consolidation,
merger, conveyance, transfer, sale or lease between the Company and
any of its Subsidiaries (including without limitation the
reincorporation of the Company in another jurisdiction) shall be
excluded from the operation of this clause (ii); or
(iii) during any period of two consecutive years, individuals who
at the beginning of such period constituted the Board of Directors
(together with any new directors whose election by such Board of
Directors, or whose nomination for election by the shareholders of the
Company, as the case may be, was approved by a vote of 66 2/3% of the
directors then still in office who were either directors at the
beginning of such period or whose election or nomination for election
was previously so approved) cease for any reason to constitute a
majority of the Board of Directors then in office.
"CHANGE IN CONTROL PURCHASE DATE" has the meaning specified in
Section 7.3A.
"CHANGE IN CONTROL PURCHASE NOTICE" has the meaning specified in
Section 7.3C.
"CHANGE IN CONTROL PURCHASE PRICE" has the meaning specified in
Section 7.3A.
"CLOSING DATE" has the meaning specified in Section 1.2.
"CLOSING PRICE" on any Trading Day with respect to the per share
price of the Common Stock means the last reported sales price regular way or, in
case no such reported sale takes place on such Trading Day, (i) the reported
closing bid price regular way on the Nasdaq Stock Market's National Market if
the Common Stock is listed or admitted to trading on such National Market, or
(ii) if the Common Stock is not listed or admitted to trading on the Nasdaq
Stock Market's National Market, the average of the reported closing bid and
asked prices regular way on the principal national securities exchange on which
the Common Stock is listed or admitted to trading or, if not listed or admitted
to
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trading on any national securities exchange, the closing bid price in the
over-the-counter market as furnished by any New York Stock Exchange member firm
that is selected from time to time by the Company for that purpose and is
reasonably acceptable to the Majority Holders.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMMISSION" means the Securities and Exchange Commission and any
successor agency of the United States federal government having similar powers.
"COMMON STOCK" has the meaning specified in Section 2.2.
"COMPANY CHANGE IN CONTROL NOTICE" has the meaning specified in
Section 7.3B.
"COMPANY NOTICE" has the meaning specified in Section 7.4E.
"COMPANY SEC REPORTS" means the meaning specified in Section 2.5.
"CONTAMINANT" means any waste, pollutant, hazardous substance,
toxic substance, hazardous waste, special or toxic waste, petroleum or
petroleum-derived substance or waste, or any constituent of any such substance
or waste regulated under any Environmental Law.
"CONTROL" when used with respect to any specified Person means
the power to direct the management and policies of such Person, directly or
indirectly, whether through the ownership of voting securities, by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
"CONTROLLED SUBSIDIARY" means any entity as to which WP or the
Investors, individually or in the aggregate, are the beneficial owner of 50% or
more of the voting securities or as to which WP or the Investors, individually
or in the aggregate, have the right to appoint a majority of the directors or
persons exercising similar authority.
"CONVERSION RATE" has the meaning specified in Section 7.6A.
"CONVERTIBLE SECURITIES" has the meaning specified in Section
7.7B.
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"DEFAULT" means an event which, with the lapse of time and/or the
giving of notice, would constitute an Event of Default.
"DEFERRED PURCHASE DATE" has the meaning specified in Section
7.4E(2)(d).
"ENVIRONMENTAL LAWS" means any and all Federal, state, local, and
foreign statutes, laws, regulations, ordinances, rules, judgments, orders,
decrees, permits, concessions, grants, franchises, licenses, agreements or
governmental restrictions relating to pollution and the protection of the
environment, or the release of any materials into the environment, including but
not limited to those related to hazardous substances or wastes, air emissions
and discharges to waste or public systems.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended from time to time, and the rules and regulations promulgated
thereunder from time to time in effect.
"ERISA AFFILIATE" means any trade or business (whether or not
incorporated) that is treated as a single employer together with the Company
under section 414 of the Code.
"EVENT OF DEFAULT" has the meaning specified in Section 9.1.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended from time to time.
"EXISTING CONVERTIBLE DEBENTURES" means the Company's 4.5%
Convertible Subordinated Debentures due 2003 issued under the Existing
Indenture.
"EXISTING INDENTURE" means the indenture, dated as of February
15, 1996, between the Company and First American National Bank, relating to the
Existing Convertible Debentures, as the same may be amended or modified from
time to time.
"FINAL MATURITY" or "FINAL MATURITY DATE" means the fifteenth
anniversary of the Closing Date.
"GAAP" means generally accepted accounting principles from time
to time in the United States.
"GOVERNMENTAL BODY" means any federal, state, municipal or other
governmental department, commission, board, bureau, agency or instrumentality,
domestic or foreign.
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"HOLDER" means any Person in whose name the Notes are registered
from time to time on the books and records of the Company.
"HSR ACT" means the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended, and the rules and regulations promulgated thereunder.
"ISSUE PRICE" of any Note means, in connection with the original
issuance of such Note, the initial issue price at which the Note is issued as
set forth on the face of the Note.
"KNOWLEDGE OF THE COMPANY" OR "COMPANY'S KNOWLEDGE" means the
best knowledge of each of the following individuals: John K. Crawford, Thompson
S. Dent, N. Carolyn Forehand, Joseph C. Hutts, Derril W. Reeves, Fred W. Ewing,
Oliver V. Rogers, Glen N. Marconcini, Herbert A. Fritch and W. Carl Whitmer.
"LIEN" means any mortgage, pledge, encumbrance, security
interest, conditional sale or other title retention agreement or other similar
lien or encumbrance.
"MAJORITY HOLDERS" means the holder or holders of at least a
majority of the aggregate unpaid principal amount of the Notes at the time
outstanding.
"MARKET PRICE" means the average of the daily Sale Prices of the
Common Stock for the 10 Trading Days period ending on (if the third Business Day
prior to the applicable date in question is a Trading Day or, if not, then on
the last Trading Day prior to) the third Business Day prior to the applicable
date in question, appropriately adjusted to take into account the occurrence
during the period commencing on the first of such Trading Days during such 10
Trading Day period and ending on such date in question any event that would
result in an adjustment of the Conversion Rate with respect to the Common Stock.
"MATERIAL" means material in relation to the business,
operations, affairs, financial condition, assets, properties, or prospects of
the Company and its Subsidiaries taken as a whole.
"MATERIAL AGREEMENTS" mean any indenture, mortgage, deed of
trust, bank loan or credit agreement, or any other "material contract" of the
Company (as such term is defined in Regulation 601(b)(10) of Regulation S-K of
the Commission).
"MATERIAL ADVERSE EFFECT" means any change in or effect on that
is materially adverse to (A) the business, operations, properties, condition
(financial or other), prospects, assets or liabilities of the Company and its
Subsidiaries taken as a whole (including any change in any Requirement of Law
applicable to the business of the Company or its Subsidiaries), (B) the ability
of
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the Company to perform its obligations under this Agreement and the other
Transaction Documents or (C) the legality, validity or enforceability of this
Agreement or the other Transaction Documents, excluding any changes and effects
resulting from changes in economic or political conditions or changes and
effects previously disclosed in the Company SEC Reports or in the Schedules
hereto.
"MAXIMUM AMOUNT" means the sum of (i) the number of shares of
Common Stock beneficially owned by the Investors as of the date of this
Agreement (before giving effect to the transactions contemplated hereby), (ii)
the number of shares of Common Stock issuable from time to time upon conversion
of the Notes and (iii) during a period of six months from the Closing Date, the
number of shares of Common Stock that the Investors may purchase in accordance
with the provisions of Section 6.6.
"MULTIEMPLOYER PLAN" means any Plan that is a "multiemployer
plan" (as such term is defined in section 4001(a)(3) of ERISA).
"NON-PAYMENT EVENT OF DEFAULT" means a default on the Senior
Indebtedness of which the Company has received notice (other than a Payment
Event of Default) that occurs and is continuing and that permits the holders of
Senior Indebtedness to accelerate the maturity of such Senior Indebtedness.
"NOTES" has the meaning specified in Section 1.1.
"NOTE REGISTER" has the meaning specified in Section 11.
"OFFICER'S CERTIFICATE" means a certificate of a Senior Financial
Officer or of any other officer of the Company whose responsibilities extend to
the subject matter of such certificate.
"OPTIONS" has the meaning specified in Section 7.7B.
"ORDER" means any written order, writ, injunction, decree,
judgment, award, penalty, determination, direction or demand.
"ORIGINAL ISSUE DISCOUNT" of any Note means the difference
between the Issue Price and the Principal Amount at Final Maturity of the Note
as set forth on the face of the Note.
"PAYMENT EVENT OF DEFAULT" means a default in the payment of
principal of (or premium, if any), or interest on Senior Indebtedness beyond any
applicable grace period with respect thereto.
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"PERMITTED ACQUISITIONS" has the meaning specified in Section
6.6A.
"PERSON" or "PERSON" means and includes an individual, a
partnership, a joint venture, a corporation, a limited liability company, a
trust, an association, a joint-stock company, an unincorporated organization and
a Governmental Body.
"PLAN" means an "employee benefit plan" (as defined in section
3(3) of ERISA) that is or, within the preceding five years, has been established
or maintained, or to which contributions are or, within the preceding five
years, have been made or required to be made, by the Company or any ERISA
Affiliate or with respect to which the Company or any ERISA Affiliate may have
any liability.
"PRINCIPAL", "PRINCIPAL AMOUNT" or "PRINCIPAL" of any Note, means
the principal of the security, including any accrued Original Issue Discount on
the Note.
"PURCHASE DATE" has the meaning specified in Section 7.4A.
"PURCHASE NOTICE" has the meaning specified in Section 7.4A.
"PURCHASE PRICE" has the meaning specified in Section 7.4A.
"RECORD DATE" means, with respect to any dividend, distribution
or other transaction or event in which the holders of Voting Stock have the
right to receive any cash, securities or other property or in which the Voting
Stock (or other applicable security) is exchanged for or converted into any
combination of cash, securities or other property, the date fixed for
determination of shareholders entitled to receive such cash, securities or other
property (whether such date is fixed by the Board of Directors or by statute,
contract or otherwise).
"REDEMPTION DATE" means the date fixed for such redemption by or
pursuant to this Agreement.
"REDEMPTION PRICE" means the price at which the Notes are to be
redeemed pursuant to this Agreement.
"REGISTRATION RIGHTS AGREEMENT" has the meaning specified in
Section 4.9.
"REQUIREMENT OF LAW" means, as to any Person, each law, rule or
regulation, including Environmental Laws and ERISA, or Order, decree or other
determination of an arbitrator or a court
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or other Governmental Body applicable to or binding upon such Person or any of
its property or to which such Person or any of its property is subject.
"RIGHTS AGREEMENT" means the Rights Agreement, dated as of
February 18, 1994, between the Company and First Union National Bank of North
Carolina, as rights agent.
"SALE PRICE" of the Common Stock on any date means the average of
the high and low per share sale price (or if no sale prices are reported, the
average of the bid and ask prices or, if more than one in either case, the
average of the average bid and average ask prices) on such date as reported in
the composite transactions reported on the principal United States securities
exchange on which the Common Stock is listed or, if the Common Stock is not
listed on a United States national or regional stock exchange, as reported by
the National Association of Securities Dealers Automated Quotation System.
"SECURITIES" means the Notes or the shares of Common Stock
issuable upon conversion of the Notes.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SENIOR FINANCIAL OFFICER" means the chief financial officer,
principal accounting officer, treasurer or controller of the Company.
"SENIOR INDEBTEDNESS" means (a) the principal of and premium, if
any, and interest (including, without limitation, any interest accruing
subsequent to the filing of a petition or other action concerning bankruptcy or
other similar proceedings, whether or not constituting an allowed claim in any
such proceedings) on the following, whether presently outstanding or hereafter
incurred or created: all indebtedness or obligations of the Company for money
borrowed (other than that evidenced by the Notes) or assets acquired and which
is evidenced by a note, bond, debenture or similar instrument (including a
purchase money mortgage) given in connection with the acquisition of any
property or assets (other than inventory or other similar property acquired in
the ordinary course of business) including securities, (b) all obligations
constituting Bank Debt (as defined in the Existing Indenture)(including without
limitation principal, interest, fees and expenses); (c) all obligations of the
Company: (i) for the reimbursement of any obligor on any letter of credit,
banker's acceptance or similar credit transaction, (ii) under interest rate
swaps, caps, collars, options and similar arrangements, and (iii) under any
foreign exchange contact, currency swap agreement, futures contract, currency
option contract, or other foreign currency hedge; (d) all obligations for the
payment of money relating to a
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capitalized lease obligation; (e) any liabilities of others described in the
preceding clauses (a), (b), (c) and (d) which the Company has guaranteed or
which are otherwise its legal liability; and (f) renewals, extensions,
refundings, restructurings, amendments and modifications of any such
indebtedness or guarantee. Notwithstanding anything to the contrary in this
Agreement or the Notes, "SENIOR INDEBTEDNESS" shall not include (v) the Existing
Convertible Debentures, (w) subordinated indebtedness previously issued in
connection with clinic acquisitions, (x) future clinic acquisition subordinated
indebtedness of the Company, provided that such subordinated indebtedness by its
terms or the terms of the instrument creating or evidencing it expressly
provides that such subordinated indebtedness shall not be senior in right of
payment to the Securities, (y) any indebtedness of the Company to a Subsidiary
except to the extent any such indebtedness is pledged by such Subsidiary as
security for any Bank Debt, or (z) any indebtedness or guarantee of the Company
which by its terms or the terms of the instrument creating or evidencing it is
not superior in right of payment to the Notes. The Notes will rank pari passu
with the Existing Subordinated Debentures and any subordinated indebtedness of
the Company previously issued in connection with clinic acquisitions.
"SIGNIFICANT SUBSIDIARY" has the meaning specified in Regulation
1-02(w) of Regulation S-X of the Commission.
"SUBJECT SECURITIES" has the meaning specified in Section 6.7B.
"SUBSIDIARY" of any Person means any corporation or other entity
a majority of the total combined voting power of all classes of Voting Stock of
which shall, at the time as of which any determination is being made, be owned
by such Person and/or one or more of its Subsidiaries. Except as otherwise
expressly indicated herein, references to Subsidiaries shall mean Subsidiaries
of the Company.
"TAKEOVER STATUTE" shall mean any corporate takeover provision
under laws of the State of Tennessee except any health maintenance organization
or insurance change of control statute.
"TRADING DAY" means each Monday, Tuesday, Wednesday, Thursday and
Friday, other than any day on which securities are not traded on the applicable
securities exchange or in the applicable securities market.
"TRANSACTION DOCUMENTS" means this Agreement, the Notes and the
Registration Rights Agreement.
"TRANSFER" means any sale, transfer or other disposition.
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"TRANSFEROR" has the meaning specified in Section 6.7A.
"VOTING STOCK" means, with respect to any Person, any shares of
stock or other equity interests of any class or classes of such Person whose
holders are entitled under ordinary circumstances (irrespective of whether at
the time stock or other equity interests of any other class or classes shall
have or might have voting power by reason of the happening of any contingency)
to vote for the election of a majority of the directors, managers, trustees or
other governing body of such Person.
"WHOLLY OWNED SUBSIDIARY" means a Subsidiary all the Capital
Stock of which (other than directors' qualifying shares) is owned by the Company
or another Wholly Owned Subsidiary.
"WP" has the meaning specified in Section 6.5.
8.2. ACCOUNTING TERMS.
All accounting terms used herein which are not expressly defined
in this Agreement have the meanings respectively given to them in accordance
with GAAP. Except as otherwise specifically provided herein, all computations
made pursuant to this Agreement shall be made in accordance with GAAP and all
balance sheets and other financial statements with respect thereto shall be
prepared in accordance with GAAP consistently applied. Except as otherwise
expressly provided, any consolidated financial statement or financial
computation shall be done in accordance with GAAP; and, if at the time that any
such statement or computation is required to be made the Company shall not have
any Subsidiary, such terms shall mean a financial statement or a financial
computation, as the case may be, with respect to the Company only.
9. EVENTS OF DEFAULT; REMEDIES.
9.1. EVENTS OF DEFAULT; ACCELERATION OF MATURITY AND RESCISSION.
If any of the following Events of Default (each an "EVENT OF
DEFAULT") shall occur and be continuing for any reason whatsoever (and whether
such occurrence shall be voluntary or involuntary or come about or be effected
by operation of law or otherwise):
A. a default by the Company in the payment of the Principal
(including accrued Original Issue Discount), Redemption Price, Purchase Price,
or Change in Control Purchase Price due with respect to the Notes;
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B. a default by the Company or any Subsidiary with respect to its
obligation to pay indebtedness for borrowed money (other than indebtedness which
is non-recourse to the Company or the Subsidiary), which default shall have
resulted in the acceleration of, or be a failure to pay at final maturity,
indebtedness aggregating more than $10 million;
C. a material failure to perform any other covenant or warranty
of the Company herein or in the Notes, which continues for 30 days after written
notice from any Holder;
D. final judgments or orders are rendered against the Company or
any of its Subsidiaries which require the payment by the Company or any of its
Subsidiaries of an amount (to the extent not covered by insurance) in excess of
$10 million and such judgments or orders remain unstayed or unsatisfied for more
than 60 days and are not being contested in good faith by appropriate
proceedings; or
E. the Company shall (1) apply for or consent to the appointment
of, or the taking of possession by, a receiver, custodian, trustee or liquidator
of itself or of all or a substantial part of its property, (2) admit in writing
its inability to pay its debts as such debts become due, (3) make a general
assignment for the benefit of its creditors, (4) commence a voluntary case under
any law relating to bankruptcy, insolvency or reorganization, (5) file a
petition seeking to take advantage of any other law providing for the relief of
debtors, or (6) fail to controvert in a timely or appropriate manner (but within
30 days in any event), or acquiesce in writing to, any petition filed against it
in an involuntary case under any law relating to bankruptcy, insolvency or
reorganization; or
F. a proceeding or case shall be commenced against the Company,
without the application or consent of the Company in any court of competent
jurisdiction seeking (1) its liquidation, reorganization, dissolution or winding
up, or composition or readjustment of its debts, (2) the appointment of a
trustee, receiver, custodian, liquidator, encumbrancer or the like of it or of
all or any substantial part of its assets or (3) similar relief in respect of it
under any law providing for the relief of debtors, and such proceeding or case
shall continue undismissed, or unstayed and in effect, for a period of 60 days;
or an order for relief shall be entered in an involuntary case under any law
relating to bankruptcy, insolvency or reorganization against the Company;
then (i) upon the occurrence of any Event of Default described in Subsection E
or F, the unpaid principal amount of all Notes, together with the interest
accrued thereon, shall automatically become immediately due and payable, without
presentment, demand, protest or other requirements of any kind, all of which are
hereby expressly waived by the Company, or (ii) upon the occurrence and during
the continuance of any other Event of
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Default, the holders of at least 25% of the Principal Amount of the Notes at the
time may, by written notice to the Company, declare the Principal Amount of all
Notes to be, and the same shall forthwith become, due and payable, together with
the interest accrued thereon, without presentment, further demand, protest or
other requirements of any kind, all of which are hereby expressly waived by the
Company.
The provisions of this Section 9.1 are subject, however, to
the condition that if, at any time after any Note shall have become declared due
and payable, the Company shall pay all arrears of interest on the Notes and all
payments on account of the principal of and premium (if any) on the Notes which
shall have become due otherwise than by acceleration (with interest on such
principal, premium (if any) and, to the extent permitted by law, on overdue
payments of interest, at the respective rates specified in the Notes with
respect to overdue payments) and an additional amount sufficient to reimburse
the holders of the Notes for the reasonable costs and expenses incurred in
connection with any such declaration, and all Events of Default (other than
nonpayment of principal of, premium, if any, and accrued interest on Notes due
and payable solely by virtue of acceleration) shall be remedied or waived, then,
and in every such case, the Majority Holders, by written notice to the Company,
may rescind and annul any such acceleration of Notes and its consequences; but
no such action shall affect any subsequent Default or Event of Default or impair
any right consequent thereon.
9.2. SUITS FOR ENFORCEMENT.
If any Event of Default shall have occurred and be continuing,
the holder of any of the Notes may proceed to protect and enforce its rights,
either by suit in equity or by action at law, or both, whether for the specific
performance of any covenant or agreement contained in this Agreement or in the
other Transaction Documents or in aid of the exercise of any power granted in
this Agreement or in the other Transaction Documents, or the holder of any Note
may proceed to enforce the payment of all sums due upon such Note or to enforce
any other legal or equitable right of the holder of such Note.
The Company covenants that, if default shall be made in the
making of any payment due under any Note or in the performance or observance of
any agreement contained in this Agreement or the other Transaction Documents,
the Company will pay to each holder of Notes such further amounts, to the extent
lawful, as shall be sufficient to pay all costs and expenses of collection or of
otherwise enforcing such holder's rights under this Agreement or the other
Transaction Documents, including counsel fees.
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9.3. REMEDIES CUMULATIVE.
No remedy herein conferred upon you or the holder of any Note is
intended to be exclusive of any other remedy and each and every such remedy
shall be cumulative and shall be in addition to every other remedy given
hereunder or now or hereafter existing at law or in equity or by statute or
otherwise.
9.4. REMEDIES NOT WAIVED.
No course of dealing between the Company and you or the holder of
any Note and no delay or failure in exercising any rights hereunder or under any
other Transaction Document in respect of such Note shall operate as a waiver of
any of your rights or the rights of any holder of such Note.
10. SUBORDINATION OF NOTES.
10.1. SECURITIES SUBORDINATED TO SENIOR INDEBTEDNESS.
A. The Company covenants and agrees, and each Investor likewise
covenants and agrees, that all Notes shall be issued subject to the provisions
of this Section 10; and each Holder, whether upon original issue or upon
transfer or assignment thereof, accepts and agrees to be bound by such
provisions.
B. The payment of the Principal Amount and the premium, if any,
on all Notes issued hereunder shall, to the extent and in the manner hereinafter
set forth, be subordinated and subject in right of payment to the indefeasible
prior payment in full, in cash, of all Senior Indebtedness, whether outstanding
at the date of this Agreement or thereafter created, incurred, assumed or
guaranteed.
10.2. NOTES SUBORDINATED TO PRIOR PAYMENT OF ALL SENIOR INDEBTEDNESS ON
DISSOLUTION, LIQUIDATION, REORGANIZATION, ETC., OF THE COMPANY.
Upon any payment or distribution of the assets of the Company of
any kind or character, whether in cash, property or securities (including any
collateral at any time securing the Notes), to creditors upon any dissolution,
winding-up, total or partial liquidation, or reorganization of the Company
(whether voluntary or involuntary, or in bankruptcy, insolvency, reorganization,
liquidation, receivership proceedings, or upon an assignment for the benefit of
creditors, or any other marshalling of the assets and liabilities of the
Company, or otherwise), then in such event:
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(a) all Senior Indebtedness (including principal thereof,
interest thereon and fees and expenses relating thereto) shall first be paid in
full, in cash, or have provision made for such payment in a manner reasonably
satisfactory to the holders of Senior Indebtedness, before any payment is made
on account of the Principal Amount or premium, if any, of the Notes;
(b) any payment or distribution of assets of the Company of any
kind or character, whether in cash, property or securities (other than
securities of the Company as reorganized or readjusted, or securities of the
Company or any other company, trust or corporation provided for by a plan of
reorganization or readjustment, junior, or the payment of which is otherwise
subordinate, at least to the extent provided in this Section 10, with respect to
the Notes, to the payment of all Senior Indebtedness at the time outstanding and
to the payment of all securities issued in exchange therefor to the holders of
the Senior Indebtedness at the time outstanding), to which the Holders would be
entitled except for the provisions of this Section 10, including any such
payment or distribution which may be payable or deliverable by reason of the
payment of another debt of the Company being subordinated to the payment of the
Notes, shall be paid or delivered by any debtor, custodian or other person
making such payment or distribution, directly to the holders of the Senior
Indebtedness or their representative or representatives, or to the trustee or
trustees under any indenture pursuant to which any instruments evidencing any of
such Senior Indebtedness may have been issued, ratably according to the
aggregate amounts remaining unpaid on account of the principal of, interest on
and fees and expenses relating to the Senior Indebtedness held or represented by
each for application to payment of all Senior Indebtedness on a pro rata basis
according to the outstanding amount of Senior Indebtedness (including interest,
fees and expenses), to the extent necessary to pay all Senior Indebtedness in
full, in cash, after giving effect to any concurrent payment or distribution, or
provision therefor, to the holders of such Senior Indebtedness; and
(c) in the event that, notwithstanding the foregoing provisions
of this Section 10, any payment or distribution of assets of the Company of any
kind or character, whether in cash, property or securities (other than
securities of the Company as reorganized or readjusted, or securities of the
Company or any other company, trust or corporation provided for by a plan of
reorganization or readjustment, junior, or the payment of which is otherwise
subordinate, at least to the extent provided for in this Section 10, with
respect to the Notes, to the payment in full, in cash, of all Senior
Indebtedness at the time outstanding and to the payment of all securities issued
in exchange therefor to the holders of Senior Indebtedness at the time
outstanding), shall be received by the Holders before all Senior Indebtedness is
paid in full, in cash, or provision made for their payment in a manner
reasonably satisfactory to the holders of Senior Indebtedness, such payment or
distribution (subject to the
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provisions of Sections 10.6 and 10.7) shall be held in trust for the benefit of,
and shall be immediately paid or delivered to the holders of Senior Indebtedness
remaining unpaid or unprovided for, or their representative or representatives,
or to the trustee or trustees under any indenture pursuant to which any
instruments evidencing any of such Senior Indebtedness may have been issued,
ratably according to the aggregate amounts remaining unpaid on account of the
principal of, interest on and fees and expenses relating to the Senior
Indebtedness held or represented by each, for application to the payment of all
Senior Indebtedness remaining unpaid on a pro rata basis according to the
outstanding amount of Senior Indebtedness (including interest, fees and
expenses), to the extent necessary to pay all Senior Indebtedness in full, in
cash, after giving effect to any concurrent payment or distribution, or
provision therefor, to the holders of such Senior Indebtedness.
10.3. HOLDERS OF NOTES TO BE SUBROGATED TO RIGHT OF HOLDERS OF
SENIOR INDEBTEDNESS.
Subject to the prior payment in full, in cash, of all Senior
Indebtedness then due, the Holders shall be subrogated to the rights of the
holders of Senior Indebtedness to receive payments or distributions of assets of
the Company applicable to the Senior Indebtedness until the Principal Amount of
the Notes shall be paid in full, and for purposes of such subrogation, no
payments or distributions to the holders of Senior Indebtedness of assets,
whether in cash, property or securities, distributable to the holders of Senior
Indebtedness under the provisions hereof to which the Holders would be entitled
except for the provisions of this Section 10, and no payment pursuant to the
provisions of this Section 10 to the holders of Senior Indebtedness by the
Holders shall, as among the Company, its creditors other than the holders of
Senior Indebtedness, and the Holders, be deemed to be a payment by the Company
to or on account of Senior Indebtedness, it being understood that the provisions
of this Section 10 are, and are intended, solely for the purpose of defining the
relative rights of the Holders, on the one hand, and the holders of Senior
Indebtedness, on the other hand.
10.4. OBLIGATIONS OF THE COMPANY UNCONDITIONAL.
Nothing contained in this Section 10 or elsewhere in this
Agreement or in any Note is intended to or shall impair, as among the Company,
its creditors other than the holders of Senior Indebtedness, and the Holders,
the obligation of the Company, which is absolute and unconditional, to pay to
the Holders the Principal Amount on the Notes, as and when the same shall become
due and payable in accordance with the terms of the Notes, or to affect the
relative rights of the Holders and other creditors of the Company other than the
holders of Senior Indebtedness, nor shall anything herein or therein prevent any
Holder from exercising all remedies otherwise permitted by applicable law
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upon the happening of an Event of Default under this Agreement, subject to the
rights, if any, under this Section 10 of the holders of Senior Indebtedness in
respect of assets, whether in cash, property or securities, of the Company
received upon the exercise of any such remedy.
10.5. COMPANY NOT TO MAKE PAYMENT WITH RESPECT TO NOTES IN
CERTAIN CIRCUMSTANCES.
A. Upon the occurrence of a Payment Event of Default, unless and
until the amount of such Senior Indebtedness then due shall have been paid in
full, in cash, or provision made therefor in a manner reasonably satisfactory to
the holders of such Senior Indebtedness, or such default shall have been cured
or waived or shall have ceased to exist, the Company shall not pay principal of
premium, if any, or interest on the Notes and shall not repurchase, redeem or
otherwise retire any Notes (collectively, "PAY THE SECURITIES").
B. Unless Section 10.2 shall be applicable, upon (i) the
occurrence of a Non-Payment Event of Default and (ii) receipt by the Company
from the representative of the holders of Senior Indebtedness to which the
Non-payment Event of Default applies of written notice of such occurrence, then
the Company shall not Pay the Securities for a period (the "PAYMENT BLOCKAGE
PERIOD") commencing on the earlier of the date of receipt by the Company of such
notice from such representative and ending on the earlier of (subject to any
blockage of payments that may then be in effect under Section 10.5A) (x) the
date 180 days after such date, (y) the date such Non-Payment Event of Default
shall have been cured or waived in writing or shall have ceased to exist or such
Senior Indebtedness shall have been discharged, or (z) the date such Payment
Blockage Period shall have been terminated by written notice to the Company from
the representative of the holders of the Senior Indebtedness initiating such
Payment Blockage Period, after which, in case of clause (x), (y) or (z), as the
case may be, the Company shall resume making any and all required payments.
Notwithstanding any other provision of this Agreement, only one Payment Blockage
Period may be commenced within any consecutive 365-day period, and no event of
default with respect to any Senior Indebtedness which existed or was continuing
on the date of the commencement of any Payment Blockage Period with respect to
the Senior Indebtedness the holders of which initiated such Payment Blockage
Period shall be, or can be made, the basis for the commencement of a second
Payment Blockage Period whether or not within a period of 365 consecutive days
unless such event of default shall have been cured or waived for a period of not
less than 90 consecutive days. In no event will a Payment Blockage Period extend
beyond 179 days.
C. In the event that, notwithstanding the foregoing provisions of
this Section 10.5, any payment on account of
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Principal Amount on the Notes shall be made by or on behalf of the Company and
received by any Holder after the happening of a default under any Senior
Indebtedness, then, unless and until the amount of such Senior Indebtedness then
due shall have been paid in full in cash, or provision made therefor or such
default shall have been cured or waived, such payment (subject, in each case, to
the provisions of Sections 10.6 and 10.7) shall be held in trust for the benefit
of, and shall be immediately paid over to, the holders of Senior Indebtedness or
their representative or representatives or the trustee of trustees under any
indenture under which any instruments evidencing any of the Senior Indebtedness
may have been issued, ratably according to the aggregate amounts remaining
unpaid on account of the principal of and interest on the Senior Indebtedness
held or represented by each, for application to the payment of all Senior
Indebtedness remaining unpaid to the extent necessary to pay all Senior
Indebtedness in accordance with its terms, after giving effect to any concurrent
payment or distribution to or for the benefit of the holders of Senior
Indebtedness.
10.6. SUBORDINATION RIGHTS NOT IMPAIRED BY ACTS OR OMISSIONS OF COMPANY
OR HOLDERS OF SENIOR INDEBTEDNESS.
No right of any present or future holders of any Senior
Indebtedness to enforce subordination, as herein provided, shall at any time in
any way be prejudiced or impaired by any act or failure to act on the part of
the Company or by any act or failure to act, in good faith, by any such holder,
or by any non-compliance by the Company with the terms, provisions and covenants
of this Agreement, regardless or any knowledge thereof which any such holder may
modify or amend the terms of such Senior Indebtedness or any security therefor
and release, sell or exchange such security and otherwise deal freely with the
Company, all without affecting the liabilities and obligations of the parties to
this Agreement or the Holders. No provision in any amendment to this Agreement
which affects the superior position of the holders of the Senior Indebtedness
shall be effective against the holders of the Senior Indebtedness unless the
holders of such Senior Indebtedness (required pursuant to the terms of such
Senior Indebtedness to give such consent) have consented thereto.
10.7. SECTION 10 NOT TO PREVENT EVENTS OF DEFAULT.
The failure to make a payment on account of Principal Amount on
the Notes by reason of any provision in this Section 10 shall not be construed
as preventing the occurrence of any Event of Default under Section 9.
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11. REGISTRATION, TRANSFER AND EXCHANGE OF NOTES; RESTRICTIVE LEGENDS
TRANSFER RESTRICTIONS.
The Company will keep at the Company's principal office, or at
such other office or agency in the United States as the Company may from time to
time designate in writing to the holders of the Notes, a register (the "NOTE
REGISTER") in which, subject to such reasonable regulations as it may prescribe,
but at its expense (other than transfer taxes, if any), it will provide for the
registration and transfer of Notes.
Whenever a Note shall be surrendered either at such office of the
Company or at the place of payment named in such Note, for transfer or exchange,
within 5 Business Days thereafter the Company will execute and deliver in
exchange therefor a new Note or Notes, as may be requested by such holder, in
the aggregate unpaid principal amount as the series and unpaid principal amount
of the Note so surrendered. Each such new Note shall be payable to such Person
as such holder may request. Each Note presented or surrendered for registration
of transfer or exchange shall be duly endorsed or accompanied by a written
instrument of transfer duly executed by the registered holder of such Note or
such holder's attorney duly authorized in writing. Any Note issued in exchange
for any other Note or upon transfer thereof shall carry the rights to unpaid
interest and interest to accrue which were carried by the Note so exchanged or
transferred, and neither gain nor loss of interest shall result from any such
transfer or exchange. Any transfer tax relating to such transaction shall be
paid by the holder requesting the exchange.
The Company and any agent of the Company may deem and treat the
Person in whose name any Note is registered as the owner and holder of such Note
for the purpose of receiving payment of the principal of and premium, if any,
and interest on such Note and for all other purposes whatsoever, whether or not
such Note be overdue and the Company shall not be affected by notice to the
contrary.
The certificates evidencing the Notes and any shares of Common
Stock issuable upon conversion of the Notes shall bear at the time of issuance a
legend in substantially the following form:
"This security has not been registered under the Securities Act
of 1933, as amended, or applicable state securities laws, and
this security may not be sold, transferred or otherwise disposed
of in the absence of such registration or an exemption therefrom
under said Act and laws and the respective rules and regulations
thereunder. The transferability of this security is also subject
to restrictions contained in a Securities
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Purchase Agreement which agreement the Company will furnish to
the holder of this security upon request."
12. LOST, ETC., NOTES.
Upon receipt by the Company of evidence reasonably satisfactory
to it of the loss, theft, destruction or mutilation of any Note, and (in case of
loss, theft or destruction) of indemnity reeasonably satisfactory to it, and
upon surrender and cancellation of such Note, if mutilated, within five Business
Days thereafter the Company will deliver in lieu of such Note a new Note in a
like unpaid principal amount, dated as of the date to which interest has been
paid thereon or dated the date of the lost, stolen, destroyed or mutilated Note
if no interest shall have been paid thereon. The Company acknowledges that each
Investors unsecured agreement of indemnity shall be deemed satisfactory to the
Company.
13. AMENDMENT AND WAIVER.
A. Any provision of this Agreement or the other Transaction
Documents may, with the consent of the Company, be amended or waived (either
generally or in a particular instance and either retroactively or
prospectively), by one or more substantially concurrent written instruments
signed by the Majority Holders, provided that
(1) no such amendment or waiver shall
(a) change the rate or time of payment of interest on any of
the Notes, change the number or the method of calculating the
number of shares of Common Stock that may be purchased upon
conversion of any Note or the Conversion Rate in respect of such
Common Stock, without the consent of the Holder of each Note so
affected,
(b) modify any of the provisions of this Agreement with
respect to the payment or prepayment or purchase of Notes, or
change the percentage of the principal amount of the Notes the
holders of which are required with respect to any such amendment
or to effectuate any such waiver, or to accelerate any Note or
Notes, without the consent of the holders of all of the Notes
then outstanding, and
(2) no such waiver shall extend to or affect any obligation not
expressly waived or impair any right consequent thereon.
B. Any amendment or waiver pursuant to Section 13A above shall
apply equally to all of the Holders of the Notes and shall be binding upon them,
upon each future holder of any such
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Note and upon the Company, in each case whether or not a notation thereof shall
have been placed on any Note.
C. For purposes of determining whether the Holders of outstanding
Notes of the requisite percentage of unpaid principal amount at any time have
taken any action authorized by this Section or otherwise by this Agreement, any
Notes owned by the Company, any Subsidiary or any Affiliate of the Company shall
be deemed not outstanding.
14. TERMINATION.
A. This Agreement may be terminated by (i) mutual consent of the
parties, (ii) the Investors, if any of the conditions set forth in Section 4
become incapable of being satisfied or (iii) by the Company, if any of the
conditions set forth in Section 5 become incapable of being satisfied.
B. In the event of any termination of this Agreement, this
Agreement shall forthwith become void and there shall be no liability on the
part of the Investors or the Company, except that nothing herein shall relieve
any party from liability for the breach of this Agreement, other than as
provided in Section 14C.
C. If this Agreement is terminated by the Investors pursuant to
Section 14A, as a result of the condition set forth in Section 4.1 being
incapable of being satisfied due to a breach by the Company of a representation
or warranty made as of the date of this Agreement, the Company shall, within
five Business Days of the date of such termination, pay the Investors $5,000,000
(the "TERMINATION FEE"), which payment shall be payable by wire transfer to an
account specified by the Investors. Upon such payment by the Company, the
Investors shall have no further rights or claims against the Company arising out
of any breach of such representation or warranty, it being understood that the
Termination Fee is intended to be the sole and exclusive remedy available to the
Investors for such breach. The Termination Fee is intended to compensate the
Investors for their estimated fees and expenses incurred in connection with the
transactions contemplated hereby and shall not be construed or interpreted to be
a penalty.
15. PAYMENTS.
Notwithstanding anything to the contrary in this Agreement or the
Transaction Documents, so long as any Investor shall be the holder of any Note,
the Company shall pay all amounts which become due and payable on such Note by
wire or electronic funds transfer of immediately available funds to each
Investor at it address set forth in Schedule I on the date any such amounts
become due, or at such other place in the United States and in such other manner
as each Investor may designate by
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<PAGE> 77
notice to the Company, without presentation or surrender of such Note.
16. CERTAIN TAXES.
The Company agrees to pay all stamp, documentary or similar taxes
which may be payable in respect of the execution and delivery of this Agreement
or the other Transaction Documents (but not the transfer of any Note) or of any
amendment of, or waiver or consent under or with respect to, this Agreement or
any of the other Transaction Documents and will save the Investors and all
subsequent Holders harmless against any loss or liability resulting from
nonpayment or delay in payment of any such tax. The obligations of the Company
under this Section 16 shall survive the payment or conversion of the Notes.
17. MISCELLANEOUS.
17.1. EXPENSES.
Each of the parties hereto shall pay its own expenses in
connection with the transactions contemplated hereby, including the fees and
disbursements of counsel.
17.2. RELIANCE ON AND SURVIVAL OF REPRESENTATIONS.
All agreements, representations and warranties of the Company or
any Subsidiary contained herein and in any certificates or other instruments
delivered pursuant to this Agreement shall (A) be deemed to have been relied
upon by you, notwithstanding any investigation heretofore or hereafter made by
you or on your behalf, and (B) shall survive the execution and delivery of this
Agreement and the delivery of the Notes to you, and shall continue in effect so
long as any Note is outstanding and thereafter as provided herein.
17.3. SUCCESSORS AND ASSIGNS.
This Agreement shall bind and inure to the benefit of and be
enforceable by the Company and its permitted successors and assigns hereunder
and the Investors and their permitted successors and assigns.
17.4. COMMUNICATIONS.
Except as otherwise specifically provided herein, all notices and
other communications provided for in this Agreement shall be in writing and
shall be sent by confirmed facsimile transmission (hard copy to be sent by
overnight mail on the date of such transmission) or delivered by hand or sent by
a reputable overnight courier service prepaid (with confirmation of receipt)
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<PAGE> 78
A. if to the Company, at the address set forth at the beginning
of this Agreement, to the attention of its General Counsel, or at such
other address as the Company may hereafter designate by notice to you
and to each other Holder at the time outstanding,
B. if to an Investor, at its address as set forth in Schedule I
or at such other address as it may hereafter designate by notice to
the Company, or
C. if to any other Holder, at the address of such Holder as it
appears on the Note Register.
Any notice or other communication herein provided to be given to
the Holders shall be deemed to have been duly given if sent as aforesaid to each
of the registered holders of the Notes at the time outstanding at the address
for such purpose of such holder as it appears on Schedule I or the Note
Register, as the case may be.
17.5. CONSENT TO JURISDICTION; SERVICE OF PROCESS; WAIVER OF JURY TRIAL.
A. The Company irrevocably submits to the non-exclusive in
personam jurisdiction of any New York State or federal court sitting in the
Borough of Manhattan, The City of New York, over any suit, action or proceeding
arising out of or relating to this Agreement or the other Transaction Documents.
To the fullest extent permitted by applicable law, the Company irrevocably
waives and agrees not to assert, by way of motion, as a defense or otherwise,
any claim that it is not subject to the in personam jurisdiction of any such
court, any objection that it may now or hereafter have to the laying of the
venue of any such suit, action or proceeding brought in any such court and any
claim that any such suit, action or proceeding brought in any such court has
been brought in an inconvenient forum.
B. The Company consents to process being served in any suit,
action or proceeding of the nature referred to in Subsection A above by mailing
a copy thereof by registered or certified mail, postage prepaid, return receipt
requested, to the Company at its address specified in Section 17.4 or at such
other address of which you shall then have been notified pursuant to said
Section. The Company agrees that such service upon receipt (1) shall be deemed
in every respect effective service of process upon it in any such suit, action
or proceeding and (2) shall, to the fullest extent permitted by applicable law,
be taken and held to be valid personal service upon and personal delivery to the
Company. Notices hereunder shall be conclusively presumed received as evidenced
by a delivery receipt furnished by the United States Postal Service or any
reputable commercial delivery service.
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<PAGE> 79
C. Nothing in this Section 17.5 shall affect the right of any
holder of Notes to serve process in any manner permitted by law, or limit any
right that the holders of any of the Notes may have to bring proceedings against
the Company in the courts of any appropriate jurisdiction or to enforce in any
lawful manner a judgment obtained in one jurisdiction in any other jurisdiction.
D. THE COMPANY WAIVES TRIAL BY JURY IN ANY ACTION BROUGHT ON OR
WITH RESPECT TO THIS AGREEMENT, THE NOTES OR ANY OTHER DOCUMENT EXECUTED IN
CONNECTION HEREWITH OR THEREWITH.
17.6. INDEMNIFICATION.
The Company agrees, to the fullest extent permitted by applicable
law, to indemnify, exonerate and hold you and each of your officers, directors,
employees and agents (collectively the "INDEMNITEES" and individually an
"INDEMNITEE") free and harmless from and against any and all actions, causes of
action, suits, losses, liabilities and damages, and expenses in connection
therewith, including without limitation reasonable counsel fees and
disbursements (collectively the "INDEMNIFIED LIABILITIES") incurred by the
Indemnitees or any of them as a result of, or arising out of, or relating to,
any breach of any representation or warranty of the Company contained herein.
The obligations of the Company under this Section 17.6 shall survive payment or
conversion of the Notes.
17.7. GOVERNING LAW.
This Agreement and the Notes shall be governed by and construed
in accordance with the laws of the State of New York.
17.8. HEADINGS.
The headings in this Agreement are for convenience of reference
only and shall not limit or otherwise affect any of the terms hereof.
17.9. COUNTERPARTS.
This Agreement may be executed in two or more counterparts, each
of which shall be deemed to be an original but all of which together shall
constitute one and the same instrument.
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If you are in agreement with the foregoing, please sign the form
of acceptance in the space below provided, whereupon this Agreement shall become
a binding agreement between each of the Investors and the Company.
Very truly yours,
PHYCOR, INC.
By /s/ Joseph C. Hutts
----------------------------------
Title:
The foregoing Agreement is
hereby accepted as of the
date first above written:
WARBURG, PINCUS EQUITY PARTNERS, L.P.
By: Warburg, Pincus & Co.,
General Partner
By: /s/ Joel Ackerman
--------------------------
WARBURG, PINCUS NETHERLANDS EQUITY PARTNERS I, C.V.
By: Warburg, Pincus & Co.,
General Partner
By: /s/ Joel Ackerman
--------------------------
WARBURG, PINCUS NETHERLANDS EQUITY PARTNERS II, C.V.
By: Warburg, Pincus & Co.,
General Partner
By: /s/ Joel Ackerman
--------------------------
WARBURG, PINCUS NETHERLANDS EQUITY PARTNERS III, C.V.
By: Warburg, Pincus & Co.,
General Partner
By: /s/ Joel Ackerman
--------------------------
For purposes of Section 6.5 only:
WARBURG, PINCUS & CO.
By: /s/ Joel Ackerman
--------------------------
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<PAGE> 1
Exhibit 10.3
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
This Amended and Restated Employment Agreement is made this 20th day
of April, 1999 between PhyCor, Inc., a Tennessee corporation (the "Company"),
and John K. Crawford ("Employee").
W I T N E S S E T H:
WHEREAS, the Company and Employee entered into an Employment Agreement,
dated August 1, 1997, and have renegotiated the terms of such Employment
Agreement; and
WHEREAS, the Company desires to continue to employ Employee and
Employee desires to accept such continued employment by the Company subject to
the terms and conditions contained herein;
WHEREAS, in serving as an employee of the Company, Employee will be in
a position in which Employee will participate in the use and development of
confidential proprietary information about the Company's, its subsidiaries' and
affiliates' present and future products, its customers and suppliers and the
methods which the Company and its employees use in competition with other
companies, as to which the Company desires to protect fully its rights;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, and in consideration of the
promises and the mutual covenants and agreements herein set forth, the parties
agree as follows:
1. Employment. The Company hereby employs Employee as Executive Vice
President - Finance, Treasurer and Chief Financial Officer, and Employee accepts
such employment with the Company, subject to the terms and conditions set forth
herein. Employee shall perform all duties and services incident to the position
of Executive Vice President, and Chief Financial Officer and Employee shall
perform such other duties and services as may be prescribed by the Bylaws of the
Company or established by the President or the Board of Directors of the Company
from time to time; provide, however, that without Employee's written consent:
(i) the duties and services of Employee hereunder shall not be materially
altered in a manner inconsistent with Employee's position and original duties
hereunder, and (ii) Employee shall not be required to relocate more than 25
miles from the Company's Nashville, Tennessee office. During his employment
hereunder, Employee shall devote his best efforts and attention, on a full-time
basis, to the performance of the duties required of him as an employee of the
Company.
2. Compensation. As compensation for services rendered by Employee
hereunder, Employee shall receive:
<PAGE> 2
(a) An annual salary of $425,000, or such higher
salary as shall be determined by the Company's Compensation
Committee payable in arrears in equal monthly installments;
(b) Insurance and other benefits equivalent to the
benefits provided other similar employees of the Company,
which are set forth in Appendix I hereto;
(c) Participation in the Company's bonus program with
a structure consistent with the structure applied to the
Company's executive officers but at a percentage level reduced
from that of the executive officers but consistent with past
practice of the percentage applicable to Employee;
(d) Six weeks of compensated vacation time, to be
taken at any time during each year of the term of this
Agreement;
(e) Participation, when eligible, in the Company's
retirement plan as such plan may be amended or modified by the
Company from time to time; and
(f) Reimbursement for all reasonable expenses
incurred by Employee in the performance of his duties under
this Agreement, provided that Employee submits verification of
such expenses in accordance with the policies of the Company.
(g) Immediate vesting of all options granted under
the Company's Employee Incentive Stock Plan or any similar
plan adopted by the Company for such period of time as the
executive officers of the Company receive immediate vesting of
all options.
3. Confidential Information and Trade Secrets.
3.1 Employee recognizes that Employee's position with the
Company requires considerable responsibility and trust, and, in reliance on
Employee's loyalty, the Company may entrust Employee with highly sensitive
confidential, restricted and proprietary information involving Trade Secrets and
Confidential Information.
3.2 For purposes of this Agreement, a "Trade Secret" is any
scientific or technical information, design, process, procedure, formula or
improvement that is valuable and not generally known to competitors of the
Company, its subsidiaries and affiliates. "Confidential Information" is any data
or information, other than Trade Secrets, that is important, competitively
sensitive, and not generally known by the public, including, but not limited to,
the Company's business plan, business prospects, training manuals, product
development plans,
2
<PAGE> 3
bidding and pricing procedures, market strategies, internal performance
statistics, financial data, confidential personnel information concerning
employees of the Company, supplier data, operational or administrative plans,
policy manuals, and terms and conditions of contracts and agreements and such
similar information relating to subsidiaries and affiliates of the Company. The
terms "Trade Secret" and "Confidential Information" shall not apply to
information which is (i) already in Employee's possession (unless such
information was obtained by Employee from the Company or was obtained by
Employee in the course of Employee's employment by the Company), (ii) received
by Employee from a third party with no restriction on disclosure, or (iii)
required to be disclosed by any applicable law.
3.3 Except as required to perform Employee's duties as an
employee, Employee will not use or disclose any Trade Secrets or Confidential
Information during employment, at any time after termination of employment and
prior to such time as they cease to be Trade Secrets or Confidential Information
through no act of Employee in violation of this Section 3.
3.4 Upon the request of the Company and, in any event, upon
the termination of employment hereunder, Employee will surrender to the Company
all memoranda, notes, records, drawings, manuals or other documents pertaining
to the Company's business, Employee's employment (including all copies thereof)
or the business of the Company's subsidiaries or affiliates. Employee will also
leave with the Company all materials involving any Trade Secrets or Confidential
Information of the Company. All such information and materials, whether or not
made or developed by Employee, shall be the sole and exclusive property of the
Company, and Employee hereby assigns to the Company all of Employee's right,
title and interest in and to any and all of such information and materials.
4. Covenant Not to Compete.
4.1 Employee hereby covenants and agrees with the Company that
except as provided below, commencing on the date hereof and ending 24 months
after the stated expiration date of this Agreement (whether or not this
Agreement terminates at an earlier date), Employee will not directly or
indirectly (i) operate, develop or own any interest other than the ownership of
less than 5% of the equity securities of a publicly traded company, in any
business which has significant activities (viewed in relation to the business of
the Company, its subsidiaries or affiliates), or has announced intentions to
focus significant resources, relating to the ownership, management or operation
of multi-specialty medical clinics, physician group practices, independent
practice associations, management service organizations or other similar
entities (a "Business"); (ii) compete with the Company or its subsidiaries and
affiliates in the operation or development of any Business within the 48
contiguous states of the United States of America; (iii) be employed by any
business which owns, manages, or operates a Business; (iv) interfere with,
solicit, disrupt or attempt to disrupt any past, present or prospective
3
<PAGE> 4
relationship, contractual or otherwise, between the Company, or its subsidiaries
or affiliates, and any customer, client, supplier or employee of the Company, or
its subsidiaries or affiliates; or (v) solicit any employee of the Company, or
its subsidiaries or affiliates, to leave their employment with the Company or
its subsidiaries or affiliates, as the case may be, or hire any such employee to
work for a Business; provided, however, that if Employee's employment hereunder
is terminated without cause prior to the expiration of this Agreement, these
provisions of Section 4.1 shall apply only for the period in which the Company
is obligated to pay and pays Employee's compensation. The provisions of this
Agreement do not restrict the Employee from the employment with an individual
multi-specialty medical clinic, an individual physician group practice, an
independent practice association, a management service association or other
similar entity provided such employment is not primarily focused upon the
acquisition and management of physician organizations similar to the operations
of the Company. In addition, the provisions of this Agreement do not restrict
Employee from employment with a professional accounting firm which provides
consulting services to multi-specialty medical clinics or physician group
practices. Employee shall not be entitled to circumvent the provisions of this
Section 4.1 by entering into a relationship with a Business as a consultant,
director, advisor, or otherwise, which has the effect of competing with the
Company.
4.2 If a judicial determination is made that any of the
provisions of this Section 4 constitutes an unreasonable or otherwise
unenforceable restriction against Employee, the provisions of this Section 4
shall be rendered void only to the extent that such judicial determination finds
such provisions to be unreasonable or otherwise unenforceable. In this regard,
the parties hereto hereby agree that any judicial authority construing this
Agreement shall be empowered to sever any portion of the territory or prohibited
business activity from the coverage of this Section 4 and to apply the
provisions of this Section 4 to the remaining portion of the territory or the
remaining business activities not so severed by such judicial authority.
Moreover, notwithstanding the fact that any provisions of this Section 4 are
determined not to be specifically enforceable, the Company shall nevertheless be
entitled to recover monetary damages as a result of the breach of such provision
by Employee. The time period during which the prohibitions set forth in this
Section 4 shall apply shall be tolled and suspended as to Employee for a period
equal to the aggregate quantity of time during which Employee violates such
prohibitions in any respect.
5. Specific Enforcement. Employee specifically acknowledges and agrees
that the restrictions set forth in Sections 3 and 4 hereof are reasonable and
necessary to protect the legitimate interest of the Company and that the Company
would not have employed Employee in the absence of such restrictions. Employee
further acknowledges and agrees that any violation of the provisions of Sections
3 or 4 hereof will result in irreparable injury to the Company, that the remedy
at law for any violation or threatened violation of such Sections will be
inadequate and
4
<PAGE> 5
that in the event of any such breach, the Company, in addition to any other
remedies or damages available to it at law or in equity, shall be entitled to
temporary injunctive relief before trial from any court of competent
jurisdiction as a matter of course and to permanent injunctive relief without
the necessity of proving actual damages. The existence of any claim or cause of
action on the part of Employee against the Company, whether arising from this
Agreement or otherwise, shall not constitute a defense to the granting or
enforcement of this injunctive relief. If the Company is required to enforce any
of its rights under this Agreement, the Company shall be entitled to recover
from Employee all attorneys' fees, court costs and other expenses incurred by
the Company in connection with the enforcement of those rights.
6. Term of Agreement. This Agreement shall continue for an initial
period of five years from the date hereof unless sooner terminated by either
party in the manner set forth herein. For purposes of this Amended and Restated
Employment Agreement, the commencement date of this Agreement shall be August 1,
1997. Commencing 30 months prior to the end of the initial term (and thereafter
commencing on each date which is 30 months prior to the end of the then term),
the Company and Employee will negotiate in good faith for the renewal of this
Agreement for an additional term with the intent that this Agreement shall at
all times have a remaining term of greater than 24 months, subject to earlier
termination as hereinafter provided. In the event (a) the Company elects not to
renew this Agreement or (b) the parties have failed to enter into a renewal
agreement by 24 months prior to the end of the then term or extend the
negotiation period, or (c) the parties have failed to enter into a renewal
agreement by the end of the extended negotiation period, then the Company shall
be deemed to have terminated this Agreement pursuant to the provisions of
Section 10 hereof, effective 24 months prior to the end of the then term or
effective the date the extended negotiation period terminates, whichever is
later. In the event Employee elects not to renew this Agreement, Employee shall
continue to be employed and perform his obligations and responsibilities
hereunder for the remaining term of this Agreement, and be bound by the
provisions of Section 4 of this Agreement as hereinafter provided. The date upon
which this Agreement and Employee's employment hereunder shall terminate,
whether pursuant to the terms of this Section or pursuant to any other provision
of this Agreement shall hereafter be referred to as the "Termination Date".
7. Termination Upon Death of the Employee. In the event the Employee
dies during the term of this Agreement, this Agreement shall immediately
terminate and neither the Employee nor the Company shall have any further
obligations hereunder, except that (a) the Company shall continue to be
obligated under Section 2(a) hereof for any unpaid salary, bonus or unreimbursed
expenses owed to Employee or his estate that have accrued but not been paid as
of the Termination Date and any death benefits to which Employee is entitled
under the
5
<PAGE> 6
Company's benefit programs and (b) the Company shall pay to Employee's estate an
amount equal to three months salary.
8. Termination by Employee. Employee may at any time terminate his
employment by giving the Company sixty (60) days prior written notice of his
intent to terminate the Agreement. At the Termination Date, the Company shall
have no further obligation to Employee and Employee shall have no further rights
or obligations hereunder, except as set forth in Sections 3 and 4 above, and
except for the Company's obligation under Section 2 hereof for unpaid salary,
accrued benefits or unreimbursed expenses that have accrued but have not been
paid as of the Termination Date. A termination by Employee pursuant to the last
sentence of Section 10 hereof shall not constitute a termination under this
Section 8.
9. Termination for Cause. The Company shall have the right at any time
to terminate Employee's employment immediately for cause, which shall include
any of the following reasons:
(a) If Employee shall violate the provisions of Sections 3
or 4 of this Agreement, or shall fail to comply with any other
material term or condition of this Agreement or shall engage in
any material misconduct, neglect of duties or failure to act
which materially and adversely affects the business or affairs of
the Company; or
(b) If Employee shall (i) be convicted of a felony or (ii)
commit an act of dishonesty, fraud or embezzlement against the
Company or its affiliates.
Employee's obligations under Sections 3 and 4 hereof shall survive the
termination of the Agreement pursuant to this Section 9. In the event Employee's
employment hereunder is terminated in accordance with this Section, the Company
shall have no further obligation to make any payments to Employee hereunder
except for unpaid salary, accrued benefits or unreimbursed expenses that have
accrued but have not been paid as of the Termination Date.
10. Termination Without Cause. In the event Employee is terminated
without cause during the term hereof (which shall not include a termination
pursuant to Sections 7, 8, 9 or 11), the Company shall pay Employee all bonuses
and unreimbursed expenses owed to Employee that have accrued but have not been
paid as of the Termination Date. The Company shall (a) continue to pay to
Employee his salary set forth in Section 2(a) hereof for the longer of (i) the
remaining term of this Agreement or (ii) a period of 24 months, (b) continue to
provide the insurance and other benefits of Section 2(a) hereof for the period
the salary is paid, (c) cause all grants of outstanding options, restricted
stock, bonus stock and any other incentive stock award to become fully vested,
and (d) cause all deferred compensation, supplemental retirement programs and
similar programs to become fully funded. The Company's obligations pursuant to
this Section 10 shall
6
<PAGE> 7
terminate immediately if Employee obtains employment which is in violation of
Section 4 hereof, whether or not the provisions of Section 4 are then applicable
to Employee.
In the event the Company is merged or consolidated with or into another
company and the Company does not survive the transaction or survives only as a
subsidiary of another company, or in the event any person or group (as such
terms are defined in Section 13 (d) of the Securities Exchange Act of 1934, as
amended) becomes the holder of 50% or more of the outstanding voting securities
of the Company or has the power, directly or indirectly, to designate a majority
of the members of the Board of Directors of the Company, then in any such event
a termination of this Agreement by Employee for any reason within the first two
years after the consummation of any of the foregoing transactions shall
constitute a termination without cause by the Company and Employee shall be
entitled to the amounts provided for in this Section 10.
11. Disability of Employee. If, on account of physical or mental
disability, Employee shall fail or be unable to perform his assigned duties in
any material respect for a period of sixty (60) consecutive days, the Company
shall pay Employee his full salary as set forth in Section 2(a) hereof and shall
provide the insurance, bonus and other benefits of Section 2(a) for a period of
six months from the date such disability began or for such shorter period as
Employee is unable to perform his duties hereunder; provided, however, that
Employee's salary shall be reduced by any disability income paid to him pursuant
to any disability insurance policy maintained under this Agreement. In the event
Employee is unable to perform his duties hereunder after the expiration of the
six-month period, this Agreement shall automatically terminate. Employee shall
not be required to perform his obligations under Section 1 hereof during any
period of disability. Furthermore, the Company's obligations pursuant to this
Section 11 shall continue regardless of whether Employee seeks, accepts or
undertakes other employment during the six-month period unless such employment
is in violation of Section 4 hereof, as determined in good faith by the Board of
Directors.
12. Notices. Any notice or other communications under this Agreement
shall be in writing, signed by the party making the same, and shall be delivered
personally or sent by certified or registered mail, postage prepaid, addressed
as follows:
If to Employee: John K. Crawford
606 Post Oak Circle
Brentwood, Tennessee 37027
7
<PAGE> 8
If to the Company: PhyCor, Inc.
30 Burton Hills Boulevard, Suite 400
Nashville, Tennessee 37215
Attention: President
or to such other address as may hereafter be designated by either party hereto.
All such notices shall be deemed given on the date personally delivered or
mailed.
13. Governing Law. This Agreement shall be interpreted and enforced in
accordance with the laws of the State of Tennessee.
14. Severability. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid, but if any one
or more of the provisions contained in this Agreement shall be invalid, illegal
or unenforceable in any respect for any reason, the validity, legality and
enforceability for any such provisions in every other respect and of the
remaining provisions of this Agreement shall not be in any way impaired.
15. Entire Agreement. This Agreement contains the entire agreement of
the parties hereto with respect to the subject matter contained herein. There
are no restrictions, promises, covenants, or undertakings, other than those
expressly set forth herein. This Agreement supersedes all prior agreements and
understandings between the parties with respect to such subject matter. This
Agreement may not be changed except by a writing executed by the parties.
IN WITNESS WHEREOF, the undersigned have executed this Agreement on the
day and year first above written.
PHYCOR, INC.
Attest: By /s/ Joseph C. Hutts
-------------------------------
Title: Chairman and Chief
Executive Officer
/s/ N. Carolyn Forehand ---------------------------
- --------------------------
Title: Secretary
Witness: EMPLOYEE
/s/ Becky Summar /s/ John K. Crawford
- -------------------------- ---------------------------------
John K. Crawford
8
<PAGE> 9
APPENDIX I
GENERAL BENEFITS
A. Insurance
The following insurance plans will be part of the benefit package:
* Life Insurance - benefits pursuant to programs adopted by the
Company's Compensation Committee from time to time
* General Medical and Dental Insurance - Employee and dependent,
basic and major medical indemnity plans, will be provided.
* Long Term Disability Coverage per individual policies
B. Such other benefits, such as supplemental retirement benefits, as may
be approved from time to time by the Company's Compensation Committee.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 74,520
<SECURITIES> 0
<RECEIVABLES> 342,511
<ALLOWANCES> 0
<INVENTORY> 17,567
<CURRENT-ASSETS> 589,896
<PP&E> 383,133
<DEPRECIATION> 150,971
<TOTAL-ASSETS> 1,821,920
<CURRENT-LIABILITIES> 378,637
<BONDS> 602,576
0
0
<COMMON> 851,589
<OTHER-SE> (42,536)
<TOTAL-LIABILITY-AND-EQUITY> 1,821,920
<SALES> 0
<TOTAL-REVENUES> 810,032
<CGS> 0
<TOTAL-COSTS> 774,323
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,987
<INCOME-PRETAX> 17,824
<INCOME-TAX> 5,791
<INCOME-CONTINUING> 3,711
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,711
<EPS-BASIC> .05
<EPS-DILUTED> .05
</TABLE>
