<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 September 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 (Zip Code)
offices)
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 November 12, 1996, 54,668,411 shares of the Registrant's Common
Stock were outstanding.
<PAGE> 2
PHYCOR, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 1996 (unaudited) and December 31, 1995
(All dollar amounts are expressed in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1996 1995
------------ -----------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 31,283 18,827
Accounts receivable, net 249,541 167,028
Inventories 13,765 8,939
Prepaid expenses and other assets 32,292 22,727
--------- -------
Total current assets 326,881 217,521
Property and equipment, net 143,536 108,813
Intangible assets 504,648 308,963
Other assets 14,807 8,289
--------- -------
Total assets $ 989,872 643,586
========= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 277 587
Current installments of obligations under capital leases 1,304 1,799
Accounts payable 22,861 20,020
Income taxes payable 1,379 2,714
Due to physician groups 66,944 48,917
Salaries and benefits payable 20,580 11,381
Other accrued expenses and liabilities 44,777 20,683
--------- -------
Total current liabilities 158,122 106,101
Long-term debt, excluding current installments 62,325 65,905
Obligations under capital leases, excluding current installments 1,556 1,637
Convertible subordinated debentures 200,000 -
Convertible subordinated notes payable to physician groups 65,699 59,369
Due to physician groups 56,900 13,722
Deferred tax credits and other liabilities 13,561 8,030
--------- -------
Total liabilities 558,163 254,764
--------- -------
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, 54,487,000 in 1996 and 53,399,000 shares in 1995 380,916 363,211
Retained earnings 50,793 25,611
--------- -------
Total shareholders' equity 431,709 388,822
--------- -------
Total liabilities and shareholders equity $ 989,872 643,586
========= =======
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 3
\ PHYCOR, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
Three months and nine months ended September 30, 1996 and 1995
(All amounts are expressed in thousands, except for earnings per share)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1996 1995 1996 1995
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenue $196,418 114,038 535,562 305,948
Operating expenses (income):
Clinic salaries, wages and benefits 74,727 42,320 204,493 114,132
Clinic supplies 30,383 17,799 81,459 46,899
Purchased medical services 5,371 4,469 15,295 12,571
Other clinic expenses 32,191 18,673 88,737 49,346
General corporate expenses 5,032 3,468 15,307 10,391
Rents and lease expense 16,729 9,790 44,768 25,588
Depreciation and amortization 10,596 5,532 28,158 15,084
Interest income (755) (515) (2,792) (1,086)
Interest expense 4,206 708 10,761 3,666
Minority interests in earnings of
consolidated partnerships 3,185 1,770 8,429 4,980
-------- ------- ------- -------
Net operating expenses 181,665 104,014 494,615 281,571
-------- ------- ------- -------
Earnings before income taxes 14,753 10,024 40,947 24,377
Income tax expense 5,680 3,909 15,765 9,469
-------- ------- ------- -------
Net earnings $ 9,073 6,115 25,182 14,908
======== ======= ======= =======
Earnings per common share $ .15 .11 .42 .29
======== ======= ======= =======
Weighted average number of shares and share
equivalents outstanding 60,843 58,172 60,555 51,786
======== ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
PHYCOR, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three months and nine months ended September 30, 1996 and 1995
(All dollar amounts are expressed in thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ------------------------
1996 1995 1996 1995
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 9,073 6,115 25,182 14,908
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 10,596 5,532 28,158 15,084
Minority interests 192 (696) 1,586 1,285
Increase (decrease) in cash, net of effects
of clinic acquisitions, due to changes in:
Accounts receivable (14,594) (5,113) (30,219) (11,342)
Inventories (1,362) (404) (2,307) (1,173)
Prepaid expenses and other assets (3,059) 66 (9,164) (1,807)
Accounts payable 1,588 1,474 (2,907) 1,620
Due to physician groups 4,637 1,078 7,243 5,731
Other accrued expenses and liabilities 7,189 3,419 19,166 4,327
-------- ------- -------- --------
Net adjustments 5,187 5,356 11,556 13,725
-------- ------- -------- --------
Net cash provided by operating activities 14,260 11,471 36,738 28,633
-------- ------- -------- --------
Cash flows from investing activities:
Payments for acquisitions, net of cash acquired (57,434) (45,246) (179,124) (109,543)
Purchase of property and equipment (12,606) (6,337) (36,069) (19,987)
Proceeds from (investments in) other assets (820) 1,505 (1,675) (616)
-------- ------- -------- --------
Net cash used by investment activities (70,860) (50,078) (216,868) (130,146)
-------- ------- -------- --------
Cash flows from financing activities:
Net proceeds from issuance of convertible debentures - - 194,395 -
Proceeds from long-term borrowings 50,000 42,000 100,000 114,100
Repayment of long-term borrowings (100) (128) (104,464) (99,764)
Repayment of obligations under capital leases (450) (478) (1,270) (1,343)
Net proceeds (expense) from issuance of stock and warrants 924 (48) 4,010 113,358
Loan costs incurred (85) (58) (85) (201)
-------- ------- -------- --------
Net cash provided by financing activities 50,289 41,288 192,586 126,150
-------- ------- -------- --------
Net increase (decrease) in cash and cash equivalents (6,311) 2,681 12,456 24,637
Cash and cash equivalents - beginning of period 37,594 28,416 18,827 6,460
-------- ------- -------- --------
Cash and cash equivalents - end of period $ 31,283 31,097 31,283 31,097
======== ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
PHYCOR, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Three months and nine months ended September 30, 1996 and 1995
(All dollar amounts are expressed in thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ------------------------
1996 1995 1996 1995
-------- ------- -------- -------
<S> <C> <C> <C> <C>
SUPPLEMENTAL SCHEDULE OF INVESTING ACTIVITIES:
Effects of acquisitions:
Assets acquired, net of cash $ 88,422 95,593 274,366 188,600
Liabilities assumed (36,487) (31,210) (135,936) (62,283)
Payment of deferred purchase price obligations 16,944 6,821 60,793 15,285
Issuance of convertible subordinated notes payable (4,438) (13,085) (12,667) (19,186)
Issuance of common stock and warrants (7,007) (12,873) (7,432) (12,873)
-------- ------- -------- -------
Payments for acquisitions $ 57,434 45,246 179,124 109,543
======== ======= ======== =======
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Capital lease obligations incurred to acquire equipment $ 278 70 464 131
======== ======= ======== =======
Conversion of subordinated debentures and
notes payable to common stock $ 110 18,255 6,252 51,499
======== ======= ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
PHYCOR, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
Six months and nine months ended September 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
Through September 30, 1996 and during 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
Focus Health Services July 1, 1996 Denver, Colorado
Clark-Holder Clinic July 1, 1996 LaGrange, Georgia
Medical Arts Clinic August 1, 1996 Minot, North Dakota
Wilmington Health Associates August 1, 1996 Wilmington, North Carolina
Gulf Coast Medical Group August 1, 1996 Galveston, Texas
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
Case 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.
(Continued)
6
<PAGE> 7
PHYCOR, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
During the third quarter, the Company also completed its acquisition of
SPACO Management Company, Inc. (SPACO), an IPA management company in
Dallas, Texas, and certain assets of Southwest Physician Associates, a
972-physician IPA associated with SPACO. 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.
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 approximately 8,000 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -----------------------
1996 1995 1996 1995
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenue $199,347 155,134 584,951 461,221
Earnings before income taxes 14,864 12,657 44,111 34,700
Net earnings 9,141 7,721 27,128 21,205
Earnings per common share .15 .13 .45 .40
Weighted average number of shares and share
equivalents outstanding 60,853 59,423 60,726 53,267
</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.
(Continued)
7
<PAGE> 8
PHYCOR, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
The following represent amounts included in the determination of net
revenue (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1996 1995 1996 1995
-------- ------- --------- -------
<S> <C> <C> <C> <C>
Gross physician group revenues $488,208 275,566 1,343,844 741,644
Less:
Provisions for doubtful accounts
and contractual adjustments 179,649 93,504 484,788 248,016
-------- ------- --------- -------
Net physician group revenue 308,559 182,062 859,056 493,628
IPA revenue 58,926 38,209 171,778 99,840
Less amounts retained by physician groups and IPAs
IPAs 45,727 30,772 136,985 80,059
Physician groups 112,443 67,718 323,197 187,028
Clinic technical employee compensation 12,897 7,743 35,090 20,433
-------- ------- --------- -------
Net revenue $196,418 114,038 535,562 305,948
======== ======= ========= =======
</TABLE>
(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 October 1, 1996, the Company completed the purchase of certain
clinic operating assets of Hattiesburg Clinic, a 100-physician
multi-specialty clinic based in Hattiesburg, Mississippi and entered into a
40-year service agreement with the associated physician group.
On October 2, 1996, PhyCor entered into a definitive agreement to merge
with the Straub Clinic and Hospital Incorporated, an integrated health care
system comprised of a 150-physician multi-specialty clinic and a 159-bed
acute care hospital based in Honolulu, Hawaii. This agreement also
includes management of a 40-physician multi-specialty group on Guam which
is 50% owned by Straub. PhyCor has also entered into an interim
administrative services agreement with the physician group associated with
this system, effective until completion of the merger. The merger, which
is subject to certain regulatory, Straub shareholder, and other approvals,
is expected to be completed before the end of January 1997.
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 42 clinics with approximately 2,850 physicians in 24
states and manages IPAs with over 8,700 physicians in 15 markets. The
Company's IPAs, which are networks of independent physicians, provide capitated
medical services to approximately 761,000 patients, including approximately
92,000 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 nine months of 1996, PhyCor acquired certain
operating assets of ten 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 $173.6 million. PhyCor also completed
its acquisition of SPACO Management Company, Inc. (SPACO), an IPA management
company in Dallas, Texas, and certain assets of Southwest Physician Associates,
a 972-physician IPA associated with SPACO. 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
nine months of 1996 consisted of approximately 67% cash, 25% liabilities
assumed and 8% 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 October 1, 1996, the Company acquired the assets of a
100-physician group based in Hattiesburg, Mississippi and entered into a
40-year service agreement with the affiliated physician group. On October 2,
1996, PhyCor entered into a definitive agreement to merge with the Straub
Clinic and Hospital Incorporated, an integrated health care system comprised of
a 150-physician multi-specialty clinic and a 159-bed acute care hospital in
Honolulu, Hawaii. This agreement also includes management of a 40-physician
multi-specialty group on Guam which is 50% owned by Straub. PhyCor has also
entered into an interim administrative services agreement, effective until
completion of the merger, with the physician group associated with this
system. The merger, which is subject to certain regulatory, Straub
shareholder, and other approvals, is expected to be completed in January 1997.
PhyCor has reached agreements in principal to affiliate with four
additional multi-specialty physician clinics. These transactions will add two
clinics in Florida, one in Virginia, and one in Ohio to the Company's network
of affiliated clinics and will add approximately 320 affiliated physicians.
PhyCor expects to complete these transactions and enter into a long-term
service agreement with each of these physician groups within the next three
months. Consummation of these transactions is subject to completion of
definitive agreements.
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 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 37.1 38.2 37.3
Clinic supplies ............................. 15.5 15.6 15.2 15.3
Purchased medical services ................... 2.7 3.9 2.8 4.1
Other clinic expenses ....................... 16.4 16.4 16.6 16.1
General corporate expenses 2.6 3.0 2.8 3.4
Rents and lease expense ..................... 8.5 8.6 8.4 8.4
Depreciation and amortization ................ 5.4 4.9 5.3 4.9
Interest income ............................. (0.3) (0.5) (0.5) (0.3)
Interest expense ............................. 2.1 0.6 2.0 1.2
Minority interest in earnings of
consolidated partnerships .................... 1.6 1.6 1.6 1.6
----- ----- ----- -----
Net operating expenses ..................... 92.5 91.2 92.4 92.0
----- ----- ----- -----
Earnings before income taxes ............... 7.5 8.8 7.6 8.0
Income tax expense ........................... 2.9 3.4 2.9 3.1
----- ----- ----- -----
Net earnings ............................... 4.6% 5.4% 4.7% 4.9%
===== ===== ===== =====
</TABLE>
1996 Compared to 1995
Net revenue increased from $114.0 million for the third quarter of
1995 to $196.4 million for the third quarter of 1996, an increase of 72%, and
from $305.9 million to $535.6 million for the first nine months of 1995
compared to 1996, an increase of 75%. Net revenue from the 23 service
agreements in effect for both periods increased by 14.8%
11
<PAGE> 12
for the third quarter and 17.0% for the first nine 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.
During the third quarter and the first nine 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 revenues 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 September 30, 1996, the Company had $168.8 million in working
capital, up from $111.4 million as of December 31, 1995. Also, the Company
generated $14.3 million of cash flow from operations for the third quarter of
1996 compared to $11.5 million for the third quarter of 1995 and $36.7 million
for the first nine months of 1995 compared to $28.6 million for the same period
in 1995. At September 30, 1996, net accounts receivable of $249.5 million
amounted to 74 days of net clinic revenue compared to $216.2 million and 70
days at June 30, 1996 and $152.3 million and 73 days at September 30, 1995. The
increase is attributable to growth in revenues at the Company's clinics and
seasonal factors affecting payments from some payors.
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
12
<PAGE> 13
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 1996, debt was 47.2% of
total capitalization at September 30, 1996, compared to 26.6% at the end of
1995.
In the first nine months of 1996, $6.3 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 nine months of 1996 resulted in an increase of $42.9
million in shareholders' equity compared to December 31, 1995.
Capital expenditures during the first nine months of 1996 totaled
$36.1 million. 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 $14 million in capital expenditures during the remainder of 1996.
Effective January 1, 1995, the Company completed its acquisition of
North American. The Company paid $20.0 million at closing and may make
additional future payments pursuant to an earnout formula during 1996, 1997,
and 1998 of up to an aggregate of $70.0 million. The total acquisition
consideration may increase to a maximum of $130.0 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 and
totaled approximately $12.9 million in cash. Of the future payments to be
made, a portion may be payable in shares of the Company's common stock. 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 $67.1 million of
additional consideration over the next five years, of which $13.4 million would
be payable during the remainder of 1996.
Total consideration for the pending merger with Straub, and the
pending acquisition of Guthrie Clinic and four other multi-specialty clinics
with which the Company has reached agreements in principal is expected to be
approximately $234 million of which approximately $85 million is expected to be
paid in cash at closing. The remaining consideration will be payable in a
combination of deferred cash payments, assumption of liabilities, subordinated
convertible notes, warrants or common stock.
PhyCor and one of its smallest affiliated physician groups, with
respect to which PhyCor has an investment representing less than 1% of PhyCor's
total assets, are in discussions which may result in the sale of the clinic
assets. While discussions are in a preliminary stage and PhyCor does not
believe the ultimate outcome of this situation will have a material adverse
effect on PhyCor, there can be no certainty at this time as to the resolution
of this matter and its impact on PhyCor.
PhyCor has been the subject of an audit by the IRS and understands
that the IRS may propose adjustments relating to the timing of recognition of
certain revenue and deductions for tax purposes. Such adjustment may result
from a recharacterization, for tax purposes only, of PhyCor's relationship with
its affiliated physician groups. PhyCor disagrees with the tentative positions
taken by the IRS agent including any recharacterization and intends to
vigorously contest
13
<PAGE> 14
these adjustments if asserted. Any adjustment resulting from resolution of
this disagreement would not affect reported net earnings of PhyCor but would
defer tax benefits and change the levels of current and deferred tax assets and
liabilities. PhyCor does not believe the resolution of this matter will have a
material adverse effect on its financial condition, although there can be no
assurance as to the outcome of this audit.
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 November 12, 1996, $89.0 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 September 30, 1996.
At September 30, 1996, the Company had cash and cash equivalents of
approximately $31.3 million and, as of November 12, 1996, has $210.5 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, may not be sufficient to meet the
Company's current planned acquisition, expansion, capital expenditures and
working capital needs for the next 12 months. As a result, 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.
This discussion contains forward looking statements relating to
completion of pending acquisitions and other matters. Certain of these
statements are accompanied by important cautionary factors that could cause
different results than expected by the Company. In addition to those factors,
other factors such as shareholder, regulatory and third party consents with
respect to acquisitions, among other events outside the Company's control could
also cause future results to differ from expectations.
14
<PAGE> 15
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit
Number Description of Exhibits
11 -- Statement re Computation of Per Share Earnings
(b) Reports on Form 8-K.
The Company did not file any Current Reports on Form 8-K during the
quarter ended September 30, 1996.
<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: November 14, 1996
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits Page Number
- ------ ----------------------- -----------
<S> <C>
11 -- Statement re Computation
of Per Share Earnings
</TABLE>
<PAGE> 1
EXHIBIT 11
PHYCOR, INC. AND SUBSIDIARIES
Statement regarding computation of per share earnings
Three months and nine months ended September 30, 1996 and 1995
(In thousands, except for earnings per share)
<TABLE>
<CAPTION>
SIX MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Earnings per common share:
Net income $ 9,073 6,115 25,182 14,908
======= ====== ====== ======
Earnings per share $.15 .11 .42 .29
======= ====== ====== ======
Weighted average common
shares outstanding 60,843 58,172 60,555 51,786
======= ====== ====== ======
Earnings per common share, assuming full dilution:
Net income $ 9,073 6,115 25,182 14,908
======= ====== ====== ======
Earnings per share $.15 .11 .42 .29
======= ====== ====== ======
Weighted average commonshares outstanding 67,380 58,886 66,325 52,959
======= ====== ====== ======
</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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 31,283
<SECURITIES> 0
<RECEIVABLES> 249,541
<ALLOWANCES> 0
<INVENTORY> 13,765
<CURRENT-ASSETS> 326,881
<PP&E> 194,799
<DEPRECIATION> 51,263
<TOTAL-ASSETS> 989,872
<CURRENT-LIABILITIES> 158,122
<BONDS> 0
0
0
<COMMON> 380,916
<OTHER-SE> 50,793
<TOTAL-LIABILITY-AND-EQUITY> 989,872
<SALES> 0
<TOTAL-REVENUES> 535,562
<CGS> 0
<TOTAL-COSTS> 475,425
<OTHER-EXPENSES> 8,429
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,761
<INCOME-PRETAX> 40,947
<INCOME-TAX> 15,765
<INCOME-CONTINUING> 25,182
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,182
<EPS-PRIMARY> .42
<EPS-DILUTED> .42
</TABLE>
