<PAGE> 1
Filed Pursuant to Rule 424(b)(4)
Registration No. 333-21151
6,400,000 SHARES
PHYCOR (R) LOGO
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 26,
1997, the last reported sale price for the Company's Common Stock was $31.00 per
share.
------------------
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>
====================================================================================================================
PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO
PUBLIC COMMISSIONS COMPANY(1)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share............................. $30.00 $1.15 $28.85
- --------------------------------------------------------------------------------------------------------------------
Total(2).............................. $192,000,000 $7,360,000 $184,640,000
====================================================================================================================
</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 $220,800,000, $8,464,000, $210,460,750 and $1,875,250, 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 March 4,
1997.
ALEX. BROWN & SONS
INCORPORATED
EQUITABLE SECURITIES CORPORATION
MERRILL LYNCH & CO.
PIPER JAFFRAY INC.
SALOMON BROTHERS INC
THE DATE OF THIS PROSPECTUS IS FEBRUARY 27, 1997.
<PAGE> 2
PHYCOR(R) [LOGO]
OPERATING MARKETS
(MAP)
[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> 3
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 46 clinics with approximately 3,150 physicians in 27 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 five
multi-specialty clinics with an aggregate of 374 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 two additional multi-specialty physician
clinics with an aggregate of approximately 95 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> 4
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...................... 61,942,079 shares(1)
Use of proceeds..................... To repay certain indebtedness
Nasdaq National Market symbol....... PHYC
- ---------------
(1) Excludes outstanding options to purchase 10,220,909 shares of Common Stock,
subordinated debentures convertible into 5,172,414 shares of Common Stock,
subordinated notes convertible into 3,280,346 shares of Common Stock,
warrants exercisable for 1,131,212 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> 5
SUMMARY CONSOLIDATED FINANCIAL AND STATISTICAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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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)......................................... 386,480 634,890 451,050
Total shareholders' equity................................ 431,709 439,376 623,216
</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> 6
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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.
(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> 7
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> 8
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> 9
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.
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<PAGE> 10
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> 11
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby will be approximately $183.8 million ($209.7 million if the
Underwriters' over-allotment option is exercised in full). The Company intends
to utilize all of the net proceeds to repay a portion of the Company's
outstanding indebtedness under the Company's bank credit facility which
currently bears interest at the weighted average rate of 6.18% 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 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> 12
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 five asset acquisitions completed after September 30,
1996 and two 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 $ 10,430
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).................................. 380,916 388,583 572,423
Retained earnings.................................. 50,793 50,793 50,793
-------- ---------- ----------
Total shareholders' equity...................... 431,709 439,376 623,216
-------- ---------- ----------
Total capitalization....................... $818,189 $1,074,266 $1,074,266
======== ========== ==========
</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> 13
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.......... -- -- -- 0.31 -- -- --
======= ======== ======== ======== ======== ======== ========
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> 14
<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> 15
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, Palm Springs, California and Vancouver, Washington. These
clinics, in the aggregate, represent an additional 561 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> 16
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 five
multi-specialty clinics with an aggregate of 374 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 two additional
multi-specialty physician clinics with an aggregate of approximately 95
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> 17
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> 18
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> 19
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> 20
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 two
other clinic transactions with which the Company has reached agreements in
principle is expected to be approximately $124.2 million of which approximately
$57.4 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 February 26, 1997, $218.0 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 December 31, 1996, the Company had cash and cash equivalents of
approximately $30.5 million and, as of February 26, 1997, has $81.2 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> 21
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 46 clinics with approximately 3,150
physicians in 27 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> 22
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> 23
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
The Vancouver Clinic........ Vancouver, WA 1936 66 47 12 Jan. 1997 4
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> 24
In addition to the approximately 3,150 physicians affiliated with the
Company, the PhyCor-affiliated physician groups employ approximately 445
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> 25
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> 26
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> 27
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, a real estate
investment trust, and Quorum Health Group, Inc., an owner and operator of
hospitals.
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 serves on the board of directors of HEALTHSOUTH Corporation,
a leading provider of rehabilitation and outpatient surgery services, and
UROHEALTH Systems, Inc., a designer, manufacturer and marketer of urological
medical products.
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> 28
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).......... 20,700 * * -- *
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)............... 3,755,562 6.9 6.1 -- 6.1
Denver Investment Advisors,
Inc.(18)..................... 2,816,748 5.1 4.6 -- 4.5
All directors and officers as a
group (11 persons)(19)....... 2,033,364 3.6 3.3 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> 29
(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 Marsh &
McLennan Companies. 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 3,755,562 shares. Pilgrim's address is 11255
Drummers Lane, Suite 300, Wayne, Pennsylvania 19087. Information is as of
December 31, 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 997,599 shares. Denver's address is
1225 17th Street, 26th Floor, Denver, Colorado 80202. Information is as of
December 31, 1996 and is derived from Securities and Exchange Commission
filings.
(19) Includes options to purchase 995,869 shares of Common Stock and 89,678
shares of restricted Common Stock.
29
<PAGE> 30
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............................. 1,076,000
Equitable Securities Corporation............................ 1,076,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................... 1,076,000
Piper Jaffray Inc........................................... 1,076,000
Salomon Brothers Inc........................................ 1,076,000
Credit Lyonnais Securities (USA), Inc....................... 130,000
Hambrecht & Quist LLC....................................... 130,000
Montgomery Securities....................................... 130,000
Sanford C. Bernstein & Co., Inc............................. 70,000
J.C. Bradford & Co.......................................... 70,000
Citicorp Securities, Inc.................................... 70,000
Cowen & Company............................................. 70,000
Everen Securities, Inc...................................... 70,000
GS2 Securities, Inc......................................... 70,000
McDonald & Company Securities, Inc.......................... 70,000
Rauscher Pierce Refsnes, Inc................................ 70,000
Southcoast Capital Corporation.............................. 70,000
---------
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 $0.67 per
share. The Underwriters may allow, and such dealers may reallow, a concession
not in excess of $0.10 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.
30
<PAGE> 31
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 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.
The Company intends to utilize all of the net proceeds from the sale of the
shares of Common Stock offered hereby to repay a portion of the outstanding
indebtedness under the Company's bank credit facility. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." Two of the lenders under the
bank credit facility are Citibank, N.A. and Credit Lyonnais. Citibank, N.A. and
Credit Lyonnais are expected to receive in the aggregate in excess of 10% of the
net proceeds from the sale of the shares of Common Stock offered hereby as
repayment of outstanding indebtedness owed to them under the bank credit
facility. Citibank, N.A. is a related party of Citicorp Securities, Inc., a
member of the National Association of Securities Dealers, Inc. ("NASD") and an
underwriter of this offering. Credit Lyonnais is a related party of Credit
Lyonnais Securities (USA), Inc., a member of the NASD and an underwriter of this
offering. Accordingly, this offering is being made pursuant to the provisions of
Rule 2710(c)(8) of the NASD Conduct Rules.
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> 32
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,
as amended by the Company's Current Report on Form 8-K/A, dated
February 26, 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> 33
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 Income......................... 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 Income -- Nine Months Ended September 30,
1996................................................... F-29
Statement of Income -- Year Ended December 31, 1995....... F-30
Notes to Pro Forma Consolidated Financial Information..... F-31
</TABLE>
F-1
<PAGE> 34
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> 35
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> 36
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> 37
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> 38
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> 39
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> 40
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> 41
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> 42
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
-------- -------- ----------
Net physician group and IPA revenue.................... 264,721 406,036 856,355
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> 43
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> 44
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> 45
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> 46
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> 47
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> 48
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> 49
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> 50
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> 51
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> 52
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> 53
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> 54
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> 55
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> 56
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> 57
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> 58
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
-------- -------- -------- ----------
Net physician group and IPA revenue....... 220,271 367,485 593,468 1,030,834
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, First Physicians Medical Group, a 21-
physician multi-specialty clinic based in Palm Springs, California, and The
Vancouver Clinic, a 66-physician multi-specialty clinic based in Vancouver,
Washington. 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> 59
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 two clinics in 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> 60
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> 61
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 $ 157,698(B) $695,416 $ -- $ 80,918(B) $734,288
(42,046)(F)
Net patient service
revenue............ -- 397,868 (397,868)(A) -- 118,838 (118,838)(A) --
-------- -------- --------- -------- -------- --------- --------
535,562 400,024 (240,170) 695,416 118,838 (79,966) 734,288
Direct clinic
expenses............. 389,984 214,564 (101,203) 503,345 68,031 (31,349)(F) 540,027
Physician compensation
and benefits......... -- 133,675 (133,675)(A) -- 44,788 (44,788)(A) --
General corporate
expenses............. 15,307 -- -- 15,307 -- -- 15,307
Rents and leases....... 44,768 21,897 (6,186) 60,479 1,440 (3,086)(F) 58,833
Interest, net.......... 7,969 5,965 2,642(D) 16,576 1,928 36(D) 17,063
(1,477)(F)
Depreciation and
amortization......... 28,158 5,993 3,361(E) 37,512 2,525 1,485(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 17,930 (5,109) 53,768 126 1,305 55,199
Income tax expense..... 15,765 (6) 4,942(C) 20,701 -- 551(C) 21,252
-------- -------- --------- -------- -------- --------- --------
Net earnings....... $ 25,182 $ 17,936 $ (10,051) $ 33,067 $ 126 $ 754 $ 33,947
======== ======== ========= ======== ======== ========= ========
Earnings per share..... $ .42 $ .54 $ .54
======== ======== ========
Weighted average number
of shares
outstanding.......... 60,555 61,763 62,992
======== ======== ========
</TABLE>
See accompanying notes to pro forma consolidated financial information
F-29
<PAGE> 62
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 $ 338,526(B) $782,600 $ -- $ 96,454(B) $874,541
(4,513)(F)
Net patient service
revenue............ -- 733,809 (733,809)(A) -- 143,250 (143,250)(A) --
-------- -------- --------- -------- -------- --------- --------
441,596 736,287 (395,283) 782,600 143,250 (51,309) 874,541
Direct clinic
expenses............. 323,076 381,067 (131,115) 573,028 79,967 (3,430)(F) 649,565
Physicians'
compensation and
benefits............. -- 282,005 (282,005)(A) -- 60,082 (60,082)(A) --
General corporate
expenses............. 14,191 -- -- 14,191 -- -- 14,191
Rents and leases....... 36,740 39,848 (10,057) 66,531 1,920 (86)(F) 68,365
Interest, net.......... 3,414 10,126 4,472(D) 18,012 3,006 (384)(D) 20,531
(103)(F)
Depreciation and
amortization......... 21,445 11,695 6,688(E) 39,828 3,234 1,980(E) 44,712
(330)(F)
Minority interest in
earnings of
consolidated
partnerships......... 6,933 -- -- 6,933 -- -- 6,933
-------- -------- --------- -------- -------- --------- --------
Earnings before
income taxes..... 35,797 11,546 16,734 64,077 (4,959) 11,126 70,244
Income tax expense..... 13,923 (2,566) 13,594 24,951 -- 2,406 27,357
-------- -------- --------- -------- -------- --------- --------
Net earnings....... $ 21,874 $ 14,112 $ 3,140 $ 39,126 $ (4,959) $ 8,720 $ 42,887
======== ======== ========= ======== ======== ========= ========
Earnings per share..... $ .41 $ .69 $ .74
======== ======== ========
Weighted average number
of shares
outstanding.......... 53,510 56,501 57,730
======== ======== ========
</TABLE>
See accompanying notes to pro forma consolidated financial information.
F-30
<PAGE> 63
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
Physicians Medical Group and The Vancouver Clinic. In addition, PhyCor expects
to acquire the assets of Guthrie Clinic Ltd. and two clinics in 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 income reflect 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 income 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> 64
======================================================
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) LOGO
COMMON STOCK
-------------------
PROSPECTUS
-------------------
ALEX. BROWN & SONS
INCORPORATED
EQUITABLE SECURITIES CORPORATION
MERRILL LYNCH & CO.
PIPER JAFFRAY INC.
SALOMON BROTHERS INC
February 27, 1997
======================================================
