<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 30, 1996,
or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _____________ to
_______________.
COMMISSION FILE NO.: 0-19786
PHYCOR, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
TENNESSEE 62-1344801
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
30 BURTON HILLS BLVD., SUITE 400
NASHVILLE, TENNESSEE 37215
- ---------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (615) 665-9066
--------------------------
NOT APPLICABLE
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- -----
As of August 12, 1996, 54,357,098 shares of the Registrant's Common Stock
were outstanding.
<PAGE> 2
PHYCOR, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 1996 (unaudited) and December 31, 1995
(All dollar amounts are expressed in thousands)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
ASSETS 1996 1995
------ -------- ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 37,594 18,827
Accounts receivable, net 216,156 167,028
Inventories 11,840 8,939
Prepaid expenses and other assets 29,074 22,727
-------- -------
Total current assets 294,664 217,521
Property and equipment, net 132,709 108,813
Intangible assets 446,037 308,963
Due from physician groups 12,954 8,289
-------- -------
Total assets $886,364 643,586
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current installments of long-term debt $ 305 587
Current installments of obligations under capital leases 1,514 1,799
Accounts payable 19,175 20,020
Income taxes payable 302 2,714
Due to physician groups 59,082 48,917
Salaries and benefits payable 16,777 11,381
Other accrued expenses and liabilities 38,636 20,683
-------- -------
Total current liabilities 135,791 106,101
Long-term debt, excluding current installments 12,392 65,905
Obligations under capital leases, excluding current installments 1,306 1,637
Convertible subordinated debentures 200,000 -
Convertible subordinated notes payable to physician groups 61,371 59,369
Due to physician groups 47,577 13,722
Deferred tax credits and other liabilities 13,337 8,030
-------- -------
Total liabilities 471,774 254,764
-------- -------
Shareholders' equity :
Preferred stock, no par value; 10,000,000 shares authorized: - -
Common stock, no par value; 250,000,000 shares authorized; issued
and outstanding, 54,334,000 in 1996 and 53,399,000 shares in 1995 372,870 363,211
Retained earnings 41,720 25,611
-------- -------
Total shareholders' equity 414,590 388,822
-------- -------
Total liabilities and shareholders' equity $886,364 643,586
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 3
PHYCOR, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
Three months and six months ended June 30, 1996 and 1995
(All amounts are expressed in thousands, except for earnings per share)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- ------------------------
1996 1995 1996 1995
-------- ------ ------- -------
<S> <C> <C> <C> <C>
Net revenue $176,643 99,146 339,144 191,910
Operating expenses (income):
Clinic salaries, wages and benefits 67,151 37,209 129,766 71,812
Clinic supplies 27,198 15,459 51,076 29,100
Purchased medical services 4,896 4,200 9,924 8,102
Other clinic expenses 29,402 15,068 56,546 30,673
General corporate expenses 5,289 3,404 10,275 6,923
Rents and lease expense 14,861 8,030 28,039 15,798
Depreciation and amortization 9,121 4,937 17,562 9,552
Interest income (1,323) (315) (2,037) (571)
Interest expense 3,777 1,830 6,555 2,958
Minority interests in earnings of
consolidated partnerships 2,581 1,816 5,244 3,210
-------- -------- -------- --------
Net operating expenses 162,953 91,638 312,950 177,557
-------- -------- -------- --------
Earnings before income taxes 13,690 7,508 26,194 14,353
Income tax expense 5,271 2,891 10,085 5,560
-------- -------- -------- --------
Net earnings $ 8,419 4,617 16,109 8,793
======== ======== ======== ========
Earnings per common share $ .14 .09 .27 .18
======== ======== ======== ========
Weighted average number of shares and share
equivalents outstanding 60,669 48,978 60,377 48,141
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
PHYCOR, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three months and six months ended June 30, 1996 and 1995
(All dollar amounts are expressed in thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -----------------------
1996 1995 1996 1995
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 8,419 4,617 16,109 8,793
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 9,121 4,937 17,562 9,552
Minority interests (698) 587 1,394 1,981
Increase (decrease) in cash, net of effects
of acquisitions, due to changes in:
Accounts receivable (3,083) 2,140 (15,625) (6,229)
Inventories (603) (349) (945) (769)
Prepaid expenses and other assets (855) (1,537) (6,105) (1,873)
Accounts payable (984) (328) (4,495) 146
Due to physician groups (476) (724) 2,606 4,653
Other accrued expenses and liabilities 1,808 (2,255) 11,977 908
-------- ------- ------- -------
Net adjustments 4,230 2,471 6,369 8,369
-------- ------- ------- -------
Net cash provided by operating activities 12,649 7,088 22,478 17,162
-------- ------- ------- -------
Cash flows from investing activities:
Payments for acquisitions, net (42,259) (21,980) (121,690) (64,297)
Purchase of property and equipment (10,302) (7,195) (23,463) (13,650)
Payments to acquire other assets (1,158) (954) (855) (2,121)
-------- ------- ------- -------
Net cash used by investment activities (53,719) (30,129) (146,008) (80,068)
-------- ------- ------- -------
Cash flows from financing activities:
Net proceeds from issuance of convertible debentures (63) - 194,395 -
Proceeds from long-term borrowings 8,000 27,000 50,000 72,100
Repayment of long-term borrowings (283) (99,594) (104,364) (99,636)
Repayment of obligations under capital leases (237) (309) (820) (865)
Net proceeds from issuance of stock and warrants 1,985 113,217 3,086 113,406
Loan costs incurred - - - (143)
-------- ------- ------- -------
Net cash provided by financing activities 9,402 40,314 142,297 84,862
-------- ------- ------- -------
Net increase (decrease) in cash and cash equivalents (31,668) 17,273 18,767 21,956
Cash and cash equivalents - beginning of period 69,262 11,143 18,827 6,460
-------- ------- ------- -------
Cash and cash equivalents - end of period $ 37,594 28,416 37,594 28,416
======== ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
PHYCOR, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Three months and six months ended June 30, 1996 and 1995
(All dollar amounts are expressed in thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
1996 1995 1996 1995
-------- ------- ------- -------
<S> <C> <C> <C> <C>
SUPPLEMENTAL SCHEDULE OF INVESTING ACTIVITIES:
Effects of acquisitions:
Assets acquired, net of cash $ 64,524 24,957 185,944 93,007
Liabilities assumed (16,475) (2,977) (55,600) (22,609)
Issuance of convertible subordinated notes payable (5,365) - (8,229) (6,101)
Issuance of common stock and warrants (425) - (425) -
-------- ------- ------- -------
Payments for acquired assets $ 42,259 21,980 121,690 64,297
======== ======= ======= =======
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations incurred to acquire
equipment $ - 61 186 61
======== ======= ======= =======
Conversion of subordinated debentures and
notes payable to common stock $ 2,985 1,193 6,143 33,244
======== ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
PHYCOR, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
Three months and six months ended June 30, 1996 and 1995
(1) BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial reporting and in accordance with Rule 10-01 of Regulation S-X.
In the opinion of management, the unaudited interim financial statements
contained in this report reflect all adjustments, consisting of only
normal recurring accruals which are necessary for a fair presentation of
the financial position and the results of operations for the interim
periods presented. The results of operations for any interim period are
not necessarily indicative of results for the full year.
These financial statements, footnote disclosures and other information
should be read in conjunction with the financial statements and the notes
thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1995.
(2) ACQUISITIONS
During 1996 and 1995, the Company, through wholly-owned subsidiaries,
acquired certain operating assets of the following clinics:
<TABLE>
<CAPTION>
CLINIC EFFECTIVE DATE LOCATION
------ -------------- --------
<S> <C> <C>
1996:
Arizona Physicians Center January 1, 1996 Phoenix, Arizona
Clinics of North Texas March 1, 1996 Wichita Falls, Texas
Carolina Primary Care May 1, 1996 Columbia, South Carolina
Harbin Clinic May 1, 1996 Rome, Georgia
1995:
Tidewater Physicians Multispeciality Group January 1, 1995 Newport News, Virginia
Northeast Arkansas Clinic March 1, 1995 Jonesboro, Arkansas
PAPP Clinic May 1, 1995 Newnan, Georgia
Ogden Clinic June 1, 1995 Ogden, Utah
Arnett Clinic August 1, 1995 Lafayette, Indiana
Casa Blanca Clinic September 1, 1995 Mesa, Arizona
South Texas Medical Clinics November 1, 1995 Wharton, Texas
South Bend Clinic (A) November 1, 1995 South Bend, Indiana
Guthrie Clinic (B) November 17, 1995 Sayre, Pennsylvania
</TABLE>
(A) The South Bend Clinic was operated by the Company under a
management agreement between November 1, 1995 and December 31,
1995. Effective January 1, 1996, the Company completed the
purchase of certain clinic operating assets and entered into a
40-year service agreement with the affiliated physician group.
(B) The Company has entered into a series of agreements with Guthrie
Clinic whereby the Company agreed to provide management services
for up to five years and agreed, pending satisfaction of certain
conditions, to acquire certain assets of the clinic prior to the
termination or expiration of the interim management agreement.
In addition, the Company acquired certain operating assets of various
individual physician practices and single specialty groups which were
merged into clinics already operated by the Company.
The acquisitions were accounted for as purchases, and the accompanying
consolidated financial statements include the results of their operations
from the dates of their respective acquisitions. Simultaneous with each
acquisition, the Company entered into a long-term service agreement with
the related clinic physician group. The service agreements are 40 years
in length. In conjunction with certain acquisitions, the Company is
obligated to make deferred payments to physician groups. Such payments
are included in amounts due to physician groups in the accompanying
balance sheets.
(Continued)
6
<PAGE> 7
PHYCOR, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
Effective January 1, 1995, the Company completed its merger with North
American Medical Management, Inc. ("North American"), an operator and
manager of independent practice associations (IPAs). North American IPAs
provide capitated medical services through over 7,000 affiliated
physicians. The Company may make future payments for the North American
acquisition pursuant to an earn-out formula during 1996, 1997, and 1998
of up to an aggregate of $70 million, subject to adjustment to a maximum
of $130 million in the event of future acquisitions by North American of
additional interests in IPA management entities. The first of such
payments was made in the first quarter of 1996. Of the future payments
made, a portion may be payable in shares of the Company's common stock.
The unaudited consolidated pro forma results of all current, continuing
operations assuming all 1996 and 1995 acquisitions, excluding the Guthrie
Clinic which is operated under a management agreement, had been
consummated on January 1, 1995 are as follows (in thousands, except for
earnings per share):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- ------------------------
1996 1995 1996 1995
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenue $179,682 138,107 335,447 273,180
Earnings before income taxes 13,951 10,275 27,435 20,145
Net earnings 8,580 6,319 16,872 12,326
Earnings per common share .14 .12 .28 .25
Weighted average number of shares and share
equivalents outstanding 60,687 51,065 60,465 50,397
</TABLE>
(3) NET REVENUE
Revenue for all physician groups is recorded at established rates reduced
by allowances for doubtful accounts and contractual adjustments.
Contractual adjustments arise due to the terms of certain reimbursement
and managed care contracts. Such adjustments represent the difference
between charges at established rates and estimated reimbursable amounts
and are recognized by the physician groups in the period the services are
rendered. Any differences between estimated contractual adjustments and
actual final settlements under reimbursement contracts are recorded by
the physician groups as contractual adjustments in the period final
settlements are made.
The following represent amounts included in the determination of net
revenue (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- ------------------------
1996 1995 1996 1995
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Gross physician group revenues $450,526 239,274 855,636 466,078
Less:
Provisions for doubtful accounts
and contractual adjustments 162,791 80,593 305,139 154,512
-------- ------- ------- -------
Net physician group revenue 287,735 158,681 550,497 311,566
IPA revenue 59,966 33,541 112,852 61,631
Less amounts retained by physician groups and IPAs:
IPAs 48,669 26,513 91,258 49,287
Physician groups 110,832 60,016 210,754 119,310
Clinic technical employee compensation 11,557 6,547 22,193 12,690
-------- ------- ------- -------
Net revenue $176,643 99,146 339,144 191,910
======== ======= ======= =======
</TABLE>
(Continued)
7
<PAGE> 8
PHYCOR, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(4) CAPITALIZATION
During February 1996, the Company completed a public offering of
convertible subordinated debentures, which mature in 2003. Gross and net
proceeds from the offering were $200,000,000 and approximately
$194,400,000, respectively. The debentures were priced at par with a
coupon rate of 4.5% and are convertible into the Company's common stock
at $38.67 per share. The debentures may not be redeemed at the Company's
option prior to February 15, 1998. From February 15, 1998 to February
15, 1999, the debentures may be redeemed only if the price of the
Company's common stock exceeds $54.13. From February 15, 1999 to
maturity, the debentures may be redeemed by the Company at prices
decreasing from 102.572% of face value to face value.
On May 15, 1996, the Company's shareholders approved an amendment to the
Company's Restated Charter which increased from 100,000,000 shares to
250,000,000 shares the number of authorized shares of the Company's
Common Stock.
On May 10, 1996, the Company declared a three-for-two split effected in
the form of a 50% stock dividend on outstanding shares distributed June
14, 1996 to shareholders of record on May 29, 1996. All common shares
and per share data included in the financial statements and footnotes
thereto are restated to reflect the stock split.
(5) SUBSEQUENT EVENTS
Effective July 1, 1996, the Company completed the purchase of certain
clinic operating assets of Focus Health Services/Front Range Medical
Management, a multi-specialty physician clinic and management company
based in Denver, Colorado and entered into a 40-year service agreement
with the 58-physician group and 240-physician IPA associated with the
clinic.
Also, effective July 1, 1996, the Company completed the purchase of
certain clinic operating assets of Clark- Holder Clinic, a
multi-specialty physician clinic based in LaGrange, Georgia and entered
into a 40-year service agreement with the 47-physician group associated
with the clinic.
Effective August 1, 1996, the Company completed the purchase of certain
clinic operating assets of Medical Arts Clinic, a 43-physician
multi-specialty clinic based in Minot, North Dakota, Wilmington Health
Associates, a 42-physician multi-specialty clinic based in Wilmington,
North Carolina and Gulf Coast Medical Group, a 38-physician
multi-specialty clinic based in Galveston, Texas and entered into a
40- year service agreements with the physician groups associated with
the clinics.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
PhyCor is a physician practice management company that operates
multi-specialty clinics and independent practice associations ("IPAs"). The
Company owns and operates 40 clinics with approximately 2,400 physicians in 22
states and manages IPAs with over 7,000 physicians in 14 markets. The
Company's clinics and IPAs provide capitated medical services to approximately
682,000 patients, including approximately 85,000 Medicare-eligible patients.
The Company's strategy is to position its affiliated primary care-anchored
multi-specialty clinics and IPAs as the physician component of competitive
networks that are developing as the health care system reforms. PhyCor
believes physician organizations create the value in these networks as the
decisions of physicians drive the cost and quality of health care. Most of
the revenue in 1995 and 1996 was earned under clinic service agreements.
Revenue earned under the service agreements is equal to the net revenue of
clinics, less amounts retained by physician groups. The service agreements
contain financial incentives for the Company to assist the physician groups in
increasing clinic revenues and controlling expenses.
To increase clinic revenue, the Company works with the affiliated
physician groups to recruit additional physicians, merge other physicians
practicing in the area into the affiliated physician groups, negotiate
contracts with managed care organizations and provide ancillary services. To
reduce or control expenses PhyCor utilizes, among other things, national
purchasing contracts for key items, reviews staffing levels to make sure they
are appropriate and assists the physicians in developing more cost-effective
clinical practice patterns.
The Company has increased its focus on the development of IPAs to enable
the Company to provide services to a broader range of physician organizations,
to enhance the operating performance of existing clinics and to further develop
physician relationships. The Company develops IPAs that include affiliated
clinic physicians to enhance the clinics' attractiveness as providers to
managed care organizations.
PhyCor expanded its presence in the IPA management business in 1995 when
it acquired North American Medical Management, Inc. ("North American"), which
develops and manages IPAs. The Company also made a minority investment in
PhyCor Management Corporation ("PMC"). PMC develops and manages IPAs and
provides management services to physician organizations.
9
<PAGE> 10
During the first six months of 1996, PhyCor acquired certain operating
assets of five multi-specialty clinics, including the South Bend Clinic, which
the Company operated under a management agreement during November and December
1995, and numerous individual physician and single specialty practices, for a
total consideration of $158.3 million. The principal assets acquired were
accounts receivable, property and equipment and service agreement costs, an
intangible asset. The consideration for clinic asset acquisitions in the first
six months of 1996 consisted of approximately 68% cash, 27% liabilities assumed
and 5% convertible notes, warrants and stock. The cash portion of the purchase
price was funded by a combination of operating cash flow, proceeds from the
issuance of convertible subordinated debentures, and borrowings under the
Company's bank credit facility. Property and equipment acquired consists
primarily of clinic operating equipment, although the Company does own certain
land and buildings. Service agreement costs are amortized over the life of the
related service agreement, with recoverability assessed periodically.
Effective July 1, 1996, the Company acquired the assets of a 58-physician
group based in Denver, Colorado and entered into a 40-year service agreement
with the group and the associated 240-physician IPA. The Company also acquired
the assets of a 47-physician group in LaGrange, Georgia, effective July 1,
1996. Effective August 1, 1996, the Company acquired the assets of a
43-physician group in Minot, North Dakota; a 42-physician group in Wilmington,
North Carolina; and a 38-physician group based in Galveston, Texas. The
Company also entered into 40-year service agreements with these physician
groups.
10
<PAGE> 11
RESULTS OF OPERATIONS
The following table shows the percentage of net revenue represented by
various expense and other income items reflected in the Company's Consolidated
Statements of Earnings.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1996 1995 1996 1995
------ ----- ----- -----
<S> <C> <C> <C> <C>
Net Earnings................ 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Clinic salaries, wages and
benefits ................... 38.0 37.5 38.3 37.4
Clinic supplies ............ 15.4 15.6 15.1 15.1
Purchased medical services . 2.8 4.2 2.9 4.2
Other clinic expenses ...... 16.6 15.2 16.7 16.0
General corporate expenses . 3.0 3.4 3.0 3.6
Rents and lease expense .... 8.4 8.1 8.3 8.2
Depreciation and
amortization ............... 5.1 5.0 5.2 5.0
Interest income ............ (0.7) (0.1) (0.6) (0.1)
Interest expense ........... 2.1 1.8 1.9 1.5
Minority interest in
earnings of consolidated
partnerships ............... 1.5 1.7 1.5 1.6
----- ----- ----- -----
Net operating expenses ... 92.2 92.4 92.3 92.5
----- ----- ----- -----
Earnings before income
taxes .................... 7.8 7.6 7.7 7.5
Income tax expense.......... 3.0 2.9 3.0 2.9
----- ----- ----- -----
Net earnings ............. 4.8% 4.7% 4.7% 4.6%
===== ===== ===== =====
</TABLE>
1996 Compared to 1995
Net revenue increased from $99.1 million for the second quarter of 1995 to
$176.6 million for the second quarter of 1996, an increase of 78% and from
$191.9 million to $339.1 million for the first six months of 1995 compared to
1996, an increase of 77%. Net revenue from the 23 service agreements in effect
for both periods increased by 18.6% for the second quarter and 18.1% for the
first six months of 1996 compared with the same periods in 1995. Same clinic
growth resulted from the addition of new physicians, the expansion of ancillary
services, increases in patient volume and increases in fees. The remaining
increase was the result of the acquisition of clinic assets.
11
<PAGE> 12
During the second quarter and the first six months of 1996, most
categories of operating expenses were relatively unchanged as a percentage of
net revenue when compared to the same periods in 1995, despite the large
increase in the amount of such expenses resulting from acquisitions and clinic
growth. The increase in clinic salaries, wages and benefits resulted from the
acquisition of clinics with higher levels of these expenses compared to the
existing base of clinics and the addition of primary care physicians at
existing clinics. The ratio of staffing costs to net revenue is higher for
primary care practices than for specialty care. The reductions in purchased
medical services as a percentage of net revenue resulted from the Company's
continuing efforts to reduce clinic operating costs by improving the
productivity of non-physician personnel and limiting payments for outside
medical services. While general corporate expenses decreased as a percentage
of net revenue, the dollar amount of general corporate expenses increased as a
result of the addition of corporate personnel to accommodate increased
acquisition activity and to respond to increasing physician group needs for
support in managed care negotiations, information systems implementation and
clinical outcomes management programs.
Income tax expense increased from the prior year as a result of the
Company's increased profitability. The Company expects an effective tax rate
of approximately 38.5% in 1996.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, the Company had $158.9 million in working capital, up
from $111.4 million as of December 31, 1995. Also, the Company generated $12.6
million of cash flow from operations for the second quarter of 1996 compared to
$7.1 million for the second quarter of 1995 and $22.5 million for the first six
months of 1996 compared to $17.2 million for the same period in 1995. At June
30, 1996, net accounts receivable of $216.2 million amounted to 70 days of net
clinic revenue compared to $201.1 million and 73 days at March 31, 1996 and
$167.0 million and 68 days at the end of the prior year. The increase is
attributable to growth in revenues at the Company's clinics and
seasonal factors affecting payments from some payors and patients'
responsibility for beginning of year deductible requirements.
During February 1996, the Company completed a public offering of
convertible subordinated debentures, which mature in 2003. Gross and net
proceeds from the offering were $200.0 million and approximately $194.4
million, respectively. The debentures were priced at par with a coupon rate of
4.5% and are convertible into the Company's common stock at $38.67 per share.
The debentures may not be redeemed at the Company's option prior to February
15, 1998. From February 15, 1998 to February 15, 1999, the debentures may be
redeemed only if the price of the Company's common stock exceeds $54.13. From
February 15, 1999 to maturity, the debentures may be redeemed by the Company at
prices decreasing from 102.572% of par value to par value. As a result of the
issuance of convertible subordinated debentures during the quarter, debt was
43.8% of total capitalization at June 30, 1996, compared to 26.6% at the end of
1995.
12
<PAGE> 13
In the first six months of 1996, $6.1 million of convertible subordinated
notes issued in connection with physician group asset acquisitions were
converted into common stock. These conversions, option exercises and net
earnings for the first six months of 1996 resulted in an increase of $25.8
million in shareholders' equity compared to December 31,1995.
Capital expenditures during the first six months of 1996 totaled $23.5
million. In addition, deferred acquisition payments are payable to physician
groups in the event such physician groups attain predetermined financial
targets during established periods of time following the acquisitions. If each
group satisfied their applicable financial targets for the periods covered, the
Company would be required to pay an aggregate of approximately $52.0 million of
additional consideration over the next five years, of which $15.4 million would
be payable during the remainder of 1996. The Company is committed to make
specified levels of capital expenditures, including the financing of the
acquisition of the assets of physician practices, under its service agreements.
The Company expects to make approximately $27 million in capital expenditures
during the remainder of 1996.
In July 1996, the Company completed modifications to its bank credit
facility which included the revision of certain terms and conditions and the
addition of six participating financial institutions. The Company's bank
credit facility provides for a five year, $200.0 million revolving line of
credit and a $100.0 million 364-day facility for use by the Company prior to
July 2001, for acquisitions, working capital, capital expenditures and general
corporate purposes. As of August 12, 1996, $30.0 million in borrowings were
outstanding under the Company's bank credit facility. The bank credit facility
provides that borrowings under the facility bear interest at the agent's base
rate or .25% to .55% above the applicable Eurodollar rate. The Company is
required to pay a facility fee of between .10% to .25% per annum on the
commitments, payable quarterly in arrears, until the commitments are
terminated. The total drawn cost of borrowings under the bank credit facility
ranges from .375% to .75% per annum.
The bank credit facility contains covenants which, among other things,
require the Company to maintain certain financial ratios and impose certain
limitations or prohibitions on the Company with respect to (i) the incurring of
certain indebtedness, (ii) the creation of security interests on the assets of
the Company, and (iii) the payment of cash dividends on, and the redemption or
repurchase of, securities of the Company, investments and acquisitions. The
Company is required to obtain bank consent for an acquisition with an aggregate
purchase price of $50.0 million or more. The Company was in compliance with
such covenants at June 30, 1996.
At June 30, 1996, the Company had cash and cash equivalents of
approximately $37.6 million and, as of August 12, 1996, has $269.5 million
available under its bank credit facility. The Company believes that the
combination of funds available under its bank credit facility, together with
cash reserves and cash flow from operations, should be sufficient
13
<PAGE> 14
to meet the Company's currently planned acquisition, expansion, capital
expenditures and working capital needs for the next 12 months. In addition, in
order to provide the funds necessary for the continued pursuit of the Company's
long-term expansion strategy, PhyCor expects to continue to incur, from time to
time, additional short-term and long-term bank indebtedness and to issue equity
and debt securities, the availability and terms of which will depend upon market
and other conditions. There can be no assurance that such additional financing
will be available on terms acceptable to the Company.
PART II
OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The annual meeting of shareholders of the Company was held on Wednesday,
May 15, 1996. At this meeting, the following matters were voted upon by the
Company's shareholders:
(a) Amendment to the Company's Restated Charter
The Company's Restated Charter was amended to increase number of shares of
Common Stock authorized thereunder from 100,000,000 to 250,000,000. This
amendment was approved by the shareholders of the Company by the following
vote:
Votes Cast in Favor Votes Cast Against Abstentions
------------------- ------------------ -----------
18,356,318 5,438,503 36,330
(b) Amendment to the Company's Amended 1988 Incentive Stock Plan
The Company's shareholders approved the amendment to the Company's Amended
1988 Incentive Stock Plan to (i) increase from 6,000,000 to 9,000,000 the
number of shares of Common Stock authorized thereunder and (ii) amend the
definition of the term "retirement" to include the retirement of an employee
who is at least 55 years old and has been continuously employed by the Company
for a period of at least 20 years.
Votes Cast in Favor Votes Cast Against Abstentions
------------------- ------------------ -----------
14,276,399 6,432,387 52,007
(c) Amendments to the Company's Amended 1991 Employee Stock Purchase Plan
The Company's shareholders approved the amendment to the Company's Amended
1991 Employee Stock Purchase Plan to increase from
14
<PAGE> 15
562,500 to 1,000,000 the number of shares authorized thereunder by the following
vote:
Votes Cast in Favor Votes Cast Against Abstentions
------------------- ------------------ -----------
20,347,488 421,394 49,298
(d) Election of Class II Directors
Sam A. Brooks, Jr., Thompson S. Dent and Dr. James A. Moncrief were
elected to serve as Class II directors of the Company. The vote was as
follows:
<TABLE>
<CAPTION>
Votes Cast Votes Cast
Name in Favor Against or Withheld Abstentions
- ---- ---------- -------------------- -----------
<S> <C> <C> <C>
Sam A. Brooks, Jr. 23,559,164 0 334,739
Thompson S. Dent 23,558,914 0 334,989
Dr. James A. Moncrief 23,558,914 0 334,989
</TABLE>
(e) Selection of Auditors
The shareholders of the Company ratified the appointment of KPMG Peat
Marwick LLP as the Company's independent auditors for the fiscal year ended
December 31,1996, by the following vote:
Votes Cast in Favor Votes Cast Against Abstentions
------------------- ------------------ -----------
23,826,961 31,448 19,239
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit
Number Description of Exhibits
------- -----------------------
11 -- Statement re Computation of Per Share Earnings
27 -- Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K.
The Company did not file any Current Reports on Form 8-K during the
quarter ended June 30, 1996.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
PHYCOR, INC.
By: /s/ John K. Crawford
---------------------------
John K. Crawford
Chief Financial Officer
Date: August 12, 1996
16
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits Page Number
------- ----------------------- -----------
<S> <C> <C>
11 -- Statement re Computation
of Per Share Earnings
27 -- Financial Data Schedule
(for SEC use only)
</TABLE>
<PAGE> 1
EXHIBIT 11
PHYCOR, INC. AND SUBSIDIARIES
Statement regarding computation of per share earnings
Three months and six months ended June 30, 1996 and 1995
(All amounts are expressed in thousands, except for earnings per share)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ -----------------------
1996 1995 1996 1995
------- ------ ------ ------
<S> <C> <C> <C> <C>
Earnings per common share:
Net income (in thousands) $ 8,419 4,617 16,109 8,793
======= ====== ====== ======
Earnings per share $ .14 .09 .27 .18
======= ====== ====== ======
Weighted average common
shares outstanding 60,669 48,978 60,377 48,141
======= ====== ====== ======
Earnings per common share, assuming full dilution:
Net income (in thousands) $ 8,419 4,617 16,109 8,793
======= ====== ====== ======
Earnings per share $ .14 .09 .27 .18
======= ====== ====== ======
Weighted average common
shares outstanding 67,121 49,195 65,752 48,443
======= ====== ====== ======
</TABLE>
Note: The convertible debentures were not included in the
calculation of the fully diluted earnings per share since the
effect of inclusion would be antidilutive.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 37,594
<SECURITIES> 0
<RECEIVABLES> 216,156
<ALLOWANCES> 0
<INVENTORY> 11,840
<CURRENT-ASSETS> 294,664
<PP&E> 178,015
<DEPRECIATION> 45,306
<TOTAL-ASSETS> 886,364
<CURRENT-LIABILITIES> 135,791
<BONDS> 212,392
0
0
<COMMON> 372,870
<OTHER-SE> 41,720
<TOTAL-LIABILITY-AND-EQUITY> 886,364
<SALES> 0
<TOTAL-REVENUES> 339,144
<CGS> 0
<TOTAL-COSTS> 301,151
<OTHER-EXPENSES> 5,244
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,555
<INCOME-PRETAX> 26,194
<INCOME-TAX> 10,085
<INCOME-CONTINUING> 16,109
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,109
<EPS-PRIMARY> .27
<EPS-DILUTED> .27
</TABLE>
