<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ending June 30, 1997.
[ ] Transition Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition
period from to .
------------ ---------------
COMMISSION FILE NO.: 0-19786
PHYCOR, INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
TENNESSEE 62-1344801
------------------------------ ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
30 BURTON HILLS BLVD., SUITE 400
NASHVILLE, TENNESSEE 37215
- -------------------------------- --------------
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (615) 665-9066
------------------
NOT APPLICABLE
---------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
----- -----
As of August 13, 1997, 64,255,069 shares of the Registrant's Common Stock
were outstanding.
<PAGE> 2
PHYCOR, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 1997 (unaudited) and December 31, 1996
(All dollar amounts are expressed in thousands)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
ASSETS 1997 1996
------ ---- -----
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 38,677 30,530
Accounts receivable, net 349,543 295,437
Inventories 16,447 15,185
Prepaid expenses and other assets 49,158 42,275
---------- ---------
Total current assets 453,825 383,427
Property and equipment, net 199,660 160,228
Intangible assets 738,869 559,705
Due from physician groups 31,246 15,221
---------- ---------
Total assets $1,423,600 1,118,581
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current installments of long-term debt $ 1,170 424
Current installments of obligations under capital leases 1,935 1,237
Accounts payable 25,957 24,103
Due to physician groups 96,157 75,340
Salaries and benefits payable 29,560 23,120
Other accrued expenses and liabilities 58,431 46,257
---------- ---------
Total current liabilities 213,210 170,481
Long-term debt, excluding current installments 98,250 123,112
Obligations under capital leases, excluding current installments 3,097 1,467
Purchase price payable 61,884 66,103
Deferred tax credits and other liabilities 49,414 21,797
Convertible subordinated notes payable to physician groups 73,509 83,918
Convertible subordinated debentures 200,000 200,000
---------- ---------
Total liabilities 699,364 666,878
---------- ---------
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, 64,067,000 in 1997 and 54,334,000 shares in 1996 636,232 389,712
Retained earnings 88,004 61,991
---------- ---------
Total shareholders' equity 724,236 451,703
---------- ---------
Total liabilities and shareholders' equity $1,423,600 1,118,581
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 3
PHYCOR, INC. AND SUBSIDIARIES
Consolidated Statements of Earning
Three months and six months ended June 30, 1997 and 1996
(All amounts are expressed in thousands, except for earnings per share)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------- -----------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenue $ 267,354 176,643 518,006 339,144
Operating expenses (income):
Clinic salaries, wages and benefits 100,722 67,151 195,586 129,766
Clinic supplies 42,374 27,198 81,638 51,076
Purchased medical services 7,661 4,896 14,689 9,924
Other clinic expenses 41,284 29,402 80,307 56,546
General corporate expenses 6,672 5,289 13,159 10,275
Rents and lease expense 23,717 14,861 45,960 28,039
Depreciation and amortization 14,938 9,121 28,660 17,562
--------- -------- -------- --------
Net operating expenses 237,368 157,918 459,999 303,188
--------- -------- -------- --------
Earnings from operations 29,986 18,725 58,007 35,956
Interest income (660) (1,323) (1,713) (2,037)
Interest expense 5,266 3,777 11,425 6,555
Minority interests in earnings of
consolidated partnerships 2,985 2,581 5,889 5,244
--------- -------- -------- --------
Earnings before income taxes 22,395 13,690 42,406 26,194
Income tax expense 8,689 5,271 16,393 10,085
--------- -------- -------- --------
Net earnings $ 13,706 8,419 26,013 16,109
========= ======== ======== ========
Earnings per common share $ .20 .14 .39 .27
========= ======== ======== ========
Weighted average number of shares and share
equivalents outstanding 68,191 60,669 65,932 60,377
========= ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
PHYCOR, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three months and six months ended June 30, 1997 and 1996
(All dollar amounts are expressed in thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------- -----------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 13,706 8,419 26,013 16,109
Adjustments to reconcile net earnings to net cash
used by operating activities:
Depreciation and amortization 14,938 9,121 28,660 17,562
Minority interests (14) (698) 2,214 1,394
Increase (decrease) in cash, net of effects
of clinic acquisitions, due to changes in:
Accounts receivable 1,522 (3,083) (13,894) (15,625)
Inventories (876) (603) (758) (945)
Prepaid expenses and other assets (6,108) (855) (2,783) (6,105)
Accounts payable 2,818 (984) (2,667) (4,495)
Due to physician groups (2,409) (476) 5,277 2,606
Other accrued expenses and liabilities (1,221) 1,808 (2,496) 11,977
-------- ------- -------- --------
Net adjustments 8,650 4,230 13,553 6,369
-------- ------- -------- --------
Net cash provided by operating activities 22,356 12,649 39,566 22,478
-------- ------- -------- --------
Cash flows from investing activities:
Payments for acquisitions, net (31,414) (42,259) (182,373) (121,690)
Purchase of property and equipment (14,349) (10,302) (32,271) (23,463)
Payments to acquire other assets (373) (1,158) (2,171) (855)
-------- ------- -------- --------
Net cash used by investment activities (46,136) (53,719) (216,815) (146,008)
-------- ------- -------- --------
Cash flows from financing activities:
Proceeds from long-term borrowings 27,000 8,000 182,000 50,000
Repayment of long-term borrowings (8,127) (283) (218,225) (104,364)
Repayment of obligations under capital leases (203) (237) (2,175) (820)
Net proceeds from issuance of stock and warrants 11,231 1,985 223,796 3,086
Net proceeds from issuance of convertible debentures -- (63) -- 194,395
-------- ------- -------- --------
Net cash provided by financing activities 29,901 9,402 185,396 142,297
-------- ------- -------- --------
Net increase (decrease) in cash and cash equivalents 6,121 (31,668) 8,147 18,767
Cash and cash equivalents - beginning of period 32,556 69,262 30,530 18,827
-------- ------- -------- --------
Cash and cash equivalents - end of period $ 38,677 37,594 38,677 37,594
======== ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
PHYCOR, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Three months and six months ended June 30, 1997 and 1996
(All dollar amounts are expressed in thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------- -----------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
SUPPLEMENTAL SCHEDULE OF INVESTING ACTIVITIES:
Effects of acquisitions:
Assets acquired, net of cash $ 22,168 64,524 279,736 185,944
Liabilities paid (assumed), net of deferred purchase
price payments 9,246 (16,475) (80,513) (55,600)
Issuance of convertible subordinated notes payable -- (5,365) (8,672) (8,229)
Issuance of common stock and warrants -- (425) (8,178) (425)
-------- ------- -------- --------
Payments for acquisitions $ 31,414 42,259 182,373 121,690
======== ======= ======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations incurred to acquire
equipment $ 146 -- 310 186
======== ======= ======== ========
Conversion of subordinated notes payable
to common stock $ 3,888 2,985 11,558 6,143
======== ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
PHYCOR, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
Three months and six months ended June 30, 1997 and 1996
(1) BASIS OF PRESENTATION
---------------------
The accompanying unaudited consolidated 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 consolidated 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 unaudited consolidated financial statements, footnote disclosures
and other information should be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31,
1996.
(2) ACQUISITIONS
------------
(A) MULTI-SPECIALTY MEDICAL CLINICS
-------------------------------
Through June 30, 1997 and during 1996, the Company, through
wholly-owned subsidiaries, acquired certain operating assets of the
following clinics:
<TABLE>
<CAPTION>
CLINIC EFFECTIVE DATE LOCATION
------ ------------- --------
<S> <C> <C>
1997:
Vancouver Clinic January 1, 1997 Vancouver, Washington
First Physicians Medical Group February 1, 1997 Palm Springs, California
St. Petersburg-Suncoast Medical Group February 28, 1997 St. Petersburg, Florida
Greater Chesapeake Medical Group May 1, 1997 Annapolis, Maryland
Welborn Clinic (a) June 1, 1997 Evansville, Indiana
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
Hattiesburg Clinic October 1, 1996 Hattiesburg, Mississippi
Straub Clinic & Hospital (b) October 1, 1996 Honolulu, Hawaii
Toledo Clinic November 1, 1996 Toledo, Ohio
Lewis-Gale Clinic November 1, 1996 Roanoke, Virginia
</TABLE>
(a) Welborn Clinic entered into an interim management agreement
effective June 1, 1997. Effective August 1, 1997, the Company
completed its acquisition of certain operating assets and entered
into a long-term service agreement with the affiliated physician
group.
(b) Straub Clinic & Hospital, Incorporated (Straub) was operated
under an administrative services agreement effective October 1,
1996. The Company completed its merger and entered into a
long-term service agreement with Straub effective January 17, 1997.
(Continued)
6
<PAGE> 7
PHYCOR, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
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.
(B) NORTH AMERICAN MEDICAL MANAGEMENT, INC. (NORTH AMERICAN)
-------------------------------------------------------
Effective January 1, 1995, the Company completed its merger with
North American, an operator and manager of independent practice
associations (IPAs). The Company made additional payments for the
North American acquisition pursuant to an earn-out formula during
1996 and 1997 totaling $34.0 million. A final payment of up to
$36.0 million may be made pursuant to the earnout formula in 1998.
Of the future payments to be made, a portion may be payable in
shares of the Company's common stock.
(C) PRO FORMA INFORMATION AND SUBSEQUENT EVENTS
-------------------------------------------
The unaudited consolidated pro forma results of all current,
continuing operations assuming 1997 acquisitions through June 30,
1997 and all 1996 acquisitions, had been consummated on January 1,
1996 are as follows (in thousands, except for earnings per share):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenue $ 267,797 240,181 526,600 475,799
Earnings before income taxes 22,410 17,303 42,723 34,117
Net earnings 13,715 10,641 26,207 20,982
Earnings per common share .20 .17 .40 .34
Weighted average number of shares and share
equivalents outstanding 68,191 61,271 66,273 61,035
</TABLE>
Since June 30, 1997, the Company has acquired the assets of a
50-physician multi-specialty clinic based in Ft. Walton Beach,
Florida. In addition, the Company acquired certain assets of a
93-physician multi-specialty clinic based in Evansville, Indiana,
which entered into an interim management agreement effective
June 1, 1997. The Company entered into long-term service
agreements with each of the affiliated physician groups.
(3) NET REVENUE
-----------
Clinic service agreement revenue is equal to the net revenue of the
clinics, less amounts retained by physician groups. Net clinic revenue is
recorded by the physician groups at established rates reduced by
provisions 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 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 recognized as contractual adjustments in the
year final settlements are determined.
(Continued)
7
<PAGE> 8
PHYCOR, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
IPA management revenue is equal to the difference between the amount of
capitation and risk pool payments due to the IPAs managed by the Company
less amounts retained by the IPAs.
The following represent amounts included in the determination of net
revenue (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------- -----------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Gross physician group revenue $686,126 450,526 1,329,283 855,636
Less:
Provisions for doubtful accounts
and contractual adjustments 260,369 162,791 503,202 305,139
-------- ------- -------- --------
Net physician group revenue 425,757 287,735 826,081 550,497
IPA revenue 98,637 59,966 185,627 112,852
-------- ------- -------- --------
Net physician group and IPA revenue 524,394 347,701 1,011,708 663,349
Less amounts retained by physician groups and IPAs:
Physician groups 157,809 110,832 305,584 210,754
Clinic technical employee compensation 17,437 11,557 34,732 22,193
IPAs 81,794 48,669 153,386 91,258
-------- ------- -------- --------
Net revenue $267,354 176,643 518,006 339,144
======== ======= ======== ========
</TABLE>
(4) CAPITALIZATION
--------------
In the first quarter of 1997, the Company completed a public offering of
7,295,000 shares of its common stock at a price of $30.00 per share. Net
proceeds from the offering of approximately $210.0 million were used to
repay bank debt and accrued interest.
8
<PAGE> 9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
PhyCor is a physician practice management company that operates
multi-specialty medical clinics and independent practice associations (IPAs).
The Company currently operates 50 clinics with approximately 3,420 physicians in
28 states and manages IPAs with over 16,800 physicians in 27 markets. The
Company's affiliated physicians provide capitated medical services to
approximately 1,070,000 patients, including approximately 160,000
Medicare-eligible patients.
The Company's strategy is to position its affiliated primary care
anchored multi-specialty clinics and IPAs as the physician component of
competitive networks that are developing as reforms occur to the health care
system. PhyCor believes physician organizations create the value in these
networks as the decisions of physicians drive the cost and quality of health
care.
Most of the Company's revenue in 1997 and 1996 was earned under
clinic 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 groups to recruit additional physicians, merge other physicians
practicing in the area into the affiliated physician groups, negotiate contracts
with managed care organizations and provide 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 include
affiliated clinic physicians to enhance the clinics' attractiveness as providers
to managed care organizations.
During the second quarter, the Company entered into an agreement with
Florida Independent Physician Association (FIPA) whereby the Company assumed
management responsibilities for FIPA under an agreement with Florida Physician
Services, the IPA management company associated with FIPA. FIPA is a network of
12 regionally based, physician-directed IPAs covering the state of Florida,
currently contracting with approximately 6,000 physicians who deliver services
to approximately 61,000 patients
9
<PAGE> 10
under capitated contracts.
On July 17, 1997, PhyCor announced that it had signed a letter of
intent with New York and Presbyterian Hospitals Care Network, Inc. to create and
operate a regional managed care contracting network, which will include
hospitals and IPAs in New York City, northern New Jersey and southern
Connecticut.
During the first six months of 1997, PhyCor affiliated with five
multi-specialty clinics and numerous smaller medical practices and completed its
previously announced merger with Straub Clinic & Hospital, Incorporated located
in Honolulu, Hawaii adding an aggregate of $259.6 million in assets. The
principal assets acquired were accounts receivable, property and equipment and
service agreement costs, an intangible asset. The consideration for the
acquisitions consisted of approximately 63% cash, 31% liabilities assumed and
6% stock and convertible notes. The cash portion of the purchase price was
funded by a combination of operating cash flow and borrowings under the
Company's bank credit facility. Property and equipment acquired consists mostly
of clinic and hospital operating equipment, although the Company purchased
certain land and buildings. Service agreement costs are amortized over the life
of the related service agreement, with recoverability assessed periodically.
Since June 30, 1997, the Company has acquired the assets of a
50-physician multi-specialty clinic based in Fort Walton Beach, Florida. In
addition, the Company has acquired the assets of a 93-physician multi-specialty
clinic based in Evansville, Indiana, which entered into an interim
management agreement effective June 1, 1997. The Company entered into long-term
service agreements with these affiliated physician groups.
10
<PAGE> 11
RESULTS OF OPERATIONS
The following table shows the percentage of net revenue represented by
various expense and other income items reflected in the Company's Consolidated
Statements of Earnings.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ---------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenue................................. 100% 100% 100% 100%
Operating expenses
Clinic salaries, wages and benefits...... 37.7 38.0 37.8 38.3
Clinic supplies.......................... 15.8 15.4 15.8 15.1
Purchased medical services............... 2.9 2.8 2.8 2.9
Other clinic expenses.................... 15.4 16.6 15.5 16.7
General corporate expenses............... 2.5 3.0 2.5 3.0
Rents and lease expense.................. 8.9 8.4 8.9 8.3
Depreciation and amortization............ 5.6 5.1 5.5 5.2
---- ---- ---- ----
Net operating expenses................ 88.8 89.3 88.8 89.5
---- ---- ---- ----
Earnings from operations.............. 11.2 10.7 11.2 10.5
Interest income.......................... (0.3) (0.7) (0.3) (0.6)
Interest Expense......................... 2.0 2.1 2.2 1.9
Minority interest in earnings of
consolidated partnerships............ 1.1 1.5 1.1 1.5
---- ---- ---- ----
Earnings before income taxes.......... 8.4 7.8 8.2 7.7
Income tax expense.......................... 3.3 3.0 3.2 3.0
---- ---- ---- ----
Net earnings.......................... 5.1% 4.8% 5.0% 4.7%
==== ==== ==== ====
</TABLE>
1997 Compared to 1996
Net revenue increased from $176.6 million for the second quarter of
1996 to $267.4 million for the second quarter of 1997, an increase of $90.8
million, or 51.4%, and from $339.1 million to $518.0 million for the first six
months of 1996 compared to 1997, an increase of 52.8%. On a base of 31 clinics
and 13 IPA markets, net revenue increased by 13.1% for the quarter and six
months ended June 30, 1997, compared with the same periods in 1996. Same market
growth resulted from the addition of new physicians, the expansion of ancillary
services and increases in patient volume and fees.
During the second quarter and the first six months of 1997, most
categories of operating expenses were relatively stable as a percentage of net
revenue when compared to the same periods in 1996, despite the large increase in
the dollar amounts resulting from acquisitions and clinic growth. The decrease
in clinic salaries, wages and benefits and
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<PAGE> 12
other clinic expenses 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. The increase in clinic supplies and rents and lease
expense as a percentage of net revenue resulted from the acquisition of clinics
with higher levels of these expenses compared to the existing base of clinics.
The addition of pharmacies at certain clinics also resulted in increased clinic
supplies expense as a percentage of net revenue. 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 clinic 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 38.8% in 1997.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, the Company had $240.6 million in working capital,
up from $212.9 million as of December 31, 1996. Also, the Company generated
$22.4 million of cash flow from operations for the second quarter of 1997
compared to $12.6 million for the second quarter of 1996 and $39.6 million for
the first six months of 1997 compared to $22.5 million for the same period in
1996. At June 30, 1997, net accounts receivable of $349.5 million amounted to
72 days of net clinic revenue compared to $295.4 million and 73 days at the end
of 1996. The decrease is primarily attributable to seasonal factors affecting
payments from some payors.
In the first quarter of 1997, the Company completed a public offering of
7,295,000 shares of its common stock at a price of $30.00 per share. Net
proceeds from the offering of approximately $210.0 million were used to repay
bank debt and accrued interest. As a result of the issuance of common stock
during the first quarter of 1997, debt was 37.6% of total capitalization at June
30, 1997, compared to 51.2% at the end of 1996.
In the first six months of 1997, $11.6 million of convertible
subordinated notes issued in connection with physician group asset acquisitions
were converted into common stock. These conversions, the issuance of common
stock, option exercises and net earnings for the first six months of 1997
resulted in an increase of $272.5 million in shareholders' equity compared to
December 31, 1996.
Capital expenditures during the first six months of 1997 totaled $32.3
million. The Company is responsible for making specified levels of capital
expenditures at its affiliated clinics under the terms of its service
agreements. The Company expects to make approximately $28 million in capital
expenditures during the remainder of 1997.
12
<PAGE> 13
Effective January 1, 1995, the Company completed its acquisition of
North American Medical Management, Inc. (North American). The Company paid
$20.0 million at closing and has made additional payments pursuant to an
earn-out formula during 1996 and 1997 totaling $34.0 million. A final payment
of up to $36.0 million may be made pursuant to the earnout formula in 1998. Of
the future payments to be made, a portion may be payable in shares of the
Company's common stock.
In addition, deferred acquisition payments are payable to physician
groups in the event such physician groups attain predetermined financial
targets during established periods of time following the acquisitions. If each
group satisfied their applicable financial targets for the periods covered, the
Company would be required to pay an aggregate of approximately $73.8 million of
additional consideration over the next five years, of which a maximum of $3.1
million would be payable during 1997.
The Company may exercise its option to acquire the outstanding Class B
Common Stock of PhyCor Management Corporation before the end of 1997. In
accordance with the terms of the options, the aggregate purchase price for
these shares at that time would be approximately $18 to $19 million.
PhyCor has been subject of an audit by the IRS since 1991. 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 is vigorously contesting
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 1997, the Company completed modifications to its bank credit
facility which included the revision of certain terms and conditions and the
addition of seven participating financial institutions. The Company's bank
credit facility provides for a five-year, $250.0 million revolving line of
credit for use by the Company prior to July 2002 and a $150.0 million 364-day
facility for acquisitions, working capital, capital expenditures and general
corporate purposes. The total drawn cost under the facility is either .275% to
.75% above the applicable eurodollar rate or the agent's base rate plus .10% to
.225% per annum.
The Company's bank credit facility contains covenants which, among
other things, require the Company to maintain certain financial ratios and
impose certain limitations or
13
<PAGE> 14
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, (iv) investments and (v) acquisitions.
The Company is required to obtain bank consent for an acquisition with an
aggregate purchase price of $75.0 million or more. The Company was in compliance
with such covenants at June 30, 1997.
At June 30, 1997, the Company had cash and cash equivalents of
approximately $38.7 million, and as of August 13, 1997, $288.7 million available
under its bank credit facility. The Company believes that the combination of
funds available under the Company's bank credit facility, together with cash
reserves and cash flow from operations, should be sufficient to meet the
Company's current planned acquisition, expansion, capital expenditures and
working capital needs through 1997. In addition, in order to provide the funds
necessary for the continued pursuit of the Company's long-term expansion
strategy, the Company expects to continue to incur, from time to time,
additional short-term and long-term indebtedness and to issue equity and debt
securities, the availability and terms of which will depend upon market and
other conditions. There can be no assurance that such additional financing will
be available on terms acceptable to the Company.
This discussion contains forward looking statements, certain of which
are accompanied by important cautionary factors that could cause different
results than expected by the Company. In addition to those factors,
shareholder, regulatory and third party consents with respect to acquisitions,
health care regulatory changes and other factors outside the Company's control
could also cause future results to differ from expectations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
No disclosure required.
14
<PAGE> 15
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The annual meeting of shareholders of the Company was held on
Wednesday, May 21, 1997. At this meeting, the following matters were voted upon
by the Company's shareholders:
(A) AMENDMENT TO THE COMPANY'S AMENDED 1988 INCENTIVE STOCK PLAN
The Company's shareholders approved the amendment to the Company's
Amended 1988 Incentive Stock Plan to increase from 13,500,000 to 17,000,000 the
number of shares of Common Stock authorized thereunder.
<TABLE>
<CAPTION>
VOTES CAST IN FAVOR VOTES CAST AGAINST ABSTENTIONS
------------------- ------------------ -----------
<S> <C> <C>
26,849,586 20,419,110 82,921
</TABLE>
(B) ELECTION OF CLASS III DIRECTORS
Ronald B. Ashworth, Joseph C. Hutts and Derril W. Reeves were
elected to serve as Class III directors of the Company. The vote was as
follows:
<TABLE>
<CAPTION>
VOTES CAST VOTES CAST
NAME IN FAVOR AGAINST OR WITHHELD
- ---- ---------- -------------------
<S> <C> <C>
Ronald B. Ashworth 48,392,828 1,360,710
Joseph C. Hutts 48,375,664 1,377,874
Derril W. Reeves 48,321,354 1,432,184
</TABLE>
(C) SELECTION OF AUDITORS
The shareholders of the Company ratified the appointment of KPMG
Peat Marwick LLP as the Company's independent auditors for the fiscal year ended
December 31, 1997, by the following vote:
<TABLE>
<CAPTION>
VOTES CAST IN FAVOR VOTES CAST AGAINST ABSTENTIONS
------------------- ------------------ -----------
<S> <C> <C>
49,658,802 55,084 39,652
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------ -----------------------
<S> <C> <C>
3.1 -- Restated Charter of Registrant(1)
3.2 -- Amendment to Restated Charter of the Registrant (2)
3.3 -- Amendment to Restated Charter of the Registrant (3)
3.4 -- Amended Bylaws of the Registrant (1)
4.1 -- Specimen of Common Stock Certificate (4)
4.2 -- Shareholder Rights Agreement, dated February 18, 1994, between
the Registrant and First Union National Bank of North Carolina (5)
11 -- Statement re Computation of Per Share Earnings
27 -- Financial Data Schedule (for SEC use only)
</TABLE>
-------------
(1) Incorporated by reference to Exhibits 3.2 filed with the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1994,
Commission No. 0-19786.
(2) Incorporated by reference to Exhibits 4.2 filed with the Registrant's
Registration Statement on Form S-3 Registration No. 33-93018.
(3) Incorporated by reference to Exhibits 4.3 filed with the Registrant's
Registration Statement on Form S-3 Registration No. 33-98528.
(4) Incorporated by reference to Exhibits 4.2 filed with the Registrant's
Registration Statement on Form S-1 Registration No. 33-44123.
(5) Incorporated by reference to exhibits filed with the Registrant's Annual
Report on Form 8-K dated February 18, 1994, Commission No. 0-19786.
(B) REPORTS ON FORM 8-K.
The Company did not file any Current Reports on Form 8-K during the
quarter ended June 30, 1997.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
PHYCOR, INC.
By: /s/ John K. Crawford
------------------------
John K. Crawford
Chief Financial Officer
Date: August 13, 1997
16
<PAGE> 1
EXHIBIT 11
PHYCOR, INC. AND SUBSIDIARIES
Statement regarding computation of per share earnings
Three months and six months ended June 30, 1997 and 1996
(All amounts are expressed in thousands, except for earnings per share)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------- -----------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Earnings per common share:
Net income $ 13,706 8,419 26,013 16,109
========== ====== ====== ======
Earnings per common share $ .20 .14 .39 .27
========== ====== ====== ======
Weighted average common
shares outstanding 68,191 60,669 65,932 60,377
========== ====== ====== ======
Earnings per common share, assuming full dilution:
Net income $ 13,706 8,419 26,013 16,109
========== ====== ====== ======
Earnings per common share $ .20 .14 .39 .27
========== ====== ====== ======
Weighted average common
shares outstanding 74,803 67,121 72,183 65,752
========== ====== ====== ======
</TABLE>
Note: The convertible debentures were not included in the calculation of
the fully diluted earnings per share since the effect of inclusion
would be antidilutive.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 38,677
<SECURITIES> 0
<RECEIVABLES> 349,543
<ALLOWANCES> 0
<INVENTORY> 16,447
<CURRENT-ASSETS> 453,825
<PP&E> 273,249
<DEPRECIATION> 73,589
<TOTAL-ASSETS> 1,423,600
<CURRENT-LIABILITIES> 213,210
<BONDS> 298,250
0
0
<COMMON> 636,232
<OTHER-SE> 88,004
<TOTAL-LIABILITY-AND-EQUITY> 1,423,600
<SALES> 0
<TOTAL-REVENUES> 518,006
<CGS> 0
<TOTAL-COSTS> 459,999
<OTHER-EXPENSES> 4,176
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,425
<INCOME-PRETAX> 42,406
<INCOME-TAX> 16,393
<INCOME-CONTINUING> 26,013
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,013
<EPS-PRIMARY> .39
<EPS-DILUTED> .39
</TABLE>
