-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WEmejrnnv1PZ89soGxvi7zRGvN0omJOUNi5Kvlwu3PxvGHmZPmvbN6SPj6sqKTQc xlQvxfuT1T5WWTQ57CTEpw== 0000950144-97-012776.txt : 19971125 0000950144-97-012776.hdr.sgml : 19971125 ACCESSION NUMBER: 0000950144-97-012776 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971124 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHYCOR INC/TN CENTRAL INDEX KEY: 0000881400 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-OFFICES & CLINICS OF DOCTORS OF MEDICINE [8011] IRS NUMBER: 621344801 STATE OF INCORPORATION: TN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 000-19786 FILM NUMBER: 97727217 BUSINESS ADDRESS: STREET 1: 30 BURTON HILLS BLVD STREET 2: STE 400 CITY: NASHVILLE STATE: TN ZIP: 37215 BUSINESS PHONE: 6156659066 MAIL ADDRESS: STREET 1: 30 BURTON HILLS BLVD STREET 2: STE 400 CITY: NASHVILLE STATE: TN ZIP: 37215 10-Q/A 1 PHYCOR, INC FORM 10-Q/A DATED 09-30-97 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A (Mark One) [X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ending September 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 November 10, 1997, 64,495,674 shares of the Registrant's Common Stock were outstanding. 2 PHYCOR, INC. AND SUBSIDIARIES Consolidated Balance Sheets September 30, 1997 (unaudited) and December 31, 1996 (In thousands, except share data)
ASSETS SEPTEMBER 30, DECEMBER 31, ------- 1997 1996 ---------- ---------- (Unaudited) Current assets: Cash and cash equivalents $ 37,534 30,530 Accounts receivable, net 373,315 295,437 Inventories 17,646 15,185 Prepaid expenses and other assets 50,366 42,275 ---------- ---------- Total current assets 478,861 383,427 Property and equipment, net 217,992 160,228 Intangible assets 772,858 559,705 Other assets 32,299 15,221 ---------- ---------- Total assets $1,502,010 1,118,581 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current installments of long-term debt $ 1,156 424 Current installments of obligations under capital leases 3,474 1,237 Accounts payable 34,084 24,103 Due to physician groups 100,028 75,340 Salaries and benefits payable 38,878 23,120 Other accrued expenses and liabilities 66,080 46,257 ---------- ---------- Total current liabilities 243,700 170,481 Long-term debt, excluding current installments 135,086 123,112 Obligations under capital leases, excluding current installments 6,036 1,467 Due to physician groups 53,222 66,103 Deferred tax credits and other liabilities 49,222 21,797 Convertible subordinated notes payable to physician groups 70,481 83,918 Convertible subordinated debentures 200,000 200,000 ---------- ---------- Total liabilities 757,747 666,878 ---------- ---------- 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, 64,352,000 at September 30, 1997 and 54,831,000 shares at December 31, 1996 641,219 389,712 Retained earnings 103,044 61,991 ---------- ---------- Total shareholders' equity 744,263 451,703 ---------- ---------- Total liabilities and shareholders' equity $1,502,010 1,118,581 ========== ==========
See accompanying notes to consolidated financial statements and management's discussion and analysis. 2 3 PHYCOR, INC. AND SUBSIDIARIES Consolidated Statements of Earnings Three months and nine months ended September 30, 1997 and 1996 (In thousands, except for earnings per share) (Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------ ----------------- ----------------------- 1997 1996 1997 1996 --------- --------- --------- --------- Net revenue $ 284,291 196,418 802,297 535,562 Operating expenses (income): Clinic salaries, wages and benefits 106,875 74,727 302,461 204,493 Clinic supplies 46,547 30,383 128,185 81,459 Purchased medical services 7,788 5,371 22,477 15,295 Other clinic expenses 43,050 32,191 123,357 88,737 General corporate expenses 6,609 5,032 19,768 15,307 Rents and lease expense 25,416 16,729 71,376 44,768 Depreciation and amortization 15,958 10,596 44,618 28,158 --------- --------- --------- --------- Net operating expenses 252,243 175,029 712,242 478,217 --------- --------- --------- --------- Earnings from operations 32,048 21,389 90,055 57,345 Interest income (744) (755) (2,457) (2,792) Interest expense 5,366 4,206 16,791 10,761 Minority interests in earnings of consolidated partnerships 2,850 3,185 8,739 8,429 --------- --------- --------- --------- Earnings before income taxes 24,576 14,753 66,982 40,947 Income tax expense 9,536 5,680 25,929 15,765 --------- --------- --------- --------- Net earnings $ 15,040 9,073 41,053 25,182 ========= ========= ========= ========= Earnings per common share $ .22 .15 .61 .42 ========= ========= ========= ========= Weighted average number of common shares and share equivalents outstanding 69,072 60,843 66,853 60,555 ========= ========= ========= =========
See accompanying notes to consolidated financial statements and management's discussion and analysis. 3 4 PHYCOR, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Three months and nine months ended September 30, 1997 and 1996 (In thousands) (Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------- --------------------- 1997 1996 1997 1996 -------- -------- -------- -------- Cash flows from operating activities: Net earnings $ 15,040 9,073 41,053 25,182 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 15,958 10,596 44,618 28,158 Minority interests (112) 192 2,102 1,586 Increase (decrease) in cash, net of effects of acquisitions, due to changes in: Accounts receivable (6,695) (14,594) (20,589) (30,219) Inventories (377) (1,362) (1,135) (2,307) Prepaid expenses and other assets 43 (3,059) (2,740) (9,164) Accounts payable 5,203 1,588 2,536 (2,907) Due to physician groups 3,133 4,637 8,410 7,243 Other accrued expenses and liabilities 10,595 7,189 8,099 19,166 -------- -------- -------- -------- Net adjustments 27,748 5,187 41,301 11,556 -------- -------- -------- -------- Net cash provided by operating activities 42,788 14,260 82,354 36,738 -------- -------- -------- -------- Cash flows from investing activities: Payments for acquisitions, net (59,534) (57,434) (241,907) (179,124) Purchase of property and equipment (16,000) (12,606) (48,271) (36,069) Investments in other assets (2,434) (820) (4,605) (1,675) -------- -------- -------- -------- Net cash used by investing activities (77,968) (70,860) (294,783) (216,868) -------- -------- -------- -------- Cash flows from financing activities: Net proceeds from issuance of convertible debentures -- -- -- 194,395 Proceeds from long-term borrowings 37,000 50,000 219,000 100,000 Repayment of long-term borrowings (3,108) (100) (221,333) (104,464) Repayment of obligations under capital leases (845) (450) (3,020) (1,270) Net proceeds from issuance of stock and warrants 1,256 924 225,052 4,010 Loan costs incurred (266) (85) (266) (85) -------- -------- -------- -------- Net cash provided by financing activities 34,037 50,289 219,433 192,586 -------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents (1,143) (6,311) 7,004 12,456 Cash and cash equivalents - beginning of period 38,677 37,594 30,530 18,827 -------- -------- -------- -------- Cash and cash equivalents - end of period $ 37,534 31,283 37,534 31,283 ======== ======== ======== ========
See accompanying notes to consolidated financial statements and management's discussion and analysis. 4 5 PHYCOR, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows, Continued Three months and nine months ended September 30, 1997 and 1996 (In thousands) (Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------------- ------------------------- 1997 1996 1997 1996 -------- -------- -------- -------- SUPPLEMENTAL SCHEDULE OF INVESTING ACTIVITIES: Effects of acquisitions: Assets acquired, net of cash $ 69,414 88,422 349,150 274,366 Liabilities assumed, net of deferred purchase price payments (8,604) (19,543) (89,117) (75,143) Issuance of convertible subordinated notes payable (740) (4,438) (9,412) (12,667) Issuance of common stock and warrants (536) (7,007) (8,714) (7,432) -------- -------- -------- -------- Payments for acquisitions $ 59,534 57,434 241,907 179,124 ======== ======== ======== ======== SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Capital lease obligations incurred to acquire equipment $ 97 278 407 464 ======== ======== ======== ======== Conversion of subordinated notes payable to common stock $ 2,496 110 14,054 6,252 ======== ======== ======== ========
See accompanying notes to consolidated financial statements and management's discussion and analysis. 5 6 PHYCOR, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements Three months and nine months ended September 30, 1997 and 1996 (1) BASIS OF PRESENTATION ----------------- The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles 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 September 30, 1997 and during 1996, the Company, through wholly-owned subsidiaries, acquired certain operating assets of the following clinics:
CLINIC EFFECTIVE DATE LOCATION ------ -------------- -------- 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 White-Wilson Medical Center July 1, 1997 Ft. Walton Beach, Florida Maui Medical Group September 1, 1997 Maui, Hawaii
(Continued) 6 7 PHYCOR, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements
CLINIC EFFECTIVE DATE LOCATION ------ -------------- -------- 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
(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. 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 earn-out formula in 1998. Of any future payments to be made, a portion may be payable in shares of the Company's common stock. (Continued) 7 8 PHYCOR, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements (C) PRO FORMA INFORMATION ------------------- The unaudited consolidated pro forma results of all current, continuing operations assuming 1997 acquisitions through September 30, and all 1996 acquisitions, had been consummated on January 1, 1996 are as follows (in thousands, except for earnings per share):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------- -------------------- 1997 1996 1997 1996 -------- -------- -------- -------- Net revenue $284,464 256,262 835,188 755,321 Earnings before income taxes 24,642 19,519 63,397 57,890 Net earnings 15,080 12,004 41,919 35,602 Earnings per common share .22 .19 .63 .58 Weighted average number of shares and share equivalents outstanding 69,072 61,716 66,879 61,588
(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. 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. (Continued) 8 9 PHYCOR, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements The following represent amounts included in the determination of net revenue (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------- ---------------------- 1997 1996 1997 1996 --------- --------- --------- --------- Gross physician group revenues $ 718,315 488,208 2,047,598 1,343,844 Less: Provisions for doubtful accounts and contractual adjustments 275,648 179,649 778,850 484,788 --------- --------- --------- --------- Net physician group revenue 442,667 308,559 1,268,748 859,056 IPA revenue 112,288 58,926 297,915 171,778 --------- --------- --------- --------- Net physician group and IPA revenue 554,955 367,485 1,566,663 1,030,834 Less amounts retained by physician groups and IPAs Physician groups 157,667 112,443 463,251 323,197 Clinic technical employee compensation 19,113 12,897 53,845 35,090 IPAs 93,884 45,727 247,270 136,985 --------- --------- --------- --------- Net revenue $ 284,291 196,418 802,297 535,562 ========= ========= ========= =========
(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. (5) SUBSEQUENT EVENTS --------------- Since September 30, 1997, the Company has acquired certain assets of a 40-physician multi-specialty clinic based in Murfreesboro, Tennessee and a 150-physician multi-specialty clinic based in Pensacola, Florida and entered into a long-term service agreement with each of the affiliated physician groups. On October 29, 1997, the Company announced a definitive agreement to acquire MedPartners, Inc., forming a physician practice management company with annual net health services revenue of more than $8.4 billion. Under the terms of the agreement, holders of MedPartners Common Stock will be entitled to receive a fixed ratio of 1.18 shares of PhyCor Common Stock for each MedPartner share held. The transaction includes assumption of $1.2 billion of debt and is expected to be accounted for as a pooling-of-interests and to be treated as a tax-free exchange. The transaction is subject to the approval of the shareholders of both companies, various state and federal regulatory agencies, and other customary conditions. Closing of the transaction is expected in the first quarter of 1998. 9 10 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 53 clinics with approximately 3,780 physicians in 28 states and manages IPAs with over 17,800 physicians in 27 markets. The Company's affiliated physicians provide medical services to approximately 1,100,000 patients under prepaid health plans, including approximately 165,000 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 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 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 nine months of 1997, PhyCor affiliated with seven multi-specialty clinics and numerous smaller medical practices and completed its previously announced merger with Straub Clinic and Hospital, Incorporated located in Honolulu, Hawaii adding $329.0 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 48% cash, 45% liabilities assumed and 7% 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 10 11 Company purchased certain land and buildings. Service agreement costs are amortized over the life of the related service agreement, with recoverability assessed periodically. Since September 30, 1997, the Company has acquired the assets of a 40-physician multi-specialty clinic based in Murfreesboro, Tennessee, and a 150-physician multi-specialty clinic based in Pensacola, Florida. The Company entered into long-term service agreements with each of these affiliated physician groups. On October 29, 1997, the Company announced a definitive agreement to acquire MedPartners, Inc. ("MedPartners"), forming a physician practice management company with annual net health services revenue of more than $8.4 billion. Under the terms of the agreement, holders of MedPartners Common Stock will receive a fixed ratio of 1.18 shares of PhyCor Common Stock for each MedPartners share held. The transaction includes assumption of $1.2 billion of debt and is expected to be accounted for as a pooling-of-interests and to be treated as a tax-free exchange. The transaction is subject to the approval of the shareholders of both companies, various state and federal regulatory agencies, and other customary conditions. Closing of the transaction is expected in the first quarter of 1998. As a result of the merger, the Company's historical results of operations will no longer be comparable to or indicative of future post-merger pooled results for the combined entity. 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.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ---------------- ---------------- 1997 1996 1997 1996 ---- ---- ---- ---- Net revenue .......................... 100% 100% 100% 100% Operating expenses Clinic salaries, wages and benefits 37.6 38.0 37.7 38.2 Clinic supplies ................... 16.4 15.5 16.0 15.2 Purchased medical services ........ 2.8 2.7 2.8 2.8 Other clinic expenses ............. 15.1 16.4 15.4 16.6 General corporate expenses ........ 2.3 2.6 2.5 2.8 Rents and lease expense ........... 8.9 8.5 8.9 8.4 Depreciation and amortization ..... 5.6 5.4 5.5 5.3 ---- ---- ---- ---- Net operating expenses ......... 88.7 89.1 88.8 89.3 ---- ---- ---- ---- Earnings from operations ....... 11.3 10.9 11.2 10.7 Interest income ................... (0.2) (0.3) (0.3) (0.5) Interest expense .................. 1.9 2.1 2.1 2.0 Minority interest in earnings of consolidated partnerships ..... 1.0 1.6 1.1 1.6 ---- ---- ---- ---- Earnings before income taxes ... 8.6 7.5 8.3 7.6 Income tax expense ................... 3.3 2.9 3.2 2.9 ---- ---- ---- ---- Net earnings ................... 5.3% 4.6% 5.1% 4.7% ==== ==== ==== ====
1997 Compared to 1996 Net revenue increased from $196.4 million for the third quarter of 1996 to $284.3 million for the third quarter of 1997, an increase of $87.9 million, or 44.8%, and from $535.6 million to $802.3 million 11 12 for the first nine months of 1996 compared to 1997, an increase of 49.8%. On a base of 31 clinics and 13 IPA markets, net revenue increased by 12.2% for the quarter and 12.8% for the nine months ended September 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 third quarter and the first nine 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 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 September 30, 1997, the Company had $235.2 million in working capital, up from $212.9 million as of December 31, 1996. Also, the Company generated $42.8 million of cash flow from operations for the third quarter of 1997 compared to $14.3 million for the third quarter of 1996, and $82.4 million for the first nine months of 1997 compared to $36.7 million for the same period in 1996. At September 30, 1997, net accounts receivable of $373.3 million amounted to 72 days of net clinic revenue compared to $295.4 million and 73 days at the end of 1996. The decrease in days of net clinic revenue 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 38.4% of total capitalization at September 30, 1997, compared to 51.2% at the end of 1996. In the first nine months of 1997, $14.1 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 nine months of 1997 resulted in an increase of $292.6 million in shareholders' equity compared to December 31, 1996. Capital expenditures during the first nine months of 1997 totaled $48.3 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 $12 million in capital expenditures during the fourth quarter of 1997. 12 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 $73.6 million of additional consideration over the next five years, of which a maximum of $2.8 million would be payable during the fourth quarter of 1997. The Company may exercise its option to acquire the outstanding Class B Common Stock of PhyCor Management Corporation near 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 $21.0 million. PhyCor has been 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 the Company's relationship with affiliated physician groups. PhyCor 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 the 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. On October 17, 1997, the Company entered into an interest rate swap agreement to fix the interest rate on $100.0 million of debt at 5.85% for a two-year period. 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 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, 1997. 13 14 In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 (SFAS 128), Earnings Per Share. This statement establishes standards for computing and presenting earnings per share (EPS), replacing the presentation of currently required primary EPS with a presentation of Basic EPS. For entities with complex capital structures, the statement requires the dual presentation of both Basic EPS and Diluted EPS on the face of the statement of operations. Under this new statement, Basic EPS is computed based on weighted average shares outstanding and excludes any potential dilution. Diluted EPS reflects potential dilution from the exercise or conversion of securities into Common Stock or from other contracts to issue Common Stock and is similar to the currently required fully diluted EPS. SFAS 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods, and earlier application is not permitted. When adopted, the Company will be required to restate its EPS data for all prior periods presented. The Company does not expect the impact of the adoption of this statement to be material to previously reported EPS amounts. At September 30, 1997, the Company had cash and cash equivalents of approximately $37.5 million, and as of November 10, 1997, $239.6 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. The merger of PhyCor with MedPartners is expected to close in the first quarter of 1998. PhyCor expects to finance the transaction with a combination of approximately 236,000,000 shares of newly issued Common Stock and the assumption of approximately $1.2 billion in debt. The additional shares of Common Stock to be issued in the merger would increase the shares of Common Stock outstanding by approximately 366%. In addition, prior to consummating the merger, PhyCor will be required to expand its existing credit facility. 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 the merger with MedPartners, 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 15 PART II OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. From time to time, the Company issues subordinated convertible notes and warrants to purchase shares of the Company's Common Stock in connection with the acquisition of the assets of multi-specialty clinics and physician practice groups. In general, the subordinated convertible notes are convertible into shares of the Company's Common Stock following the first anniversary of the issuance of the notes at a conversion price based on the market price of the Common Stock at the time the note was issued. The Company issues subordinated convertible notes, warrants and the shares of Common Stock issued upon conversion of notes and exercise of warrants in transactions intended to be exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Sections 3(a)(11), 3(b) or 4(2) thereunder. During the third quarter of 1997, the Company issued the following subordinated convertible notes, warrants and shares of Common Stock upon conversion of notes: On July 1, 1997, the Company issued a subordinated convertible note in the principal amount of $295,282 to Stephen R. Rauls, M.D. On July 1, 1997, the Company issued a subordinated convertible note in the principal amount of $445,282 to Charles C. Dunn, M.D. On July 2, 1997, the Company issued 90,909 shares of Common Stock to Carriere & Associates, P.A. upon conversion of a subordinated convertible note in the principal amount of $1,400,000. On July 10, 1997, the Company issued 3,792 shares of Common Stock to Dennis Wayne Berry, M.D. upon conversion of a subordinated convertible note in the principal amount of $109,680. On July 22, 1997, the Company issued 80,559 shares of Common Stock to Tidewater Physicians Multi-Specialty Group, P.C., upon conversion of a subordinated convertible note in the principal amount of $975,576. On August 1, 1997, the Company issued warrants to purchase 40,000 shares of Common Stock to the Welborn Clinic. The warrants are exercisable beginning August 1, 2000 at an exercise price of $33.16 and expire on August 1, 2002. On September 11, 1997, the Company issued 345 shares of Common Stock to Luiz Sergio Lisboa, M.D. upon conversion of a subordinated convertible note in the principal amount of $10,000. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (A) EXHIBITS.
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS - ------ ----------------------- 2 -- Plan and Agreement of Merger by and between the Registrant and MedPartners, Inc.(1) 3.1 -- Restated Charter of Registrant(2) 3.2 -- Amendment to Restated Charter of the Registrant (3) 3.3 -- Amendment to Restated Charter of the Registrant (4) 3.4 -- Amended Bylaws of the Registrant (2) 4.1 -- Specimen of Common Stock Certificate (5) 4.2 -- Shareholder Rights Agreement, dated February 18, 1994, between the Registrant and First Union National Bank of North Carolina (6) 11 -- Statement re Computation of Per Share Earnings (1) 27 -- Financial Data Schedule (for SEC use only) (1)
- ------------- (1) Previously filed. (2) Incorporated by reference to Exhibits 3.1 and 3.2 filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994, Commission No. 0-19786. (3) Incorporated by reference to Exhibit 4.2 filed with the Registrant's Registration Statement on Form S-3 Registration No. 33-93018. (4) Incorporated by reference to Exhibit 4.3 filed with the Registrant's Registration Statement on Form S-3 Registration No. 33-98528. (5) Incorporated by reference to Exhibit 4.2 filed with the Registrant's Registration Statement on Form S-1 Registration No. 33-44123. (6) 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 has not filed a Current Report on Form 8-K during the quarter for which this report is filed. 15 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PHYCOR, INC. By: /s/ John K. Crawford ----------------------- John K. Crawford Chief Financial Officer Date: November 21, 1997 16 -----END PRIVACY-ENHANCED MESSAGE-----