<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 5, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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PHYCOR, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<C> <C>
TENNESSEE 62-1344801
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
30 BURTON HILLS BOULEVARD, SUITE 400
NASHVILLE, TENNESSEE 37215
(615) 665-9066
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
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JOSEPH C. HUTTS
CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER
PHYCOR, INC.
30 BURTON HILLS BOULEVARD, SUITE 400
NASHVILLE, TENNESSEE 37215
(615) 665-9066
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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COPIES TO:
<TABLE>
<C> <C>
J. CHASE COLE, ESQ. LESLIE E. DAVIS, ESQ.
WALLER LANSDEN DORTCH & DAVIS, PLLC TESTA, HURWITZ & THIBEAULT, LLP
2100 NASHVILLE CITY CENTER HIGH STREET TOWER, 125 HIGH STREET
NASHVILLE, TENNESSEE 37219-8966 BOSTON, MASSACHUSETTS 02110
(615) 244-6380 (617) 248-7000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] _________________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] _________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1)(2) PER SHARE(3) OFFERING PRICE(3) FEE
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<S> <C> <C> <C> <C>
Common Stock, no par value per share.. 7,360,000 shares $33.00 $242,880,000 $73,600
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</TABLE>
(1) Includes up to 960,000 shares of Common Stock which the Underwriters have
the option to purchase from the Company and the Selling Shareholders solely
to cover over-allotments, if any.
(2) The Rights which are attached to the Common Stock being registered will be
issued for no additional consideration. Therefore, no additional
registration fee is required.
(3) Estimated in accordance with Rule 457(c) solely for the purpose of
calculating the registration fee and is based on the average high and low
reported sales prices of the Common Stock on the Nasdaq Stock Market's
National Market on February 4, 1997.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD
NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION
STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER
TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE
OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE
WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE
SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION
FEBRUARY 5, 1997
6,400,000 SHARES
PHYCOR LOGO (R)
COMMON STOCK
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All of the shares of Common Stock, no par value per share (the "Common
Stock"), offered hereby are being offered by PhyCor, Inc. (the "Company"). The
Common Stock of the Company is traded on the Nasdaq Stock Market's National
Market (the "Nasdaq National Market") under the symbol "PHYC." On February 4,
1997, the last reported sale price for the Company's Common Stock was $32 3/4
per share.
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THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" APPEARING ON PAGES 7 THROUGH 10.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO
PUBLIC COMMISSIONS COMPANY(1)
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<S> <C> <C> <C>
Per Share............................. $ $ $
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Total(2).............................. $ $ $
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</TABLE>
(1) Before deducting expenses of the offering estimated at $800,000 payable by
the Company.
(2) The Company and certain shareholders (the "Selling Shareholders") have
granted the Underwriters a 30-day option to purchase up to 960,000
additional shares of Common Stock solely to cover over-allotments, if any.
To the extent that the option is exercised, the Underwriters will offer the
additional shares at the Price to Public shown above. If the option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions, Proceeds to Company and Proceeds to Selling Shareholders will
be $ , $ , $ and $ , respectively. See
"Underwriting."
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The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject to
the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the offices
of Alex. Brown & Sons Incorporated, Baltimore, Maryland, on or about
, 1997.
ALEX. BROWN & SONS
INCORPORATED
EQUITABLE SECURITIES CORPORATION
MERRILL LYNCH & CO.
PIPER JAFFRAY INC.
SALOMON BROTHERS INC
THE DATE OF THIS PROSPECTUS IS , 1997.
<PAGE> 3
PHYCOR LOGO (R)
OPERATING MARKETS
[A map of the contiguous 48 states and Hawaii setting forth the location
of each of the Company's multi-specialty medical clinics and independent
practice associations is included here.]
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PhyCor was incorporated in Tennessee in January 1988. Unless otherwise
stated or the context otherwise requires, references in this Prospectus to
"PhyCor" and the "Company" refer to PhyCor, Inc. and its subsidiaries. The
Company's executive offices are located at 30 Burton Hills Boulevard, Suite 400,
Nashville, Tennessee 37215, and its telephone number is (615) 665-9066.
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IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
NASDAQ IN ACCORDANCE WITH RULE 10B-6A OR ANY SUCCESSOR RULES UNDER THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). SEE
"UNDERWRITING."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus.
THE COMPANY
PhyCor is a physician practice management company that acquires and
operates multi-specialty medical clinics and develops and manages independent
practice associations ("IPAs"). PhyCor's objective is to organize physicians
into professionally managed networks that assist physicians in assuming
increased responsibility for delivering cost-effective medical care, while
attaining high-quality clinical outcomes and patient satisfaction. The Company
operates 45 clinics with approximately 3,070 physicians in 26 states. The
Company also manages IPAs, which are networks of independent physicians, that
include over 9,300 physicians in 17 markets. The Company's affiliated physicians
provide capitated medical services to approximately 825,000 members, including
approximately 105,000 Medicare members.
The Company's strategy is to position its affiliated multi-specialty
medical clinics and IPAs to be the physician component of organized health care
systems. PhyCor targets for acquisition primary care-oriented multi-specialty
medical clinics with significant market shares and established reputations for
providing quality medical care. The Company is also assisting independent
physicians in particular markets in developing new physician groups that enter
into long-term agreements with the Company. The Company focuses its IPA
development and management efforts in markets that have characteristics
indicating opportunities for rapid enrollment growth and attractive capitation
rates. The Company generates increased demand for the services and capabilities
of its affiliated physician organizations and achieves growth through the
addition of physicians, the expansion of managed care relationships and the
addition and expansion of ancillary services.
PhyCor believes that primary care-oriented multi-specialty physician
organizations are a critical element of organized health care systems, because
physician decisions determine the cost and quality of care. PhyCor believes that
physician-driven organizations, including multi-specialty medical clinics, IPAs
and the combination of such organizations, present more attractive alternatives
for physician consolidation than hospital or insurer/HMO-controlled
organizations. The combination of PhyCor's multi-specialty medical clinic and
IPA management capabilities and new group-formation efforts enables the Company
to offer physician practice management services to substantially all types of
physician organizations.
RECENT DEVELOPMENTS
Since September 30, 1996, the Company has acquired the assets of four
multi-specialty clinics with an aggregate of 307 physicians. In January 1997,
PhyCor consummated its merger with Straub Clinic & Hospital, Incorporated
("Straub"), an integrated health care system with a 152-physician
multi-specialty clinic and 159-bed acute care hospital located in Honolulu,
Hawaii. In connection with the merger, PhyCor will also provide management
services to a related 35-physician group. Currently, the Company has agreements
in principle to acquire the assets of three additional multi-specialty physician
clinics with an aggregate of approximately 160 physicians. These transactions
are expected to be completed during the first quarter of 1997.
On February 5, 1997, the Company announced that for the fourth quarter of
1996, net revenues were $230.8 million, an increase of 70.2% from $135.6 million
for the comparable prior year period. Net earnings for the quarter totaled $11.2
million, or $0.18 per share, compared with net earnings of $7.0 million, or
$0.12 per share, in the comparable prior year period, representing increases of
60.0% and 50.0%, respectively.
3
<PAGE> 5
For the year ended December 31, 1996, net revenues were $766.3 million, an
increase of 73.5% from $441.6 million in the prior year. Net earnings for 1996
totaled $36.4 million, or $0.60 per share, compared with net earnings of $21.9
million, or $0.41 per share, representing increases of 66.2% and 46.3%,
respectively.
THE OFFERING
Common Stock offered................ 6,400,000 shares
Common Stock to be outstanding after
the offering...................... 61,772,319 shares(1)
Use of proceeds..................... To repay certain indebtedness and for
general corporate purposes, including
acquisitions.
Nasdaq National Market symbol....... PHYC
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(1) Excludes outstanding options to purchase 10,254,704 shares of Common Stock,
subordinated debentures convertible into 5,172,414 shares of Common Stock,
subordinated notes convertible into 3,227,828 shares of Common Stock,
warrants exercisable for 881,212 shares of Common Stock and approximately
127,000 shares of Common Stock which may be issued from time to time to a
physician group upon satisfaction of established financial performance
criteria. See "Capitalization."
4
<PAGE> 6
SUMMARY CONSOLIDATED FINANCIAL AND STATISTICAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA(1)
----------------------------
NINE MONTHS ENDED NINE MONTHS
YEAR ENDED DECEMBER 31, SEPTEMBER 30, YEAR ENDED ENDED
---------------------------------- -------------------- DECEMBER 31, SEPTEMBER 30,
1993 1994 1995 1995 1996 1995 1996
-------- -------- -------- -------- -------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Net revenue........ $167,381 $242,485 $441,596 $305,948 $535,562 $874,541 $734,288
Net earnings....... 7,140(2) 11,675(2) 21,874 14,908 25,182 42,887 33,947
Net earnings per
share............ $ 0.28(2) $ 0.32(2) $ 0.41 $ 0.29 $ 0.42 $ 0.74 $ 0.54
Weighted average
shares and share
equivalents...... 25,869 36,329 53,510 51,786 60,555 57,730 62,992
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
---------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED(1)(3)
-------- ------------ -----------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................................... $168,759 $ 203,581 $ 210,251
Total assets.............................................. 989,872 1,364,179 1,370,849
Long-term debt(4)......................................... 386,480 634,890 440,620
Total shareholders' equity................................ 431,709 439,376 640,316
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------- ---------------------
1993 1994 1995 1995 1996
-------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
STATISTICAL DATA:
Clinic Operations:
Affiliated physicians(5)......................... 674 1,143 1,955 1,570 2,560
Affiliated clinics(5)............................ 18 22 31 28 40
Number of states(5).............................. 11 15 20 19 22
Same-clinic revenue growth(6).................... 8.5% 11.6% 18.1% 16.3% 17.0%
Primary care physician percentage(5)............. 52% 47% 51% 51% 54%
IPA Operations(5):
Markets.......................................... -- 7(7) 13 13 17
Members:
Commercial..................................... -- 105,000(7) 180,000 158,000 283,000
Medicare....................................... -- 24,000(7) 38,000 35,000 60,000
-------- -------- -------- -------- ----------
Total members................................ -- 129,000(7) 218,000 193,000 343,000
Margin Data:
Operating margin(8).............................. 7.1% 7.9% 8.9% 8.8% 9.1%
Net margin....................................... 4.3% 4.8% 5.0% 4.9% 4.7%
Net Physician Group and IPA Revenues:
Net physician group revenues(9).................. $264,721 $406,036 $709,380 $493,628 $ 859,056
IPA revenues(10)................................. -- -- 146,975 99,840 171,778
-------- -------- -------- -------- ----------
Total........................................ $264,721 $406,036 $856,355 $593,468 $1,030,834
Percentage of Net Physician Group and IPA Revenues
from:(11)
Medicare/Medicaid................................ 36% 32% 24% 25% 23%
Managed care..................................... 24% 25% 35% 36% 41%
Private pay/other................................ 40% 43% 41% 39% 36%
</TABLE>
Footnotes appear on the next page
5
<PAGE> 7
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(1) Pro forma for all pending transactions and transactions completed after the
beginning of the period as if such transactions were completed at the
beginning of the period. See Unaudited Pro Forma Consolidated Financial
Information.
(2) Excluding the effect of the utilization of a net operating loss
carryforward in 1993 and 1994, net earnings and net earnings per share
would have been $5.1 million, or $0.20 per share, and $10.2 million, or
$0.27 per share, in such years.
(3) Adjusted to give effect to the application of the net proceeds to the
Company of this offering, assuming a public offering price of $32.75.
(4) Includes obligations under the Company's revolving credit agreement,
mortgages, other notes payable and capital leases, convertible subordinated
debentures, convertible subordinated notes payable to physician groups and
deferred purchase price obligations.
(5) As of the end of the period.
(6) Represents the average net revenue growth achieved by affiliated clinics
operated by the Company throughout both of the compared periods, adjusted
for actual days of operation.
(7) As of January 1, 1995.
(8) Represents earnings before interest income, interest expense and income
taxes as a percentage of net revenues.
(9) Represents gross physician group revenue of clinics managed by the Company
less provisions for doubtful accounts and contractual adjustments.
(10) Represents capitation and risk pool payments received under managed care
contracts entered into by IPAs managed by the Company. Excludes payments to
hospitals under such managed care contracts.
(11) As a percentage of combined IPA and net physician group revenue for IPAs
and clinics affiliated with the Company at the end of the period.
Except as otherwise specified (i) all information in this Prospectus
assumes no exercise of the Underwriter's over-allotment option (See
"Underwriting") and (ii) all share amounts reflect the three-for-two stock
splits effected as stock dividends on December 15, 1994, September 15, 1995 and
June 14, 1996.
6
<PAGE> 8
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the shares
of PhyCor Common Stock. This discussion also identifies important cautionary
factors that could cause PhyCor's actual results to differ materially from those
projected in forward looking statements of the Company made by, or on behalf of,
the Company. In particular, PhyCor's forward looking statements, including those
regarding the acquisition of additional clinics, the development of additional
IPAs, the adequacy of PhyCor's capital resources, the future profitability of
capitated fee arrangements and other statements regarding trends relating to
various revenue and expense items, could be affected by a number of risks and
uncertainties including those described below.
No Assurance of Continued Rapid Growth. PhyCor's continued growth is
dependent upon its ability to achieve significant consolidation of
multi-specialty medical clinics, to sustain and enhance the profitability of
those clinics and to develop and manage IPAs. The process of identifying
suitable acquisition candidates and proposing, negotiating and implementing an
economically feasible affiliation with a physician group or formation or
management of a physician network is lengthy and complex. Clinic and physician
network operations require intensive management in a dynamic marketplace
increasingly subject to cost containment pressures. There can be no assurance
that PhyCor will be able to sustain its historically rapid rate of growth. The
success of PhyCor's strategy to develop and manage IPAs is largely dependent
upon its ability to form networks of physicians, to obtain favorable payor
contracts, to manage and control costs and to realize economies of scale. Many
of the agreements entered into by physicians participating in PhyCor-managed
IPAs are not exclusive arrangements. The physicians, therefore, could join
competing networks or terminate their relationships with the IPAs. There can be
no assurance that PhyCor will continue to be successful in acquiring additional
physician practice assets, establishing new IPA networks or maintaining
relationships with affiliated physicians. See "Business -- Physician Networks."
Additional Financings. PhyCor's multi-specialty medical clinic acquisition
and expansion program and its IPA development and management plans require
substantial capital resources. The operations of its existing clinics require
ongoing capital expenditures for renovation and expansion and the addition of
costly medical equipment and technology utilized in providing ancillary
services. PhyCor may also, in certain circumstances, acquire real estate in
connection with clinic acquisitions. PhyCor will require additional financing
for the development of additional IPAs and expansion and management of its
existing IPAs. The Company expects that its capital needs over the next several
years will exceed capital generated from operations. The Company plans to incur
indebtedness and to issue, from time to time, additional debt or equity
securities, including the issuance of Common Stock or convertible notes in
connection with transactions with newly affiliated physician groups. PhyCor's
bank credit facility requires the lenders' consent for borrowings in connection
with the acquisition of certain clinic assets. There can be no assurance that
sufficient financing will be available or available on terms satisfactory to
PhyCor. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
Competition. The business of providing health care related services is
highly competitive. Many companies, including professionally managed physician
practice management companies like the Company, have been organized to pursue
the acquisition of medical clinics, manage such clinics, employ clinic
physicians or provide services to IPAs. Large hospitals, other multi-specialty
clinics and other health care companies, health maintenance organizations
("HMOs") and insurance companies are also involved in activities similar to
those of PhyCor. Some of these competitors have longer operating histories and
significantly greater resources than PhyCor. There can be no assurance that
PhyCor will be able to compete effectively, that additional competitors will not
enter the market, or that such competition will not make it more difficult to
acquire the assets of multi-specialty clinics on terms beneficial to PhyCor. See
"Business -- Multi-Specialty Medical Clinics" and "Business -- Physician
Networks."
Risks Associated with Managed Care and Capitation; Reliance on Physician
Networks. Many of the payor contracts entered into on behalf of PhyCor-managed
IPAs are based on capitated fee
7
<PAGE> 9
arrangements. Under capitation arrangements, health care providers bear the
risk, subject to certain loss limits, that the aggregate costs of providing
medical services to the members will exceed the premiums received. Management
fees are based, in part, upon a share of surplus, if any, of a capitated amount
of revenue. Some agreements with payors also contain "shared risk" provisions
under which PhyCor and the IPA can earn additional compensation based on
utilization of hospital services by members and may be required to bear a
portion of any loss in connection with such "shared risk" provisions. Any such
losses could have a material adverse effect on PhyCor. The profitability of the
managed IPAs is dependent upon the ability of the providers to effectively
manage the per patient costs of providing medical services and the level of
utilization of medical services. The management fees are also based upon a
percentage of revenue collected by the IPAs. Any loss of revenue by the IPAs as
a result of losing affiliated physicians, the termination of third party payor
contracts or otherwise could have a material adverse effect on management fees
derived by PhyCor from its management of IPAs. Through its service agreements,
PhyCor also shares in capitation risk assumed by its affiliated physician
groups. Managed care providers and management entities such as the Company are
increasingly subject to liability claims arising from utilization management,
provider compensation arrangements and other activities designed to control
costs by reducing services. A successful claim on this basis against PhyCor or
an affiliated clinic or IPA could have a material adverse effect on PhyCor.
Risks of Changes in Payment for Medical Services. The profitability of
PhyCor may be adversely affected by Medicare and Medicaid regulations, cost
containment decisions of third party payors and other payment factors over which
PhyCor has no control. The federal Medicare program has undergone significant
legislative and regulatory changes in the reimbursement and fraud and abuse
areas, including the adoption of the resource-based relative value scale
("RBRVS") schedule for physician compensation under Medicare, which has had and
may continue to have a negative impact on PhyCor's revenue. Efforts to control
the cost of health care services are increasing. Many of PhyCor's physician
groups are becoming affiliated with provider networks, managed care
organizations and other organized health care systems, which often provide fixed
fee schedules or capitation payment arrangements which are lower than standard
charges. Future profitability in the changing health care environment, with
differing methods of payment for medical services, is likely to be affected
significantly by management of health care costs, pricing of services and
agreements with payors. Because PhyCor derives its revenues from the revenues
generated by its affiliated physician groups and from its managed IPAs, further
reductions in payments to physicians generally or other changes in payment for
health care services could have an adverse effect on PhyCor.
Additional Regulatory Risks. The health care industry and physicians'
medical practices are highly regulated at the state and federal levels. Many
state laws restrict the unlicensed practice of medicine, the splitting or
sharing of fees with non-physician entities and the enforcement of non-
competition agreements. Federal law prohibits the offer, payment, solicitation
or receipt of any form of remuneration in return for the referral of Medicare or
state health program patients or patient care opportunities, or in return for
the purchase, lease or order of items or services that are covered by Medicare
or state health programs. In addition, federal law requires that physician
groups be included within a definition of "group practice" in order to be
permitted to make referrals within the group. Federal antitrust law also
prohibits conduct that may result in price-fixing or other anticompetitive
conduct. Because of the structure of the relationships between PhyCor and the
physician groups and its managed IPAs, there can be no assurance that review of
PhyCor's business by courts or health care, tax, labor or other regulatory
authorities will not result in determinations that could adversely affect the
financial condition or results of operations of PhyCor or that the health care
regulatory environment will not change in a manner that would restrict PhyCor's
existing operations or limit the expansion of PhyCor's business or otherwise
adversely affect PhyCor. In addition to civil and, in some cases, criminal
penalties for violation of Medicare and Medicaid statutes, violators of these
statutes may be excluded from participation in Medicare or state health
programs.
8
<PAGE> 10
Risks Associated with Straub Transaction. In connection with the
transaction with Straub, the Company provides certain management services to
both a physician group practice and a hospital owned by the group. Because the
hospital is subject to extensive regulation and because hospital management
companies have, in some instances, been viewed as referral sources by federal
regulatory agencies, the relationship between PhyCor and the physician group
could come under increased scrutiny under the Medicare fraud and abuse law. In
late 1995, prior to its association with PhyCor, Straub was served with a
federal search warrant in connection with an investigation into Straub's
billings and receivables practices, including with respect to Medicare, Medicaid
and CHAMPUS. The investigation is ongoing, and no determination can be made at
this time as to its outcome. The Company is indemnified by the physician group
affiliated with Straub against any penalties imposed as a result of the
investigation, and PhyCor believes that such indemnity will be sufficient to
satisfy any claims made against PhyCor as a successor to Straub, although no
assurance can be given in that regard. In addition, the federal government could
in certain circumstances suspend or prevent Straub from participating in
government programs, which would have a negative impact on PhyCor's revenues
under its service agreement with Straub.
Tax Audit. PhyCor has been the subject of an audit by the Internal Revenue
Service (the "IRS") since 1991, and the IRS has proposed adjustments relating to
the timing of recognition for tax purposes of certain revenue and deductions
relating to uncollectible accounts. One proposed adjustment is a
recharacterization, for tax purposes only, of PhyCor's relationships with its
affiliated physician groups. PhyCor disagrees with the positions asserted by the
IRS including any recharacterization and intends to vigorously contest these
proposed adjustments. The Company believes that any adjustments resulting from
resolution of this disagreement would not affect reported net earnings of PhyCor
but would defer tax benefits and change the levels of current and deferred tax
assets and liabilities. For the years under audit and, potentially, for
subsequent years, any such adjustments could result in material cash payments by
the Company. PhyCor does not believe the resolution of this matter will have a
material adverse effect on its financial condition, although there can be no
assurance as to the outcome of this matter.
Applicability of Insurance Regulations. PhyCor, through its IPAs, enters
into contracts and joint ventures with licensed insurance companies, such as
HMOs, whereby PhyCor and its IPAs assume risk in connection with providing
medical services under capitation arrangements. To the extent PhyCor or its
managed IPAs are in the business of insurance as a result of entering into such
risk sharing arrangements, they are subject to a variety of regulatory and
licensing requirements applicable to insurance companies or HMOs. In connection
with multi-specialty medical clinic acquisitions, PhyCor has and may continue to
acquire HMOs previously affiliated with such clinics. The HMO industry is highly
regulated at the state level and is highly competitive. Additionally, the HMO
industry has been subject to numerous legislative initiatives within the past
several years. There can be no assurance that developments in any of these areas
will not have an adverse effect on PhyCor's wholly-owned HMOs or on HMOs in
which PhyCor has a partial ownership interest or other financial involvement.
Risks Inherent in Provision of Medical Services. The physician groups with
which PhyCor affiliates and the physicians participating in networks developed
and managed by PhyCor are involved in the delivery of medical services to the
public and, therefore, are exposed to the risk of professional liability claims.
Claims of this nature, if successful, could result in substantial damage awards
to the claimants which may exceed the limits of any applicable insurance
coverage. Insurance against losses related to claims of this type can be
expensive and varies widely from state to state. PhyCor does not control the
practice of medicine by affiliated physicians or the compliance with certain
regulatory and other requirements directly applicable to physicians, physicians
networks and physician groups. PhyCor is indemnified under its service
agreements for claims against the physician groups, maintains liability
insurance for itself and negotiates liability insurance for the physicians
affiliated with its clinics and under its management agreements for claims
against the IPAs and physician members. Successful malpractice claims asserted
against the physician groups, the managed IPAs, or PhyCor, however, could have a
material adverse effect on PhyCor.
9
<PAGE> 11
Impact of Health Care Regulatory Changes. The United States Congress and
many state legislatures routinely consider proposals to reform or modify the
health care system, including measures that would control health care spending,
convert all or a portion of government reimbursement programs to managed care
arrangements, and balance the federal budget by reducing spending for Medicare
and state health programs. These measures can affect a health care company's
cost of doing business and contractual relationships. For example, recent
developments that affect 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 Health
Care Financing Administration policy prohibiting restrictions in Medicare risk
HMO plans on a physician's recommending to patients other health plans and
treatment options; and (iii) regulations imposing restrictions on physician
incentive provisions in physician provider agreements. There can be no assurance
that such legislation, programs and other regulatory changes will not have a
material adverse effect on PhyCor.
Dependence on Affiliated Physicians. Substantially all of PhyCor's revenue
is derived from service or management agreements with PhyCor's affiliated
clinics, the loss of certain of which could have a material adverse effect on
PhyCor. In addition, any material decline in revenue by PhyCor's affiliated
physician groups, whether as a result of physicians leaving the affiliated
physician groups or otherwise, could have a material adverse effect on PhyCor.
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.
Risks Associated with PhyCor Management Corporation ("PMC"). PMC, an
entity in which PhyCor owns a minority interest, has been organized to develop
and manage IPAs and provide development and other services to physician
organizations. PMC is managed by PhyCor and has a PhyCor executive officer on
its Board of Directors. PMC expects to operate at a loss during its first few
years of operations. PhyCor is recognizing a pro rata portion of PMC's losses
equal to PhyCor's minority equity interest in PMC. PMC has been organized so as
not to be consolidated with PhyCor. Changes in structure or accounting rules or
the exercise by PhyCor of its option to purchase PMC's Class B Common Stock
prior to such time, if any, as PMC shall have become profitable could result in
PhyCor being required to consolidate the operations of PMC. Such consolidation
could cause PhyCor to recognize a greater percentage of PMC's operating losses
which could have a material adverse effect on PhyCor. See "Business -- Physician
Networks."
Anti-takeover Considerations. The Company is authorized to issue up to
10,000,000 shares of preferred stock, the rights of which may be fixed by the
Board of Directors. In February 1994, the Board of Directors approved the
adoption of a Shareholder Rights Plan (the "Rights Plan"). The Rights Plan is
intended to encourage potential acquirors to negotiate with the PhyCor's Board
of Directors and to discourage coercive, discriminatory and unfair proposals.
PhyCor's stock incentive plans provide for the acceleration of the vesting of
options in the event of a change in control, and PhyCor's Restated Charter
provides for the classification of its Board of Directors into three classes,
with each class of directors serving staggered terms of three years. Provisions
in the executive officers' employment agreements provide for post-termination
compensation, including payment of certain of the executive officers' salaries
for 24 months, following a change in control. Most physician groups may
terminate their service agreements with the Company in certain events, including
a change in control of PhyCor which is not approved by a majority of PhyCor's
Board of Directors. The former shareholders of North American Medical
Management, Inc., an entity acquired by PhyCor in January 1995 which develops
and manages IPAs, ("North American") have the right to repurchase the capital
stock of North American in the event of a change of control which occurs prior
to December 31, 1997. A change in control of PhyCor also constitutes an event of
default under PhyCor's bank credit facility. The foregoing matters may, together
or separately, have the effect of discouraging or making more difficult an
acquisition or change of control of PhyCor.
10
<PAGE> 12
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby will be approximately $200.9 million ($229.2 million if the
Underwriters' over-allotment option is exercised in full). Of the proceeds, the
Company intends to utilize approximately $193.0 million to repay the Company's
outstanding indebtedness under the Company's bank credit facility which
currently bears interest at the weighted average rate of 6.07% and is payable
beginning July 2001. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources." The
Company utilized the proceeds of such indebtedness to finance the acquisition of
certain physician practice assets and for working capital and other general
corporate purposes.
The Company will utilize any remainder of the net proceeds to finance
future acquisitions of the assets of additional single-specialty and
multi-specialty clinics and individual physician practices, to develop and
manage additional IPAs, to fund deferred purchase price obligations or for
working capital and other general corporate purposes. Until utilized for the
above purposes, the Company will invest any remaining net proceeds in
short-term, interest bearing, investment grade instruments such as treasury
bills, repurchase agreements and commercial paper. There can be no assurance
that any pending acquisitions will be successfully concluded or that the Company
will be successful in developing and managing additional IPAs.
The Company will not receive any of the proceeds from any sale of shares by
the Selling Shareholders pursuant to any exercise of the Underwriters'
over-allotment option.
11
<PAGE> 13
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1996, on an actual basis, on a pro forma basis to reflect the
Straub transaction, the four asset acquisitions completed after September 30,
1996 and three additional pending transactions, and on an as adjusted basis to
reflect the pro forma capitalization and the application of proceeds of this
offering. See "Business -- Multi-Specialty Medical Clinics" and Unaudited Pro
Forma Consolidated Financial Information.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-------------------------------------
ACTUAL PRO FORMA AS ADJUSTED
-------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Current installments of long-term debt and
obligations under capital leases................... $ 1,581 $ 12,743 $ 12,743
======== ========== ==========
Long-term debt:
Revolving credit agreement......................... $ 58,000 $ 194,270 $ --
Mortgages and other notes payable.................. 4,325 35,399 35,399
Obligations under capital leases................... 1,556 5,759 5,759
4.5% Convertible Subordinated Debentures due 2003.. 200,000 200,000 200,000
Convertible subordinated notes payable to physician
groups(1)....................................... 65,699 111,427 111,427
Purchase price payable............................. 56,900 88,035 88,035
Shareholders' equity:
Preferred stock, no par value, 10,000,000 shares
authorized; no shares outstanding............... -- -- --
Common stock, no par value, 250,000,000 shares
authorized; 54,487,000 shares issued and
outstanding(2).................................. 380,916 388,583 589,523
Retained earnings.................................. 50,793 50,793 50,793
-------- ---------- ----------
Total shareholders' equity...................... 431,709 439,376 640,316
-------- ---------- ----------
Total capitalization....................... $818,189 $1,074,266 $1,080,936
======== ========== ==========
</TABLE>
- ---------------
(1) The convertible subordinated notes may be converted commencing on varying
dates through 2001 at the option of the holders.
(2) Excludes approximately (a) 7.7 million shares of Common Stock reserved for
issuance pursuant to outstanding options at an aggregate weighted average
exercise price of $13.23 per share, (b) approximately 900,000 shares of
Common Stock reserved for issuance pursuant to outstanding warrants at an
aggregate weighted average exercise price of $22.51 per share, (c) 2.8
million shares of Common Stock reserved for issuance pursuant to outstanding
subordinated convertible notes at an aggregated weighted average conversion
price of $24.23 per share and (d) approximately 5.2 million shares of Common
Stock reserved for issuance pursuant to convertible subordinated debentures
at a conversion price of $38.67 per share. See Notes 8, 9 and 12 of Notes to
Consolidated Financial Statements.
12
<PAGE> 14
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data which
have been derived from the consolidated financial statements of the Company as
of and for the years ended December 31, 1991 through 1995. The financial
statements as of and for the years ended December 31, 1991 through 1995 have
been audited by KPMG Peat Marwick LLP. The financial statements as of and for
the nine month periods ended September 30, 1995 and 1996 are unaudited. The
Company's Statement of Operations data for each of the years in the three-year
period ended December 31, 1995 and the Balance Sheet data as of December 31,
1994 and 1995 should be read in conjunction with and are qualified in their
entirety by the Consolidated Financial Statements and related notes included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------------- ---------------------
1991 1992 1993 1994 1995 1995 1996
------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net revenue.............. $90,065 $135,866 $167,381 $242,485 $441,596 $305,948 $535,562
Operating expenses:
Clinic salaries, wages
and benefits......... 36,440 51,264 63,202 88,443 166,031 114,132 204,493
Clinic supplies........ 13,289 19,265 25,031 37,136 67,596 46,899 81,459
Purchased medical
services............. 6,201 10,122 8,920 11,778 17,572 12,571 15,295
Other clinic
expenses............. 15,010 22,813 28,174 40,939 71,877 49,346 88,737
General corporate
expenses............. 2,993 3,717 5,418 9,417 14,191 10,391 15,307
Rents and lease
expense.............. 7,077 13,210 16,441 23,413 36,740 25,588 44,768
Depreciation and
amortization......... 4,228 6,397 8,394 12,229 21,445 15,084 28,158
Interest income........ (348) (629) (309) (1,334) (1,816) (1,086) (2,792)
Interest expense....... 3,842 4,481 3,878 3,963 5,230 3,666 10,761
Minority interest in
earnings of
consolidated
partnerships......... -- -- -- -- 6,933 4,980 8,429
Provision for clinic
restructuring(1)..... -- 18,566 -- -- -- -- --
------- -------- -------- -------- -------- -------- --------
Net operating
expenses........... 88,732 149,206 159,149 225,984 405,799 281,571 494,615
------- -------- -------- -------- -------- -------- --------
Earnings (loss)
before income taxes
and extraordinary
item............... 1,333 (13,340) 8,232 16,501 35,797 24,377 40,947
Income tax expense....... 575 405 1,092 4,826 13,923 9,469 15,765
------- -------- -------- -------- -------- -------- --------
Earnings (loss)
before
extraordinary
item............... 758 (13,745) 7,140 11,675 21,874 14,908 25,182
Extraordinary item -- tax
benefit................ 297 -- -- -- -- -- --
------- -------- -------- -------- -------- -------- --------
Net earnings
(loss)............. $ 1,055 $(13,745)(2) $ 7,140(3) $ 11,675(3) $ 21,874 $ 14,908 $ 25,182
======= ======== ======== ======== ======== ======== ========
Earnings (loss) before
extraordinary item per
share.................. $ 0.05 $ (0.57) $ 0.28 $ 0.32 $ 0.41 $ 0.29 $ 0.42
Extraordinary item per
share.................. 0.02 -- -- -- -- -- --
------- -------- -------- -------- -------- -------- --------
Net earnings (loss) per
share
Primary................ $ 0.07 $ (0.57) $ 0.28(3) $ 0.32(3) $ 0.41 $ 0.29 $ 0.42
======= ======== ======== ======== ======== ======== ========
Fully Diluted.......... -- -- -- .31 -- -- --
======= ======== ======== ======== ======== ======== ========
Weighted average shares
outstanding
Primary................ 14,236 23,942 25,869 36,329 53,510 51,786 60,555
Fully diluted.......... -- -- -- 43,427 -- -- --
</TABLE>
13
<PAGE> 15
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------- SEPTEMBER 30,
1991 1992 1993 1994 1995 1996
------- -------- -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................................ $21,833 $ 35,920 $ 46,927 $ 80,533 $111,420 $168,759
Total assets................................... 92,538 141,442 171,174 351,385 643,586 989,872
Long-term debt(5).............................. 49,344 54,087 69,014 94,653 140,633 386,480
Total shareholders' equity..................... 25,466 53,879 70,005 184,125 388,822 431,709
</TABLE>
- ---------------
(1) Relates to the non-recurring pre-tax charge to earnings of $18.6 million
incurred in connection with the restructuring and sale of assets of the
Miller Medical Clinic, which was formerly affiliated with PhyCor.
(2) Excluding the effect of the restructuring charge described in note (1), and
a net operating loss carryforward, PhyCor's net earnings per share for 1992
would have been approximately $3.2 million and $.14 per share, respectively.
(3) Excluding the effect of the utilization of a net operating loss carryforward
to reduce income taxes in 1993 and 1994, net earnings and net earnings per
share would have been $5.1 million, or $0.20 per share, and $10.2 million,
or $0.27 per share, in such years.
(4) Per share amounts and weighted average shares outstanding have been adjusted
for the three-for-two stock splits effected in December 1994, September 1995
and June 1996.
(5) Includes obligations under the Company's revolving credit agreement,
mortgages, other notes payable and capital leases, convertible subordinated
debentures, convertible subordinated notes payable to physician groups and
deferred purchase price obligations.
14
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company acquires and operates primary care-oriented multi-specialty
medical clinics and develops and manages IPAs. Substantially all of the
Company's revenue in 1995 and most of its revenue in the first three quarters of
1996 was earned under its service agreements. Revenue earned under the service
agreements is equal to the net revenue of the clinics, less amounts retained by
physician groups. The service agreements contain financial incentives for the
Company to assist the physician groups in increasing clinic revenues and
controlling expenses.
To increase clinic revenue, the Company works with the affiliated physician
group to recruit additional physicians, merge other physicians practicing in the
area into the affiliated physician groups, negotiate contracts with managed care
organizations and provide additional ancillary services. To reduce or control
expenses, among other things, PhyCor utilizes national purchasing contracts for
key items, reviews staffing levels to make sure they are appropriate and assists
the physicians in developing more cost-effective clinical practice patterns.
The Company has increased its focus on the development of IPAs to enable
the Company to provide services to a broader range of physician organizations,
to enhance the operating performance of existing clinics and to further develop
physician relationships. The Company develops IPAs that may include affiliated
clinic physicians to enhance the clinics' attractiveness to managed care
organizations. The Company has also begun assisting independent physicians in
particular markets in developing new physician groups that enter into long-term
agreements with the Company.
The table below indicates the number of clinics and physicians affiliated
with the Company and provides certain information with respect to the Company's
IPA operations at the end of the periods indicated:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
---------------------------- -----------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Clinic operations:
Number of affiliated clinics............. 18 22 31 28 40(1)
Number of affiliated physicians.......... 674 1,143 1,955 1,570 2,560(1)
IPA operations:
Number of markets........................ -- 7(2) 13 13 17
Number of commercial members............. -- 105,000(2) 180,000 158,000 283,000
Number of Medicare members............... -- 24,000(2) 38,000 35,000 60,000
</TABLE>
- ---------------
(1) Since September 30, 1996, the Company has acquired certain operating assets
of clinics in Hattiesburg, Mississippi, Toledo, Ohio, Roanoke, Virginia,
Honolulu, Hawaii and Palm Springs, California. These clinics, in the
aggregate, represent an additional 494 affiliated physicians.
(2) As of January 1, 1995.
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 $247.2 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
15
<PAGE> 17
land and buildings. Service agreement costs are amortized over the life of the
related service agreement, with recoverability assessed periodically.
Since September 30, 1996, the Company has acquired the assets of four
multi-specialty clinics with an aggregate of 307 physicians. In January 1997,
PhyCor consummated its merger with Straub, an integrated health care system with
a 152-physician multi-specialty clinic and 159-bed acute care hospital located
in Honolulu, Hawaii. In connection with the merger, PhyCor entered into a
long-term service agreement with the 152-physician group associated with Straub
and will provide management services to a related 35-physician group. Currently,
the Company has agreements in principle to acquire the assets of three
additional multi-specialty physician clinics with an aggregate of approximately
160 physicians. These transactions are expected to be completed during the first
quarter of 1997.
RECENT OPERATING RESULTS
The following table summarizes selected financial data of the Company for
the three months and the years ended December 31, 1995 and 1996. All such
information, other than the data for the year ended December 31, 1995, is
derived from unaudited data. The Company believes that this information reflects
all adjustments (consisting of only normally recurring adjustments) necessary
for a fair presentation of the information for the periods presented:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
-------------------- --------------------
1995 1996 1995 1996
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net revenue................................ $135,648 $230,763 $441,596 $766,325
Net earnings............................... 6,966 11,198 21,874 36,380
Earnings per common share.................. $ 0.12 $ 0.18 $ 0.41 $ 0.60
Weighted average shares and share
equivalents.............................. 59,418 62,114 53,510 61,096
</TABLE>
Net revenue increased from $135.6 million for the three months ended
December 31, 1995 to $230.8 million for the three months ended December 31,
1996, an increase of 70.2%. Net revenue from the 23 service agreements in effect
as of January 1, 1995 increased 13.5% in the fourth quarter. Same-clinic revenue
growth resulted from the recruitment of new physicians, existing-market mergers
and increases in net fees and patient volume. Net earnings increased from $7.0
million, or $0.12 per share, for the three months ended December 31, 1995 to
$11.2 million, or $0.18 per share, for the three months ended December 31, 1996,
increases of 60.0% and 50.0%, respectively. During the same time periods, the
Company's weighted average shares outstanding increased to 62.1 million from
59.4 million.
For the year ended December 31, 1996 compared to 1995, net revenue
increased from $441.6 million to 766.3 million, an increase of 73.5%.
Same-clinic revenue growth for 1996 was 16.1%. Net earnings increased from $21.9
million, or $0.41 per share, for the year ended December 31, 1995 to $36.4
million, or $0.60 per share, for the year ended December 31, 1996, increases of
66.2% and 46.3%, respectively. During the same time periods, the Company's
weighted average shares outstanding increased to 61.1 million from 53.5 million.
16
<PAGE> 18
RESULTS OF OPERATIONS
The following table shows the percentage of net revenue represented by
various expense categories reflected in the Company's Consolidated Statements of
Operations:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------- --------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net revenue..................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Clinic salaries, wages and benefits........... 37.8 36.5 37.6 37.3 38.2
Clinic supplies............................... 15.0 15.3 15.3 15.3 15.2
Purchased medical services.................... 5.3 4.8 4.0 4.1 2.8
Other clinic expenses......................... 16.8 16.9 16.3 16.2 16.6
General corporate expenses.................... 3.2 3.9 3.2 3.4 2.8
Rents and lease expense....................... 9.8 9.7 8.3 8.4 8.4
Depreciation and amortization................. 5.0 5.0 4.8 4.9 5.3
Interest income............................... (0.1) (0.5) (0.4) (0.4) (0.5)
Interest expense.............................. 2.3 1.6 1.2 1.2 2.0
Minority interest in earnings of consolidated
partnerships............................... -- -- 1.6 1.6 1.6
----- ----- ----- ----- -----
Net operating expenses..................... 95.1 93.2 91.9 92.0 92.4
----- ----- ----- ----- -----
Earnings before income taxes............... 4.9 6.8 8.1 8.0 7.6
Income tax expense.............................. 0.6 2.0 3.1 3.1 2.9
----- ----- ----- ----- -----
Net earnings.................................. 4.3% 4.8% 5.0% 4.9% 4.7%
===== ===== ===== ===== =====
</TABLE>
Nine Months Ended September 30, 1996 Compared to Nine Months Ended September
30, 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 72.3%, and from
$305.9 million to $535.6 million for the first nine months of 1995 compared to
1996, an increase of 75.1%. Net revenue from the 23 service agreements in effect
for both periods increased by 14.8% 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.
17
<PAGE> 19
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Net revenue increased from $242.5 million to $441.6 million for 1995, an
increase of 82.1%. Net revenue from the 17 service agreements in effect during
both periods increased 18.1% in 1995 compared with the same period in 1994. 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 and the
acquisition of North American.
During 1995, most categories of operating expenses were relatively
unchanged as a percentage of net revenue when compared to the same period in
1994, despite the large increase in the dollar amounts 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 the 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 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 and other costs to accommodate operations,
increased acquisition activity and to respond to increasing physician needs for
support in managed care negotiations, information systems implementation and
clinical outcomes management programs. The decrease in other clinic expenses and
rents and leases as a percentage of net revenue resulted from the acquisition of
clinics with lower levels of these expenses compared to the existing base of
clinics. Minority interest in earnings of consolidated partnerships relate to
the IPA operations of North American, which was acquired in 1995.
Income tax expense increased from the prior year as a result of the
Company's increased profitability and the fact that benefits relating to net
operating loss carryforwards were substantially consumed during 1994. The
Company had an effective tax rate of approximately 39% in 1995.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993
Net revenue increased from $167.4 million for 1993 to $242.5 million for
1994, an increase of $75.1 million, or 44.9%. Approximately $61.7 million, or
82.2% of the increase, was the result of the acquisition of clinic assets in
1993 and 1994. Net revenue from the 13 service agreements in effect for both
years increased by $20.0 million, or 11.6%. Same clinic growth resulted from the
addition of new physicians, the expansion of ancillary services, increases in
patient volume and increases in fees.
During 1994, most categories of operating expenses were relatively stable
as a percentage of net revenue when compared to 1993, despite the large increase
in the dollar amounts resulting from acquisitions and clinic growth. The
reductions in clinic salaries, wages and benefits and purchased medical services
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. The increase in general corporate expenses is the
result of the addition of corporate personnel to handle the increased
acquisition activity and to respond to increasing physician needs for support in
managed care negotiations, information systems implementation, and clinical
outcomes management programs. Interest expense decreased as a result of
decreased borrowing levels and the conversion of convertible debentures into
Common Stock.
Income tax expense increased dramatically from the prior year as a result
of the Company's increased profitability and the fact that remaining net
operating loss carryforwards, which significantly reduced tax expense in prior
years, were fully used during 1994.
Summary of Operations by Quarter
The following table presents unaudited quarterly operating results for 1994
and 1995 and the first three quarters of 1996. The Company believes that all
necessary adjustments have been
18
<PAGE> 20
included in the amounts stated below to present fairly the quarterly results
when read in conjunction with the Consolidated Financial Statements. Results of
operations for any particular quarter are not necessarily indicative of results
of operations for a full year or predictive of future periods.
<TABLE>
<CAPTION>
1994 QUARTER ENDED 1995 QUARTER ENDED
--------------------------------------- ------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30
-------- ------- -------- ------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net revenue.......... $49,765 $50,458 $63,183 $79,079 $92,764 $99,146
Earnings before
taxes.............. 2,776 3,676 4,321 5,728 6,845 7,508
Net earnings......... 2,332 3,088 2,704 3,551 4,176 4,617
Net earnings per
share.............. $ 0.08 $ 0.09 $ 0.07 $ 0.08 $ 0.09 $ 0.09
Adjusted earnings per
share(1)........... $ 0.06 $ 0.06 $ 0.07 $ 0.08 $ 0.09 $ 0.09
<CAPTION>
1995 QUARTER ENDED 1996 QUARTER ENDED
------------------- ------------------------------
SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net revenue.......... $114,038 $135,648 $162,501 $176,643 $196,418
Earnings before
taxes.............. 10,024 11,420 12,504 13,690 14,753
Net earnings......... 6,115 6,966 7,690 8,419 9,073
Net earnings per
share.............. $ 0.11 $ 0.12 $ 0.13 $ 0.14 $ 0.15
Adjusted earnings per
share(1)........... $ 0.11 $ 0.12 $ 0.13 $ 0.14 $ 0.15
</TABLE>
- ---------------
(1) Adjusted to exclude the effect of tax loss carryforwards.
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
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 1996 and totaled approximately $13.9 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,
19
<PAGE> 21
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 $64.0 million of additional
consideration over the next five years, of which $23.6 million would be payable
during the remainder of 1997. The Company may exercise its option to acquire the
outstanding Class B Common Stock of PMC before the end of 1997. In accordance
with the terms of the option, the aggregate purchase price for these shares at
that time would be approximately $18 to $19 million.
Total consideration for the pending acquisition of Guthrie Clinic and three
other clinic transactions with which the Company has reached agreements in
principle is expected to be approximately $137.8 million of which approximately
$58.5 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 has been the subject of an audit by the IRS since 1991, and the IRS
has proposed adjustments relating to the timing of recognition for tax purposes
of certain revenue and deductions relating to uncollectible accounts. PhyCor
disagrees with the positions asserted by the IRS and intends to vigorously
contest these proposed adjustments. The Company believes that any adjustments
resulting from resolution of this disagreement would not affect reported net
earnings of PhyCor but would defer tax benefits and change the levels of current
and deferred tax assets and liabilities. For the years under audit and,
potentially, for subsequent years, any such adjustments could result in material
cash payments by the Company. PhyCor does not believe the resolution of this
matter will have a material adverse effect on its financial condition, although
there can be no assurance as to the outcome of this matter.
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 January 28, 1997, $193.0 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% above the
applicable Eurodollar rate.
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 December 31, 1996.
At September 30, 1996, the Company had cash and cash equivalents of
approximately $31.3 million and, as of January 28, 1997, has $106.2 million
available under its bank credit facility. The Company believes that the
combination of funds available from the proceeds of this offering and under its
bank credit facility, together with cash reserves and cash flow from operations,
will be sufficient to meet the Company's current 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.
20
<PAGE> 22
BUSINESS
PhyCor is a physician practice management company that acquires and
operates multi-specialty medical clinics and develops and manages IPAs. PhyCor's
objective is to organize physicians into professionally managed networks that
assist physicians in assuming increased responsibility for delivering
cost-effective medical care while attaining high-quality clinical outcomes and
patient satisfaction. The Company operates 45 clinics with approximately 3,070
physicians in 26 states. The Company also manages IPAs, which are networks of
independent physicians, that include over 9,300 physicians in 17 markets. The
Company's affiliated physicians provide capitated medical services to
approximately 825,000 members, including approximately 105,000 Medicare members.
PhyCor believes that primary care-oriented physician organizations are a
critical element of organized health care systems, because physician decisions
determine the cost and quality of care. PhyCor believes that physician-driven
organizations, including multi-specialty medical clinics, IPAs and the
combination of such organizations, present more attractive alternatives for
physician consolidation than hospital or insurer/HMO-controlled organizations.
The combination of PhyCor's multi-specialty medical clinic and IPA management
capabilities and new group-formation efforts enables the Company to offer
physician practice management services to substantially all types of physician
organizations.
INDUSTRY TRENDS
In 1995, there were approximately 613,000 non-federal physicians in the
United States, an increase of 82% from 1980. In 1994, physicians' direct
billings aggregated approximately $180 billion, representing about 22% of total
health care spending in the United States. In 1993, approximately 41% of
practicing physicians were primary care physicians and the remainder were
specialists.
Two important trends have emerged in the physician sector in recent years.
First, physicians have increasingly elected to practice medicine as part of a
group practice rather than as a sole practitioner or partnership. As of 1995,
34% of physicians in the United States were part of a group practice, up from
26% in 1980. In 1995, there were approximately 19,500 group practices in the
United States, 22% of which were multi-specialty oriented. The size of these
clinics by number of physicians was as follows:
<TABLE>
<CAPTION>
NUMBER
NUMBER OF
GROUP SIZE OF GROUPS PHYSICIANS
---------- --------- ----------
<S> <C> <C>
>100 Physicians........................................... 238 64,770
50-99..................................................... 226 15,193
10-49..................................................... 3,184 56,976
3-9....................................................... 15,830 73,871
</TABLE>
The second major trend that has emerged in recent years is the rise of
for-profit, professionally managed physician practice management companies
("PPMs"). PPMs emerged in the late 1980s in response to: (i) the desire of
physicians to better position themselves competitively for managed care and
integrated health care delivery systems; (ii) the desire of physicians to access
professional-management expertise; (iii) the need of physicians for capital to
expand clinic operations; (iv) physicians' desire for liquidity in their
practice investments; and (v) the increasing business complexity of group
practice operations. While the PPM industry has grown rapidly in recent years,
the Company estimates that publicly traded PPMs represent less than 5% of total
physician billings in the United States.
The Company believes that the health care industry will continue to be
driven by local market factors and that organized providers of health care, like
IPAs, will play a significant role in delivering cost-effective, quality medical
care. IPAs offer physicians an opportunity to participate in expanding
21
<PAGE> 23
organized health care systems and assistance in contracting with insurance
companies and HMOs and other large purchasers of health care services.
Certain of the foregoing statistical information is derived from reports
published by the Health Care Financing Administration and other industry
sources.
MULTI-SPECIALTY MEDICAL CLINICS
A multi-specialty medical clinic provides a wide range of primary and
specialty physician care and ancillary services through an organized physician
group practice representing various medical specialties. Multi-specialty medical
clinics historically have been locally owned organizations managed by practicing
physicians.
Management believes, based on patient and physician surveys and other data
available to it, that the number of multi-specialty clinics and the number of
physicians practicing in such clinics will continue to increase for a variety of
reasons.
- Multi-specialty clinics are favored by managed care organizations because
of the large number and variety of physicians and services and the
expectation that multi-specialty clinics will be able to control hospital
utilization and total health care costs more effectively than other
providers.
- Multi-specialty clinics have the critical mass of primary care and
specialist physicians and patients necessary to provide a comprehensive
range of services as the focus of medical care shifts from the inpatient
setting to alternate sites. In addition, multi-specialty clinics have the
resources to assume responsibility for capitation arrangements and other
managed care contracts for large patient groups.
- Multi-specialty clinics are effectively positioned in the evolving health
care environment because of their ability to control the cost and to
improve the quality of care by affecting physician decisions.
- Multi-specialty clinics, as physician-driven organizations, represent an
attractive alternative to other physician consolidation models and are the
practice model most likely to maximize the competitive position of
physicians within organized health care networks.
- Multi-specialty clinics are generally recognized for high quality medical
care.
- Multi-specialty clinics are more attractive to patients because of the
convenience afforded by the availability of a wide range of primary and
specialty care and ancillary services.
- Multi-specialty clinics enable physicians to pool their resources to
finance sophisticated medical equipment, technology and support services.
The Company generates increased demand for the services and capabilities of
its affiliated physician organizations and achieves growth through the addition
of physicians, the expansion of managed care relationships and the addition and
expansion of ancillary services. During 1996, the Company assisted its
affiliated clinics in recruiting approximately 320 new physicians. The Company
merged the practices of approximately 140 additional physicians into its
existing clinics. The Company is also assisting formerly unaffiliated physicians
in particular markets to develop new physician groups which enter into a
long-term service agreements with the Company. In addition, the Company is
developing physician networks around its physician groups to enhance managed
care contracting and to provide the physician component of organized health care
systems. Physicians in affiliated physician groups may participate in IPAs
developed and managed by North American or PMC. See "Physician Networks." PhyCor
is also positioning the clinics for participation in organized health care
systems by establishing strategic alliances with HMOs, insurers, hospitals and
other health care providers and by enhancing medical management systems.
22
<PAGE> 24
The Company believes that continued growth will result from its
demonstrated ability to improve and expand the health care services provided
through its clinics, to enhance operating efficiency and profitability at the
clinics, to earn and maintain the trust and confidence of the physician groups
and to assist physicians in managing the operation of its clinics in a way that
reduces the utilization and cost of health care services while achieving desired
clinical outcomes.
<TABLE>
<CAPTION>
PERCENTAGE OF NO. OF PHYCOR
YEAR NUMBER OF PRIMARY CARE MEDICAL OPERATIONS SERVICE
CLINIC LOCATION FOUNDED PHYSICIANS PHYSICIANS SPECIALTIES COMMENCED SITES
------ -------- ------- ---------- ------------- ----------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Green Clinic................ Ruston, LA 1948 36 47% 16 Oct. 1988 2
Doctors' Clinic............. Vero Beach, FL 1969 39 46 19 Jan. 1989 5
Nalle Clinic................ Charlotte, NC 1921 119 54 23 Feb. 1990 10
Greeley Medical Clinic...... Greeley, CO 1933 40 55 15 Oct. 1990 4
Pueblo Physicians........... Pueblo, CO 1970 43 56 13 Sept. 1991 7
First Coast Medical Group... Jacksonville, FL 1921 103 68 18 Nov. 1991 54
Sadler Clinic............... Conroe, TX 1955 39 54 15 Jan. 1992 7
Diagnostic Clinic........... San Antonio, TX 1972 45 53 16 Jan. 1992 5
Virginia Physicians......... Richmond, VA 1923 108 74 18 Feb. 1992 17
Valley Diagnostic Medical
and Surgical Clinic....... Harlingen, TX 1954 23 44 13 Aug. 1992 2
Laconia Clinic.............. Laconia, NH 1938 24 54 13 Sept. 1992 2
Olean Medical Group......... Olean, NY 1937 32 44 15 Nov. 1992 2
Holston Medical Group....... Kingsport, TN 1975 45 71 13 Jan. 1993 12
The Medical & Surgical
Clinic of Irving.......... Irving, TX 1961 33 70 11 Mar. 1993 2
Simon-Williamson Clinic..... Birmingham, AL 1935 52 75 14 July 1993 9
Medical Arts Center......... Dixon, IL 1986 28 39 14 Oct. 1993 6
Medical Arts Clinic......... Corsicana, TX 1952 42 50 18 Jan. 1994 5
Lexington Clinic............ Lexington, KY 1920 160 47 25 Feb. 1994 22
Southern Plains Medical
Center.................... Chickasha, OK 1946 32 53 15 Aug. 1994 2
Holt-Krock Clinic........... Fort Smith, AR 1921 155 44 23 Sept. 1994 20
Burns Clinic Medical
Center.................... Petoskey, MI 1931 127 44 26 Oct. 1994 8
Boulder Medical Center...... Boulder, CO 1949 50 42 21 Oct. 1994 3
Tidewater Physicians Multi-
specialty Group........... Newport News, VA 1993 69 83 11 Jan. 1995 30
Northeast Arkansas Clinic... Jonesboro, AR 1977 61 66 9 Mar. 1995 12
PAPP Clinic................. Newnan, GA 1939 39 51 11 May 1995 5
Ogden Clinic................ Ogden, UT 1968 43 51 18 June 1995 3
Arnett Clinic............... Lafayette, IN 1922 116 41 24 Aug. 1995 11
Casa Blanca Clinic.......... Mesa, AZ 1969 97 63 20 Sept. 1995 7
South Texas Medical
Clinics................... Wharton, TX 1985 62 65 15 Nov. 1995 10
South Bend Clinic........... South Bend, IN 1916 55 58 19 Nov. 1995(1) 4
Guthrie Clinic.............. Sayre, PA 1910 229 42 29 Nov. 1995(2) 30
Arizona Physicians Center... Phoenix, AZ 1987 35 74 10 Jan. 1996 2
Clinics of North Texas...... Wichita Falls, TX 1995 73 51 21 Mar. 1996 6
Carolina Primary Care....... Columbia, SC 1995 30 100 3 May 1996 9
Harbin Clinic............... Rome, GA 1948 66 21 15 May 1996 7
Focus Health Services....... Denver, CO 1989 55 89 7 July 1996 16
Clark-Holder Clinic......... LaGrange, GA 1936 47 38 19 July 1996 5
Medical Arts Clinic......... Minot, ND 1958 44 52 19 Aug. 1996 1
Wilmington Health
Associates................ Wilmington, NC 1971 43 40 13 Aug. 1996 5
Gulf Coast Medical Group.... Galveston, TX 1996 33 73 10 Aug. 1996 10
Hattiesburg Clinic.......... Hattiesburg, MS 1963 101 44 17 Oct. 1996 12
Toledo Clinic............... Toledo, OH 1926 80 18 19 Nov. 1996 10
Lewis-Gale Clinic........... Roanoke, VA 1909 106 49 23 Nov. 1996 14
Straub Clinic & Hospital.... Honolulu, HI 1921 187 52 26 Jan. 1997(3) 10
First Physicians Medical
Group..................... Palm Springs, CA 1997 21 67 9 Feb. 1997 16
</TABLE>
- ---------------
(1) Entered into an interim management agreement effective November 1, 1995 and
consummated the acquisition of certain assets and entered into a long-term
service agreement effective January 1, 1996.
(2) Entered into a series of agreements whereby PhyCor agreed to provide
management services for up to five years and agreed to acquire certain
assets of the clinic upon the occurrence of certain conditions.
(3) Entered into an administrative services agreement effective October 1, 1996
and consummated the merger with Straub and entered into a long-term service
agreement effective January 17, 1997.
23
<PAGE> 25
In addition to the approximately 3,070 physicians affiliated with the
Company, the PhyCor-affiliated physician groups employ approximately 430
physician extenders, which include physician assistants, nurse practitioners and
other mid-level providers. The Company believes physician extenders comprise an
important component of its integrated network strategy by efficiently expanding
the level of services offered in its clinics.
Upon the acquisition by PhyCor of a clinic's operating assets, the
affiliated physician group simultaneously enters into a long-term service
agreement with the Company. The Company, under the terms of the service
agreement, provides the physician group with the equipment and facilities used
in its medical practice, manages clinic operations, employs most of the clinic's
non-physician personnel, other than certain diagnostic technicians, and receives
a service fee.
The physician groups offer a wide range of primary and specialty physician
care and ancillary services. Approximately 53% of PhyCor's affiliated physicians
are primary care providers. The primary care physicians are those in family
practice, general internal medicine, obstetrics, pediatrics and emergency and
urgent care. PhyCor works closely with its affiliated physician groups to
recruit new physicians and merge sole practices or single specialty groups,
especially primary care groups, into the clinics' physician groups.
Substantially all of the physicians practicing in the clinics are certified or
eligible to be certified by applicable specialty boards.
PhyCor's affiliated physicians maintain full professional control over
their medical practices, determine which physicians to hire or terminate and set
their own standards of practice in order to promote high quality health care.
Pursuant to its service agreements with physician groups, PhyCor manages all
aspects of the clinic other than the provision of medical services, which is
controlled by the physician groups. At each clinic, a joint policy board equally
comprised of physicians and PhyCor personnel focuses on strategic and
operational planning, marketing, managed care arrangements and other major
issues facing the clinic. The joint policy board involves experienced health
care managers in the decision making process and brings increased discipline and
accountability to clinic operations. PhyCor is not engaged in the practice of
medicine.
Management believes its clinics have the opportunity to form relationships
with managed care organizations, insurance companies and hospitals to create
high-quality, cost-effective health care delivery systems. The Company is
aligning its affiliated clinics with low-cost, high-quality hospitals and
related providers in each of its markets and through various relationships is
seeking to more closely coordinate the overall delivery of health care to
patients. These plans may include participation by affiliated physicians in
physician networks developed and managed by PhyCor or PMC. See "Physician
Networks." Pursuant to certain of the Company's relationships with managed care
organizations and insurance companies, responsibility for physician services,
hospital utilization and overall medical management is assumed by the physician
networks being developed by PhyCor-affiliated clinics. The Company believes that
medical management performed within physician organizations can yield the
greatest value in quality-driven, cost-effective health care and that premiums
collected from purchasers of health care will be allocated based upon the value
of the services performed by the health care provider members of organized
health care systems.
The Company has initiated the PhyCor Institute for Healthcare Management
which provides practical managed care and medical management training for
physicians affiliated or considering affiliation with PhyCor. Through the
Institute's efforts, physicians in many locations work together to achieve
"economies of intellect" and best practice performance through shared data and
experience. These efforts emphasize outcomes measurement and management and are
intended to improve the physicians' ability to attain optimal clinical outcomes
and patient satisfaction, while emphasizing appropriate utilization of health
care resources. The Company believes that, in the future, its ability to
differentiate its physician organizations based upon quality clinical
performance will increasingly impact financial performance.
24
<PAGE> 26
The Company provides support for the selection and implementation of
information systems at its clinics. The Company has selected certain practice
management and other systems considered to be most effective for capitated risk
management, provider profiling, outcomes analysis and automated patient records
for implementation at its clinics. These systems are designed to allow physician
organizations to successfully capture information that will enable them to more
effectively manage the risk associated with capitated arrangements.
The Company also negotiates national arrangements that provide cost savings
to its clinics through economies of scale in malpractice insurance, supplies and
equipment. In addition, PhyCor has a service improvement program that aligns
staffing with the volume and service needs of its physician organizations and
focuses on measuring and improving patient satisfaction. Upon assuming the
operations of a clinic, the Company implements a standard set of business
policies and reviews procedure coding practices in each clinic.
PHYSICIAN NETWORKS
PhyCor established its presence in the IPA management business in 1995 and
believes that a significant opportunity exists to develop and manage IPAs. IPAs
consolidate independent physicians by providing general organizational structure
and management to the physician network. IPAs provide or contract for medical
management services to assist physician networks in obtaining and servicing
managed care contracts and enable previously unaffiliated physicians to assume
and more effectively manage capitated risk.
PhyCor manages IPAs with over 9,300 physicians in 17 markets. The Company
establishes management companies through which all health plan contracts are
negotiated. These management companies, in which physicians may have an equity
interest, provide information and operating systems, actuarial and financial
analysis, medical management and provider contract services to the IPA. PhyCor
assists physicians in forming networks to develop a managed care delivery system
in which the IPA accepts fiscal responsibility for providing a wide range of
medical services. PhyCor intends to continue to develop primary care-oriented
health care delivery systems in certain markets that do not have established
managed care networks.
In June 1995, PhyCor purchased a minority interest in PMC and manages PMC
pursuant to a ten-year administrative services agreement. PMC develops and
manages IPAs and provides other services to physician organizations. PhyCor has
an option to purchase the remaining equity interest of PMC prior to the end of
May 2005.
25
<PAGE> 27
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Joseph C. Hutts............................ 55 Chairman of the Board, President, Chief
Executive Officer and Director
Derril W. Reeves........................... 53 Executive Vice President, Development and
Director
Richard D. Wright.......................... 51 Executive Vice President, Operations and
Director
Thompson S. Dent........................... 46 Executive Vice President, Corporate
Services, Secretary and Director
John K. Crawford........................... 38 Vice President, Treasurer and Chief
Financial Officer
Ronald B. Ashworth(1)...................... 51 Director
Sam A. Brooks, Jr.(2)...................... 58 Director
Winfield Dunn(1)........................... 69 Director
C. Sage Givens(2).......................... 40 Director
Joseph A. Hill, M.D.(1).................... 56 Director
James A. Moncrief, M.D.(1)................. 61 Director
</TABLE>
- ---------------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
Mr. Hutts has served as Chairman of the Board, President, Chief Executive
Officer and a director of the Company since its inception in 1988. Prior to
becoming an officer of the Company, Mr. Hutts served at Hospital Corporation of
America ("HCA") from 1977 to 1986 in various positions, including Vice
President, Operations, Senior Vice President, Western Operations, and President
of HCA Health Plans, a managed care subsidiary of HCA. Mr. Hutts then became
Vice Chairman and Chief Operating Officer of EQUICOR -- Equitable HCA
Corporation ("EQUICOR"), an employee benefits company, a position he held from
October 1986 until June 1987. Mr. Hutts serves on the board of directors of
Renal Care Group, Inc., a provider of nephrology services, and Quorum Health
Group, Inc., an owner and operator of hospitals.
Mr. Reeves, a director of the Company, has served as Executive Vice
President, Development, since inception of the Company. Mr. Reeves served as
Vice President of Sales and Marketing with HCA Management Company from 1977
until 1986, at which time he took the position of Senior Vice President,
National Sales, with EQUICOR, a position he held until October 1987.
Mr. Wright, a director of the Company, has served as Executive Vice
President, Operations, since inception of the Company. Mr. Wright served in
several international positions with HCA concluding in 1986 with the position of
Chief Executive Officer of an 800,000 member HMO in Brazil. He returned to the
United States in 1986 to assume the position of Senior Vice President,
Development, for EQUICOR, a position he held from October 1986 until May 1987.
Mr. Wright is a trustee of Helen Keller International.
Mr. Dent, a director of the Company, has served as Executive Vice
President, Corporate Services, since inception of the Company. Mr. Dent was
selected to serve as Secretary of the Company in 1991. Mr. Dent served as Vice
President of Development at EQUICOR, a position he held from October 1986 until
March 1988. Prior to October 1986, Mr. Dent served as Director of Mergers and
Acquisitions for HCA. Mr. Dent is a director of Healthcare Realty Trust
Incorporated, a real estate investment trust.
26
<PAGE> 28
Mr. Crawford has served as Vice President and Treasurer of the Company
since 1993 and Chief Financial Officer since July 1994. From 1991 to 1993, Mr.
Crawford served as Director of Clinic Financial Operations for the Company.
Prior to joining the Company, from 1987 to 1991, Mr. Crawford served as a Senior
Manager for KPMG Peat Marwick LLP, in Nashville, Tennessee, the Company's
independent public accountants.
Mr. Ashworth has served as a director of the Company since April 1992.
Since 1991, Mr. Ashworth has served as Executive Vice President and Chief
Operating Officer of the Sisters of Mercy Health System, St. Louis, Missouri, a
system consisting of hospitals and affiliated health care entities serving a
seven-state area in the central and southwestern United States. From 1986 to
1990, Mr. Ashworth served as Vice Chairman of Specialized Industries and
Marketing for KPMG Peat Marwick LLP, the Company's independent public
accountants. From 1978 to 1985, Mr. Ashworth served as National Director of the
health care practice of KPMG Peat Marwick LLP. Mr. Ashworth is a director of the
Franciscan Health System.
Mr. Brooks has served as a director of the Company since February 1988. He
is President, Chief Executive Officer and a director of Renal Care Group, Inc.,
a specialized provider of nephrology services. He is also President of MedCare
Investments Corp., a health care investment company, and is Chairman of National
Imaging Affiliates, Inc., an owner of outpatient diagnostic imaging centers.
From 1986 to 1989, Mr. Brooks was President of Nationwide Health Properties, a
health care real estate investment trust. From 1969 to 1986, Mr. Brooks served
as Chief Financial Officer of HCA. Mr. Brooks is a director of Kinetic Concepts,
Inc., a hospital bed manufacturer, Nationwide Health Properties and Quorum
Health Group, Inc.
Dr. Dunn, a former Governor of the State of Tennessee, has served as a
director of the Company since August 1988. From 1979 to 1985, Dr. Dunn served as
Senior Vice-President, Government Affairs, for HCA. From 1987 to 1991, Dr. Dunn
served as Chairman of the Board of First Cumberland Bank. In 1993, Dr. Dunn
became Chairman of the Board of Medshares Management Group, Incorporated, an
owner and manager of home health care agencies.
Ms. Givens has served as a director of the Company since December 1989.
Since June 1995, Ms. Givens has served as the managing partner of Acacia Venture
Partners, a private venture fund specializing in health care services. From 1987
to June 1995, Ms. Givens served as a general partner of First Century Management
Company. Ms. Givens is a director of HEALTHSOUTH Corporation, a leading provider
of rehabilitation and outpatient surgery services.
Dr. Hill has served as a director of the Company since April 1989. He is a
physician specializing in family practice at Doctors' Clinic in Vero Beach,
Florida, a clinic managed by the Company. Dr. Hill joined Doctors' Clinic in
1973. Dr. Hill served as President of Doctors' Clinic from 1988 to 1991.
Dr. Moncrief has served as a director of the Company since December 1988.
He is a physician specializing in pediatrics and pediatric neurology at Green
Clinic in Ruston, Louisiana, a clinic managed by the Company. Dr. Moncrief
joined Green Clinic in 1966 and serves as its Medical Director.
27
<PAGE> 29
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding beneficial
stock ownership as of December 31, 1996 (unless otherwise noted) and as adjusted
to reflect the sale of the Common Stock offered hereby by (i) each director of
the Company, (ii) all directors and officers as a group, (iii) each shareholder
known by the Company to be the beneficial owner of more than 5% of the
outstanding Common Stock, and (iv) the Selling Shareholders. Except as otherwise
indicated, the persons or entities listed below have sole voting and investment
power with respect to all shares shown to be beneficially owned by them, except
to the extent such power is shared by a spouse under applicable law.
<TABLE>
<CAPTION>
NUMBER
OF SHARES PERCENT
SUBJECT IF OVER-
SHARES PERCENT PERCENT TO OVER- ALLOTMENT
BENEFICIALLY BEFORE AFTER ALLOTMENT OPTION
NAME OWNED(1) OFFERING(1) OFFERING(1)(2) OPTION EXERCISED(1)(3)
---- ------------ ----------- -------------- --------- ---------------
<S> <C> <C> <C> <C> <C>
Joseph C. Hutts(4)............. 350,771 * * -- *
Derril W. Reeves(5)............ 495,418 * * -- *
Thompson S. Dent(6)............ 481,778 * * -- *
Richard D. Wright(7)........... 410,529 * * 40,000 *
John K. Crawford(8)............ 66,045 * * 25,000 *
Ronald B. Ashworth(9).......... 23,683 * * -- *
Sam A. Brooks, Jr.(10)......... 35,323 * * -- *
Winfield Dunn(11).............. 42,170 * * -- *
C. Sage Givens(12)............. 29,513 * * -- *
Joseph A. Hill, M.D.(13)....... 50,607 * * -- *
James A. Moncrief, M.D.(14).... 50,510 * * -- *
Putnam Investments, Inc.(15)... 6,501,598 11.9% 10.6% -- 10.5%
Jennison Associates Capital
Corp.(16).................... 5,280,429 9.6 8.6 -- 8.5
Pilgrim Baxter &
Associates(17)............... 3,609,412 6.6 5.9 -- 5.8
Denver Investment Advisors,
Inc.(18)..................... 2,894,198 5.3 4.7 -- 4.7
All directors and officers as a
group (11 persons)(19)....... 2,024,072 3.6 3.2 65,000 3.1
</TABLE>
- ---------------
* Less than 1%.
(1) The table above includes shares of the Company's Common Stock which an
individual has a right to acquire, whether upon conversion of convertible
securities or upon exercise of options and warrants, within 60 days of the
date of this Prospectus. Such shares are deemed to be outstanding for the
purposes of calculating the percentage ownership of the individual holding
such shares, but are not deemed outstanding for purposes of computing the
percentage of any other person shown on the table.
(2) Assumes no exercise of the Underwriters' over-allotment option.
(3) Assumes that the Underwriters' over-allotment option is exercised in full.
(4) Includes options to purchase 206,885 shares of Common Stock and 21,581
shares of restricted Common Stock. Excludes unvested options to purchase
648,458 shares of Common Stock.
(5) Includes options to purchase 197,843 shares of Common Stock and 18,950
shares of restricted Common Stock. Excludes unvested options to purchase
486,703 shares of Common Stock.
(6) Includes options to purchase 197,843 shares of Common Stock and 20,656
shares of restricted Common Stock. Of these shares, 133,630 shares are held
in three trusts by Mr. Dent for the benefit of members of his immediate
family. Excludes unvested options to purchase 486,703 shares of Common
Stock.
28
<PAGE> 30
(7) Includes options to purchase 197,843 shares of Common Stock and 16,744
shares of restricted Common Stock. Of these shares, 5,347 shares are held
by Mr. Wright for the benefit of his minor daughter. Excludes unvested
options to purchase 486,703 shares of Common Stock.
(8) Includes options to purchase 46,953 shares (21,953 shares after the
offering) of Common Stock and 6,729 shares of restricted Common Stock. Of
these shares, 1,270 shares are held in trust by Mr. Crawford for the
benefit of his two minor daughters. Excludes unvested options to purchase
344,153 shares of Common Stock.
(9) Includes options to purchase 19,125 shares of Common Stock and 787 shares
of restricted Common Stock.
(10) Includes options to purchase 29,250 shares of Common Stock and 617 shares
of restricted Common Stock.
(11) Includes options to purchase 37,688 shares of Common Stock and 999 shares
of restricted Common Stock.
(12) Includes options to purchase 20,813 shares of Common Stock and 999 shares
of restricted Common Stock.
(13) Includes options to purchase 20,813 shares of Common Stock and 999 shares
of restricted Common Stock.
(14) Includes options to purchase 20,813 shares of Common Stock and 617 shares
of restricted Common Stock.
(15) Of these shares, Putnam Investments, Inc., a registered investment adviser
("Putnam"), has shared voting power as to 86,796 shares and no voting power
as to 6,414,802 shares. Putnam is a wholly-owned subsidiary of American
Express Company. Putnam's address is One Post Office Square, Boston,
Massachusetts 02109. Information is as of September 30, 1996 and is derived
from Securities and Exchange Commission filings.
(16) Of these shares, Jennison Associates Capital Corp., a registered investment
adviser ("Jennison"), has shared voting power as to 3,852,343 shares and no
voting power as to 330,986 shares. Jennison is a wholly-owned subsidiary of
The Prudential Insurance Company of America. Jennison's address is 466
Lexington Avenue, New York, New York 10017. Information is as of September
30, 1996 and is derived from Securities and Exchange Commission filings.
(17) Pilgrim Baxter & Associates, a registered investment adviser ("Pilgrim"),
has shared voting power as to 3,609,412 shares. Pilgrim's address is 1255
Drummer Lane, Suite 300, Wayne, Pennsylvania 19087. Information is as of
September 30, 1996 and is derived from Securities and Exchange Commission
filings.
(18) Denver Investment Advisors, Inc., a registered investment adviser
("Denver"), has no voting power as to 1,001,249 shares. Denver's address is
633 17th Street, Suite 1800, Denver, Colorado 80217. Information is as of
September 30, 1996 and is derived from Securities and Exchange Commission
filings.
(19) Includes options to purchase 983,593 shares of Common Stock and 89,678
shares of restricted Common Stock.
29
<PAGE> 31
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their representatives,
Alex. Brown & Sons Incorporated, Equitable Securities Corporation, Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Piper Jaffray Inc. and Salomon
Brothers Inc have severally agreed to purchase from the Company the following
respective numbers of shares of Common Stock set forth opposite their names
below at the public offering price less the underwriting discounts and
commissions set forth on the cover page of this Prospectus:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Alex. Brown & Sons Incorporated.............................
Equitable Securities Corporation............................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................
Piper Jaffray Inc...........................................
Salomon Brothers Inc........................................
---------
Total....................................................... 6,400,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all shares of the Common Stock offered hereby if any
of such shares are purchased.
The Company has been advised by the representatives of the Underwriters
that the Underwriters propose to offer the shares of Common Stock to the public
at the public offering price set forth on the cover page of this Prospectus and
to certain dealers at such price less a concession not in excess of $ per
share. The Underwriters may allow, and such dealers may reallow, a concession
not in excess of $ per share to certain other dealers. After the public
offering, the offering price and the other selling terms may be changed by the
representatives of the Underwriters.
The Company and the Selling Shareholders have granted to the Underwriters
an option, exercisable not later than 30 days after the date of this Prospectus,
to purchase up to a maximum of 895,000 and 65,000 additional shares of Common
Stock, respectively, at the public offering price less the underwriting
discounts and commissions set forth on the cover page of this Prospectus. To the
extent that the Underwriters exercise such option, each of the Underwriters will
have a firm commitment to purchase approximately the same percentage thereof
that the number of shares of Common Stock to be purchased by it shown in the
above table bears to 6,400,000, and the Company and the Selling Shareholders
will be obligated, pursuant to the option, to sell such shares to the
Underwriters. The Underwriters may exercise such option only to cover
over-allotments made in connection with the sale of the Common Stock offered
hereby. If purchased, the Underwriters will offer such additional shares on the
same terms as those on which the 6,400,000 shares are being offered.
The Company and, if the Underwriters' over-allotment option is exercised,
the Selling Shareholders, have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933, as
amended.
The Company has agreed not to offer, sell or otherwise dispose of any
shares of Common Stock, for a period of at least 45 days after the date of this
Prospectus without the prior written consent of the representatives of the
Underwriters, excepting securities issued by the Company pursuant to the
conversion of existing convertible subordinated debentures, convertible
subordinated notes, the exercise of outstanding warrants or stock option and
purchase plans. In addition, the Company may issue securities in connection with
acquisitions of the assets of additional physician groups, provided that the
public sale of such securities remains subject to the 45 day lock-up. The
executive officers of the Company have agreed not to offer, sell or otherwise
dispose of any shares of Common
30
<PAGE> 32
Stock for a period of at least 45 days after the date of this Prospectus without
the prior written consent of the Underwriters.
In connection with this offering, certain Underwriters and selling group
members (if any) or their respective affiliates who are qualified registered
market makers on the Nasdaq National Market may engage in passive market making
on the Nasdaq National Market in accordance with Rule 10b-6A under the Exchange
Act during the two business day period before the commencement of the offers or
sales of the Common Stock. The passive market making transactions must comply
with applicable volume and price limits and be identified as such. In general, a
passive market maker may display its bid at a price not in excess of the highest
independent bid for such security; if all independent bids are lowered before
the passive market maker's bid, however, such bid must then be lowered when
certain purchase limits are exceeded.
Alex. Brown & Sons Incorporated, Equitable Securities Corporation and
Salomon Brothers Inc participated as representatives of the underwriters in
connection with the February 1996 public offering of the Company's 4.5%
Convertible Subordinated Debentures due 2003. In such offering, such firms
received customary commissions and allowed discounts by the Company. Each of the
representatives of the Underwriters makes a market in the Common Stock.
LEGAL MATTERS
Certain legal matters with respect to the validity of the shares of Common
Stock will be passed upon for the Company by Waller Lansden Dortch & Davis, A
Professional Limited Liability Company, Nashville, Tennessee. Testa, Hurwitz &
Thibeault, LLP is acting as counsel to the Underwriters in connection with
certain legal matters relating to the shares of Common Stock offered hereby.
EXPERTS
The Consolidated Financial Statements of PhyCor as of December 31, 1994 and
1995, and for each of the years in the three-year period ended December 31,
1995, included elsewhere in the Registration Statement have been included in
reliance upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, upon the authority of such firm as experts in accounting and
auditing.
31
<PAGE> 33
AVAILABLE INFORMATION
The Company has filed a Registration Statement on Form S-3, including
amendments thereto, relating to the Common Stock offered hereby (the
"Registration Statement") with the Securities and Exchange Commission (the
"Commission"). This Prospectus does not contain all of the information set forth
in the Registration Statement and the exhibits and schedules thereto. Statements
contained in this Prospectus as to the contents of any contract or other
document referred to are not necessarily complete and in each instance reference
is made to the copy of such contract or other document filed as an exhibit to
the Registration Statement or as previously filed with the Commission and
incorporated herein by reference. For further information with respect to the
Company and the Common Stock offered hereby, reference is made to such
Registration Statement, exhibits and schedules.
The Company is subject to the information requirements of the Exchange Act
and, in accordance therewith, files reports, proxy statements and other
information with the Commission. The Registration Statement, as well as such
reports, proxy statements and other information, may be inspected and copied at
prescribed rates at the public reference facilities maintained by the Commission
at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the Commission's regional offices located at 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, Suite 1300,
New York, New York 10048. In addition, the Commission maintains a web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission at
http://www.sec.gov. The Company's Common Stock is quoted on the Nasdaq National
Market, and such reports, proxy statements and other information may be
inspected at the offices of Nasdaq Operations, 1735 K Street, N.W., Washington,
D.C. 20006.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents or portions of documents filed by the Company
(0-19786) with the Commission are incorporated herein by reference:
(1) The Company's Annual Report on Form 10-K for the year ended
December 31, 1995;
(2) The Company's Quarterly Report on Form 10-Q for the three months
ended March 31, 1996;
(3) The Company's Quarterly Report on Form 10-Q for the three months
ended June 30, 1996;
(4) The Company's Quarterly Report on Form 10-Q for the three months
ended September 30, 1996;
(5) The Company's Current Report on Form 8-K, dated February 3, 1997;
and
(6) The description of the Company's Common Stock contained in the
Company's Registration Statements on Form 8-A, dated January 8,
1992 and March 8, 1994, respectively.
All reports and other documents filed by the Company pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus
and prior to the termination of the offering of the Common Stock hereunder shall
be deemed to be incorporated by reference in this Prospectus and to be part
hereof from the filing date of such documents.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein,
or in any other subsequently filed document that also is incorporated or is
deemed to be incorporated by reference herein, modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
Subject to the foregoing, all information appearing in this Prospectus is
qualified in its entirety by the information appearing in the documents
incorporated herein by reference.
This Prospectus incorporates documents by reference which are not presented
herein or delivered herewith. These documents are available upon written or oral
request, at no charge, from the Company. Requests should be directed to the
Company, 30 Burton Hills Boulevard, Suite 400, Nashville, Tennessee 37215,
Attention: John K. Crawford, Vice President and Chief Financial Officer.
32
<PAGE> 34
PHYCOR, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
CONSOLIDATED ANNUAL FINANCIAL STATEMENTS OF PHYCOR, INC.
Independent Auditors' Report.............................. F-2
Consolidated Balance Sheets............................... F-3
Consolidated Statements of Operations..................... F-4
Consolidated Statements of Shareholders' Equity........... F-5
Consolidated Statements of Cash Flows..................... F-6
Notes to Consolidated Financial Statements................ F-7
CONSOLIDATED INTERIM FINANCIAL STATEMENTS OF PHYCOR, INC.
Consolidated Balance Sheets............................... F-21
Consolidated Statements of Earnings....................... F-22
Consolidated Statements of Cash Flows..................... F-23
Notes to Unaudited Consolidated Financial Statements...... F-24
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION:
Basis of Presentation..................................... F-27
Balance Sheet -- September 30, 1996....................... F-28
Statement of Operations -- Nine Months Ended September 30,
1996................................................... F-29
Statement of Operations -- Year Ended December 31, 1995... F-30
Notes to Pro Forma Consolidated Financial Information..... F-31
</TABLE>
F-1
<PAGE> 35
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
PhyCor, Inc.:
We have audited the consolidated balance sheets of PhyCor, Inc. and
subsidiaries as of December 31, 1994 and 1995 and the related consolidated
statements of income, shareholders' equity and cash flows for each of the years
in the three-year period ended December 31, 1995. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of PhyCor, Inc.
and subsidiaries as of December 31, 1994 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Nashville, Tennessee
February 13, 1996, except for Note (16)
which is as of June 14, 1996
F-2
<PAGE> 36
PHYCOR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995
(ALL DOLLAR AMOUNTS ARE EXPRESSED IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995
-------- --------
<S> <C> <C>
ASSETS (NOTE 10)
Current assets:
Cash and cash equivalents................................. $ 6,460 $ 18,827
Accounts receivable, less allowances of $68,860 in 1994
and $82,205 in 1995.................................... 118,175 167,028
Inventories............................................... 5,840 8,939
Prepaid expenses and other assets......................... 14,407 22,727
-------- --------
Total current assets.............................. 144,882 217,521
Property and equipment, net (notes 4, 10, and 11)........... 58,761 108,813
Intangible assets (note 6).................................. 137,635 308,963
Other assets (note 5)....................................... 10,107 8,289
-------- --------
Total assets...................................... $351,385 $643,586
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt (note 10).......... $ 148 $ 587
Current installments of obligations under capital leases
(note 11).............................................. 1,533 1,799
Accounts payable.......................................... 10,269 20,020
Income taxes payable...................................... -- 2,714
Due to physician groups (note 2).......................... 27,577 48,917
Salaries and benefits payable............................. 7,433 11,381
Other accrued expenses and liabilities.................... 17,389 20,683
-------- --------
Total current liabilities......................... 64,349 106,101
Long-term debt, excluding current installments (note 10).... 32,150 65,905
Obligations under capital leases, excluding current
installments (note 11).................................... 1,261 1,637
Due to physician groups (note 2)............................ 9,755 13,722
Deferred tax credits and other liabilities (note 13)........ 8,258 8,030
Convertible subordinated notes payable to physician groups
(notes 7 and 8)........................................... 22,832 59,369
Convertible subordinated debentures (notes 7 and 9)......... 28,655 --
-------- --------
Total liabilities................................. 167,260 254,764
-------- --------
Shareholders' equity (notes 8, 9, 12 and 16):
Preferred stock, no par value, 10,000,000 shares
authorized............................................. -- --
Common stock, no par value; 100,000,000 shares authorized;
issued and outstanding, 37,899,000 shares in 1994 and
53,399,000 shares in 1995.............................. 180,388 363,211
Retained earnings......................................... 3,737 25,611
-------- --------
Total shareholders' equity........................ 184,125 388,822
-------- --------
Commitments and contingencies (notes 11, 12, 14, and 15)
Total liabilities and shareholders' equity........ $351,385 $643,586
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 37
PHYCOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1993, 1994, AND 1995
(ALL AMOUNTS ARE EXPRESSED IN THOUSANDS, EXCEPT FOR EARNINGS PER SHARE)
<TABLE>
<CAPTION>
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Net revenue (note 2)........................................ $167,381 $242,485 $441,596
Operating expenses (income):
Clinic salaries, wages and benefits....................... 63,202 88,443 166,031
Clinic supplies........................................... 25,031 37,136 67,596
Purchased medical services................................ 8,920 11,778 17,572
Other clinic expenses..................................... 28,174 40,939 71,877
General corporate expenses................................ 5,418 9,417 14,191
Rents and lease expense................................... 16,441 23,413 36,740
Depreciation and amortization............................. 8,394 12,229 21,445
Interest income........................................... (309) (1,334) (1,816)
Interest expense.......................................... 3,878 3,963 5,230
Minority interest in earnings of consolidated
partnerships........................................... -- -- 6,933
-------- -------- --------
Net operating expenses............................ 159,149 225,984 405,799
-------- -------- --------
Earnings before income taxes...................... 8,232 16,501 35,797
Income tax expense (note 13)................................ 1,092 4,826 13,923
-------- -------- --------
Net earnings...................................... $ 7,140 $ 11,675 $ 21,874
======== ======== ========
Earnings per common share (note 16):
Primary................................................... $ .28 $ .32 $ .41
Fully diluted............................................. -- $ .31 --
======== ======== ========
Weighted average number of shares and share equivalents
outstanding (note 16):
Primary................................................... 25,869 36,329 53,510
Fully diluted............................................. -- 43,427 --
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 38
PHYCOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993, 1994, AND 1995
(ALL AMOUNTS ARE EXPRESSED IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED
EARNINGS
COMMON STOCK (ACCUMU-
----------------- LATED
SHARES AMOUNT DEFICIT) TOTAL
------ -------- -------- --------
<S> <C> <C> <C> <C>
Balances at December 31, 1992....................... 22,041 $ 68,957 $(15,078) $ 53,879
Issuance of common stock, net of placement
commissions and offering expenses.............. 510 2,303 -- 2,303
Conversion of subordinated debentures to common
stock.......................................... 377 2,117 -- 2,117
Conversion of notes payable to common stock....... 1,090 4,310 -- 4,310
Stock options exercised........................... 179 256 -- 256
Net earnings for the year ended December 31,
1993........................................... -- -- 7,140 7,140
------ -------- -------- --------
Balances at December 31, 1993....................... 24,197 77,943 (7,938) 70,005
Issuance of common stock, net of placement
commissions and offering expenses.............. 8,978 76,726 -- 76,726
Conversion of subordinated debentures to common
stock.......................................... 4,113 23,129 -- 23,129
Conversion of notes payable to common stock....... 589 2,498 -- 2,498
Stock options exercised........................... 22 92 -- 92
Net earnings for the year ended December 31,
1994........................................... -- -- 11,675 11,675
------ -------- -------- --------
Balances at December 31, 1994....................... 37,899 180,388 3,737 184,125
Issuance of common stock and warrants, net of
placement commissions and offering expenses.... 7,835 127,773 -- 127,773
Conversion of subordinated debentures to common
stock.......................................... 4,882 27,566 -- 27,566
Conversion of notes payable to common stock....... 2,670 26,405 -- 26,405
Stock options exercised and related tax
benefits....................................... 113 1,079 -- 1,079
Net earnings for the year ended December 31,
1995........................................... -- -- 21,874 21,874
------ -------- -------- --------
Balances at December 31, 1995....................... 53,399 $363,211 $ 25,611 $388,822
====== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 39
PHYCOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993, 1994, AND 1995
(ALL AMOUNTS ARE EXPRESSED IN THOUSANDS)
<TABLE>
<CAPTION>
1993 1994 1995
------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings.............................................. $ 7,140 $ 11,675 $ 21,874
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization........................... 8,394 12,229 21,445
Deferred income taxes................................... 492 1,566 2,948
Minority interests...................................... -- -- 729
Increase (decrease) in cash, net of effects of
acquisitions, due to changes in:
Accounts receivable, net.............................. (5,911) (9,496) (12,179)
Inventories........................................... (281) (576) (1,280)
Prepaid expenses and other assets..................... (1,795) (2,046) (1,749)
Accounts payable...................................... (85) 1,646 5,474
Due to physician groups............................... (1,455) 29 8,595
Other accrued expenses and liabilities................ (175) (1,527) 2,204
------- -------- --------
Net adjustments.................................... (816) 1,825 26,187
------- -------- --------
Net cash provided by operating activities.......... 6,324 13,500 48,061
------- -------- --------
Cash flows from investing activities:
Payments for acquisitions, net............................ (29,882) (69,164) (145,075)
Purchase of property and equipment........................ (7,369) (17,496) (29,292)
Proceeds from sale of property and equipment.............. 10,386 -- --
Payments to acquire other assets.......................... (1,436) (4,488) (2,943)
------- -------- --------
Net cash used by investment activities............. (28,301) (91,148) (177,310)
------- -------- --------
Cash from financing activities:
Net proceeds from issuance of stock and warrants.......... 178 59,131 113,594
Net proceeds from issuance of convertible debentures...... 52,518 -- --
Proceeds from long-term borrowings........................ 2,034 42,100 130,400
Repayment of long-term borrowings......................... (36,267) (17,115) (100,144)
Repayment of obligations under capital leases............. (2,096) (3,170) (1,965)
Loan costs incurred....................................... (342) (38) (269)
------- -------- --------
Net cash provided by financing activities.......... 16,025 80,908 141,616
------- -------- --------
Net increase (decrease) in cash and cash equivalents........ (5,952) 3,260 12,367
Cash and cash equivalents -- beginning of year.............. 9,152 3,200 6,460
------- -------- --------
Cash and cash equivalents -- end of year.................... $ 3,200 $ 6,460 $ 18,827
======= ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest.................................................. $ 3,668 $ 5,092 $ 4,674
Income taxes, net of refunds.............................. 356 2,828 10,760
======= ======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES
Effects of acquisitions (note 3):
Assets acquired, net of cash.............................. $37,394 $172,441 $270,925
Liabilities assumed....................................... (5,605) (64,577) (50,015)
Reduction (issuance) of convertible subordinated notes
payable................................................. 451 (16,931) (62,942)
Issuance of common stock.................................. (2,358) (17,438) (12,893)
Cash received from disposition of clinic assets........... -- (4,331) --
------- -------- --------
Payment for acquired assets........................ $29,882 $ 69,164 $145,075
======= ======== ========
Capital lease obligations incurred to acquire equipment..... $ 422 $ 466 $ 173
Conversion of subordinated debentures and notes payable to
common stock.............................................. 6,427 25,627 53,971
======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 40
PHYCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993, 1994, AND 1995
(1) SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
(a) Description of Business
PhyCor, Inc. is a physician-driven medical management company that acquires
and operates multispecialty medical clinics and develops and manages independent
practice associations ("IPAs"). PhyCor's objective is to organize physicians
into professionally managed networks that assist physicians in assuming
increased responsibility for delivering cost-effective medical care while
attaining high-quality clinical outcomes and patient satisfaction. The Company,
through wholly-owned subsidiaries, acquires certain assets of and operates
clinics under long-term service agreements with affiliated physician groups that
practice exclusively through such clinics. The Company provides administrative
and technical support for professional services rendered by the physician groups
under service agreements. Under most service agreements, the Company is
reimbursed for all clinic expenses, as defined in the agreement, and
participates at varying levels in the excess of net clinic revenue over clinic
expenses. As of December 31, 1995, the Company operated 31 multispecialty
clinics in twenty states.
The Company also manages IPAs which are networks of independent physicians.
These IPAs include over 5,700 physicians in 13 markets in six states which
provide capitated medical services to approximately 218,000 members, including
approximately 38,000 Medicare members.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its majority owned subsidiaries, partnerships and other entities in which
the company has more than 50% ownership interest or exercises control. All
significant intercompany balances and transactions are eliminated in
consolidation.
(c) Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. Cash and cash
equivalents as of December 31, 1995 include $2,139,000 of consolidated
partnership cash. These balances may only be used for the operations of the
respective partnerships.
(d) Accounts Receivable
Accounts receivable principally represent receivables from patients for
medical services provided by physician groups. Such amounts are recorded net of
contractual allowances and estimated bad debts. Accounts receivable are a
function of net clinic revenue rather than net revenue of the Company (See note
2).
(e) Inventories
Inventories are comprised primarily of medical supplies, medications and
other materials used in the delivery of health care services by the physician
groups at the Company's clinics. The Company values inventories at the lower of
cost or market with cost determined using the first-in, first-out (FIFO) method.
F-7
<PAGE> 41
PHYCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(f) Property and Equipment
Property and equipment are stated at cost. Equipment held under capital
leases is stated at the present value of minimum lease payments at the inception
of the related leases. Depreciation of property and equipment is calculated
using the straight-line method over the estimated useful lives of the assets.
Equipment held under capital leases and leasehold improvements are amortized on
a straight line basis over the shorter of the lease term or estimated useful
life of the assets.
When assets are retired or otherwise disposed of, the costs and related
accumulated depreciation are removed from the accounts. The difference between
the net book value of the assets and proceeds from disposition is recognized as
gain or loss. Routine maintenance and repairs are charged to expenses as
incurred, while betterments and renewals are capitalized.
(g) Intangible Assets
Clinic Service Agreements
Costs of obtaining clinic service agreements are amortized using the
straight-line method over the periods during which the agreements are effective,
currently twenty-five to forty years. Clinic service agreements represent the
exclusive right to operate the Company's clinics in affiliation with the related
physician groups during the term of the agreements. In the event of termination
of a service agreement, the related physician group is required to purchase all
clinic assets, including the unamortized portion of intangible assets, generally
at the current book value.
Excess of Cost of Acquired Assets Over Fair Value
Excess of cost of acquired assets over fair value (goodwill) is amortized
using the straight line method over thirty years.
Other Intangible Assets
Other intangible assets include costs associated with obtaining long-term
financing which are being amortized systematically over the terms of the related
debt agreements.
Amortization and Recoverability
The Company periodically reviews its intangible assets to assess
recoverability and impairments would be recognized in the statement of
operations if a permanent impairment were determined to have occurred.
Recoverability of intangibles is determined based on undiscounted future
operating cash flows from the related business unit or activity. The amount of
impairment, if any, is measured based on discounted future operating cash flows
using a discount rate reflecting the Company's average cost of funds. The
assessment of the recoverability of intangible assets will be impacted if
estimated future operating cash flows are not achieved. Amortization of
intangibles amounted to $2,268,000, $3,518,000, and $7,441,000 for 1993, 1994
and 1995, respectively.
(h) Income Taxes
The Company is a corporation subject to Federal and state income taxes.
Effective January 1, 1993, the Company adopted the provisions of Financial
Accounting Standards Board Statement No. 109, Accounting for Income Taxes. Under
the asset and liability method of Statement No. 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates
F-8
<PAGE> 42
PHYCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The Company adopted
Statement No. 109 prospectively. There was no cumulative effect of the change in
the method of accounting for income taxes.
(i) Earnings Per Share
Primary earnings per share have been computed by dividing net earnings by
the weighted average number of common shares and common share equivalents
outstanding during the periods. Common share equivalents included in determining
earnings per share include shares issuable upon exercise of warrants and stock
options and shares issuable upon conversion of certain debentures and notes
payable, if dilutive.
Fully diluted earnings per share have been computed by dividing net
earnings plus convertible subordinated debenture and note interest and
amortization expense (net of income taxes) by the weighted average number of
common shares and common share equivalents after giving effect to the common
stock equivalents noted above and those arising from the conversion of the
convertible subordinated debentures and notes.
(j) Use of Estimates
Management of the Company has made certain estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
(k) Reclassifications
Certain prior year amounts have been reclassified to conform to the 1995
presentation.
(2) NET REVENUE
Revenue for multispecialty clinics is recorded at established rates reduced
by allowances for doubtful accounts and contractual adjustments and amounts
retained by physician groups. 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 recoverable
amounts and are recognized in the period the services are rendered. Any
differences between estimated contractual adjustments and actual final
settlements under reimbursement contracts are reported as contractual
adjustments in the year final settlements are made.
IPA management revenue is recorded at the amount of capitation and risk
pool payments due to the Company reduced by amounts retained by the IPA.
F-9
<PAGE> 43
PHYCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following represent amounts included in the determination of net
revenue (in thousands):
<TABLE>
<CAPTION>
1993 1994 1995
-------- -------- ----------
<S> <C> <C> <C>
Gross physician group revenue.......................... $365,941 $581,156 $1,069,033
Less:
Provisions for doubtful accounts and contractual
adjustments....................................... 101,220 175,120 359,653
-------- -------- ----------
Net physician group revenue.................. 264,721 406,036 709,380
IPA revenue............................................ -- -- 146,975
Less amounts retained by physician groups and IPAs:
IPAs................................................. -- -- 118,599
Physician groups..................................... 90,424 148,983 266,725
Clinic technical employee compensation............... 6,916 14,568 29,435
-------- -------- ----------
Net revenue.................................. $167,381 $242,485 $ 441,596
======== ======== ==========
</TABLE>
The Company derives substantially all of its net revenue from thirty-one
physician groups located in twenty states with which it has service agreements.
For the year ended December 31, 1995, one of these physician groups comprises
10% of the Company's net revenue.
The Company's affiliated physician groups derived approximately 29% and 24%
of their net revenues from services provided under the Medicare program for the
years ended December 31, 1994 and 1995, respectively. Other than the Medicare
program, the physician groups have no customers which represent more than 10% of
aggregate net clinic revenue or 5% of accounts receivables at December 31, 1995.
(3) ACQUISITIONS
(a) Multispecialty Medical Clinics
During 1993, 1994, 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>
1993:
Holston Medical Group January 1, 1993 Kingsport, Tennessee
The Medical & Surgical Clinic of Irving March 1, 1993 Irving, Texas
Simon-Williamson Clinic July 1, 1993 Birmingham, Alabama
Medical Arts Center October 1, 1993 Dixon, Illinois
1994:
Medical Arts Clinic January 1, 1994 Corsicana, Texas
Lexington Clinic (C) August 1, 1994 Lexington, Kentucky
Southern Plains Medical Center August 1, 1994 Chickasha, Oklahoma
Holt-Krock Clinic September 1, 1994 Fort Smith, Arkansas
Burns Clinic Medical Center October 1, 1994 Petoskey, Michigan
Boulder Medical Center October 1, 1994 Boulder, Colorado
</TABLE>
F-10
<PAGE> 44
PHYCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
CLINIC EFFECTIVE DATE LOCATION
------ -------------- --------
<S> <C> <C>
1995:
Tidewater Physicians Multispecialty 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.
(C) The Lexington Clinic was operated by the Company under a management
agreement between February 15, 1994 and July 31, 1994.
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 Company acquires operating assets and liabilities in exchange for cash,
convertible debentures, common stock or a combination thereof. Such
consideration for the above clinic acquisitions and single specialty mergers was
$37,394,000 for 1993, $172,441,000 for 1994, and $239,620,000 for 1995. The
acquisitions were accounted for as purchases, and the accompanying consolidated
financial statements include the results of their operations from the dates of
acquisition. Simultaneous with each acquisition, the Company entered into a
long-term service agreement with the clinic physician group. In conjunction with
certain acquisitions, the Company is obligated to make deferred payments to
physician groups. Such payments are included in due to physician groups in the
accompanying balance sheets.
On September 30, 1994, the Company completed the sale of the assets of the
Winter Haven, Florida clinic back to the affiliated physician group and ended
its service agreement with the physician group. No gain or loss was realized by
the Company in connection with the transaction.
(b) North American Medical Management, Inc. ("North American")
Effective January 1, 1995, the Company completed its acquisition of North
American, an operator and manager of IPAs. The Company paid $20.0 million at
closing and may make additional future payments pursuant to an earn-out 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 interest in IPA
management entities. The first of such payments is expected to be made in the
first quarter of 1996 and is expected to be approximately $12.9 million in cash.
Of the future payments made, a portion is payable in shares of the Company's
common stock.
F-11
<PAGE> 45
PHYCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(c) Pro Forma Information and Subsequent Event
The unaudited consolidated pro forma results of all current, continuing
operations, assuming all 1994 and 1995 acquisitions, and the 1994 disposition of
the Winter Haven, Florida clinic had been consummated on January 1, 1994, are as
follows (in thousands except for earnings per share):
<TABLE>
<CAPTION>
1994 1995
-------- --------
<S> <C> <C>
- --
Net revenue................................................. $436,234 $494,927
Earnings before income taxes................................ 27,306 40,395
Net earnings................................................ 17,078 24,679
Earnings per common share................................... .36 .45
Weighted average number of shares and share equivalents
outstanding............................................... 46,994 54,668
</TABLE>
Effective January 1, 1996, the Company completed the purchase of certain
clinic operating assets of Arizona Physicians Center, P.C., a 35-physician
multispecialty clinic in Phoenix, Arizona, and entered into a 40-year service
agreement with the physician group.
(4) PROPERTY AND EQUIPMENT
Property and equipment at December 31, are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1994 1995
-------- --------
<S> <C> <C>
Land and improvements....................................... $ 3,210 $ 3,677
Buildings and leasehold improvements........................ 18,654 42,779
Equipment................................................... 48,113 83,786
Equipment under capital leases.............................. 7,556 8,300
Construction in progress.................................... 1,458 4,666
-------- --------
78,991 143,208
Less accumulated depreciation............................... 20,230 34,395
-------- --------
Net property and equipment................................ $ 58,761 $108,813
======== ========
</TABLE>
The sale and leaseback of real estate assets at the Vero Beach, Florida
clinic, was completed with a real estate investment trust in 1993. Net proceeds
from the sale were approximately $10.0 million. The excess of net proceeds over
the net book value of assets sold was deferred and is being amortized over the
term of the related lease.
(5) INVESTMENT IN PHYCOR MANAGEMENT CORPORATION ("PMC")
In June 1995, PhyCor purchased a minority interest in PMC and manages PMC
pursuant to a ten-year administrative services agreement. PMC provides
management information systems, claims administration, utilization and case
management, quality assurance programs, physician credentialing and recruitment
to physician organizations. PhyCor has an option to purchase the remaining
equity interest of PMC prior to the end of May 2005 at increasing prices based
on the issuance price of the stock plus a fixed annual return. In connection
with the PMC transaction, the Company committed to establish a revolving line of
credit of $2.0 million for PMC for a period of five years.
F-12
<PAGE> 46
PHYCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) INTANGIBLE ASSETS
Intangible assets at December 31, consist of the following (in thousands):
<TABLE>
<CAPTION>
1994 1995
-------- --------
<S> <C> <C>
Clinic service agreements................................... $132,922 $288,787
Excess of cost of acquired assets over fair value........... -- 16,583
Franchise rights............................................ 2,514 2,366
Other....................................................... 2,199 1,227
-------- --------
$137,635 $308,963
======== ========
</TABLE>
(7) FAIR VALUE OF FINANCIAL INSTRUMENTS
As of December 31, 1994 and 1995, the fair value of the Company's cash and
cash equivalents, accounts receivable, due to physician groups, accounts payable
and accrued expenses approximated their carrying value because of the short
maturities of those financial instruments. The fair value of the Company's
long-term debt also approximates its carrying value since the related notes bear
interest at current market rates.
The estimated fair value of the convertible subordinated notes payable to
physician groups was approximately $33,265,000 and $99,293,000 as of December
31, 1994 and 1995, respectively. The carrying value of these notes was
$22,832,000 and $59,369,000 at December 31, 1994 and 1995, respectively. The
estimated fair value of the Company's convertible subordinated debentures as of
December 31, 1994 was $58,070,000, compared to a carrying value of $28,655,000.
The estimated fair value of these convertible securities is based on the greater
of their face value and the closing market value of the common shares into which
they could have been converted at the respective balance sheet date.
(8) CONVERTIBLE SUBORDINATED NOTES PAYABLE TO PHYSICIAN GROUPS
At December 31, 1994 and 1995, the Company had outstanding subordinated
convertible notes payable to affiliated physician groups in the aggregate
principal amount of $22,832,000 and $59,369,000, respectively. These notes bear
interest at rates of 6.0% to 7.0% and are convertible into shares of the
Company's common stock at conversion prices ranging from $8.80 to $36.86 per
share. A convertible subordinated note of $33,295,000 issued in connection with
the Guthrie Clinic transaction will be convertible into approximately 903,000
shares of common stock upon the Company's acquisition of the clinic's assets. If
the then current price of the common stock is less than the conversion price,
PhyCor will pay the clinic the principal amount of the note. The remaining
convertible notes may be converted into approximately 2,043,000 shares of common
stock commencing on varying dates in 1996 and 1997 at the option of the holders.
(9) CONVERTIBLE SUBORDINATED DEBENTURES
At December 31, 1994, the Company had $28,655,000 of convertible
subordinated debentures outstanding. The debentures had a coupon rate of 6.5%
and were convertible into the Company's common stock at $5.87 per share. The
Company called for redemption effective January 20, 1995, all outstanding
debentures at a redemption price of 105.2% of par value plus accrued interest.
In January 1995, prior to the redemption date, the debentures were converted
into common stock of the Company.
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
F-13
<PAGE> 47
PHYCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
approximately $194,500,000, 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
bonds may be redeemed only if the price of the Company's common stock exceeds
$54.13. From February 15, 1999 to maturity, the bonds may be redeemed at prices
decreasing from 102.572% of face value to face value.
(10) LONG-TERM DEBT
Long-term debt at December 31, consists of the following (in thousands):
<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Term loan and revolving credit agreement, bearing interest
at rates of 6.19% to 8.68% at December 31, 1995........... $27,100 $58,300
Mortgages payable, bearing interest at rates ranging from
8.00% to 10.5%, secured by land, building, and certain
equipment................................................. 4,244 7,767
Other notes payable......................................... 954 425
------- -------
Total long-term debt.............................. 32,298 66,492
Less current installments................................... 148 587
------- -------
Long-term debt, excluding current installments.............. $32,150 $65,905
======= =======
</TABLE>
In August 1995, the Company completed modifications to its bank credit
facility ("Bank Credit Facility"), which included the revision of certain terms
and conditions and the addition of three participating financial institutions.
The revised Bank Credit Facility provides for a seven-year, $200,000,000
revolving credit and term loan facility for use by the Company prior to August
1997, for acquisitions, working capital, capital expenditures and general
corporate purposes. Any outstanding borrowings convert to a five year term loan
in August 1997. The amended Bank Credit Facility provides that borrowings under
the facility bear interest at either the Agent's base rate or .25% to .5625%
above the Agent's eurodollar rate. The Company is required to pay a facility fee
of between .125% to .3125% per annum on the unused portion of commitments,
payable quarterly in arrears, until the commitments are terminated. In February
1996, the Company repaid all amounts outstanding under the Bank Credit Facility.
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 incurrence of
certain indebtedness, (ii) the creation of security interest 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 was in compliance with such covenants at December 31, 1995. The Company
is required to obtain bank consent for an acquisition with an aggregate purchase
price of $35.0 million or more.
F-14
<PAGE> 48
PHYCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The aggregate maturities of long-term debt at December 31, 1995, are as
follows (in thousands):
<TABLE>
<S> <C>
1996........................................................ $ 587
1997........................................................ 3,568
1998........................................................ 12,360
1999........................................................ 12,417
2000........................................................ 12,481
Thereafter.................................................. 25,079
-------
$66,492
=======
</TABLE>
(11) LEASES
The Company has entered into operating leases of commercial property and
clinic equipment with affiliated physician groups and third parties. Commercial
properties under operating leases include clinic buildings, satellite
operations, and administrative facilities. Capital leases relating to clinic
equipment expire at various dates during the next five years.
The future minimum lease payments under noncancelable operating leases and
the present value of future minimum capital lease payments at December 31, 1995,
are as follows (in thousands):
<TABLE>
<CAPTION>
NET
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1996........................................................ $1,935 $ 3,953
1997........................................................ 1,117 3,690
1998........................................................ 650 2,581
1999........................................................ 154 2,184
2000........................................................ 15 2,028
Thereafter.................................................. -- 12,053
------ -------
Total minimum lease payments........................... $3,871 $26,489
=======
Less amount representing interest (at rates ranging from 10%
to 13%)................................................... 435
------
Present value of net minimum capital lease payments.... 3,436
Less current installments of obligations under capital
leases.................................................... 1,799
------
Obligations under capital leases, excluding current
installments.............................................. $1,637
======
</TABLE>
At December 31, 1995, equipment with a cost of approximately $8,300,000 and
accumulated depreciation of approximately $5,246,000 was held under capital
leases.
Net payments under operating basis include total commitments of
$351,502,000 reduced by amounts to be reimbursed under clinic service agreements
of $325,013,000. Payments due under operating leases include $158,700,000
payable to physician groups and their affiliates. In the event of a service
agreement termination, any related lease obligations are also terminated. Total
rental expense for operating leases in 1993, 1994, and 1995 was approximately
$16,370,000, $22,961,000, and $37,920,000, respectively.
F-15
<PAGE> 49
PHYCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(12) SHAREHOLDERS' EQUITY
(a) Common Stock
On April 15, 1994, the Company completed a public offering of 6,885,000
shares of its common stock. Net proceeds from the offering were approximately
$58,700,000. On June 23, 1995, the Company completed an additional public
offering of 6,955,000 shares of its common stock. Net proceeds from the offering
were approximately $110,900,000.
On November 18, 1994, the Company declared a three-for-two stock split
effected in the form of a 50% stock dividend on outstanding shares distributed
December 15, 1994 to shareholders of record on December 1, 1994. A second
three-for-two stock split was declared on August 18, 1995 to shareholders of
record on September 1, 1995. All common share and per share data included in the
financial statements and footnotes thereto have been restated to reflect these
stock splits.
(b) Preferred Stock
The Company has 10,000,000 shares of authorized but unissued preferred
stock. The Company has reserved for issuance 500,000 shares of Series A Junior
Participating Preferred Stock issuable in the event of certain change-in-control
events.
(c) Warrants
Warrants to purchase 778,159 shares of common stock were outstanding at
December 31, 1995. In February 1992, the Company issued a warrant to purchase
42,187 shares of its common stock at an exercise price of $4.74 per share,
exercisable at any time prior to February 1998.
In June 1995, the Company issued warrants for the purchase of 348,001
shares of common stock in connection with the PMC offering, which consisted of
the warrants and shares of PMC's Class B common stock. The exercise price of the
warrants is $15.40. The warrants are exercisable at any time prior to May 2005.
In November 1995, in connection with the agreements with Guthrie Clinic,
the Company issued a warrant to purchase 387,967 shares of the common stock at
an exercise price of $25.78 per share. The warrant is exercisable on the date of
closing of the acquisition of the assets of the clinic, after the satisfaction
of certain conditions.
(d) 1988 Stock Incentive Plan and Other Stock Plans
The Company has reserved 9,000,000 shares of its Common Stock for issuance
pursuant to options to be granted under its 1988 Stock Incentive Plan (the
Plan). Options have been granted to employees and directors of the Company, and
will expire ten years after the date on which they were granted. The exercise
price of the options is the estimated fair market value of the Company's common
stock on the date the options are granted. In addition to options granted under
the Plan, the Company has granted options for the purchase of 25,312 shares of
its common stock to a director of the Company and a consultant.
The Company also established an employee stock purchase plan, and reserved
843,750 common shares for the plan. During 1994 and 1995, approximately 97,000
and 66,000 shares were issued relative to the plan. Shares issued under the
employee stock purchase plan will generally be priced at the lower of 85% of the
fair market value of the Company's common stock on the first or the last trading
days of the plan year.
F-16
<PAGE> 50
PHYCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Under the directors' stock plan, 337,500 shares of its common stock are
reserved for issuance. Beginning in 1995, options issued under the directors'
plan will generally be exercisable at the fair market value of the Company's
common stock when the options are granted. Options to purchase 89,437 shares of
common stock were outstanding at December 31, 1995. During 1995, 9,090 shares
were issued relative to the directors' stock plan.
The following represents a summary of options outstanding at December 31,
1995:
<TABLE>
<CAPTION>
EXERCISABLE AT
NUMBER EXERCISE DECEMBER 31,
DATE OF GRANT OF SHARES PRICE 1995
------------- --------- ------------ -----------------
<S> <C> <C> <C>
1988............................................... 25,312 $2.97 25,312
1989............................................... 79,087 2.97-3.26 79,087
1990............................................... 192,293 4.15 192,293
1991............................................... 185,748 4.15 123,832
1992............................................... 691,050 3.33-4.74 386,522
1993............................................... 1,206,234 4.22- 8.45 6,750
1994............................................... 2,273,897 8.15-12.22 --
1995............................................... 2,900,208 11.14-25.67 40,500
--------- --------
7,553,829 854,296
========= ========
</TABLE>
Options become exercisable in installments over periods ranging up to 60
months following the date of grant. All options become exercisable in full upon
the occurrence of certain extraordinary events such as a tender offer for the
stock of the Company. For options granted through December 31, 1995, the
following summarizes the earliest periods in which options may be exercised:
<TABLE>
<S> <C>
Currently exercisable....................................... 854,296
1996...................................................... 624,414
1997...................................................... 1,310,900
1998...................................................... 2,106,529
1999...................................................... 1,704,453
2000...................................................... 953,237
---------
7,553,829
=========
</TABLE>
(13) INCOME TAX EXPENSE
Current income tax expense for the years ended December 31, 1993, 1994, and
1995, consists of (in thousands):
<TABLE>
<CAPTION>
1993 1994 1995
------ ------ -------
<S> <C> <C> <C>
Current:
Federal................................................... $ -- $2,199 $ 9,476
State..................................................... 600 1,061 1,499
Deferred:
Federal................................................... -- 1,302 2,564
State..................................................... 492 264 384
------ ------ -------
$1,092 $4,826 $13,923
====== ====== =======
</TABLE>
F-17
<PAGE> 51
PHYCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Total income tax expense differed from the amount computed by applying the
U.S. Federal income tax rate of 34 percent in 1993 and 1994 and 35 percent in
1995 to earnings before income taxes and extraordinary item as a result of the
following (in thousands):
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Computed "expected" tax expense............................. $ 2,799 $ 5,610 $12,529
Increase (reduction) in income taxes resulting from:
Net operating loss carryforwards (utilized)............... (2,366) (3,662) --
State income taxes, net of federal income tax benefit..... 721 875 1,224
Reduction of goodwill of acquired entity.................. -- 1,951 --
Increase in deferred tax rate............................. -- -- 160
Other..................................................... (62) 52 10
------- ------- -------
Total income tax expense.......................... $ 1,092 $ 4,826 $13,923
======= ======= =======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax asset and deferred tax liability are presented
below (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1995
------------ ------------
<S> <C> <C>
Deferred tax assets:
Reserves for incurred but not reported
self-insurance claims............................ $ 511 $ 555
Operating loss carryforwards........................ 1,421 4,208
Deferred gain on sale and leaseback................. 304 304
Alternative Minimum Tax credit...................... 1,114 --
Other............................................... 561 1,288
------- -------
Total gross deferred tax asset.............. 3,911 6,355
Less valuation allowance............................ (1,380) (2,520)
------- -------
Net deferred tax asset...................... $ 2,531 $ 3,835
======= =======
Deferred tax liability:
Plant and equipment, principally due to differences
in depreciation.................................. $ 2,385 $ 3,463
Capital leases...................................... 2,035 1,814
Clinic service agreements........................... 2,962 4,658
Prepaid expenses.................................... 1,060 1,293
Other............................................... 78 265
------- -------
Total deferred tax liability................ $ 8,520 $11,493
======= =======
</TABLE>
The significant components of the deferred tax expense as of December 31,
1994 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
1994 1995
------- ------
<S> <C> <C>
Change in net deferred tax liability........................ $ 5,497 $1,669
Deferred taxes of acquired entities......................... (912) 1,279
Decrease in valuation allowance for deferred tax assets..... (3,019) --
------- ------
Deferred tax expense...................................... $ 1,566 $2,948
======= ======
</TABLE>
The valuation allowance for deferred tax assets as of December 31, 1995 was
$2,520,000. The net change in the total valuation allowance, which primarily
relates to federal and state net operating
F-18
<PAGE> 52
PHYCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
loss carryforwards, for the year ended December 31, 1995 was an increase of
$1,140,000. The increase in the valuation reserve relates to deferred tax assets
of entities acquired during 1995. As of December 31, 1995, the Company had
approximately $6,000,000 of federal and $28,000,000 of state net operating loss
carryforwards which begin to expire in 2003. The utilization of these
carryforwards is subject to the future level of taxable income of the applicable
subsidiaries.
(14) EMPLOYEE BENEFIT PLANS
As of January 1, 1989, the Company adopted the PhyCor, Inc. Savings and
Profit Sharing Plan. The Plan is a defined contribution plan covering
substantially all employees. Company contributions are based on specified
percentages of employee compensation. The Company funds contributions as
accrued. The contributions for 1993, 1994, and 1995 amounted to $1,635,000,
$2,265,000, and $3,976,000, respectively.
In connection with certain of the Company's acquisitions, the Company
adopted employee retirement plans previously sponsored solely by the physician
groups. The Company has recognized as expense its required contributions to be
made to the plans of approximately $526,000, $1,016,000, and $1,248,000 relative
to its employees for 1993, 1994 and 1995, respectively.
(15) COMMITMENTS AND CONTINGENCIES
(a) Employment Agreements
The Company has entered into employment agreements with certain of its
management employees, which include, among other terms, noncompetitive
provisions and salary and benefits continuation.
(b) Commitments to Physician Groups
Under the terms of certain of its service agreements, the Company is
committed to provide capital for the improvement and expansion of clinic
facilities. Each such service agreement specifies the amount of the commitment
and the period over which payments are to be made. The commitments vary
depending on such factors as total capital expenditures, the number of
physicians practicing at each clinic, and the cost of specific planned projects.
All projects funded under these commitments must be approved by the Company
before they commence.
The Company is also committed to provide, under certain circumstances,
advances to physician groups to principally finance the recruitment of new
physicians. These advances will be repaid out of the physician groups' share of
future clinic revenue. At December 31, 1994 and 1995, $712,000 and $672,000,
respectively, of such advances were outstanding.
(c) Litigation
The Company is subject to various claims and legal actions which arise in
the ordinary course of business. The Company has malpractice insurance to
protect against such claims or legal actions. In the opinion of management, the
ultimate resolution of such matters will be adequately covered by the insurance
and will not have a material adverse effect on the Company's financial position
or results of operations.
F-19
<PAGE> 53
PHYCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(d) Insurance
The Company and its affiliated physician groups are insured with respect to
medical malpractice risks on a claims-made basis. Management is not aware of any
claims against it or its affiliated physician groups which might have a material
impact on the Company's financial position.
(e) Contingent Consideration
In connection with the acquisition of clinic operating assets, the Company
is contingently obligated to pay an estimated additional $33,838,000 in future
years, depending on the achievement of certain financial and operational
objectives by the related physician groups. Such liability, if any, will be
recorded in the period in which the outcome of the contingency becomes known.
Any payment made will be allocated among the assets acquired and will not
immediately be charged to expense.
(16) SUBSEQUENT EVENT
On May 10, 1996, the Company declared a three-for-two stock split effected
in the form of a 50% stock dividend on outstanding shares distributed June 14,
1996 to shareholders of record on May 31, 1996. All common shares and per share
data included in the consolidated financial statements and notes thereto are
restated to reflect the stock split.
F-20
<PAGE> 54
PHYCOR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND SEPTEMBER 30, 1996 (UNAUDITED)
(ALL DOLLAR AMOUNTS ARE EXPRESSED IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 18,827 $ 31,283
Accounts receivable, net.................................. 167,028 249,541
Inventories............................................... 8,939 13,765
Prepaid expenses and other assets......................... 22,727 32,292
-------- --------
Total current assets.............................. 217,521 326,881
Property and equipment, net................................. 108,813 143,536
Intangible assets........................................... 308,963 504,648
Other assets................................................ 8,289 14,807
-------- --------
Total assets...................................... $643,586 $989,872
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt.................... $ 587 $ 277
Current installments of obligations under capital
leases................................................. 1,799 1,304
Accounts payable.......................................... 20,020 22,861
Income taxes payable...................................... 2,714 1,379
Due to physician groups................................... 48,917 66,944
Salaries and benefits payable............................. 11,381 20,580
Other accrued expenses and liabilities.................... 20,683 44,777
-------- --------
Total current liabilities......................... 106,101 158,122
Long-term debt, excluding current installments.............. 65,905 62,325
Obligations under capital leases, excluding current
installments.............................................. 1,637 1,556
Convertible subordinated debentures......................... -- 200,000
Convertible subordinated notes payable to physician
groups.................................................... 59,369 65,699
Due to physician groups..................................... 13,722 56,900
Deferred tax credits and other liabilities.................. 8,030 13,561
-------- --------
Total liabilities................................. 254,764 558,163
-------- --------
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, 53,399,000 shares in 1995 and
54,487,000 in 1996..................................... 363,211 380,916
Retained earnings......................................... 25,611 50,793
-------- --------
Total shareholders' equity........................ 388,822 431,709
-------- --------
Total liabilities and shareholders' equity........ $643,586 $989,872
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-21
<PAGE> 55
PHYCOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
(ALL AMOUNTS ARE EXPRESSED IN THOUSANDS, EXCEPT FOR EARNINGS PER SHARE)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1995 1996 1995 1996
-------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenue....................................... $114,038 $196,418 $305,948 $535,562
Operating expenses (income):
Clinic salaries, wages and benefits............. 42,320 74,727 114,132 204,493
Clinic supplies................................. 17,799 30,383 46,899 81,459
Purchased medical services...................... 4,469 5,371 12,571 15,295
Other clinic expenses........................... 18,673 32,191 49,346 88,737
General corporate expenses...................... 3,468 5,032 10,391 15,307
Rents and lease expense......................... 9,790 16,729 25,588 44,768
Depreciation and amortization................... 5,532 10,596 15,084 28,158
Interest income................................. (515) (755) (1,086) (2,792)
Interest expense................................ 708 4,206 3,666 10,761
Minority interests in earnings of consolidated
partnerships................................. 1,770 3,185 4,980 8,429
-------- -------- -------- --------
Net operating expenses.................. 104,014 181,665 281,571 494,615
-------- -------- -------- --------
Earnings before income taxes............ 10,024 14,753 24,377 40,947
Income tax expense................................ 3,909 5,680 9,469 15,765
-------- -------- -------- --------
Net earnings............................ $ 6,115 $ 9,073 $ 14,908 $ 25,182
======== ======== ======== ========
Earnings per common share......................... $ .11 $ .15 $ .29 $ .42
======== ======== ======== ========
Weighted average number of shares and share
equivalents outstanding......................... 58,172 60,843 51,786 60,555
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-22
<PAGE> 56
PHYCOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
(ALL DOLLAR AMOUNTS ARE EXPRESSED IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ---------------------
1995 1996 1995 1996
-------- -------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings............................................ $ 6,115 $ 9,073 $ 14,908 $ 25,182
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization......................... 5,532 10,596 15,084 28,158
Minority interests.................................... (696) 192 1,285 1,586
Increase (decrease) in cash, net of effects of clinic
acquisitions, due to changes in:
Accounts receivable................................. (5,113) (14,594) (11,342) (30,219)
Inventories......................................... (404) (1,362) (1,173) (2,307)
Prepaid expenses and other assets................... 66 (3,059) (1,807) (9,164)
Accounts payable.................................... 1,474 1,588 1,620 (2,907)
Due to physician groups............................. 1,078 4,637 5,731 7,243
Other accrued expenses and liabilities.............. 3,419 7,189 4,327 19,166
-------- -------- --------- ---------
Net adjustments.................................. 5,356 5,187 13,725 11,556
-------- -------- --------- ---------
Net cash provided by operating activities........ 11,471 14,260 28,633 36,738
-------- -------- --------- ---------
Cash flows from investing activities:
Payments for clinic operating assets, net of cash
acquired.............................................. (45,246) (57,434) (109,543) (179,124)
Purchase of property and equipment...................... (6,337) (12,606) (19,987) (36,069)
Investments in other assets............................. 1,505 (820) (616) (1,675)
-------- -------- --------- ---------
Net cash used by investment activities........... (50,078) (70,860) (130,146) (216,868)
-------- -------- --------- ---------
Cash flows from financing activities:
Net proceeds from issuance of convertible debentures.... -- -- -- 194,395
Proceeds from long-term borrowings...................... 42,000 50,000 114,100 100,000
Repayment of long-term borrowings....................... (128) (100) (99,764) (104,464)
Repayment of obligations under capital leases........... (478) (450) (1,343) (1,270)
Net proceeds (expense) from issuance of stock and
warrants.............................................. (48) 924 113,358 4,010
Loan costs incurred..................................... (58) (85) (201) (85)
-------- -------- --------- ---------
Net cash provided by financing activities........ 41,288 50,289 126,150 192,586
-------- -------- --------- ---------
Net increase (decrease) in cash and cash equivalents...... 2,681 (6,311) 24,637 12,456
Cash and cash equivalents -- beginning of period.......... 28,416 37,594 6,460 18,827
-------- -------- --------- ---------
Cash and cash equivalents -- end of period................ $ 31,097 $ 31,283 $ 31,097 $ 31,283
======== ======== ========= =========
SUPPLEMENTAL SCHEDULE OF INVESTING ACTIVITIES:
Effects of acquisitions:
Assets acquired, net of cash............................ $ 95,593 $ 88,422 $ 188,600 $ 274,366
Liabilities assumed..................................... (31,210) (36,487) (62,283) (135,936)
Payment of deferred purchase price obligations.......... 6,821 16,944 15,285 60,793
Issuance of convertible subordinated notes payable...... (13,085) (4,438) (19,186) (12,667)
Issuance of common stock and warrants................... (12,873) (7,007) (12,873) (7,432)
-------- -------- --------- ---------
Payments for clinic operating assets............. $ 45,246 $ 57,434 $ 109,543 $ 179,124
======== ======== ========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Capital lease obligations incurred to acquire
equipment............................................... $ 70 $ 278 $ 131 $ 464
======== ======== ========= =========
Conversion of subordinated debentures and
notes payable to common stock........................... $ 18,255 $ 110 $ 51,499 $ 6,252
======== ======== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-23
<PAGE> 57
PHYCOR, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
(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 1995 and through September 30, 1996, the Company, through
wholly-owned subsidiaries, acquired certain operating assets of the following
clinics:
<TABLE>
<CAPTION>
CLINIC EFFECTIVE DATE LOCATION
------ -------------- --------
<S> <C> <C>
1995:
Tidewater Physicians Multispecialty
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
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
</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
F-24
<PAGE> 58
PHYCOR, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
satisfaction of certain conditions, to acquire certain assets of the clinic
prior to the termination or expiration of the interim management agreement.
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 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 over 6,000 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 1995 and 1996 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,
------------------- -------------------
1995 1996 1995 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenue....................................... $155,134 $199,347 $461,221 $584,951
Earnings before income taxes...................... 12,657 14,864 34,700 44,111
Net earnings...................................... 7,721 9,141 21,205 27,128
Earnings per common share......................... .13 .15 .40 .45
Weighted average number of shares and share
equivalents outstanding......................... 59,423 60,853 53,267 60,726
</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.
F-25
<PAGE> 59
PHYCOR, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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,
-------------------- ----------------------
1995 1996 1995 1996
-------- -------- -------- ----------
<S> <C> <C> <C> <C>
Gross physician group revenues............ $275,566 $488,208 $741,644 $1,343,844
Less:
Provisions for doubtful accounts and
contractual adjustments.............. 93,504 179,649 248,016 484,788
-------- -------- -------- ----------
Net physician group revenue..... 182,062 308,559 493,628 859,056
IPA revenue............................... 38,209 58,926 99,840 171,778
Less amounts retained by physician groups
and IPAs
IPAs.................................... 30,772 45,727 80,059 136,985
Physician groups........................ 67,718 112,443 187,028 323,197
Clinic technical employee
compensation......................... 7,743 12,897 20,433 35,090
-------- -------- -------- ----------
Net revenue..................... $114,038 $196,418 $305,948 $ 535,562
======== ======== ======== ==========
</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
Since September 30, 1996, the Company has completed the purchase of certain
operating assets of Hattiesburg Clinic, a 100-physician multi-specialty clinic
based in Hattiesburg, Mississippi, Toledo Clinic, a 80-physician multi-specialty
clinic based in Toledo, Ohio, Lewis-Gale Clinic, a 106-physician multi-specialty
clinic based in Roanoke, Virginia, and First Physicians Medical Group, a
21-physician multi-specialty clinic based in Palm Springs, California. The
Company has also entered into a 40-year service agreement with each of these
physician groups.
In January 1997, PhyCor consummated its merger with Straub Clinic &
Hospital, Incorporated, an integrated health care system with a 152-physician
multi-specialty clinic and 159-bed acute care hospital located in Honolulu,
Hawaii. In connection with the merger, PhyCor will also provide management
services to a related 35-physician group.
F-26
<PAGE> 60
PHYCOR, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
BASIS OF PRESENTATION
The accompanying pro forma consolidated balance sheet as of September 30,
1996 and the related pro forma consolidated statements of operations for the
year ended December 31, 1995 and the nine months ended September 30, 1996, give
effect to all completed 1995, 1996 and 1997 acquisitions, and the pending
acquisitions of Guthrie Clinic Ltd. and clinics in Washington and Florida, as if
they had occurred on the first day of 1995. The pro forma information is based
on the historical financial statements of PhyCor and the acquired entities
giving effect to the acquisitions under the purchase method of accounting, and
the assumptions and adjustments in the accompanying notes to the pro forma
consolidated financial information.
The pro forma statements have been prepared by PhyCor management based on
the unaudited financial statements of the acquired entities adjusted when
necessary, to the basis of accounting used in the historical financial
statements of PhyCor. Such adjustments include modifying the pro forma
consolidated statements of operations to reflect operations as if the related
service agreement had been in effect during the year presented. Additional
general corporate expenses which would have been required to support the
operations of the acquired clinics are not included in the consolidated pro
forma results of operations. These pro forma statements may not be indicative of
the results that would have occurred if the acquisitions had been in effect on
the date indicated or which may be obtained in the future. The pro forma
financial statements should be read in conjunction with the consolidated
financial statements and notes of PhyCor and subsidiaries contained elsewhere or
incorporated by reference herein.
F-27
<PAGE> 61
PHYCOR, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1996
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
ACQUIRED EFFECTS OF PRO
AND ACQUISITIONS FORMA
PHYCOR LIABILITIES AND RELATED CONSOLIDATED
HISTORICAL ASSUMED FINANCINGS TOTALS
---------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................... $ 31,283 $ 12,983 $ -- $ 44,266
Accounts receivable, net..................... 249,541 102,155 -- 351,696
Other current assets......................... 46,057 8,536 -- 54,593
-------- -------- -------- ----------
Total current assets................. 326,881 123,674 -- 450,555
Property and equipment, net.................... 143,536 54,923 -- 198,459
Intangible assets.............................. 504,648 -- 176,920 681,568
Other assets................................... 14,807 18,790 -- 33,597
-------- -------- -------- ----------
Total assets......................... $989,872 $197,387 $176,920 $1,364,179
======== ======== ======== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt....... $ 277 $ 10,289 $ -- $ 10,566
Current installments of obligations under
capital leases............................ 1,304 873 -- 2,177
Accounts payable............................. 22,861 22,089 -- 44,950
Due to physician groups...................... 66,944 666 18,876 86,486
Other accrued expenses and liabilities....... 66,736 36,059 -- 102,795
-------- -------- -------- ----------
Total current liabilities............ 158,122 69,976 18,876 246,974
Long-term debt, excluding current
installments................................. 62,325 31,074 136,270 229,669
Obligations under capital leases, excluding
current installment.......................... 1,556 4,203 -- 5,759
Convertible subordinated debentures............ 200,000 -- -- 200,000
Convertible subordinated notes payable to
physician groups............................. 65,699 -- 45,728 111,427
Due to physician groups........................ 56,900 -- 31,135 88,035
Other long-term liabilities.................... 13,561 29,378 -- 42,939
-------- -------- -------- ----------
Total liabilities.................... 558,163 134,631 232,009 924,803
Shareholders' equity:
Common stock................................. 380,916 -- 7,667 388,583
Retained earnings............................ 50,793 -- -- 50,793
-------- -------- -------- ----------
Total shareholders' equity........... 431,709 -- 7,667 439,376
-------- -------- -------- ----------
Total liabilities and shareholders'
equity............................. $989,872 $134,631 $239,676 $1,364,179
======== ======== ======== ==========
</TABLE>
See accompanying notes to pro forma consolidated financial information.
F-28
<PAGE> 62
PHYCOR, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1996
(ALL AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT FOR EARNINGS PER SHARE)
(UNAUDITED)
<TABLE>
<CAPTION>
CONSOLIDATED
RESULTS FOR
COMPLETED COMPLETED PROBABLE PRO FORMA
HISTORICAL TRANSACTIONS ADJUSTMENTS TRANSACTIONS TRANSACTIONS ADJUSTMENTS TOTAL
---------- ------------ ----------- ------------ ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue
Net revenue.......... $535,562 $ 2,156 $ 142,362(B) $680,080 $ -- $ 96,254(B) $734,288
(42,046)(F)
Net patient service
revenue............ -- 375,207 (375,207)(A) -- 141,499 (141,499)(A) --
-------- -------- --------- -------- -------- --------- --------
535,562 377,363 (232,845) 680,080 141,499 (87,291) 734,288
Direct clinic
expenses............. 389,984 202,295 (101,203) 491,076 80,300 (31,349)(F) 540,027
Physician compensation
and benefits......... -- 125,123 (125,123)(A) -- 53,340 (53,340)(A) --
General corporate
expenses............. 15,307 -- -- 15,307 -- -- 15,307
Rents and leases....... 44,768 20,607 (6,186) 59,189 2,730 (3,086)(F) 58,833
Interest, net.......... 7,969 5,859 2,523(D) 16,351 2,034 155(D) 17,063
(1,477)(F)
Depreciation and
amortization......... 28,158 5,661 3,194(E) 37,013 2,857 1,652(E) 39,430
(2,092)(F)
Minority interests in
earnings of
consolidated
partnerships......... 8,429 -- -- 8,429 -- -- 8,429
-------- -------- --------- -------- -------- --------- --------
Earnings before
income taxes..... 40,947 17,818 (6,050) 52,715 238 2,246 55,199
Income tax expense..... 15,765 (6) 4,536(C) 20,295 -- 957(C) 21,252
-------- -------- --------- -------- -------- --------- --------
Net earnings....... $ 25,182 $ 17,824 $ (10,586) $ 32,420 $ 238 $ 1,289 $ 33,947
======== ======== ========= ======== ======== ========= ========
Earnings per share..... $ .42 $ .53 $ .54
======== ======== ========
Weighted average number
of shares
outstanding.......... 60,555 61,669 62,992
======== ======== ========
</TABLE>
See accompanying notes to pro forma consolidated financial information
F-29
<PAGE> 63
PHYCOR, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1995
(ALL AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT FOR EARNINGS PER SHARE)
(UNAUDITED)
<TABLE>
<CAPTION>
CONSOLIDATED
RESULTS FOR
COMPLETED COMPLETED PROBABLE PRO FORMA
HISTORICAL TRANSACTIONS ADJUSTMENTS TRANSACTIONS TRANSACTIONS ADJUSTMENTS TOTAL
---------- ------------ ----------- ------------ ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Net revenue.......... $441,596 $ 2,478 $ 318.233(B) $762,307 $ -- $ 116,747(B) $874,541
(4,513)(F)
Net patient service
revenue............ -- 705,504 (705,504)(A) -- 171,555 (171,555)(A) --
-------- -------- --------- -------- -------- --------- --------
441,596 707,982 (387,271) 762,307 171,555 (59,321) 874,541
Direct clinic expenses. 323,076 364,432 (131,115) 556,393 96,602 (3,430)(F) 649,565
Physicians'
compensation and
benefits............. -- 272,135 (272,135)(A) -- 69,952 (69,952)(A) --
General corporate
expenses............. 14,191 -- -- 14,191 -- -- 14,191
Rents and leases....... 36,740 38,291 (10,057) 64,974 3,477 (86)(F) 68,365
Interest, net.......... 3,414 9,980 4,319(D) 17,713 3,152 (231)(D) 20,531
(103)(F)
Depreciation and
amortization......... 21,445 11,235 6,391(E) 39,071 3,694 2,277(E) 44,712
(330)(F)
Minority interest in
earnings of
consolidated
partnerships......... 6,933 -- -- 6,933 -- -- 6,933
-------- -------- --------- -------- -------- --------- --------
Earnings before
income taxes..... 35,797 11,909 15,326 63,032 (5,322) 12,534 70,244
Income tax expense..... 13,923 (2,566) 13,187 24,544 -- 2,813 27,357
-------- -------- --------- -------- -------- --------- --------
Net earnings....... $ 21,874 $ 14,475 $ 2,139 $ 38,488 $ (5,322) $ 9,721 $ 42,887
======== ======== ========= ======== ======== ========= ========
Earnings per share..... $ .41 $ .68 $ .74
======== ======== ========
Weighted average number
of shares
outstanding.......... 53,510 56,407 57,730
======== ======== ========
</TABLE>
See accompanying notes to pro forma consolidated financial information.
F-30
<PAGE> 64
The accompanying pro forma consolidated financial information presents the
pro forma consolidated financial position of PhyCor and subsidiaries as of
September 30, 1996 and the results of their operations for the nine months ended
September 30, 1996 and the year ended December 31, 1995.
PhyCor acquired certain operating assets of Tidewater Physicians
Multispecialty Group, Northeast Arkansas Clinic, PAPP Clinic, Ogden Clinic,
Arnett Clinic, Casa Blanca Clinic, South Texas Medical Clinics and North
American Medical Management, Inc. ("North American") in 1995. In 1996, PhyCor
acquired certain operating assets of South Bend Clinic, Arizona Physicians
Center, Clinics of North Texas, Carolina Primary Care, Harbin Clinic,
Clark-Holder Clinic, Focus Health Services, Wilmington Health Associates,
Medical Arts Clinic, SPACO Management Company, Gulf Coast Medical Group,
Hattiesburg Clinic, Toledo Clinic, and Lewis-Gale Clinic. In 1997 PhyCor merged
with Straub Clinic and Hospital and acquired certain operating assets of First
Physician Medical Group. In addition, PhyCor expects to acquire the assets of
Guthrie Clinic Ltd. and clinics in Washington, California and Florida. The
accompanying pro forma combined balance sheet includes the acquired assets,
assumed liabilities and effects of financing, as if the pending transactions had
been completed on September 30, 1996. The accompanying pro forma consolidated
statements of operations reflects the pro forma results of operations of PhyCor,
as if the pending transactions had been completed on the first day of the period
presented.
PRO FORMA CONSOLIDATED BALANCE SHEET
The adjustments reflected in the pro forma consolidated balance sheet are
to reflect the values of assets acquired and liabilities assumed in connection
with transactions completed after September 30, 1996, and other pending
transactions, and to reflect the effects of borrowings, the issuance of
subordinated convertible notes and common stock and to reflect the recording of
intangible assets acquired.
PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
Certain amounts in the historical columns have been combined and
reclassified in order to conform to the PhyCor presentation. The adjustments
reflected to the pro forma consolidated statements of operations are as follows:
(A) To eliminate net patient service revenue and physician
compensation and benefits in total as such will be retained by the
physician groups.
(B) To accrue net revenue resulting from service agreements related to
clinics acquired. Amounts were calculated based upon actual clinic results
for the period, as adjusted, under the terms of the related service
agreements.
(C) To record estimated federal and state income taxes at a combined
rate of approximately 39% in 1995 and 38.5% in 1996.
(D) To reflect interest on acquisition-related borrowings. Interest
was calculated at an annual rate of 6.25%.
(E) To record amortization of the intangible assets. The asset is
amortized over a period of 40 years.
(F) To remove the results of the Guthrie Clinic while under the
management agreement.
F-31
<PAGE> 65
------------------------------------------------------
------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING SHAREHOLDERS
OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF ANY OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
Use of Proceeds....................... 11
Capitalization........................ 12
Selected Consolidated Financial
Data................................ 13
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 15
Business.............................. 21
Management............................ 26
Principal and Selling Shareholders.... 28
Underwriting.......................... 30
Legal Matters......................... 31
Experts............................... 31
Available Information................. 32
Incorporation of Certain Information
by Reference........................ 32
Index to Financial Statements......... F-1
</TABLE>
------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
6,400,000 SHARES
PhyCor(R)
COMMON STOCK
-------------------
PROSPECTUS
-------------------
ALEX. BROWN & SONS
INCORPORATED
EQUITABLE SECURITIES CORPORATION
MERRILL LYNCH & CO.
PIPER JAFFRAY INC.
SALOMON BROTHERS INC
, 1997
------------------------------------------------------
------------------------------------------------------
<PAGE> 66
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C> <C>
Commission Registration Fee................................. $ 73,600
National Association of Securities Dealers, Inc. Fee........ 24,788
Nasdaq Listing Fee.......................................... 17,500
* State Qualification Expenses (including legal fees)......... 5,000
* Printing Expenses........................................... 150,000
* Legal Fees and Expenses..................................... 75,000
* Auditors' Fees and Expenses................................. 100,000
* Transfer Agent's Fees and Expenses.......................... 2,000
* Travel and Miscellaneous Expenses........................... 352,112
--------
* Total....................................................... $800,000
========
</TABLE>
- ---------------
* Estimated
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
(a) Article 8 of the Registrant's Amended Bylaws provides as follows:
The Corporation may indemnify, and upon request may advance expenses
to, any person (or the estate of any person) who was or is a party to, or
is threatened to be made a party to, any threatened, pending or completed
action, suit or proceeding, whether or not by or in the right of the
Corporation, and whether civil, criminal, administrative, investigative or
otherwise, by reason of the fact that such person is or was a director,
officer, employee or agent of the Corporation, or is or was serving at the
request of the Corporation as a director, officer, partner, trustee,
employee or agent of another corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise, against any liability
incurred in the action, suit or proceeding, despite the fact that such
person has not met the standard of conduct set forth in Section
48-18-502(a) of the Tennessee Business Corporation Act (the "Act") or would
be disqualified for indemnification under Section 48-18-502(d) of the Act,
if a determination is made by the person or persons enumerated in Section
48-18-502(b) of the Act that the director or officer seeking
indemnification is liable for (i) any breach of the duty of loyalty to the
Corporation or its shareholders, (ii) acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law or
(iii) voting for or assenting to a distribution in violation of the Act.
Section 7 of the Registrant's Restated Charter provides as follows:
The Corporation shall indemnify, and upon request shall advance
expenses to, in the manner and to the full extent permitted by law, any
person (or the estate of any person) who was or is a party to, or is
threatened to be made a party to, any threatened, pending or completed
action, suit or proceeding, whether or not by or in the right of the
Corporation, and whether civil, criminal, administrative, investigative or
otherwise, by reason of the fact that such person is or was a director,
officer, or employee of the Corporation, or is or was serving at the
request of the Corporation as a director, officer, partner, trustee,
employee or agent of another corporation, partnership, joint venture, trust
or other enterprise (an "indemnitee"). The indemnification provided herein
shall not be deemed to limit the right of the Corporation to indemnify any
other person for any such expenses to the full extent permitted by law, nor
shall it be deemed exclusive of any other rights to which any person
seeking indemnification from the Corporation may have or hereafter acquire
under this Charter or the Bylaws of the Corporation or under any agreement
or vote of shareholders or disinterested directors or otherwise, both as to
action in
II-1
<PAGE> 67
his official capacity and as to action in another capacity while holding
such office; provided, however, that the Corporation shall not indemnify
any such indemnitee in connection with a proceeding (or part thereof) if a
judgment or other final adjudication adverse to the indemnitee establishes
his liability (i) for any breach of the duty of loyalty to the Corporation
or its shareholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law or (iii) under
Section 48-18-304 of the Tennessee Business Corporation Act.
(b) In addition to the foregoing provisions of the Amended Bylaws and
Restated Charter of the Registrant, directors, officers, employees and agents of
the Registrant may be indemnified by the Registrant, pursuant to the provisions
of Section 48-18-501 et seq. of the Tennessee Code Annotated.
(c) In addition, the Registrant maintains directors and officers liability
insurance.
(d) The Underwriting Agreement (set forth as Exhibit 1 hereto) provides for
the indemnification by the Underwriters of the Registrant, each of the
Registrant's directors, each of the Registrant's officers who signs this
Registration Statement and each person who controls the Registrant within the
meaning of the Securities Act of 1933, as amended.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<C> <S> <C>
1 -- Form of Underwriting Agreement
4.1 -- Restated Charter of the Registrant(1)
4.2 -- Amendment to Restated Charter of the Registrant(2)
4.3 -- Amendment to Restated Charter of the Registrant(3)
4.4 -- Amended Bylaws of the Registrant(1)
4.5 -- Specimen of Common Stock Certificate(4)
4.6 -- Shareholder Rights Agreement, dated February 18, 1994,
between the Registrant and First Union National Bank of
North Carolina(5)
5 -- Opinion of Waller Lansden Dortch & Davis, A Professional
Limited Liability Company
23.1 -- Consent of KPMG Peat Marwick LLP
23.2 -- Consent of Waller Lansden Dortch & Davis, A Professional
Limited Liability Company (included in Exhibit 5)
24 -- Power of Attorney (included on page II-4)
</TABLE>
- ---------------
(1) Incorporated by reference to Exhibit 3.2 filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1994, Commission No.
0-19786.
(2) Incorporated by reference to Exhibit 4.2 filed with the Registrant's
Registration Statement on Form S-3, Registration No. 33-93018.
(3) Incorporated by reference to Exhibit 4.3 filed with the Registrant's
Registration Statement on Form S-3, Registration No. 33-98528.
(4) Incorporated by reference to Exhibit 4.2 filed with the Registrant's
Registration Statement on Form S-1, Registration No. 33-44123.
(5) Incorporated by reference to exhibits filed with the Registrant's Annual
Report on Form 8-K dated February 18, 1994, Commission No. 0-19786.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities
II-2
<PAGE> 68
Exchange Act of 1934) that is incorporated by reference in the registration
statement shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant, pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted against the
registrant by such director, officer or controlling person in connection with
the securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b) (1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 69
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Nashville, State of Tennessee, on February 4, 1997.
PHYCOR, INC.
By: /s/ JOSEPH C. HUTTS
------------------------------------
Joseph C. Hutts,
Chairman of the Board, President
and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, each person whose signature appears below
on this Registration Statement hereby constitutes and appoints Joseph C. Hutts
and John K. Crawford and each of them, with full power to act without the other,
his true and lawful attorney-in-fact and agent, with full power of substitution
and resubstitution, for him and in his name, place and stead, in any and all
capacities (until revoked in writing) to sign any and all amendments to this
Registration Statement (including post-effective amendments and amendments
thereto) and any registration statement relating to the same offering as this
Registration Statement that is to be effective upon filing pursuant to Rule
462(b) under the Securities Act of 1933, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and
thing, ratifying and confirming all that said attorneys-in-fact and agents or
any of them, or their or his substitute or substitutes, may lawfully do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ JOSEPH C. HUTTS Chairman of the Board, February 4, 1997
- ----------------------------------------------------- President and Chief
Joseph C. Hutts Executive Officer (Principal
Executive Officer) and
Director
/s/ DERRIL W. REEVES Executive Vice President, February 4, 1997
- ----------------------------------------------------- Development and Director
Derril W. Reeves
/s/ JOHN K. CRAWFORD Vice President and Chief February 4, 1997
- ----------------------------------------------------- Financial Officer (Principal
John K. Crawford Financial Officer and
Principal Accounting
Officer)
/s/ THOMPSON S. DENT Executive Vice President, February 4, 1997
- ----------------------------------------------------- Corporate Services and
Thompson S. Dent Director
</TABLE>
II-4
<PAGE> 70
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ RICHARD D. WRIGHT Executive Vice President, February 4, 1997
- ----------------------------------------------------- Operations and Director
Richard D. Wright
/s/ RONALD B. ASHWORTH Director February 4, 1997
- -----------------------------------------------------
Ronald B. Ashworth
/s/ SAM A. BROOKS, JR. Director February 4, 1997
- -----------------------------------------------------
Sam A. Brooks, Jr.
/s/ WINFIELD DUNN Director February 4, 1997
- -----------------------------------------------------
Winfield Dunn
/s/ C. SAGE GIVENS Director February 4, 1997
- -----------------------------------------------------
C. Sage Givens
/s/ JOSEPH A. HILL, M.D. Director February 4, 1997
- -----------------------------------------------------
Joseph A. Hill, M.D.
/s/ JAMES A. MONCRIEF, M.D. Director February 4, 1997
- -----------------------------------------------------
James A. Moncrief, M.D.
</TABLE>
II-5
<PAGE> 71
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<C> <C> <S>
1 -- Form of Underwriting Agreement
4.1 -- Restated Charter of the Registrant(1)
4.2 -- Amendment to Restated Charter of the Registrant(2)
4.3 -- Amendment to Restated Charter of the Registrant(3)
4.4 -- Amended Bylaws of the Registrant(1)
4.5 -- Specimen of Common Stock Certificate(4)
4.6 -- Shareholder Rights Agreement, dated February 18, 1994,
between the Registrant and First Union National Bank of
North Carolina(5)
5 -- Opinion of Waller Lansden Dortch & Davis, A Professional
Limited Liability Company
23.1 -- Consent of KPMG Peat Marwick LLP
23.2 -- Consent of Waller Lansden Dortch & Davis, A Professional
Limited Liability Company (included in Exhibit 5)
24 -- Power of Attorney (included on page II-4)
</TABLE>
- ---------------
(1) Incorporated by reference to Exhibit 3.2 filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1994, Commission No.
0-19786.
(2) Incorporated by reference to Exhibit 4.2 filed with the Registrant's
Registration Statement on Form S-3, Registration No. 33-93018.
(3) Incorporated by reference to Exhibit 4.3 filed with the Registrant's
Registration Statement on Form S-3, Registration No. 33-98528.
(4) Incorporated by reference to Exhibit 4.2 filed with the Registrant's
Registration Statement on Form S-1, Registration No. 33-44123.
(5) Incorporated by reference to exhibits filed with the Registrant's Annual
Report on Form 8-K dated February 18, 1994, Commission No. 0-19786.
<PAGE> 1
EXHIBIT 1
6,400,000 SHARES
PHYCOR, INC.
COMMON STOCK
(No Par Value)
UNDERWRITING AGREEMENT
February , 1997
ALEX. BROWN & SONS INCORPORATED
EQUITABLE SECURITIES CORPORATION
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
PIPER JAFFRAY INC.
SALOMON BROTHERS INC
As Representatives of the
Several Underwriters
c/o Alex. Brown & Sons Incorporated
One South Street
Baltimore, Maryland 21202
Gentlemen:
PhyCor, Inc., a Tennessee corporation (the "Company") proposes to sell to
the several underwriters (the "Underwriters") named in Schedule I hereto for
whom you are acting as representatives (the "Representatives") an aggregate of
6,400,000 shares of the Company's Common Stock, no par value (the "Firm
Shares"). The Company and certain executive officers of the Company (the
"Selling Shareholders") also propose to sell at the Underwriters' option an
aggregate of up to 960,000 additional shares of the Company's Common Stock (the
"Option Shares") as set forth below. The respective amounts of the Firm Shares
to be purchased by the several Underwriters are set forth opposite their names
on Schedule I hereto. The respective amounts of the Option Shares to be sold by
the Company and each of the Selling Shareholders are set forth on Schedule II.
The Company and the Selling Shareholders are sometimes referred to herein
collectively as the "Sellers."
As the Representatives, you have advised the Company and the Selling
Shareholders (a) that you are authorized to enter into this Agreement on behalf
of the several Underwriters, and (b) that the several Underwriters are willing,
acting severally and not jointly, to purchase the numbers of Firm Shares set
forth opposite their respective names in Schedule I, plus their pro rata portion
of the Option Shares if you elect to exercise the over-allotment option in whole
or in part for the accounts of the several Underwriters. The Firm Shares and the
Option Shares (to the extent the aforementioned option is exercised) are herein
collectively called the "Shares."
In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the parties
hereto agree as follows:
1. Representations and Warranties of the Company and the Selling
Shareholders. (a) The Company represents and warrants to each of the
Underwriters as follows:
(i) A registration statement on Form S-3 (File No. 333- ) with
respect to the Shares has been carefully prepared by the Company in
conformity with the requirements of the Securities Act of 1933, as amended,
(the "Act") and the Rules and Regulations (the "Rules and Regulations") of
the Securities and Exchange Commission (the "Commission") thereunder and
has been filed with the Commission under the Act. The Company has complied
with the conditions for the use of Form S-3. Copies of such registration
statement, including any amendments thereto, the preliminary prospectuses
(meeting the requirements of Rule 430A of
<PAGE> 2
the Rules and Regulations) contained therein and the exhibits, financial
statements and schedules, as finally amended and revised, have heretofore
been delivered by the Company to you, and, to the extent applicable, were
identical to the electronically transmitted copies thereof filed with the
Commission pursuant to the Commission's Electronic Data Gathering, Analysis
and Retrieval System ("EDGAR"), except to the extent permitted by
Regulation S-T. Such registration statement, together with any registration
statement filed by the Company pursuant to Rule 462(b) of the Act, herein
referred to as the "Registration Statement," which shall be deemed to
include all information omitted therefrom in reliance upon Rule 430A and
contained in the Prospectus referred to below, has become effective under
the Act and no post-effective amendment to the Registration Statement has
been filed as of the date of this Agreement. "Prospectus" means (a) the
form of prospectus first filed by the Company with the Commission pursuant
to its Rule 424(b) or (b) the term sheet or abbreviated term sheet filed by
the Company with the Commission pursuant to Rule 424(b)(7) together with
the last preliminary prospectus included in the Registration Statement
filed prior to the time it becomes effective or filed pursuant to Rule
424(a) under the Act that is delivered by the Company to the Underwriters
for delivery to purchasers of the Shares. Each preliminary prospectus
included in the Registration Statement prior to the time it becomes
effective is herein referred to as a "Preliminary Prospectus." Any
reference herein to the Registration Statement, any Preliminary Prospectus
or the Prospectus shall be deemed to refer to and include the documents
incorporated by reference therein, as of the date of such Registration
Statement, Preliminary Prospectus or Prospectus, as the case may be, and,
in the case of any reference herein to any Prospectus, also shall be deemed
to include any documents incorporated by reference therein, and any
supplements or amendments thereto, filed with the Commission after the date
of filing of the Prospectus under Rule 424(b) or Rule 430A, and prior to
the termination of the offering of the Shares by the Underwriters. For
purposes of this Agreement, all references to the Registration Statement,
any Preliminary Prospectus, the Prospectus, or any amendment or supplement
to any of the foregoing shall be deemed to include the respective copies
thereof filed with the Commission pursuant to EDGAR.
(ii) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Tennessee, with
corporate power and authority to own or lease its properties and conduct
its business as described in the Registration Statement; each of the
subsidiaries of the Company listed in Schedule III hereto (collectively,
the "Subsidiaries") has been duly incorporated and is validly existing and
in good standing under the laws of the jurisdiction of its incorporation,
with power and authority to own or lease its properties and conduct its
business as described in the Registration Statement; the Company and each
of the Subsidiaries are duly qualified to transact business in all
jurisdictions in which the conduct of their business requires such
qualification; the outstanding shares of capital stock of each of the
Subsidiaries have been duly authorized and validly issued, are fully paid
and non-assessable and such shares of capital stock in each Subsidiary are
wholly owned by the Company free and clear of all liens, encumbrances and
security interests other than the pledge of shares of the capital stock of
the Subsidiaries to Citibank, N.A., as agent, pursuant to the Company's
Fifth Amended and Restated Revolving Credit and Term Loan Agreement with
Citibank dated as of July 22, 1996, as the same may be amended from time to
time; and no options, warrants or other rights to purchase, agreements or
other obligations to issue or other rights to convert any obligations into
shares of capital stock or ownership interests in the Subsidiaries are
outstanding, except to the extent set forth in the Registration Statement,
including the exhibits thereto. The Subsidiaries are the only subsidiaries,
direct or indirect, of the Company.
(iii) The outstanding shares of Common Stock, including all
outstanding shares of Common Stock to be sold by the Selling Shareholders,
have been duly authorized and validly issued and are fully paid and
non-assessable; the portion of the Shares to be issued and sold by the
Company have been duly authorized and when issued and paid for as
contemplated herein will be validly issued, fully paid and non-assessable;
shares of Common Stock to be sold by the
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<PAGE> 3
Selling Shareholders will be at the time of their sale to the Underwriters
hereunder, validly issued, fully paid and non-assessable. No person or
entity holds a right to require or participate in the registration under
the Act of shares of Common Stock of the Company which right has not been
waived by the holder thereof as to the offering contemplated hereby and by
the Registration Statement, or satisfied by participation by such holder in
the offering. No person or entity has any preemptive or other right of
participation or first refusal with respect to any of the Shares or the
issue thereof by the Company or the sale thereof by the Company and the
Selling Shareholders, which rights have not been waived.
(iv) The information set forth under the caption "Capitalization" in
the Prospectus is true and correct in all material respects as of the dates
set forth therein. The Shares conform with the statements concerning them
set forth and incorporated by reference in the Registration Statement.
(v) The Commission has not issued an order preventing or suspending
the use of any Preliminary Prospectus or Prospectus relating to the
proposed offering of the Shares nor instituted proceedings for that
purpose. The Registration Statement contains and the Prospectus and any
amendments or supplements thereto will contain all statements which are
required to be stated therein by, and in all respects conform or will
conform, as the case may be, to the requirements of, the Act and the Rules
and Regulations. The documents incorporated by reference in the Prospectus,
at the time they are filed with the Commission will conform in all respects
to the requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), or the Act, as applicable, and the Rules and Regulations
of the Commission thereunder. Neither the Registration Statement nor any
amendment thereto, any Preliminary Prospectus, and neither the Prospectus
nor any amendment or supplement thereto, contains or will contain, as the
case may be, any untrue statement of a material fact or omits or will omit
to state any material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under which
they were made, not misleading; provided, however, that the Company makes
no representations or warranties as to information contained in or omitted
from the Registration Statement or the Prospectus, or any such amendment or
supplement, in reliance upon, and in conformity with, written information
furnished to the Company by or on behalf of any Underwriter through the
Representatives, specifically for use in the preparation thereof.
(vi) The historical consolidated financial statements of the Company
and the Subsidiaries, together with related notes and schedules as set
forth or incorporated by reference in the Registration Statement, present
fairly the financial position and the results of operations and cash flows
of the Company and Subsidiaries consolidated, at the indicated dates and
for the indicated periods. Such financial statements have been prepared in
accordance with generally accepted principles of accounting, consistently
applied throughout the periods involved, and all adjustments necessary for
a fair presentation of results for such periods have been made. The pro
forma financial statements and other pro forma financial information set
forth in the Registration Statement and the Prospectus fairly present the
information required to be presented therein, have been prepared in
accordance with the Commission's rules and guidelines with respect to pro
forma financial statements, have been properly compiled on the pro forma
bases described therein, and, in the opinion of the Company, the
assumptions used in the preparation thereof are reasonable and the
adjustments used therein are appropriate to give effect to the transactions
or circumstances referred to therein. The summary pre-transaction financial
information set forth in the Registration Statement materially complies
with that certain letter dated September 16, 1991 from the Commission to
the Company, presents fairly the information shown therein and has been
compiled on a basis consistent with the notes thereto. The summary
financial and statistical data included in the Registration Statement
presents fairly the information shown therein and have been compiled on a
basis consistent with the financial statements presented therein.
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<PAGE> 4
(vii) There is no action or proceeding pending or, to the knowledge of
the Company, threatened against the Company, any of the Subsidiaries or any
of the medical practice groups, including, without limitation, clinics,
IPAs and other groups and individual practitioners, with which the Company
or the Subsidiaries have service agreements (collectively, the "Practice
Groups"), and, to the knowledge of the Company, there is no action or
proceeding pending against any individual physicians practicing in any
Practice Group, before any court or administrative agency which the Company
has reason to believe is likely to result in any material adverse change in
the business or condition of the Company and of the Subsidiaries taken as a
whole, except as set forth in the Registration Statement.
(viii) The Company and the Subsidiaries have good and marketable title
to all of the properties and assets reflected in the financial statements
(or as described in the Registration Statement) hereinabove described,
subject to no lien, mortgage, pledge, charge or encumbrance of any kind
except those reflected in such financial statements (or as described in the
Registration Statement) or which are not material in amount. The Company
and the Subsidiaries occupy leased properties under valid and binding
leases and, as to rented properties, occupy such properties as
tenants-at-will pursuant to valid and binding agreements, except where the
failure to have such leases or agreements would not have a material adverse
effect on the Company and its Subsidiaries.
(ix) The Company and the Subsidiaries have (i) filed all Federal,
State and foreign income tax returns which have been required to be filed,
(ii) paid all taxes indicated by said returns and all assessments received
by them or any of them to the extent that such taxes have become due, and
(iii) adequately provided for all tax liabilities in the financial
statements of the Company, except (a) where the failure to do so would not
have a material adverse effect on the Company and its Subsidiaries and (b)
with respect to matters described in the "Tax Audit" paragraph under the
caption "Risk Factors" in the Registration Statement.
(x) Since the respective dates as of which information is given in the
Registration Statement, as it may be amended or supplemented, there has not
been any material adverse change or any development involving a prospective
material adverse change in or affecting the condition, financial or
otherwise, of the Company and its Subsidiaries taken as a whole or the
earnings, business affairs, management, or business prospects of the
Company and its Subsidiaries taken as a whole, whether or not occurring in
the ordinary course of business, and there has not been any material
transaction entered into by the Company or the Subsidiaries, other than
transactions in the ordinary course of business and changes and
transactions contemplated by the Registration Statement, as it may be
amended or supplemented. The Company and the Subsidiaries have no material
contingent obligations which are not disclosed in the Registration
Statement, as it may be amended or supplemented.
(xi) Neither the Company nor any of the Subsidiaries is or with the
giving of notice or lapse of time or both, will be, in violation of or in
default under its Restated Charter or By-laws or under any agreement,
lease, contract, indenture or other instrument or obligation to which it is
a party or by which it or any of its properties is bound and which default
is of material significance in respect of the business or financial
condition of the Company and the Subsidiaries taken as a whole. The
execution and delivery of this Agreement and the consummation of the
transactions herein contemplated and the fulfillment of the terms hereof
will not conflict with or result in a breach of any of the terms or
provisions of, or constitute a default under, (i) any indenture, mortgage,
deed of trust or other agreement or instrument to which the Company or any
Subsidiary is a party, except for any such breach or default which would
not have a material adverse effect or the Company or any of its
Subsidiaries, singly or in the aggregate, or (ii) the Restated Charter or
By-laws of the Company or any order, rule or regulation applicable to the
Company or any Subsidiary of any court or of any regulatory body or
administrative agency or other governmental body having jurisdiction.
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<PAGE> 5
(xii) Each approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body necessary in connection with the execution and delivery
by the Company of this Agreement and the consummation of the transactions
herein contemplated (except such additional steps as may be required by the
National Association of Securities Dealers, Inc. (the "NASD") or may be
necessary to qualify the Shares for public offering by the Underwriters
under State securities or Blue Sky laws) has been obtained or made and is
in full force and effect.
(xiii) To the Company's knowledge, the Company, each of the
Subsidiaries and each Practice Group is conducting its business in material
compliance with all the laws, rules and regulations of the jurisdictions in
which they are conducting businesses, including those relating to
healthcare. Without limiting the foregoing, the Company, each of the
Subsidiaries and, to the Company's knowledge, each Practice Group and each
physician practicing in such jurisdictions owns or possesses and is
operating in compliance with the terms, provisions and conditions of all
authorizations, approvals, orders, licenses, registrations, certificates
and permits of and from all governmental regulatory officials and bodies
necessary to conduct their respective businesses, except where the failure
to comply, individually or in the aggregate, would not have a material
adverse effect on the Company and the Subsidiaries, taken as a whole; as to
the Company and each Subsidiary and, to the Company's knowledge, as to each
Practice Group, each such authorization, approval, order, license,
registration, other certificate and permit of and from such governmental
regulatory officials and bodies is valid and in full force and effect and
there is no proceeding pending or, to the Company's knowledge, threatened
(or any basis therefor) which may cause any such authorization, approval,
order, license, registration, other certificate or permit of and from all
governmental regulatory officials and bodies that is material to the
conduct of the business of the Company and the Subsidiaries taken as a
whole as presently conducted to be revoked, withdrawn, cancelled, suspended
or not renewed. The Company has not been made aware of, or been put on
notice that, any physician in a Practice Group is not practicing in
material compliance with all such laws and regulations.
(xiv) The Company and each of the Subsidiaries owns or possesses
adequate licenses or other rights to use all patents, patent applications,
trademarks, trademark applications, service marks, service mark
applications, tradenames, copyrights, trade secrets and know-how or other
information (collectively, "Intellectual Property") described in the
Prospectus (or the documents incorporated by reference therein) as owned by
or used by it or which is necessary to the conduct of its business as now
conducted or proposed to be conducted as described in the Prospectus (or
the documents incorporated by reference therein). The Company is not aware
of any infringement of or conflict with the rights of claims of others with
respect to any of the Company's Intellectual Property which could have a
material adverse effect on the business or financial condition of the
Company. The Company is not aware of any infringement of any of the
Company's Intellectual Property rights by any third party which could have
a material adverse effect on the business or financial condition of the
Company.
(xv) KPMG Peat Marwick LLP, who have certified certain of the
financial statements filed with the Commission as part of the Registration
Statement, are independent public accountants as required by the Act and
the Rules and Regulations.
(xvi) Neither the Company nor, to the Company's knowledge, any of its
affiliates, has taken or may take, directly or indirectly, any action
designed to cause or result in, or which has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of
the price of stock to facilitate the sale or resale of the Shares. The
Company acknowledges that the Underwriters may engage in passive market
making transactions in the Shares on the Nasdaq National Market in
accordance with Rule 10b-6A under the Exchange Act (or any successor
Rules).
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(xvii) The Company is not, and after giving effect to the issuance of
the Shares will not be, an "investment company" within the meaning of the
Investment Company Act of 1940, as amended, and the Company is not, nor
will be subject to regulation under said act.
(xviii) The Company confirms as of the date hereof that it is in
compliance with all provisions of Section 1 of Laws of Florida, Chapter
92-198, An Act Relating to Disclosure of Doing Business with Cuba, and the
Company further agrees that if it commences engaging in business with the
government of Cuba or with any person or affiliate located in Cuba after
the date the Registration Statement becomes or has become effective with
the Commission or with the Florida Department of Banking and Finance (the
"Department"), whichever date is later, or if the information reported or
incorporated by reference in the Prospectus, if any, concerning the
Company's business with Cuba or with any person or affiliate located in
Cuba changes in any material way, the Company will provide the Department
notice of such business or change, as appropriate, in a form acceptable to
the Department.
(xix) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific authorization;
(ii) transactions are recorded as necessary to permit preparation of
financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets; (iii) access to
assets is permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
(xx) The Company and each of its Subsidiaries carry, or are covered
by, insurance in such amounts and covering such risks as is adequate for
the conduct of their respective businesses and the value of their
respective properties and as is customary for companies engaged in similar
industries.
(xxi) The Company is in compliance in all material respects with all
presently applicable provisions of the Employee Retirement Income Security
Act of 1974, as amended, including the regulations and published
interpretations thereunder ("ERISA"); no "reportable event" (as defined in
ERISA) has occurred with respect to any "pension plan" (as defined in
ERISA) for which the Company would have any liability; the Company has not
incurred and does not expect to incur liability under (i) Title IV of ERISA
with respect to termination of, or withdrawal from, and "pension plan" or
(ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended,
including the regulations and published interpretations thereunder (the
"Code"); and each "pension plan" for which the Company would have any
liability that is intended to be qualified under Section 401(a) of the Code
has been issued a favorable determination letter from the Internal Revenue
Service with respect to its qualification under Section 401(a) of the Code,
and the Company is aware of no occurrence, whether by action or by failure
to act, which would cause the revocation of such determination letter or
the loss of such qualification.
(b) Each of the Selling Shareholders severally represents and warrants as
of the date hereof and the Option Closing Date, as the case may be, to each of
the Underwriters as follows:
(i) Such Selling Shareholder has and at the Option Closing Date (as
such date is hereinafter defined) will have good and valid title to the
Option Shares to be sold by such Selling Shareholder, free of any liens,
encumbrances, equities and claims, and full right, power and authority to
effect the sale and delivery of such Option Shares; and upon the delivery
of and payment for such Option Shares pursuant to this Agreement, good and
valid title thereto, free of any liens, encumbrances, equities and claims,
will be transferred to the several Underwriters.
(ii) Such Selling Shareholder has full right, power and authority to
execute and deliver this Agreement. the Power of Attorney and the Custody
Agreement (as hereinafter defined) and to perform its obligations under
such agreements. The execution and delivery of this Agreement
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<PAGE> 7
and the consummation by such Selling Shareholder of the transactions herein
contemplated and the fulfillment by such Selling Shareholder of the terms
hereof will not result in a breach of any of the terms and provisions of,
or constitute a default under, any indenture, mortgage, deed of trust or
other agreement or instrument to which such Selling Shareholder is a party,
or of any order, rule or regulation applicable to the Selling Shareholder
of any court or of any regulatory body or administrative agency or other
governmental body having jurisdiction.
(iii) Such Selling Shareholder has not taken and will not take,
directly or indirectly, any action designed to, or which has constituted,
or which might reasonably be expected to cause or result in stabilization
or manipulation of the price of the Common Stock of the Company and, other
than as permitted by the Act, the Selling Shareholder will not distribute
any prospectus or other offering material in connection with the offering
of the Shares.
(iv) Without having undertaken to determine independently the accuracy
or completeness of either the representations and warranties of the Company
contained herein or the information contained in the Registration Statement
and documents incorporated by reference therein, such Selling Shareholder
has no reason to believe that the representations and warranties of the
Company contained in this Section 1 are not true and correct, is familiar
with the Registration Statement and has no knowledge of any material fact,
condition or information not disclosed in the Registration Statement and
documents incorporated by reference therein which has adversely affected or
may adversely affect the business of the Company and the Subsidiaries taken
as a whole; and the sale of the Option Shares by such Selling Shareholder
pursuant hereto is not prompted by any information concerning the Company
or any of the Subsidiaries which is not set forth in the Registration
Statement and documents incorporated by reference therein. The information
pertaining to such Selling Shareholder under the caption "Selling
Shareholders" in the Prospectus is complete and accurate in all material
aspects.
2. Purchase, Sale and Delivery of the Firm Shares. On the basis of the
representations, warranties and covenants herein contained, and subject to the
conditions herein set forth, the Company agrees to sell to the Underwriters and
each Underwriter agrees, severally and not jointly, to purchase, at a price of
$ per share, the number of Firm Shares set forth opposite the name of each
Underwriter in Schedule I hereof, subject to adjustments in accordance with
Section 9 hereof. The number of Firm Shares to be purchased by each Underwriter
from the Company shall be as nearly as practicable in the same proportion to the
total number of Firm Shares being sold by the Company as the number of Firm
Shares being purchased by each Underwriter bears to the total number of Firm
Shares to be sold hereunder. The obligations of the Company and the Selling
Shareholder shall be several and not joint.
Certificates in negotiable form for the total number of the Shares to be
sold hereunder by the Selling Shareholders have been placed in custody with
Waller Lansden Dortch & Davis PLLC, as custodian (the "Custodian"), pursuant to
the Letter of Transmittal and Custody Agreement (the "Custody Agreement")
executed by each Selling Shareholder for delivery of all Option Shares to be
sold hereunder by the Selling Shareholders. The Selling Shareholders
specifically agree that the Option Shares represented by the certificates held
in custody for such Selling Shareholders under the Custody Agreement are subject
to the interests of the Underwriters hereunder, that the arrangements made by
the Selling Shareholders for such custody are to that extent irrevocable, and
that the obligations of the Selling Shareholders hereunder shall not be
terminable by any act or deed of the Selling Shareholders (or by any other
person, firm or corporation, including the Company, the Custodian or the
Underwriters) or by operation of law (including the death of any Selling
Shareholder) or by the occurrence of any other event or events, except as set
forth in the Custodian Agreement. If any such event should occur prior to the
delivery to the Underwriters of the Option Shares hereunder, certificates for
the Option Shares shall be delivered by the Custodian in accordance with the
terms and conditions of this Agreement as if such event has not occurred. The
Custodian is authorized to receive and acknowledge receipt of the proceeds of
sale of the Shares held by it against delivery of such Shares.
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<PAGE> 8
Payment for the Firm Shares to be sold hereunder is to be made by wire
transfer in same-day funds, payable to the order of the Company, against
delivery of certificates therefor to the Representatives for the several
accounts of the Underwriters. Such payment and delivery are to be made at the
offices of Alex. Brown & Sons Incorporated, One South Street, Baltimore,
Maryland, at 10:00 a.m., Baltimore time, on the third business day after the
date of this Agreement, or at such other time and date not later than five
business days thereafter as you and the Company shall agree upon, such time and
date being herein referred to as the "Closing Date." (As used herein, "business
day" means a day on which the New York Stock Exchange is open for trading and on
which banks in New York are open for business and not permitted by law or
executive order to be closed.) The certificates for the Firm Shares will be
delivered in such denominations and in such registrations as the Representatives
request in writing not later than the second full business day prior to the
Closing Date, and will be made available for inspection by the Representatives
at least one business day prior to the Closing Date.
In addition, on the basis of the representations and warranties herein
contained and subject to the terms and conditions herein set forth, the Company
and the Selling Shareholders hereby grant an option to the several Underwriters
to purchase the Option Shares at the price per share as set forth in the first
paragraph of this Section 2. The maximum number of Option Shares to be sold by
the Company and the Selling Shareholders is 960,000. The option granted hereby
may be exercised in whole or in part by giving written notice (i) at any time
before the Closing Date and (ii) only once thereafter within 30 days after the
date of this Agreement, by you, as Representatives of the several Underwriters,
to the Company and the Custodian setting forth the number of Option Shares as to
which the several Underwriters are exercising the option, the names and
denominations in which the Option Shares are to be registered and the time and
date at which such certificates are to be delivered. If the option granted by
the Company and the Selling Shareholders is exercised by the several
Underwriters for less than all of the Option Shares, the Underwriters will
purchase from the Selling Shareholders the maximum number of Option Shares to be
sold by each such Selling Shareholder, as set forth beside such Selling
Shareholder's name on Schedule II, before the Underwriters purchase any Option
Shares from the Company. If the option granted hereby is exercised for less than
the maximum number of Option Shares being offered by the Selling Shareholders,
the respective number of Option Shares to be sold by each of the Selling
Shareholders listed on Schedule II hereto shall be determined on a pro rata
basis in accordance with the number of shares set forth opposite their names on
Schedule II hereto, adjusted by you in such manner as to avoid fractional
shares. The time and date at which certificates for Option Shares are to be
delivered shall be determined by the Representatives but shall not be earlier
than three nor later than 10 full business days after the exercise of such
option, nor in any event prior to the Closing Date (such time and date being
herein referred to as the "Option Closing Date"). If the date of exercise of the
option is three or more days before the Closing Date, the notice of exercise
shall set the Closing Date as the Option Closing Date. The number of Option
Shares to be purchased by each Underwriter shall be in the same proportion to
the total number of Option Shares being purchased as the number of Firm Shares
being purchased by such Underwriter bears to 6,400,000, adjusted by you in such
manner as to avoid fractional shares. The option with respect to the Option
Shares granted hereunder may be exercised only to cover over-allotments in the
sale of the Firm Shares by the Underwriters. You, as Representatives of the
several Underwriters, may cancel such option at any time prior to its expiration
by giving written notice of such cancellation to the Company. To the extent, if
any, that the option is exercised, payment for the Option Shares shall be made
on the Option Closing Date in New York Clearing House funds by certified or bank
cashier's check drawn to the order of the Company for the Option Shares to be
sold by it and to the order of "Waller Lansden Dortch & Davis, A Professional
Limited Liability Company, Custodian" for the Option Shares to be sold by the
Selling Shareholders, against delivery of certificates therefor at the offices
of Alex. Brown & Sons Incorporated, One South Street, Baltimore, Maryland.
3. Offering by the Underwriters. It is understood that the several
Underwriters are to make a public offering of the Firm Shares as soon as the
Representatives deem it advisable to do so. The
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<PAGE> 9
Firm Shares are to be initially offered to the public at the initial public
offering price set forth in the Prospectus. The Representatives may from time to
time thereafter change the public offering price and other selling terms. To the
extent, if at all, that any Option Shares are purchased pursuant to Section 2
hereof, the Underwriters will offer them to the public on the foregoing terms.
It is further understood that you will act as the Representatives for the
Underwriters in the offering and sale of the Shares in accordance with a Master
Agreement Among Underwriters entered into by you and the several other
Underwriters.
4. Covenants of the Company and the Selling Shareholders. (a) The Company
covenants and agrees with the several Underwriters and the Selling Shareholders
that:
(i) The Company will (A) prepare and timely file with the Commission
under Rule 424(b) of the Rules and Regulations a Prospectus containing
information previously omitted at the time of effectiveness of the
Registration Statement in reliance on Rule 430A of the Rules and
Regulations, (B) not file any amendment to the Registration Statement or
supplement to the Prospectus of which the Representatives shall not
previously have been advised and furnished with a copy or to which the
Representatives shall have reasonably objected in writing or which is not
in compliance with the Rules and Regulations and (C) file on a timely basis
all reports and any definitive proxy or information statements required to
be filed by the Company with the Commission subsequent to the date of the
Prospectus and prior to the termination of the offering of the Shares by
the Underwriters. To the extent applicable, the copies of the Registration
Statement and each amendment thereto (including all exhibits filed
therewith), any Preliminary Prospectus or Prospectus (in each case, as
amended or supplemented) furnished to the Underwriters will be identical to
the electronically transmitted copies thereof filed with the Commission
pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(ii) The Company will advise the Representatives promptly when the
Registration Statement or any post-effective amendment thereto shall have
become effective; of the receipt of any comments from the Commission; of
any request of the Commission for amendment of the Registration Statement
or for supplement to the Prospectus or for any additional information, and
of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or the use of the Prospectus or
of the institution of any proceedings for that purpose, and the Company
will use its best efforts to prevent the issuance of any such stop order
preventing or suspending the use of the Prospectus and to obtain as soon as
possible the lifting thereof, if issued.
(iii) The Company will cooperate with the Representatives in
endeavoring to qualify the Shares for sale under the securities laws of
such jurisdictions as the Representatives may reasonably have designated in
writing and will make such applications, file such documents, and furnish
such information as may be reasonably required for that purpose, provided
the Company shall not be required to qualify as a foreign corporation or to
file a general consent to service of process in any jurisdiction where it
is not now so qualified or required to file such a consent. The Company
will, from time to time, prepare and file such statements, reports, and
other documents, as are or may be required to continue such qualifications
in effect for so long a period as the Representatives may reasonably
request for distribution of the Shares.
(iv) The Company will deliver to, or upon the order of, the
Representatives, from time to time, as many copies of any Preliminary
Prospectus as the Representatives may reasonably request. The Company will
deliver to, or upon the order of, the Representatives during the period
when delivery of a Prospectus is required under the Act, as many copies of
the Prospectus in final form, or as thereafter amended or supplemented, as
the Representatives may reasonably request. The Company will deliver to the
Representatives at or before the Closing Date, four signed copies of the
Registration Statement and all amendments thereto including all exhibits
filed therewith, and will deliver to the Representatives such number of
copies of the Registration Statement, including documents incorporated by
reference therein, but without
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<PAGE> 10
exhibits, and of all amendments thereto, as the Representatives may
reasonably request. To the extent applicable, all such documents shall be
identical to the electronically transmitted copies thereof filed with the
Commission pursuant to EDGAR, except to the extent permitted by Regulation
S-T.
(v) The Company will comply with the Act and the rules and regulations
of the Commission thereunder, and the Exchange Act, and the rules and
regulations of the Commission thereunder, so as to permit the completion of
the distribution of the Shares as contemplated in this Agreement and the
Prospectus. If during the period in which a prospectus is required by law
to be delivered by an Underwriter or dealer any event shall occur as a
result of which, in the judgment of the Company or in the opinion of
counsel for the Underwriters, it becomes necessary to amend or supplement
the Prospectus in order to make the statements therein, in the light of the
circumstances existing at the time the Prospectus is delivered to a
purchaser, not misleading, or, if it is necessary at any time to amend or
supplement the Prospectus to comply with any law, the Company promptly will
either (i) prepare and file with the Commission an appropriate amendment to
the Registration Statement or supplement to the Prospectus or (ii) prepare
and file with the Commission an appropriate filing under the Exchange Act
which shall be incorporated by reference in the Prospectus so that the
Prospectus as so amended or supplemented will not, in the light of the
circumstances when it is so delivered, be misleading, or so that the
Prospectus will comply with the law.
(vi) The Company will make generally available to its security
holders, as soon as it is practicable to do so, but in any event not later
than 15 months after the effective date of the Registration Statement, an
earnings statement (which need not be audited) in reasonable detail,
covering a period of at least 12 consecutive months beginning after the
effective date of the Registration Statement, which earnings statement
shall satisfy the requirements of Section 11(a) of the Act and Rule 158 of
the Rules and Regulations and will advise you in writing when such
statement has been so made available.
(vii) The Company will, for a period of five years from the Closing
Date, deliver to the Representatives copies of annual reports and copies of
all other documents, reports and information (including similar documents,
reports and information with respect to significant subsidiaries, as that
term is defined in the Rules and Regulations, which are not consolidated in
the Company's financial statements) furnished by the Company to its
stockholders generally or filed with any securities exchange pursuant to
the requirements of such exchange or with the Commission pursuant to the
Act or the Securities Exchange Act of 1934, as amended. To the extent
applicable, such reports or documents shall be identical to the
electronically transmitted copies thereof filed with the Commission
pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(viii) No offering, sale, short sale or other disposition of any
Common Stock of the Company or other securities convertible into or
exchangeable for Common Stock or derivative of Common Stock will be made
for a period of 45 days after the date of this Agreement, directly or
indirectly, by the Company otherwise than hereunder or with the prior
written consent of the Representatives except that the Company may, without
such consent, issue shares to directors pursuant to the Company's
restricted stock plan, grant options pursuant to its option plans described
in the Prospectus, issue shares upon the exercise of options and warrants
or the conversion of securities outstanding on the date of this Agreement
and described in the Prospectus and, in addition, may issue Common Stock or
securities convertible into, or exchangeable or exercisable for, shares of
Common Stock in connection with the acquisition of the operating assets of
additional Practice Groups if the terms of issuance or legal restrictions
thereon provide that such Common Stock or securities shall not be sold
publicly prior to the expiration of the 45 day period hereinabove
referenced.
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<PAGE> 11
(ix) The Company will use its best efforts to list, subject to notice
of issuance, the Shares on The Nasdaq National Market ("NMS").
(x) The Company will apply the net proceeds from the sale of the
Shares for the purposes set forth in the Prospectus.
(xi) The Company is familiar with the Investment Company Act of 1940,
as amended, and the rules and regulations thereunder and has in the past
conducted and will in the future conduct its affairs in such a manner as to
ensure that the Company was not and will not be an "investment company"
within the meaning of said Act and such rules and regulations.
(xii) The Company has caused each executive officer of the Company to
furnish to you, on or prior to the date of this agreement, a letter or
letters, in form and substance satisfactory to the Underwriters, pursuant
to which each such person shall agree not to: (A) offer to sell, contract
to sell, transfer or otherwise dispose of, directly or indirectly, any
shares of Common Stock, any options, rights or warrants to purchase any
shares of Common Stock (including any stock appreciation right, or similar
right with an exercise or conversion privilege at a price related to, or
derived from, the market price of the Common Stock) or any securities
convertible into or exchangeable for shares of Common Stock owned directly
by such person or with respect to which such person has the power of
disposition (including, without limitation, shares of Common Stock which
such person may be deemed to beneficially own in accordance with the rules
and regulations promulgated under the Exchange Act); or (B) engage in any
hedging transactions with respect to the Common Stock that may have an
impact on the market price of the Common Stock for a period beginning on
the date of such letters and expiring 45 days following the date the
Registration Statement is declared effective by the Commission (the "Lockup
Period"), directly or indirectly ("Lockup Agreements"); provided, however,
such officers, directors and specified shareholders shall be permitted to
make the following transfers: (i) transfers made by gift, provided the
donee thereof agrees in writing to be bound by the terms of the Lockup
Agreement; (ii) transfers to the transferor's affiliates, as such term is
defined in Rule 405 promulgated under the Securities Act, provided that
each transferee agrees in writing to be bound by the terms of the Lockup
Agreement; (iii) transfers made with the prior written consent of Alex.
Brown & Sons Incorporated; and (iv) transfers pursuant to the Registration
Statement.
(xiii) The Company will maintain a transfer agent and, if necessary
under the jurisdiction of incorporation of the Company, a registrar for the
Common Stock.
(xiv) The Company will not take, directly or indirectly, any action
designed to cause or result in, or that has constituted or might reasonably
be expected to constitute, the stabilization or manipulation of the price
of any securities of the Company.
(b) Each of the Selling Shareholders covenants and agrees with the several
Underwriters and the Company that:
(i) Such Selling Shareholder will not: (A) offer to sell, contract to
sell, transfer or otherwise dispose of, directly or indirectly, any shares
of Common Stock, any options, rights or warrants to purchase any shares of
Common Stock (including any stock appreciation right, or similar right with
an exercise or conversion privilege at a price related to, or derived from,
the market price of the Common Stock) or any securities convertible into or
exchangeable for shares of Common Stock owned directly by such Selling
Shareholder or with respect to which such Selling Shareholder has the power
of disposition (including, without limitation, shares of Common Stock which
such Selling Shareholder may be deemed to beneficially own in accordance
with the rules and regulations promulgated under the Exchange Act); or (B)
engage in any hedging transactions with respect to the Common Stock that
may have an impact on the market price of the Common Stock during the
Lockup Period, directly or indirectly, otherwise than hereunder or with the
prior written consent of Alex. Brown & Sons
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<PAGE> 12
Incorporated; provided, however, such Selling Shareholder shall be
permitted to make the following transfers: (i) transfers of Common Stock
made by gift, provided the donee thereof agrees in writing to be bound by
the terms hereof; (ii) transfers to the transferor's affiliates, as such
term is defined in Rule 405 promulgated under the Securities Act, provided
that each transferee agrees in writing to be bound by the terms hereof;
(iii) transfers made with the prior written consent of Alex. Brown & Sons
Incorporated; and (iv) transfers pursuant to the Registration Statement.
(ii) In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Tax Equity and Fiscal
Responsibility Act of 1982 and the Interest and Dividend Tax Compliance Act
of 1983 with respect to the transactions herein contemplated, the Selling
Shareholders agree to deliver to you prior to or at the Closing Date a
properly completed and executed United States Treasury Department Form W-9
(or other applicable form or statement specified by Treasury Department
regulations in lieu thereof).
(iii) Such Selling Shareholder will not take, directly or indirectly,
any action designed to cause or result in, or that has constituted or might
reasonably be expected to constitute, the stabilization or manipulation of
the price of any securities of the Company.
5. Costs and Expenses. The Company will pay all costs, expenses and fees
incident to the performance of the obligations of the Company and the Selling
Shareholders under this Agreement, including, without limiting the generality of
the foregoing, the following: accounting fees of the Company; the fees and
disbursements of counsel for the Company and the Selling Shareholders, the cost
of printing and delivering to, or as requested by, the Underwriters copies of
the Registration Statement, Preliminary Prospectuses, the Prospectus, all
documents incorporated by reference in the foregoing, this Agreement, the Master
Agreement Among Underwriters, the Underwriters' internal Selling Memorandum, the
Underwriters' Questionnaire, the Invitation Letter, the Power of Attorney, the
Custody Agreement, the Blue Sky Survey and any supplements or amendments
thereto; the filing fees of the Commission; the filing fees and expenses,
including the fees and disbursements of counsel for the Underwriters, incident
to securing any required review by NASD of the terms of the sale of the Shares;
the additional listing fee of NMS and the expenses, including the fees and
disbursements of counsel for the Underwriters, incurred in connection with the
qualification of the Shares under State securities or Blue Sky laws. To the
extent, if at all, that any of the Selling Shareholders engages special legal
counsel to represent such Selling Shareholder in connection with this offering,
the fees and expenses of such counsel shall be borne by such Selling
Shareholder. Any transfer taxes imposed on the sale of the Shares to the several
Underwriters will be paid by the Sellers pro rata. The Sellers shall not,
however, be required to pay for any of the Underwriters expenses (other than
those related to qualification under State securities or Blue Sky laws and NASD
review) except that, if this Agreement shall not be consummated because the
conditions in Section 6 hereof are not satisfied, or because this Agreement is
terminated by the Representatives pursuant to Section 12 hereof, or by reason of
any failure, refusal or inability on the part of the Company or the Selling
Shareholders to perform any undertaking or satisfy any condition of this
Agreement or to comply with any of the terms hereof on their part to be
performed, unless such failure to satisfy said condition or to comply with said
terms be due to the default or omission of any Underwriter, then the Company
shall reimburse the several Underwriters for reasonable out-of-pocket expenses,
including fees and disbursements of counsel, reasonably incurred in connection
with investigating, marketing and proposing to market the Shares or in
contemplation of performing their obligations hereunder; but the Company and the
Selling Shareholders shall not in any event be liable to any of the several
Underwriters for damages on account of loss of anticipated profits from the sale
by them of the Shares.
6. Conditions of Obligations of the Underwriters. The several obligations
of the Underwriters to purchase the Firm Shares on the Closing Date and the
Option Shares, if any, on the Option Closing Date are subject to the accuracy,
as of the Closing Date or the Option Closing Date, as the case may be, of the
representations and warranties of the Company and the Selling Shareholders
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<PAGE> 13
contained herein, and to the performance by the Company and the Selling
Shareholders of their covenants and obligations hereunder and to the following
additional conditions:
(a) The Registration Statement and all post-effective amendments
thereto shall have become effective and any and all filings required by
Rule 424 and Rule 430A of the Rules and Regulations shall have been made,
and any request of the Commission for additional information (to be
included in the Registration Statement or otherwise) shall have been
disclosed to the Representatives and complied with to their reasonable
request. No stop order suspending the effectiveness of the Registration
Statement, as amended from time to time, shall have been issued and no
proceedings for that purpose shall have been taken or, to the knowledge of
the Company or the Selling Shareholders, shall be contemplated by the
Commission and no injunction, restraining order, or order of any nature by
a federal or state court of competent jurisdiction shall have been issued
as of the Closing Date or Option Closing Date, as the case may be, which
would prevent the issuance of the Shares.
(b) The Representatives shall have received on the Closing Date or the
Option Closing Date, as the case may be, the opinion of Waller Lansden
Dortch & Davis, A Professional Limited Liability Company ("WLDD"), counsel
for the Company and the Selling Shareholders, and the opinion of Carolyn
Forehand, General Counsel for the Company, each dated the Closing Date or
the Option Closing Date, as the case may be, addressed to the Underwriters
which collectively provide that:
(i) The Company has been duly organized and is validly existing as
a corporation in good standing under the laws of the State of Tennessee,
with corporate power and authority to own its properties and conduct its
business as described in the Prospectus; each of the Subsidiaries has
been duly incorporated and is validly existing as a corporation in good
standing under the laws of the jurisdiction of its incorporation, with
corporate power and authority to own its properties and conduct its
business as described in the Prospectus. The Company and each of the
Subsidiaries are duly qualified to transact business in all
jurisdictions in which the conduct of their business as described in the
Prospectus and based on inquiry of officers of the Company requires such
qualification, or in which the failure to qualify would have a
materially adverse effect upon the business of the Company and the
Subsidiaries taken as a whole, based, as to matters of fact, upon a
certificate of officers of the Company; and the outstanding shares of
capital stock of each of the Subsidiaries have been duly authorized and
validly issued, are fully paid and non-assessable and are wholly owned
by the Company; and, to such counsel's knowledge, the outstanding shares
of capital stock of each of the Subsidiaries is owned free and clear of
all liens, encumbrances and security interests, other than the pledge of
shares of the capital stock of the Subsidiaries to Citibank, N.A., as
agent, pursuant to the Company's Fifth Amended and Restated Revolving
Credit and Term Loan Agreement with Citibank dated as of July 22, 1996,
as the same may be amended from time to time, and no options, warrants
or other rights to purchase, agreements or other obligations to issue or
other rights to convert any obligations into any shares of capital stock
of the Subsidiaries are outstanding except as described in or
contemplated by the Registration Statement, including the exhibits
thereto.
(ii) The Company had authorized and outstanding capital stock as of
the dates indicated as set forth under the caption "Capitalization" in
the Prospectus; the authorized shares of its Common Stock have been duly
authorized; the outstanding shares of its Common Stock, including the
outstanding shares of Common Stock to be sold by the Selling
Shareholders, have been duly authorized and validly issued and are fully
paid and non-assessable; all of the Shares conform to the description
thereof contained in the Prospectus; the certificates for the Shares,
assuming they are in the form of the specimen certificate received by
such counsel, are in due and proper form; the shares of Common Stock,
including the Option Shares, if any, to be sold by the Company and the
Selling Shareholders pursuant to this Agreement have been duly
authorized and will be validly
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<PAGE> 14
issued, fully paid and non-assessable when issued and paid for as
contemplated by this Agreement; and no preemptive rights of shareholders
exist with respect to any of the Shares or the issue and sale thereof.
(iii) The Registration Statement has become effective under the Act
and, to the best of the knowledge of such counsel, no stop order
proceedings with respect thereto have been instituted or are pending or
threatened under the Act.
(iv) The Registration Statement, all Preliminary Prospectuses, the
Prospectus and each amendment or supplement thereto and documents
incorporated by reference therein comply as to form in all material
respects with the requirements of the Act or the Exchange Act, as
applicable, and the applicable rules and regulations thereunder (except
that such counsel need express no opinion as to the financial
statements, schedules and other financial and statistical information
included therein). The conditions for the use of Form S-3, set forth in
the General Instructions thereto, have been satisfied.
(v) The statements under the captions "Risk Factors," "Business,"
and "Principal and Selling Shareholders" in the Prospectus, insofar as
such statements constitute a summary of documents referred to therein or
matters of law, are accurate summaries in all material respects and
fairly present the information called for with respect to such documents
and matters. Such counsel does not know of any laws, rules or
regulations or legal or governmental proceedings applicable to the
business of the Company and the Subsidiaries required to be described in
the Registration Statement or the Prospectus that are not described as
required.
(vi) Such counsel does not know of any contracts or documents
required to be filed as exhibits to the Registration Statement or
described in the Registration Statement or the Prospectus or
incorporated by reference therein which are not so filed or described as
required or incorporated by reference, and such contracts and documents
as are summarized in the Registration Statement or the Prospectus are
fairly summarized in all material respects.
(vii) Such counsel knows of no material legal proceedings pending
or threatened against the Company or any of the Subsidiaries, except as
described in the Prospectus.
(viii) The execution and delivery of this Agreement and the
consummation of the transactions herein contemplated (A) do not and will
not conflict with or result in a breach of any of the terms or
provisions of, or constitute a default under, the Restated Charter, as
amended, or By-laws, as amended, of the Company, or any agreement or
instrument known to such counsel to which the Company is a party or by
which the Company may be bound; (B) will not violate any material
statute, rule or regulation applicable to the Company; and (C) does not
require submission or approval of, or any other action by, any Federal
or state authority that regulates the provision of healthcare services
by the Company in the jurisdictions in which the Company conducts its
business.
(ix) The Company holds all licenses, authorizations, consents,
approvals, certificates and permits (individually, a "Permit") from any
regulatory body or administrative agency or other governmental body
having jurisdiction that are applicable to the operations of the Company
as now conducted or proposed to be conducted as described in the
Prospectus, all of which permits are current except where the failure to
so hold or comply with any Permit would not have, singly or in the
aggregate, a material adverse effect on the business or financial
condition of the Company. To the knowledge of such counsel, there are no
proceedings, pending or threatened, and such counsel knows of no
circumstances that could lead counsel to believe that any such
proceedings are imminent, relating to the revocation or modification of
any such Permit which, singly or in the aggregate if the subject of an
unfavorable decision, ruling or finding, could have a material adverse
effect on
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<PAGE> 15
the business or financial condition of the Company. The provisions of
the Company's service agreements and other business arrangements
described in the Prospectus or incorporated by reference therein and the
operations of the Company in accordance with the terms thereof are in
material compliance with applicable law and government regulation.
(x) This Agreement has been duly authorized, executed and delivered
by the Company.
(xi) No approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body is necessary in connection with the execution and
delivery of this Agreement and the consummation of the transactions
herein contemplated (other than as may be required by the NASD or as
required by State securities and Blue Sky laws as to which such counsel
need express no opinion) except such as have been obtained or made,
specifying the same.
(xii) This Agreement has been duly authorized, executed and
delivered on behalf of each of the Selling Shareholders.
(xiii) Each of the Selling Shareholders has full legal right, power
and authority, and any approval required by law (other than as required
by State securities and Blue Sky laws as to which such counsel need
express no opinion), to sell, assign, transfer and deliver the portion
of the Shares to be sold by such Selling Shareholder.
(xiv) The Power of Attorney and the Custody Agreement executed and
delivered by each of the Selling Shareholders is a valid, irrevocable
instrument legally sufficient for the purposes intended.
(xv) The Underwriters (assuming that they are bona fide purchasers
within the meaning of the Uniform Commercial Code) have acquired good
and marketable title to the Shares being sold by the Selling
Shareholders on the Option Closing Date, free and clear of all claims,
liens, encumbrances and security interests whatsoever.
(xvi) Except as described in or contemplated by the Prospectus, to
the knowledge of such counsel, there are no outstanding securities of
the Company convertible or exchangeable into or evidencing the right to
purchase or subscribe for any shares of capital stock of the Company and
there are no outstanding or authorized options, warrants or rights of
any character obligating the Company to issue any shares of its capital
stock or any securities convertible or exchangeable into or evidencing
the right to purchase or subscribe for any shares of such stock; and
except as described in the Prospectus, to the knowledge of such counsel,
there is no holder of any securities of the Company or any other person
who has the right, contractual or otherwise, to cause the Company to
sell or otherwise issue to them, or to permit them to underwrite the
sale of, any of the Shares or the right to have any Common Stock or
other securities of the Company included in the Registration Statement
or the right, as a result of the filing of the Registration Statement,
to require registration under the Act of any Common Stock or other
securities of the Company.
In rendering such opinion WLDD may rely as to matters governed by the
laws of states other than Tennessee, Delaware or Federal laws on local
counsel in such jurisdictions, provided that in each case WLDD shall state
that they believe that they and the Underwriters are justified in relying
on such other counsel, and, as to the matters set forth in subparagraphs
(xiii), (xiv) and (xv), exclusively as to factual matters, upon contractual
representations made by the Selling Shareholders. In addition to the
matters set forth above, such opinion shall also include a statement to the
effect that nothing has come to the attention of such counsel which leads
them to believe that the Registration Statement, as of the time it became
effective under the Act (but after giving effect to the changes
incorporated pursuant to Rule 430A under the Act), and as of the Closing
Date or Option Closing Date, as the case may be, contained an untrue
statement of a
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<PAGE> 16
material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, or that
the Prospectus or any amendment or supplement thereto, on the date it was
filed pursuant to Rule 424(b), and as of the Closing Date or Option Closing
Date, as the case may be, or any of the documents incorporated by reference
therein, as of the date of effectiveness of the Registration Statement or,
in the case of documents incorporated by reference in the Prospectus after
the date of effectiveness of the Registration Statement, as of the
respective dates when such documents were filed with the Commission and the
Registration Statement and the Prospectus, or any amendment or supplement
thereto, as of the Closing Date or the Option Closing Date, as the case may
be, contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading (except that such counsel need express no view as to
financial statements, schedules and other financial information included
therein). With respect to such statement, Waller Lansden Dortch & Davis may
state that their belief is based upon the procedures set forth therein, but
is without independent check and verification.
(c) The Representatives shall have received from Testa, Hurwitz &
Thibeault, LLP counsel for the Underwriters, an opinion dated the Closing
Date or the Option Closing Date, as the case may be, substantially to the
effect specified in subparagraphs (ii), (iii), (iv) and (x) of Paragraph
(b) of this Section 6, and that the Company is a validly organized and
existing corporation under the laws of the State of Tennessee. In rendering
such opinion Testa, Hurwitz & Thibeault, LLP may rely as to all matters
governed other than by Delaware or Federal laws on the opinion of counsel
referred to in Paragraph (b) of this Section 6. In addition to the matters
set forth above, such opinion shall also include a statement to the effect
that nothing has come to the attention of such counsel which leads them to
believe that the Registration Statement, as of the time it became effective
under the Act (but after giving effect to changes incorporated pursuant to
Rule 430A under the Act), contained an untrue statement of a material fact
or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, or that the
Prospectus or any amendment or supplement thereto, on the date it was filed
pursuant to Rule 424(b) and the Registration Statement and the Prospectus,
or any amendment or supplement thereto, as of the Closing Date or the
Option Closing Date, as the case may be, contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading (except that such
counsel need express no view as to financial statements, schedules and
other financial information included therein). With respect to such
statement, Testa, Hurwitz & Thibeault may state that their belief is based
upon the procedures set forth therein, but is without independent check and
verification.
(d) The Representatives shall have received at or prior to the Closing
Date from Testa, Hurwitz & Thibeault, LLP a memorandum or summary, in form
and substance satisfactory to the Representatives, with respect to the
qualification for offering and sale by the Underwriters of the Shares under
the State securities or Blue Sky laws of such jurisdictions as the
Representatives may reasonably have designated to the Company.
(e) The Representatives shall have received on the date hereof,
Closing Date and the Option Closing Date, as the case may be, a signed
letter from KPMG Peat Marwick LLP, dated the date hereof, the Closing Date
and the Option Closing Date, as the case may be, in form and substance
satisfactory to you, confirming that they are independent public
accountants within the meaning of the Act and the applicable published
Rules and Regulations thereunder and stating that in their opinion the
financial statements and schedules examined by them and included in the
Registration Statement comply in form in all material respects with the
applicable accounting requirements of the Act and the related published
Rules and Regulations; and containing such other statements and information
as is ordinarily included in accountants'
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<PAGE> 17
"comfort letters" to underwriters with respect to the financial statements
and certain financial and statistical information contained in the
Registration Statement and Prospectus.
(f) The Representatives shall have received on the Closing Date or the
Option Closing Date, as the case may be, a certificate or certificates of
the Chief Executive Officer and the Principal Financial and Accounting
Officer of the Company to the effect that, as of the Closing Date or the
Option Closing Date, as the case may be, each of them severally represents
as follows:
(i) The Registration Statement has become effective under the Act
and no stop order suspending the effectiveness of the Registration
Statement has been issued, and no proceedings for such purpose have been
taken or are, to his knowledge, contemplated by the Commission.
(ii) He does not know of any litigation instituted or threatened
against the Company of a character required to be disclosed in the
Registration Statement which is not so disclosed; he does not know of
any material contract required to be filed as an exhibit to the
Registration Statement which is not so filed; and the representations
and warranties of the Company contained in Section 1 hereof are true and
correct as of the Closing Date or the Option Closing Date, as the case
may be.
(iii) He has carefully examined the Registration Statement and the
Prospectus and, in his opinion, as of the effective date of the
Registration Statement, the statements contained in the Registration
Statement, including any document incorporated by reference therein,
were true and correct in all material respects, and such Registration
Statement and Prospectus or any document incorporated by reference
therein did not omit to state a material fact required to be stated
therein or necessary in order to make the statements therein not
misleading and, in his opinion, since the effective date of the
Registration Statement, no event has occurred which should have been set
forth in a supplement to or an amendment of the Prospectus which has not
been so set forth in such supplement or amendment.
(iv) Since the respective dates as of which information is given in
the Registration Statement and Prospectus, there has not been any
material adverse change or any development involving a prospective
material adverse change in or affecting the condition, financial or
otherwise, of the Company and its Subsidiaries or the earnings,
business, management, properties, assets, rights, operations, condition
(financial or otherwise) or prospects of the Company and the
Subsidiaries, whether or not arising in the ordinary course of business;
(v) All of the representations and warranties of the Company
contained in this Underwriting Agreement are true and correct on and as
of the date hereof and on and as of the Closing Date or the Option
Closing Date, as the case may be, with the same force and effect as if
made on and as of the Closing Date or the Option Closing Date, as the
case may be, except for representations and warranties made as of a
specific date, which were true and correct as of such date;
(vi) Each of the conditions specified in Section 6 of this
Underwriting Agreement has been, as of the Closing Date or the Option
Closing Date, as the case may be, satisfied in all respects; and
(vii) The Company has performed and/or complied with all of its
agreements and covenants required to be performed or complied with under
this Underwriting Agreement as of or prior to the Closing Date or the
Option Closing Date, if any, as the case may be.
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<PAGE> 18
(g) The Representatives shall have received on the Option Closing
Date, if any, a certificate of each Selling Shareholder to the effect that,
as of the Option Closing Date each such Selling Shareholder shall represent
as follows:
(i) All of the representations and warranties of such Selling
Shareholder contained in this Underwriting Agreement are true and
correct on and as of the date hereof and on and as of the Closing Date
with the same force and effect as if made on and as of the Closing Date
except for representations and warranties made as of a specific date,
which were true and correct as of such date; and
(ii) Such Selling Shareholder has performed and/or complied with
all of such Selling Shareholder's agreements and covenants required to
be performed or complied with under this Underwriting Agreement as of or
prior to the Closing Date.
(h) The Company and the Selling Shareholders shall have furnished to
the Representatives such further certificates and documents confirming the
representations and warranties contained herein and related matters as the
Representatives may reasonably have requested.
(i) The Firm Shares and Option Shares, if any, have been approved for
designation upon notice of issuance on The Nasdaq National Market.
(j) All filings required to have been made pursuant to Rules 424 or
430A under the Act have been made.
(k) Since the respective dates as of which information is given in the
Registration Statement and Prospectus, there has not been any material
adverse change or any development involving a prospective adverse change in
or affecting the condition, financial or otherwise, of the Company or the
earnings, business affairs, management or business prospects of the Company
whether or not arising in the ordinary course of business.
(l) The Lockup Agreements described in Section 4(a)(xii) are in full
force and effect.
The opinions and certificates mentioned in this Agreement shall be deemed
to be in compliance with the provisions hereof only if they are in all material
respects reasonably satisfactory to the Representatives and to Testa, Hurwitz &
Thibeault, LLP, counsel for the Underwriters.
If any of the conditions hereinabove provided for in this Section 6 shall
not have been fulfilled when and as required by this Agreement to be fulfilled,
the obligations of the Underwriters hereunder may be terminated by the
Representatives by notifying the Company of such termination in writing or by
telegram at or prior to the Closing Date or the Company and the Selling
Shareholders prior to the Option Closing Date, as the case may be.
In such event, the Selling Shareholder, the Company and the Underwriters
shall not be under any obligation to each other (except to the extent provided
in Sections 5 and 8 hereof).
7. Conditions of the Obligations of the Sellers. The obligations of the
Sellers to sell and deliver the portion of the Shares required to be delivered
as and when specified in this Agreement are subject to the conditions that at
the Closing Date or the Option Closing Date, as the case may be, no stop order
suspending the effectiveness of the Registration statement shall have been
issued and in effect or proceedings therefor initiated or threatened.
8. Indemnification. (a) The Company and each of the Selling Shareholders,
jointly and severally, agree to indemnify and hold harmless each Underwriter and
each person, if any, who controls any Underwriter within the meaning of the Act
against any losses, claims, damages or liabilities to which such Underwriter or
such controlling person may become subject under the Act or otherwise, insofar
as such losses, claims, damages or liabilities (or actions or proceedings in
respect thereof) arise out of or are based upon (i) any untrue statement or
alleged untrue statement of any material fact contained or incorporated by
reference in the Registration Statement, any Preliminary Prospectus, the
Prospectus or any amendment or supplement thereto, or (ii) the
18
<PAGE> 19
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, and
will reimburse each Underwriter and each such controlling person upon demand for
any legal or other expenses reasonably incurred by such Underwriter or such
controlling person in connection with investigating or defending any such loss,
claim, damage, liability, action or proceeding and expenses reasonably incurred
in responding to a subpoena or governmental inquiry whether or not such
underwriter or controlling person is a party to the related action or
proceeding; provided, however, that the Company and the Selling Shareholders
will not be liable in any such case to the extent that any such loss, claim,
damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement, or omission or alleged omission made or incorporated
by reference in the Registration Statement, any Preliminary Prospectus, the
Prospectus, or such amendment or supplement, in reliance upon and in conformity
with written information furnished to the Company by or through the
Representatives specifically for use in the preparation thereof. In no event,
however, shall the liability of the Selling Shareholders for indemnification
under this Section 8(a) exceed the proceeds received by such Selling Shareholder
from the Underwriters in the offering; and provided further that the Company
shall not be liable to any Underwriter pursuant to this subsection (a) with
respect to any Preliminary Prospectus to the extent that such loss, claim,
damage or liability of such Underwriter results from the fact that such
Underwriter sold securities in any case where delivery of a Prospectus is
required by the Act if the Company has previously furnished copies of the
Prospectus to such Underwriter and the loss, claim, damage or liability of such
Underwriter results from an untrue statement or omission of a material fact
contained in, or the omission of a material fact from, such Preliminary
Prospectus which was corrected in the Prospectus and such Underwriter failed to
deliver such corrected Prospectus to a purchaser of Shares as required by the
Act. This indemnity agreement will be in addition to any liability which the
Company or the Selling Shareholder may otherwise have.
(b) Each Underwriter severally and not jointly will indemnify and hold
harmless the Company, each of its directors, each of its officers who have
signed the Registration Statement, the Selling Shareholders, and each person, if
any, who controls the Company or the Selling Shareholders within the meaning of
the Act, against any losses, claims, damages or liabilities to which the Company
or any such director, officer, Selling Shareholder or controlling person may
become subject under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions or proceedings in respect thereof) arise out
of or are based upon any untrue statement or alleged untrue statement of any
material fact contained or incorporated by reference in the Registration
Statement, any Preliminary Prospectus, the Prospectus or any amendment or
supplement thereto, or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading in the light of the
circumstances under which they were made; and will reimburse any legal or other
expenses reasonably incurred by the Company or any such director, officer,
Selling Shareholder or controlling person in connection with investigating or
defending any such loss, claim, damage, liability, action or proceeding;
provided, however, that each Underwriter will be liable in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission has been made or incorporated by
reference in the Registration Statement, any Preliminary Prospectus, the
Prospectus or such amendment or supplement, in reliance upon and in conformity
with written information furnished to the Company by or through the
Representatives specifically for use in the preparation thereof. This indemnity
agreement will be in addition to any liability which such Underwriter may
otherwise have.
(c) In case any proceeding (including any governmental investigation) shall
be instituted involving any person in respect of which indemnity may be sought
pursuant to this Section 8, such person (the "indemnified party") shall promptly
notify the person against whom such indemnity may be sought (the "indemnifying
party") in writing. No indemnification provided for in Section 8(a) or (b) shall
be available to any party who shall fail to give notice as provided in this
Section 8(c) if the party to whom notice was not given was unaware of the
proceeding to which such notice would have related and was prejudiced by the
failure to give such notice, but the failure to
19
<PAGE> 20
give such notice shall not relieve the indemnifying party or parties from any
liability which it or they may have to the indemnified party for contribution or
otherwise than on account of the provisions of Section 8(a) or (b). In case any
such proceeding shall be brought against any indemnified party and it shall
notify the indemnifying party of the commencement thereof, the indemnifying
party shall be entitled to participate therein and, to the extent that it shall
wish, jointly with any other indemnifying party similarly notified, to assume
the defense thereof, with counsel satisfactory to such indemnified party and
shall pay as incurred the fees and disbursements of such counsel related to such
proceeding. In any such proceeding, any indemnified party shall have the right
to retain its own counsel at its own expense. Notwithstanding the foregoing, the
indemnifying party shall pay as incurred the fees and expenses of the counsel
retained by the indemnified party in the event (i) the indemnifying party and
the indemnified party shall have mutually agreed to the retention of such
counsel or (ii) the named parties to any such proceeding (including any
impleaded parties) include both the indemnifying party and the indemnified party
and representation of both parties by the same counsel would be inappropriate
due to actual or potential differing interests between them. It is understood
that the indemnifying party shall not, in connection with any proceeding or
related proceedings in the same jurisdiction, be liable for the reasonable fees
and expenses of more than one separate firm for all such indemnified parties.
Such firm shall be designated in writing by you in the case of parties
indemnified pursuant to Section 8(a) and by the Company and the Selling
Shareholder in the case of parties indemnified pursuant to Section 8(b). The
indemnifying party shall not be liable for any settlement of any proceeding
effected without its written consent but if settled with such consent or if
there be a final judgement for the plaintiff, the indemnifying party agrees to
indemnify the indemnified party from and against any loss or liability by reason
of such settlement or judgment. In addition, the indemnifying party will not,
without the prior written consent of the indemnified party, settle or compromise
or consent to the entry of any judgment in any pending or threatened claim,
action or proceeding, of which indemnification may be sought hereunder (whether
or not any indemnified party is an actual or potential party to such claim,
action or proceeding) unless such settlement, compromise or consent includes an
unconditional release of the indemnified party from all liability arising out of
such claim, action or proceeding.
(d) If the indemnification provided for in this Section 8 is unavailable to
or insufficient to hold harmless an indemnified party under Section 8(a) or (b)
above in respect of any losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) referred to therein, then each indemnifying
party shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) in such proportion as is appropriate to reflect
the relative benefits received by the Company and the Selling Shareholder on the
one hand and the Underwriters on the other from the offering of the Shares. If,
however, the allocation provided by the immediately preceding sentence is not
permitted by applicable law or if the indemnified party failed to give the
notice required under Section 8(c) above, then each indemnifying party shall
contribute to such amount paid or payable by such indemnified party in such
proportion as is appropriate to reflect not only such relative benefits but also
the relative fault of the Company and the Selling Shareholders on the one hand
and the Underwriters on the other in connection with the statements or omissions
which resulted in such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company and the Selling
Shareholders on the one hand and the Underwriters on the other shall be deemed
to be in the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company and the Selling Shareholder bear to
the total underwriting discounts and commissions received by the Underwriters,
in each case as set forth in the table on the cover page of the Prospectus. The
relative fault shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by the
Company or the Selling Shareholders on the one hand or the Underwriters on the
other and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
20
<PAGE> 21
The Company, the Selling Shareholders and the Underwriters agree that it
would not be just and equitable if contributions pursuant to this Section 8(d)
were determined by pro rata allocation (even if the Underwriters were treated as
one entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above in this Section
8(d). The amount paid or payable by an indemnified party as a result of the
losses, claims, damages or liabilities (or actions or proceedings in respect
thereof) referred to above in this Section 8(d) shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this subsection (d), (i) no Underwriter shall
be required to contribute any amount in excess of the underwriting discounts and
commissions applicable to the Shares purchased by such Underwriter, (ii) no
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation, and (iii) the Selling Shareholders
shall not be required to contribute any amount in excess of the proceeds
received by the Selling Shareholder from the Underwriters in the offering. The
Underwriters' obligations in this Section 8(d) to contribute are several in
proportion to their respective underwriting obligations and not joint.
(e) In any proceeding relating to the Registration Statement, any
Preliminary Prospectus, the Prospectus or any supplement or amendment thereto,
each party against whom contribution may be sought under this Section 8 hereby
consents to the jurisdiction of any court having jurisdiction over any other
contributing party, agrees that process issuing from such court may be served
upon him or it by any other contributing party and consents to the service of
such process and agrees that any other contributing party may join him or it as
an additional defendant in any such proceeding in which such other contributing
party is a party.
(f) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 8 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 8 and the
representations and warranties of the Company set forth in this Agreement shall
remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter, the Company, its directors or officers or any persons
controlling the Company, (ii) acceptance of any Shares and payment therefor
hereunder, and (iii) any termination of this Agreement. A successor to any
Underwriter, or to the Company, its directors or officers, or any person
controlling the Company, shall be entitled to the benefits of the indemnity,
contribution and reimbursement agreements contained in this Section 8.
9. Default by Underwriters. If on the Closing Date or the Option Closing
Date, as the case may be, any Underwriter shall fail to purchase and pay for the
portion of the Shares which such Underwriter has agreed to purchase and pay for
on such date (otherwise than by reason of any default on the part of the Company
or the Selling Shareholder), you, as Representatives of the Underwriters, shall
use your best efforts to procure within 24 hours thereafter one or more of the
other Underwriters, or any others, to purchase from the Company and the Selling
Shareholders such amounts as may be agreed upon and upon the terms set forth
herein, the Firm Shares or Option Shares, as the case may be, which the
defaulting Underwriter or Underwriters failed to purchase. If during such 24
hours you, as such Representatives, shall not have procured such other
Underwriters, or any others, to purchase the Firm Shares or Option Shares, as
the case may be, agreed to be purchased by the defaulting Underwriter or
Underwriters, then (a) if the aggregate number of shares with respect to which
such default shall occur does not exceed 10% of the Firm Shares or Option
Shares, as the case may be, covered hereby, the other Underwriters shall be
obligated, severally, in proportion to the respective numbers of Firm Shares or
Option Shares, as the case may be, which they are obligated to purchase
hereunder, to purchase the Firm Shares or Option Shares, as the case may be,
which such defaulting Underwriter or Underwriters failed to purchase, or (b) if
the aggregate number of shares of Firm Shares or Option Shares, as the case may
be, with respect to
21
<PAGE> 22
which such default shall occur exceeds 10% of the Firm Shares or Option Shares,
as the case may be, covered hereby, the Company and the Selling Shareholder or
you as the Representatives of the Underwriters will have the right, by written
notice given within the next 24-hour period to the parties to this Agreement, to
terminate this Agreement without liability on the part of the non-defaulting
Underwriters or of the Company or of the Selling Shareholders except to the
extent provided in Section 8 hereof. In the event of a default by any
Underwriter or Underwriters, as set forth in this Section 9, the Closing Date or
Option Closing Date, as the case may be, may be postponed for such period, not
exceeding seven days, as you, as Representatives, may determine in order that
the required changes in the Registration Statement or in the Prospectus or in
any other documents or arrangements may be effected. The term "Underwriter"
includes any person substituted for a defaulting Underwriter. Any action taken
under this Section 9 shall not relieve any defaulting Underwriter from liability
in respect of any default of such Underwriter under this Agreement.
10. Default by Selling Shareholders. If on the Option Closing Date, if
any, any of the Selling Shareholders fails to sell the Option Shares which such
Selling Shareholders have agreed to sell on such date as set forth in Schedule
II hereto, the Company agrees that it will sell that number of shares of Common
Stock to the Underwriters which represents the Option Shares which such Selling
Shareholders have failed to so sell, as set forth in Schedule II hereto, or such
lesser number as may be requested by the Representatives.
11. Notices. All communications hereunder shall be in writing and, except
as otherwise provided herein, will be mailed, delivered or telegraphed and
confirmed as follows: if to the Underwriters, to Alex. Brown & Sons
Incorporated, One South Street, Baltimore, Maryland 21202, Attention: Steven H.
Schuh; with a copy to Alex. Brown & Sons Incorporated, One South Street,
Baltimore, Maryland 21202 Attention: General Counsel; if to the Company or the
Selling Shareholders, to PhyCor, Inc., 30 Burton Hills Boulevard, Suite 500,
Nashville, Tennessee 37215, Attention: Joseph C. Hutts, President.
12. Termination. This Agreement may be terminated by you by notice to the
Sellers as follows:
(a) At any time prior to the earlier of (i) the time the Shares are
released by you for sale by notice to the Underwriters, or (ii) 11:30 a.m.
on the first business day following the date of this Agreement;
(b) At any time prior to the Closing Date if any of the following has
occurred: (i) since the respective dates as of which information is given
in the Registration Statement and the Prospectus, any material adverse
change, or any development involving a prospective material adverse change,
in or affecting the condition, financial or otherwise, of the Company and
its Subsidiaries taken as a whole or the earnings, business affairs,
management or business prospects of the Company and its Subsidiaries taken
as a whole, whether or not arising in the ordinary course of business, (ii)
any outbreak or escalation of hostilities or declaration of war or national
emergency after the date hereof or other national or international calamity
or crisis or change in economic or political conditions if the effect of
such outbreak, escalation, declaration, emergency, calamity, crisis or
change on the financial markets of the United States would, in your
reasonable judgment, make the offering or delivery of the Shares
impracticable or inadvisable, (iii) suspension of trading in securities on
the New York Stock Exchange, the American Stock Exchange or NASDAQ or
limitation on prices (other than limitations on hours or numbers of days of
trading) for securities on either such Exchange or NASDAQ, (iv) the
enactment, publication, decree or other promulgation of any federal or
state statute, regulation, rule or order of any court or other governmental
authority which in your reasonable opinion materially and adversely affects
or will materially and adversely affect the business or operations of the
Company, (v) declaration of a banking moratorium by either Federal or New
York State authorities, (vi) the taking of any action by any Federal, State
or local government or agency in
22
<PAGE> 23
respect of its monetary or fiscal affairs which in your reasonable opinion
has a material adverse effect on the securities markets in the United
States or (vii) the suspension of trading of the Company's Common Stock on
the Nasdaq National Market; or
(c) As provided in Sections 6 and 9 of this Agreement.
This Agreement also may be terminated by you, by notice to the Company, as
to any obligation of the Underwriters to purchase the Option Shares, upon the
occurrence at any time prior to the Option Closing Date of any of the events
described in subparagraph (b) above or as provided in Sections 6 and 9 of this
Agreement.
13. Successors. This Agreement has been and is made solely for the benefit
of the Underwriters, the Company and the Selling Shareholder and their
respective successors, executors, administrators, heirs and assigns, and the
officers, directors and controlling persons referred to herein, and no other
person will have any right or obligation hereunder. The term "successors" shall
not include any purchaser of the Shares merely because of such purchase. No
purchaser of Shares from any Underwriter shall be deemed a successor or assign
merely because of such purchase.
14. Information Provided by Underwriters. The Company, the Selling
Shareholders and the Underwriters acknowledge and agree that the only
information furnished or to be furnished by any Underwriter to the Company for
inclusion in any Prospectus or the Registration Statement consists of the
information set forth in the last paragraph on the front cover page (insofar as
such information relates to the Underwriters), information provided in
connection with Item 502(d) of Regulation S-K under the Act and information
under the caption "Underwriting" in the Prospectus.
15. Miscellaneous. The reimbursement, indemnification and contribution
agreements contained in this Agreement and the representations, warranties and
covenants in this Agreement shall remain in full force and effect regardless of
(a) any termination of this Agreement, (b) any investigation made by or on
behalf of any Underwriter or controlling person thereof, or by or on behalf of
the Company or its directors or officers and (c) delivery of and payment for the
Shares under this Agreement the other covenants of the Company in this Agreement
shall remain in full force and effect regardless of (a) any investigation made
by or on behalf of any underwriter or controlling person and (b) delivery of any
payment for the Shares under this Agreement.
23
<PAGE> 24
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
This Agreement shall be governed by, and construed in accordance with, the
laws of the State of Maryland.
If the foregoing letter is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Selling Shareholders, the
Company and the several Underwriters in accordance with its terms. It is
understood that your acceptance of this letter on behalf of each of the
Underwriters is pursuant to the authority set forth in a form of Agreement among
Underwriters, the form of which shall be submitted to the Company for
examination, upon request, but without warranty on your part as to the authority
of the signers thereof.
Any person executing and delivering this Agreement as Attorney-in-Fact for
a Selling Shareholder represents by so doing that he has been duly appointed as
Attorney-in-Fact by such Selling Shareholder pursuant to a validly existing and
binding Power of Attorney which authorizes such Attorney-in-Fact to take such
action.
Very truly yours,
PHYCOR, INC.
By: ________________________
President
Selling Shareholders listed on
Schedule II
By: ________________________
Attorney-in-Fact
The foregoing Underwriting Agreement
is hereby confirmed and accepted as of
the date first above written.
ALEX. BROWN & SONS INCORPORATED
EQUITABLE SECURITIES CORPORATION
MERRILL, LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
PIPER JAFFRAY INC.
SALOMON BROTHERS INC
As Representatives of the several
Underwriters listed on Schedule I
By: ALEX. BROWN & SONS INCORPORATED
By: __________________________
Authorized Officer
24
<PAGE> 25
SCHEDULE I
SCHEDULE OF UNDERWRITERS
<TABLE>
<CAPTION>
NUMBER OF FIRM SHARES
UNDERWRITER TO BE PURCHASED
- ----------- ---------------------
<S> <C>
Alex. Brown & Sons Incorporated.............................
Equitable Securities Corporation............................
Merrill, Lynch, Pierce, Fenner & Smith Incorporated.........
Piper Jaffray Inc...........................................
Salomon Brothers Inc........................................
---------
Total............................................. 6,400,000
=========
</TABLE>
25
<PAGE> 26
SCHEDULE II
SCHEDULE OF OPTION SHARES
TO BE SOLD BY THE COMPANY AND SELLING SHAREHOLDERS
<TABLE>
<CAPTION>
NUMBER OF
OPTION
SHARES TO BE
NAME OF SELLER SOLD
- -------------- ------------
<S> <C>
PhyCor, Inc................................................. 895,000
Richard D. Wright........................................... 40,000
John K. Crawford............................................ 25,000
-------
Total........................................ 960,000
=======
</TABLE>
26
<PAGE> 27
SCHEDULE III
SCHEDULE OF SUBSIDIARIES
<TABLE>
<CAPTION>
PERCENT OWNED
DIRECTLY BY
NAME AND ADDRESS PHYCOR, INC.
---------------- -------------
<S> <C>
PhyCor of Ruston, Inc., a Louisiana corporation............. 100%
1200 South Farmerville Street
Ruston, Louisiana 71270
PhyCor of Vero Beach, Inc., a Florida corporation........... 100%
2300 Fifth Avenue
Vero Beach, Florida 32960
PhyCor of Nashville, Inc., a Tennessee corporation.......... 100%
30 Burton Hills Blvd.
Suite 500
Nashville, Tennessee 37215
PhyCor of Charlotte, Inc., a Tennessee corporation.......... 100%
1350 So. Kings Drive
Charlotte, North Carolina 28207
PhyCor of Winter Haven, Inc., a Tennessee corporation....... 100%
635 First Street North
Winter Haven, Florida 33881
PhyCor of Greeley, Inc., a Tennessee corporation............ 100%
1900 16th Street
Greeley, Colorado 80631
PhyCor of Jacksonville, Inc., a Tennessee corporation....... 100%
2005 Riverside Avenue
Jacksonville, Florida 32204
PhyCor of Pueblo, Inc., a Tennessee corporation............. 100%
2004 Lake Avenue
Pueblo, Colorado 81004
PhyCor of Conroe, Inc., a Tennessee corporation............. 100%
3205 West Davis Street
Conroe, Texas 77304
PhyCor of San Antonio, Inc., a Tennessee corporation........ 100%
4607 Medical Drive
P.O. Box 29249
San Antonia, Texas 78284-3100
PhyCor of Richmond, Inc., a Tennessee corporation........... 100%
7702 Partham Road
Richmond, Virginia 23294
PhyCor of Harlingen, Inc., a Tennessee corporation.......... 100%
2200 Haine Drive
Harlingen, Texas 78550
PhyCor of Laconia, Inc., a Tennessee corporation............ 100%
724 Main Street
Laconia, New Hampshire 03246
PhyCor of Olean, Inc., a Tennessee corporation.............. 100%
535 Main Street
Olean, New York 14760
PhyCor of Kingsport, Inc., a Tennessee corporation.......... 100%
2112 Brookside Drive, Suite 200
Kingsport, Tennessee 37660
</TABLE>
27
<PAGE> 28
<TABLE>
<CAPTION>
PERCENT OWNED
DIRECTLY BY
NAME AND ADDRESS PHYCOR, INC.
---------------- -------------
<S> <C>
PhyCor of Irving, Inc., a Tennessee corporation............. 100%
2023 West Park Drive
Irving, Texas 75061
PhyCor of Cleburne, Inc., a Tennessee corporation........... 100%
505 North Ridgeway Drive
Cleburne, Texas 76033
PhyCor of Birmingham, Inc., a Tennessee corporation......... 100%
833 Princeton Avenue, S.W.
Birmingham, Alabama 35211
PhyCor of Dixon, Inc., a Tennessee corporation.............. 100%
102 South Hennegin Avenue
Dixon, Illinois 61021
PhyCor of Kentucky, Inc., a Tennessee corporation........... 100%
30 Burton Hills Boulevard, Suite 500
Nashville, Tennessee 37215
PhyCor of Fort Smith, Inc., a Tennessee corporation......... 100%
30 Burton Hills Boulevard, Suite 500
Nashville, Tennessee 37215
PhyCor of Northeast Arkansas, Inc., a Tennessee
corporation............................................... 100%
30 Burton Hills Boulevard, Suite 500
Nashville, Tennessee 37215
PhyCor of Boulder, Inc., a Tennessee corporation............ 100%
30 Burton Hills Boulevard, Suite 500
Nashville, Tennessee 37215
PhyCor of Newnan, Inc., a Tennessee corporation............. 100%
30 Burton Hills Boulevard, Suite 500
Nashville, Tennessee 37215
PhyCor of Freeport, Inc., a Tennessee corporation........... 100%
30 Burton Hills Boulevard, Suite 500
Nashville, Tennessee 37215
PhyCor of Northern Michigan, Inc., a Tennessee
corporation............................................... 100%
30 Burton Hills Boulevard, Suite 500
Nashville, Tennessee 37215
PhyCor of Chickasha, Inc., a Tennessee corporation.......... 100%
30 Burton Hills Boulevard, Suite 500
Nashville, Tennessee 37215
PhyCor of Corsicana, Inc., a Tennessee corporation.......... 100%
30 Burton Hills Boulevard, Suite 500
Nashville, Tennessee 37215
PhyCor of Ogden, a Tennessee corporation.................... 100%
30 Burton Hills Boulevard, Suite 500
Nashville, Tennessee 37215
PhyCor of Tidewater, Inc., a Tennessee corporation.......... 100%
30 Burton Hills Boulevard, Suite 500
Nashville, Tennessee 37215
North American Medical Management Inc., a Tennessee
corporation............................................... 100%
30 Burton Hills Boulevard, Suite 500
Nashville, Tennessee 37215
</TABLE>
28
<PAGE> 29
<TABLE>
<CAPTION>
PERCENT OWNED
DIRECTLY BY
NAME AND ADDRESS PHYCOR, INC.
---------------- -------------
<S> <C>
IPA Management Associates, Inc., a Texas corporation........ 0%
800 W. Airport Freeway, Suite 1020, L.B. 6086, Irving,
Texas 75062
Managed Care Management Associates, Inc., a Texas
corporation............................................... 0%
1235 North Loop West, Suite 450, Houston, Texas 77008
Sun State Medical Group, Inc., an Arizona corporation....... 0%
13000 N. 103rd Avenue, Suite 63, Sun City, Arizona 85351
North American Medical Management -- Tennessee, Inc., a
Tennessee
corporation............................................... 0%
500 Tallan Building, Two Union Square, Chattanooga,
Tennessee 37402
North American Medical Management -- Florida, Inc., a
Florida corporation....................................... 0%
1201 Hayes Street, Suite 105, Tallahassee, Florida 32301
North American Medical Management -- Illinois, Inc., an
Illinois corporation...................................... 0%
33 N. LaSalle Street, Chicago, Illinois 60602
North American Medical Management -- North Carolina, Inc., a
North Carolina corporation................................ 0%
327 Hillsborough Street, Raleigh, North Carolina 27603
North American Medical Marketing, Inc., a California
corporation............................................... 0%
45951 Citrus View Drive, Hemet, California 92344
</TABLE>
29
<PAGE> 1
EXHIBIT 5
February 5, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: PhyCor, Inc.
Registration Statement on Form S-3
Ladies and Gentlemen:
We are acting as counsel to PhyCor, Inc., a Tennessee corporation (the
"Registrant"), in connection with the preparation of a Registration Statement
on Form S-3 (the "Registration Statement") to be filed with the Securities and
Exchange Commission registering up to 7,360,000 shares of Common Stock, no par
value per share (the "Common Stock"), of the Registrant to be sold by the
Registrant and certain selling shareholders to the underwriters represented by
Alex. Brown & Sons Incorporated, Equitable Securities Corporation, Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Piper Jaffray Inc. and Salomon
Brothers Inc (the "Underwriters"), pursuant to the Underwriting Agreement
between the Registrant and the Underwriters, a form of which was filed as
Exhibit 1 to the Registration Statement (the "Underwriting Agreement").
In connection with this opinion, we have examined and relied upon such
records, documents and other instruments as in our judgment are necessary and
appropriate in order to express the opinions hereinafter set forth and have
assumed the genuineness of all signatures, the authenticity of all documents
submitted to us as originals, and the conformity to original documents of all
documents submitted to us as certified or photostatic copies.
Based upon the foregoing, we are of the opinion that the shares of
Common Stock being sold by the Registrant will be, when issued and delivered in
the manner and on the terms described in the Registration Statement and the
Underwriting Agreement (after the Registration Statement is declared
effective), and the shares of Common Stock being sold by certain selling
shareholders are, duly authorized, validly issued, fully paid and
non-assessable.
<PAGE> 2
February 5, 1997
Page 2
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and further consent to the reference to us under the
caption "Legal Matters" in the prospectus included in the Registration
Statement.
Very truly yours,
WALLER LANSDEN DORTCH & DAVIS,
A PROFESSIONAL LIMITED LIABILITY COMPANY
<PAGE> 1
EXHIBIT 23.1
The Board of Directors and Shareholders
PhyCor, Inc.:
We consent to the use of our report included herein and to the references
to our firm under the headings "Selected Consolidated Financial Data" and
"Experts" in the prospectus.
KPMG PEAT MARWICK LLP
Nashville, Tennessee
February 5, 1997
