EXHIBIT 99.3
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
- - - - - - - - - - - - - - - - - - - - - - - x
:
:
In re :
:
PHYCOR, INC., et al., : Chapter 11
: Case Nos. 02-40278 (PCB)
: (Jointly Administered)
Debtors.
:
:
- - - - - - - - - - - - - - - - - - - - - - - x
DISCLOSURE STATEMENT WITH RESPECT TO
SECOND AMENDED JOINT REORGANIZATION PLAN OF
PHYCOR, INC. AND DEBTOR SUBSIDIARIES
SKADDEN, ARPS, SLATE, MEAGHER
& FLOM LLP
Kayalyn A. Marafioti
Thomas J. Matz
Mark M. Brown
Four Times Square
New York, New York 10036-6522
(212) 735-3000
Attorneys for PhyCor, Inc., et al.
Dated: New York, New York
June 6, 2002
DISCLAIMER
ALL CREDITORS ARE ADVISED AND ENCOURAGED TO READ THIS DISCLOSURE STATEMENT AND
THE PLAN IN THEIR ENTIRETY BEFORE VOTING TO ACCEPT OR REJECT THE PLAN. PLAN
SUMMARIES AND STATEMENTS MADE IN THIS DISCLOSURE STATEMENT, INCLUDING THE
FOLLOWING SUMMARY, ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO THE PLAN,
OTHER EXHIBITS ANNEXED TO THE PLAN, AND THIS DISCLOSURE STATEMENT. THE
STATEMENTS CONTAINED IN THIS DISCLOSURE STATEMENT ARE MADE ONLY AS OF THE DATE
HEREOF, AND THERE CAN BE NO ASSURANCE THAT THE STATEMENTS CONTAINED HEREIN WILL
BE CORRECT AT ANY TIME AFTER THE DATE HEREOF.
THIS DISCLOSURE STATEMENT HAS BEEN PREPARED IN ACCORDANCE WITH SECTION 1125 OF
THE BANKRUPTCY CODE AND RULE 3016(c) OF THE FEDERAL RULES OF BANKRUPTCY
PROCEDURE AND NOT NECESSARILY IN ACCORDANCE WITH FEDERAL OR STATE SECURITIES
LAWS OR OTHER APPLICABLE LAW.
AS TO CONTESTED MATTERS, ADVERSARY PROCEEDINGS, AND OTHER ACTIONS OR THREATENED
ACTIONS, THIS DISCLOSURE STATEMENT DOES NOT CONSTITUTE AND MAY NOT BE CONSTRUED
AS AN ADMISSION OF ANY FACT OR LIABILITY, STIPULATION, OR WAIVER, BUT RATHER AS
A STATEMENT MADE IN SETTLEMENT NEGOTIATIONS.
THE INFORMATION CONTAINED IN THIS DISCLOSURE STATEMENT IS INCLUDED HEREIN FOR
PURPOSES OF SOLICITING ACCEPTANCES OF THE PLAN AND MAY NOT BE RELIED UPON FOR
ANY PURPOSE OTHER THAN TO DETERMINE HOW TO VOTE ON THE PLAN. THE DESCRIPTIONS
SET FORTH HEREIN OF THE ACTIONS, CONCLUSIONS, OR RECOMMENDATIONS OF THE DEBTOR,
THE NOTEHOLDERS' COMMITTEE, OR ANY OTHER PARTY IN INTEREST HAVE BEEN SUBMITTED
TO OR APPROVED BY SUCH PARTY, BUT NO SUCH PARTY MAKES ANY REPRESENTATION
REGARDING SUCH DESCRIPTIONS.
THIS DISCLOSURE STATEMENT WILL NOT BE ADMISSIBLE IN ANY NON-BANKRUPTCY
PROCEEDING INVOLVING THE DEBTOR OR ANY OTHER PARTY, NOR WILL IT BE CONSTRUED TO
CONSTITUTE CONCLUSIVE ADVICE ON THE TAX, SECURITIES, OR OTHER LEGAL EFFECTS OF
THE REORGANIZA TION AS TO HOLDERS OF CLAIMS AGAINST, OR EQUITY INTERESTS IN, THE
DEBTOR.
TABLE OF CONTENTS
Page
TABLE OF CONTENTS.................................................................................................i
TABLE OF EXHIBITS.................................................................................................v
EXECUTIVE SUMMARY.................................................................................................I
A. SUMMARY OF THE PLAN.............................................................................I
B. SUMMARY OF POST-CONFIRMATION OPERATIONS........................................................VI
I. INTRODUCTION..................................................................................................1
II. THE BANKRUPTCY PLAN VOTING INSTRUCTIONS AND PROCEDURES.......................................................1
A. DEFINITIONS.....................................................................................1
B. NOTICE TO HOLDERS OF CLAIMS AND INTERESTS.......................................................1
C. SOLICITATION PACKAGE............................................................................2
D. VOTING PROCEDURES, BALLOTS, AND VOTING DEADLINE.................................................2
E. CONFIRMATION HEARING AND DEADLINE FOR OBJECTIONS TO CONFIRMATION................................3
III. GENERAL INFORMATION.........................................................................................4
A. INTRODUCTION....................................................................................4
B. THE DEBTORS' BUSINESSES.........................................................................4
C. OUTSTANDING SECURITIES..........................................................................6
1. 4.5% Convertible Subordinated Debentures...............................................6
2. Zero Coupon Notes......................................................................6
3. Common Stock...........................................................................6
4. Preferred Stock........................................................................6
5. Warrants, Options, And Rights..........................................................6
D. EVENTS LEADING TO THE FILING OF THE CHAPTER 11 CASES............................................6
1. Prepetition Developments...............................................................6
2. Covenant And Interest Payment Defaults.................................................7
3. Negotiations With The Noteholders' Committee And Warburg, Pincus;
Due Diligence; Releases................................................................7
4. The Pre-negotiated Reorganization Plan.................................................7
5. Shareholder Litigation Claims..........................................................8
6. Delisting Of Common Stock..............................................................8
E. PURPOSES AND EFFECTS OF THE PLAN................................................................8
IV. BUSINESS PLAN FOR REORGANIZED PHYCOR.........................................................................9
A. BUSINESS AND OPERATING STRATEGIES OF PHYCOR.....................................................9
1. Overview...............................................................................9
2. Operations.............................................................................9
(a) IPAs And PHOs.................................................................9
(b) Service, Management, And Consulting Agreements...............................11
B. RISK FACTORS RELATED TO PHYCOR'S BUSINESS PLAN.................................................12
1. Competition...........................................................................12
2. Regulation............................................................................12
(a) General......................................................................12
(b) HIPAA Privacy And Security Requirements......................................13
(c) Knox-Keene License...........................................................13
(d) Insurance Regulation.........................................................13
(e) Managed Care Plans - Risk Of Loss............................................14
(f) Antitrust Risks..............................................................14
(g) State Legislation............................................................14
i
(h) Medicare Payment System......................................................14
(i) Medicare Fraud And Abuse And Anti-Referral Provisions........................14
(j) Impact Of Healthcare Regulatory Changes......................................15
3. Payment Structure.....................................................................16
4. Litigation............................................................................16
V. CORPORATE STRUCTURE AND MANAGEMENT OF PHYCOR.................................................................18
A. BOARD OF DIRECTORS OF PHYCOR...................................................................18
B. MANAGEMENT OF PHYCOR...........................................................................18
C. EMPLOYMENT ARRANGEMENTS........................................................................19
D. MANAGEMENT INCENTIVE PLAN......................................................................21
VI. CERTAIN EVENTS IN THE CHAPTER 11 CASES......................................................................22
A. "FIRST-DAY" ORDERS.............................................................................22
B. RETENTION OF PROFESSIONALS.....................................................................23
VII. SUMMARY OF THE PLAN........................................................................................24
A. INTRODUCTION...................................................................................24
B. CLASSIFICATION AND TREATMENT OF CLAIMS AND INTERESTS...........................................24
1. Unclassified Claims...................................................................25
(a) Administrative Claims (Unimpaired)...........................................25
(b) Priority Tax Claims (Unimpaired).............................................25
2. Unimpaired Classes Of Claims..........................................................25
(a) Class 1: Other Priority Claims..............................................25
(b) Class 2a: AmSouth Secured Claim.............................................26
(c) Class 2b: Other Secured Claims..............................................26
3. Impaired Classes Of Claims And Interests..............................................26
(a) Class 3: Convenience Claims.................................................26
(b) Class 4: General Unsecured Claims...........................................27
(c) Class 5: Preferred Stock Interests..........................................27
(d) Class 6: Common Stock Interests.............................................27
(e) Class 7: Shareholder Litigation Claims......................................27
(f) Class 8: Warrants Interests.................................................27
C. OTHER PROVISIONS OF THE PLAN...................................................................28
1. Substantive Consolidation ............................................................28
(a) Consolidation Of The Chapter 11 Cases........................................28
(b) Substantive Consolidation Order..............................................28
2. Continued Corporate Existence.........................................................29
3. Class 4: Delivery Of 4.5% Convertible Subordinated Debentures By
Claimants Who Elect To Reduce Their Claims To $50,000.................................29
4. Cancellation Of Existing Securities And Agreements....................................29
5. Vesting Of Assets.....................................................................30
6. Effectuating Documents; Further Transactions..........................................30
7. Exemption From Certain Transfer Taxes.................................................30
8. Payment Of Statutory Fees.............................................................30
9. Severability Of Plan Provisions.......................................................30
10. Revocation, Withdrawal, Or Non-Consummation...........................................31
11. Plan Supplement.......................................................................31
12. Indemnification Obligations...........................................................31
13. Term Of Injunctions Or Stays..........................................................31
14. Governing Law.........................................................................32
15. Distributions Under The Plan..........................................................32
(a) General......................................................................32
(b) Delivery Of 4.5% Convertible Subordinated Debentures By
Claimants Who Elect To Reduce Their Claims To $50,000........................32
ii
(c) Record Date For Distributions................................................32
(d) Calculation Of Distribution Amounts Of New Common Stock......................33
(e) Delivery Of Distributions And Undeliverable Or Unclaimed
Distributions................................................................34
(f) Fractional Dollars; De Minimis Distributions.................................34
16. Resolution And Treatment Of Disputed, Contingent, And Unliquidated
Claims................................................................................34
(a) Objection Deadline; Prosecution Of Objections................................34
(b) No Distributions Pending Allowance...........................................35
(c) Disputed Claims Reserve......................................................35
(d) Distributions After Allowance................................................35
17. Surrender Of Cancelled Debt Instruments Or Securities.................................35
18. Treatment Of Executory Contracts And Unexpired Leases.................................36
(a) Rejected Contracts And Leases; Related Payments..............................36
(b) Rejected Contracts And Leases; Bar To Rejection Damages......................36
(c) Compensation And Benefit Programs............................................37
19. Retention Of Exclusive Jurisdiction By The Bankruptcy Court...........................37
20. Bar Dates.............................................................................37
(a) Administrative Claims........................................................37
(b) Professional Fee Claims......................................................37
(c) Other Claims.................................................................38
21. Miscellaneous.........................................................................38
(a) Interest On Claims...........................................................38
(b) Preservation Of Rights Of Action; Settlement Of Claims.......................38
(c) Withholding And Reporting Requirements.......................................39
D. CONFIRMATION OF THE PLAN.......................................................................39
1. Confirmation Hearing..................................................................39
2. Requirements For Confirmation Of The Plan.............................................39
3. Confirmation Without Acceptance Of All Impaired Classes -
"Cramdown"............................................................................40
4. Conditions To Confirmation And Consummation...........................................41
(a) Conditions To Confirmation...................................................41
(b) Conditions To Consummation...................................................43
E. EFFECTS OF CONSUMMATION........................................................................43
1. Binding Effect........................................................................43
2. Discharge Of The Debtors..............................................................43
3. Injunction............................................................................44
4. Debtor Releases.......................................................................44
5. Other Releases........................................................................44
6. Creditors' Committee..................................................................45
VIII. TREATMENT OF EMPLOYEES DURING THE CHAPTER 11 CASES........................................................45
IX. FINANCING DURING AND AFTER THE CHAPTER 11 CASES.............................................................45
A. DIVIDENDS AND INTERCOMPANY ADVANCES............................................................45
X. CERTAIN FACTORS TO BE CONSIDERED.............................................................................45
A. MAINTENANCE OF OPERATIONS AND POSTPETITION FINANCING...........................................45
B. CERTAIN BANKRUPTCY CONSIDERATIONS..............................................................45
1. Effect On Non-Filing Subsidiaries Or Affiliates.......................................45
2. Failure To Confirm The Plan...........................................................46
3. Failure To Consummate The Plan........................................................46
C. CERTAIN TAX CONSIDERATIONS.....................................................................46
D. INHERENT UNCERTAINTY OF FINANCIAL PROJECTIONS..................................................46
E. DIVIDENDS......................................................................................46
F. COMPETITION....................................................................................46
iii
XI. SECURITIES TO BE ISSUED IN CONNECTION WITH THE PLAN.........................................................47
A. DESCRIPTION OF SECURITIES TO BE ISSUED.........................................................47
1. New Common Stock .....................................................................47
2. Management Incentive Options..........................................................47
B. RESALE OF SECURITIES OF REORGANIZED PHYCOR ....................................................48
1. Registration Of New Common Stock......................................................48
2. Lack Of Established Market For New Securities.........................................49
XII. CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN..........................................49
A. FEDERAL INCOME TAX CONSEQUENCES TO PHYCOR......................................................50
1. Cancellation Of Indebtedness Income...................................................50
2. Deductions Of Accrued Interest And Original Issue Discount By
Reorganized PhyCor....................................................................50
3. Limitations On NOLs And Other Tax Attributes..........................................50
4. Alternative Minimum Tax...............................................................53
B. FEDERAL INCOME TAX CONSEQUENCES TO HOLDERS OF CLAIMS AND INTERESTS.............................53
1. Class 1 Other Priority Claims, Class 2a AmSouth Secured Claim, Class 2b
Other Secured Claims, And Class 3 Convenience Claims..................................53
2. Class 4 General Unsecured Claims......................................................53
(a) Treatment Of Class 4 General Unsecured Claims That Constitute
Tax Securities...............................................................53
(b) Treatment Of Other Class 4 General Unsecured Claims..........................54
3. Class 5 Preferred Stock Interests, Class 6 Common Stock Interests, Class
7 Shareholder Litigation Claims, And Class 8 Warrants Interests.......................54
4. Treatment Of Accrued Interest.........................................................54
XIII. FEASIBILITY OF THE PLAN AND THE BEST INTERESTS OF CREDITORS TEST..........................................55
A. FEASIBILITY OF THE PLAN........................................................................55
B. BEST INTERESTS TEST............................................................................56
C. LIQUIDATION ANALYSIS...........................................................................57
D. VALUATION OF REORGANIZED PHYCOR................................................................57
XIV. ALTERNATIVES TO CONFIRMATION AND
CONSUMMATION OF THE PLAN................................................................................59
A. ALTERNATIVE PLAN...............................................................................59
B. LIQUIDATION UNDER CHAPTER 7 OR CHAPTER 11......................................................59
XV. SOLICITATION; VOTING PROCEDURES.............................................................................60
A. FIDUCIARIES AND OTHER REPRESENTATIVES..........................................................61
B. PARTIES IN INTEREST ENTITLED TO VOTE...........................................................61
C. CLASSES IMPAIRED UNDER THE PLAN................................................................61
XVI. FINANCIAL ADVISORS; INFORMATION AND CLAIMS AGENTS; FEES AND EXPENSES.......................................62
A. JEFFERIES & COMPANY, INC.......................................................................62
B. KPMG LLP.......................................................................................62
C. NOTEHOLDERS' COMMITTEE AND WARBURG, PINCUS.....................................................62
D. MACKENZIE PARTNERS, INC........................................................................62
E. POORMAN-DOUGLAS CORPORATION....................................................................63
RECOMMENDATION AND CONCLUSION....................................................................................64
iv
TABLE OF EXHIBITS
Exhibit A Amended Joint Reorganization Plan Of PhyCor, Inc.
And Debtor Subsidiaries
Exhibit B Financial Projections
Exhibit C Form 10-K For The Fiscal Year Ended December 31, 2001
Exhibit D Form 10-Q For The Quarterly Period Ended March 31, 2002
Exhibit E Liquidation Analysis
Exhibit F Reorganization Valuation Analysis
v
EXECUTIVE SUMMARY
PhyCor, Inc. ("PhyCor" or the "Company") and certain of its
Subsidiaries, debtors and debtors-in-possession (collectively, the "Debtors")
filed petitions for relief under Chapter 11 of the United States Bankruptcy Code
on January 31, 2002. On that date, the Debtors also filed their joint plan of
reorganization (as and to the extent subsequently amended, the "Plan"), which
sets forth the manner in which Claims against and Interests in the Debtors will
be treated following the Debtors' emergence from Chapter 11. This Disclosure
Statement describes certain aspects of the Plan, the Debtors' business
operations, significant events occurring in their Chapter 11 Cases, and related
matters. This Executive Summary is intended solely as a summary of the
distribution provisions of the Plan and certain matters related to the Debtors'
businesses. FOR A COMPLETE UNDERSTANDING OF THE PLAN, YOU SHOULD READ THE
DISCLOSURE STATEMENT, THE PLAN, AND THE EXHIBITS THERETO IN THEIR ENTIRETY.
Capitalized terms used in this Executive Summary and not otherwise defined
herein have the meanings ascribed to them in the Disclosure Statement and the
Plan or the Bankruptcy Code.
A. SUMMARY OF THE PLAN
Under the Plan, Claims against and Interests in the Debtors are divided
into Classes. Certain unclassified Claims, including Administrative Claims and
Priority Tax Claims, will receive payment in Cash either on the Distribution
Date, as such Claims are liquidated, or in installments over time, as permitted
by the Bankruptcy Code, or as agreed with the holders of such Claims. All other
Claims and all Interests are classified into eight Classes and will receive the
distributions and recoveries (if any) described in the table below.
The table below summarizes the classification and treatment of the
principal prepetition Claims and Interests under the Plan. The classification
and treatment for all Classes are described in more detail under the section of
the Disclosure Statement entitled "Summary of the Plan - Certain Matters
Regarding Classification and Treatment of Claims and Interests." Estimated Claim
amounts are based upon the Debtors' books and records as of January 31, 2002.
There can be no assurance that the estimated amounts below are correct, and
actual Claim amounts may be significantly different from the estimates. This
summary is qualified in its entirety by reference to the provisions of the Plan,
a copy of which is attached hereto as Exhibit A.
THE DEBTORS STRONGLY URGE ACCEPTANCE OF THE PLAN. THE DEBTORS NEGOTI
ATED THE PRINCIPAL TERMS OF THE PLAN WITH AN INFORMAL COMMITTEE OF UNAFFILIATED
NOTEHOLDERS (THE "NOTEHOLDERS' COMMITTEE") OF PHYCOR'S 4.5% CONVERTIBLE
SUBORDINATED DEBENTURES DUE FEBRUARY 15, 2003 AND WITH WARBURG, PINCUS EQUITY
PARTNERS L.P. AND CERTAIN OF ITS AFFILIATES (COLLECTIVELY, "WARBURG, PINCUS"),
HOLDERS OF THE COMPANY'S SERIES A ZERO COUPON CONVERTIBLE SUBORDINATED NOTES,
DUE SEPTEMBER 3, 2014.
THE PLAN HAS THE SUPPORT OF THE OFFICIAL COMMITTEE OF UNSECURED
CREDITORS AND THE DEBTORS STRONGLY RECOMMEND THAT ALL CREDITORS VOTE TO ACCEPT
THE PLAN.
I
SUMMARY TREATMENT OF CLAIMS AND INTERESTS UNDER
SECOND AMENDED JOINT PLAN OF REORGANIZATION OF
PHYCOR, INC. AND DEBTOR SUBSIDIARIES
Class Description Treatment Under The Plan
Administrative Claims Unclassified - Subject to the requirements of Article XV.A of the
Estimated Amount: $5,030,000 Plan, each holder of an Allowed Administrative Claim will, in full
satisfaction, settlement, release, and discharge of and in
exchange for such Allowed Administrative Claim, receive (i) Cash
equal to the unpaid portion of such Allowed Administrative Claim
or (ii) such other treatment as to which the Debtors or
Reorganized PhyCor and such holder have agreed upon in writing,
except that Allowed Administrative Claims with respect to
liabilities incurred by the Debtors in the ordinary course of
business during the Chap ter 11 Cases will be paid in the ordinary
course of business in accordance with the terms and conditions of
any agreements relating thereto.
Estimated Recovery - 100%
II
Priority Tax Claims Unclassified - In the sole discretion of the Debtors or Reorganized
Estimated Amount: $40,000 PhyCor, either (i) each Allowed Priority Tax Claim will remain
unaltered with respect to all the legal, equitable, and
contractual rights to which such Allowed Priority Tax Claim
entitles the holder thereof, (ii) each holder of an Allowed
Priority Tax Claim will, in full satisfaction, settlement, and
release of and in exchange for such Allowed Priority Tax Claim,
receive (A) Cash equal to the amount of such Allowed Priority Tax
Claim, (B) Cash pay ments over a period not exceeding six years
from the date of assessment of such Allowed Priority Tax Claim as
provided in section 1129(a)(9)(C) of the Bankruptcy Code, plus
interest on the unpaid portion thereof at the Case Interest Rate,
or (iii) such other treatment as to which the Debtors or
Reorganized PhyCor and such holder will have agreed upon in
writing, except that any Claim or demand for payment of a penalty
(other than a penalty of the type specified in section
507(a)(8)(G) of the Bankruptcy Code) will be disallowed pursuant
to the Plan, and the holder of an Allowed Priority Tax Claim will
not assess or attempt to collect such penalty from the Debtors,
their Estates, Reorganized PhyCor, or their property.
Estimated Recovery - 100%
Class 1- Other Priority Claims Unimpaired - Each holder of an Allowed Other Priority Claim
Estimated Amount: Zero will, in full satisfaction, settlement, release, and discharge of and
in exchange for such Allowed Other Priority Claim, in the sole
discretion of the Debtors or Reorganized PhyCor, receive (i) Cash
in an amount equal to such Allowed Other Priority Claim or (ii)
such other treatment as the Debtors or Reorganized PhyCor and such
holder will have agreed upon in writing.
Estimated Recovery - 100%
Class 2a - AmSouth Secured Claim Unimpaired - Class 2a consists of the AmSouth Secured Claim.
Estimated Amount: $1,750,000 The holder of the AmSouth Secured Claim will, in full satisfaction,
settlement, release, and discharge of and in exchange for such
Allowed AmSouth Secured Claim, in the sole discretion of the
Debtors or Reorganized PhyCor, (i) receive Cash in an amount equal
to such Allowed AmSouth Secured Claim, (ii) upon aban donment by
Reorganized PhyCor, receive the collateral securing such holder's
Allowed AmSouth Secured Claim, plus any interest, in Cash,
required to be paid under section 506(b) of the Bank ruptcy Code,
(iii) have its Allowed AmSouth Secured Claim Reinstated, or (iv)
receive such other treatment as the Debtors or Reorganized PhyCor
and such holder will have agreed upon in writing.
Estimated Recovery - 100%
III
Class 2b - Other Secured Claims Unimpaired - Class 2b consists of all Secured Claims, other than
Estimated Amount: Zero the AmSouth Secured Claim. Each holder of an Allowed Other
Secured Claim will, in full satisfaction, settlement, release, and
discharge of and in exchange for such Allowed Other Secured Claim,
in the sole discretion of the Debtors or Reorganized PhyCor, (i)
receive Cash in an amount equal to such Allowed Other Secured
Claim, (ii) upon abandonment by Reorganized PhyCor, receive the
collateral securing such holder's Allowed Other Secured Claim,
plus any interest, in Cash, required to be paid under section
506(b) of the Bankruptcy Code, (iii) have its Allowed Other
Secured Claim Reinstated, or (iv) receive such other treatment as
the Debtors or Reorganized PhyCor and such holder will have agreed
upon in writing.
Estimated Recovery - 100%
Class 3 - Convenience Claims Impaired - Class 3 consists of all Claims that would otherwise be
Estimated Amount: $11,277,000 classified as a Class 4 General Unsecured Claim that are (a)
$50,000 or less or (b) more than $50,000 if the holder has prop
erly elected, on a timely cast Ballot, to accept the distribution
set out below for a Class 3 Convenience Claim in full
satisfaction, discharge, and release of such Claim. Each holder of
an Allowed Convenience Claim will, in full satisfaction,
settlement, and re lease of and in exchange for such Allowed
Convenience Claim, receive Cash equal to 12.2% of the amount of
such Allowed Convenience Claim.
Estimated Recovery - 12.2%
IV
Class 4 - General Unsecured Claims Impaired - Class 4 consists of all Claims that are not an Adminis
Estimated Amount: $369,623,000 trative Claim, Priority Tax Claim, Other Priority Claim, AmSouth
Secured Claim, Other Secured Claim, Convenience Claim, or
Shareholder Litigation Claim. Class 4 Claims include claims in an
amount exceeding $50,000 based on PhyCor's 4.5% Convertible
Subordinated Debentures. (The aggregate amount outstanding under
the 4.5% Convertible Subordinated Debentures as of Janu ary 31,
2002 was $209.7 million, including accrued interest. The accreted
amount of the Zero Coupon Notes was $117.2 million as of January
31, 2002.) Each holder of an Allowed General Unse cured Claim
will, in full satisfaction, settlement, release, and discharge of
and in exchange for such Allowed General Unsecured Claim receive
its pro rata share of 5.8 million shares of the New Common Stock
of Reorganized PhyCor, such number being equivalent to 96.5% of
the outstanding shares of New Common Stock of Reorganized PhyCor.
The holder of an Allowed Class 4 General Unsecured Claim that
properly elects to reduce the amount of its Allowed Claim will be
deemed to be the holder of an Allowed Class 3 Convenience Claim
for classification, voting, and all other purposes under the Plan.
Estimated Recovery: 12.2%
Class 5 - Preferred Stock Interests Impaired - Class 5 consists of all Interests arising from or under
the Preferred Stock of PhyCor. On the Consummation Date, the
Preferred Stock Interests will be cancelled. Each holder of a Class
5 Preferred Stock Interest will not be entitled to, and will not
receive or retain, any property or interest in property on account of
such Interest. PhyCor believes that there are no holders of Class 5
Preferred Stock Interests.
Class 6 - Common Stock Interests Impaired - Class 6 consists of all Interests arising from or under
the outstanding common stock of PhyCor, authorized as of the
Petition Date. On the Consummation Date, the Common Stock
Interests will be cancelled. Each holder of a Class 6 Common
Stock Interest will not be entitled to, and will not receive or retain,
any property or interest in property on account of such Interest.
Class 7 - Shareholder Litigation Claims Impaired - Class 7 consists of all claims based on the purported
securities class actions originally filed in state and federal courts
in Tennessee and New York in 1998 and 1999 against PhyCor and
certain of its current and former officers and directors. Each
holder of a Class 7 Shareholder Litigation Claim will not be
entitled to, and will not receive or retain, any property of PhyCor
or interest in property of PhyCor on account of such Claim, which
will be discharged on the Consummation Date.
Class 8 - Warrants Interests Impaired - Class 8 consists of all Interests arising from or under
the Warrants. On the Consummation Date, the Warrants Interests
will be cancelled. Each holder of a Class 8 Warrants Interest will
not be entitled to, and will not receive or retain, any property or
interest in property on account of such Interests.
After careful review of the Debtors' current business operations,
estimated recoveries in a liquidation scenario, and prospects as an ongoing
business, the Debtors have concluded that the recovery to creditors will be
maximized by Reorganized PhyCor's continued operation as a going concern. The
Debtors believe that the businesses and assets of PhyCor and its subsidiaries
have significant value that would not be realized in the liquidation of the
Debtors, either in whole or in substantial part. According to the liquidation
analysis prepared by the Debtors with their financial advisors, Reorganized
PhyCor is worth considerably more to the Debtors' Creditors in general as a
going concern.
V
B. SUMMARY OF POST-CONFIRMATION OPERATIONS
Attached hereto as Exhibit B are Financial Projections which project
the financial performance of Reorganized PhyCor, on a consolidated basis with
its Subsidiaries, through December 31, 2004. These projections are based upon
the current business plan for Reorganized PhyCor and upon assumptions made and
information available as of May 31, 2002.
VI
I. INTRODUCTION
PhyCor, and certain of its Subsidiaries, debtors and
debtors-in-possession, hereby transmit this disclosure statement (the
"Disclosure Statement") pursuant to section 1125 of the Bankruptcy Code, for use
in the solicitation of votes on their joint plan of reorganization, filed with
the United States Bankruptcy Court for the Southern District of New York, on
January 31, 2002, as it was and may be further amended from time to time in
accordance with its terms and in accordance with 11 U.S.C. ss. 1127 (the
"Plan"). A copy of the Plan is attached to this Disclosure Statement as Exhibit
A.
This Disclosure Statement sets forth certain information regarding the
Debtors' prepetition history, the nature of their Chapter 11 Cases, and the
anticipated organization and operations of Reorganized PhyCor. This Disclosure
Statement also describes the Plan, including certain alternatives to the Plan,
certain effects of confirmation of the Plan, certain risk factors associated
with securities to be issued under the Plan, and the manner in which
distributions will be made under the Plan. In addition, this Disclosure
Statement discusses the confirmation process and the voting procedures that
holders of Claims in Impaired Classes must follow for their votes to be counted.
FOR A DESCRIPTION OF THE PLAN AND VARIOUS RISK AND OTHER FACTORS
PERTAINING TO THE PLAN AS IT RELATES TO HOLDERS OF CLAIMS AGAINST AND INTERESTS
IN THE DEBTOR, PLEASE SEE "SUMMARY OF THE PLAN" AND "CERTAIN FACTORS TO BE
CONSIDERED."
THIS DISCLOSURE STATEMENT CONTAINS SUMMARIES OF CERTAIN PROVISIONS OF
THE PLAN, CERTAIN STATUTORY PROVISIONS, CERTAIN DOCUMENTS RELATED TO THE PLAN,
CERTAIN EVENTS IN THE CHAPTER 11 CASES, AND CERTAIN FINANCIAL INFORMATION.
ALTHOUGH THE DEBTORS BELIEVE THAT THE PLAN AND RELATED DOCUMENT SUMMARIES ARE
FAIR AND ACCURATE, SUCH SUMMARIES ARE QUALIFIED TO THE EXTENT THAT THEY DO NOT
SET FORTH THE ENTIRE TEXT OF SUCH DOCUMENTS OR STATUTORY PROVISIONS. FACTUAL
INFORMATION CONTAINED IN THIS DISCLOSURE STATEMENT HAS BEEN PROVIDED BY THE
DEBTORS' MANAGE MENT, EXCEPT WHERE OTHERWISE SPECIFICALLY NOTED. THE DEBTORS ARE
UNABLE TO WARRANT OR REPRESENT THAT THE INFORMATION CONTAINED HEREIN, INCLUDING
THE FINANCIAL INFORMATION, IS WITHOUT ANY INACCURACY OR OMISSION.
NOTHING CONTAINED HEREIN WILL CONSTITUTE AN ADMISSION OF ANY FACT OR
LIABILITY BY ANY PARTY, BE ADMISSIBLE IN ANY NON-BANKRUPTCY PROCEEDING INVOLVING
THE DEBTORS OR ANY OTHER PARTY, OR BE DEEMED CONCLUSIVE ADVICE ON THE TAX OR
OTHER LEGAL EFFECTS OF THE REORGANIZATION AS TO HOLDERS OF ALLOWED CLAIMS OR
INTERESTS. YOU SHOULD CONSULT YOUR PERSONAL COUNSEL OR TAX ADVISOR ON ANY
QUESTIONS OR CONCERNS RESPECTING TAX, SECURITIES, OR OTHER LEGAL CONSEQUENCES OF
THE PLAN.
II. THE BANKRUPTCY PLAN VOTING INSTRUCTIONS AND PROCEDURES
A. DEFINITIONS
Unless otherwise defined elsewhere in this Disclosure Statement,
capitalized terms used herein have the meanings ascribed to them in the Plan or
the Bankruptcy Code.
B. NOTICE TO HOLDERS OF CLAIMS AND INTERESTS
This Disclosure Statement is being transmitted to certain holders of
Claims against and Interests in PhyCor and the other Debtors. The purpose of
this Disclosure Statement is to provide adequate information to enable you, as
the holder of a Claim against the Debtors, to make a reasonably informed
decision with respect to the Plan prior to exercising your right to vote to
accept or reject the Plan.
On June 6, 2002, the Bankruptcy Court approved this Disclosure
Statement as containing information of a kind and in sufficient detail adequate
to enable the holders of Claims against the Debtors to make an informed judgment
with respect to acceptance or rejection of the Plan. THE BANKRUPTCY COURT'S
APPROVAL OF THIS DISCLOSURE STATEMENT DOES NOT CONSTITUTE EITHER A GUARANTY OF
THE ACCURACY OR COMPLETENESS OF THE INFORMATION CONTAINED HEREIN OR AN
ENDORSEMENT OF THE PLAN BY THE BANKRUPTCY COURT.
1
ALL HOLDERS OF CLAIMS AGAINST THE DEBTORS ARE ENCOURAGED TO READ THIS
DISCLOSURE STATEMENT AND ITS EXHIBITS CAREFULLY AND IN THEIR ENTIRETY BEFORE
DECIDING TO VOTE EITHER TO ACCEPT OR TO REJECT THE PLAN. This Disclosure
Statement contains important information about the Plan and considerations
pertinent to acceptance or rejection of the Plan, and developments concerning
the Chapter 11 Cases.
THIS DISCLOSURE STATEMENT IS THE ONLY DOCUMENT AUTHORIZED BY THE
BANKRUPTCY COURT TO BE USED IN CONNECTION WITH THE SOLICITATION OF VOTES ON THE
PLAN. No solicitation of votes may be made except after distribution of this
Disclosure Statement, and no person has been authorized to distribute any
information concerning the Debtors other than the information contained herein.
CERTAIN OF THE INFORMATION CONTAINED IN THIS DISCLOSURE STATEMENT IS BY
ITS NATURE FORWARD LOOKING AND CONTAINS ESTIMATES, ASSUMPTIONS, AND PROJECTIONS
THAT MAY BE MATERIALLY DIFFERENT FROM ACTUAL, FUTURE RESULTS.
Except with respect to the projections set forth in Exhibit B attached
hereto (the "Financial Projections") and except as otherwise specifically and
expressly stated herein, this Disclosure Statement does not reflect any events
that may occur subsequent to the date hereof and that may have a material impact
on the information contained in this Disclosure Statement. Neither the Debtors
nor Reorganized PhyCor intend to update the Projections. Accordingly, the
Projections will not reflect the impact of any subsequent events not already
accounted for in the assumptions underlying the Projections. Further, the
Debtors do not anticipate that any amendments or supplements to this Disclosure
Statement will be distributed to reflect such occurrences. The delivery of this
Disclosure Statement will not under any circumstances imply that the information
herein is correct or complete as of any time subsequent to the date hereof.
C. SOLICITATION PACKAGE
Accompanying this Disclosure Statement are copies of (i) the Plan, (ii)
the notice of, among other things, the time for submitting Ballots to accept or
reject the Plan, the date, time, and place of the hearing to consider the
confirmation of the Plan and related matters, and the time for filing objections
to the confirmation of the Plan (the "Confirmation Hearing Notice"), (iii) if
applicable, one or more Ballots (and return envelopes) that you may use in
voting to accept or to reject the Plan, and (iv) a letter from the Creditors'
Committee recommending that creditors vote to accept the Plan. If you did not
receive a Ballot in your package and believe that you should have, please
contact the Solicitation Agent at the address or telephone number set forth in
the next subsection.
D. VOTING PROCEDURES, BALLOTS, AND VOTING DEADLINE
After carefully reviewing the Plan, this Disclosure Statement, the
detailed instructions accompanying your Ballot, and the letter from the
Creditors' Committee, please indicate your acceptance or rejection of the Plan
by voting in favor of or against the Plan on the enclosed Ballot. Please
complete and sign your original Ballot (copies will not be accepted) and return
it in the envelope provided.
Each Ballot has been coded to reflect the Class of Claims it
represents. Accordingly, in voting to accept or reject the Plan, you must use
only the coded Ballot or Ballots sent to you with this Disclosure Statement.
FOR YOUR VOTE TO BE COUNTED, YOUR BALLOT MUST BE PROPERLY COMPLETED AS
SET FORTH ABOVE AND IN ACCORDANCE WITH THE VOTING INSTRUCTIONS ON THE BALLOT AND
RECEIVED NO LATER THAN JULY 15, 2002, AT 5:00 P.M. EASTERN TIME (THE "VOTING
DEADLINE") BY MACKENZIE PARTNERS, INC. (THE "INFORMATION AGENT").
To accurately record the Class 4 claimants holding in excess of $50,000
(including unpaid interest accrued through January 31, 2002) of PhyCor's 4.5%
Convertible Subordinated Debentures who properly elect to reduce their claims to
$50,000 and therefore receive distributions of Cash as Class 3 claimants, such
claimants are required to (i) vote on the Plan using the Class 4 Ballot and (ii)
deliver the 4.5% Convertible Subordinated Debenture certificate(s) to
2
SunTrust Bank, the Indenture Trustee at the following address by 5:00 p.m. on
the Voting Deadline. AS OF JANUARY 31, 2002, THE ACCRUED INTEREST FOR EACH
$1,000 PRINCIPAL AMOUNT OF 4.5% CONVERTIBLE SUBORDINATED DEBENTURES IS $67.19.
IF THE PRINCIPAL PORTION OF YOUR 4.5% CONVERTIBLE SUBORDINATED DEBENTURE CLAIM
IS $47,000 OR MORE, THEN PRINCIPAL PLUS ACCRUED INTEREST WILL EXCEED $50,000 AND
YOU WILL NEED TO ELECT TO REDUCE YOUR TOTAL CLAIM TO $50,000 IF YOU WANT TO
RECEIVE A DISTRIBUTION IN CASH.
SunTrust Bank
Attn: Faye McQuiston
424 Church Street, 6th Floor
Nashville, Tennessee 37219
Telephone: (615) 748-4559
Only Class 4 claimants holding in excess of $50,000 (including accrued
and unpaid interest as set forth above) of PhyCor's 4.5% Convertible
Subordinated Debentures who properly elect to reduce their claims to $50,000 and
therefore receive distributions as Class 3 claimants are to deliver their 4.5%
Convertible Subordinated Debenture certificate(s) to the Indenture Trustee by
5:00 p.m. on the Voting Deadline. All other holders of PhyCor's 4.5% Convertible
Subordinated Debentures are requested not to deliver their certificates at this
time. Instructions for delivering such certificates will be provided shortly
after Confirmation.
If you have any questions about the procedure for voting your Claim or
with respect to the packet of materials that you have received, please contact
the Information Agent:
MacKenzie Partners, Inc.
105 Madison Avenue, 14th Floor
New York, New York 10016-7418
Telephone: (212) 929-5500
(800) 322-2885
If you wish to obtain, at your own expense unless otherwise
specifically required by Fed. R. Bank. P. 3017(d), an additional copy of the
Plan, this Disclosure Statement, or any exhibits to such documents, please
contact the Solicitation Agent or log on to the Bankruptcy Court's website at
http://www.nysb.uscourts.gov. A password is needed to gain access to case files.
Details on how to obtain a password are available on the Bankruptcy Court's
website.
If you have any questions about the amount of your Claim, please
contact the Claims Agent:
Poorman-Douglas Corporation
10300 SW Allen Boulevard
Beaverton, Oregon 97005
Telephone: (877) 869-6372
E. CONFIRMATION HEARING AND DEADLINE FOR OBJECTIONS TO CONFIRMATION
Pursuant to section 1128 of the Bankruptcy Code and Fed. R. Bank. P.
3017(c), the Bankruptcy Court has scheduled a hearing on confirmation of the
Plan (the "Confirmation Hearing") to commence on July 18, 2002 at 3:00 p.m.
Eastern Time, or as soon thereafter as counsel may be heard, before the
Honorable Prudence Carter Beatty, United States Bankruptcy Judge, in the United
States Bankruptcy Court, Southern District of New York, One Bowling Green, New
York, New York 10004. The Bankruptcy Court has directed that objections, if any,
to confirmation of the Plan must be filed with the clerk of the Bankruptcy Court
and served so that they are RECEIVED on or before July 12, 2002 at 5:00 p.m.
Eastern Time by:
Counsel for the Debtors:
Skadden, Arps, Slate, Meagher & Flom LLP
Four Times Square
New York, New York 10036-6522
Att'n: Kayalyn A. Marafioti, Esq.
3
United States Trustee:
The Office of the United States Trustee
Southern District of New York
33 Whitehall Street
21st Floor
New York, New York 10004
Att'n: Paul K. Schwartzberg, Esq.
Counsel for the Creditors' Committee:
Milbank, Tweed, Hadley & McCloy LLP
601 S. Figueroa Street, 30th Floor
Los Angeles, California 90017
Att'n: Robert J. Moore, Esq.
Fred Neufeld, Esq.
Counsel for Warburg, Pincus:
Willkie Farr & Gallagher
The Equitable Center
787 Seventh Avenue
New York, New York 10019
Att'n: Michael J. Kelly, Esq.
The Confirmation Hearing may be adjourned from time to time by the
Bankruptcy Court without further notice except for the announcement of the
adjournment date made at the Confirmation Hearing or at any subsequent adjourned
Confirmation Hearing.
IN THE DEBTORS' VIEW, THE TREATMENT OF HOLDERS OF CLAIMS IN THE
IMPAIRED CLASSES ELIGIBLE TO VOTE CONTEMPLATES A GREATER POTENTIAL
RECOVERY FOR SUCH HOLDERS THAN WOULD BE AVAILABLE IN A LIQUIDATION.
ACCORDINGLY, THE DEBTORS BELIEVE THAT THE PLAN IS IN THE BEST INTERESTS
OF HOLDERS OF CLAIMS IN SUCH CLASSES AND RECOMMENDS THAT ALL HOLDERS OF
CLAIMS IN THE IMPAIRED CLASSES ENTITLED TO DO SO VOTE TO ACCEPT THE
PLAN.
III. GENERAL INFORMATION
A. INTRODUCTION
The primary purpose of the Plan is to realign the Debtors' capital
structure to enable PhyCor's current operations to continue and allow its future
operating prospects to materialize. At this time, funds available to the Debtors
are insufficient to meet their debt service requirements. Confirmation of the
Plan would significantly reduce the principal amount of the Debtors' outstanding
indebtedness by converting substantially all of that indebtedness into New
Common Stock. By offering the holders of the Debtors' unsecured claims 96.5% of
the equity of Reorganized PhyCor on a post- restructuring basis, these Creditors
will participate in the long term growth and appreciation of the Debtors'
business, which is expected to be enhanced by the significant reduction of the
Debtors' debt service obligations and the business plan described in more detail
below.
B. THE DEBTORS' BUSINESSES
PhyCor and its subsidiaries comprise a medical network management
company that develops and manages independent practice associations of
physicians ("IPAs"), manages physician hospital organizations ("PHOs"), provides
contract management services to physician networks owned by health systems, and
provides consulting services to
4
independent medical organizations. Historically, the Company through certain of
its subsidiaries also acquired assets of and managed multi-specialty medical
clinics (each, a "Clinic," and collectively, the "Clinics") and provided
healthcare decision-support services through a subsidiary that was sold in May
2001. At its peak, the Company managed 61 Clinics, managed IPAs with more than
26,000 physician members in 36 markets, and provided healthcare decision-support
services to approximately four million members.
As of June 30, 2001, PhyCor had completed the process of selling the
assets of its Clinics back to the related physician groups (in certain
instances, the related physician groups dissolved themselves and did not buy
back Clinic assets from PhyCor) and had sold CareWise, Inc., its healthcare
decision-support subsidiary. For the year ended December 31, 2001, the Company's
revenue was approximately $298.3 million, and it recorded a net loss of
approximately $35.8 million. For the three months ended March 31, 2002, the
Company's revenue was approximately $73.0 million and net loss was approximately
$1.9 million. Current liabilities exceeded current assets by $341.8 million at
December 31, 2001. At March 31, 2002, current liabilities, including liabilities
subject to compromise under the Plan, exceeded current assets by $354.1 million.
Principal Debt Obligations. In February 1996, PhyCor issued $200
million aggregate principal amount of its 4.5% Convertible Subordinated
Debentures due February 15, 2003. These debentures were subordinate to the
Citicorp Facility (as hereinafter defined). On December 31, 2001, the Citicorp
Facility terminated. See "Prior Bank Debt" below. The proceeds from the issuance
of the 4.5% Convertible Subordinated Debentures were used to repay bank debt and
to finance growth and working capital needs of the Company. The aggregate amount
outstanding under the 4.5% Convertible Subordinated Debentures as of January 31,
2002 was $209.7 million, including accrued interest.
On September 3, 1999, PhyCor issued to Warburg, Pincus, $100 million
aggregate principal amount of its Series A Zero Coupon Convertible Subordinated
Notes due September 3, 2014. These debentures were subordinate to the Citicorp
Facility (as hereinafter defined). The Zero Coupon Notes accrete to a maturity
value of approximately $266.4 million. The net proceeds of the Zero Coupon
Notes, approximately $92.5 million, were used to repay indebtedness outstanding
under the Citicorp Facility (as defined below). The accreted amount of the Zero
Coupon Notes as of January 31, 2002 was $117.2 million.
Prior Bank Debt. Commencing in February 1990, the Company entered into
a series of credit facilities (collectively, the "Citicorp Facility") guaranteed
by most of PhyCor's subsidiaries. PhyCor used funds available under the Citicorp
Facility primarily for acquisitions, working capital, capital expenditures, and
general corporate purposes.
The Citicorp Facility was amended several times. In April 1998, the
credit limit under the Citicorp Facility reached $500 million, with an
additional $25 million available to fund letters of credit. In January 2000, the
Citicorp Facility was collateralized by a lien upon the stock of most of the
Company's subsidiaries and certain real and personal property, and was amended
to provide for a $355 million revolving line of credit. Also at that time, the
banks required that proceeds from sales of PhyCor's assets be used to repay
indebtedness under the Citicorp Facility. Finally, as of August 25, 2000, the
Citicorp Facility was amended to provide for the conversion of outstanding
balances to a term loan and a $25 million revolving loan. This amendment also
required cash collateralization of outstanding letters of credit.
During the first quarter of 2001, all borrowings under the Citicorp
Facility were repaid. By the close of the second quarter of 2001, all
outstanding letters of credit had been fully collateralized with cash. As of
December 31, 2001, the date on which the Citicorp Facility terminated, all
letters of credit issued under the Citicorp Facility had been terminated and
replaced with letters of credit issued under the AmSouth Facility (as
hereinafter defined).
As of October 9, 2001, the Company entered into a one-year credit
agreement with AmSouth Bank (the "AmSouth Facility") which provides for the
issuance of letters of credit up to an aggregate of $2.65 million to replace
those outstanding under the Citicorp Facility. Letters of credit aggregating
$1.75 million are currently outstanding under the AmSouth Facility and are
collateralized with cash. Any replacement letters of credit issued by AmSouth
Bank will also be cash collateralized.
5
C. OUTSTANDING SECURITIES
1. 4.5% Convertible Subordinated Debentures
As previously noted, in February 15, 1996, PhyCor issued and sold $200
million aggregate principal amount of its 4.5% Convertible Subordinated
Debentures due February 15, 2003. PhyCor did not make semi-annual interest
payments due on February 15 and August 15, 2001 on the 4.5% Convertible
Subordinated Debentures. As of January 31, 2002, $196.5 million in principal
amount of the 4.5% Convertible Subordinated Debentures and $13.2 million in
accrued and default interest was outstanding.
2. Zero Coupon Notes
On September 3, 1999, PhyCor issued to Warburg, Pincus $100 million
aggregate principal amount of its Zero Coupon Notes due September 13, 2013. The
Zero Coupon Notes accrete to a maturity value of approximately $266.4 million.
As of January 31, 2002, the accreted amount of Zero Coupon Notes was $117.2
million.
3. Common Stock
Commencing January 22, 1992, PhyCor's common stock was listed on the
Nasdaq Stock Market, Inc. ("Nasdaq"). Currently, there are 73,234,105 shares of
PhyCor common stock issued and outstanding. Effective August 25, 2000, Nasdaq
delisted the common stock in light of PhyCor's failure to satisfy certain
minimum listing requirements. See "Events Leading To The Filing Of The Chapter
11 Cases - Delisting Of Common Stock."
4. Preferred Stock
PhyCor's Preferred Stock consists of 10,000,000 no par value shares,
authorized but not issued as of the Petition Date.
5. Warrants, Options, And Rights
Historically, the Company issued warrants in connection with certain
transactions and as partial compensation for services. As of April 1, 2002,
warrants to purchase 348,000 shares of common stock remained outstanding at an
exercise price of $15.40 per share. In addition, the Company granted options to
purchase common stock to its employees and directors as part of their
compensation packages. As of April 1, 2002, 2,506,000 options remained
outstanding to directors and employees. All existing warrants, options, rights
to purchase preferred stock, and all authorized common stock will be cancelled
in connection with the Plan.
D. EVENTS LEADING TO THE FILING OF THE CHAPTER 11 CASES
1. Prepetition Developments
During 1998, the Company began experiencing challenges that were
plaguing much of the physician practice management industry sector. Among other
things, the financial markets appeared not to understand the risks and
challenges associated with medical group operations and abandoned the relatively
young industry sector. In addition, physician groups were unable or unwilling to
make changes necessitated by reduced healthcare spending, which resulted in
lower reimbursement for physician services. In the face of downward pressure on
physician incomes, it became difficult to define and communicate to the
Company's affiliated physician groups the value that PhyCor was contributing to
their practices. Moreover, physicians began to question the benefits of
practicing in a multi-specialty group as opposed to other physician practice
models. Some physicians left their groups or threatened to leave. As physicians
lost confidence in PhyCor and the entire practice management industry, their
desire and efforts to extricate themselves from their relationship with PhyCor
increased. Over time, as these pressures intensified, PhyCor realized that to
avoid further deterioration of the physician groups and PhyCor's investment in
the Clinics and to avoid prolonged and costly litigation of issues relating to
PhyCor's contractual relations with the groups, it would be wise, when possible,
to offer the groups a chance to buy back from PhyCor the Clinic assets.
PhyCor terminated its relationship with eight physician groups in 1998,
18 groups in 1999, 34 groups in 2000, and six groups in 2001. Because the value
of the Clinic assets and stability of the physician groups varied significantly,
the price and terms of PhyCor's resale of assets to and termination of its
relationship with the groups also varied. The Company realized aggregate cash
proceeds of $400.3 million from these sales, which were primarily used to repay
indebtedness under the Citicorp Facility and to cash collateralize outstanding
letters of credit. The Company also
6
collected $28.9 million in respect of promissory notes received from these
sales. Remaining contractual rights and notes receivable from these sales have
an aggregate book value of $14.7 million as of March 31, 2002 and mature on
various dates through 2009.
The general industry trends affecting the Company's Clinic business
were also detrimental to the IPAs it managed. The IPAs were at financial risk
when the costs of providing medical services exceeded the capitated payments
received from payors. Some IPAs were also vulnerable to liability for hospital
care charges. PhyCor subsidiaries were compensated for managing the IPAs through
base management fees plus participations in any IPA surplus that might result
from an excess of payor payments over actual care costs. The Company's surplus
participation, if any, was often predicated on its agreement to fund IPA
deficits and/or to issue letters of credit to secure IPA obligations to payors.
Healthcare reimbursement for commercial and senior risk programs became
insufficient to cover rising costs of care, thus causing financial difficulties
for the IPA industry. These difficulties often triggered the Company's deficit
funding obligation and prevented payment of base management fees, reduced
surplus, if any, and created financial and operational problems. As a result,
the Company withdrew from many IPA markets.
2. Covenant And Interest Payment Defaults
For the reasons set forth above, physician groups became unwilling or
unable to honor their financial commitments to PhyCor, the IPA business became
financially distressed, and the Company experienced significant operating losses
for the years 1998, 1999, and 2000. These losses led to the Company's inability
to comply with certain of the covenants contained in the Citicorp Facility,
which in turn prompted the various amendments discussed above.
On February 15 and August 15, 2001, the Company failed to make interest
payments, totaling approximately $8.8 million, due on the 4.5% Convertible
Subordinated Debentures, resulting in a default under the indenture therefor.
These defaults constituted a default under the Citicorp Facility, which defaults
were waived by the banks participating in the Citicorp Facility. Although
acceleration of the 4.5% Convertible Subordinated Debentures would cause a
default under the Zero Coupon Notes, acceleration of the 4.5% Convertible
Subordinated Debentures has not occurred.
3. Negotiations With The Noteholders' Committee And Warburg,
Pincus; Due Diligence; Releases
As of March 16, 2001, the Company and certain members of the
Noteholders' Committee entered into an agreement pursuant to which the
noteholders agreed to forbear from taking actions otherwise available to them
under the indenture (such as acceleration of principal, which would constitute a
default under the Zero Coupon Notes), pending negotiations with the Company. The
Company also entered into a similar limited waiver and forbearance agreement
with Warburg, Pincus on March 19, 2001 (together with the Noteholders'
Committee's forbearance agreement, the "Forbearance Agreements"). The
Forbearance Agreements, which were subsequently amended, expired February 28,
2002.
Following execution of the Forbearance Agreements and completion by
counsel to the Noteholders' Committee of a due diligence review of the Company's
financial and corporate documents, the Noteholders' Committee, Warburg, Pincus,
the Company, and their respective professional advisors engaged in discussions
regarding the restructuring of the Company's finances and corporate structure.
These discussions resulted in the agreement in principle reflected in the Plan.
As part of the financial and corporate restructuring to be effected under the
Plan, the parties agreed to a transition in senior management (see "Corporate
Structure and Management of PhyCor - Employment Arrangements") and certain
releases (see "Effects of Consummation - Debtor Releases - Other Releases") as
those releases are provided for in Article XIII.D and E of the Plan.
4. The Pre-negotiated Reorganization Plan
The Plan, a consensual arrangement among the Debtors, the Noteholders'
Committee, and Warburg, Pincus, and which is supported by the Creditors'
Committee, contemplates, among other things, (i) the creation of a streamlined
corporate structure for the Company through consolidation of most of its Debtor
Subsidiaries, (ii) a pro rata distribution of cash to unsecured creditors
holding smaller claims in an administrative convenience class, (iii) a pro rata
distribution to holders of the 4.5% Convertible Subordinated Debentures, the
Zero Coupon Notes, and other general unsecured creditors, in each case whose
claims exceed $50,000, of shares of common stock of Reorganized PhyCor, and (iv)
cancellation of all of PhyCor's equity securities. The Company's restructuring
is more fully described in the Plan.
7
5. Shareholder Litigation Claims
PhyCor and certain of its current and former officers and directors
have been named as defendants in the following securities fraud class actions
filed in state and federal courts in Tennessee and New York in 1998 and 1999:
James Meyer, et al. v. Joseph C. Hutts, et al., Civil Action No. 3-98-0834,
United States District Court for the Middle District of Tennessee; John Butler,
et al. v. Joseph C. Hutts, et al., Civil Action No. 3-98-0911, United States
District Court for the Middle District of Tennessee; Louis J. D'Ambrosio, et al.
v. Joseph C. Hutts, et al., Civil Action No. 3-98- 0948, United States District
Court for the Middle District of Tennessee; Christopher Cimino, et al. v. Joseph
C. Hutts, et al., Civil Action No. 3-98-1008, United States District Court for
the Middle District of Tennessee; Dr. Stuart Siegal, et al. v. Joseph C. Hutts,
et al., Civil Action No. 3-98-09734, United States District Court for the Middle
District of Tennessee; Albert Zucker, et al. v. Joseph C. Hutts, et al., Civil
Action No. 98-CV-6191, United States District Court for the Eastern District of
New York; Malcolm Rosenwald, et al. v. Joseph C. Hutts, et al., Civil Action No.
98-CV-5642, United States District Court for the Eastern District of New York;
Robert H. Leonard, et al. v. Joseph C. Hutts, et al., Civil Action No.
98-2813-I, Chancery Court for Davidson County, Tennessee; James W. Bryant, et
al. v. Joseph C. Hutts, et al., Civil Action No. 98-2719-III, Chancery Court for
Davidson County, Tennessee; Stanley Gale, et al. v. Joseph C. Hutts, et al.,
Civil Action No. 3:99-0561, United States District Court for the Middle District
of Tennessee; Robert H. Leonard, et al. v. PhyCor, Inc. and KPMG, LLP, Civil
Action No. 3:99-0807, United States District Court for the Middle District of
Tennessee; and Parul Patel, et al. v. Hutts, Civil Action No. 99-2353-I,
Chancery Court for Davidson County, Tennessee.
PhyCor, Joseph C. Hutts, Derril W. Reeves, Richard D. Wright, John K.
Crawford, and Thompson S. Dent (the "Settling Defendants") and the plaintiffs in
the various actions comprising the Shareholder Litigation Claims (the
"Litigation") other than Parul Patel (the "Class Plaintiffs") have agreed in
principle to settle their respective claims as they pertain to the Settling
Defendants as follows: (i) the Settling Defendants (through their insurer) will
deposit the sum of $3.4 million into an interest bearing escrow account for
distribution in accordance with the order of the District Court and (ii) the
Class Plaintiffs will dismiss with prejudice all claims pending in the
Litigation against the Settling Defendants. The settlement is subject to the
occurrence of certain conditions, the approval of all of its material terms by
the District Court, and the expiration of the time for appeal from such
approval. A notice of settlement, including a copy of a memorandum of
understanding outlining the terms of the settlement, was filed with the District
Court on March 12, 2002. Fully executed settlement documents were filed with the
District Court on April 12, 2002 and any opt-outs or objections to the
settlement must be filed with the District Court on or before July 8, 2002. The
final hearing on the settlement is scheduled for July 20, 2002 at 1:00 p.m.
Reorganized PhyCor will take whatever steps are necessary on its part to
complete the settlement of the Litigation. Subject to approval by the District
Court, KPMG has also settled the claims against it in the Litigation.
With respect to the state court derivative action filed by Parul Patel,
Mr. Patel has not agreed to settle his claim. Under the terms of the Plan, Mr.
Patel's interest as a holder of a Class 6 Common Stock Claim will be cancelled
and his interest as a holder of a Class 7 Shareholder Litigation Claim will be
discharged. Finally, under the terms of the Plan, PhyCor is releasing any claims
against its current and former officers and directors that it may have in
respect of the Patel action. Accordingly, upon Confirmation, Mr. Patel will lack
standing to assert any similar claims against either PhyCor or its officers and
directors.
6. Delisting Of Common Stock
As a result of the charges recorded by the Company in the second
quarter of 2000, PhyCor no longer satisfied Nasdaq's minimum listing
requirements. Accordingly, on August 25, 2000, its common stock was delisted
from that exchange and immediately began trading on the OTC Bulletin Board.
PhyCor's common stock is currently trading below one cent per share.
E. PURPOSES AND EFFECTS OF THE PLAN
The primary purposes of the Plan are to reduce PhyCor's debt service
requirements and overall level of indebtedness, to realign its capital and
corporate structures, and to provide it with greater liquidity. If consummated,
the Plan would reduce the principal amount of PhyCor's indebtedness,
significantly lessen its debt service requirements, and transfer majority
ownership of PhyCor from its present equity security holders to the current
holders of 4.5% Convertible Subordinated Debentures, Zero Coupon Notes, and
other unsecured debt, with equity participation by management.
8
A number of subsidiaries of PhyCor did not file for reorganization
relief under Chapter 11 of the Bankruptcy Code. The largest group of these
entities is the Company's IPA operations that have survived the Company's
downsizing, most of which are in California. These entities are not included in
the Chapter 11 Cases because they are neither insolvent nor dependent upon
PhyCor for operating funds, claims processing, or other support or services. One
of these non-filing entities is PrimeCare Medical Network, Inc. ("PMNI"), a
subsidiary of PrimeCare International, Inc., which holds a limited Knox-Keene
license. This entity adds significant value to the IPA operations. PMNI is
closely regulated by the California Department of Managed Health Care ("DMHC"),
however. If PMNI became financially unstable or sought bankruptcy protection,
the State of California would be empowered to take over PMNI. In that event,
PhyCor would be deprived of the benefits it derives from operating an entity
holding this special license and from the cash reserves held by PMNI.
IV. BUSINESS PLAN FOR REORGANIZED PHYCOR
A. BUSINESS AND OPERATING STRATEGIES OF PHYCOR
1. Overview
The Company is a medical network management company that develops and
manages IPAs, manages PHOs, provides contract management services to physician
networks owned by health systems, and provides management and consulting
services to independent medical organizations.
North American Medical Management, Inc. ("NAMM"), a wholly-owned
subsidiary, through its subsidiaries, manages IPAs in northern and southern
California, Kansas, and Tennessee, and manages eight PHOs and IPAs in Illinois.
NAMM's California subsidiary, North American Medical Management California, Inc.
("NAMM California") manages most of the IPAs in California, and its affiliate,
PrimeCare Medical Network, Inc. ("PMNI") owns certain of these IPAs. PMNI holds
a limited Knox-Keene license in the State of California. This license allows
PMNI to contract with payors to assume risk under certain managed care contracts
and then delegate that risk to IPAs. Finally, through its PhySys division
("PhySys"), the Company provides management and support services to two of its
formerly affiliated multi- specialty clinics and to the physician networks of
two health systems. In addition, PhySys offers consulting services to
independent medical organizations through limited engagements.
2. Operations
(a) IPAs And PHOs
Through its IPAs and PHOs, the Company provides
healthcare-related services to approximately 786,000 commercial equivalent
members ("CEMs") in four states. Approximately 224,000 of these CEMs are
enrolled in Medicare+ Choice Plans offered by payors to individuals who qualify
for Medicare benefits. In the State of California, the Company operates 23 IPAs
through its subsidiaries. The Company's California operations include 632,000
CEMs and constitute over 90% of the Company's revenues. The next largest market
is Chicago, Illinois, where the Company provides services to 125,000 CEMs.
NAMM. Through its subsidiaries, NAMM manages 23 IPAs in California, one
IPA in Kansas, two IPAs in Tennessee, and two IPAs and six PHOs in Illinois. The
two IPAs in Tennessee are managed in partnership with a local hospital.
Effective March 1, 2002, NAMM California completed the acquisition of management
contracts and other assets from Medical Pathways Corp., bringing the number of
managed IPAs in California from 16 to 23 and expanding its service area into Los
Angeles, Orange, and San Luis Obispo counties. Eight of the California IPAs are
owned by PMNI and a few are owned by a physician who also serves as medical
director of the Company's California operations. These IPAs contract with PMNI
to have access to payor contracts.
The management agreements for the IPAs which contract with PMNI provide
for NAMM California to receive a percentage of revenue that is no less than its
cost to manage plus the surplus remaining after distributions to physicians. The
management agreements for the IPAs and PHOs which do not contract with PMNI and
for the PHOs provide for the NAMM subsidiary to receive fees based upon either a
percentage of revenue collected by the IPAs or a per member/per month payment,
plus a share of surplus, if any, of capitated revenue of the IPAs or PHOs in
excess of any healthcare claims expense. These IPAs contract directly with
payors and not through PMNI, and these contracts typically provide that the
payor may terminate the agreement without cause on 120 days' notice. Any loss by
an IPA or PHO of a large payor contract would materially adversely affect the
revenues and financial condition of the NAMM managing entity, and potentially,
the Company and its subsidiaries as a whole.
9
The IPA management agreements are typically short-term agreements with
automatic renewal provisions for additional periods. The California IPAs that
contract with PMNI have management agreements with NAMM California for ten-year
terms which terms commenced January 2002, and are renewable for additional
five-year terms. The remaining California IPAs generally have management
agreements with a NAMM subsidiary with terms ranging from one year to three
years. The initial terms of all of the Illinois management agreements have been
completed and all but one of these agreements automatically renew indefinitely
for one-year terms; the eighth agreement renews for a single two-year term, with
subsequent one-year renewals, indefinitely. Six of the eight Illinois management
agreements can be terminated without cause upon 90 days' notice and with cause
on 30 days' notice. The other two agreements can be terminated without cause by
the applicable IPA upon three months' notice and by the NAMM subsidiary on six
months' notice, and they can be terminated with cause by either party upon 60
days' notice. The management agreement in Kansas City terminates in 2009 and
renews indefinitely for five-year terms unless either party gives a six-month
notice of its intention not to renew the agreement. The Kansas City agreement
can only be terminated for cause upon 60 days' notice after the passage of a
90-day cure period. The initial term of each Tennessee management agreement has
been completed. The agreements have automatically renewed for additional
five-year terms and will do so indefinitely unless terminated by either party.
Both Tennessee agreements can be terminated without cause upon 180 days' notice
and with cause upon 30 days' notice.
The following table sets forth the membership enrolled in the IPAs
managed or operated by the Company in its four markets as of April 1, 2002:
MARKET NUMBER OF PHOS/IPAS CEMS
- ------ ------------------- --------
California* 23 632,000
Illinois 8 125,000
Tennessee 2 20,000
Kansas 1 9,000
* These numbers reflect the Medical Pathways Corp. transaction that was
completed in March 2002 which included the acquisition of contracts with
seven IPAs and approximately 230,000 CEMs.
A substantial portion of PhyCor's revenues and profits are derived from
the 224,000 CEMs the Company serves which qualify for Medicare benefits. In the
past two years, many payors have discontinued enrollment in Medicare+Choice
plans or abandoned markets altogether because rate increases provided to the
payors by the federal government have not kept pace with inflation and the
rising utilization of healthcare services. Although this trend has not yet
affected the Company's operations in California, PhyCor's Chicago market has
lost approximately 29,000 senior CEMs to date in 2002. The Company's dependence
on the viability of Medicare+Choice products offered by payors is a key factor
in the assessment of its business strength and is central to its development of
a long-term business strategy.
PMNI. In connection with the Company's California operations, PMNI
contracts with payors primarily on a capitated basis (i.e., fixed payment per
payor plan member per month). Payors delegate to PMNI the administrative and
financial responsibility for credentialing, medical management, capitation
management, and claims adjudication and payment. PMNI contracts with the IPAs it
owns to perform physician services. Contractually, PMNI is at risk if the cost
of physician professional services exceeds the capitated payments received from
payors. Through its contracts with various hospitals, PMNI also assumes limited
risk for the institutional (hospital) costs.
Although PMNI contracts with several payors, its contract with
PacifiCare of California represented approximately 24% of the Company's revenue
in 2001. PMNI's payor contracts are renewed annually on a calendar basis, and
PMNI has already renewed its payor contracts that are effective in 2002. Loss of
any significant payor contract, however, would have a material adverse effect
upon the Company.
As a result of PMNI's holding a limited Knox-Keene license in the State
of California, PMNI is subject to a significant level of state oversight,
including a requirement to maintain a defined level of tangible net equity by
the California Department of Managed Health Care (the "DMHC"). A Knox-Keene
license is a license issued by the State of
10
California that allows an entity to assume limited risk under certain managed
care contracts. The license renews annually provided PMNI complies with the
renewal requirements. If PMNI lost its limited Knox-Keene license, it would no
longer be able to enter these risk contracts and, accordingly our revenues would
decline materially. In addition, pursuant to the Knox-Keene requirements, PMNI,
as a condition to receipt of its license, agreed not to make any distributions
of cash to its parent corporation, PrimeCare International, Inc ("PrimeCare") or
to PhyCor if any such distribution would cause PMNI to fail to be in compliance
with the Knox-Keene requirements. In addition, during the third quarter of 2000,
PMNI reached an agreement with the DMHC regarding the funding of certain cash
reserve requirements for claims payment. PMNI was in compliance with such
requirements as of March 31, 2002. As of that date, PMNI had restricted cash
reserves of $26.7 million and outstanding healthcare claims and liabilities of
$21.5 million.
Future Prospects For NAMM And PMNI. The Company intends to pursue the
growth of NAMM and PMNI. The Company is seeking to contract with additional
payors and to add additional physicians to its managed IPAs. The Company
believes it will be able to add physicians and members due to its marketing
efforts and the marketing efforts of payors with which it contracts. The Company
is also seeking to develop additional management relationships with IPAs to
enhance both capitated and non-capitated managed care contracting systems.
(b) Service, Management, And Consulting Agreements
Through its PhySys division, the Company provides support services to
health systems and independent medical organizations. The Company's strategy is
to assist these organizations to improve the operations of their physician
networks by offering them a range of services to address their needs. Pursuant
to these affiliations, the Company provides management services to physician
networks for a fee, but does not acquire the assets or employ the personnel of
the physician groups, except certain key employees, and does not have any
ongoing obligation to provide capital to the affiliated groups. The Company may
choose to negotiate an investment in these groups in the future, and may do so
through a joint venture. To date, however, it has not invested any capital in
these groups and has no commitment to do so. This modified structure enables the
physician group or health system to benefit from the Company's management
expertise, while retaining control of its employees and decisions regarding
future capital investment. The Company intends to change the name of PhySys
after the Consummation Date to improve its marketing efforts.
The Rome And Suffolk Agreements. Through its PhySys division, the
Company has support services contracts with two formerly affiliated
multi-specialty clinics: the Harbin Clinic in Rome, Georgia and the Lakeview
Medical Center in Suffolk, Virginia. The fee under each of the Rome and Suffolk
agreements is a fixed monthly fee plus reimbursement of certain expenses. The
Company does not employ the personnel at these clinics and does not own any of
the clinics' assets. Under the Rome agreement, the Company is obligated to
provide lease financing for the acquisition of equipment to be used in the
group's operation of up to $750,000 annually through September 30, 2005. The
lease rate is the prime rate, and the group has the sole discretion whether to
use the Company as the source of capital for leased equipment. To date, no such
financing has been requested. The Rome agreement terminates on September 30,
2007, subject to earlier termination for various reasons. The Suffolk agreement
terminates on November 30, 2005, subject to earlier termination without cause
upon 90 days' notice upon payment of a termination fee. Under the Suffolk
agreement, the physician group may offset, against any obligation it has to the
Company, amounts that are owed to the physician group under a promissory note,
dated January 1, 1998, in the principal amount of $173,783. The obligations
under this note were assigned from PhyCor to its wholly-owned subsidiary,
SynerPhy of Suffolk, Inc.
The Rockford Health Agreement. Through PhySys, the Company also
provides management services to the physician networks of certain health
systems. Currently, this division provides management and support services to a
110-physician group affiliated with the Rockford Health System, a healthcare
delivery system serving northern Illinois and southern Wisconsin. Under the
agreement, the Company receives a fixed annual fee, payable monthly, and
reimbursement of various expenses. The Company is obligated to provide to
Rockford an executive director, a controller, and an analyst to perform the
required management and support services. The Rockford agreement terminates on
December 31, 2002, and the Company will receive a termination fee at such time.
The Mercy Health Agreement. PhySys also provides services to MedClinic
of Sacramento, a 120-member physician group affiliated with the Mercy Health
System in Sacramento, California. The Company is obligated to provide an
executive director and a controller to perform services for Mercy Health. The
term of the Mercy Health agreement is three years, subject to earlier
termination by either party in certain circumstances, including termination
prior to June 30, 2002 for any reason.
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Future Plans For Service Arrangements. The Company is pursuing
additional management services relationships with other health systems and
physician groups, but there can be no assurance that the Company will in the
future enter into arrangements similar to those with Rockford and Mercy Health
or that such arrangements will be successful.
B. RISK FACTORS RELATED TO PHYCOR'S BUSINESS PLAN
1. Competition
A large number of companies engage in IPA management activities in
California. IPAs are common in California because payors there have
traditionally been willing to delegate risk (capitate) and the payment of claims
to third parties like IPAs . The Company is highly dependent on the continuation
of the "delegated risk model" and capitation within its various markets. Many
payors organize their own physician networks and do not rely on third parties to
take risk or to organize physician networks on their behalf. In the event that
the Company's customers choose to implement their own physician networks or to
abandon the capitated delivery model and pay medical providers primarily on a
fee for service basis, the Company's operations and financial condition would be
adversely affected. The Company also competes with "staff-model" provider
networks like the one owned by Kaiser Permanente ("Kaiser"). Kaiser is the
largest health plan in California with over 6 million members.
In Illinois, Kansas, and Tennessee, PhyCor does have competitors but
the delegated risk model is not as prevalent in these markets as it is in
California. As a result, IPA management companies are less common in those
markets.
The Company's revenues are dependent upon the revenues of, and in most
cases, the creation of surplus in, the IPAs that it manages. These organizations
face competition from several sources, including other IPAs, sole practitioners,
single and multi-specialty groups, and staff model HMOs.
The Company believes that its IPA management companies differentiate
themselves from competitors through their commitment to superior quality service
and medical management initiatives, their ability to pay claims efficiently and
effectively, their ability to contract with providers and payors, their stable
physician networks including both primary care doctors and specialists, and
their ability to provide capital reserves to backstop medical claims incurred.
The Company also believes that its claims payment operations are highly
efficient and provide a level of confidence to payors and physicians that
medical claims are paid accurately and promptly.
There are many competitors in the Company's PhySys division. Physician
consulting, and, to a lesser extent, management services, are provided by many
companies, including large accounting and consulting firms that provide a broad
array of healthcare services. Numerous small and "boutique" physician consulting
businesses exist. PhySys differentiates itself from its competitors by its
employees and their experience and expertise in the management of multi-
specialty medical clinics.
The Company's current financial position may adversely affect its
ability to compete effectively in all of its business areas. Competitors such as
large hospitals, public healthcare companies, HMOs, and insurance companies may
have closer relationships with potential customers and/or may have greater
access to capital than does PhyCor.
2. Regulation
(a) General
The healthcare industry is highly regulated and consistently subject to
significant change. In connection with the entry into new business lines, new
markets, and managed care arrangements, the Company, its managed IPAs, the
physician networks, the health systems, and the payors with whom the Company and
its affiliated entities contract to provide services may become subject to
additional regulation. In general, regulation of healthcare companies is
increasing.
PMNI holds a limited Knox-Keene license under California law that
permits it to assume limited risk under certain managed care contracts. NAMM's
Illinois operation holds an Illinois Third Party Administrator license to
adjudicate payment of claims and to review the medical necessity of certain
claims. In addition, NAMM's Kansas
12
operations hold a Kansas Utilization Management/Utilization Review license which
enables it to review the medical necessity of certain claims. These licenses are
renewed on an annual basis unless revoked by the state agency.
PhySys and the physician organizations and health systems to which it
provides services are also subject to federal, state, and local laws dealing
with issues such as fraud and abuse in Medicare and Medicaid claims,
occupational safety, employment, patient confidentiality and privacy, insurance
regulations, civil rights and discrimination, and medical waste and other
environmental issues. At an increasing rate, federal, state, and local
governments are expanding their regulatory requirements of businesses, including
healthcare organizations. The imposition of these regulatory requirements may
have the effect of increasing the Company's exposure to liability and/or
increasing its operating costs.
(b) HIPAA Privacy And Security Requirements
There are currently numerous legislative and regulatory initiatives at
the federal and state levels addressing patient privacy concerns. In particular,
the Health Insurance Portability and Accountability Act of 1998 ("HIPAA")
contains provisions that may require the Company to acquire and implement
expensive new computer systems and to adopt business procedures designed to
protect the privacy of patients' individual health information. On December 27,
2001, President Bush signed H.R. 33231 into law which delays the required
compliance date with HIPAA's Transactions and Code Sets requirements until
October 16, 2003, provided that entities submit a compliance plan to the
Secretary of the Department of Health and Human Services ("HHS") by October 16,
2002. On December 28, 2000, HHS published health privacy regulations. Compliance
with these regulations by no later than April 14, 2003 is required for most
healthcare organizations. On March 27, 2002, HHS published proposed revisions to
the privacy regulations. As of May 31, 2002, HHS has not published a final rule
regarding privacy standards. Under the proposed revisions, compliance with the
privacy regulations by no later than April 14, 2003 is still required for most
healthcare organizations.
In their current form, the HIPAA regulations contain very broad and
complex provisions which increase patient control over medical records, severely
limit the ways in which patient health information can be used, and impose
substantial financial penalties for violating a patient's privacy. The HIPAA
regulations will significantly affect providers, payors, and all consultants or
business partners of providers, including PhyCor, who have access to or transmit
information about patients. The current form of the regulations requires
providers, among other things, to adopt privacy policies and designate privacy
officers charged with implementing the HIPAA privacy and security standards. The
HIPAA privacy and security regulatory scheme is new, complex, and somewhat
controversial. There is little or no available authority interpreting the
statute or the regulations. The Company intends to comply fully with the HIPAA
regulations, once implemented, although such compliance may increase operating
costs and adversely affect performance standards. The Company's actions may be
reviewed or challenged by the authorities having responsibility for HIPAA
enforcement. If the Company violates HIPAA, it could be subject to monetary
fines and penalties, criminal sanctions, and civil causes of action. The Company
cannot predict how further modifications to the final regulations will impact
its ability to comply or the costs of compliance.
(c) Knox-Keene License
PMNI holds a limited Knox-Keene license in the State of California and,
as a result, is subject to significant state oversight, including tangible net
equity requirements by the DMHC. During the third quarter of 2000, the Company
reached an agreement with the DMHC regarding the funding of certain cash reserve
requirements for claims payment. The Company's operations would be adversely
affected if it failed to maintain compliance with this agreement or any other
regulations applicable to Knox-Keene licenses, and the California regulators
took corrective action.
Under California Law, PMNI is also responsible for monitoring the
financial viability of the IPAs with which it contracts. If the information
indicates financial deficiencies that need to be corrected, PMNI and the
affected IPA are required to develop a corrective action plan and contingency
plans in order to ensure the delivery of healthcare services if the corrective
action fails. The Company's operations would be adversely affected if it failed
to comply with these provisions and the DMHC took corrective action.
(d) Insurance Regulation
The Company's managed IPAs that do not contract through PMNI and
managed physician groups typically enter into contracts and joint ventures with
licensed insurance companies, such as HMOs, pursuant to which these IPAs and
13
physician groups may be paid on a capitated fee basis. Under capitation
arrangements, healthcare providers bear the risk, subject to certain loss
limits, that the total costs of providing medical services to members will
exceed the premiums received. To the extent that the IPAs and affiliated
physician groups subcontract with physicians or other providers for their
services on a fee-for-service basis, the managed IPAs and affiliated physician
groups may be deemed, under state law, to be in the business of insurance. If
the IPAs and physician groups are deemed to be insurers, they will be subject to
a variety of regulatory and licensing requirements applicable to insurance
companies or HMOs, resulting in increased costs and corresponding lower revenue
for the Company.
(e) Managed Care Plans - Risk Of Loss
As indicated above, under capitation arrangements, healthcare providers
receive a fixed fee per plan member per month, and providers bear the risk,
generally subject to certain loss limits, that the total costs of providing
medical services to the members will exceed the fixed fee. The IPA management
fees are based, in part, upon a share of the portion, if any, of the fixed fee
that exceeds actual costs incurred. Some agreements with payors also contain
"shared risk" provisions under which, through the IPA, the IPA and its manager
can share additional fees or additional costs, depending on the utilization
rates of the members and the success of the IPAs. Any significant costs that
exceed the fixed fee could have a material adverse effect on PhyCor's
operations.
The healthcare provider's ability to manage effectively the costs and
utilization of medical services determines the profitability of a capitated fee
arrangement. The management fees are also based upon a percentage of revenue
collected by the IPAs. Any loss of revenue by the IPAs because of the loss of
affiliated physicians, the termination of third party payor contracts, or other
changes in plan membership or capitated fees may reduce the Company's revenues.
The Company, like other managed care management entities, is often subject to
liability claims arising from the incentives inherent in capitated fee
arrangements and activities such as quality assurance and utilization
management, which are designed to control costs through more efficient
utilization of healthcare services. A successful claim on this basis against the
Company, a physician group, health system, physician network, or IPA with whom
we contract to provide services could have a material adverse effect on the
Company.
(f) Antitrust Risks
Federal and state antitrust laws prohibit agreements in restraint of
trade, the exercise of monopoly power and other practices that are considered to
be anti-competitive. The Company believes that it is in material compliance with
federal and state antitrust laws in connection with the operation of its
physician relationships and IPAs.
(g) State Legislation
In addition to state insurance laws (as discussed above), all states
have laws restricting the unlicensed practice of medicine, and many states also
prohibit the splitting or sharing of fees between physicians and non-physician
entities. Some states have interpreted management agreements with physicians as
unlawful fee-splitting. The Company does not believe that its contractual
arrangements with physician networks, hospitals, or physician groups will
subject it to these types of claims. Changes in the laws may necessitate
modifications in the Company's relationships with its clients.
(h) Medicare Payment System
The Company's affiliated IPAs derived approximately 41% of their net
revenue in the year 2001 from payments for services provided to patients
enrolled in the federal Medicare program, including patients covered by risk
contracts. In 2001, IPAs managed by the Company provided medical services under
risk contracts to approximately 63,000 Medicare members. Rate increases provided
to the payors by the federal government have not kept pace with inflation and
the rising utilization of healthcare services and, as a result, many payors have
discontinued enrollment in Medicare+ Choice Plans and have abandoned markets.
(i) Medicare Fraud And Abuse And Anti-Referral Provisions
Many provisions in the Social Security Act are intended to address
fraud and abuse among healthcare providers and other healthcare companies. One
of the fraud and abuse provisions (the "Anti-Kickback Statute") prohibits
providers and others from soliciting, receiving, offering, or paying, directly
or indirectly, any form of remuneration in return for the
14
referral of, or the arranging for the referral of, Medicare and other federal or
state healthcare program patients or patient care opportunities. It also
prohibits payments in return for the purchase, lease, arrangement, or order of
any item or service that is covered by Medicare, certain other federal
healthcare programs, or a state health program.
In July 1991, the federal government published regulations that provide
exceptions, or "safe harbors," for business transactions that will be deemed not
to violate the Anti-Kickback Statute. In November 1999, additional safe harbors
were published for eight activities, including referrals within group practices
consisting of active investors. In April 1998, the HHS Office of the Inspector
General released Advisory Opinion 98-4, which states that a percentage- based
management fee paid to a medical network management company does not fit within
any safe harbor. The opinion concludes that, because a percentage-based fee does
not fit within a safe harbor, such a fee could implicate the Anti- Kickback
Statute if any part of the management fee is intended to compensate the manager
for its efforts in arranging for referrals to the managed group. The opinion
acknowledges, however, that a management fee that does not fit within a safe
harbor is not necessarily illegal. Both the opinion and the preamble to the
government's published safe harbors state that arrangements that do not fall
within safe harbors are nevertheless legal so long as there is no intent on the
part of either party to pay for or accept payment for referrals.
PhyCor believes that its operations are in material compliance with
applicable Medicare fraud and abuse laws. Although the Company received
remuneration under its management agreements for the services provided to
formerly affiliated clinics and IPAs, it was not in a position to make or
influence referrals of federal or state healthcare program patients or services
to the physician groups or networks. Under PhyCor's current agreements, the
Company will not be in a position to make or influence referrals. Moreover,
PhyCor believes that the fees it receives represent fair value for its services.
No part of the fees is intended to constitute remuneration for improper
activities. Consequently, PhyCor does not believe that the service and
management fees it receives from its clients could be viewed as remuneration for
referring or influencing referrals of patients or services covered by federal or
state healthcare programs as prohibited by the Anti- Kickback Statute.
If any of PhyCor's arrangements were found to be in violation of the
Anti-Kickback Statute, the Company, the health systems, the physician groups,
and/or the individual physicians would be subject to civil and criminal
penalties, including possible exclusion from participation in government
healthcare. These penalties could have a materially adverse affect on PhyCor's
results of operations.
Under legislation known as the Stark Law, physicians who have an
ownership interest or a compensation arrangement with certain providers of
"designated health services" are prohibited from referring Medicare and Medicaid
patients to those providers, unless an exception exists. The "designated health
services" covered by the Stark Law include physical therapy services;
occupational therapy services; radiology services, including magnetic resonance
imaging, computed tomography, and ultrasound; radiation therapy services;
durable medical equipment; parenteral and enteral nutrients, equipment, and
supplies; prosthetics, orthotics, and prosthetic devices; home health services;
outpatient prescription drugs; and inpatient and outpatient hospital services.
If any of the providers with whom PhyCor contracts is found to be in violation
of the Stark Law, such provider could be subject to significant penalties. In
that event, the likelihood of PhyCor's continuing its relationship with the
affected provider would be remote, and termination of such a relationship could
negatively affect PhyCor's revenue.
(j) Impact Of Healthcare Regulatory Changes
Congress and many state legislatures routinely consider proposals to
control healthcare spending. Government efforts to reduce healthcare expenses
through the use of managed care or the reduction of Medicare and Medicaid
reimbursement may adversely affect PhyCor's cost of doing business and
contractual relationships. For example, recent developments that affect the
Company's activities include (i) federal legislation requiring a health plan to
continue coverage for individuals who are no longer eligible for group health
benefits and prohibiting the use of "pre-existing condition" exclusions that
limit the scope of coverage, (ii) a Centers for Medicare and Medicaid Services
policy prohibiting restrictions in Medicare risk HMO plans on a physician's
recommendation of other health plans and treatment options to patients, and
(iii) regulations imposing restrictions on physician incentive provisions in
physician provider agreements. PhyCor's operating results may be adversely
affected by these types of legislation, programs, and other regulatory changes.
15
PhyCor believes that its operations are in material compliance with
applicable law and expects to modify its agreements and operations to conform in
all material respects to future regulatory changes. PhyCor's ability to be
profitable will depend in part upon the entities it owns and the IPAs and
physician groups it manages (i) obtaining and maintaining all necessary
licenses, certificates of need, and other approvals and (ii) operating in
compliance with applicable healthcare regulations. PhyCor cannot determine what
additional government regulations affecting its business, if any, may be enacted
in the future or how existing or future laws and regulations might be
interpreted by the relevant regulatory authorities. The failure of the Company,
any managed IPAs, or any physician network or group with which PhyCor contracts
to comply with applicable law could have a material adverse effect on the
Company's results of operations.
3. Payment Structure
The Company's IPA business constitutes over 90% of its revenue. This
revenue comes from payors, primarily HMOs, that pay a percentage of the premiums
they receive from members enrolled in health plans, or that pay a "per member
per month" fee. In the case of IPAs owned by PMNI, the payments are made from
payors to PMNI, and then PMNI makes payments to the IPAs it owns. All of the
other IPAs managed by the Company contract directly with the payors. The IPAs
owned by PMNI, as well as the IPAs managed by the Company that contract directly
with the payors, agree to (i) make available physicians that render services to
health plan members and (ii) pay the medical claims submitted by providers in
the network. PMNI or NAMM then provide some of these services on behalf of the
IPAs as part of its management arrangement. This method of contracting between
payors and IPAs (or in the case of some of our California operations, between
payors and PMNI) is commonly referred to as the delegated risk model because the
payor has delegated the responsibility of paying claims and, in most cases, has
delegated the risk associated with fixed fee, prepaid healthcare services,
commonly referred to as capitation, to the IPA. The Company is highly dependent
on capitation and the delegated risk model for its revenue. In some markets,
there has been a general movement away from capitation to more traditional
discounted-fee-for-service payment methods. Many HMOs in California continue to
negotiate capitated contracts with providers, but in other parts of the country
capitation is less common. The Company is highly dependent on the continued
acceptance of capitation by healthcare providers and the willingness of payors
to shift risk away from themselves to providers. Contracts with Pacificare of
California, a managed care payor in California, represented more than 24% of the
Company's total revenue in 2001. These contracts are renewed on an annual basis
and were renewed for 2002. If the Pacificare relationship were terminated or
failed to be renewed, the Company's operating revenue would be materially
adversely affected.
Profitability in the management of IPAs depends in part on the ability
to create a surplus in the IPA by managing healthcare utilization. A portion of
the management fee is usually a portion of any surplus. In addition, most IPAs
managed by the Company are subject to losses to the extent to which they share
risk. In the event the IPAs' capitated fees do not exceed the cost of services,
the IPAs will suffer losses. In the event the IPAs are not profitable, the
Company may not receive fees owed to it and its results of operations will be
materially adversely affected.
Approximately 41% of the 2001 revenue of the Company's affiliated IPAs
and PHOs was derived from CEMs who qualified for Medicare benefits. These
members have joined "Medicare+Choice" plans offered by HMOs. The HMOs receive
capitated premium payments directly from the federal government and then
contract with providers and IPAs to render care. Medicare is heavily regulated
by the government, which solely determines the amount of premiums paid to HMOs
and the nature and quality of care to be provided. The government has not
increased premiums for Medicare enrollees in HMOs in an amount equal to the
increase in the overall cost of healthcare, so many HMOs have abandoned their
Medicare+Choice plans. The Company's largest HMO customer in California,
Pacificare, has dropped a number of counties from its Medicare+Choice plans,
called "Secure Horizons," for the year 2002. Although the Company's California
operations have not been affected to date by declines in Medicare+Choice
enrollment, if the federal government does not increase future premiums more
than it has in the past, it is likely that plans like Secure Horizons and others
will limit membership. Although this trend has not yet affected the Company's
operations in California, PhyCor's Chicago market has lost approximately 29,000
senior CEMs to date in 2002. If this occurs in other markets that the Company
serves it will likely have a material adverse effect on the Company's revenue
and profitability in those markets.
4. Litigation
While there is ongoing litigation against PhyCor and various Debtor
Subsidiaries which will be stayed as a result of their filing for relief under
the Bankruptcy Code , in one such case judgment has been entered against PhyCor
and PhyCor of Jacksonville, Inc. In that case which was filed in the Circuit
Court of the 11th Judicial Circuit in and for
16
Miami-Dade County, Florida, Busch Drive Ltd. and Lime Street Ltd., the landlords
of the Company's formerly affiliated physician group, First Coast Medical Group,
P.A., claimed the Company guaranteed the lease obligations of the physician
group. The judge in that case has entered judgments in favor of the landlords in
the aggregate amount of $2,474,510. This judgment will be dealt with as a Claim
under the Plan.
In addition, there is litigation against PrimeCare and/or its
affiliates which could have a material adverse effect on the Company.
On April 18, 2000, a jury in the case of United States of America ex
rel. William R. Benz v. PrimeCare and Prem Reddy, in the United States District
Court, Central District of California, returned a verdict in favor of the
plaintiff as follows: $0.5 million against PrimeCare on plaintiff's breach of
contract claims; $0.9 million in compensatory damages and $3 million in punitive
damages jointly and severally against PrimeCare and Prem Reddy on plaintiff's
claims for wrongful termination and intentional infliction of emotional
distress; and $0.2 million against PrimeCare on plaintiff's claim for violations
of state labor codes. The court entered a final judgment on July 13, 2000.
Effective May 3, 2001, the Company entered into a settlement agreement with Mr.
Benz which subsequently received court approval. In exchange for PrimeCare's
paying Mr. Benz $2.7 million, which amount has been paid, all claims were
dropped by Mr. Benz against the Company and its affiliates. Mr. Benz has not
settled with Dr. Reddy and Dr. Reddy maintains that PrimeCare and several IPAs
that it manages each has an indemnification obligation to him. In March 2002,
various affiliates sued by Dr. Reddy were granted a demurrer with respect to Dr.
Reddy's claim for indemnity, and accordingly, his claim will be dismissed with
prejudice. Dr. Reddy has not appealed this decision as of the date hereof.
The IPAs managed by the Company, the physicians employed by those
IPAs, and in some cases PMNI, are parties to several medical malpractice and/or
managed care liability cases which PhyCor believes will be adjudicated within
applicable insurance coverage limits. In addition, many of the California
subsidiaries and affiliated IPAs have been sued on business claims such as
breach of contract, misrepresentation, fraud, and deceit. The plaintiffs in
these suits are seeking millions of dollars in damages, and the Company is
vigorously defending these suits. One such case was recently tried in the
Superior Court of the State of California for the County of Riverside. The jury
has awarded the plaintiff damages jointly against PrimeCare and PMNI in the
amount of $3 million based upon its breach of contract claim; $208,189 against
PrimeCare on its constructive fraud claim; and $5,000 in punitive damages
against PrimeCare. PrimeCare was awarded $296,190 on its cross-complaint. The
Company does not agree with this decision and has appealed. The plaintiff has
cross-appealed. PMNI obtained a $5 million appellate bond secured by a letter of
credit to enable PrimeCare to pursue this appeal. There can be no assurance that
the Company will be successful with this appeal or in other pending litigation.
Additional damage awards at the levels the various Plaintiffs have demanded
could have a material adverse effect on the Company.
In addition, PrimeCare and the Company have been named in litigation
involving PrimeCare operations that were not transferred to the Company when the
Company acquired PrimeCare. In one such case in Oklahoma, the plaintiff is
alleging that a former PrimeCare subsidiary (which the Company did not buy) is
guilty of breach of contract, conversion, and fraud, and is seeking damages in
excess of $2 million plus punitive damages. Since filing the litigation, the
plaintiff has filed for bankruptcy relief. In the other such case in Florida,
the plaintiff is seeking approximately $250,000 in damages. Although the Company
did not own PrimeCare at the time of the alleged incidents, PrimeCare and the
Company may have liability for the actions of these entities and may not have
indemnity rights against Dr. Reddy, the former owner (who is also a
co-defendant). It is not possible to determine the amount of exposure of the
Company and its subsidiaries in these cases. Although a judgment against the
Company would be dealt with as a Claim under the Plan, a judgment against
PrimeCare would not be dealt with as a Claim under the Plan and such a judgment
could have a material adverse effect on the Company.
Certain litigation is pending against the Company's formerly affiliated
physician groups and certain of its managed IPAs. 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 which
may exceed applicable insurance coverage limits. Although the Company may not be
a party to such litigation, a substantial financial obligation of the physician
group or IPA could threaten its viability or its ability to pay fees to the
Company. Although there can be no assurance that the physician groups and IPAs
will be successful in any such litigation, at this time the Company does not
believe any such litigation will have a material adverse effect on its
operations.
17
V. CORPORATE STRUCTURE AND MANAGEMENT OF PHYCOR
A. BOARD OF DIRECTORS OF PHYCOR
On the Consummation Date, the term of the current board of directors of
PhyCor will expire. The initial board of directors of the Reorganized PhyCor
after the Consummation Date will consist of five members, which will include the
President and Chief Executive Officer of Reorganized PhyCor, Tarpley B. Jones,
who will be the Chairman of the Board, one person who will be designated by
Warburg, Pincus, and three people who will be designated by the Noteholders'
Committee. In the event that Warburg, Pincus fails to designate a board member,
the Noteholders' Committee will succeed to Warburg, Pincus' right to so
designate a board member. The Debtors and the Noteholders' Committee intend to
announce prior to the Confirmation Date the identities of all individuals
proposed to serve as directors or officers of Reorganized PhyCor. The identities
of such individuals will be announced by inclusion of a list of proposed
directors and/or officers in the Plan Supplement.
Tarpley B. Jones has served as President and Chief Executive Officer
since February 1, 2002. Prior to that, he served as Executive Vice President and
Chief Financial Officer of the Company since February 1, 2000. From February
1997 until January 2000, Mr. Jones served as President, Chief Executive Officer
and a Director of Cardiology Partners of America, Inc., a physician practice
management company that operated and managed cardiology physician practices and
clinics. Mr. Jones was President of the Surgery Center Division of HEALTHSOUTH
from January 1996 until January 1997. He was Senior Vice President and Chief
Financial Officer of Surgical Care Affiliates, Inc. from January 1, 1992 until
its merger with HEALTHSOUTH in January 1996. Prior to joining Surgical Care
Affiliates, Inc., he was Executive Vice President and Chief Financial Officer of
Comdata Holdings Corporation and Comdata Network.
B. MANAGEMENT OF PHYCOR
PhyCor contemplates the retention of certain members of its current
senior management pursuant to existing or superseding employment contracts and
arrangements. The following is a list of PhyCor's senior management who are
expected to continue in their positions with Reorganized PhyCor:
Tenure With
Name And Title The Debtor Summary Of Responsibilities
Tarpley B. Jones 2/1/00 Has served as President and Chief Executive Officer since
President and Chief the Petition Date. Mr. Jones previously served as Executive
Executive Officer Vice President and Chief Financial Officer of the Company
since joining the Company in February, 2000. In this
position he had full responsibility for management of the
Company's finances.
Monte S. Frankenfield 2/24/92 Has served as Vice President, Finance and Controller since
Vice President, Finance and 1996. In this position, she has responsibility for the manage-
Controller ment of the Company's corporate accounting function. Ms.
Frankenfield previously served as Director, Controller.
Jess N. Judy 8/28/95 Has served as Vice President, Group Operations-PhySys
Vice President, Group since October, 2000. In this position he has responsibility
Operations - PhySys for operations of PhySys, one of PhyCor's subsidiaries. Mr.
Judy previously served as Group Vice President, Development.
John W. Phillips 9/1/89 Has served as Senior Vice President, Contract Management
Senior Vice President, Division-PhySys since July 1998. In this position he has
Contract Management responsibility for the profitability, marketing and operations
Division of PhySys. Mr. Phillips previously served as Group Vice
President, Operations.
Michael R. McClintock 11/1/88 Has served as Vice President, Development-PhySys since
Vice President, January 2001. In this position he has responsibility for the
Development - PhySys business development of PhySys. Mr. McClintock previously
served as Vice President, Operations-PhySys.
18
Oliver V. Rogers 6/15/92 Has served as Senior Vice President, Services and Solutions-
Senior Vice President, PhySys since January 2001. In this position he has
Services and Solutions - PhySys responsibility for the profitability, marketing and operations
of this division. Mr. Rogers previously served as Senior
Vice President, Clinic Operations.
Rene P. Moret 6/1/99 Has served as President and Chief Executive Officer of
President and Chief North American Medical Management California since
Executive Officer, North October 2001. In this position he has responsibility for the
American Medical Management profitability, marketing, and operations of PhyCor's California
California operations. Mr. Moret previously served as Vice President,
Operations, North American Medical Management.
Peter M. Kindrachuk 12/19/94 Has served as Vice President, Group Operations -North
Vice President, Group American Medical Management since May, 2000. In this
Operations, North American position he has responsibility for the profitability, marketing
Medical Management and operations for four North American Medical Management
markets. Mr. Kindrachuk previously served as Group
Vice President, Clinic Operations.
Jon M. Sundock 4/24/95 - 1/5/01 Has served as Vice President, Legal since May 2002. He
Vice President, Legal also served as Vice President, Associate General Counsel
5/13/02 from 1997 to January 2001. Mr. Sundock previously served
as Director, Associate General Counsel. Mr. Sundock is
expected to serve as Secretary and General Counsel of
Reorganized PhyCor.
C. EMPLOYMENT ARRANGEMENTS
On February 15, 2002, the Bankruptcy Court entered an order under which
PhyCor assumed the separation agreement and general release of Thompson S. Dent
(the "Dent Separation Agreement") and the employment agreement of Tarpley B.
Jones (the "Jones Employment Agreement"). The principal provisions of these
agreements are as follows:
The Dent Separation Agreement. The Dent Separation Agreement became
effective on the Petition Date, at which time Mr. Dent relinquished the
positions of President and Chief Executive Officer of the Company and each of
its subsidiaries and remained as the Chairman of PhyCor and each subsidiary. Mr.
Dent's employment with PhyCor will cease on the Consummation Date, except that
upon 30 days' written notice, Mr. Dent may accelerate his termination date (the
"Separation Date") and relinquish the position of Chairman.
Compensation And Benefits. From the Petition Date until the Separation
Date, Mr. Dent's annual base salary is $500,000 plus benefits and reimbursement
of his business expenses. Mr. Dent will not be entitled to any additional
severance or bonus payments as a result of the Dent Separation Agreement.
Accordingly, although Mr. Dent's employment agreement provides that upon
termination he will receive a "Severance Amount" of $1,750,000, less any bonus
payment based upon the reduction of the Citicorp Facility, the $1,750,000 bonus
payment that Mr. Dent previously received in 2001 was fully credited against the
Severance Amount.
Release. Mr. Dent and the Company each released the other, except with
respect to (i) obligations under the Dent Separation Agreement, (ii) claims that
Mr. Dent may have under the Age Discrimination in Employment Act, and (iii)
claims arising after January 22, 2002, the date Mr. Dent signed the Dent
Separation Agreement.
Non-Competition And Confidentiality. The non-competition and
confidentiality provisions contained in Mr. Dent's original employment agreement
with PhyCor will remain in full force and effect after the Separation Date. The
non-competition provision will continue until January 21, 2004.
19
Certain Litigation Matters. PhyCor will continue to provide a defense
for Mr. Dent and to indemnify him with respect to any costs, expenses, or losses
relating to any current or future actions relating to his role as an executive,
officer, or director of PhyCor, its subsidiaries or affiliates to the extent
allowed under PhyCor's charter, bylaws, and policy with respect to claims
against its executives, officers, and directors.
The Jones Employment Agreement. Prior to the commencement of the
Chapter 11 Cases, Tarpley B. Jones was the Company's Chief Financial Officer and
Executive Vice President. On the Petition Date, Mr. Jones became the President
and Chief Executive Officer of each of the Debtors and most of the non-Debtor
subsidiaries. The principal terms of the Jones Employment Agreement are as
follows:
Salary And Bonus: Mr. Jones will receive an annual base salary of
$487,000, and also received $8,333 per month in retroactive pay beginning
October 1, 2001 through January 31, 2002. Mr. Jones was paid an incentive award
of $237,500 for his performance in 2001. Mr. Jones will be eligible to receive
an annual incentive award with a target amount of 100% of his base salary. The
annual bonus is tied to objective criteria which will be established annually by
the board of directors of Reorganized PhyCor or its compensation committee. Upon
the Consummation Date, and provided that Mr. Jones is the President and Chief
Executive Officer of PhyCor on that date, Mr. Jones will receive a success bonus
of $110,000. Furthermore, within 120 days of the Consummation Date, PhyCor has
agreed to (i) issue to Mr. Jones common stock equal to 3.5% of Reorganized
PhyCor's common stock and (ii) grant to Mr. Jones options to purchase common
stock equal to 1.5% of Reorganized PhyCor's common stock. The 3.5% stock grant
is estimated by Jefferies & Company, Inc. ("Jefferies") to have an approximate
value of $1,640,000. See "Management Incentive Plan - Exercise Price" for the
option exercise price.
Term And Termination: The Jones Employment Agreement commenced on
January 31, 2002 and continues for a period of three years. Mr. Jones's term as
President and Chief Executive Officer will automatically be extended for one
additional year unless the parties mutually agree otherwise. The Company may
terminate the Jones Employment Agreement without cause, but if it does so, Mr.
Jones may be entitled to receive a lump sum payment on or before his date of
termination (the "Severance Date") equal to (i) all earned but unpaid base
salary and annual incentive award that is owed to him through the Severance Date
and (ii) 1/12 of the sum of the then-current annual base salary plus the amount
of his previous year's annual incentive award, multiplied by the greater of the
number of months remaining in the term of the Jones Employment Agreement or 18
months. PhyCor will also be obligated to make a contribution to its retirement
plan for the account of Mr. Jones for the first calendar year ending on or after
the Severance Date as though Mr. Jones had not been terminated.
Change Of Control: If there is a change in control and, within 24
months, Mr. Jones is terminated without cause or, within six months, Mr. Jones
elects to resign, the stated time period, (i) PhyCor will pay to Mr. Jones the
amounts described in the immediately preceding paragraph above, (ii) the stock
options granted or stock issued to Mr. Jones will become fully vested and remain
exercisable for one year following the change in control, and (iii) upon
resignation or termination, PhyCor will pay a retention bonus for services
actually rendered on and after the date of the change in control. The bonus will
be a lump sum payment equal to 50% of the sum of Mr. Jones' base salary on the
date of resignation or termination (or, if greater, on the date of the change in
control) and the greater of the most recent annual incentive award paid or
earned by Mr. Jones or the current annual incentive award target in effect at
the time of such termination or resignation. Confirmation of the Plan will not
constitute a change of control under the Jones Employment Agreement.
On February 25, 2002, Healthcare Realty Trust and its affiliates
(together, "HRT") filed a motion to reconsider the February 15, 2002 order
authorizing PhyCor to assume the Dent Separation Agreement and the Jones
Employment Agreement. The Debtors have opposed this motion because they believe
that the assumption of these agreements was a proper exercise of their business
judgment. The motion to reconsider will be withdrawn by HRT in connection with
the Lewis-Gale Settlement (see "Other Provisions Of The Plan - Treatment of
Executory Contracts And Unexpired Leases - Rejected Contracts And Leases;
Related Payments").
PhyCor will also assume all other employment contracts with its
employees existing on the Petition Date (to the extent such contracts have not
terminated by their own terms or by agreement with, or action of, the Debtors
prior to the Consummation Date) as well as certain separation agreements.
20
By order entered on February 1, 2002, the Bankruptcy Court authorized
the Debtors to reject the separation and release agreements of Derril W. Reeves
and Joseph C. Hutts, who were founders of PhyCor and served as executor officers
of the Debtors until June 2000. At that time, Mr. Reeves also resigned from the
Debtors' boards of directors. Mr. Hutts remains on the board of directors of
PhyCor. As a result of the rejections of these separation and release
agreements, PhyCor admits that Mr. Reeves has a claim against the Company for
$666,802 and Mr. Hutts has a claim against the Company for $938,902. Together
these claims comprise less than one half of one percent of the Debtors'
outstanding indebtedness.
D. MANAGEMENT INCENTIVE PLAN
In connection with the Plan, Reorganized PhyCor will adopt the
Management Incentive Plan, which is intended to provide incentives to senior
management to continue their efforts to foster and promote the long term growth
and performance of Reorganized PhyCor and to increase the market price for the
New Common Stock. The Management Incentive Plan initially will only provide
authority for the grant of shares of New Common Stock and options to buy
additional shares of New Common Stock in accordance with Reorganized PhyCor's
employment agreement with its President and Chief Executive Officer. A copy of
the Management Incentive Plan is attached as Exhibit B to the Plan.
The principal terms of the Management Incentive Plan to be adopted by
Reorganized PhyCor and the terms of the initial awards evidencing the grant of
both stock and options thereunder are as follows:
Eligible Employees (i) Senior management, (ii) managers,
including senior vice presidents, group
vice presidents, and vice presidents,
(iii) all key employees who have continued
with PhyCor through its reorganization, and
(iv) future new hires at management levels.
Administration The Management Incentive Plan will be
administered by a committee established by
Reorganized PhyCor's Board of Directors and
consisting of two or more directors who are
not employees of the Company (the
"Compensation Committee").
Stock Grant Shares equivalent to 3.5% of the New Common
Stock, as of the Consummation Date, will be
granted to the chief executive officer,
pursuant to his employment agreement with
Reorganized PhyCor. If additional shares are
approved for issuance, future allocation of
the stock grants among Eligible Employees
will be recommended by senior management and
subject to the approval of the Compensation
Committee. Some or all of these stock grants
will be subject to a risk of forfeiture
until a stated vesting date. In the event of
a change of control of Reorganized PhyCor,
unvested grants will become fully vested.
Stock Price The initial price of the New Common Stock
(the "Initial Stock Price") will be
determined by the Board of Directors and
will be based on the valuation analysis
prepared by Jefferies in connection with the
Plan. The price of the New Common Stock
thereafter will be (i) determined by the
public markets if the New Common Stock is
publicly traded, (ii) based on the most
recent price at which New Common Stock is
sold by Reorganized PhyCor in private
transactions, if any, or (iii) otherwise
determined in good faith by the Board of
Directors based on the future financial
performance of Reorganized PhyCor.
("Publicly traded" means traded on the New
York Stock Exchange or another national
stock exchange such as the Nasdaq National
Market, Nasdaq Small Cap Market, or the OTC
Bulletin Board System.)
Option Grant Options to purchase shares equivalent to an
additional 1.5% of the New Common Stock on a
fully diluted basis as of the Consummation
Date will be granted to the President and
Chief Executive Officer, pursuant to his
employment agreement with Reorganized
PhyCor. If additional shares are approved
for issuance, future option grants to
Eligible Employees will be granted by the
Compensation Committee based on the
performance and hiring needs of Reorganized
PhyCor.
Exercise Price One-half of the total options will have an
exercise price equal to the Base Exercise
Price (as herein defined) and one-half of
the total options will have an exercise
price equal to 200% of the Base Exercise
Price. If the New Common Stock is publicly
traded, the Base Exercise Price will be
equal to the fair market value (as defined
in the Management Incentive Plan) of the New
Common Stock on the grant of the options. In
no case will the Base
21
Exercise Price be equal to or less than 33%
of the Initial Stock Price. If the New
Common Stock is not publicly traded at the
time of grant, the Base Exercise Price will
be determined by the Compensation Committee
at the time of grant.
Option Vesting One-third of the options will vest on the
first anniversary of the date of the
option grant, one-third on the second
anniversary, and the remaining one-third on
the third anniversary of the option grant.
All options will become immediately
exercisable in the event of a change of
control of Reorganized PhyCor, unless
otherwise determined by the Compensation
Committee.
Expiration Of Options Options will expire on the earlier of (i)
ten years after grant, (ii) three months
after termination of employment for any
reason other than death, disability,
retirement, or cause, (iii) one year after
termination of employment by reason of
death, disability, or retirement, or (iv)
immediately upon termination of employment
for cause. Options that are not yet vested
on the date of termination of employment
will be forfeited.
Type Of Options Options will be non-qualified stock options.
Registration If Reorganized PhyCor is a Securities and
Exchange Commission reporting company, it
will file a Registration Statement on Form
S-8 covering the stock grants, the shares
issuable upon exercise of the options, and
the resale of such shares. If Reorganized
PhyCor is not a Securities and Exchange
Commission reporting company, it will only
issue securities under the Management
Incentive Plan pursuant to federal and state
registration exemptions that are available,
and will comply with applicable federal and
state securities requirements. In such
event, the stock issued under the Management
Incentive Plan and the shares issuable upon
the exercise of Management Incentive Options
will be unregistered under the Securities
Act of 1933 and the securities laws of any
state. Such securities must be held
indefinitely unless the disposition thereof
is registered under the Securities Act of
1933 and under applicable state securities
laws or exemptions from such registration
requirements, whether pursuant to Rule 144
of the securities Act of 1933 or otherwise,
are available.
Board Approval Any modification to the Management
Incentive Plan will be presented to
Reorganized PhyCor's Board of Directors for
its approval and, if required, to
Reorganized PhyCor's shareholders for
approval.
THIS SOLICITATION OF VOTES ON THE PLAN WILL BE DEEMED A SOLICITATION FOR
APPROVAL OF THE MANAGEMENT INCENTIVE PLAN. PHYCOR BELIEVES THAT THE CONFIRMATION
ORDER SHOULD CONSTITUTE APPROVAL OF THE MANAGEMENT INCENTIVE PLAN FOR THE
PURPOSES OF SECTIONS 422 AND 162(m) OF THE INTERNAL REVENUE CODE OF 1986, AS
AMENDED. THERE CAN BE NO ASSURANCE THAT THE INTERNAL REVENUE SERVICE WILL AGREE
WITH THIS POSITION.
VI. CERTAIN EVENTS IN THE CHAPTER 11 CASES
A. "FIRST-DAY" ORDERS
On the Petition Date, the Debtors filed their petitions for
reorganization relief under Chapter 11 of the Bankruptcy Code, thereby
commencing these Chapter 11 Cases. On the first day of these cases, the Debtors
also filed several motions seeking the relief provided by certain so called
"first-day" orders. First-day orders are intended to ensure a seamless
transition between a debtor's prepetition and postpetition business operations
by approving certain regular business conduct that may not be authorized
specifically under the Bankruptcy Code or as to which the Bankruptcy Code
requires prior approval by the Bankruptcy Court.
On February 1, 2002, the Bankruptcy Court entered first-day orders in
these cases which authorized, among other relief:
22
1. Joint administration of the Debtors' bankruptcy
cases;
2. Payment of certain prepetition tax claims;
3. Continuation of utility services during the pendency
of the Chapter 11 Cases;
4. Payment of employees' accrued prepetition wages and
employee benefit claims;
5. Maintenance of the Debtors' bank accounts and
operation of their cash management system
substantially as it existed prior to the Petition
Date; and
6. Continued retention of professionals regularly
employed by the Debtors in the ordinary course of
their businesses.
On February 7, 2002, the Bankruptcy Court entered an order setting
March 5, 2002 as the Bar Date for the filing of proofs of Claim against the
Debtors and an order scheduling a hearing on February 15, 2002 to consider
approval of the Disclosure Statement and substantive consolidation of the
Debtors' Estates (the "Disclosure Statement and Substantive Consolidation
Order"). At that hearing, the Bankruptcy Court determined that a hearing to
consider substantive consolidation would occur immediately before the
Confirmation Hearing.
On March 11, 2002, the Debtors filed amendments to certain of their
Schedules, thereby establishing a supplemental Bar Date of April 17, 2002 for
only the creditors affected by such amendments. Notice of the supplemental Bar
Date of April 17, 2002 was given to the creditors affected by the amendments.
On or about June 6, 2002, the Bankruptcy Court entered an order
approving the Disclosure Statement.
B. RETENTION OF PROFESSIONALS
On the Petition Date, the Debtors also requested that the Bankruptcy
Court enter, among others, the following:
1. An order authorizing the retention of Skadden, Arps,
Slate, Meagher & Flom LLP as attorneys for
debtors-in-possession;
2. An order authorizing the retention of Waller Lansden
Dortch & Davis, a Professional Limited Liability
Company, as special counsel for
debtors-in-possession;
3. An order authorizing the retention of Jefferies &
Company, Inc. as financial advisors to
debtors-in-possession;
4. An order authorizing the retention of Poorman-Douglas
Corporation as Claims Agent for
debtors-in-possession;
5. An order authorizing the retention of MacKenzie
Partners, Inc. as Information Agent for
debtors-in-possession; and
6. An order authorizing the retention of KPMG LLP as
accountants, tax and financial advisors, and auditors
for debtors-in-possession.
On February 1, 2002, the Bankruptcy Court entered an order authorizing
the retention of MacKenzie Partners, Inc. as Information Agent and on February
7, 2002, entered an order authorizing the retention of Poorman-Douglas
Corporation as Claims Agent. The other orders described above were all entered
by the Bankruptcy Court on February 15, 2002.
On April 4, 2002, the Bankruptcy Court entered an order authorizing the
retention of Milbank, Tweed, Hadley & McCloy LLP as counsel for the Creditors'
Committee.
23
VII. SUMMARY OF THE PLAN
A. INTRODUCTION
Chapter 11 is the principal business reorganization chapter of the
Bankruptcy Code. Under Chapter 11, a debtor is authorized to reorganize its
business for the benefit of itself and its creditors and shareholders. In
addition to permitting rehabilitation of the debtor, Chapter 11 promotes
equality of treatment of creditors and equity security holders who hold
substantially similar claims against or interests in the debtor and its assets.
In furtherance of these two goals, upon the filing of a petition for relief
under Chapter 11, section 362 of the Bankruptcy Code provides for an automatic
stay of substantially all acts and proceedings against the debtor and its
property, including all attempts to collect claims or enforce liens that arose
prior to the commencement of the Chapter 11 case.
The consummation of a plan of reorganization is the principal objective
of a Chapter 11 case. A plan of reorganization sets forth the means for
satisfying claims against and interests in a debtor. Confirmation of a plan of
reorganization by the Bankruptcy Court makes the plan binding upon the debtor,
any issuer of securities under the plan, any person or entity acquiring property
under the plan, and any creditor of or equity security holder in the debtor,
whether or not such creditor or equity security holder (i) is impaired under or
has accepted the plan or (ii) receives or retains any property under the plan.
Subject to certain limited exceptions and other than as provided in the plan
itself or the confirmation order, the confirmation order discharges the debtor
from any debt that arose prior to the date of confirmation of the plan and
substitutes therefor the obligations specified under the confirmed plan, and
terminates all rights and interests of equity security holders.
THE REMAINDER OF THIS SECTION PROVIDES A SUMMARY OF THE STRUCTURE AND
MEANS FOR IMPLEMENTATION OF THE DEBTORS' PLAN, AND OF THE CLASSIFICATION AND
TREATMENT OF CLAIMS AND INTERESTS UNDER THE PLAN, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE PLAN (AS WELL AS THE EXHIBITS THERETO AND
DEFINITIONS THEREIN), WHICH IS ANNEXED TO THIS DISCLOSURE STATEMENT AS EXHIBIT
A.
THE STATEMENTS CONTAINED IN THIS DISCLOSURE STATEMENT INCLUDE SUMMARIES
OF THE PROVISIONS CONTAINED IN THE PLAN AND IN DOCUMENTS REFERRED TO THEREIN.
THE STATEMENTS CONTAINED IN THIS DISCLOSURE STATEMENT DO NOT PURPORT TO BE
PRECISE OR COMPLETE STATEMENTS OF ALL THE TERMS AND PROVISIONS OF THE PLAN OR
DOCUMENTS REFERRED TO THEREIN, AND REFERENCE IS MADE TO THE PLAN AND TO SUCH
DOCUMENTS FOR THE FULL AND COMPLETE STATEMENTS OF SUCH TERMS AND PROVISIONS.
THE PLAN ITSELF AND THE DOCUMENTS REFERRED TO THEREIN CONTROL THE
ACTUAL TREATMENT OF CLAIMS AGAINST AND INTERESTS IN THE DEBTORS UNDER THE PLAN
AND WILL, UPON OCCURRENCE OF THE CONSUMMATION DATE, BE BINDING UPON ALL HOLDERS
OF CLAIMS AGAINST AND INTERESTS IN THE DEBTORS, THEIR ESTATES, REORGANIZED
PHYCOR, ALL PARTIES RECEIVING PROPERTY UNDER THE PLAN, AND OTHER PARTIES IN
INTEREST. IN THE EVENT OF ANY CONFLICT BETWEEN THIS DISCLOSURE STATEMENT, ON THE
ONE HAND, AND THE PLAN OR ANY OTHER OPERATIVE DOCUMENT, ON THE OTHER HAND, THE
TERMS OF THE PLAN AND/OR SUCH OTHER OPERATIVE DOCUMENT WILL CONTROL.
B. CLASSIFICATION AND TREATMENT OF CLAIMS AND INTERESTS
Section 1123 of the Bankruptcy Code provides that a plan of
reorganization must classify the claims and interests of a debtor's creditors
and equity interest holders. In accordance with section 1123, the Plan divides
Claims and Interests into Classes and sets forth the treatment for each Class
(other than Administrative Claims and Priority Tax Claims which, pursuant to
section 1123(a)(1), need not be and have not been classified). The Debtors are
also required, under section 1122 of the Bankruptcy Code, to classify Claims
against and Interests in the Debtors into Classes that contain Claims and
Interests that are substantially similar to the other Claims and Interests in
such Class.
The classification of Claims and Interests and the nature of
distributions to members of each Class are summarized below. The Debtors believe
that the consideration, if any, provided under the Plan to holders of Claims and
24
Interests reflects an appropriate resolution of their Claims and Interests,
taking into account the differing nature and priority of such Claims and
Interests. The Bankruptcy Court must find, however, that a number of statutory
tests are met before it may confirm the Plan. See "Summary Of The Plan -
Confirmation Of The Plan." Many of these tests are designed to protect the
interests of holders of Claims or Interests who are not entitled to vote on the
Plan, or do not vote to accept the Plan, but who will be bound by the provisions
of the Plan if it is confirmed by the Bankruptcy Court.
1. Unclassified Claims
(a) Administrative Claims (Unimpaired)
The Plan provides that Administrative Claims are Unimpaired.
Administrative Claims consist of the actual and necessary costs and expenses of
the Chapter 11 Cases that are allowed under sections 503(b) and 507(a)(1) of the
Bankruptcy Code. They include, among other things, the cost of operating
PhyCor's business following the Petition Date (e.g., the postpetition salaries
and other benefits for PhyCor's employees, postpetition rent, amounts owed to
vendors providing goods and services to PhyCor during the Chapter 11 Cases, tax
obligations incurred after the Petition Date, and certain statutory fees and
charges assessed under 28 U.S.C. ss. 1930), and the actual, reasonable fees and
expenses of the professionals retained by PhyCor and the Creditors' Committee in
the Chapter 11 Cases. All payments to professionals in connection with the
Chapter 11 Cases for compensation and reimbursement of expenses and all payments
to reimburse expenses of members of the Creditors' Committee would be made in
accordance with the procedures established by the Bankruptcy Code and the
Bankruptcy Rules and would be subject to approval of the Bankruptcy Court as
being reasonable.
Administrative expenses representing liabilities incurred in the
ordinary course of business by the Debtors, consistent with past practice, will
be paid by the Debtors in accordance with the terms and conditions of the
particular transaction and any related agreements and instruments. All other
holders of Allowed Administrative Claims will receive Cash equal to the unpaid
portion of such Allowed Administrative Claim or such other treatment as to which
PhyCor and such holder have agreed upon in writing.
(b) Priority Tax Claims (Unimpaired)
Priority Tax Claims are unsecured Claims asserted by federal and state
governmental authorities for taxes specified in section 507(a)(8) of the
Bankruptcy Code, such as certain income taxes, property taxes, excise taxes, and
employment and withholding taxes. These unsecured Claims are given a statutory
priority in right of payment. The Plan provides that Priority Tax Claims, if
any, are Unimpaired.
Under the Plan, except to the extent that a holder of an Allowed
Priority Tax Claim has agreed in writing to a different treatment, in the sole
discretion of the Debtors or Reorganized PhyCor, either (i) each Allowed
Priority Tax Claim will remain unaltered with respect to all the legal,
equitable, and contractual rights to which such Allowed Priority Tax Claim
entitles the holder thereof, (ii) each holder of an Allowed Priority Tax Claim
will receive in full satisfaction, settlement, and release of and in exchange
for such Allowed Priority Tax Claim (A) Cash equal to the amount of such Allowed
Priority Tax Claim, (B) Cash payments over a period not exceeding six years from
the date of assessment of such Allowed Priority Tax Claim as provided in section
1129(a)(9)(C) of the Bankruptcy Code, plus interest on the unpaid portion
thereof at the Case Interest Rate. The Debtors further reserve the right to pay
any Allowed Priority Tax Claim, or any remaining balance of any Allowed Priority
Tax Claim, in full, without premium or penalty. Subject to Bankruptcy Court
approval, the Company has settled one Priority Tax Claim for approximately
$40,000. The Company has requested mediation with the Internal Revenue Service
involving another Priority Tax Claim which could total as much as $700,000.
2. Unimpaired Classes Of Claims
(a) Class 1: Other Priority Claims
Class 1 Other Priority Claims include Claims, other than Administrative
Claims and Priority Tax Claims, that are entitled to priority under section
507(a) of the Bankruptcy Code, such as unsecured Claims for accrued employee
compensation, including vacation, severance, and sick-leave pay, earned within
90 days before the Petition Date, to the extent of $4,650 per employee, and
contributions to employee benefit plans arising from services rendered within
the 180-day period preceding the Petition Date, but only for such plans to the
extent of the number of employees covered by
25
such plans multiplied by $4,650, less the aggregate amount paid to such
employees for accrued employee compensation. Under the Plan, the holder of an
Allowed Other Priority Claim will, in full satisfaction, settlement, release,
and discharge of and in exchange for such Allowed Other Priority Claim, in the
sole discretion of the Company, receive (i) Cash in an amount equal to such
Allowed Class 1 Other Priority Claim, or (ii) such other treatment as the
Debtors or Reorganized PhyCor and such holder will have agreed upon in writing.
The Company estimates that the amount of Allowed Other Priority Claims will be
zero.
(b) Class 2a: AmSouth Secured Claim
Class 2a AmSouth Secured Claim consists of the AmSouth Secured Claim.
Under the Plan, the holder of the Allowed AmSouth Secured Claim will, in full
satisfaction, settlement, release, and discharge of and in exchange for such
Allowed Class 2a AmSouth Secured Claim, in the sole discretion of the Debtors or
Reorganized PhyCor, (i) receive Cash in an amount equal to such Allowed Class 2a
AmSouth Secured Claim, (ii) upon abandonment by Reorganized PhyCor, receive the
collateral securing such holder's Allowed Class 2a AmSouth Secured Claim, plus
any interest, in Cash, required to be paid under section 506(b) of the
Bankruptcy Code, (iii) have its Allowed Class 2a AmSouth Secured Claim
Reinstated, or (iv) receive such other treatment as the Debtors or Reorganized
PhyCor and such holder will have agreed upon in writing.
(c) Class 2b: Other Secured Claims
Class 2b Other Secured Claims consists of all Secured Claims against a
Debtor, other than the AmSouth Secured Claim. The Company specifically reserves
all rights to challenge the validity, nature, and perfection of, and to avoid
pursuant to the provisions of the Bankruptcy Code and other applicable law, any
purported liens and security interests.
Under the Plan, each holder of an Allowed Other Secured Claim will, in
full satisfaction, settlement, release, and discharge of and in exchange for
such Allowed Class 2b Other Secured Claim, in the sole discretion of the Debtors
or Reorganized PhyCor, (i) receive Cash in an amount equal to such Allowed Class
2b Other Secured Claim, (ii) upon abandonment by Reorganized PhyCor, receive the
collateral securing such holder's Allowed Class 2b Other Secured Claim, plus any
interest, in Cash, required to be paid under section 506(b) of the Bankruptcy
Code, (iii) have its Allowed Class 2b Other Secured Claim Reinstated, or (iv)
receive such other treatment as the Debtors or Reorganized PhyCor and such
holder will have agreed upon in writing.
The Company estimates that it will have no Allowed Class 2b Other
Secured Claims.
3. Impaired Classes Of Claims And Interests
(a) Class 3: Convenience Claims
Convenience Claims consist of each and every Claim that would otherwise
be classified as a Class 4 General Unsecured Claim that is (a) $50,000 or less
or (b) more than $50,000 if the holder has properly elected, on a timely cast
Ballot, to accept, in full satisfaction, discharge, and release of such claim,
the distribution provided in the Plan for Class 3 Convenience Claims. Under the
Plan, each holder of an Allowed Convenience Claim will, in full satisfaction,
settlement, and release of and in exchange for such Allowed Convenience Claim,
receive Cash equal to 12.2% of the amount of such Allowed Convenience Claim.
As noted above, by checking the appropriate box on a timely cast
Ballot, the holder of an Allowed Class 4 General Unsecured Claim in an amount
greater than $50,000 may elect to reduce the amount of such holder's Allowed
Class 4 General Unsecured Claim to $50,000 and to receive treatment as an
Allowed Class 3 Convenience Claim in the amount of $50,000, as described above.
Such an election will constitute a waiver of the right to collect, and a release
of, the amount of the Allowed Class 4 Unsecured Claim in excess of $50,000, and
the holder of such Allowed Class 3 Convenience Claim will be deemed to have
released the Debtors, their Estates, Reorganized PhyCor, and their property from
any and all liability for such excess amount.
To accurately record the Class 4 claimants holding in excess of $50,000
(including unpaid interest accrued through January 31, 2002) of PhyCor's 4.5%
Convertible Subordinated Debentures who properly elect to reduce their claims to
$50,000 and therefore receive distributions as Class 3 claimants, such claimants
must (i) vote on the Plan using
26
the Class 4 Ballot and (ii) deliver the 4.5% Convertible Subordinated Debenture
certificates(s) to SunTrust Bank, the Indenture Trustee, by 5:00 p.m. on the
Voting Deadline. AS OF JANUARY 31, 2002, THE ACCRUED INTEREST FOR EACH $1,000
PRINCIPAL AMOUNT OF 4.5% CONVERTIBLE SUBORDINATED DEBENTURES IS $67.19. IF THE
PRINCIPAL PORTION OF YOUR 4.5% CONVERTIBLE SUBORDINATED DEBENTURE CLAIM IS
$47,000 OR MORE, THEN PRINCIPAL PLUS ACCRUED INTEREST WILL EXCEED $50,000 AND
YOU WILL NEED TO ELECT TO REDUCE YOUR TOTAL CLAIM TO $50,000 IF YOU WANT TO
RECEIVE A DISTRIBUTION IN CASH. The holder of an Allowed Class 4 General
Unsecured Claim who properly elects to reduce the amount of its Allowed Claim
will be deemed to be the holder of an Allowed Class 3 Convenience Claim for
classification, voting, and all other purposes under the Plan. PhyCor estimates
that approximately 1,000 of its Creditors, including approximately 650 holders
of 4.5% Convertible Subordinated Debentures, hold claims of $50,000 or less.
Accordingly, PhyCor estimates that the total distribution of Cash to Allowed
Class 3 Convenience Claim holders will be approximately $1.4 million. Although
it is impossible to predict how many other Creditors will elect to reduce their
claims to $50,000 so as to become Class 3 Convenience Claim holders, if all
other Creditors were to make the election the estimated Cash distribution to
Class 3 Convenience Claim holders would increase to a total distribution of
approximately $2 million.
(b) Class 4: General Unsecured Claims
General Unsecured Claims consist of all Claims that are not
Administrative Claims, Priority Tax Claims, Other Priority Claims, the AmSouth
Secured Claim, Other Secured Claims, Convenience Claims, or Shareholder
Litigation Claims. Class 4 Claims include Claims in an amount exceeding $50,000
based on PhyCor's 4.5% Convertible Subordinated Debentures (including both
principal and accrued interest through January 31, 2002). The amount outstanding
under the 4.5% Convertible Subordinated Debentures as of January 31, 2002 was
$209.7 million, including accrued interest. Under the Plan, each holder of an
Allowed Class 4 General Unsecured Claim will, in full satisfaction, settlement,
release, and discharge of and in exchange for such Allowed Class 4 General
Unsecured Claim, receive its pro rata share of 5.8 million shares of the New
Common Stock of Reorganized PhyCor. The Company estimates that Allowed Class 4
General Unsecured Claims will aggregate approximately $369,623,000.
(c) Class 5: Preferred Stock Interests
The Preferred Stock Interests consist of all Interests directly or
indirectly arising from or under or relating in any way to the Preferred Stock.
Each holder of a Class 5 Preferred Stock Interest will not be entitled to, and
will not receive or retain, any property or interest in property on account of
such Interests, which Interests will be cancelled on the Consummation Date.
PhyCor believes that there are no holders of Class 5 Preferred Stock Interests.
(d) Class 6: Common Stock Interests
The Common Stock Interests consist of all Interests directly or
indirectly arising from or under or relating in any way to the Common Stock.
Each holder of a Class 6 Common Stock Interest will not be entitled to, and will
not receive or retain, any property or interest in property on account of such
Interests, which Interests will be cancelled on the Consummation Date.
(e) Class 7: Shareholder Litigation Claims
Class 7 consists of shareholder litigation claims based on the
purported securities class actions originally filed in state and federal courts
in Tennessee and New York in 1998 and 1999 against PhyCor and certain of
PhyCor's current and former officers and directors. See "Events Leading To The
Filing Of The Chapter 11 Cases - Shareholder Litigation Claims." Holders of
Class 7 Shareholder Litigation Claims will not receive or retain any property of
PhyCor or interest in property of PhyCor on account of such Claims, which Claims
will be discharged on the Consummation Date.
(f) Class 8: Warrants Interests
The Warrants Interests consist of all Interests directly or indirectly
arising from or under or relating in any way to the Warrants. Each holder of a
Class 8 Warrants Interest will not be entitled to, and will not receive or
retain, any property or interest in property on account of such Interests, which
will be cancelled on the Consummation Date.
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C. OTHER PROVISIONS OF THE PLAN
1. Substantive Consolidation
(a) Consolidation Of The Chapter 11 Cases
The Plan contemplates and is predicated upon entry of an order
substantively consolidating the Debtors' Estates and Chapter 11 Cases for the
purposes of all actions associated with Confirmation and consummation of the
Plan. As a result of such consolidation, (i) all Intercompany Claims by,
between, and among the Debtors will be eliminated, (ii) all assets and
liabilities of the Subsidiaries will be merged or treated as if they were merged
with the assets and liabilities of PhyCor, (iii) any obligation of a Debtor and
all guaranties thereof by one or more of the other Debtors will be deemed to be
one obligation of PhyCor, (iv) the Subsidiary Interests will be cancelled, and
(v) each Claim filed or to be filed against any Debtor will be deemed filed only
against PhyCor and will be deemed a single Claim against and a single obligation
of PhyCor. On the Confirmation Date, and in accordance with the terms of the
Plan and the consolidation of the assets and liabilities of the Debtors, all
Claims based upon guaranties of collection, payment, or performance made by the
Debtors as to the obligations of another Debtor will be released and of no
further force and effect.
As noted above, as a result of substantive consolidation, all
Intercompany Claims by, between, and among the Debtors will be eliminated.
Although Creditors of most of the Debtor Subsidiaries will benefit from
substantive consolidation, PhyCor's Creditors will suffer a slight dilution in
the distribution made to them as a result of consolidation. The Debtors believe,
however, that in the absence of consolidation, certain of the Debtor
Subsidiaries could assert avoidance actions against PhyCor, and that if such
avoidance actions were successful, the recovery from PhyCor by such Subsidiaries
and the cost to PhyCor of litigating any defenses to such actions would offset
the amount of this dilution. In addition, the Debtors believe that substantive
consolidation of their estates will result in administrative cost savings to
their estates. On balance, the Debtors believe that any harm that their
creditors may suffer from substantive consolidation is minimal.
In addition, the Debtors believe that substantive consolidation of
their Estates is appropriate in light of the substantial identity and extensive
interrelationship and interdependence between and among PhyCor and the Debtor
Subsidiaries as evidenced by the fact that, among other things, (i) the boards
of directors of the Debtor Subsidiaries are comprised, with rare exceptions, of
the same slate of senior PhyCor officers who served in the same capacity for all
of the Debtor Subsidiaries, (ii) PhyCor maintained umbrella insurance policies
for itself and the Debtor Subsidiaries, (iii) corporate policy for all of the
Debtors was always formulated by PhyCor's officers and board of directors and
implemented by the Debtor Subsidiaries according to express directives from
PhyCor, (iv) the supervision of financial operations of the Debtor Subsidiaries
was traditionally conducted by PhyCor officers and employees, located at
PhyCor's corporate headquarters offices, to whom a local employee in charge of
financial matters would report, (v) all of the Debtor Subsidiaries' federal
income tax returns were prepared on a consolidated basis and financial
information disseminated to the public by the Debtors was almost always prepared
and presented on a consolidated basis, (vi) Debtor Subsidiaries were not
authorized to borrow money in their own right, nor did any Debtor Subsidiary
independently maintain its own credit facilities (all borrowings for the benefit
of and capital allocations to the Debtor Subsidiaries were effected by PhyCor
through its wholly-owned subsidiary, PhyCor of Nashville, Inc.), (vii) with no
outside source of capital available to them, the Debtor Subsidiaries relied on
PhyCor's unified financial operations and centralized cash management system,
which is monitored by PhyCor's controller, to conduct their business operations,
(xi) PhyCor guaranteed the performance obligations of the Debtor Subsidiaries
under their management services agreements with the physician groups as well as
equipment leases and various other contractual arrangements entered into by the
Debtor Subsidiaries, and (xii) PhyCor's obligations under the Citicorp Facility
were guaranteed by most of the Debtor Subsidiaries.
On the Consummation Date, all of the Debtor Subsidiaries other than The
Member Corporation, Inc. and SynerPhy of Rome, Inc. (f/k/a PhyCor of Rome, Inc.)
will be merged with and consolidated into PhyCor pursuant to the terms of a plan
and agreement of merger attached to the Plan as Exhibit E.
(b) Substantive Consolidation Order
As noted above, the Debtors on the Petition Date moved for substantive
consolidation of their cases (the "Consolidation Motion"). The Bankruptcy Court
has scheduled a hearing on the Consolidation Motion for July 18, 2002 at 3:00
p.m. Eastern Time, immediately before the Confirmation Hearing.
28
2. Continued Corporate Existence; Change Of Name
The Company will continue to exist as Reorganized PhyCor after the
Consummation Date in accordance with the laws of the State of Tennessee and
pursuant to the amended and restated charter and by-laws in effect prior to the
Consummation Date, except to the extent amended under the Plan. Effective upon
the Consummation Date, the Company will change its name to Aveta Health, Inc.
The amended and restated charter and by-laws of PhyCor will be amended to, among
other things: (i) authorize 25 million shares of New Common Stock, $0.01 par
value per share, (ii) pursuant to section 1123(a)(6) of the Bankruptcy Code,
prohibit the issuance of non-voting equity securities, and (iii) change the
Company's name to Aveta Health, Inc. The Amended and Restated Charter and
By-laws will be included in the Plan Supplement.
3. Class 4: Delivery Of 4.5% Convertible Subordinated Debentures
By Claimants Who Elect To Reduce Their Claims To $50,000
To accurately record the Class 4 claimants holding in excess of $50,000
(including unpaid interest accrued through January 31, 2002) of PhyCor's 4.5%
Convertible Subordinated Debentures who properly elect to reduce their claims to
$50,000 and therefore receive distributions as Class 3 claimants, such claimants
must (i) vote on the Plan using the Class 4 Ballot and (ii) deliver the 4.5%
Convertible Subordinated Debenture certificate(s) to SunTrust Bank, the
Indenture Trustee, by 5:00 p.m. on the Voting Deadline. AS OF JANUARY 31, 2002,
THE ACCRUED INTEREST FOR EACH $1,000 PRINCIPAL AMOUNT OF 4.5% CONVERTIBLE
SUBORDINATED DEBENTURES IS $67.19. IF THE PRINCIPAL PORTION OF YOUR 4.5%
CONVERTIBLE SUBORDINATED DEBENTURE CLAIM IS $47,000 OR MORE, THEN PRINCIPAL PLUS
ACCRUED INTEREST WILL EXCEED $50,000 AND YOU WILL NEED TO ELECT TO REDUCE YOUR
TOTAL CLAIM TO $50,000 IF YOU WANT TO RECEIVE A DISTRIBUTION IN CASH.
Beneficial holders who properly elect to reduce their claims as set
forth in the preceding paragraph should contact their broker, dealer, commercial
bank, trust company, or other nominee (collectively, the "Custodian") through
which they hold their 4.5% Convertible Subordinated Debentures and request that
their 4.5% Convertible Subordinated Debenture certificates be delivered to the
Indenture Trustee on their behalf. Brokers, dealers, commercial banks, trust
companies, or other nominees may deliver such certificates to the Indenture
Trustee through DTC. DTC has authorized DTC participants that hold the 4.5%
Convertible Subordinated Debentures on behalf of beneficial owners to deliver
the 4.5% Convertible Subordinated Debentures as if they were holders. To effect
a delivery, DTC participants should transmit their delivery to DTC through the
DTC Automated Tender Offer Program ("ATOP"), for which the transaction will be
eligible. Accordingly, DTC participants may electronically deliver 4.5%
Convertible Subordinated Debentures by causing DTC to transfer 4.5% Convertible
Subordinated Debentures to the Indenture Trustee in accordance with DTC's ATOP
procedures for such a transfer.
To deliver 4.5% Convertible Subordinated Debenture certificate(s), a
Custodian must effect or cause to be effected a book-entry confirmation of all
4.5% Convertible Subordinated Debentures to be delivered to the Indenture
Trustee's account at DTC on or before the Distribution Date.
The Indenture Trustee will establish promptly an account with respect
to the 4.5% Convertible Subordinated Debentures at DTC. Any financial
institution that is a DTC participant may make a book-entry delivery of 4.5%
Convertible Subordinated Debentures by causing DTC to transfer 4.5% Convertible
Subordinated Debentures to the Indenture Trustee's account. DELIVERY OF A CLASS
4 BALLOT TO THE INFORMATION AGENT WILL NOT CONSTITUTE VALID DELIVERY OF THE 4.5%
CONVERTIBLE SUBORDINATED DEBENTURES TO THE INDENTURE TRUSTEE.
CLASS 4 BALLOTS SHOULD BE SENT TO THE INFORMATION AGENT AND NOT TO THE
COMPANY OR THE INDENTURE TRUSTEE AND THE 4.5% CONVERTIBLE SUBORDINATED DEBENTURE
CERTIFICATE(S) SHOULD BE DELIVERED TO SUNTRUST BANK, THE INDENTURE TRUSTEE, AND
NOT TO THE COMPANY OR THE INFORMATION AGENT.
4. Cancellation Of Existing Securities And Agreements
On the Consummation Date, except as otherwise provided for in the Plan,
(i) the Existing Securities (including Preferred Stock), to the extent not
already cancelled, will be cancelled and (ii) the obligations of PhyCor under
the
29
Existing Securities and under PhyCor's amended and restated charter or any
agreements, indentures, or certificates of designations governing the Existing
Securities will be discharged; except that each indenture or other agreement
that governs the rights of the holder of a Claim based on the Existing
Securities and that is administered by an indenture trustee, an agent, or a
servicer will continue in effect solely for the purposes of (a) allowing such
indenture trustee, agent, or servicer to make the distributions to be made on
account of such Claims under the Plan as provided in Article III of the Plan and
(b) permitting such indenture trustee, agent, or servicer to maintain any rights
it may have for fees, costs, and expenses under such indenture or other
agreement. The Indenture Trustee will make the distributions required under the
Plan to the holders in Class 3 and Class 4.
Any actions taken by an indenture trustee, agent, or servicer that are
not for the purposes authorized in the Plan will not be binding upon the
Debtors. Nonetheless, the Debtors may terminate any indenture or other governing
agreement and the authority of any indenture trustee, agent, or servicer to act
thereunder at any time, with or without cause, by giving five days' written
notice of termination to the indenture trustee, agent, or servicer. If
distributions under the Plan have not been completed at the time of termination
of the indenture or other governing agreement, the Debtors will designate a
Disbursing Agent to act in place of the indenture trustee, agent, or servicer.
5. Vesting Of Assets
The property of the Debtors' Estates that is not specifically disposed
of pursuant to the Plan will vest in PhyCor on the Confirmation Date.
Thereafter, PhyCor will be permitted to operate its business and use, acquire,
and dispose of property free of any restrictions of the Bankruptcy Code, the
Bankruptcy Rules, and the Bankruptcy Court. As of the Confirmation Date, all
property of PhyCor will be free and clear of all Claims and interests, except as
specifically provided in the Plan or the Confirmation Order. Without limiting
the generality of the foregoing, PhyCor may, without application to or approval
by the Bankruptcy Court, pay professional fees and expenses that the Debtors or
any of them may incur after the Confirmation Date.
6. Effectuating Documents; Further Transactions
The chairman of the board of directors, president, chief financial
officer, or any other appropriate officer of Reorganized PhyCor will be
authorized to execute, deliver, file, or record such contracts, instruments,
releases, indentures, and other agreements or documents, and take such actions,
as may be necessary or appropriate to effectuate and further evidence the terms
and conditions of the Plan. The secretary or assistant secretary of Reorganized
PhyCor will be authorized to certify or attest to any of the foregoing actions.
7. Exemption From Certain Transfer Taxes
Pursuant to section 1146(c) of the Bankruptcy Code, any transfers from
the Debtors to Reorganized PhyCor or any other Person or entity pursuant to the
Plan will not be subject to any document recording tax, stamp tax, conveyance
fee, intangibles or similar tax, mortgage tax, stamp act, real estate transfer
tax, mortgage recording tax, or other similar tax or governmental assessment and
the Confirmation Order will direct the appropriate state or local governmental
officials or agents to forego the collection of any such tax or governmental
assessment and to accept for filing and recordation any of the foregoing
instruments or other documents without the payment of any such tax or
governmental assessment.
8. Payment Of Statutory Fees
All fees payable by the Debtors pursuant to section 1930 of title 28 of
the United States Code, as determined by the Bankruptcy Court at the
Confirmation Hearing, will be paid on or before the Consummation Date. Any such
fees arising after the Consummation Date but prior to the closing of the Chapter
11 Cases will be paid by Reorganized PhyCor.
9. Severability Of Plan Provisions
If, prior to Confirmation, any term or provision of the Plan is held by
the Bankruptcy Court to be invalid, void, or unenforceable, the Bankruptcy
Court, at the request of the Debtors, will have the power to alter and interpret
such term or provision to make it valid or enforceable to the maximum extent
practicable, consistent with the original purpose of the term or provision held
to be invalid, void, or unenforceable, and such term or provision will then be
applicable as altered or interpreted. Notwithstanding any such holding,
alteration, or interpretation, the remainder of the terms and provisions
30
of the Plan will remain in full force and effect and will in no way be affected,
impaired, or invalidated by such holding, alteration, or interpretation. The
Confirmation Order will constitute a judicial determination and will provide
that each term and provision of the Plan, as it may have been altered or
interpreted in accordance with the foregoing, is valid and enforceable pursuant
to its terms.
10. Revocation, Withdrawal, Or Non-Consummation
The Debtors reserve the right to revoke or withdraw the Plan at any
time prior to the Confirmation Date and to file subsequent plans of
reorganization. If the Debtors revoke or withdraw the Plan as to any or all of
the Debtors, or if Confirmation or Consummation as to any or all of the Debtors
does not occur, then with respect to such Debtors, (i) the Plan will be null and
void in all respects, (ii) any settlement or compromise embodied in the Plan
(including the fixing or limiting to an amount certain any Claim or Class of
Claims), assumption or rejection of executory contracts or leases effected by
the Plan, and any document or agreement executed pursuant to the Plan will be
deemed null and void, and (iii) nothing contained in the Plan, and no acts taken
in preparation for Consummation of the Plan, will (a) constitute or be deemed to
constitute a waiver or release of any Claims by or against, or any Interests in,
the Debtors or any other Person, (b) prejudice in any manner the rights of the
Debtors or any Person in any further proceedings involving the Debtors, or (c)
constitute an admission of any sort by the Debtors or any other Person.
11. Plan Supplement
Any and all exhibits, lists, or schedules not filed with the Plan will
be contained in the Plan Supplement and filed with the Clerk of the Bankruptcy
Court seven days prior to the date set for the hearing on Confirmation. Upon its
filing with the Bankruptcy Court, the Plan Supplement may be inspected in the
office of the Clerk of the Bankruptcy Court during normal court hours or may be
viewed on the Bankruptcy Court's website at www.nysb.uscourts.gov. A password
is needed to gain access to case files. Details on how to obtain a password are
available on the Bankruptcy Court's website. Holders of Claims or Interests may
obtain a copy of the Plan Supplement upon written request to the Company in
accordance with Article XV.G of the Plan.
12. Indemnification Obligations
Any claims of any of the Debtors' current or former directors or
officers for indemnification based upon any obligations or rights of any of the
Debtors to defend, indemnify, or limit the liability of its current and former
directors or officers pursuant to any Debtors' charter, by-laws, applicable
state law, or specific agreement in respect of any claims, demands, suits,
causes of action, or proceedings against such directors or officers based upon
any act or omission related to such current or former directors' or officers'
services with, for, or on behalf of any of the Debtors prior to the Consummation
Date, and any reimbursement obligations arising in respect of the foregoing
(collectively, the "Indemnity Claims") shall be treated as follows, regardless
of whether such directors or officers filed proofs of claim by the applicable
Bar Date, if any: (i) the Indemnity Claims shall be discharged on the date that
is six years after the Consummation Date and (ii) during the period between the
Consummation Date and the sixth anniversary thereof, Reorganized PhyCor shall
pay the Indemnity Claims in the same manner and on the same legal bases as
PhyCor would have done prior to the Petition Date under applicable
non-bankruptcy law, provided, however, that (a) for the first three years of
such six-year period, the holders of the Indemnity Claims shall look first to
and recover from the extended reporting period (tail) coverage under the
directors and officers liability insurance purchased in accordance with Article
X.B.1.d of the Plan and secondly, if such insurance coverage has been exhausted,
then from Reorganized PhyCor,whose aggregate liability on account of all such
Indemnity Claims hereunder shall not exceed $2,500,000; and (b) for the second
three years of such six-year period, the holders of the Indemnity Claims shall
look only to and recover from the extended reporting period (tail) coverage
under the directors and officers liability insurance purchased in accordance
with Article X.B.1.d of the Plan and Reorganized PhyCor shall have no further
liability for the payment of Indemnity Claims. Notwithstanding the foregoing,
Reorganized PhyCor shall be liable for and shall pay any insurance deductible
payable in respect of any Indemnity Claim made under the provisions of clauses
(ii)(a) and (ii)(b) above.
13. Term Of Injunctions Or Stays
Unless otherwise provided herein or in the Confirmation Order, all
injunctions or stays provided for in the Chapter 11 Cases under sections 105 or
362 of the Bankruptcy Code or otherwise, and outstanding on the Confirmation
Date (excluding any injunctions or stays contained in this Plan or the
Confirmation Order), will remain in full force and effect until the Consummation
Date.
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14. Governing Law
Unless a rule of law or procedure is supplied by federal law (including
the Bankruptcy Code and Bankruptcy Rules), the laws of (i) the State of New York
will govern the construction and implementation of the Plan and any agreements,
documents, and instruments executed in connection with the Plan and (ii) the
laws of the state of Tennessee will govern corporate governance matters with
respect to the Company, in either case without giving effect to the principles
of conflicts of law thereof.
15. Distributions Under The Plan
(a) General
Except as otherwise provided in the Plan or as ordered by the
Bankruptcy Court, distributions to be made on account of Claims that are Allowed
Claims as of the Consummation Date will be made on the Distribution Date. The
New Securities to be issued under the Plan will be deemed issued as of the
Distribution Date regardless of the date on which they are actually distributed.
Distributions on account of Claims that first become Allowed Claims after the
Consummation Date will be made pursuant to Articles III, VII, and IX of the
Plan.
Except as otherwise provided in the Plan or the Confirmation Order, all
Cash necessary for Reorganized PhyCor to make payments pursuant to the Plan will
be obtained from the Debtors' existing Cash balances and the liquidation of the
Debtors' remaining non-Cash assets, if any. Reorganized PhyCor, or such
third-party Disbursing Agent(s) as it may employ, in its sole discretion, will
initially make all distributions of Cash and New Common Stock required to be
distributed under the applicable provisions of the Plan, except with respect to
a holder of a Claim whose distribution is governed by an indenture or other
agreement and is administered by an indenture trustee, agent, or servicer. The
latter such distributions will be deposited with the appropriate indenture
trustee, agent, or servicer, who will deliver such distributions to the holders
of Claims in accordance with the provisions of this Plan and the terms of the
relevant indenture or other governing agreement. Each Disbursing Agent will
serve without bond, and each third-party Disbursing Agent will receive, without
further Bankruptcy Court approval, reasonable compensation for distribution
services rendered pursuant to the Plan and reimbursement of reasonable
out-of-pocket expenses incurred in connection with such services from
Reorganized PhyCor on terms acceptable to Reorganized PhyCor.
Cash payments made pursuant to the Plan will be in U.S. dollars and
will be made, at the option and in the sole discretion of Reorganized PhyCor, by
checks drawn on or wire transfer from, a domestic bank selected by Reorganized
PhyCor.
(b) Delivery Of 4.5% Convertible Subordinated Debentures
By Claimants Who Elect To Reduce Their Claims To
$50,000
To accurately record the Class 4 claimants holding in excess of $50,000
(including unpaid interest accrued through January 31, 2002) of PhyCor's 4.5%
Convertible Subordinated Debentures who properly elect to reduce their claims to
$50,000 and therefore receive distributions as Class 3 claimants, such claimants
must (i) vote on the Plan using the Class 4 Ballot and (ii) deliver the 4.5%
Convertible Subordinated Debenture certificate(s) to SunTrust Bank, the
Indenture Trustee, by 5:00 p.m. on the Voting Deadline. See "Summary Of The Plan
- - Classification And Treatment Of Claims And Interests - Impaired Classes Of
Claims And Interests - Class 3: Convenience Claims". AS OF JANUARY 31, 2002, THE
ACCRUED INTEREST FOR EACH $1,000 PRINCIPAL AMOUNT OF 4.5% CONVERTIBLE
SUBORDINATED DEBENTURES IS $67.19. IF THE PRINCIPAL PORTION OF YOUR 4.5%
CONVERTIBLE SUBORDINATED DEBENTURE CLAIM IS $47,000 OR MORE, THEN PRINCIPAL PLUS
ACCRUED INTEREST WILL EXCEED $50,000 AND YOU WILL NEED TO ELECT TO REDUCE YOUR
TOTAL CLAIM TO $50,000 IF YOU WANT TO RECEIVE A DISTRIBUTION IN CASH.
(c) Record Date For Distributions
The record date for distributions to holders of Allowed General
Unsecured Claims will be the seventh Business Day following entry of the
Confirmation Order (the "Distribution Record Date"). At the close of business on
the Distribution Record Date, the transfer ledgers for the 4.5% Convertible
Subordinated Debentures
32
and Zero Coupon Notes will be closed and there will be no further changes in the
record holders of the 4.5% Convertible Subordinated Debentures and Zero Coupon
Notes. Reorganized PhyCor, the Indenture Trustee, and the Disbursing Agent, if
any, will have no obligation to recognize any transfer of such 4.5% Convertible
Subordinated Debentures and Zero Coupon Notes occurring after the Distribution
Record Date, and will be entitled instead to recognize and deal for all purposes
with only those record holders stated on the transfer ledgers as of the close of
business on the Distribution Record Date.
(d) Calculation Of Distribution Amounts Of New Common
Stock
No fractional shares of New Common Stock will be issued or distributed
under the Plan or by Reorganized PhyCor or any Disbursing Agent, indenture
trustee, agent, or servicer. Each Person entitled to receive New Common Stock
will receive the total number of whole shares of New Common Stock to which such
Person is entitled. Whenever any distribution to a particular Person would
otherwise call for distribution of a fraction of a share of New Common Stock,
the Disbursing Agent will allocate separately one whole share or option to such
Person and other Persons similarly entitled, in order of the fractional portion
of their entitlements, starting with the largest such fractional portion, until
all remaining whole shares or options have been allocated. Upon the allocation
of a whole share or option to a Person in respect of the fractional portion of
its entitlement, such fractional portion will be cancelled. If two or more
Persons are entitled to equal fractional entitlements and the number of Persons
so entitled exceeds the number of whole shares or options which remain to be
allocated, the Disbursing Agent will allocate the remaining whole shares or
options to such holders by random lot or such other impartial method as the
Disbursing Agent deems fair. Upon the allocation of all of the whole shares or
options authorized under the Plan, all remaining fractional portions of the
entitlements will be cancelled and will be of no further force and effect. The
Disbursing Agent, or any appropriate indenture trustee, agent, or servicer will
not make any distribution of less than five shares of New Common Stock with
respect to any Claim unless a request therefor is made in writing to such
Disbursing Agent, indenture trustee, agent, or servicer, as the case may be.
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(e) Delivery Of Distributions And Undeliverable Or
Unclaimed Distributions
(i) Delivery Of Distributions In General
Distributions to holders of Allowed Claims will be made by the
Disbursing Agent, or the appropriate indenture trustee, agent, or servicer (i)
at the addresses set forth on the proofs of Claim filed by such holders (or at
the last known addresses of such holders if no proof of Claim is filed or if the
Debtors have been notified of a change of address), (ii) at the addresses set
forth in any written notices of address changes delivered to the Disbursing
Agent after the date of any related proof of Claim, (iii) at the addresses
reflected in the Schedules if no proof of Claim has been filed and the
Disbursing Agent has not received a written notice of a change of address, (iv)
in the case of the holder of a Claim which is governed by an indenture or other
agreement and is administered by an indenture trustee, agent, or servicer, at
the addresses contained in the official records of such indenture trustee,
agent, or servicer, or (v) at the addresses set forth in a properly completed
letter of transmittal accompanying securities properly remitted to the Debtors.
(ii) Undeliverable And Unclaimed Distributions
Holding Of Undeliverable And Unclaimed Distributions. If any holder's
distribution is returned as undeliverable, no further distributions to such
holder will be made unless and until the Disbursing Agent or the appropriate
indenture trustee, agent, or servicer is notified of such holder's then-current
address, at which time all missed distributions will be made to such holder
without interest. Amounts in respect of undeliverable distributions made through
the Disbursing Agent or the indenture trustee, agent, or servicer will be
returned to Reorganized PhyCor until such distributions are claimed.
Failure To Claim Undeliverable Distributions. All claims for
undeliverable distributions must be made on or before the second anniversary of
the Consummation Date, after which date (i) all Cash in respect of such
undeliverable distributions, including interest accrued thereon, will revert to
Reorganized PhyCor and (ii) all New Common Stock in respect of such
undeliverable distributions will be cancelled notwithstanding any contrary
federal or state escheat laws.
(f) Fractional Dollars; De Minimis Distributions
Notwithstanding any other provision of the Plan, no payments of
fractions of dollars will be made. Whenever any payment of a fraction of a
dollar under the Plan would otherwise be called for, the actual payment made
will reflect a rounding of such fraction to the nearest whole dollar (up or
down), with half dollars being rounded down. The Disbursing Agent, or any
indenture trustee, agent, or servicer, as the case may be, will not make any
payment of less than $25.00 with respect to any Claim unless a request therefor
is made in writing to such Disbursing Agent, indenture trustee, agent, or
servicer.
16. Resolution And Treatment Of Disputed, Contingent, And
Unliquidated Claims
(a) Objection Deadline; Prosecution Of Objections
The Company or Reorganized PhyCor, as the case may be, will be allowed
up to 120 days after the Consummation Date (unless extended by an order of the
Bankruptcy Court) to file objections to Claims, other than Claims deemed Allowed
pursuant to express provisions of the Plan, with the Bankruptcy Court and serve
such objections upon the holders of each of the Claims to which objections are
made. Notwithstanding the foregoing, nothing contained in the Plan will limit
the Reorganized Company's right to object to Claims, if any, filed or amended
more than 120 days after the Consummation Date.
The objection procedure described above will apply to any and all
Claims that are listed in the Schedules as disputed, contingent, and/or
unliquidated only if the holder of any such Claim filed a proof of Claim on
account of such Claim. The Debtors reserve their right to seek an order
expunging and disallowing any Claim that is listed in the Schedules as disputed,
contingent, and/or unliquidated, and for which no proof of Claim was timely
filed.
Except as otherwise provided in the Plan, nothing will affect the
Debtors' or Reorganized PhyCor's rights and defenses, both legal and equitable,
with respect to any Claims, other than Claims deemed Allowed pursuant to express
provisions of the Plan, including, but not limited to, all rights with respect
to legal and equitable defenses to setoffs against Claims or recoupments.
34
(b) No Distributions Pending Allowance
No payments or distributions will be made with respect to all or any
portion of a Disputed Claim unless and until all objections to such Disputed
Claim have been settled or withdrawn or have been determined by Final Order and
the Disputed Claim, or some portion thereof, has become an Allowed Claim.
Disputed Claims are Claims, or portions of Claims, that are neither Allowed
Claims nor Disallowed Claims, as the case may be, and include, but are not
limited to, Claims that have not been Scheduled by the Debtors; Claims that have
been Scheduled at zero or as contingent, unliquidated, or disputed; Claims that
are the subject of a proof of Claim that differs in nature, amount, or priority
from the Debtors' Schedules; and Claims that have not yet been allowed or
disallowed by a Final Order.
(c) Disputed Claims Reserve
Reorganized PhyCor or the Disbursing Agent will, on the Distribution
Date, or as soon thereafter as practicable, establish and fund (from the Cash
and New Common Stock or other property to be distributed under the Plan) the
Disputed Claims Reserve. In general, the purpose of the Disputed Claims Reserve
is to ensure that sufficient Cash and New Common Stock or other property is set
aside to distribute to holders of Disputed Claims the amounts to which they are
entitled under the Plan if, as, and when their Disputed Claims become Allowed
Claims. The amount of Cash, New Common Stock, or other property to be withheld
by the Disbursing Agent on account of each Disputed Claim will be determined in
accordance with the provisions of Article IX of the Plan.
Neither the Disbursing Agent nor any other party will be entitled to
vote any shares of the New Common Stock held in the Disputed Claims Reserve. In
the event that any matter requires approval by the shareholders of Reorganized
PhyCor prior to the distribution or cancellation of all shares of New Common
Stock from the Disputed Claims Reserve, the shares of New Common Stock held by
the Disbursing Agent will be deemed, for voting purposes only, not to have been
issued.
(d) Distributions After Allowance
Reorganized PhyCor or the Disbursing Agent, as the case may be, will
make payments and distributions from the Disputed Claims Reserve to each holder
of a Disputed Claim that has become an Allowed Claim in accordance with the
provisions of the Plan governing the class of Claims to which such holder
belongs. On the date which is 30 days after the date that the order or judgment
of the Bankruptcy Court allowing all or part of such Claim becomes a Final
Order, the Disbursing Agent will distribute to the holder of such Claim any
Cash, New Common Stock, or other property in the Disputed Claims Reserve that
would have been distributed on the Distribution Date had such Allowed Claim been
allowed on the Distribution Date. After a Final Order has been entered, or other
final resolution has been reached, with respect to each Disputed Claim, (i) any
New Common Stock or other property held in the Disputed Claims Reserve will be
distributed pro rata to holders of Allowed Claims entitled thereto under the
terms of the Plan and (ii) any Cash or other property remaining in the Disputed
Claims Reserve will become property of Reorganized PhyCor. All distributions
made under Article IX of the Plan on account of an Allowed Claim will be made
together with any dividends, payments, or other distributions made on account
of, as well as any obligations arising from, the distributed property, as if
such Allowed Claim had been an Allowed Claim on the Distribution Date. In no
event, however, will the Disbursing Agent be required to make distributions
under Article IX of the Plan more frequently than once every 180 days or to make
any individual payments in an amount less than $25.00.
17. Surrender Of Cancelled Debt Instruments Or Securities
On or before the Distribution Date, or as soon thereafter as
practicable, each holder of an instrument evidencing a Claim on account of an
Existing Security (a "Certificate"), except in the case of certain Class 4
claimants who have previously delivered debt instruments to the Indenture
Trustee, will surrender such Certificate to the Disbursing Agent or, with
respect to indebtedness that is governed by an indenture or other agreement, the
respective indenture trustee, agent, or servicer, as the case may be, and such
Certificate will be cancelled. In the case of a Class 4 claimant who holds at
least $17,500,000 in principal amount of 4.5% Convertible Subordinated
Debentures, the Certificate will be accompanied by an Affirmation in the form
attached as Exhibit F to the Plan. The Affirmation will be included with the
letter of transmittal regarding the surrender of Certificates that will be
forwarded to each Class 4 claimant by the Information Agent as soon as
practicable after Confirmation.
35
No distribution of property under the Plan will be made to or on behalf
of any such holder unless and until such Certificate and Affirmation are
received by the Disbursing Agent or the appropriate indenture trustee, agent, or
servicer or the unavailability of such Certificate is reasonably established to
the satisfaction of the Disbursing Agent or the appropriate indenture trustee,
agent, or servicer. Any such holder who fails to surrender or cause to be
surrendered the appropriate Certificate or fails to execute and deliver an
affidavit of loss and indemnity reasonably satisfactory to the Disbursing Agent
or the appropriate indenture trustee, agent, or servicer, prior to the second
(2nd) anniversary of the Confirmation Date, will be deemed to have forfeited all
rights and Claims or Interests in respect of such Certificate and will not
participate in any distribution hereunder, and all property in respect of such
forfeited distribution, including accrued interest, will revert to Reorganized
PhyCor notwithstanding any contrary federal or state escheat laws.
18. Treatment Of Executory Contracts And Unexpired Leases
Under section 365 of the Bankruptcy Code, the Debtors have the right,
subject to Bankruptcy Court approval, to assume or reject any executory
contracts or unexpired leases. If the Debtors reject an executory contract or
unexpired lease that was entered into before the Petition Date, the contract
will be treated as if it had been breached on the date immediately preceding the
Petition Date, and the other party to the agreement may assert a General
Unsecured Claim for damages incurred as a result of the rejection. In the case
of rejection of employment agreements and real property leases, damages are
subject to certain limitations imposed by section 502 of the Bankruptcy Code.
(a) Rejected Contracts And Leases; Related Payments
Except as otherwise provided in the Plan, or in any contract,
instrument, release, or other agreement or document entered into in connection
with the Plan, each of the executory contracts and unexpired leases to which any
Debtor is a party, to the extent such contracts or leases are executory
contracts or unexpired leases, will be deemed to have been rejected by the
applicable Debtor on the Confirmation Date, unless such contract or lease (i)
previously (a) will have been assumed or rejected by the Debtors or (b) will
have expired or terminated pursuant to its own terms, or (ii) is listed on the
schedule of assumed contracts and leases to the Plan. The Confirmation Order
will constitute an order of the Bankruptcy Court approving the rejections
described above as of the Confirmation Date.
Any monetary amounts by which each executory contract and unexpired
lease to be assumed under the Plan may be in default will be satisfied, under
section 365(b)(1) of the Bankruptcy Code, by cure payments to be made on the
Distribution Date. If there is a dispute regarding (i) the nature or amount of
any cure payments, (ii) the ability of the Debtors or any assignee of the
Debtors to provide "adequate assurance of future performance" (within the
meaning of section 365 of the Bankruptcy Code) under the contract or lease to be
assumed, or (iii) any other matter pertaining to assumption or assignment, the
Debtors or Reorganized PhyCor will make such cure payments following the entry
of a Final Order resolving the dispute and approving the assumption and, as the
case may be, assignment.
HRT, lessors of property formerly leased by two Debtor Subsidiaries,
has filed claims against the Debtors totaling $94,722,808. Lewis-Gale Clinic,
LLC ("Lewis-Gale"), a physician group whose lease with HRT was guaranteed by
PhyCor, also filed claims against the Company totaling $26,637,428. The Debtors
disputed the HRT Claims and the Lewis-Gale Claims on the grounds, among others,
that they are contingent, unliquidated, and do not accurately state the amounts
of the Debtors' obligations, if any, to HRT and Lewis-Gale. As a result of
discussions among the Debtors, HRT, and Lewis-Gale, the parties have agreed that
on the Consummation Date, HRT and Lewis-Gale will be deemed to have undisputed,
allowed, prepetition, unsecured, non-priority claims in the Chapter 11 Cases in
the amounts of $25,501,050 (approximately) and $4,998,950 (approximately),
respectively. The allowance of the HRT and Lewis-Gale Claims in these amounts is
part of the transfer and sale of these claims to a third party. By virtue of its
purchase of the HRT and Lewis-Gale Claims, the buyer will accede to any and all
rights otherwise accorded HRT and Lewis-Gale under the Plan, including the right
to a distribution on account of the HRT and Lewis-Gale Claims. The settlement
and transfer of the HRT and Lewis-Gale Claims has the consent of the Creditors'
Committee.
(b) Rejected Contracts And Leases; Bar To Rejection
Damages
Pursuant to section 365 (d)(2) of the Bankruptcy Code, the Company
reserves the right, at any time prior to the Confirmation Date, to seek to
reject any executory contract or unexpired lease to which it is a party.
36
If the rejection, pursuant to the Plan or otherwise, of an executory
contract or unexpired lease results in a Claim, then such Claim will be forever
barred and unenforceable against the applicable Debtor or Reorganized PhyCor, as
the case may be, or the properties of either of them, unless a proof of Claim is
filed with the Clerk of the Bankruptcy Court and served upon Reorganized PhyCor
and counsel for the Reorganized PhyCor within 30 days after service of the
earlier of (i) notice of entry of the Confirmation Order or (ii) other notice
that the executory contract or unexpired lease has been rejected.
(c) Compensation And Benefit Programs
Except and to the extent previously assumed by an order of the
Bankruptcy Court, on or before the Confirmation Date, and except as set forth
below, all employee compensation and Benefit Plans of the Debtors, including
programs subject to sections 1114 and 1129(a)(13) of the Bankruptcy Code,
entered into before or after the Petition Date and not since terminated, will be
deemed to be, and will be treated as if they were, executory contracts that are
assumed under Article VIII.C of the Plan, but only to the extent that rights
under such programs are held by the Debtors or Persons who are employees of the
Debtors as of the Confirmation Date, and the Debtors' obligations under such
programs to Persons who are employees of the Debtors on the Confirmation Date
will survive confirmation of this Plan, except for (i) executory contracts or
Benefit Plans specifically rejected pursuant to the Plan (to the extent such
rejection does not violate sections 1114 and 1129(a)(13) of the Bankruptcy Code)
and (ii) such executory contracts or Benefit Plans as have previously been
rejected, are the subject of a motion to reject, or have been specifically
waived by the beneficiaries of any Benefit Plans or contracts.
PhyCor of Northern Michigan, Inc. is the only Debtor whose employees
accrued benefits under a defined benefit pension plan ("Retirement Plan"). A
defined benefit pension plan is one that provides an employee, upon retirement,
a fixed, periodic payment as determined by the terms of the plan. The Pension
Benefit Guaranty Corporation ("PBGC") is the United States government agency
that administers the mandatory termination insurance program for defined benefit
pension plans under Title IV of the Employee Retirement Income Security Act
("ERISA"). The PBGC guarantees the payment of certain pension benefits upon
termination of a defined benefit pension plan. The Retirement Plan is covered by
Title IV of ERISA. The Retirement Plan is currently being terminated by the plan
sponsor. As a result of the termination of the Retirement Plan, PhyCor of
Northern Michigan, Inc. and all members of its controlled group, as defined by
sections 414(b) and (c) of the Internal Revenue Code of 1986, as amended, could
be jointly and severally liable for the unfunded benefit liabilities of the
Retirement Plan. Since PhyCor of Northern Michigan, Inc. is a wholly-owned
subsidiary of PhyCor, Inc., PhyCor, Inc. is a member of PhyCor of Northern
Michigan, Inc.'s controlled group.
19. Retention Of Exclusive Jurisdiction By The Bankruptcy Court
Pursuant to sections 105(a) and 1142 of the Bankruptcy Code, and
notwithstanding entry of the Confirmation Order and occurrence of the
Consummation Date, the Bankruptcy Court will, to the fullest extent permitted by
law, retain exclusive jurisdiction over all matters arising out of, and related
to, the Chapter 11 Cases and the Plan, as more fully set forth in Article XII of
the Plan.
20. Bar Dates
(a) Administrative Claims
The Confirmation Order will establish an Administrative Claims Bar Date
for filing Administrative Claims (except for Professional Fee Claims and the
expenses of the members of any Creditors' Committee), which date will be 30 days
after the Confirmation Date. Holders of asserted Administrative Claims, except
for Professional Fee Claims, United States Trustee fees, or the expenses of the
members of the Creditors' Committee, not paid prior to the Confirmation Date
must submit proofs of Claim on or before such Administrative Claims Bar Date or
forever be barred from doing so. The notice of Confirmation to be delivered
pursuant to Fed. R. Bankr. P. 3020(c) and 2002(f) will set forth such date and
constitute notice of this Administrative Claims Bar Date. The Debtors, or
Reorganized PhyCor, as the case may be, will have 30 days (or such longer period
as may be allowed by order of the Bankruptcy Court) following the Administrative
Claims Bar Date to review and object to such Administrative Claims before a
hearing for determination of allowance of such Administrative Claims.
(b) Professional Fee Claims
37
All final requests for compensation or reimbursement of Professional
Fee Claims pursuant to sections 327, 328, 330, 331, 503(b), or 1103 of the
Bankruptcy Code for services rendered to the Debtors or the Creditors' Committee
prior to the Confirmation Date, including requests under section 503(b)(4) of
the Bankruptcy Code by any Professional or other entity for making a substantial
contribution in the Chapter 11 Cases, must be filed and served on Reorganized
PhyCor and its counsel no later than 60 days after the Confirmation Date, unless
otherwise ordered by the Bankruptcy Court. Objections to applications of such
Professionals or other entities for compensation or reimbursement of expenses
must be filed and served on the Reorganized PhyCor, its counsel, and the
requesting Professional or other entity no later than 15 days (or such longer
period as may be allowed by order of the Bankruptcy Court) after the date on
which the applicable application for compensation or reimbursement was served.
(c) Other Claims
By order entered February 7, 2002, the Bankruptcy Court entered an
order (the "Bar Date Order") setting March 5, 2002 (the "Bar Date") as the last
date for the filing of proofs of Claim against the Debtors on account of any
Claim, other than Claims deemed Allowed under the Plan, against the Debtors,
which arose prior to the Petition Date. On March 11, 2002, the Debtors filed
amendments to certain of their Schedules, thereby establishing a supplemental
Bar Date of April 17, 2002 for only the creditors affected by such amendments.
Notice of the supplemental Bar Date of April 17, 2002 was given to the creditors
affected by the amendments. Pursuant to the Bar Date Order and Fed. R. Bankr. P.
3003(c)(2), any entity or person who is required to file a timely proof of Claim
in the form and manner specified by the Bar Date Order and that failed to do so
on or before the Bar Date (or, in the case of a claim based upon the Debtors'
rejection of an unexpired lease or executory contract, before the Rejection
Damages Bar Date, as defined in the Bar Date Order), will not be entitled to
vote on the Plan and will not receive or retain, or be entitled to receive or
retain, any property or any payment or distribution of property from the
Debtors, or their successor, or assigns with respect to such Claim.
21. Miscellaneous
(a) Interest On Claims
Unless otherwise specifically provided for in the Plan or Confirmation
Order, or required by applicable bankruptcy law, postpetition interest will not
accrue or be paid on any Claims, and no holder of a Claim will be entitled to
interest accruing on or after the Petition Date on any Claim.
(b) Preservation Of Rights Of Action; Settlement Of
Claims
Preservation Of Rights Of Action. Except as otherwise provided in the
Plan, the Confirmation Order, or in any document, instrument, release, or other
agreement entered into in connection with the Plan, in accordance with section
1123(b) of the Bankruptcy Code, the Debtors and their Estates will retain the
Litigation Claims. Reorganized PhyCor, as the successor in interest to the
Debtors, may enforce, sue on, settle or compromise (or decline to do any of the
foregoing) any or all of the Litigation Claims. The failure of the Debtors to
list a claim, right of action, suit, or proceeding on Exhibit D to the Plan will
not constitute a waiver or release by the Debtors or their Estates of such
claim, right of action, suit, or proceeding.
Settlement Of Litigation Claims. At any time after the Confirmation
Date and before the Consummation Date, notwithstanding anything in this Plan to
the contrary, the Debtors may settle some or all of the Litigation Claims with
the approval of the Bankruptcy Court pursuant to Fed. R. Bankr. P. 9019.
Class Action Settlement. PhyCor, Joseph C. Hutts, Derril W. Reeves,
Richard D. Wright, John K. Crawford, and Thompson S. Dent (the "Settling
Defendants") and the plaintiffs in the various actions comprising the
Shareholder Litigation Claims (the "Litigation") other than Parul Patel (the
"Class Plaintiffs") have agreed in principle to settle their respective claims
as they pertain to the Settling Defendants as follows: (i) the Settling
Defendants (through their insurer) will deposit the sum of $3.4 million into an
interest bearing escrow account for distribution in accordance with the order of
the District Court and (ii) the Class Plaintiffs will dismiss with prejudice all
claims pending in the Litigation against the Settling Defendants. The settlement
is subject to the occurrence of certain conditions, the approval of all of its
material terms by the District Court and the expiration of the time for appeal
from such approval. A notice of settlement, including
38
a copy of a memorandum of understanding outlining the terms of the settlement,
was filed with the District Court on March 12, 2002. Fully executed settlement
documents were filed with the District Court on April 12, 2002 and any opt-outs
or objections to the settlement must be filed with the District Court on or
before July 8, 2002. The final hearing on the settlement is scheduled for July
20, 2002 at 1:00 p.m. Reorganized PhyCor will take whatever steps are necessary
on its part to complete the settlement of the Litigation. Subject to approval by
the District Court, KPMG has also settled the claims against it in the
Litigation.
With respect to the state court derivative action filed by Parul Patel,
Mr. Patel has not agreed to settle his claim. Under the terms of the Plan, Mr.
Patel's interest as a holder of a Class 6 Common Stock Claim will be cancelled
and his interest as a holder of a Class 7 Shareholder Litigation Claim will be
discharged. Finally, under the terms of the Plan, PhyCor is releasing any claims
against its current and former officers and directors that it may have in
respect of the Patel action. Accordingly, upon Confirmation, Mr. Patel will lack
standing to assert any similar claims against either PhyCor or its officers and
directors.
(c) Withholding And Reporting Requirements
In connection with the Plan and all distributions thereunder, the
Disbursing Agent will comply with all withholding and reporting requirements
imposed by any federal, state, local, or foreign taxing authority, and all
distributions hereunder will be subject to any such withholding and reporting
requirements.
D. CONFIRMATION OF THE PLAN
Described below are certain important considerations under the
Bankruptcy Code in connection with confirmation of the Plan.
1. Confirmation Hearing
Section 1128(a) of the Bankruptcy Code requires the Bankruptcy Court,
after notice, to hold a hearing on confirmation of the Plan (the "Confirmation
Hearing"). Section 1128(b) of the Bankruptcy Code provides that any party in
interest may object to confirmation of the Plan.
The Debtors will provide notice of the Confirmation Hearing to all
known Creditors and Interest holders or their representatives (the "Confirmation
Notice"). The Confirmation Hearing may be adjourned from time to time by the
Bankruptcy Court without further notice except for an announcement of the
adjourned date made at the Confirmation Hearing or any adjournment thereof.
Objections to confirmation must be filed and served in the manner and within the
time set forth in the Confirmation Notice and must (i) be in writing, (ii)
comply with the Federal Rules of Bankruptcy Procedure and the Local Bankruptcy
Rules, (iii) set forth the name of the objector, and the nature and amount of
any Claim or Interest asserted by the objector against or in the Debtors, their
Estates, or their property, and (iv) state with particularity the legal and
factual bases for the objection. OBJECTIONS TO CONFIRMATION THAT ARE NOT TIMELY
FILED AND SERVED MAY NOT BE CONSIDERED BY THE BANKRUPTCY COURT AND MAY BE
OVERRULED.
2. Requirements For Confirmation Of The Plan
The Bankruptcy Court will determine at the Confirmation Hearing whether
the following requirements for confirmation, set forth in section 1129(a) of the
Bankruptcy Code, have been satisfied:
(a) The Plan complies with the applicable provisions of
the Bankruptcy Code.
(b) The Debtors have complied with the applicable
provisions of the Bankruptcy Code.
(c) The Plan has been proposed in good faith and not by
any means forbidden by law.
(d) Any payment made or promised by the Debtors or by a
person issuing securities or acquiring property under
the Plan for services or for costs and expenses in,
or in connection with, the Chapter 11 Cases, or in
connection with the Plan and incident to the Chapter
11 Cases, has
39
been disclosed to the Bankruptcy Court, and any such
payment made before Confirmation of the Plan is
reasonable, or if such payment is to be fixed after
Confirmation of the Plan, such payment is subject to
the approval of the Bankruptcy Court as reasonable.
(e) The Debtors have disclosed (i) the identity and
affiliations of (a) any individual proposed to serve,
after Confirmation of the Plan, as a director,
officer, or voting trustee of Reorganized PhyCor, (b)
any affiliate of the Debtors participating in a joint
plan with the Debtors, or (c) any successor to the
Debtors under the Plan (and the appointment to, or
continuance in, such office of such individual(s) is
consistent with the interests of Creditors and
Interest holders and with public policy), and (d) the
identity of any insider that will be employed or
retained by Reorganized PhyCor and the nature of any
compensation for such insider.
(f) With respect to each Class of Claims or Interests,
each Impaired Creditor and Impaired Interest holder
either has accepted the Plan or will receive or
retain under the Plan, on account of the Claims or
Interests held by such entity, property of a value,
as of the Consummation Date, that is not less than
the amount that such entity would receive or retain
if the Debtors were to be liquidated on such date
under Chapter 7 of the Bankruptcy Code. See
"Feasibility Of The Plan And The Best Interests Of
Creditors Test."
(g) The Plan provides that Administrative Claims and
Priority Claims other than Priority Tax Claims will
be paid in full on the Consummation Date and that
Priority Tax Claims will receive on account of such
Claims deferred cash payments, over a period not
exceeding six years after the date of assessment of
such Claims, of a value, as of the Consummation Date,
equal to the Allowed Amount of such Claims, except to
the extent that the holder of any such Claim has
agreed to a different treatment.
(h) If a Class of Claims is Impaired under the Plan, at
least one Class of Impaired Claims has accepted the
Plan, determined without including any acceptance of
the Plan by insiders holding Claims in such Class.
(i) Confirmation of the Plan is not likely to be followed
by the liquidation, or the need for further financial
reorganization, of the Debtors or any successor to
them under the Plan, unless such liquidation or
reorganization is proposed in the Plan. See
"Feasibility Of The Plan And The Best Interests Of
Creditors Test."
(j) The Plan provides for the continuation after the
Consummation Date of all retiree benefits, if any, at
the level established pursuant to section
1114(e)(1)(B) or 1114(g) of the Bankruptcy Code at
any time prior to Confirmation of the Plan, for the
duration of the period PhyCor has obligated itself to
provide such benefits.
The Debtors believe that, upon receipt of the requisite acceptances,
the Plan will satisfy all the statutory requirements of Chapter 11 of the
Bankruptcy Code, that they have complied or will have complied with all of the
requirements of Chapter 11, and that the Plan is being proposed and will be
submitted to the Bankruptcy Court in good faith.
3. Confirmation Without Acceptance Of All Impaired Classes -
"Cramdown"
The Debtors will request confirmation of the Plan, as it may be
modified from time to time, under section 1129(a) of the Bankruptcy Code, and
have reserved the right to modify the Plan to the extent, if any, that
confirmation pursuant to section 1129(b) of the Bankruptcy Code requires
modification.
Section 1129(b) of the Bankruptcy Code provides that a plan can be
confirmed even if it is not accepted by all impaired classes of claims and
interests, as long as at least one impaired class of claims has accepted it.
Thus, if the requisite acceptances are received, the Bankruptcy Court may
confirm the Plan notwithstanding the rejection, deemed or otherwise, of an
Impaired Class of Claims or Interests if the Plan "does not discriminate
unfairly" and is "fair and equitable" as to each Impaired Class that has
rejected, or is deemed to have rejected, the Plan.
40
A plan does not discriminate unfairly within the meaning of the
Bankruptcy Code if a rejecting impaired class is treated equally with respect to
other classes of equal rank.
A plan is fair and equitable as to a class of unsecured claims that
rejects the plan if, among other things, the plan provides that (i) each holder
of a claim in the rejecting class will receive or retain on account of its claim
property that has a value, as of the effective date of the plan, equal to the
allowed amount of the claim or (ii) no holder of a claim or interest that is
junior to the claims of the rejecting class will receive or retain under the
plan any property on account of such junior claim or interest.
A plan is fair and equitable as to a class of equity interests that
rejects the plan if the plan provides that (i) each holder of an interest
included in the rejecting class receive or retain on account of that interest
property that has a value, as of the effective date of the plan, equal to the
greatest of the allowed amount of any fixed liquidation preference to which such
holder is entitled, any fixed redemption price to which such holder is entitled,
or the value of such interest or (ii) no holder of an interest that is junior to
the interest of the rejecting class will receive or retain under the plan any
property on account of such junior interest.
As described above, holders of Interests and Claims in Classes 5, 6, 7,
and 8 will not receive or retain property under the Plan on account of their
Interests and Claims in such Classes. Accordingly, under section 1126(g) of the
Bankruptcy Code, Classes 5, 6, 7, and 8 are presumed to have rejected the Plan.
The Debtors intend to request confirmation of the Plan under section 1129(b) of
the Bankruptcy Code notwithstanding the deemed rejection of the Plan by Classes
5, 6, 7, and 8 and reserve the right to seek confirmation of the Plan under
section 1129(b) of the Bankruptcy Code notwithstanding the rejection of the Plan
by other classes of Claims or Interests.
The Debtors believe that the Plan may be confirmed pursuant to the
above-described "cramdown" provisions, over the dissent of certain Classes of
Claims and Interests, in view of the treatment proposed for such Classes. The
Debtors believe that the treatment under the Plan of the holders of Interests
and Claims in Classes 5, 6, 7, and 8 will satisfy the "fair and equitable" test
because, although no distribution will be made in respect of Interests and
Claims in such Classes and, as a result, such Classes will be deemed to have
rejected the Plan, no Class junior to these non-accepting Classes will receive
or retain any property under the Plan. In addition, the Debtors do not believe
that the Plan unfairly discriminates against any dissenting Classes.
4. Conditions To Confirmation And Consummation
(a) Conditions To Confirmation
The following are conditions precedent to confirmation of the Plan:
(i) The Bankruptcy Court has entered an order approving
the Disclosure Statement with respect to the Plan as
containing adequate information within the meaning of
section 1125 of the Bankruptcy Code.
(ii) The Substantive Consolidation Order, which may be the
Confirmation Order, will be in form and substance
reasonably acceptable to the Debtors and the
Creditors' Committee, and has been entered by the
Bankruptcy Court prior to or contemporaneously with
the Confirmation Order.
(b) Conditions To Consummation
The following are conditions precedent to the occurrence of the
Consummation Date, each of which may be satisfied or waived in accordance with
Article X.C of the Plan:
(i) The Confirmation Date must have occurred and the
Confirmation Order, in form and substance reasonably
acceptable to the Debtors, Warburg, Pincus, the
Noteholders' Committee, and the Creditors' Committee,
confirming the Plan, as the same may have been
modified, must have been entered and must, among
other things, provide that:
41
(A) the Debtors and Reorganized PhyCor are
authorized and directed to take all actions
necessary or appropriate to enter into,
implement and consummate the instruments,
releases, and other agreements or documents
created in connection with the Plan;
(B) the provisions of the Confirmation Order are
nonseverable and mutually dependent;
(C) all executory contracts or unexpired leases
assumed or assumed and assigned by the
Debtors during the Chapter 11 Cases or under
the Plan will remain in full force and
effect for the benefit of Reorganized PhyCor
or its assignee(s) thereof, notwith standing
any provision in such contract or lease
(including those described in sections
365(b)(2) and (f) of the Bankruptcy Code)
that prohibits such assignment or transfer
or that enables, permits, or requires
termination of such contract or lease;
(D) the Debtors and Reorganized PhyCor must have
purchased directors and officers liability
insurance effective upon the Consummation
Date in the amount of $5 million to be
effective for a period of six years from and
after the Consummation Date;
(E) the transfers of property by the Debtors (i)
to Reorganized PhyCor (a) are or will be
legal, valid, and effective transfers of
property, (b) vest or will vest Reorganized
PhyCor with good title to such property free
and clear of all liens, charges, Claims,
encumbrances, or interests, except as
expressly provided in the Plan or Confirma
tion Order, (c) do not and will not
constitute avoidable transfers under the
Bankruptcy Code or under applicable
bankruptcy or nonbankruptcy law, and (d) do
not and will not subject Reorganized PhyCor
to any liability by reason of such transfer
under the Bankruptcy Code or under
applicable nonbankruptcy law, including,
without limitation, any laws affecting
successor, transferee, or stamp or recording
tax liability and (ii) to holders of Claims
under the Plan are for good consideration
and value;
(F) except as expressly provided in the Plan,
the Debtors are discharged effective upon
the Confirmation Date from any "debt" (as
that term is defined in section 101(12) of
the Bankruptcy Code), and the Debtors'
liability in respect thereof is extinguished
completely, whether or not reduced to
judgment, liquidated or unliquidated,
contingent or noncontingent, asserted or
unasserted, fixed or unfixed, matured or
unmatured, disputed or undisputed, legal or
equitable, or known or unknown, or that
arose from any agreement of the Debtors that
has either been assumed or rejected in the
Chapter 11 Cases or pursuant to the Plan, or
obligation of the Debtor incurred before the
Confirmation Date, or from any conduct of
the Debtors prior to the Confirmation Date,
or that otherwise arose before the
Confirmation Date, including, without
limitation, all interest, if any, on any
such debts, whether such interest accrued
before or after the Petition Date;
(G) the Plan does not provide for the
liquidation of all or substantially all of
the property of the Debtor and its
Confirmation is not likely to be followed by
the liquidation of the Reorganized Debtor or
the need for further financial reorganiza
tion;
(H) all Existing Securities and Interests will
be cancelled effective upon the Consumma
tion Date;
(I) the New Common Stock issued under the Plan
in exchange for Claims is exempt from
registration under the Securities Act of
1933 pursuant to section 1145 of the
Bankruptcy Code, except to the extent that
any holders of New Common Stock are
"underwriters," as that term is defined in
section 1145 of the Bankruptcy Code; and
(J) the waivers, exculpations, and injunctions
described in Article XIII of the Plan are
approved.
42
(ii) Reorganized PhyCor must have access to Cash, in the
form of dividends, intercompany advances, or
otherwise from its subsidiaries, in an amount
acceptable to Reorganized PhyCor, to provide it with
working capital to meet ordinary and peak
requirements.
(iii) All authorizations, consents, and regulatory
approvals required, if any, in connection with the
consummation of the Plan must have been obtained.
(iv) The following documents and agreements, in form
satisfactory to the Debtors and the Noteholders'
Committee, must have been executed and delivered, and
all conditions precedent thereto must have been
satisfied:
(A) Reorganized PhyCor's Amended and Restated
Charter and By-laws; and
(B) Management Incentive Plan.
(v) All other actions, documents and agreements necessary
to implement the Plan must have been effected or
executed.
(vi) The Confirmation Order must have become a Final
Order.
(c) Waiver Of Conditions
Each of the conditions set forth in D.4.(a) and D.4.(b) above, other
than those set forth in D.4.(a)(i), D.4.(b)(i), and D.4.(b)(ii), may be waived
in whole or in part by the Debtors or Reorganized PhyCor without any notice to
parties in interest or the Bankruptcy Court and without a hearing.
(d) Modifications And Amendments
The Debtors may alter, amend, or modify the Plan or any Exhibits
thereto under section 1127(a) of the Bankruptcy Code at any time prior to the
Confirmation Date. After the Confirmation Date and prior to "substantial
consummation" of the Plan, as defined in section 1101(2) of the Bankruptcy Code,
the Debtors may, under section 1127(b) of the Bankruptcy Code, institute
proceedings in the Bankruptcy Court to remedy any defect or omission or
reconcile any inconsistencies in the Plan, the Disclosure Statement approved
with respect to the Plan, or the Confirmation Order, and to accomplish such
matters as may be necessary to carry out the purpose and effect of the Plan so
long as such proceedings do not adversely affect the treatment of holders of
Claims or Interests under the Plan; except that prior notice of such proceedings
will be served in accordance with the Federal Rules of Bankruptcy Procedure or
order of the Bankruptcy Court.
E. EFFECTS OF CONSUMMATION
1. Binding Effect
From and after the Confirmation Date, the Plan will be binding upon and
inure to the benefit of the Debtors, all present and former holders of Claims
against and Interests in the Debtors, and their respective successors and
assigns, including, but not limited to, Reorganized PhyCor, and all other
parties-in-interest in the Chapter 11 Cases.
2. Discharge Of The Debtors
All consideration distributed and treatment of Claims under the Plan
will be in exchange for, and in complete satisfaction, settlement, discharge,
and release of, all Claims against and Interests in the Debtors of any nature
whatsoever or against any of the Debtors' assets or properties. Except as
otherwise expressly provided in the Plan, entry of the Confirmation Order will
act as a discharge of all Claims against, liens on, and Interests in each of the
Debtors, their assets, and its properties, arising at any time before the entry
of the Confirmation Order, regardless of whether a proof of Claim or proof of
Interest therefor was filed, whether the Claim or Interest is Allowed, or
whether the holder thereof votes to
43
accept the Plan or is entitled to receive a distribution thereunder, subject to
the occurrence of the Consummation Date. Upon entry of the Confirmation Order,
and subject to the occurrence of the Distribution Date, any holder of such
discharged Claim or Interest will be precluded from asserting against the
Debtors or any of their assets or properties any other or further Claim or
Interest based upon any document, instrument, act, omission, transaction, or
other activity of any kind or nature that occurred before the date of entry of
the Confirmation Order. The Confirmation Order will be a judicial determination
of discharge of all liabilities of the Debtors, subject to the occurrence of the
Distribution Date.
3. Injunction
In accordance with section 524 of the Bankruptcy Code, the discharge
provided by the Plan and section 1141 of the Bankruptcy Code will act as an
injunction against the commencement or continuation of any action, employment of
process, or act to collect, offset, or recover the Claims and Interests
discharged hereby. Except as otherwise expressly provided in the Plan or the
Confirmation Order, all entities who have held, hold, or may hold Claims
against, or Interests in, the Debtors will be permanently enjoined, on and after
the Consummation Date, subject to the occurrence of the Distribution Date, from
(i) commencing or continuing in any manner any action or other proceeding of any
kind with respect to any such Claim or Interest, (ii) the enforcement,
attachment, collection, or recovery by any manner or means of any judgment,
award, decree, or order against the Debtors on account of any such Claim or
Interest, (iii) creating, perfecting, or enforcing any encumbrance of any kind
against the Debtors or against the property or interests in property of the
Debtors on account of any such Claim or Interest, and (iv) asserting any right
of setoff, subrogation, or recoupment of any kind against any obligation due
from the Debtors or against the property or interests in property of the Debtors
on account of any such Claim or Interest. The foregoing injunction will extend
to successors of the Debtors (including, without limitation, Reorganized PhyCor)
and their respective properties and interests in property.
4. Debtor Releases
Effective as of the Confirmation Date, but subject to the occurrence of
the Distribution Date, the Debtors will release and be permanently enjoined from
any prosecution or attempted prosecution of any and all causes of action which
any of them has, may have, or may claim to have against (i) any current or
former director, officer, or employee of the Debtors, including any claims that
were or could have been asserted in the action entitled Parul Patel et al. v.
Hutts, Civil Action No. 99-2353-I, Chancery Court for Davidson County,
Tennessee, (ii) any member of the Noteholders' Committee and the Notholders'
Committee's attorneys, (iii) any member of the Creditors' Committee and the
Creditors' Committee's attorneys, and (iv) Warburg, Pincus and/or its general
and/or limited partners, in any way relating to the Debtors, the Chapter 11
Cases, or the Plan; except that the foregoing will not operate as a waiver of or
release from any causes of action arising out of (x) the rights of the Debtors
or Reorganized PhyCor to enforce the Plan and the contracts, instruments,
releases, and other agreements or documents delivered thereunder, (y) any
express written contractual obligation owing by any such director, officer, or
employee of the Debtors, or (z) the willful misconduct, gross negligence, or
breach of fiduciary duty of any of the foregoing released parties in connection
with, related to, or arising out of the Chapter 11 Cases, the pursuit of
confirmation of the Plan, the consummation of the Plan, the administration of
the Plan, or the property to be distributed under the Plan. The releases
provided herein are justified based upon the substantial contribution of the
released parties to the Debtors' reorganization, including the formulation and
development of the Plan. These releases were a critical prerequisite to the
creation of a feasible plan that maximizes recoveries for creditors and achieves
a consensus among the Debtors' principal constituents.
5. Other Releases
Effective as of the Confirmation Date, but subject to the occurrence of
the Distribution Date, and except as otherwise provided herein or in the
Confirmation Order, each of the Debtors', Reorganized PhyCor's, Noteholders'
Committee's, Creditors' Committee's, Indenture Trustee's, and Warburg, Pincus'
respective current and former members, officers, directors, agents,
subsidiaries, affiliates, general and limited partners, financial advisors,
independent accountants, attorneys, employees, and representatives and their
respective property will be released from any and all claims, obligations,
rights, causes of action, and liabilities which the Debtors, Reorganized PhyCor,
or any holder of a Claim against or Interest in the Debtors may be entitled to
assert, whether for tort, contract, violations of federal or state securities
laws, or otherwise, whether known or unknown, foreseen or unforeseen, existing
or hereafter arising, based in whole or in part upon any act or omission,
transaction, or other occurrence taking place on or before the Confirmation Date
in any way relating to the Chapter 11 Cases or the Plan. Nothing in the Plan
will release any Person from any claims, obligations, rights, causes of action,
or liabilities based upon any act or omission in connection with, relating to,
or arising
44
out of, the Chapter 11 Cases, the solicitation of acceptances of the Plan, the
pursuit of Confirmation of the Plan, the Consummation of the Plan, the
administration of the Plan, or the property to be distributed under the Plan
arising out of such Person's gross negligence, willful misconduct, or breach of
fiduciary duty. The releases provided herein are justified based upon the
substantial contribution of the released parties to the Debtors' reorganization,
including the formulation and development of the Plan. These releases were a
critical prerequisite to the creation of a feasible plan that maximizes
recoveries for creditors and achieves a consensus among the Debtors' principal
constituents.
6. Creditors' Committee
On the date which is 30 days after the Consummation Date, the
Creditors' Committee will be dissolved and its members will be deemed released
of all their duties, responsibilities, and obligations in connection with the
Chapter 11 Cases or the Plan and its implementation, and the retention or
employment of the Creditors' Committee's attorneys, accountants, and other
agents will terminate. All expenses of Creditors' Committee members and the fees
and expenses of their professionals through the Confirmation Date will be paid
in accordance with the terms and conditions of the Professional Fee Order.
VIII. TREATMENT OF EMPLOYEES DURING THE CHAPTER 11 CASES
The Debtors intend that salaries, wages, accrued paid vacation, health
related benefits, and similar employee benefits will be unaffected by the
Chapter 11 Cases. Employee benefit claims that accrue prepetition will be
unimpaired under the terms of the Plan. To ensure the continuity of the Debtors'
workforce and to further accommodate the unimpaired treatment of employee
benefits, the Debtors obtained the approval of the Bankruptcy Court to honor
payroll checks outstanding as of the Petition Date, to permit employees to use
their accrued vacation time, and to continue paying medical and other benefits
under benefit plans. Employee claims and benefits not paid or honored, as the
case may be, prior to consummation of the Plan will be paid or honored in full
upon consummation of the Plan or as soon thereafter as such payment or other
obligation becomes due or performable.
IX. FINANCING DURING AND AFTER THE CHAPTER 11 CASES
A. DIVIDENDS AND INTERCOMPANY ADVANCES
In the ordinary course of its business, PhyCor funds its obligations
through its own operations and dividends and advances from its Subsidiaries.
During and after the Chapter 11 Cases, PhyCor will continue to fund its
postpetition and post-consummation obligations from these sources.
X. CERTAIN FACTORS TO BE CONSIDERED
Holders of Impaired Claims who are entitled to vote on the Plan should
carefully consider the following factors before deciding whether to vote to
accept or to reject the Plan.
A. MAINTENANCE OF OPERATIONS AND POSTPETITION FINANCING
Although the Debtors believe they will have sufficient funds to meet
their obligations under the Plan, failure by the Debtors to have sufficient
funds to meet these obligations would pose serious risks to PhyCor's viability,
and could preclude consummation of the Plan or any other recapitalization or
reorganization.
B. CERTAIN BANKRUPTCY CONSIDERATIONS
1. Effect On Non-Filing Subsidiaries Or Affiliates
The filing of the Chapter 11 Cases by the Debtors and the publicity
attendant thereto might also adversely affect the businesses of the non-filing
subsidiaries. Because the financial viability and businesses of the Debtors is
significantly dependent upon the businesses of its non-filing subsidiaries, any
downturn in the businesses of the non-filing subsidiaries
45
as a result of the Chapter 11 Cases would also affect PhyCor's prospects.
Although the Debtors do not believe that the Chapter 11 Cases have adversely
affected the businesses of the non-filing subsidiaries in a material way, if the
Chapter 11 Cases become protracted, the possibility of adverse effects on such
subsidiaries may increase.
2. Failure To Confirm The Plan
Section 1129 of the Bankruptcy Code requires, among other things, a
showing that confirmation of the Plan will not be followed by liquidation or the
need for further financial reorganization of the Debtors (see "Feasibility Of
The Plan And The Best Interests Of Creditors Test - Feasibility Of The Plan"),
and that the value of distributions to dissenting holders of Claims and
Interests may not be less than the value such holders would receive if the
Company were liquidated under Chapter 7 of the Bankruptcy Code (see "Feasibility
Of The Plan And The Best Interests Of Creditors Tests - Best Interests Test").
Although the Debtors believe that the Plan will meet these tests, there can be
no assurance that the Bankruptcy Court will reach the same conclusion.
3. Failure To Consummate The Plan
Consummation of the Plan is conditioned upon, among other things, entry
of the Confirmation Order and an order (which may be the Confirmation Order)
approving the rejection of all executory contracts and unexpired leases (other
than those specifically assumed by the Company) by PhyCor, and the negotiation
and execution of certain definitive agreements. As of the date of this
Disclosure Statement, there can be no assurance that any or all of the foregoing
conditions will be met (or waived) or that the other conditions to consummation,
if any, will be satisfied. Accordingly, even if the Plan is confirmed by the
Bankruptcy Court, there can be no assurance that the Plan will be consummated.
C. CERTAIN TAX CONSIDERATIONS
THERE ARE A NUMBER OF MATERIAL INCOME TAX CONSIDERATIONS, RISKS, AND
UNCERTAINTIES ASSOCIATED WITH CONSUMMATION OF THE PLAN. INTERESTED PARTIES
SHOULD READ CAREFULLY THE DISCUSSION SET FORTH IN THE SECTION OF THIS DISCLOSURE
STATEMENT ENTITLED "CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE
PLAN "FOR A DISCUSSION OF THE MATERIAL FEDERAL INCOME TAX CONSEQUENCES AND RISKS
FOR HOLDERS OF CLAIMS AND THE COMPANY RESULTING FROM THE TRANSACTIONS OCCURRING
IN CONNECTION WITH THE PLAN.
D. INHERENT UNCERTAINTY OF FINANCIAL PROJECTIONS
The Financial Projections set forth in Exhibit B attached hereto cover
Reorganized PhyCor's operations through the period ending December 31, 2004.
These Projections are based on numerous assumptions that are an integral part of
the Projections, including Confirmation and consummation of the Plan in
accordance with its terms, the anticipated future performance of Reorganized
PhyCor and its Subsidiaries, industry performance, general business and economic
conditions, competition, adequate financing, absence of material contingent or
unliquidated litigation or indemnity claims, and other matters, many of which
are beyond the control of Reorganized PhyCor and some or all of which may not
materialize. In addition, unanticipated events and circumstances occurring
subsequent to the date of this Disclosure Statement may affect the actual
financial results of Reorganized PhyCor's operations. These variations may be
material and may adversely affect the ability of Reorganized PhyCor to pay the
obligations owing to certain holders of Claims entitled to distributions under
the Plan and other post-Consummation Date indebtedness. Because the actual
results achieved throughout the periods covered by the Projections may vary from
the projected results, the Projections should not be relied upon as a guaranty,
representation, or other assurance of the actual results that will occur.
E. DIVIDENDS
The Company does not anticipate that any dividends will be paid with
respect to the New Common Stock in the near term. The Financial Projections
contemplate no payment of dividends through at least the end of the projection
period ending December 31, 2004.
F. COMPETITION
See "Business Plan For Reorganized PhyCor - Risk Factors Related To
PhyCor's Business Plan - Competition."
46
XI. SECURITIES TO BE ISSUED IN CONNECTION WITH THE PLAN
As of the Distribution Date, Reorganized PhyCor will issue the New
Common Stock and Management Incentive Options, referred to collectively in the
Plan as the "New Securities."
The following discussion summarizes the material provisions of the New
Common Stock and Management Incentive Options including references, where
applicable, to Reorganized PhyCor's Amended and Restated Charter and By-laws.
This summary does not purport to be complete and is qualified in its entirety by
reference to the full text of the Management Incentive Plan and Reorganized
PhyCor Amended and Restated Charter and By-laws, which will be included in the
Plan Supplement.
A. DESCRIPTION OF SECURITIES TO BE ISSUED
1. New Common Stock
The principal terms of the New Common Stock to be issued by Reorganized
PhyCor under the Plan will be as follows:
Authorization 25 million shares
Initial Issuance 6 million shares
(96.5% of the New Common Stock will be
issued to holders of Allowed Class 4 General
Unsecured Claims and the remaining 3.5% will
be issued to the President and Chief
Executive Officer of Reorganized PhyCor
under the Management Incentive Plan.)
Par Value $0.01 per share
Voting Rights One vote per share
Preemptive Rights None
Dividends Payable at the discretion of the board of
directors of Reorganized PhyCor
2. Management Incentive Options
Management Incentive Options to purchase shares equivalent to 1.5% of
New Common Stock on a fully diluted basis as of the Consummation Date will be
issued to the President and Chief Executive Officer of Reorganized PhyCor on the
Consummation Date pursuant to the Management Incentive Plan. One-half of the
total options will have an exercise price equal to the Base Exercise Price (as
defined below) and one-half will have an exercise price equal to 200% of the
Base Exercise Price. If the New Common Stock is publicly traded, the Base
Exercise Price will be equal to the fair market value (as defined in the
Management Incentive Plan) of the New Common Stock on the grant of the options.
In no case will the Base Exercise Price be equal to or less than 33% of the
initial price of the New Common Stock as determined by the board of directors of
the Company, based on a valuation analysis prepared by Jefferies in connection
with the Plan. If the New Common Stock is not publicly traded at the time of
grant, the Base Exercise Price will be determined by the Compensation Committee
at the time of the grant of the Management Incentive Options.
One-third of the Management Incentive Options will vest on the first
anniversary of the date of the option grant, one-third on the second
anniversary, and the remaining one-third on the third anniversary of the option
grant date. All Management Incentive Options will become immediately exercisable
in the event of a change of control of Reorganized PhyCor.
47
The Management Incentive Options will be non-qualified stock options
and will expire on the earlier of (i) ten years after grant, (ii) three months
after termination of employment for any reason other than death, disability,
retirement, or cause, (iii) one year after termination of employment by reason
of death, disability, or retirement, or (iv) termination of employment for
cause. Management Incentive Options that are not yet vested on the date of
termination of employment will be forfeited.
B. RESALE OF SECURITIES OF REORGANIZED PHYCOR
1. Registration Of New Common Stock
Under section 1145(a) of the Bankruptcy Code, the issuance of the New
Common Stock to be distributed under the Plan in exchange for Claims against the
Debtors and the subsequent resale of such securities by entities that are not
"underwriters" (as defined in section 1145(b) of the Bankruptcy Code) are not
subject to the registration requirements of section 5 of the Securities Act of
1933. BECAUSE OF THE COMPLEX, SUBJECTIVE NATURE OF THE QUESTION OF WHETHER A
PARTICULAR HOLDER MAY BE AN UNDERWRITER, THE DEBTORS MAKE NO REPRESENTATION
CONCERNING THE ABILITY OF ANY PERSON TO DISPOSE OF THE SECURITIES TO BE
DISTRIBUTED UNDER THE PLAN.
Section 1145(b)(1) of the Bankruptcy Code provides:
(b) (1) Except as provided in paragraph (2) of this
subsection and except with respect to ordinary
trading transactions of an entity that is not an
issuer, an entity is an underwriter under section
2(11) of the Securities Act of 1933, if such entity -
(A) purchases a claim against, interest in, or
claim for an administrative expense in the
case concerning, the debtor, if such
purchase is with a view to distribution of
any security received or to be received in
exchange for such a claim or interest;
(B) offers to sell securities offered or sold
under the plan for the holders of such
securities;
(C) offers to buy securities offered or sold
under the plan from the holders of such
securities, if such offer to buy is -
(i) with a view to distribution of such
securities; and
(ii) under an agreement made in
connection with the plan, with the
consummation of the plan, or with
the offer or sale of securities
under the plan; or
(D) is an issuer, as used in such section 2(11), with
respect to such securities.
(2) An entity is not an underwriter under section 2(11) of the
Securities Act of 1933 or under paragraph (1) of this
subsection with respect to an agreement that provides only for
-
(A) (i) the matching or combining of fractional interests
in securities offered or sold under the plan into
whole interests, or
(ii) the purchase or sale of such fractional
interests from or to entities receiving such
fractional interests under the plan; or
(B) the purchase or sale for such entities of such
fractional or whole interests as are necessary to
adjust for any remaining fractional interests after
such matching.
(3) An entity other than an entity of the kind specified in
paragraph (1) of this subsection is not an underwriter under
section 2(11) of the Securities Act of 1933 with respect to
any securities offered or sold to such entity in the manner
specified in subsection (a)(1) of this section.
48
Because Reorganized PhyCor hopes not to be subject to the reporting
requirements of the Securities Exchange Act of 1934 (the "Exchange Act"), PhyCor
has no current intention to register under the Securities Act of 1933 the New
Common Stock to be (i) distributed to holders of certain Claims on account of
and in exchange for such Claims or (ii) reserved for future purchase pursuant to
Management Incentive Options. If Reorganized PhyCor is subject to the reporting
requirements of the Exchange Act, Reorganized PhyCor will file a Registration
Statement on Form S-8 covering the stock grants, the shares issuable upon
exercise of the options, and the resale of such shares. If Reorganized PhyCor is
not a Securities and Exchange Commission reporting company, it will only issue
securities under the Management Incentive Plan pursuant to federal and state
registration exemptions that are available, and will comply with applicable
federal and state securities requirements. In such event, the stock issued under
the Management Incentive Plan and the shares issuable upon the exercise of
Management Incentive Options will be unregistered under the Securities Act of
1933 and the securities laws of any state. Such securities must be held
indefinitely unless the disposition thereof is registered under the Securities
Act of 1933 and under applicable state securities laws or exemptions from such
registration requirements, whether pursuant to Rule 144 of the securities Act of
1933 or otherwise, are available.
2. Lack Of Established Market For New Securities
There may be certain restrictions on the ability of holders of New
Securities to sell, transfer, or otherwise freely dispose of such New Securities
received under the Plan if the holders are "issuers" or "dealers" under sections
2(11) and 2(12), respectively, of the Securities Act of 1933, or "underwriters,"
as defined in section 1145(b) of the Bankruptcy Code. Moreover, the New
Securities will be issued pursuant to the Plan to holders of Claims, some of
whom may prefer to liquidate their investment rather than hold such securities
on a long-term basis. Accordingly, the market for the New Securities, if any,
may be volatile, at least for an initial period after the Distribution Date, and
indeed may be depressed for a period of time immediately following the
Consummation Date until the market has had time to absorb these sales and to
observe the post-Consummation Date performance of Reorganized PhyCor. Other
factors, such as the statutory restrictions on transferability and the
likelihood that Reorganized PhyCor will not declare dividends for the
foreseeable future, may further depress the market for the New Securities. In
addition, although the Plan and the Projections were prepared based upon an
assumed reorganization value range as described below in "Feasibility Of The
Plan And The Best Interests Of Creditors Test - Valuation Of Reorganized
PhyCor," such valuation was not an estimate of the price at which the New
Securities may trade in the market, and the Company has not attempted to make
any such estimate in connection with the development of the Plan. No assurance
can be given as to the market price, if any, that will prevail following the
Distribution Date. See "Feasibility of the Plan and the Best Interests of
Creditors Test - Valuation Of the Reorganized Company."
XII. CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN
The following discussion summarizes certain anticipated federal income
tax consequences of the transactions proposed in the Plan to PhyCor and to the
holders of Claims and Interests who hold such Claims and Interests as capital
assets and who are United States persons. The summary is provided for
informational purposes only and is based on the Internal Revenue Code of 1986,
as amended (the "Tax Code"), the treasury regulations promulgated thereunder
(the "Regulations"), judicial authority, and current administrative rulings and
practice, all as in effect as of the date hereof and all of which are subject to
change, which changes may be retroactively applied in a manner that could
adversely affect PhyCor, its creditors, and equity security holders.
The summary does not address all aspects of federal income taxation
that may be relevant to a particular holder of a Claim or Interest in light of
its particular facts and circumstances or to certain types of holders of Claims
or Interests subject to special treatment under the Tax Code (for example,
foreigners, financial institutions, broker-dealers, insurance companies, and
tax-exempt organizations) and also does not discuss any aspects of state, local,
or foreign taxation.
Events subsequent to the date of this Disclosure Statement, such as
additional tax legislation, court decisions, or administrative changes, could
affect the federal income tax consequences of the Plan and the transactions
contemplated thereunder. No ruling will be sought from the Internal Revenue
Service (the "Service") with respect to any of the tax aspects of the Plan and
no opinion of counsel has heretofore been obtained by PhyCor with respect
thereto. ACCORDINGLY, EACH HOLDER OF A CLAIM OR INTEREST IS STRONGLY URGED TO
CONSULT WITH ITS TAX ADVISOR REGARDING THE FEDERAL, STATE, LOCAL, AND FOREIGN
TAX CONSEQUENCES OF THE PLAN.
49
A. FEDERAL INCOME TAX CONSEQUENCES TO PHYCOR
1. Cancellation Of Indebtedness Income
A taxpayer generally must include in gross income the amount of any
discharged indebtedness realized during the taxable year, except to the extent
that payment of such indebtedness would have given rise to a deduction. Such
amounts, however, are not included in income when the discharge of indebtedness
is accomplished pursuant to a plan approved by the court in a case under the
Bankruptcy Code. Instead, the amount of discharged indebtedness that would
otherwise have been required to be included in income will be applied to reduce
certain tax attributes of the taxpayer generally in the following order: net
operating losses ("NOLs") and NOL carryovers, general business credit
carryovers, capital loss carryovers, the taxpayer's basis in its property, and
foreign tax credit carryovers. Section 108(b)(5) of the Tax Code permits a
corporation that is the subject of a bankruptcy case to elect to apply the
required attribute reduction to reduce first the basis of its depreciable
property to the extent of such basis, with any excess applied next to reduce its
NOLs and NOL carryovers and then certain other tax attributes. PhyCor has not
yet determined whether it will make such election.
Under the Plan, satisfaction of the Claims against PhyCor would give
rise to discharge of indebtedness income to Reorganized PhyCor in an amount
equal to the difference between (i) the sum of the adjusted issue prices (as
defined for federal income tax purposes) of those Claims that constitute debt
instruments for federal income tax purposes and (ii) the sum of (a) the amount
of cash, if any, paid by Reorganized PhyCor in partial satisfaction of such
Claims and (b) the fair market value of stock and other consideration issued in
satisfaction of such Claims. To the extent, however, that the discharged Claims
would have given rise to a deduction had they been paid in full by Reorganized
PhyCor (and a deduction for such amounts had not already been claimed), such
amounts of discharge of indebtedness income would not be realized by Reorganized
PhyCor.
The Debtors estimate that, as of May 31, 2002, the amount of their
liabilities that are impaired under the Plan is approximately $381 million,
which includes approximately $12 million of estimated contingent liabilities
that the Company believes should not be treated as liabilities for federal
income tax purposes. In addition, the Debtors estimate that the aggregate amount
of consideration to be issued in satisfaction of such indebtedness is
approximately $48 million (as determined for federal income tax purposes based
on the projected recoveries under the Plan determined by the financial advisors
to the Debtors (see "EXECUTIVE SUMMARY--Summary of Anticipated Distributions
Under The Plan") resulting in discharge of indebtedness of approximately $321
million. The appropriate valuation of the consideration to be paid, however, is
subject to both legal and factual uncertainty and thus the amount of discharge
of indebtedness could differ substantially from the amounts set forth above.
Because the discharge will be accomplished pursuant to a plan approved
by a court in a case under the Bankruptcy Code, Reorganized PhyCor will not be
required to recognize income, if any, in respect of such discharge. Instead, the
amount of such discharge will reduce tax attributes existing after the
determination of Reorganized PhyCor's taxable income for the taxable year in
which the discharge occurs.
2. Deductions Of Accrued Interest And Original Issue Discount By
Reorganized PhyCor
To the extent that a portion of the consideration issued to Creditors
pursuant to the Plan is attributable to accrued and unpaid interest on their
Claims, Reorganized PhyCor would be entitled to interest deductions in the
amount of such accrued interest, to the extent PhyCor has not already deducted
such amounts.
3. Limitations On NOLs And Other Tax Attributes
50
Based on its tax returns as filed, PhyCor had approximately $625
million of federal NOLs at December 31, 2000, approximately $702 million(1) of
federal NOLs as of December 31, 2001, prior to taking into account reductions
for discharge of indebtedness discussed above (see "Cancellation of Indebtedness
Income") and any additional reductions required pursuant to the Title 11
Exception discussed below. After taking into account such reductions, the net
amount of NOLs would be approximately $363 million based on PhyCor's federal
income tax returns as filed and estimates as of December 31, 2001. It should be
noted, however, the PhyCor's federal income tax returns have not been audited by
the Service. Thus, there can be no assurance that an audit of one or more of
those returns including tax returns filed for 1998 and later taxable years would
not result in the reduction in the amount or complete elimination of the
remaining NOLs available for future use. Moreover, the Tax Code and the
Regulations contain several limitations on the utilization of NOLs, including
sections 269, 382, and 384 of the Tax Code and certain provisions of the
consolidated return Regulations. ACCORDINGLY, THERE ARE SUBSTANTIAL RISKS THAT
REORGANIZED PHYCOR'S ABILITY TO UTILIZE THE NOLs MAY BE REDUCED OR ELIMINATED.
THESE LIMITATIONS ARE DISCUSSED BELOW.
(a) Section 382
(i) In General
Section 382 of the Tax Code provides in general that when a corporation
with certain tax attributes such as NOLs undergoes an "ownership change" (as
defined in section 382(g) of the Tax Code), the corporation's ability to utilize
such NOLs and other tax attributes to offset income earned following such change
may be subject to limitations unless the so-called "Title 11 Exception" under
section 382(1)(5) of the Tax Code (discussed below) is available. Generally, an
ownership change occurs when the percentage of stock (determined on the basis of
value) owned by one or more holders of at least five per cent of such stock
increases by more than 50 percentage points (in relationship to the
corporation's total stock considered to be outstanding for this purpose) from
the lowest percentage of stock that was owned by such five per cent shareholders
at any time during the applicable "testing period." The testing period is
ordinarily the shorter of (i) the three-year period preceding the date of
testing or (ii) the period of time since the most recent ownership change of the
corporation. In general, for purposes of determining stock ownership under
section 382, stock owned by an entity is deemed owned proportionately by its
owners and, with certain exceptions, all persons holding less than five per cent
of the value of the corporation's stock are treated as a single five per cent
shareholder.
Subject to the application of the Title 11 Exception, a corporation
that undergoes an "ownership change" may use pre-change NOLs in any taxable year
following an ownership change only to the extent of its "section 382 limitation"
for such taxable year. (Similar limitations apply with respect to built-in
losses, and, under section 383, tax credits.) The section 382 limitation for a
taxable year equals, in general and subject to adjustments, the product of (i)
the "long-term tax-exempt bond rate" (5.01% for ownership changes occurring
during the month of May, 2002) as determined at the time of the ownership change
and (ii) the equity value of the corporation immediately before the ownership
change. In general, in the case of a corporation that undergoes an ownership
change in a bankruptcy case (to which the Title 11 Exception is not applied),
the value of the corporation, for purposes of calculating the section 382
limitation, is increased to reflect the surrender or cancellation of creditors'
claims for stock. If the limitation under section 382 of the Tax Code applies
with respect to an ownership change, and the corporation does not continue its
historic business (as defined in the Tax Code) during the two-year period
following the date of such ownership change, the NOLs are eliminated in their
entirety. NOLs not utilized in a given year because of the section 382
limitation remain available for use in future years until their normal
expiration dates, but subject to the section 382 limitation in such later years.
To the extent that a corporation's section 382 limitation in a given year
exceeds its taxable income for such year, such excess will increase the section
382 limitation in future taxable years.
PhyCor has taken the position in filing its tax returns to date that it
has not undergone an ownership change prior to the Consummation Date of the
Plan. If the Service were successfully to assert that PhyCor has previously
undergone an ownership change, the resulting section 382 limitation could
severely limit or eliminate the deductibility of all or a substantial portion of
PhyCor's existing NOLs.
- -----------------
(1) PhyCor estimates NOL expirations approximately as follows: $15 million,
$150 million, $460 million, and $77 million (estimated) expire in the
years 2018, 2019, 2020, and 2021, respectively.
51
(ii) Application To The Plan
Pursuant to the Plan, all existing stock of PhyCor will be canceled,
and shares of New Common Stock representing 96.5% of the outstanding shares of
New Common Stock will be issued to holders of Allowed Class 4 General Unsecured
Claims in respect of such Claims. As a result of such exchange, an ownership
change, within the meaning of section 382 of the Tax Code, will occur. Unless
the Title 11 Exception applies to the ownership change that results from the
Plan, the operation of section 382 will significantly reduce or eliminate the
amount of NOLs that may be utilized by the PhyCor in any taxable period after
the Effective Date.
Section 382(1)(5) of the Tax Code (the "Title 11 Exception") provides
that the section 382 limitation does not apply if (i) a corporation that is
otherwise subject to section 382 of the Tax Code is under the jurisdiction of a
court in a case under the Bankruptcy Code and (ii) the shareholders and
"qualified creditors" of the corporation (determined immediately before the
ownership change) together own, after such ownership change, and as a result of
being shareholders or qualified creditors immediately before such change, stock
having 50% or more of the value and voting power of the reorganized corporation
or its reorganized parent corporation, and (iii) the corporation so elects. For
this purpose "qualified creditors" include (i) persons who hold indebtedness at
least 18 months before the Petition Date and (ii) holders of indebtedness that
arose in the ordinary course of business of the corporation and who have at all
times held the beneficial interest in such indebtedness.
If the Title 11 Exception applies, the use of the corporation's NOLs is
not subject to the section 382 limitation, but the NOLs are reduced by the
amount of interest relating to any indebtedness that is converted into stock and
for which the corporation claimed a deduction during the three-year period
preceding the taxable year of the ownership change, plus the portion of the year
of the ownership change prior to the Consummation Date of the Plan. PhyCor
estimates the amount of this reduction to be approximately $18 million, although
it is possible that the Service will disagree with PhyCor's calculation. Under
the Title 11 Exception, if there were a second ownership change during the
two-year period following the ownership changes that results from the Plan, the
Title 11 Exception would not apply with respect to the first ownership change
and the NOLs and other tax attributes of the corporation would be subject to a
section 382 limitation of $0 for all taxable years ending after the date of the
second ownership change (thereby, in effect, eliminating entirely the
corporation's ability to utilize such tax attributes).
PhyCor believes that qualified creditors will own 50% or more of the
stock of Reorganized PhyCor and it intends to file its tax returns consistent
with such belief.
If the Service were successfully to assert that PhyCor did not qualify
for the Title 11 Exception, PhyCor's NOLs remaining after immediately after the
Consummation Date of the Plan will be subject to a Section 382 limitation equal
to the long-term tax exempt rate applicable at such date multiplied by the
equity value of Reorganized PhyCor on such date (after taking into account the
surrender of cancellation of Claims for New Common Stock). Thus, a long-term tax
exempt rate of 5.01% for ownership changes occurring during the month of May,
2002 and an anticipated equity value of approximately $48 million after the
discharge of Claims for New Common Stock, PhyCor's annual Section 382 limitation
will be approximately $2 million.
(b) Other Limitations
In addition to section 382, certain other sections of the Tax Code and
Regulations could apply to limit PhyCor's utilization of its tax attributes,
including its NOLs, following its reorganization under the Plan. PhyCor's tax
attributes could be further limited under certain sections of the Tax Code and
the Regulations to the extent that it engages in future mergers or acquisition
transactions that are found not to have non-tax business purposes or are found
to have tax avoidance as their principal purpose. In addition, if Reorganized
PhyCor engages in a merger transaction with another entity in which it is not
the surviving entity and which transaction does not constitute a reorganization
or other transaction described in section 381 of the Tax Code, the NOLs will be
eliminated.
Section 269 of the Tax Code provides generally that where (i) a person
or persons acquire, directly or indirectly, control of a corporation, or (ii)
any corporation acquires, directly or indirectly, property of another
corporation not controlled by the acquiring corporation or its shareholder prior
to the acquisition, the basis of which property in the hands
52
of the acquiring corporation is determined in whole or in part by reference to
the basis of the property in the hands of the transferor corporation, for the
principal purpose of the avoidance or evasion of federal income tax by securing
the benefit of a deduction, credit, or other allowance which such person or
other corporation would not otherwise enjoy, the Service may disallow such
deduction, credit, or other allowance. If the Service determined that the
acquisition by holders of Allowed Class 4 General Unsecured Claims of the New
Common Stock under the Plan, or any future acquisition of or by PhyCor had, as
its principal purpose the avoidance or evasion of federal income tax, the
Service could disallow PhyCor's utilization of certain tax attributes, including
its NOL carryforwards.
4. Alternative Minimum Tax
In general, for purposes of computing Reorganized PhyCor's regular tax
liability, all of the taxable income recognized in a taxable year generally may
be offset by the carryover of NOLs (to the extent permitted under the Tax Code).
Although all of Reorganized PhyCor's regular tax liability for a given year may
be reduced to zero by virtue of its NOLs, in any given year, Reorganized PhyCor
may be subject to the alternative minimum tax ("AMT"). The AMT imposes a tax
equal to the amount by which 20% of a corporation's alternative minimum taxable
income ("AMTI") exceeds the corporation's regular tax liability. AMTI is
calculated pursuant to specific rules in the Tax Code which eliminate or limit
the availability of certain tax deductions and which include as income certain
amounts not generally included in computing regular tax liability. Of particular
importance to Reorganized PhyCor is that in calculating AMTI, only 90% of a
corporation's AMTI may be offset by NOL carryovers (as computed for these
purposes). Thus, in any year for which Reorganized PhyCor may be subject to the
AMT, any AMTI recognized would be taxable at an effective rate of 2% (i.e., 10%
of the 20% AMT tax rate). This rule does not apply, however, to NOLs originating
in or carried to 2001 or 2002.
For NOLs generated in taxable years ending in 2001 or 2002, however,
the 90% limit on the amount of AMTI which may be offset by NOL carryovers is
eliminated. Thus, in any year for which Reorganized PhyCor offsets AMTI with
NOLs generated in 2001 or 2002, or offsets AMTI in the 2001 or 2002 taxable
years with NOLs generated in prior or future years, there will be no AMT due to
the extent of those particular NOLs. To the extent that NOLs generated in other
years are also utilized in the same year that this exception applies, any AMTI
recognized on those amounts would still be taxable at an effective rate of 2%.
B. FEDERAL INCOME TAX CONSEQUENCES TO HOLDERS OF CLAIMS AND INTERESTS
1. Class 1 Other Priority Claims, Class 2a AmSouth Secured Claim,
Class 2b Other Secured Claims, And Class 3 Convenience Claims
On the exchange of its Claim for cash, each holder of an Allowed Class
1 Other Priority Claim, Class 2a AmSouth Secured Claim, Class 2b Citicorp
Secured Claim, Class 2c Other Secured Claim, or Class 3 Convenience Claim will
recognize gain or loss measured by the difference between the amount realized on
the exchange and its tax basis in the Claim. The amount realized will be equal
to the aggregate fair market value of the cash and/or property received to the
extent not allocable to interest (see "Treatment of Accrued Interest," below).
The character and taxation of any recognized gain or loss will depend on the
status of the Creditor, the nature of the Claim in its hands, and its holding
period.
2. Class 4 General Unsecured Claims
Pursuant to the Plan, each holder of an Allowed Class 4 General
Unsecured Claim (a "Class 4 Holder") will receive New Common Stock in exchange
for such Claim. The federal income tax consequences of the Plan to a Class 4
Holder depend, in part, on whether such claim constitutes a "security" for
federal income tax purposes (a "Tax Security"). The determination of whether a
particular debt instrument constitutes a Tax Security depends on an overall
evaluation of the facts and circumstances surrounding the origin and nature of
the debt and its maturity date. Generally, bonds or debentures with an original
term of at least ten years have been considered to be Tax Securities. In
contrast, instruments with terms of five years or less rarely qualify as Tax
Securities. PhyCor believes that, although the matter is not entirely free from
doubt, the 4.5% Convertible Subordinated Debentures and the Zero Coupon Notes
are likely to be treated as Tax Securities, and that all other Class 4 General
Unsecured Claims will not qualify at Tax Securities.
(a) Treatment Of Class 4 General Unsecured Claims That
Constitute Tax Securities
53
If a Class 4 General Unsecured Claim constitutes a Tax Security, the
exchange of such Tax Security for New Common Stock will constitute a
recapitalization under section 368(a)(1)(E) of the Tax Code. Accordingly, a
holder of such a Tax Security will not recognize gain or loss on the exchange
except to the extent, if any, the New Common Stock received is attributable to
interest accrued on the Tax Security after the beginning of such holder's
holding period (see "Treatment of Accrued Interest" below). Such a holder's
adjusted tax basis in the New Common Stock received will generally equal its
basis in the Tax Securities. In general, such a holder's holding period for the
New Common Stock received will include its holding period for the Tax Securities
exchanged therefor, except to the extent the New Common Stock was issued in
respect of accrued interest on the Tax Securities.
In addition, the Treasury Department is expected to promulgate
Regulations that will provide that any accrued "market discount" not treated as
ordinary income upon a tax-free exchange of market discount bonds would carry
over to the nonrecognition property received in the exchange. If such
Regulations are promulgated and applicable to the Plan, any Class 4 Holder of a
Tax Security which has accrued market discount would carry over such accrued
market discount to the New Common Stock received pursuant to the Plan, such that
any gain recognized by the holder upon a subsequent disposition of such New
Common Stock also would be treated as ordinary income to the extent of any
accrued market discount not previously included in income. In general, a Claim
will have accrued "market discount" if such Claim was acquired after its
original issuance at a discount to its adjusted issue price.
(b) Treatment Of Other Class 4 General Unsecured Claims
If a Class 4 General Unsecured Claim does not constitute a Tax
Security, each holder of a such a Claim will recognize gain or loss measured by
the difference between the amount realized on the exchange and its tax basis in
the Claim. The amount realized will be equal to the aggregate fair market value
of the New Common Stock received to the extent not allocable to interest (see
"Treatment of Accrued Interest" below). The character and taxation of any
recognized gain or loss will depend on the status of the Class 4 Holder, the
nature of the Claim in its hands, and its holding period.
3. Class 5 Preferred Stock Interests, Class 6 Common Stock
Interests, Class 7 Shareholder Litigation Claims, And Class 8
Warrants Interests
Pursuant to the Plan, holders of Class 5 Preferred Stock Interests,
Class 6 Common Stock Interests, Class 7 Shareholder Litigation Claims, and Class
8 Warrants Interests will not be entitled to receive any property of PhyCor or
interest in property of PhyCor on account of such Interests and Claims, and such
Interests will be cancelled, and such Claims will be discharged, on the
Consummation Date. A holder of an Interest or Shareholder Litigation Claim will
generally incur a capital loss in an amount equal to such holder's adjusted tax
basis in such Interest or Claim.
4. Treatment Of Accrued Interest
A Creditor will be treated as receiving interest with respect to a
Claim to the extent that the cash or New Common Stock received is "attributable
to" unpaid interest since the beginning of the Creditor's holding period. A
Creditor will recognize interest income to the extent that the amount received
attributable to its unpaid interest exceeds the amount, if any, that such
Creditor had previously included in income with respect to such interest, and
will recognize a loss to the extent that the amount of interest previously
included in income exceeds the amount treated as attributable to interest.
Neither the Tax Code nor the Regulations specify how a Creditor who
receives consideration with respect to a Claim that is less than the amount of
the Claim should allocate such consideration between principal and interest. The
Report of the House Ways and Means Committee on the Bankruptcy tax Act of 1980
indicates that if an allocation is reflected in the plan or reorganization, both
the debtor and the creditor must utilize the allocation. The Plan provides that
the entire amount of cash paid to holders of Claims in Classes 1, 2a, 2b, and 3
in satisfaction of their Claims and the entire amount of New Common Stock issued
to holders of Claims in Class 4 will be allocated to the principal first and
then to the interest portion. The Service could, however, take the view that the
consideration must be allocated proportionately between the portion of a Claim
representing principal and the portion of the Claim representing interest or,
possibly, first to the portion of the Claim representing interest. Creditors
should consult their tax advisors as to the proper allocation.
THE FEDERAL, STATE AND LOCAL TAX CONSEQUENCES OF THE PLAN ARE COMPLEX
AND, IN SOME CASES UNCERTAIN. IN ADDITION, THE FOREGOING SUMMARY DOES NOT
DISCUSS ALL ASPECTS OF FEDERAL INCOME TAXATION THAT MAY BE RELEVANT TO A
PARTICULAR CREDITOR OR EQUITY
54
HOLDER IN LIGHT OF ITS PARTICULAR CIRCUMSTANCES AND INCOME TAX SITUATION.
ACCORDINGLY, EACH HOLDER OF A CLAIM OR INTEREST IS STRONGLY URGED TO CONSULT
WITH ITS OWN TAX ADVISOR REGARDING THE FEDERAL, STATE, AND LOCAL TAX
CONSEQUENCES OF THE PLAN.
XIII. FEASIBILITY OF THE PLAN AND THE BEST INTERESTS OF CREDITORS TEST
A. FEASIBILITY OF THE PLAN
As a condition to confirmation of a plan, the Bankruptcy Code requires,
among other things, that a bankruptcy court determine that the plan is
"feasible" (i.e., that confirmation is not likely to be followed by a
liquidation or the need for further financial reorganization of the debtor) as
set forth in section 1129(a)(7) of the Bankruptcy Code. In connection with the
development of the Plan, and for purposes of determining whether the Plan
satisfies feasibility standards, the Company's management has, through the
development of the Financial Projections attached hereto as Exhibit B analyzed
the ability of the Company to meet its obligations under the Plan to maintain
sufficient liquidity and capital resources to conduct its business. The
Financial Projections attached hereto as Exhibit B were also prepared to assist
each holder of a claim entitled to vote under the Plan in determining whether to
accept or reject the Plan.
The Financial Projections indicate that Reorganized PhyCor should have
sufficient cash flow to (i) make the payments required under the Plan on the
Distribution Date, (ii) repay and service debt obligations, and (iii) maintain
operations on a going-forward basis. Accordingly, the Debtors believe that the
Plan complies with section 1129(a)(11) of the Bankruptcy Code.
The Financial Projections should be read in conjunction with the
assumptions, qualifications and footnotes to tables containing the Financial
Projections set forth therein, the historical consolidated financial information
(including the notes and schedules thereto) and the other information set forth
in the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 2001, attached hereto as Exhibit C and the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2002, attached hereto as Exhibit D.
The Financial Projections were prepared in good faith based upon assumptions
believed to be reasonable and applied in a manner consistent with past practice.
The Financial Projections are based on assumptions as of May 31, 2002 related,
in part, to the economic, competitive, and general business conditions
prevailing at the time. While as of the date of this Disclosure Statement such
economic, competitive and general business conditions have not materially
changed, any future changes in these conditions may materially impact the
ability of Reorganized PhyCor to achieve the Financial Projections.
THE PROJECTIONS WERE NOT PREPARED WITH A VIEW TOWARDS COMPLYING WITH
THE GUIDELINES FOR PROSPECTIVE FINANCIAL STATEMENTS PUBLISHED BY THE AMERICAN
INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS. NEITHER THE COMPANY'S INDEPENDENT
AUDITORS, NOR ANY OTHER INDEPENDENT ACCOUNTANTS, HAVE COMPILED OR EXAMINED THE
ACCOMPANYING PROSPECTIVE FINANCIAL INFORMATION TO DETERMINE THE REASONABLENESS
THEREOF AND, ACCORDINGLY, HAS NOT EXPRESSED AN OPINION OR ANY OTHER FORM OF
ASSURANCE WITH RESPECT THERETO.
THE COMPANY DOES NOT AS A MATTER OF COURSE MAKE PUBLIC PROJECTIONS AS
TO FUTURE REVENUES, EARNINGS, OR OTHER RESULTS. HOWEVER, THE MANAGEMENT OF THE
COMPANY HAS PREPARED THE FINANCIAL PROJECTIONS SET FORTH BELOW TO COMPLY WITH
THE REQUIREMENTS OF THE BANKRUPTCY CODE. THE ACCOMPANYING PROSPECTIVE FINANCIAL
INFORMATION WAS NOT PREPARED WITH A VIEW TOWARD PUBLIC DISCLOSURE OR WITH A VIEW
TOWARD COMPLYING WITH THE GUIDELINES ESTABLISHED BY THE AMERICAN INSTITUTE OF
CERTIFIED PUBLIC ACCOUNTANTS WITH RESPECT TO PROSPECTIVE FINANCIAL INFORMATION,
BUT, IN THE VIEW OF THE COMPANY'S MANAGEMENT, WAS PREPARED ON A REASONABLE
BASIS, REFLECTS THE BEST CURRENTLY AVAILABLE ESTIMATES AND JUDGMENTS, AND
PRESENTS, TO THE BEST OF MANAGEMENT'S KNOWLEDGE AND BELIEF, THE EXPECTED COURSE
OF ACTION AND THE EXPECTED FUTURE FINANCIAL PERFORMANCE OF THE COMPANY. HOWEVER,
THIS INFORMATION IS NOT FACT AND SHOULD NOT BE RELIED UPON AS BEING NECESSARILY
INDICATIVE OF FUTURE RESULTS, AND READERS OF THIS DISCLOSURE STATEMENT ARE
CAUTIONED NOT TO PLACE UNDUE RELIANCE ON
55
THE FINANCIAL PROJECTIONS. ACCORDINGLY, THE COMPANY DOES NOT INTEND, AND
DISCLAIMS ANY OBLIGATION, TO (A) FURNISH UPDATED PROJECTIONS TO HOLDERS OF
CLAIMS OR EQUITY INTERESTS PRIOR TO THE CONSUMMATION DATE OR TO NEW HOLDERS OF
NEW COMMON STOCK OR ANY OTHER PARTY AFTER THE CONSUMMATION DATE, (B) INCLUDE
SUCH UPDATED INFORMATION IN ANY DOCUMENTS THAT MAY BE REQUIRED TO BE FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION, OR (C) OTHERWISE MAKE SUCH UPDATED
INFORMATION PUBLICLY AVAILABLE.
THE PROJECTIONS PROVIDED IN THIS MEMORANDUM HAVE BEEN PREPARED
EXCLUSIVELY BY THE COMPANY'S MANAGEMENT. THESE PROJECTIONS, WHILE PRESENTED WITH
NUMERICAL SPECIFICITY, ARE NECESSARILY BASED ON A VARIETY OF ESTIMATES AND
ASSUMPTIONS WHICH, THOUGH CONSIDERED REASONABLE BY MANAGEMENT, MAY NOT BE
REALIZED, AND ARE INHERENTLY SUBJECT TO SIGNIFICANT BUSINESS, ECONOMIC AND
COMPETITIVE UNCERTAINTIES AND CONTINGENCIES, MANY OF WHICH ARE BEYOND THE
COMPANY'S CONTROL. NO REPRESENTA TIONS CAN BE MADE AS TO THE ACCURACY OF THESE
FINANCIAL PROJECTIONS OR TO REORGA NIZED PHYCOR'S ABILITY TO ACHIEVE THE
PROJECTED RESULTS. SOME ASSUMPTIONS INEVITABLY WILL NOT MATERIALIZE. FURTHER,
EVENTS AND CIRCUMSTANCES OCCURRING SUBSEQUENT TO THE DATE ON WHICH THESE
PROJECTIONS WERE PREPARED MAY BE DIFFERENT FROM THOSE ASSUMED OR, ALTERNATIVELY,
MAY HAVE BEEN UNANTICIPATED, AND THUS THE OCCURRENCE OF THESE EVENTS MAY AFFECT
FINANCIAL RESULTS IN A MATERIAL AND POSSIBLY ADVERSE MANNER. THE PROJECTIONS,
THEREFORE, MAY NOT BE RELIED UPON AS A GUARANTY OR OTHER ASSURANCE OF THE ACTUAL
RESULTS THAT WILL OCCUR.
FINALLY, THE FOLLOWING PROJECTIONS INCLUDE ASSUMPTIONS AS TO THE
ENTERPRISE VALUE OF THE REORGANIZED COMPANY, THE FAIR VALUE OF ITS ASSETS AND
ITS ACTUAL LIABILITIES AS OF MAY 31, 2002. REORGANIZED PHYCOR WILL BE REQUIRED
TO MAKE SUCH ESTIMATIONS AS OF THE CONSUMMATION DATE. SUCH DETERMINATION WILL BE
BASED UPON THE FAIR VALUES AS OF THAT DATE, WHICH COULD BE MATERIALLY GREATER OR
LOWER THAN THE VALUES ASSUMED IN THE FOREGOING ESTIMATES.
B. BEST INTERESTS TEST
Pursuant to section 1129(a)(7) of the Bankruptcy Code (also called the
"best interests" test), the Bankruptcy Code requires that each holder of an
impaired claim or common stock interest either (i) accept a plan or (ii) receive
or retain under the plan property of a value, as of the effective date, that is
not less than the value such holder would receive or retain if the debtor were
liquidated under Chapter 7 of the Bankruptcy Code on the effective date. The
first step in meeting this test is to determine the dollar amount that would be
generated from the hypothetical liquidation of the debtor's assets in the
context of a liquidation in a Chapter 7 case.
To calculate the probable distribution to members of each impaired
class of holders of claims and equity interests if a debtor were liquidated
under Chapter 7, the Bankruptcy Court must first determine the aggregate dollar
amount that would be generated from the debtor's assets if its Chapter 11 case
were converted to a Chapter 7 case under the Bankruptcy Code. This "liquidation
value" would consist primarily of the proceeds from a forced sale of the
debtor's assets by a Chapter 7 trustee.
The amount of liquidation value available to holders of unsecured
claims against and interests in the debtor would be reduced by, first, secured
claims (to the extent of the value of their collateral), and second, by the
costs and expenses of liquidation, as well as by other administrative expenses
and costs of both the Chapter 7 case and the Chapter 11 case. Costs of a
liquidation of the debtor under Chapter 7 of the Bankruptcy Code would include
the compensation of a Chapter 7 trustee, as well as of attorneys and other
professionals retained by the trustee, asset disposition expenses, all unpaid
expenses incurred by the debtor in the Chapter 11 case (such as compensation of
attorneys, financial advisors, and accountants) that are allowed in the Chapter
7 case, litigation costs, and claims arising from the operations of the debtor
during the pendency of the Chapter 11 case. The liquidation itself would trigger
certain priority payments that otherwise would be due in the ordinary course of
business. Those priority claims would be paid in full from the liquidation
proceeds before the balance would be made available to pay unsecured claims or
to make any distribution in respect of equity interests. The liquidation would
also prompt the rejection of executory contracts and unexpired leases and
thereby create a significantly greater amount of unsecured claims.
56
In a Chapter 7 liquidation, no junior class of claims may be paid
unless all classes of claims senior to such junior class are paid in full.
Section 510(a) of the Bankruptcy Code provides that subordination agreements are
enforceable in a bankruptcy case to the same extent that such subordination is
enforceable under applicable non-bankruptcy law. Therefore, no class of claims
that is contractually subordinated to another class would receive any payment on
account of its claims, unless and until such senior class were paid in full.
Once the Bankruptcy Court determines the recoveries in liquidation of
the debtor's secured and priority creditors, it would then determine the
probable distribution to unsecured creditors from the remaining available
proceeds of the liquidation. If this probable distribution has a value greater
than the distributions to be received by the unsecured creditors under the plan,
then the plan is not in the best interests of creditors and cannot be confirmed
by the Bankruptcy Court. As shown in the liquidation analysis the Company
prepared with the assistance of Jefferies, its financial advisors, which is
attached hereto as Exhibit E (the "Liquidation Analysis"), the Debtors believe
that each Class of Impaired Claims and Interests will receive more under the
Plan than it would receive if the Debtors were liquidated.
C. LIQUIDATION ANALYSIS
As noted above, the Debtors believe that under the Plan each holder of
Impaired Claims and Interests will receive distributions with a value not less
than the value such holder would receive in a liquidation of the Debtors under
Chapter 7 of the Bankruptcy Code. The Debtors' belief is based primarily upon
extensive consideration of the effects that a Chapter 7 liquidation would have
on the ultimate proceeds available for distribution to creditors including, but
not limited to, (i) the increased costs and expenses of a liquidation under
Chapter 7 arising from fees payable to a Chapter 7 trustee and advisors to the
trustee, (ii) any erosion in value of assets in a Chapter 7 case in the context
of the rapid liquidation required under Chapter 7 and the "forced sale"
atmosphere that would prevail, (iii) any adverse effects on the Debtors'
businesses as a result of the likely departure of key employees, (iv) any
reduction of value associated with a Chapter 7 trustee's operation of the
Debtors' businesses, and (v) any substantial delay in distributions to the
Debtors' Creditors that may ensue in a Chapter 7 liquidation. The Debtors
believe that the holders of Common Stock would receive no distribution of any
liquidation proceeds. The Debtors' belief is also based upon the Liquidation
Analysis. The Liquidation Analysis does not reflect the likely delay in
distributions to creditors in a liquidation scenario, which, if considered,
would only further reduce the present value of any liquidation proceeds.
The Debtors believe that any liquidation analysis is speculative
because such an analysis is necessarily premised upon assumptions and estimates
that are inherently subject to significant uncertainties and contingencies, many
of which would be beyond the control of the Debtors. Thus, there can be no
assurance as to values that would actually be realized in a Chapter 7
liquidation, nor can there be any assurance that the Bankruptcy Court would
accept the Debtor's conclusions or concur with such assumptions in making its
determinations under section 1129(a)(7) of the Bankruptcy Code.
For example, the Liquidation Analysis necessarily contains an estimate
of the amount of Claims that will ultimately become Allowed Claims. This
estimate is based solely upon the Debtors' review of their books and records and
the Debtors' estimates as to additional Claims that may be filed in the Chapter
11 Cases or that would arise in the event of a conversion of the case from
Chapter 11 to Chapter 7. No order or finding has been entered by the Bankruptcy
Court estimating or otherwise fixing the amount of Claims at the projected
amounts of Allowed Claims set forth in the Liquidation Analysis. In preparing
the Liquidation Analysis, the Debtors' have projected an amount of Allowed
Claims that is at the lower end of a range of reasonableness such that, for
purposes of the Liquidation Analysis, the largest possible liquidation dividend
to holders of Allowed Claims can be assessed. The estimate of the amount of
Allowed Claims set forth in the Liquidation Analysis should not be relied upon
for any other purpose, including, without limitation, any determination of the
value of any distribution to be made on account of Allowed Claims under the
Plan. The annexed Liquidation Analysis is provided solely to disclose to holders
the effects of a hypothetical Chapter 7 liquidation of the Debtors, subject to
the assumptions set forth therein.
To the extent that Confirmation of the Plan requires the establishment
of amounts for the Chapter 7 liquidation value of the Debtors, funds available
to pay Claims, and the reorganization value of the Debtors, the Bankruptcy Court
will determine those amounts at the Confirmation Hearing.
D. VALUATION OF REORGANIZED PHYCOR
57
In connection with confirmation of the Plan, the Bankruptcy Court may
be asked to determine the reorganization value of Reorganized PhyCor on the
Consummation Date. The reorganization value of an equity often is used for the
purpose of evaluating the consideration that creditors and holders of equity
interests will receive under a plan of reorganization.
PhyCor requested that Jefferies, its financial advisor in connection
with the Chapter 11 Cases, provide PhyCor's board of directors with an estimate
of PhyCor's equity value after giving effect to the proposed restructuring as
set forth in the Plan (the "Restructuring"). For the purposes of Jefferies'
reorganization valuation analysis which is attached hereto as Exhibit F (the
"Reorganization Valuation Analysis"), equity value was defined as the total
value of PhyCor as a going concern, including any non-operating and financial
assets. The Reorganization Valuation Analysis assumes that the Debtors are
substantively consolidated. Jefferies' Reorganization Valuation Analysis and
estimate of PhyCor's equity value were provided solely for the information of
PhyCor's board of directors in connection with its consideration of the
Restructuring. Jefferies has advised the Company that, as of May 31, 2002,
financial analyses indicate that the estimated total equity value of PhyCor,
after giving effect to the proposed restructuring is between $43.9 million and
$53.1 million. Therefore, assuming six million shares of New Common Stock will
be issued on the Distribution Date, the mid-point value of New Common Stock is
estimated to be between $7.10 and $8.60 per share, before the impact, if any, on
the value of the stock from the issuance of the Management Incentive Options.
In connection with performing its Reorganization Valuation Analysis,
Jefferies reviewed the Plan and certain related documents, as well as certain
publicly available business and financial information relating to PhyCor.
Jefferies also reviewed certain other information relating to PhyCor, including
the Financial Projections, prepared and provided to Jefferies by PhyCor's
management and included in this Disclosure Statement, and met with the
management of PhyCor to discuss the business and prospects of PhyCor. The
Financial Projections are substantially the same as those reviewed by Jefferies
in performing its Reorganization Valuation Analysis.
The preparation of a valuation analysis is a complex analytical process
involving various determinations as to the most appropriate and relevant methods
of financial analysis and the application of those methods to particular facts
and circumstances, many of which are beyond the control of PhyCor and Jefferies.
The estimate of a range of equity values for PhyCor indicated by Jefferies'
analysis is not necessarily indicative of the prices at which the common stock
or other securities of the Company may be bought or sold after giving effect to
the Restructuring or predictive of future financial or operating results for
PhyCor, which may be significantly more or less favorable than those indicated
by Jefferies' analysis. Jefferies has not independently evaluated the
reasonableness of the Financial Projections. Because projections, by definition,
are forward-looking, certain of the financial results projected by the
management of PhyCor may differ from the recent historical results of operations
for PhyCor. To the extent that the estimate of a range of equity values for
PhyCor indicated by Jefferies' analysis is dependent upon PhyCor achieving
PhyCor management's forecasts, such estimates are inherently subject to
substantial uncertainty.
In preparing its report to the board of directors of PhyCor, Jefferies
performed a variety of financial and comparative analyses. Jefferies did not
attribute any particular weight to any analysis or factor considered by it, but
rather made qualitative judgments as to the significance and relevance of each
analysis and factor. Accordingly, Jefferies believes that its analyses must be
considered as a whole and that selecting portions of its analyses and the
factors considered by it, without considering all analyses and factors, could
create a misleading or incomplete view of the processes underlying such
analyses.
THE ESTIMATED EQUITY VALUE IS HIGHLY DEPENDENT UPON ACHIEVING THE FUTURE
FINANCIAL RESULTS SET FORTH IN THE PROJECTIONS AS WELL AS THE REALIZATION OF
CERTAIN OTHER ASSUMPTIONS WHICH ARE NOT GUARANTEED.
THE VALUATIONS SET FORTH HEREIN REPRESENT ESTIMATED REORGANIZATION VALUES AND DO
NOT NECESSARILY REFLECT VALUES THAT COULD BE ATTAINABLE IN PUBLIC OR PRIVATE
MARKETS. THE EQUITY VALUE ASCRIBED IN THE ANALYSIS DOES NOT PURPORT TO BE AN
ESTIMATE OF THE POST-REORGANIZATION MARKET VALUE. SUCH MARKET VALUE, IF ANY, MAY
BE AFFECTED BY SUCH THINGS AS THE CLOSELY HELD NATURE OF THE STOCK AFTER THE
CONSUMMATION DATE, THE LACK OF IMMEDIATELY AVAILABLE AUDITED FINANCIAL
STATEMENTS AND THE FACT THAT THE NEW COMMON STOCK INITIALLY IS NOT EXPECTED TO
TRADE ON A MAJOR EXCHANGE. DUE TO THESE REASONS AND OTHERS, THE MARKET VALUE MAY
BE MATERIALLY DIFFERENT FROM THE REORGANIZATION EQUITY VALUE SET FORTH IN THE
VALUATION ANALYSIS.
58
XIV. ALTERNATIVES TO CONFIRMATION AND
CONSUMMATION OF THE PLAN
The Debtors believe the Plan affords holders of Claims the potential
for the greatest realization on the Debtors' assets and, therefore, is in the
best interests of such holders. If, however, the requisite acceptances are not
received, or the Plan is not subsequently confirmed and consummated, the
theoretical alternatives include (i) formulation of an alternative plan of
reorganization or (ii) liquidation of the Debtors under Chapter 7 or 11 of the
Bankruptcy Code.
A. ALTERNATIVE PLAN
If the requisite acceptances are not received or if the Plan is not
confirmed, the Debtors, or, if the Debtors' exclusive periods in which to file
and solicit acceptances of a reorganization plan have expired, any other
party-in-interest, could attempt to formulate and propose a different plan of
reorganization. Such a plan might involve either a reorganization and
continuation of the Debtors' businesses or an orderly liquidation of assets.
With respect to an alternative plan, the Debtors have explored various
other alternatives in connection with the extensive negotiation process involved
in the formulation and development of the Plan. The Debtors believe that the
Plan, which is the result of extensive negotiations between the Company, the
Noteholders' Committee, Warburg, Pincus, and the Creditors' Committee and their
professional representatives, enables the holders of Claims against the Debtors
to realize the greatest possible value under the circumstances and, that as
compared to any alternative plan of reorganization, the Plan has the greatest
chance to be confirmed and consummated.
B. LIQUIDATION UNDER CHAPTER 7 OR CHAPTER 11
If no plan is confirmed, the Chapter 11 Cases may be converted to cases
under Chapter 7 of the Bankruptcy Code, pursuant to which a trustee would be
elected or appointed to liquidate the Debtors' assets for distribution in
accordance with the priorities by the Bankruptcy Code. It is impossible to
predict precisely how the proceeds of the liquidation would be distributed to
the respective holders of Claims against the Debtors.
The Debtors believe that in liquidation under Chapter 7, before
Creditors receive any distribution, additional administrative expenses arising
from the appointment of a trustee and attorneys, accountants, and other
professionals to assist such trustee would cause a substantial diminution in the
value of the Debtors' Estates. The assets available for distribution to
Creditors would be reduced by such additional expenses and by Claims, some of
which would be entitled to priority, which would arise by reason of the
liquidation and from the rejection of leases and other executory contracts in
connection with the cessation of operations and the failure to realize the
greater going concern value of the Debtors' assets.
The Debtors could also be liquidated pursuant to the provisions of a
Chapter 11 plan of reorganization. In a liquidation under Chapter 11, the
Debtors' assets could be sold in an orderly fashion over a more extended period
of time than in a liquidation under Chapter 7. Thus, a Chapter 11 liquidation
might result in larger recoveries than in a Chapter 7 liquidation, but the delay
in distributions could result in lower present values received and higher
administrative costs. Because a trustee is not required in a Chapter 11 case,
expenses for professional fees could be lower than in a Chapter 7 case, in which
a trustee must be appointed. Any distribution to the holders of Claims under a
Chapter 11 liquidation plan probably would be delayed substantially.
The Debtors believe that, although preferable to a Chapter 7
liquidation, any alternative liquidation under Chapter 11 is a much less
attractive alternative to Creditors than the Plan. THE COMPANY BELIEVES THAT THE
PLAN AFFORDS SUBSTANTIALLY GREATER BENEFITS TO CREDITORS THAN WOULD A
LIQUIDATION UNDER CHAPTER 7 OR CHAPTER 11 OF THE BANKRUPTCY CODE.
The Liquidation Analysis, prepared by the Debtors with the assistance
of Jefferies, is premised upon a liquidation in a Chapter 7 case. In the
analysis, the Debtors have taken into account the nature, status, and underlying
value of their assets, the ultimate realizable value of such assets, and the
extent to which the assets are subject to liens and security interests.
59
The likely form of any liquidation would be the sale of individual
assets. Based on this analysis, it is likely that a liquidation of the Debtors'
assets would produce less value for distribution to creditors than that
recoverable in each instance under the Plan. In the Debtors' opinion, the
recoveries projected to be available in liquidation are not likely to afford
holders of Claims as great a realization potential as does the Plan.
XV. SOLICITATION; VOTING PROCEDURES
On or about June 6, 2002, the Bankruptcy Court entered an order
establishing solicitation, voting, and tabulation procedures (the "Solicitation
and Voting Procedures Order") which, among other things, established procedures
for voting on the Plan. On June 10, 2002, the Bankruptcy Court entered an order
approving this Disclosure Statement. A copy of the notice of the Confirmation
Hearing is enclosed with this Disclosure Statement. The notice of the
Confirmation Hearing sets forth in detail, among other things, procedures
governing voting deadlines and objection deadlines. The notice of Confirmation
Hearing and the instructions attached to the Ballot should be read in connection
with this section of this Disclosure Statement.
If you have any questions about the procedure for voting your Claim or
about the packet of materials you received or wish to obtain an additional copy
of the Plan, this Disclosure Statement, or any exhibits to such documents, at
your own expense, unless otherwise specifically required by Fed. R. Bankr. P.
3017(d), please contact the Information Agent:
MacKenzie Partners, Inc.
105 Madison Avenue, 14th Floor
New York, New York 10016-7418
Telephone: (212) 929-5500
(800) 322-2885
You may also obtain additional copies of the Plan and Disclosure
Statement by logging on to the Bankruptcy Court's website at
http://www.nysb.uscourts.gov. A password is needed to gain access to case
files. Details on how to obtain a password are available on the Bankruptcy
Court's website.
If you have any questions about the amount of your Claim, please
contact the Claims Agent:
Poorman-Douglas Corporation
10300 SW Allen Boulevard
Beaverton, Oregon 97005
Telephone: (877) 869-6372
The Bankruptcy Court may confirm the Plan only if it determines that
the Plan complies with the technical requirements of Chapter 11 of the
Bankruptcy Code and that the disclosures by the Debtors concerning the Plan have
been adequate and have included information concerning all payments made or
promised in connection with the Plan and the Chapter 11 Cases. In addition, the
Bankruptcy Court must determine that the Plan has been proposed in good faith
and not by any means forbidden by law and, under Fed. R. Bankr. P. 3020(b)(2),
it may do so without receiving evidence if no objection is timely filed.
In particular, the Bankruptcy Code requires the Bankruptcy Court to
find, among other things, that (i) the Plan has been accepted by the requisite
votes of the Classes of Impaired Claims and equity Interests unless approval
will be sought under section 1129(b) of the Bankruptcy Code in spite of the
dissent of one or more such classes, which will be the case under the Plan, (ii)
the Plan is "feasible," which means that there is a reasonable probability that
confirmation of the Plan will not be followed by liquidation or the need for
further financial reorganization, and (iii) the Plan is in the "best interests"
of all holders of Claims and equity Interests, which means that such holders
will receive at least as much under the Plan as they would receive in a
liquidation under Chapter 7 of the Bankruptcy Code. The Bankruptcy Court must
find that all conditions mentioned above are met before it can confirm the Plan.
Thus, even if all Classes of Impaired Claims accept the Plan by the requisite
votes, the Bankruptcy Court must make an independent finding that the Plan
conforms to
60
the requirements of the Bankruptcy Code, that the Plan is feasible, and that the
Plan is in the best interests of the holders of Claims against and equity
Interests in the Debtors. These statutory conditions to Confirmation are
discussed above.
A. FIDUCIARIES AND OTHER REPRESENTATIVES
If a Ballot is signed by a trustee, executor, administrator, guardian,
attorney-in-fact, officer of a corporation, or another acting in a fiduciary or
representative capacity, such person should indicate such capacity when signing
and, unless otherwise determined by the Debtors, must submit proper evidence
satisfactory to the Debtors of authority to so act. Authorized signatories
should submit separate Ballots for each beneficial owner for whom they are
voting.
UNLESS THE MASTER BALLOT BEING FURNISHED IS TIMELY SUBMITTED TO THE
INFORMATION AGENT ON OR PRIOR TO THE VOTING DEADLINE TOGETHER WITH ANY OTHER
DOCUMENTS REQUIRED BY SUCH BALLOT, THE DEBTORS MAY, IN THEIR SOLE DISCRETION,
REJECT SUCH BALLOT AS INVALID AND, THEREFORE, DECLINE TO COUNT IT AS AN
ACCEPTANCE OR REJECTION OF THE PLAN. IN NO CASE SHOULD A BALLOT OR ANY OF THE
SECURITIES BE DELIVERED TO THE DEBTORS OR ANY OF THEIR ADVISORS.
B. PARTIES IN INTEREST ENTITLED TO VOTE
Under section 1124 of the Bankruptcy Code, a class of claims or equity
interests is deemed to be impaired under a plan unless (i) the plan leaves
unaltered the legal, equitable, and contractual rights to which such claim or
equity interest entitles the holder thereof or (ii) notwithstanding any legal
right to an accelerated payment of such claim or equity interest, the plan cures
all existing defaults (other than defaults resulting from the occurrence of
events of bankruptcy) and reinstates the maturity of such claim or equity
interest as it existed before the default.
In general, a holder of a claim or equity interest may vote to accept
or to reject a plan if (i) the claim or equity interest is allowed, which means
generally that no party in interest has objected to such claim or equity
interest, and (ii) the claim or equity interest is impaired by the Plan. If the
holder of an impaired claim or interest will not receive or retain any
distribution under the plan in respect of such claim or interest, the Bankruptcy
Code deems such holder to have rejected the plan. If the claim or interest is
not impaired, the Bankruptcy Code deems that the holder of such claim or
interest has accepted the plan and the plan proponent need not solicit such
holder's vote.
The holder of a claim against the debtor that is impaired under the
plan is entitled to vote to accept or reject the plan if (i) the plan provides a
distribution in respect of such claim and (ii) (a) the claim has been scheduled
by the debtors (and such claim is not scheduled at zero or as disputed,
contingent, or unliquidated) or (b) it has filed a proof of claim on or before
the bar date applicable to such holder pursuant to sections 502(a) and 1126(a)
of the Bankruptcy Code and Fed. R. Bankr. P. 3003 and 3018. Any claim as to
which an objection has been timely filed and has not been withdrawn or dismissed
is not entitled to vote unless the Bankruptcy Court, pursuant to Fed. R. Bankr.
P. 3018(a), upon application of the holder of the claim with respect to which
there has been objection, temporarily allows the claim in an amount that the
Bankruptcy Court deems proper for the purpose of accepting or rejecting the
Plan.
A vote may be disregarded if the Bankruptcy Court determines, pursuant
to section 1126(e) of the Bankruptcy Code, that it was not solicited or procured
in good faith or in accordance with the provisions of the Bankruptcy Code. The
Solicitation and Voting Procedures Order also sets forth assumptions and
procedures for tabulating Ballots that are not completed fully or correctly.
C. CLASSES IMPAIRED UNDER THE PLAN
Class 3 Convenience Claims and Class 4 General Unsecured Claims are
Impaired under the Plan and entitled to vote on the Plan. Class 1 Other Priority
Claims, Class 2a AmSouth Secured Claim, Class 2b Citicorp Secured Claim, and
Class 2c Other Secured Claims are not Impaired under the Plan, are deemed under
section 1126(f) to have accepted the Plan, and their votes to accept or to
reject the Plan will not be solicited. Class 5 Preferred Stock Interests, Class
6 Common Stock Interests, Class 7 Shareholder Litigation Claims, and Class 8
Warrants Interests will receive no distributions and will retain no property
under the Plan arising from or under, or relating to, the ownership of Preferred
Stock, Common Stock, interests in Shareholder Litigation Claims, or Warrants
Interests, as the case may be, are deemed under section 1126(g) of the
Bankruptcy Code to have rejected the Plan, and their votes to accept or reject
the Plan will not be solicited.
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XVI. FINANCIAL ADVISORS; INFORMATION AND CLAIMS AGENTS; FEES AND EXPENSES
A. JEFFERIES & COMPANY, INC.
Pursuant to an engagement letter dated February 2, 2001, PhyCor engaged
Jefferies as its financial advisor to assist the Debtors in their analysis and
consideration of one or more possible transactions, including (i) any offer by
the Company or any of its subsidiaries with respect to the Company's 4.5%
Convertible Subordinated Debentures and Zero Coupon Notes (the "Existing
Securities"), (ii) a solicitation of votes, approvals, or consents regarding the
Existing Securities (including with respect to a prenegotiated plan of
reorganization pursuant to Chapter 11), (iii) an offer of new securities in
exchange for the Existing Securities, (iv) any offer to acquire Existing
Securities for cash, (v) any negotiation of, modifications to, or suspensions
of, the obligations to pay interest on the Existing Securities, or any
amendments thereof, and (vi) any negotiation of the financial aspects of any
restructuring.
Jefferies also agreed to provide financial advisory services, including
(i) becoming familiar with and analyzing the business, operations, properties,
financial condition, and prospects of the Company, (ii) advising the Company on
the state of the "restructuring market," (iii) assisting and advising the
Company in developing a general strategy for accomplishing a restructuring,
including evaluating the securities, if any, that may be issued to creditors
under any restructuring plan, and (iv) rendering such other financial advisory
services as might be agreed upon by the Company and Jefferies.
The Debtors obtained Bankruptcy Court approval to retain Jefferies as
their financial advisor in these Chapter 11 Cases on the terms set forth in the
Engagement Letter (see above). As compensation, the Debtors will pay Jefferies
(i) a monthly fee of $85,000, (ii) a Restructuring Fee of $250,000, and (iii)
disbursements and out-of-pocket expenses.
B. KPMG LLP
The Debtors obtained Bankruptcy Court approval to retain KPMG LLP as
their accountants, auditors, and tax and financial consultants to (i) review
financial and other information regarding the Debtors' operations and financial
position, (ii) assist the Debtors in connection with financial reporting matters
resulting from the Chapter 11 Cases and any reports required by the Court, (iii)
consult with the Debtors' management and counsel in connection with other
business matters relating to the activities of the Debtors, (iv) provide expert
testimony as required, (v) work with accountants and other financial consultants
for any committees and other creditor groups, and (vi) provide such other
accounting, auditing, tax, and financial consulting services as required by the
Debtors and their legal counsel. KPMG LLP will be compensated on an hourly
basis, plus their disbursements.
C. NOTEHOLDERS' COMMITTEE AND WARBURG, PINCUS
Pursuant to section 1129(a)(4) of the Bankruptcy Code, the Debtors have
agreed to pay reasonable out-of-pocket expenses of the Noteholders' Committee,
including the reasonable fees and expenses of its legal advisors. The
Noteholders' Committee was represented by Milbank, Tweed, Hadley & McCloy,
L.L.P., its legal advisor. Pursuant to section 1129(a)(4) of the Bankruptcy
Code, the Debtors have also agreed to pay the reasonable fees and expenses of
Warburg, Pincus, including the reasonable fees and expenses of its counsel,
Willkie Farr & Gallagher which, on behalf of Warburg, Pincus, has received a
retainer of $50,000 from the Company.
D. MACKENZIE PARTNERS, INC.
The Debtors obtained Bankruptcy Court approval to retain MacKenzie
Partners, Inc. ("MacKenzie") to serve as the Information Agent in connection
with the solicitation of votes to accept or reject the Plan. In particular,
MacKenzie will undertake the actions and procedures provided for in 28 U.S.C.
ss.156(c) and the guidelines promulgated thereunder by the Clerk's Office of the
United States Bankruptcy Court for the Southern District of New York, including,
(i) notifying all potential creditors of the filing of the bankruptcy petitions
by the Debtors and of the setting of the first meeting of creditors, (ii)
notifying all potential claimants of the amount of their respective claims, as
established by the Debtors' records, in accordance with the Schedules, (iii)
furnishing a notice of the last date for the filing of proofs of claim and a
form for filing a proof of claim to each creditor notified of the filing of
these cases, and (iv) providing subsequent distribution services as required.
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The Company will pay the Information Agent reasonable and customary
compensation for its services in connection with the solicitation, plus
reimbursement for its reasonable out-of-pocket disbursements. Brokers, dealers,
commercial banks, trust companies, and other nominees will be reimbursed by the
Company for customary mailing and handling expenses incurred by them in
forwarding materials to their customers, but, with the exception of the
Indenture Trustee, will not otherwise be compensated for their services. The
Company also will pay any other fees and expenses attributable to the
solicitation.
E. POORMAN-DOUGLAS CORPORATION
The Debtors obtained Bankruptcy Court approval to retain
Poorman-Douglas Corporation to serve as Claims Agent to (i) maintain all proofs
of claim filed in these cases, (ii) maintain all official claims registered by
docketing all proofs of claims on a claims register, the date the proof of claim
was filed with the Court, the claim number assigned to the proof of claim, and
the amount and classification asserted by such claimant, (iii) maintain original
proofs of claim in correct claim number order, (iv) transmit to the Clerk of the
Court an official copy of the claims register and provide the Clerk of the Court
with any information regarding the claims register upon request, (v) maintain an
up to date mailing list for all entities that have filed a proof of claim, which
shall be available upon request of a party-in-interest or the office of the
Clerk of the Court, (vi) be open to the public for examination of the original
proofs of claim without charge during regular business hours, (vii) record all
transfers of claims and provide notice of the transfer, (viii) make all original
documents in its possession available to the Clerk of the Court on an expedited
immediate basis, and (ix) promptly comply with such further conditions and
requirements as the Clerk of the Court may hereafter prescribe.
The Company will pay the Claims Agent reasonable and customary
compensation for its services in connection with the claims process, plus
reimbursement for its reasonable out-of-pocket disbursements.
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RECOMMENDATION AND CONCLUSION
For all of the reasons set forth in this Disclosure Statement, the
Debtors believe that Confirmation and consummation of the Plan is preferable to
all other alternatives. Consequently, the Debtors urge all eligible holders of
Impaired Claims to vote to ACCEPT the Plan, and to complete and return their
ballots so that they will be RECEIVED by the Information Agent on or before 5:00
p.m. Eastern Time on July 15, 2002.
Dated: New York, New York
June 6, 2002
PHYCOR, INC., et al.,
Debtors and Debtors-in-Possession
By: /s/ Tarpley B. Jones
-------------------------------------
Name: Tarpley B. Jones
Title: President and Chief Executive
Officer
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
Attorneys for PhyCor, Inc., et al.
By: /s/ Kayalyn A. Marafioti
-------------------------------------
Kayalyn A. Marafioti (KM 9362)
(A Member Of The Firm)
Thomas J. Matz (TM 5986)
Mark M. Brown (MB 1716)
Four Times Square
New York, New York 10036-6522
(212) 735-3000
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