<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1998.
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition period from _____________ to _____________.
COMMISSION FILE NUMBER: 0-19786
PHYCOR, INC.
(Exact Name of Registrant as Specified in Its Charter)
TENNESSEE 62-1344801
------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
30 BURTON HILLS BLVD., SUITE 400
NASHVILLE, TENNESSEE 37215
--------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (615) 665-9066
----------------
NOT APPLICABLE
-----------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
----- -----
As of November 13, 1998, 76,154,048 shares of the Registrant's Common
Stock were outstanding.
<PAGE> 2
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
PHYCOR, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 1998 (unaudited) and December 31, 1997
(All dollar amounts are expressed in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1998 1997
- - ------ ---------- ---------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 42,766 $ 38,160
Accounts receivable, net 430,004 391,668
Inventories 20,521 18,578
Prepaid expenses and other current assets 63,203 48,158
---------- ----------
Total current assets 556,494 496,564
Property and equipment, net 267,982 235,685
Intangible assets, net 1,027,112 807,726
Other assets 38,812 22,801
---------- ----------
Total assets $1,890,400 $1,562,776
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- - ------------------------------------
Current liabilities:
Current installments of long-term debt $ 4,984 $ 1,144
Current installments of obligations under capital leases 5,875 3,564
Accounts payable 47,661 34,622
Due to physician groups 53,814 50,676
Purchase price payable 58,862 114,971
Salaries and benefits payable 39,321 37,141
Other accrued expenses and liabilities 101,330 51,145
---------- ----------
Total current liabilities 311,847 293,263
Long-term debt, excluding current installments 361,501 210,893
Obligations under capital leases, excluding current installments 6,591 5,093
Purchase price payable 17,596 23,545
Deferred tax credits and other liabilities 48,750 57,918
Convertible subordinated notes payable to physician groups 56,225 61,576
Convertible subordinated debentures 200,000 200,000
---------- ----------
Total liabilities 1,002,510 852,288
---------- ----------
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, 77,671,000 in 1998 and 63,273,000 shares in 1997 865,718 645,288
Retained earnings 22,172 65,200
---------- ----------
Total shareholders' equity 887,890 710,488
---------- ----------
Total liabilities and shareholders' equity $1,890,400 $1,562,776
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 3
PHYCOR, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Three months and nine months ended
September 30, 1998 and 1997 (All amounts are
expressed in thousands, except for earnings per share)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1998 1997 1998 1997
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Net revenue $ 408,487 $284,291 $1,102,632 $802,297
Operating expenses:
Cost of provider services 52,669 - 78,693 -
Salaries, wages and benefits 133,616 106,875 381,307 302,461
Supplies 58,138 46,547 167,787 128,185
Purchased medical services 9,876 7,788 28,449 22,477
Other expenses 57,129 43,050 159,688 123,357
General corporate expenses 7,614 6,609 22,755 19,768
Rents and lease expense 33,215 25,416 94,928 71,376
Depreciation and amortization 24,453 15,958 65,463 44,618
Provision for asset revaluation
and clinic restructuring 92,500 - 114,500 -
Merger expenses - - 14,196 -
--------- -------- ---------- --------
Net operating expenses 469,210 252,243 1,127,766 712,242
--------- -------- ---------- --------
Earnings (loss) from operations (60,723) 32,048 (25,134) 90,055
Interest income (791) (744) (2,283) (2,457)
Interest expense 9,649 5,366 26,452 16,791
--------- -------- ---------- --------
Earnings (loss) before income taxes and
minority interest (69,581) 27,426 (49,303) 75,721
Income tax (benefit) expense (22,176) 9,536 (16,438) 25,929
Minority interest in earnings of
consolidated partnerships 3,438 2,850 10,163 8,739
--------- -------- ---------- --------
Net earnings (loss) $ (50,843) $ 15,040 $ (43,028) $ 41,053
========= ======== ========== ========
Earnings (loss) per share:
Basic $ (.66) $ .23 $ (.61) $ .66
Diluted (.66) .22 (.61) .61
========= ======== ========== ========
Weighted average number of shares and dilutive
share equivalents outstanding:
Basic 77,501 64,574 70,448 62,283
Diluted 77,501 69,072 70,448 66,853
========= ======== ========== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
PHYCOR, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three months and nine months ended September 30, 1998 and 1997
(All dollar amounts are expressed in thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- -----------------------
1998 1997 1998 1997
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $(50,843) $15,040 $(43,028) $41,053
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization 24,453 15,958 65,463 44,618
Minority interests 3,438 2,850 10,163 8,739
Provision for asset revaluation and clinic restructuring 92,500 - 114,500 -
Merger expenses - - 14,196 -
Increase (decrease) in cash, net of effects
of acquisitions, due to changes in:
Accounts receivable 11,100 (6,695) (11,022) (20,589)
Inventories (287) (377) (265) (1,135)
Prepaid expenses and other current assets (3,806) 43 (12,617) (2,740)
Accounts payable 1,581 5,203 (1,151) 2,536
Due to physician groups (5,354) 3,133 (316) 8,410
Other accrued expenses and liabilities (34,282) 10,595 (23,011) 8,099
-------- ------- -------- --------
Net cash provided by operating activities 38,500 45,750 112,912 88,991
-------- ------- -------- --------
Cash flows from investing activities:
Payments for acquisitions, net (23,546) (59,534) (163,540) (241,907)
Purchase of property and equipment (13,315) (16,000) (51,285) (48,271)
Payments to acquire other assets (17,231) (2,434) (28,364) (4,605)
-------- ------- -------- --------
Net cash used by investing activities (54,092) (77,968) (243,189) (294,783)
-------- ------- -------- --------
Cash flows from financing activities:
Net proceeds from issuance of stock and warrants 1,172 1,256 17,632 225,052
Repurchase of common stock (2,321) - (2,321) -
Proceeds from long-term borrowings 6,000 37,000 145,000 219,000
Repayment of long-term borrowings (3,630) (3,108) (12,686) (221,333)
Repayment of obligations under capital leases (2,160) (845) (4,058) (3,020)
Distributions of minority interests (4,007) (2,962) (8,376) (6,637)
Loan costs incurred (32) (266) (308) (266)
-------- ------- -------- --------
Net cash provided (used) by financing activities (4,978) 31,075 134,883 212,796
-------- ------- -------- --------
Net increase (decrease) in cash and cash equivalents (20,570) (1,143) 4,606 7,004
Cash and cash equivalents - beginning of period 63,336 38,677 38,160 30,530
-------- ------- -------- --------
Cash and cash equivalents - end of period $ 42,766 $37,534 $ 42,766 $ 37,534
======== ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
PHYCOR, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Three months and nine months ended September 30, 1998 and 1997
(All dollar amounts are expressed in thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
1998 1997 1998 1997
--------- ------- -------- --------
<S> <C> <C> <C> <C>
SUPPLEMENTAL SCHEDULE OF INVESTING ACTIVITIES:
Effects of acquisitions, net:
Assets acquired, net of cash $ 123,533 $69,414 $ 416,479 $349,150
Liabilities paid (assumed), net of deferred purchase price
payments 4,280 (8,604) (37,450) (89,117)
Issuance of convertible subordinated notes payable (7,000) (740) (8,317) (9,412)
Issuance of common stock and warrants (88,820) (536) (194,794) (8,714)
Cash received from disposition of clinic assets (8,447) - $ (12,378) -
--------- ------- --------- --------
Payments for acquisitions, net $ 23,546 $59,534 $ 163,540 $241,907
========= ======= ========= ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations incurred to acquire
equipment $ 151 $ 97 $ 589 $ 407
--------- ------- --------- --------
Conversion of subordinated notes payable
to common stock $ - $ 2,496 $ 2,000 $ 14,054
========= ======= ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
PHYCOR, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial
Statements Three months and nine months ended
September 30, 1998 and 1997
(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, as amended
by Form 10-K/A, for the year ended December 31, 1997.
(2) ACQUISITIONS
(A) MULTI-SPECIALTY MEDICAL CLINICS
Through September 30, 1998 and during 1997, the Company, through
wholly-owned subsidiaries, acquired certain operating assets of the
following clinics:
<TABLE>
<CAPTION>
CLINIC EFFECTIVE DATE LOCATION
------ -------------- --------
<S> <C> <C>
1998:
Grove Hill Medical Center March 1, 1998 New Britain, Connecticut
Desert Valley Medical Group and Hospital May 1, 1998 Victorville, California
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 June 1, 1997 Evansville, Indiana
White-Wilson Medical Center July 1, 1997 Ft. Walton Beach, Florida
Maui Medical Group September 1, 1997 Maui, Hawaii
Murfreesboro Medical Clinic October 1, 1997 Murfreesboro, Tennessee
West Florida Medical Center Clinic October 1, 1997 Pensacola, Florida
Northern California Medical Association December 1, 1997 Santa Rosa, California
Lakeview Medical Center (i) December 1, 1997 Suffolk, Virginia
</TABLE>
(Continued)
6
<PAGE> 7
PHYCOR, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(i) Lakeview Medical Center was operated under a management agreement
during December 1997. Effective January 1, 1998, the Company
completed the purchase of certain clinic operating assets and
entered into a long-term service agreement with the affiliated
physician group.
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.
(B) INDEPENDENT PRACTICE ASSOCIATIONS (IPAS)
Effective January 1, 1995, the Company completed its merger with
North American Medical Management, Inc. (North American), an
operator and manager of IPAs. The Company made additional payments
for the North American acquisition pursuant to an earn-out formula
during 1996 and 1997 totaling $35.0 million. A final payment of
$35.0 million was made in April 1998, of which $13.0 million was
paid in shares of the Company's Common Stock.
In July 1998, the Company acquired The Morgan Health Group, Inc.
(MHG), an Atlanta-based IPA. The MHG network includes approximately
400 primary care physicians and 1,800 specialists.
(C) PHYCOR MANAGEMENT CORPORATION (PMC)
In June 1995, the Company purchased a minority interest of
approximately 9% in PMC and managed PMC pursuant to a 10-year
administrative services agreement. PMC developed and managed IPAs
and provided other services to physician organizations. The Company
acquired the remaining interests of PMC on March 31, 1998 for an
aggregate purchase price of approximately $21.0 million paid in
shares of the Company's Common Stock.
(D) PRIMECARE INTERNATIONAL, INC. (PRIMECARE)
In May 1998, the Company acquired PrimeCare, a physician practice
management company serving southern California's Inland Empire
area, in a purchase business combination. PrimeCare's delivery
network is comprised of an integrated campus, including the Desert
Valley Medical Group, Desert Valley Hospital and Apple Valley
Surgery Center, as well as the Inland Empire area IPA network.
(E) CAREWISE, INC. (CAREWISE)
In July 1998, the Company acquired Seattle-based CareWise, a
nationally recognized leader in the health care decision-support
industry. The acquisition was accounted for as a purchase.
(F) FIRST PHYSICIAN CARE, INC. (FPC)
In July 1998, the Company acquired Atlanta-based FPC, a
privately-held physician practice management company that operated
in six markets in Texas, Flordia, Illinois, New York and Georgia,
and provided practice management services to approximately 140
physicians. The acquisition was accounted for as a purchase.
(Continued)
7
<PAGE> 8
PHYCOR, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(G) PRO FORMA INFORMATION
The unaudited consolidated pro forma results of PrimeCare, MHG,
CareWise and FPC operations assuming the 1998 acquisitions had been
consummated on January 1, 1997 are as follows (in thousands, except
for earnings per share):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ---------------------------
1998 1997 1998 1997
----------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Net revenue $ 411,293 $ 322,095 $1,167,925 $923,621
Net earnings (loss) (50,969) 14,808 (44,704) 37,081
Earnings (loss) per share:
Basic $ (.65) $ .20 $ (.58) $ .51
Diluted (.65) .19 (.58) .48
</TABLE>
(3) NET REVENUE
Net revenue of the Company is comprised of net clinic service agreement
revenue, IPA management revenue, and net hospital revenues. Clinic
service agreement revenue is equal to the net revenue of the clinics,
less amounts retained by physician groups. Net clinic revenue recorded by
the physician groups and net hospital revenue are recorded at
established rates reduced by provisions for doubtful accounts and
contractual adjustments. Contractual adjustments arise as a result of 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. With the exception of PrimeCare, the physician groups,
rather than the Company, enter into managed care contracts. Through
calculation of its service fees, the Company shares indirectly in any
capitation risk assumed by its affiliated physician groups.
IPA management revenue is equal to the difference between the amount of
capitation and risk pool payments payable to the IPAs managed by the
Company less amounts retained by the IPAs. The Company has not
historically been a party to capitated contracts entered into by the
IPAs, but is exposed to losses to the extent of its share of deficits, if
any, of the capitated revenue of the IPAs. Through the PrimeCare and MHG
acquisitions, the Company became a party to certain managed care
contracts. Accordingly, the cost of provider services for the PrimeCare
and MHG contracts is not included as a deduction to net revenue of the
Company but is reported as an operating expense.
(Continued)
8
<PAGE> 9
PHYCOR, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
The following represent amounts included in the determination of net
revenue (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ------------------------
1998 1997 1998 1997
---------- -------- --------- ---------
<S> <C> <C> <C> <C>
Gross physician group and hospital revenue $884,858 $718,315 $2,609,856 $2,047,598
Less:
Provisions for doubtful accounts
and contractual adjustments 358,471 275,648 1,049,570 778,850
-------- -------- ---------- ---------
Net physician group and
hospital revenue 526,387 442,667 1,560,286 1,268,748
IPA revenue 230,489 112,288 527,586 297,915
-------- -------- ---------- ----------
Net physician group, hospital and IPA revenue 756,876 554,955 2,087,872 1,566,663
Less amounts retained by physician groups and
IPAs:
Physician groups 174,198 157,667 536,055 463,251
Clinic technical employee compensation 24,127 19,113 70,922 53,845
IPAs 150,064 93,884 378,263 247,270
-------- -------- ---------- ----------
Net revenue $408,487 $284,291 $1,102,632 $ 802,297
======== ======== ========== ==========
</TABLE>
(4) ASSET REVALUATION AND CLINIC RESTRUCTURING
In the fourth quarter of 1997, the Company recorded a pre-tax charge to
earnings of $83.4 million related to the revaluation of assets of seven
of the Company's multi-specialty clinics. Included in the seven clinics
were three clinic operations the Company determined to dispose of because
of a variety of negative operating and market-specific issues. The
Company completed the disposal of one of these clinics in the first
quarter of 1998, a second in April 1998, and the third in July 1998.
Amounts received upon the dispositions approximated net book value of
those assets. Clinic net assets to be disposed of included current
assets, property and equipment, intangibles and other assets totaling
$3,237,000 at December 31, 1997.
In addition, restructuring charges totaling $22.0 million were recorded
in the first quarter of 1998 with respect to clinics that were being sold
or restructured. The charges were comprised of facility and lease
termination costs, severance costs and other exit costs in the amounts of
$15,316,000, $4,611,000 and $2,073,000, respectively. During the three
months and nine months ended September 30, 1998, the Company paid
approximately $2,140,000 and $2,869,000, respectively, in costs
associated with facility and lease terminations, $525,000 and $1,631,000,
respectively, in costs associated with severance, and $523,000 and
$991,000, respectively, in other exit costs. At September 30, 1998,
accrued expenses payable included remaining reserves for clinics to be
restructured and exit costs for disposed clinic operations of $5,734,000,
which included facility and lease termination costs, severance costs, and
other exit costs in the amounts of $1,788,000, $1,586,000 and $2,360,000,
respectively. Net reserves remaining from the first quarter 1998
restructuring charge of approximately $10,774,000 were reversed in the
third quarter of 1998.
(Continued)
9
<PAGE> 10
PHYCOR, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
In the third quarter of 1998, the Company recorded a net pre-tax asset
revaluation charge of $92.5 million, which is comprised of a $103.3
million charge less the reversal of the excess restructuring reserves
recorded in the first quarter of 1998. This charge related to
deteriorating negative operating trends for two clinic operations which
were included in the fourth quarter 1997 asset revaluation charge, and
the corresponding disposal of those assets. Amounts received upon the
dispositions of net assets approximated the post-charge net carrying
value. Additionally, this charge provides for the disposition of assets
of another clinic, completed in the third quarter, not included in the
fourth quarter 1997 asset revaluation charge, and the revaluation of
assets at two other clinics that will be disposed of or restructured. The
net book value of assets to be disposed of or restructured totaled $8.5
million at September 30, 1998, and consisted primarily of current assets
and property and equipment.
Pre-tax losses from clinics disposed of, to be disposed of, or
restructured in 1998 totaled $1.5 million and $730,000 for the three
months ended September 30, 1998 and 1997, respectively, and $3.6 million
and $1.8 million for the nine months ended September 30, 1998 and 1997,
respectively.
(5) MERGER EXPENSES
The Company recorded a pre-tax charge to earnings of approximately $14.2
million in the first quarter of 1998 relating to the termination of its
merger agreement with MedPartners, Inc. This charge represents the
Company's share of investment banking, legal, travel, accounting and
other expenses incurred during the merger negotiation process.
(6) SECURITIES REPURCHASE PROGRAM
In September 1998, the Company adopted a Common Stock repurchase program
whereby the Company may repurchase up to $50.0 million of its Common
Stock. In October 1998, the Company announced the expansion of its Common
Stock repurchase program into a securities repurchase program to include
the Company's 4.5% Convertible Subordinated Debentures and other
securities, the economic terms of which are derived from the Common Stock
and/or Debentures. In conjunction with the securities repurchase program,
the Company has repurchased approximately 2.4 million shares of Common
Stock for approximately $11.6 million, 450,000 shares of which were
repurchased in the third quarter.
(7) NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No.130 "Reporting Comprehensive Income".
Comprehensive income generally includes all changes in equity during a
period except those resulting from investments by shareholders and
distributions to shareholders. Net income was the same as comprehensive
income for the third quarter and first nine months of 1998 and 1997.
(8) CHANGE IN ACCOUNTING POLICY
Effective April 1, 1998, the Company changed its policy with respect to
amortization of intangible assets. All existing and future intangible
assets will be amortized over a period not to exceed 25 years from the
inception of the respective intangible assets. Had the Company adopted
this policy at the beginning of 1997, amortization expense would have
increased and diluted earnings per share would have decreased by
approximately $2.8 million and $0.03, respectively, in the third quarter
of 1997 and approximately $8.4 million and $0.08, respectively, in the
first nine months of 1997. On the same basis, for the first quarter of
1998, amortization expense would have increased by approximately $3.3
million, resulting in a decrease in diluted earnings per share of $0.03.
(Continued)
10
<PAGE> 11
PHYCOR, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(9) SUBSEQUENT EVENTS
Since September 30, 1998, the Company has acquired certain assets of a
35-physician multi-specialty clinic based in Huntington, New York and
entered into a long-term service agreement with the affiliated physician
group.
Additionally, in October 1998, the Company formed a joint venture with
Physician Partners Company, L.L.C., a physician organization created by
the New York Presbyterian Hospital network to develop networks of IPAs,
to create and operate a regional managed care contracting network, which
will include IPAs in New York City, northern New Jersey, southern
Connecticut and Long Island.
11
<PAGE> 12
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
PhyCor, Inc. ("PhyCor" or the "Company") is a physician practice
management company that acquires and operates multi-specialty medical clinics,
develops and manages independent practice associations ("IPAs") and provides
health care decision-support services, including demand management and disease
management services to managed care organizations, health care providers,
employers and other group associations. The Company currently operates 57
clinics with approximately 3,795 physicians in 28 states and manages IPAs with
approximately 25,000 physicians in 36 markets. The Company's affiliated
physicians provide medical services under capitated contracts to approximately
1,617,000 patients, including approximately 273,000 Medicare/Medicaid eligible
patients. The Company provides health care decision-support services to
approximately 2.0 million individuals within the United States and an additional
500,000 under foreign country license agreements.
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 believes physician organizations create the value in these
networks because physician decisions determine the cost and quality of health
care.
A substantial majority of the Company's revenue in the first nine
months of 1998 and 1997 was earned under service agreements with multi-specialty
medical clinics. Revenue earned under substantially all of 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 its 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.
On July 1, 1998, the Company acquired Seattle-based CareWise, Inc.
("CareWise"), a nationally recognized leader in the health care decision support
industry. The Company issued approximately 3.1 million shares of Common Stock in
conjunction with the CareWise transaction.
12
<PAGE> 13
In July 1998, the Company acquired The Morgan Health Group, Inc.
("MHG"), an Atlanta-based IPA whose network of approximately 400 primary care
physicians and 1,800 specialists provide care to approximately 57,000 managed
care members under capitated contracts. On July 24, 1998, the Company acquired
First Physician Care, Inc. ("FPC"), an Atlanta-based provider of practice
management services. The Company issued approximately 2.9 million shares of
Common Stock in conjunction with the FPC transaction.
In addition, during the first nine months of 1998, the Company
affiliated with PrimeCare International, Inc. ("PrimeCare"), one multi-specialty
clinic, numerous smaller medical practices and completed its purchase of certain
operating assets of Lakeview Medical Center located in Suffolk, Virginia, which
was operated under a management agreement during December 1997, adding a total
of $389.2 million in assets. The principal assets acquired were accounts
receivable, property and equipment, prepaid expenses, and service agreement
rights, an intangible asset. The consideration for the acquisitions consisted of
approximately 38% cash, 13% liabilities assumed, 47% Common Stock and 2%
convertible notes. The cash portion of the aggregate 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.
Since September 30, 1998, the Company has acquired certain assets of a
35-physician multi-specialty clinic based in Huntington, New York and entered
into a long-term service agreement with the affiliated physician group.
Additionally, in October 1998, the Company formed a joint venture with Physician
Partners Company, L.L.C., a physician organization created by the New York
Presbyterian Hospital network to develop networks of IPAs, to create and operate
a regional managed care contracting network, which will include IPAs in New York
City, northern New Jersey, southern Connecticut and Long Island.
The Company has historically amortized the goodwill and other
intangible assets related to its service agreements over the periods during
which the agreements are effective, ranging from 25 to 40 years. Effective April
1, 1998, the Company adopted a maximum of 25 years as the useful life for
amortization of its intangible assets, including those acquired in prior years.
Had this policy been in place for 1997, amortization expense would have
increased by approximately $2.8 million in the third quarter of 1997,
approximately $8.4 million in the first nine months of 1997, and approximately
$11.2 million for the full year. Applying the Company's historical tax rate,
diluted earnings per share would have been reduced by $.03 in the third quarter
of 1997, $.08 for the first nine months of 1997, and $.10 for the full year of
1997. On the same basis, for the first quarter of 1998, amortization expense
would have increased by approximately $3.3 million, resulting in a decrease in
diluted earnings per share of $0.03.
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<PAGE> 14
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 Operations:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1998 1997 1998 1997
------ ------ ------ -------
<S> <C> <C> <C> <C>
Net revenue................................. 100.0% 100.0% 100.0% 100.0%
Operating expenses
Cost of provider services................ 12.9 -- 7.1 --
Salaries, wages and benefits............. 32.7 37.6 34.6 37.7
Supplies................................. 14.2 16.4 15.2 16.0
Purchased medical services............... 2.4 2.8 2.6 2.8
Other expenses......................... 14.0 15.1 14.5 15.4
General corporate expenses............... 1.9 2.3 2.1 2.5
Rents and lease expense................. 8.1 8.9 8.6 8.9
Depreciation and amortization............ 6.0 5.6 5.9 5.5
Provision for asset revaluation
and clinic restructuring.............. 22.6 -- 10.4 --
Merger expenses..................... -- -- 1.3 --
------ ------ ------ ----
Operating expenses.......................... 114.8 (A) 88.7 102.3 (A) 88.8
------ ------ ------ ----
Earnings (loss) from operations....... (14.8) (A) 11.3 (2.3) (A) 11.2
Interest income............................. (0.2) (0.2) (0.2) (0.3)
Interest expense............................ 2.4 1.9 2.4 2.1
------ ------ ------ ----
Earnings (loss) before income taxes
and minority interest................ (17.0) (A) 9.6 (4.5) (A) 9.4
Income tax (benefit) expense................ (5.4) (A) 3.3 (1.5) (A) 3.2
Minority interest......................... 0.9 1.0 0.9 1.1
------ ------ ------- ----
Net earnings (loss)................... (12.5)% (A) 5.3% (3.9)% (A) 5.1%
====== ====== ======= ====
</TABLE>
(A) Excluding the effect of the provision for clinic restructuring and merger
expenses in 1998, operating expenses, earnings from operations, earnings before
income taxes and minority interest, income tax expense and net earnings, as a
percent of net revenue, would have been 92.2%, 7.8%, 5.6%, 1.8% and 2.9%,
respectively, for the three months ended September 30, 1998, and 90.6%, 9.4%,
7.2%, 2.4% and 3.9%, respectively, for the nine months ended September 30, 1998.
1998 Compared to 1997
Net revenue increased $124.2 million, or 43.7%, from $284.3 million for
the third quarter of 1997 to $408.5 million for the third quarter of 1998, and
from $802.3 million to $1.1 billion for the first nine months of 1997 compared
to 1998, an increase of 37.4%. The increase in clinic net revenue from the third
quarter of 1997 compared to 1998 was $62.1 million, including $59.0 million in
service fees resulting from newly acquired clinics in 1998 or the timing of
entering into new service agreements in 1997 and was comprised of (i) a $56.5
million increase in service fees for reimbursement of clinic expenses incurred
by the Company and (ii) a $5.6 million increase in the Company's fees from
clinic operating income and net physician group revenue. The increase in clinic
net revenue from the first nine months of 1997 compared to 1998 was $196.9
million, including $172.2 million in service fees resulting from newly acquired
clinics in 1998 or the timing of entering into new service agreements in 1997,
and was comprised of (i) a $177.0 million increase in service fees for
reimbursement of clinic expenses incurred by the Company and (ii) a $19.9
million increase in the
14
<PAGE> 15
Company's fees from clinic operating income and net physician group revenue. The
increases in clinic net revenue have been reduced as a result of assets disposed
of in 1998 by $19.5 million and $26.8 million in the third quarter and the first
nine months of 1998, respectively. Net revenue from the 38 service agreements
(excluding clinics being restructured or sold) and 27 IPA markets in effect for
both quarters, increased by $23.0 million, or 9.5%, for the quarter and $74.2
million, or 11.0%, for the nine months ended September 30, 1998, compared with
the same period in 1997. Same market growth resulted from the addition of new
physicians, the expansion of ancillary services and increases in patient volume
and fees.
During the third quarter and first nine months of 1998, most categories
of operating expenses varied as a percentage of net revenue when compared to the
same periods in 1997. The addition of cost of provider services is a result of
the acquisitions of PrimeCare and MHG in 1998. PrimeCare and MHG manage IPAs,
and each are a party to certain managed care contracts, resulting in the Company
presenting such revenue on a "gross-up basis", where the cost of provider
services (payments to physicians and other providers under sub-capitation and
other reimbursement contracts) is not included as a deduction to net revenue of
the Company but is reported as an operating expense. This revenue reporting has
an impact on the Company's operating expenses as a percentage of net revenue.
Excluding the impact of PrimeCare's and MHG's revenue reporting, most categories
of operating expenses as a percentage of net revenue during the third quarter
and first nine months of 1998 were comparable to the percentages for the same
periods in 1997. Excluding the impact of PrimeCare's revenue reporting, other
clinic expenses and rents and leases increased as a percentage of net revenue
reflecting the impact of recent acquisitions with higher levels of these
expenses compared to the existing base of operations. 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 growth and to respond to increasing physician group needs for
support in managed care negotiations, information systems implementation and
clinical outcomes management programs. The increase in depreciation and
amortization expense as a percentage of net revenue resulted from the change in
the amortization policy with respect to intangible assets and the impact of
recent acquisitions.
The provision for clinic restructuring of $22.0 million in the first
quarter of 1998 related to seven of the Company's clinics that were being
restructured or disposed of and included facility and lease termination costs,
severance and other exit costs. In the fourth quarter of 1997, the Company
recorded a pre-tax charge of $83.4 million related to asset revaluation at these
same clinics. The charges addressed operating issues which developed in four of
the Company's multi-specialty clinics which represent the Company's earliest
developments of such clinics through the formation of new groups. Three other
clinics included in the 1997 charge represent clinics disposed of during 1998
because of a variety of negative operating and market-specific issues. In the
third quarter of 1998, the Company recorded a net pre-tax asset revaluation
charge of $92.5 million. This charge related to deteriorating negative operating
trends for two clinic operations which were included in the fourth quarter 1997
asset revaluation charge, and the corresponding decision to dispose of those
assets in the third quarter of 1998. Additionally, this charge provided for the
disposition of assets of another clinic not included in the fourth quarter 1997
asset revaluation charge, and the revaluation of assets at two other clinics
that will be disposed of or restructured. Losses on the six clinics divested as
of September 30, 1998 approximated the amounts accrued. The total provision for
asset revaluation and clinic restructuring for the nine months ended September
30, 1998 totaled $114.5 million, consisting of the $22.0 million in the first
quarter of 1998 and the net $92.5 million in the third quarter of 1998. For
additional discussion, see "Liquidity and Capital Resources."
The Company also recorded a pre-tax charge to earnings of approximately
$14.2 million in the first quarter of 1998 relating to the termination of its
merger agreement with MedPartners, Inc. This charge represents PhyCor's share of
investment banking, legal, travel, accounting and other expenses incurred during
the merger negotiation process.
15
<PAGE> 16
The Company expects an effective tax rate of approximately 37.5% in
1998 before the tax benefit of the provision for clinic restructuring and merger
expenses discussed above as compared to a rate of 38.5% in 1997.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had $244.7 million in working
capital, compared to $203.3 million as of December 31, 1997. Also, the Company
generated $38.5 million of cash flow from operations for the third quarter of
1998 compared to $45.8 million for the third quarter of 1997 and $112.9 million
for the first nine months of 1998 compared to $89.0 million for the same period
in 1997. At September 30, 1998, net accounts receivable of $430.0 million
amounted to 70 days of net clinic revenue compared to $391.7 million and 72 days
at the end of 1997.
In September 1998, the Company adopted a Common Stock repurchase
program whereby the Company may repurchase up to $50.0 million of its Common
Stock. In October 1998, this program was expanded into a securities repurchase
program which includes the Company's Common Stock, the Company's 4.5%
Convertible Subordinated Debentures due 2003 and other securities, the economic
terms of which are derived from the Company's Common Stock and/or Debentures.
During the third quarter of 1998, the Company repurchased 450,000 shares of its
Common Stock for approximately $2.3 million. As of November 13, 1998, the
Company has repurchased an aggregate of approximately 2.4 million shares of its
Common Stock for approximately $11.6 million.
In the first nine months of 1998, $2.0 million of convertible
subordinated notes issued in connection with physician group asset acquisitions
were converted into Common Stock. These conversions, option exercises and other
issuances of Common Stock, combined with repurchases of Common Stock and net
losses for the first nine months of 1998, resulted in an increase of $177.4
million in shareholders' equity compared to December 31, 1997.
Capital expenditures during the first nine months of 1998 totaled $51.3
million. The Company is responsible for capital expenditures at its affiliated
clinics under the terms of its service agreements. The Company expects to make
approximately $18.0 million in capital expenditures during the remainder of
1998.
In June 1995, the Company purchased a minority interest of
approximately 9% in PhyCor Management Corporation ("PMC") and managed PMC
pursuant to a 10-year administrative services agreement. PMC developed and
managed IPAs and provided other services to physician organizations. The Company
acquired the remaining interests of PMC on March 31, 1998 for an aggregate
purchase price of approximately $21.0 million paid in shares of the Company's
Common Stock.
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 $35.0 million. A final payment of
$35.0 million was made in April 1998, of which $13.0 million was paid 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 acquisition. If each group
satisfied its applicable financial targets for the periods covered, the Company
would be required to pay an aggregate of approximately $75.9 million of
additional consideration over the next five years, of which a maximum of $16.7
million would be payable during the remainder of 1998.
16
<PAGE> 17
In the fourth quarter of 1997, the Company recorded a pre-tax charge to
earnings of $83.4 million related to the revaluation of assets of seven of the
Company's multi-specialty clinics. In the first quarter of 1998, the Company
recorded an additional charge of $22.0 million related to these clinics that
were being restructured or sold. These pre-tax charges were partially in
response to issues which arose in four of the Company's multi-specialty clinics
which represented the Company's earliest developments of such clinics through
the formation of new groups. The clinics were considered to have an impairment
of certain current assets, property and equipment, other assets and, primarily,
intangible assets as a result of certain groups of physicians within a larger
clinic terminating their relationship with the medical group affiliated with the
Company and therefore affecting future cash flows. In the third quarter of 1998,
the Company recorded a net pre-tax asset revaluation charge of $92.5 million.
This charge related to deteriorating negative operating trends for two group
formation clinics which were included in the fourth quarter 1997 asset
revaluation charge, and the corresponding disposal of those assets in the third
quarter of 1998. Additionally, this charge provided for developments at three
other group formation clinics which included the disposition of assets of one
such group not included in the fourth quarter of 1997 asset revaluation charge,
and the impairment of assets at two other group formation clinics that will be
restructured or disposed. At September 30, 1998, the Company had a total of six
group formation clinics, which includes three clinics associated with the
charges discussed above. The total assets and intangible assets of the remaining
six group formation clinics totaled $61.7 million and $26.7 million at September
30, 1998, respectively.
The three other clinics included in the fourth quarter of 1997 charge
represented clinics disposed of because of a variety of negative operating and
market issues including those related to market position and clinic
demographics, physician relations, operating results and ongoing viability of
the existing medical group. Although these factors have been present
individually from time to time in various affiliated clinics and could occur in
future clinic operations, the combined effect of the existence of these factors
at the clinics disposed of resulted in clinic operations that made it difficult
for the Company to effectively manage the clinics. One of these clinics was sold
in the first quarter of 1998, the second in April 1998 and the third in July
1998. For all clinic dispositions, the assets were disposed of at a discount to
original carrying value, as such disposition was considered more cost-effective
than a liquidation which might have subjected the Company to additional costs.
The Company recorded no gain or loss on the final disposition of these assets.
The Company does not believe that the clinics included in the charges
are indicative of a trend in the Company's operations or the industry in which
the Company operates. There can be no assurance, however, that in the future a
similar combination of negative characteristics will not develop at a clinic
affiliated with the Company and result in the termination of the service
agreement or that in the future additional clinics will not terminate their
relationships with the Company in a manner that may materially adversely affect
the Company.
The Company has been the subject of an audit by the Internal Revenue
Service ("IRS") covering the years 1988 through 1993. The IRS has proposed
adjustments relating to the timing of recognition for tax purposes of certain
revenue and deductions relating to uncollectible accounts and a
recharacterization of the Company's relationship with affiliated physician
groups. The Company disagrees with the positions asserted by the IRS including
any recharacterization 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 the Company 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. The
Company 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 addition, the IRS recently began an audit of
the Company's 1994 and 1995 federal tax returns.
17
<PAGE> 18
The Company modified its bank credit facility in April and September
1998. The Company's bank credit facility, as amended, provides for a five-year,
$500.0 million revolving line of credit for use by the Company prior to April
2003 for acquisitions, working capital, capital expenditures and general
corporate purposes. The total drawn cost under the facility is either (i) .50%
to 1.25% above the applicable eurodollar rate or (ii) the agent's base rate plus
.125% to .575% per annum. The total weighted average drawn cost of outstanding
borrowings at September 30, 1998 was 6.43%. On October 17, 1997, the Company
entered into an interest rate swap agreement to fix the interest rate on $100
million of debt at 5.85% relative to the three month floating LIBOR. This
interest rate swap agreement was amended, effective October 17, 1998, to a fixed
rate of 5.78% and a maturity date of July 2003 with the lender's option to
terminate beginning October 2000. In September 1998, the Company entered into an
interest rate swap agreement to fix the interest rate on an additional $100
million of debt at 5.14% relative to the three month floating LIBOR. This second
swap agreement matures September 2003 with the lender's option to terminate
beginning September 2000.
The Company also has a $100 million synthetic lease facility that was
entered into in April 1998. The synthetic lease facility is project specific and
provides for, among other projects, the construction or acquisition of certain
medical office buildings. The total drawn cost under the synthetic lease
facility is .375% to 1.00% above the applicable eurodollar rate.
The Company's bank credit facility and synthetic lease facility
contain 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, (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 September
30, 1998.
In September 1998, the Company announced that earnings for the third
and fourth quarters of 1998 were expected to be below analysts' expectations.
The lower earnings expectations are a result of the third quarter asset
revaluation charge, increased amortization expense in connection with the
CareWise and FPC acquisitions being accounted for as purchases rather than
poolings-of-interests and lower than originally expected earnings contributions
from recent acquisitions. While existing operations as a whole are performing
generally in line with the Company's expectations, the PrimeCare, MHG and FPC
acquisitions completed in the second and third quarters are not contributing
earnings at expected levels. Lower earnings from PrimeCare during the second
half of 1998 results from lower revenue than originally expected because of
delays in receipt of its limited Knox-Keene license and lower enrollment and
payor contracting issues. The limited license under California's Knox-Keene Act
was granted to a PrimeCare subsidiary on October 21, 1998, allowing contracting
in California for global capitation to provide professional and institutional
services. The performance of PrimeCare is expected to gradually improve over
current levels during 1999.
The earnings contributions of both MHG and FPC are below target because
of lower than expected earnings from MHG's managed care contracts and a
combination of lower revenues and higher costs in FPC's core business. The
combined earnings shortfall plus increased goodwill amortization resulted in a
decrease in the third quarter of 1998 earnings per share of approximately $0.04
and are expected to result in a decrease of $.05 in fourth quarter of 1998
earnings per share. It is currently difficult to determine whether FPC or MHG
will be able to reach targeted earnings levels in the near future. As the
physician practice management industry continues to evolve, the Company expects
to grow more slowly during this time of industry uncertainty.
At September 30, 1998, the Company had cash and cash equivalents of
approximately $42.8 million, and as of November 13, 1998, $119.4 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 capital expenditures and working capital
needs over the next year.
In addition, in order to provide the funds necessary for the continued
pursuit of the Company's long-term acquisition and 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. The outcome of certain pending legal
proceedings described in Part II, Item I hereof may have an impact on the
Company's liquidity and capital resources.
Year 2000
The following disclosure is designated as Year 2000 readiness
disclosure for purposes of the Year 2000 Information and Readiness Disclosure
Act.
PhyCor has developed a program designed to identify, assess, and
remediate potential malfunctions and failures that may result from the inability
of computers and embedded computer chips within the Company's information
systems and equipment to appropriately identify and utilize date-sensitive
information relating to periods subsequent to December 31, 1999. This issue is
commonly referred to as the "Year 2000 issue" and affects not only the Company,
but virtually all companies and organizations with whom the Company does
business. The Company is dependent upon Year 2000 compliant information
technology systems and equipment in applications critical to the Company's
business. The Company's information technology systems ("IT systems") can be
broadly categorized into the following areas: (i) practice management, (ii)
managed care information, (iii) consumer decision support system that supports
the operations of CareWise, (iv) ancillary information systems, including
laboratory, radiology, pharmacy and clinical ancillary systems, and (v) other
administrative information systems including accounting, payroll, human resource
and other desktop systems and applications.
18
<PAGE> 19
The Company generally owns and provides to its various affiliated
multi-specialty clinics the IT systems in use at those locations, and such
systems originated and are supported by a variety of vendors. In addition, the
Company generally owns and provides biomedical equipment (laboratory equipment,
radiology equipment, diagnostic equipment and medical treatment equipment) for
use by its affiliated physician groups and by its Company-owned hospital, as
well as other equipment in use at Company-owned or leased facilities such as
telephone and HVAC systems. Such non-information technology ("Non-IT") equipment
often contains embedded computer chips that could be susceptible to failure or
malfunction as a result of the Year 2000 issue.
To address the Year 2000 issue, the Company has formed a Year 2000
committee comprised of representatives from a cross-section of the Company's
operations as well as senior management of the Company. The committee, with the
assistance of outside consultants, developed a comprehensive plan to address the
Year 2000 issue within all facets of the Company's operations. The plan includes
processes to inventory, assess, remediate or replace as necessary, and test the
Company's IT systems and Non-IT equipment. In addition, the Company has
appointed local project coordinators at all PhyCor-affiliated facilities who are
responsible for overseeing the comprehensive project management activities at
the local subsidiary level. Each project coordinator is responsible for
developing a local project plan that includes processes to inventory, assess,
remediate or replace as necessary, and test the Company's IT and Non-IT systems.
Each local project coordinator is also responsible for assessing the compliance
of the electronic trading partners and business critical vendors for that
location, however the compliance of certain vendors providing business critical
IT systems in wide use within the Company is monitored at the parent company
level. The Company's Year 2000 compliance plan continues to evolve for new
business transactions and new information received from vendors and trading
partners such as third party payers and purchasing agents.
The Company has completed the inventory and assessment phase of
business critical IT systems and is in the process of upgrading or replacing IT
systems found not to be compliant, either internally or through the upgrades
provided by the Company's vendors. In certain cases, the Company's plan provides
for verification of Year 2000 compliance of vendor-supplied IT systems by
obtaining warranties and legal representations of the vendors. Much of the
remediation is being accomplished as a part of the Company's normal process of
standardizing various IT systems utilized by its affiliated clinics and IPAs,
although in certain cases the standardization process is moving at an
accelerated pace as a result of the Year 2000 issue. The Company's plan calls
for achieving Year 2000 compliance with respect to all IT systems by October
1999. The Company believes that it is on schedule to meet that goal.
The inventory and assessment of Non-IT equipment is proceeding
simultaneously with that of IT systems, but at a slower pace, partly as a result
of the need to rely on vendor representations with respect to many pieces of
equipment that involve embedded chip technology which does not allow for input
of date-sensitive information. With respect to the compliance of Non-IT
equipment, equipment directly involved in patient care is the Company's first
priority.
The malfunction or complete failure of the Company's IT systems or
certain pieces of Non-IT equipment would likely have a material adverse effect
on the operations, results of operations and financial condition of the Company
and the Company is developing contingency plans to address those risks. Risks
related to practice management applications include failures or malfunctions
that could prevent automated scheduling and accounts receivable management,
including billing and collections functions. Risks involved in the managed care
applications include failures in the Company's managed care systems causing a
backlog of claims or failures at one or more of the Company's payers causing a
delay in the payment of claims and capitation payments, either of which could
negatively affect cash flows of the Company. The failure of certain critical
pieces of medical equipment could result in personal injury or misdiagnosis of
patients by physicians practicing at the Company's affiliated clinics and
hospitals. The Company is working with local project coordinators to develop
contingency plans with respect to its own business critical IT
19
<PAGE> 20
systems and Non-IT equipment to address known risks and intends to develop
contingency plans for failures at the Company's electronic trading partners. The
Company intends to have contingency plans in place by July 1999. The nature of
the Year 2000 issue, and the lack of historical experience in addressing it,
however, could result in unforeseen risks.
To date, the Company has spent approximately $250,000 on the
development and implementation of its Year 2000 compliance plan. The Company
estimates that it will spend a total of approximately $28 million to complete
all phases of its plan, which amounts will be funded from cash flows from
operations and, if necessary, with borrowings under the Company's primary credit
facility. Of those costs, an estimated $24 million is expected to be incurred to
acquire replacement systems and equipment, including certain amounts spent in
connection with standardizing certain of the Company's systems.
Although the Company believes that it will be substantially compliant
by the Year 2000, there can be no assurance that the Company's operations will
not experience disruption as a result of system or equipment failures related to
Year 2000 issues at the Company or Year 2000 related failures at third parties,
including payors, software, data processing and other vendors, with which the
Company has commercial relationships. The Company's forward looking statements
concerning the Year 2000 issue are dependent on many factors, including the
ability of material third party vendors and trading partners to achieve Year
2000 compliance, the proper functioning of new systems and the integration of
those systems and related software into the Company's operations, some of which
are beyond the Company's control.
Forward-looking statements of PhyCor included herein or incorporated by
reference including, but not limited to, those regarding future business
prospects, the acquisition of additional clinics, the development of additional
IPAs, the adequacy of PhyCor's capital resources, the adequacy of recent and
proposed asset impairment and restructuring charges, 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,
uncertainties, and other factors described in the Company's Annual Report on
Form 10-K, as amended on Form 10-K/A, for the year ended December 31, 1997.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
No disclosure required.
20
<PAGE> 21
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and certain of its officers and directors, Joseph C. Hutts,
Derril W. Reeves, Richard D. Wright, Thompson S. Dent, and John K. Crawford have
been named defendants in nine (9) purported nationwide securities fraud class
actions filed between September 8 and October 9, 1998. Two of these actions,
James S. Bryant, etc. v. Joseph C. Hutts, et al., No. 98-2719-III and Robert H.
Leonard, etc. v. Joseph C. Hutts, et al., No. 98-2813 I, were filed in the
Chancery Court for Davidson County, Tennessee, and allege violations of
Tennessee's securities anti-fraud statutes, TCA sections 48-2-121(a)(2) and
48-2-122(c). Five of the actions, John Butler vs. Joseph C. Hutts, et al., Civil
Action No. 3-98-0911; Christopher Cimino, etc. vs. Joseph C. Hutts, et al.,
Civil Action No. 3-98-1008; James Meyer vs. Joseph C. Hutts, et al., Civil
Action No. 3-98-0834; Dr. Stuart Siegal vs. Joseph C./Hutts, et al, Civil Action
No. 3-98-0973; and Louis J. D'Ambrosio vs. Joseph C. Hutts, et al., Civil Action
No. 3-98-0948, were filed in the United States District Court for the Middle
District of Tennessee, and allege that the defendants violated section 10(b) of
the Securities Exchange Act of 1934 (the "1934 Act") and Rule 10b-5 thereunder,
and allege that the individual defendants violated section 20 of the 1934 Act,
which, under certain circumstances, may impose liability upon persons in control
of an entity which violates provisions of the 1934 Act. Two of the actions,
Malcolm Rosenwald, etc. v. Joseph C. Hutts, et al, Case No. 98-CV-4642 and
Albert Zucker, etc. v. Joseph C. Hutts, et al., Case No. 98 CV 6191, were filed
in the United States District Court for the Eastern District of New York, and
name only Joseph C. Hutts and John K. Crawford as individual defendants. These
two actions similarly allege that the defendants violated section 10(b) of the
1934 Act and Rule 10b-5, and that the individual defendants Hutts and Crawford
violated section 20 of the 1934 Act. The factual allegations of the complaints
in all nine actions are substantially identical, and assert that during various
periods between April 22, 1997 and September 22, 1998, the defendants issued
false and misleading statements which materially misrepresented the earnings and
financial condition of the Company and its clinic operations and misrepresented
and failed to disclose various other matters concerning the Company's operations
in order to conceal the purported failure of the Company's business model, and
to allow the Company's securities to trade at inflated levels while the
individual defendants sold shares of the Company's stock at such levels. In each
of the nine actions, the plaintiff seeks to be certified as the representative
of a class of all persons similarly situated who were allegedly damaged by the
defendants' alleged violations during the period alleged to be the "class
period". Each of the actions seek damages in an indeterminate amount, interest,
attorneys' fees and equitable relief including the imposition of a trust upon
the profits from the individual defendants' trades. The Company believes that it
has meritorious defenses to all of the claims, and intends to vigorously defend
all of the claims in these actions.
In the Company's Annual Report on Form 10-K, as amended by Form 10-K/A,
the Company reported that certain physicians in the Holt-Krock Clinic had filed
a declaratory judgment action, Cynthia K. Ashcraft, M.D., et al. v. Holt-Krock
Clinic, et al., in Sebastian County Chancery Court, No. E-98-407(III) seeking a
ruling regarding the enforceability of their several agreements with the
Company, its Fort Smith, Arkansas subsidiary and Holt-Krock on April 17, 1998.
The lawsuit is continuing and PhyCor and Holt-Krock have filed cross-claims
against the physicians seeking specific performance of the agreements. On
October 23, 1998, the Company and Holt-Krock commenced an action, PhyCor, Inc.
et al. v. Sparks Regional Medical Center, et al., in Sebastian County Chancery
Court alleging tortious interference with PhyCor's contracts with physicians by
the hospital and other claims. The Company believes that it has meritorious
defenses to all of the claims against it, and is vigorously pursuing these
actions.
Although the Company does not believe the above-described matters will
have a material adverse effect on its financial condition, there can be no
assurance as to the outcome of the litigation. The Company's forward-looking
statements relating to the above-described litigation reflect management's
best judgment based on the status of the litigation to date and facts currently
known to the Company and, as a result, involve a number of risks and
uncertainties, including the possible disclosure of new facts and information
adverse to the Company in the discovery process and the inherent uncertainties
associated with litigation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- - ------ -----------------------
<S> <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)
10 -- Amendment No. 1 and Consent to the Second Amended and Restated Credit Agreement,
dated as of September 22, 1998, among the Registrant, the Banks named therein and
Citibank, N.A.
27.1 -- Financial Data Schedule (for SEC use only)
27.2 -- Financial Data Schedule (for SEC use only)
</TABLE>
- - -------------
(1) Incorporated by reference to exhibits 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 filed with the Registrant's
Registration Statement on Form S-3, Registration No. 33-93018.
(3) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-3, Registration No. 33-98528.
(4) Incorporated by reference to exhibits 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 Current
Report on Form 8-K dated February 18, 1994, Commission No. 0-19786.
(B) REPORTS ON FORM 8-K.
The Company filed a Current Report on Form 8-K on July 23, 1998
announcing an expected pre-tax charge to earnings in the third quarter of 1998
pursuant to Item 5 of Form 8-K; and a Current Report on Form 8-K on September
23, 1998 announcing a reduction in targeted earnings per share for the third and
fourth quarters of 1998, an increase in the previously announced pre-tax charge
in the third quarter of 1998, the adoption of a common stock repurchase program,
and a change in the method of accounting for two acquisitions resulting in
increased expense and a reduction in expected earnings growth in 1999 pursuant
to Item 5 of Form 8-K.
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly 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
Executive Vice President and
Chief Financial Officer
Date: November 16, 1998
22
<PAGE> 23
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- - ------ -----------------------
<S> <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)
10 -- Amendment No. 1 and Consent to the Second Amended and Restated Credit Agreement,
dated as of September 22, 1998, among the Registrant, the Banks named therein and
Citibank, N.A.
27.1 -- Financial Data Schedule (for SEC use only)
27.2 -- Financial Data Schedule (for SEC use only)
</TABLE>
- - -------------
(1) Incorporated by reference to exhibits 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 filed with the Registrant's
Registration Statement on Form S-3, Registration No. 33-93018.
(3) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-3, Registration No. 33-98528.
(4) Incorporated by reference to exhibits 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 Current
Report on Form 8-K dated February 18, 1994, Commission No. 0-19786.
<PAGE> 1
EXHIBIT 10
EXECUTION COPY
AMENDMENT NO. 1 AND CONSENT
Dated as of September 22, 1998
To the banks, financial institutions and other
institutional lenders (collectively, the "Banks")
party to the Credit Agreement referred to
below, to Citibank, N.A., as administrative
agent (the "Agent") for the Banks, to SunTrust
Bank, Nashville, N.A., as the swing line bank,
and to NationsBank, N.A., as documentation agent
Ladies and Gentlemen:
We refer to the Second Amended and Restated Revolving Credit
Agreement dated as of April 2, 1998 (as amended, supplemented or otherwise
modified through the date hereof, the "Credit Agreement") among the undersigned
and you. Capitalized terms not otherwise defined in this Amendment No. 1 and
Consent have the same meanings as specified in the Credit Agreement.
It is hereby agreed by you and us as follows:
The Credit Agreement is, effective as of the date of this
Amendment No. 1 and Consent, hereby amended as follows:
(a) The definition of "EBITDA" in Section 1.01 is amended by
adding at the end thereof a new clause (x) to read as follows:
"plus (x) in the case of the fiscal quarters ending September 30,
1998, December 31, 1998 and the following three quarters, any
reduction in Net Income attributable to any charge for the
revaluation of assets made in accordance with generally accepted
accounting principles in conjunction with certain affiliations,
provided that such reduction shall not exceed $92,000,000 (prior
to any adjustment for income taxes)."
(b) The definition of "Applicable Eurodollar Rate Margin" in
Section 1.01 is amended by (i) deleting the phrase "0.4375% per annum and
thereafter 0.5250% per annum" in the first sentence thereof and
substituting therefor the phrase "0.5000% per annum and thereafter 0.6750%
per annum", (ii) deleting the date "March 31, 1998" in the second to last
sentence thereof and substituting therefor the date "September 30, 1998",
1
<PAGE> 2
(iii) deleting the figure "0.5250%" in the last sentence thereof and
substituting therefor the figure "0.6750%" and (iv) deleting the table
therein and substituting therefor the following table:
<TABLE>
<CAPTION>
Applicable Eurodollar
"Consolidated Rate Margin for
Debt/EBITDA Ratio Advances
----------------- --------
<S> <C>
Greater than 3.25 to 1.00 0.6750%
Less than or equal to 3.25 to 1.00 but 0.5000%
greater than 2.50 to 1.00
Less than or equal to 2.50 to 1.00 but 0.4250%
greater than 2.00 to 1.00
Less than or equal to 2.00 to 1.00 but 0.3250%
greater than 1.50 to 1.00
Less than or equal to 1.50 to 1.00 0.2500%"
</TABLE>
(c) The definition of "Applicable Facility Fee Rate" in Section
1.01 is amended by (i) deleting the phrase "0.1875% per annum and
thereafter for each Effective Period (as defined below) 0.2250% per annum"
in the first sentence thereof and substituting therefor the phrase "0.2500%
per annum and thereafter for each Effective Period (as defined below)
0.3250% per annum", (ii) inserting after the phrase "for such quarter" in
the second to last sentence thereof the parenthetical "(commencing with the
quarter ended September 30, 1998)", (iii) deleting the figure "0.2250% in
the last sentence thereof and substituting therefor the figure "0.3250%"
and (iv) deleting the table therein and substituting therefor the following
table:
<TABLE>
<CAPTION>
Applicable Facility Fee
"Consolidated Rate for
Debt/EBITDA Ratio Advances
----------------- --------
<S> <C>
Greater than 3.25 to 1.00 0.3250%
Less than or equal to 3.25 to 1.00 but 0.2500%
greater than 2.50 to 1.00
Less than or equal to 2.50 to 1.00 but 0.2000%
greater than 2.00 to 1.00
Less than or equal to 2.00 to 1.00 but 0.1750%
greater than 1.50 to 1.00
Less than or equal to 1.50 to 1.00 0.1250%"
</TABLE>
2
<PAGE> 3
(d) The definition of "Permitted Lien" is amended by (i) replacing
the final provision in clause (v) thereof with the following:
"and provided further that the incurrence of any Debt secured
by the Liens permitted by this clause (v) shall not exceed
$50,000,000;"
(ii) deleting the word "and" at the end of clause (viii), (iii)
replacing the period at the end of clause (ix) with the phrase "; and"
and (iv) adding the following clause (x) at the end thereof:
"(x) Liens arising in connection with Capitalized Leases or
purchases or financing of personal property permitted under
Section 6.02(c)(xiii); provided that no such Lien shall extend to
or cover any assets other than the assets subject to such
Capitalized Leases or such personal property, as the case may be."
(e) Section 1.01 is amended by adding the following definitions in
the correct alphabetical order:
(i) "`Applicable Letter of Credit Fee Rate` means 0.3750%
per annum and thereafter for each Effective Period (as defined
below) 0.5000% per annum, provided, however, that if the Borrower
shall have satisfied the Consolidated Debt/EBITDA Ratio test
indicated in the table below, the Applicable Letter of Credit Fee
Rate for the Effective Period as to which such test is satisfied
shall be the percentage rate per annum set forth opposite the
appropriate test for the Commitment in the table below.
<TABLE>
<CAPTION>
Consolidated Applicable Letter of Credit
Debt/EBITDA Ratio Fee Rate
----------------- --------
<S> <C>
Greater than 3.25 to 1.00 0.5000%
Less than or equal to 3.25 to 1.00 but 0.3750%
greater than 2.50 to 1.00
Less than or equal to 2.50 to 1.00 but 0.3125%
greater than 2.00 to 1.00
Less than or equal to 2.00 to 1.00 but 0.1875%
greater than 1.50 to 1.00
Less than or equal to 1.50 to 1.00 0.1250%
</TABLE>
The Applicable Letter of Credit Fee Rate shall be determined by the
Agent each quarter on the basis of quarterly certified Consolidated
financial statements and a schedule evidencing financial covenant
compliance delivered to the Banks pursuant to section 6.04(b). The
"Effective Period" with respect to the Applicable Letter of Credit
3
<PAGE> 4
Fee Rate shall be the period commencing on the fifth Business Day
after the Borrower shall have delivered to the Agent the quarterly
certified Consolidated financial statements and financial covenant
compliance schedule for such quarter (commencing with the quarter
ended September 30, 1998) and ending the date that is five Business
Days after delivery to the Agent of quarterly certified consolidated
financial statements and financial covenant compliance certificate for
the subsequent quarter. Notwithstanding the foregoing, the Applicable
Letter of Credit Fee Rate shall be deemed to be 0.5000% per annum for
each day during an Effective Period as of which the deliveries
required to calculate the Applicable Letter of Credit Fee Rate shall
not have been made."
(ii) "Applicable Utilization Fee Rate" means 0.1250% per annum
and thereafter for each Effective Period (as defined below) 0.2500% per
annum; provided, however, that if the Borrower shall have satisfied the
Consolidated Debt/EBITDA Ratio test indicated in the table below, the
Applicable Utilization Fee Rate for the Effective Period as to which
such test is satisfied shall be the percentage rate per annum set forth
opposite the appropriate test for the Commitment in the table below.
<TABLE>
<CAPTION>
Applicable Utilization Fee
Consolidated Rate for
Debt/EBITDA Ratio Advances
----------------- --------
<S> <C>
Greater than 3.25 to 1.00 0.2500%
Less than or equal to 3.25 to 1.00 but 0.1250%
greater than 2.50 to 1.00
Less than or equal to 2.50 to 1.00 but 0.1250%
greater than 2.00 to 1.00
Less than or equal to 2.00 to 1.00 but 0.1250%
greater than 1.50 to 1.00
Less than or equal to 1.50 to 1.00 0.1250%
</TABLE>
The Applicable Utilization Fee Rate shall be determined by the Agent
each quarter on the basis of quarterly certified Consolidated financial
statements and a schedule evidencing financial covenant compliance
delivered to the Banks pursuant to Section 6.04(b). The "Effective
Period" with respect to the Applicable Utilization Fee Rate shall be
the period commencing on the fifth Business Day after the Borrower
shall have delivered to the Agent the quarterly certified Consolidated
financial statements and financial covenant compliance schedule for
such quarter (commencing with the quarter ended September 30, 1998) and
ending on the date that is five Business Days after delivery to the
Agent of quarterly certified Consolidated financial statements and
financial covenant compliance certificate for the subsequent quarter.
Notwithstanding the foregoing, the Applicable Utilization Fee Rate
shall be deemed to be 0.2500% per annum for each day during an
Effective Period as of which the deliveries required to calculate the
Applicable Utilization Fee Rate shall not have been made."
4
<PAGE> 5
(f) Section 2.03 is amended by adding to the end thereof a new
subsection (c), to read as follows:
"(c) Utilization Fees. The Borrower agrees to pay to
the Agent, for the account of each of the Banks, a utilization
fee, in respect of any day on which the aggregate principal
amount of the Advances outstanding exceeds 50% of the
aggregate Commitments on such day, on such aggregate principal
amount of the Advances outstanding at the Applicable
Utilization Fee Rate from time to time in effect, payable
quarterly in arrears on the last day of each March, June,
September and December, commencing December 31, 1998, and on
the Revolver Termination Date."
(g) Section 3.05(a) is amended by replacing clause (i) with
the following:
"(i) to each Bank (in accordance with its Commitment
Percentage) at a rate equal to the Applicable Letter of Credit
Fee Rate in effect on the date of Issuance thereof."
(h) Section 6.02(c) is amended (i) by deleting the word "and"
at the end of clause (xi) thereof, (ii) replacing the period at the end
of clause (xii) with the phrase "; and" and (iii) adding the following
clause (xiii) at the end thereof:
"(xiii) Capitalized Leases or other Debt related to
the financing of personal property not to exceed in
the aggregate $25,000,000 at any time outstanding."
(i) The proviso to Section 6.02(e)(i) is amended by (i)
inserting the word "and" immediately preceding Clause C thereof, (ii)
deleting the figure "$35,000,000" and substituting therefor the phrase
"(together with the aggregate purchase price spent by the Borrower
pursuant to Section 6.02(j)(vii) and the aggregate amount of Capital
Investments made pursuant to Section 6.02 (f)(viii)) $75,000,000" and
(iii) deleting Clause (D) thereof.
(j) Section 6.02(f) is amended by (i) deleting the word "and"
following the semicolon at the end of clause (vi)(D) thereof, (ii)
deleting the phrase "(1) that shall have a final maturity not later
than the stated Revolver Termination Date and provide for the repayment
of principal prior to final maturity at the annual rate of one-sixth of
the principal outstanding at the time loan availability under the
applicable credit facility for Straub ceases and (2)" in clause (D)
thereof, (iii) deleting the period at the end of clause (vii) thereof
and substituting a semicolon therefor, and (iv) adding to the end
thereof new subsections (viii) and (ix), to read as follows:
5
<PAGE> 6
"(viii) the Borrower may make Capital Investments of
the type described in clause (ii) of the definition thereof in
connection with a direct or indirect purchase of the 4.5%
Convertible Subordinated Debentures, due 2003 and issued by
the Borrower in an aggregate amount not to exceed (together
with the aggregate amount of Common Stock Payments made
pursuant to the provisions of Section 6.02(e)(i)(C) and the
aggregate purchase price spent by the Borrower pursuant to
Section 6.02(j)(vii)) $75,000,000; and
(ix) without limiting amounts that may be invested
in, or loaned or advanced to other Persons pursuant to Section
6.02(f)(v), the Borrower or any Subsidiary may make secured
loans to any Person (other than Straub) party to a Service
Agreement; provided that:
(A) at the time of each such loan and after
giving effect thereto, no Event of Default or event
which would constitute an Event of Default but for
the requirement that notice be given or time elapse
or both shall occur and be continuing;
(B) loans other than working capital loans
shall be secured by a first priority security
interest in all of the assets directly or indirectly
acquired by the Borrower or such Subsidiary from the
proceeds of any such loans, free and clear of any
other Liens; and the aggregate principal amount of
all such loans may not exceed (together with the
aggregate amount of all loans made pursuant to clause
(C) below) $50,000,000 at any time outstanding;
(C) working capital loans shall be made
providing loan availability for no more than one year
from the commencement of the term thereof (which may
be renewed on an annual basis, but not provide
availability later than the Revolver Termination
Date) and shall be secured by a first priority
security interest in all of the accounts receivable,
inventory, supplies and other current assets of such
Person, free and clear of any other Liens; and the
aggregate principal amount of all such working
capital loans may not exceed (together with the
aggregate amount of all loans made pursuant to clause
(B) above) $50,000,000 at any time outstanding; and
(D) each such loan shall be evidenced by a
promissory note that shall be subject to any
repurchase right of such Person if so provided in
such Service Agreement."
(k) Section 6.02(j) is amended by (i) deleting the word "or"
following the comma at the end of clause (v) thereof, (ii) deleting the
period at the end of clause (vi)
6
<PAGE> 7
thereof and substituting the phrase ", or " therefor, and (iii) adding
to the end thereof a new subsection (vii), to read as follows:
"(vii) the purchase of the 4.5% Convertible
Subordinated Debentures, due 2003 and issued by the Borrower
for an aggregate purchase price (together with the aggregate
amount of Common Stock Payments made pursuant to the
provisions of Section 6.02(e)(i)(C) and the aggregate amount
of Capital Investments made pursuant to Section 6.02(f)(viii))
not to exceed $75,000,000."
(l) Section 6.04(a)(ii) is amended by adding immediately after
the phrase "Section 6.03" therein the phrase "and the provisions of
Section 6.02(e)(i)".
(m) Schedule IV to the Credit Agreement in full reads as set
forth on Schedule II hereto.
(n) Schedule V to the Credit Agreement in full reads as set
forth on Schedule III hereto.
(o) Section 6.03 is amended by adding immediately after the
phrase "For purposes of subsection (b)" therein the phrase "and (c)".
Notwithstanding the provisions of Section 7.01(j), the
Majority Banks hereby consent to the termination of the Service Agreements
listed on Schedule I hereto.
This Amendment No. 1 and Consent shall become effective as of
the date first above written when, and only when, on or before September 30,
1998, (i) the Agent shall have received counterparts of this Amendment No. 1 and
Consent executed by the undersigned, the Issuing Bank and the Majority Banks or,
as to any of the Banks, advice satisfactory to the Agent that such Bank has
executed this Amendment No. 1 and Consent, (ii) the Agent shall have received
for the ratable account of each Bank approving this Amendment No. 1 and Consent
a consent fee of 1/10 of one percent of each such Bank's Commitment, and (iii)
the consent attached hereto executed by each Guarantor. This Amendment No. 1 and
Consent is subject to the provisions of Section 9.01 of the Credit Agreement.
On and after the effectiveness of this Amendment No. 1 and
Consent, each reference in the Credit Agreement to "this Agreement",
"hereunder", "hereof" or words of like import referring to the Credit Agreement,
and each reference in the Notes and each of the other Loan Documents to "the
Credit Agreement", "thereunder", "thereof" or words of like import referring to
the Credit Agreement, shall mean and be a reference to the Credit Agreement, as
amended by this Amendment No. 1 and Consent.
The Credit Agreement, the Notes and each of the other Loan
Documents, as specifically amended by this Amendment No. 1 and Consent, are and
shall continue to be in full force and effect and are hereby in all respects
ratified and confirmed. The execution, delivery
7
<PAGE> 8
and effectiveness of this Amendment No. 1 and Consent shall not, except as
expressly provided herein, operate as a waiver of any right, power or remedy of
any Bank or the Agent under any of the Loan Documents, nor constitute a waiver
of any provision of any of the Loan Documents.
If you agree to the terms and provisions hereof, please
evidence such agreement by executing and returning at least three counterparts
of this Amendment No. 1 and Consent to Michael Stein at Shearman & Sterling, 599
Lexington Avenue, New York, NY 10022 (Telecopier No. (212) 848-7179).
This Amendment No. 1 and Consent may be executed in any number
of counterparts and by different parties hereto in separate counterparts, each
of which when so executed shall be deemed to be an original and all of which
taken together shall constitute one and the same agreement. Delivery of an
executed counterpart of a signature page to this Amendment No. 1 and Consent by
telecopier shall be effective as delivery of a manually executed counterpart of
this Amendment No. 1 and Consent.
This Amendment No. 1 and Consent shall be governed by, and
construed in accordance with, the laws of the State of New York.
Very truly yours,
PHYCOR, INC.
By
-------------------------------
Title:
Agreed as of the date first above written:
CITIBANK, N.A.,
as Agent, as an Issuing Bank and as Bank
By
----------------------------------------
Title:
NATIONSBANK, N.A.
as Documentation Agent
By
--------------------------------------
Title:
8
<PAGE> 9
AMSOUTH BANK
By
-------------------------------------
Title:
BANK OF AMERICA NT & SA
By
------------------------------------
Title:
BANKERS TRUST COMPANY
By
---------------------------------
Title:
THE BANK OF NOVA SCOTIA
By
---------------------------------
Title:
9
<PAGE> 10
CREDIT LYONNAIS NEW YORK BRANCH
By
----------------------------------
Title:
FIRST AMERICAN NATIONAL BANK
By
------------------------------------
Title:
THE FIRST NATIONAL BANK OF CHICAGO
By
-------------------------------------
Title:
FIRST UNION NATIONAL BANK
By
-----------------------------------
Title:
10
<PAGE> 11
FLEET NATIONAL BANK
By
-----------------------------------
Title:
MELLON BANK, N.A.
By
-------------------------------
Title:
COOPERATIEVE CENTRALE RAIFFEISEN
BOERENLEENBANK B.A., "RABOBANK NEDERLAND",
NEW YORK BRANCH
By
--------------------------------
Title:
By
--------------------------------
Title:
11
<PAGE> 12
THE SUMITOMO BANK, LIMITED
By
---------------------------------
Title:
SUNTRUST, NASHVILLE, N.A.
as Swing Line Bank
By
--------------------------------
Title:
TORONTO DOMINION (TEXAS), INC.
By
---------------------------------
Title:
WACHOVIA BANK
By
----------------------------------
Title:
12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 42,766
<SECURITIES> 0
<RECEIVABLES> 430,004
<ALLOWANCES> 0
<INVENTORY> 20,521
<CURRENT-ASSETS> 556,494
<PP&E> 393,036
<DEPRECIATION> 125,054
<TOTAL-ASSETS> 1,890,400
<CURRENT-LIABILITIES> 311,847
<BONDS> 561,501
0
0
<COMMON> 865,718
<OTHER-SE> 22,172
<TOTAL-LIABILITY-AND-EQUITY> 1,890,400
<SALES> 0
<TOTAL-REVENUES> 1,102,632
<CGS> 0
<TOTAL-COSTS> 1,127,766
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,169
<INCOME-PRETAX> (49,303)
<INCOME-TAX> (16,438)
<INCOME-CONTINUING> (43,028)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (43,028)
<EPS-PRIMARY> (.61)
<EPS-DILUTED> (.61)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 37,534
<SECURITIES> 0
<RECEIVABLES> 373,315
<ALLOWANCES> 0
<INVENTORY> 17,646
<CURRENT-ASSETS> 478,861
<PP&E> 299,748
<DEPRECIATION> 81,756
<TOTAL-ASSETS> 1,502,010
<CURRENT-LIABILITIES> 243,700
<BONDS> 335,086
0
0
<COMMON> 641,219
<OTHER-SE> 103,044
<TOTAL-LIABILITY-AND-EQUITY> 1,502,010
<SALES> 0
<TOTAL-REVENUES> 802,297
<CGS> 0
<TOTAL-COSTS> 712,242
<OTHER-EXPENSES> 6,282
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,791
<INCOME-PRETAX> 66,982
<INCOME-TAX> 25,929
<INCOME-CONTINUING> 41,053
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 41,053
<EPS-PRIMARY> .66
<EPS-DILUTED> .61
<FN>
EARNINGS PER SHARE FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 HAS BEEN
RESTATED TO CONFORM WITH THE PROVISIONS OF FAS NO. 128, EARNINGS PER SHARE,
ADOPTED BY THE COMPANY IN 1997.
</FN>
</TABLE>
