-----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, VPbpfOZh4VpylzNcBIq1LWgKJP25mYLLsnWLkCOSn7dTXPVIFPJZsG2Afk7T6D9J SYKblIVtyZwhmBGgCCS7DA== 0000950144-97-000879.txt : 19970225 0000950144-97-000879.hdr.sgml : 19970225 ACCESSION NUMBER: 0000950144-97-000879 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19970205 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: S-3 SEC ACT: 1933 Act SEC FILE NUMBER: 333-21151 FILM NUMBER: 97518257 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 S-3 1 PHYCOR, INC. FORM S-3 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 5, 1997 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------ FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------ 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 BOULEVARD, SUITE 400 NASHVILLE, TENNESSEE 37215 (615) 665-9066 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ------------------ JOSEPH C. HUTTS CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER PHYCOR, INC. 30 BURTON HILLS BOULEVARD, SUITE 400 NASHVILLE, TENNESSEE 37215 (615) 665-9066 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------ COPIES TO: J. CHASE COLE, ESQ. LESLIE E. DAVIS, ESQ. WALLER LANSDEN DORTCH & DAVIS, PLLC TESTA, HURWITZ & THIBEAULT, LLP 2100 NASHVILLE CITY CENTER HIGH STREET TOWER, 125 HIGH STREET NASHVILLE, TENNESSEE 37219-8966 BOSTON, MASSACHUSETTS 02110 (615) 244-6380 (617) 248-7000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [ ] If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] _________________ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] _________________ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ------------------ CALCULATION OF REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- PROPOSED PROPOSED AMOUNT MAXIMUM MAXIMUM AMOUNT OF TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE REGISTRATION SECURITIES TO BE REGISTERED REGISTERED(1)(2) PER SHARE(3) OFFERING PRICE(3) FEE - ---------------------------------------------------------------------------------------------------------------------- Common Stock, no par value per share.. 7,360,000 shares $33.00 $242,880,000 $73,600 - ---------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------
(1) Includes up to 960,000 shares of Common Stock which the Underwriters have the option to purchase from the Company and the Selling Shareholders solely to cover over-allotments, if any. (2) The Rights which are attached to the Common Stock being registered will be issued for no additional consideration. Therefore, no additional registration fee is required. (3) Estimated in accordance with Rule 457(c) solely for the purpose of calculating the registration fee and is based on the average high and low reported sales prices of the Common Stock on the Nasdaq Stock Market's National Market on February 4, 1997. ------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION FEBRUARY 5, 1997 6,400,000 SHARES PHYCOR LOGO (R) COMMON STOCK ------------------ All of the shares of Common Stock, no par value per share (the "Common Stock"), offered hereby are being offered by PhyCor, Inc. (the "Company"). The Common Stock of the Company is traded on the Nasdaq Stock Market's National Market (the "Nasdaq National Market") under the symbol "PHYC." On February 4, 1997, the last reported sale price for the Company's Common Stock was $32 3/4 per share. ------------------ THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" APPEARING ON PAGES 7 THROUGH 10. ------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- PRICE UNDERWRITING PROCEEDS TO DISCOUNTS AND TO PUBLIC COMMISSIONS COMPANY(1) - -------------------------------------------------------------------------------------------------------------------- Per Share............................. $ $ $ - -------------------------------------------------------------------------------------------------------------------- Total(2).............................. $ $ $ - -------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------
(1) Before deducting expenses of the offering estimated at $800,000 payable by the Company. (2) The Company and certain shareholders (the "Selling Shareholders") have granted the Underwriters a 30-day option to purchase up to 960,000 additional shares of Common Stock solely to cover over-allotments, if any. To the extent that the option is exercised, the Underwriters will offer the additional shares at the Price to Public shown above. If the option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions, Proceeds to Company and Proceeds to Selling Shareholders will be $ , $ , $ and $ , respectively. See "Underwriting." ------------------ The shares of Common Stock are offered by the several Underwriters, subject to prior sale, when, as and if delivered to and accepted by them, and subject to the right of the Underwriters to reject any order in whole or in part. It is expected that delivery of the shares of Common Stock will be made at the offices of Alex. Brown & Sons Incorporated, Baltimore, Maryland, on or about , 1997. ALEX. BROWN & SONS INCORPORATED EQUITABLE SECURITIES CORPORATION MERRILL LYNCH & CO. PIPER JAFFRAY INC. SALOMON BROTHERS INC THE DATE OF THIS PROSPECTUS IS , 1997. 3 PHYCOR LOGO (R) OPERATING MARKETS [A map of the contiguous 48 states and Hawaii setting forth the location of each of the Company's multi-specialty medical clinics and independent practice associations is included here.] ------------------ PhyCor was incorporated in Tennessee in January 1988. Unless otherwise stated or the context otherwise requires, references in this Prospectus to "PhyCor" and the "Company" refer to PhyCor, Inc. and its subsidiaries. The Company's executive offices are located at 30 Burton Hills Boulevard, Suite 400, Nashville, Tennessee 37215, and its telephone number is (615) 665-9066. ------------------ IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON NASDAQ IN ACCORDANCE WITH RULE 10B-6A OR ANY SUCCESSOR RULES UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). SEE "UNDERWRITING." 2 4 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements and notes thereto appearing elsewhere in this Prospectus. THE COMPANY PhyCor is a physician practice management company that acquires and operates multi-specialty medical clinics and develops and manages independent practice associations ("IPAs"). PhyCor's objective is to organize physicians into professionally managed networks that assist physicians in assuming increased responsibility for delivering cost-effective medical care, while attaining high-quality clinical outcomes and patient satisfaction. The Company operates 45 clinics with approximately 3,070 physicians in 26 states. The Company also manages IPAs, which are networks of independent physicians, that include over 9,300 physicians in 17 markets. The Company's affiliated physicians provide capitated medical services to approximately 825,000 members, including approximately 105,000 Medicare members. The Company's strategy is to position its affiliated multi-specialty medical clinics and IPAs to be the physician component of organized health care systems. PhyCor targets for acquisition primary care-oriented multi-specialty medical clinics with significant market shares and established reputations for providing quality medical care. The Company is also assisting independent physicians in particular markets in developing new physician groups that enter into long-term agreements with the Company. The Company focuses its IPA development and management efforts in markets that have characteristics indicating opportunities for rapid enrollment growth and attractive capitation rates. The Company generates increased demand for the services and capabilities of its affiliated physician organizations and achieves growth through the addition of physicians, the expansion of managed care relationships and the addition and expansion of ancillary services. PhyCor believes that primary care-oriented multi-specialty physician organizations are a critical element of organized health care systems, because physician decisions determine the cost and quality of care. PhyCor believes that physician-driven organizations, including multi-specialty medical clinics, IPAs and the combination of such organizations, present more attractive alternatives for physician consolidation than hospital or insurer/HMO-controlled organizations. The combination of PhyCor's multi-specialty medical clinic and IPA management capabilities and new group-formation efforts enables the Company to offer physician practice management services to substantially all types of physician organizations. RECENT DEVELOPMENTS Since September 30, 1996, the Company has acquired the assets of four multi-specialty clinics with an aggregate of 307 physicians. In January 1997, PhyCor consummated its merger with Straub Clinic & Hospital, Incorporated ("Straub"), an integrated health care system with a 152-physician multi-specialty clinic and 159-bed acute care hospital located in Honolulu, Hawaii. In connection with the merger, PhyCor will also provide management services to a related 35-physician group. Currently, the Company has agreements in principle to acquire the assets of three additional multi-specialty physician clinics with an aggregate of approximately 160 physicians. These transactions are expected to be completed during the first quarter of 1997. On February 5, 1997, the Company announced that for the fourth quarter of 1996, net revenues were $230.8 million, an increase of 70.2% from $135.6 million for the comparable prior year period. Net earnings for the quarter totaled $11.2 million, or $0.18 per share, compared with net earnings of $7.0 million, or $0.12 per share, in the comparable prior year period, representing increases of 60.0% and 50.0%, respectively. 3 5 For the year ended December 31, 1996, net revenues were $766.3 million, an increase of 73.5% from $441.6 million in the prior year. Net earnings for 1996 totaled $36.4 million, or $0.60 per share, compared with net earnings of $21.9 million, or $0.41 per share, representing increases of 66.2% and 46.3%, respectively. THE OFFERING Common Stock offered................ 6,400,000 shares Common Stock to be outstanding after the offering...................... 61,772,319 shares(1) Use of proceeds..................... To repay certain indebtedness and for general corporate purposes, including acquisitions. Nasdaq National Market symbol....... PHYC - --------------- (1) Excludes outstanding options to purchase 10,254,704 shares of Common Stock, subordinated debentures convertible into 5,172,414 shares of Common Stock, subordinated notes convertible into 3,227,828 shares of Common Stock, warrants exercisable for 881,212 shares of Common Stock and approximately 127,000 shares of Common Stock which may be issued from time to time to a physician group upon satisfaction of established financial performance criteria. See "Capitalization." 4 6 SUMMARY CONSOLIDATED FINANCIAL AND STATISTICAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA(1) ---------------------------- NINE MONTHS ENDED NINE MONTHS YEAR ENDED DECEMBER 31, SEPTEMBER 30, YEAR ENDED ENDED ---------------------------------- -------------------- DECEMBER 31, SEPTEMBER 30, 1993 1994 1995 1995 1996 1995 1996 -------- -------- -------- -------- -------- ------------ ------------- STATEMENT OF OPERATIONS DATA: Net revenue........ $167,381 $242,485 $441,596 $305,948 $535,562 $874,541 $734,288 Net earnings....... 7,140(2) 11,675(2) 21,874 14,908 25,182 42,887 33,947 Net earnings per share............ $ 0.28(2) $ 0.32(2) $ 0.41 $ 0.29 $ 0.42 $ 0.74 $ 0.54 Weighted average shares and share equivalents...... 25,869 36,329 53,510 51,786 60,555 57,730 62,992
SEPTEMBER 30, 1996 --------------------------------------------- PRO FORMA ACTUAL PRO FORMA(1) AS ADJUSTED(1)(3) -------- ------------ ----------------- BALANCE SHEET DATA: Working capital........................................... $168,759 $ 203,581 $ 210,251 Total assets.............................................. 989,872 1,364,179 1,370,849 Long-term debt(4)......................................... 386,480 634,890 440,620 Total shareholders' equity................................ 431,709 439,376 640,316
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, -------------------------------- --------------------- 1993 1994 1995 1995 1996 -------- -------- -------- -------- ---------- STATISTICAL DATA: Clinic Operations: Affiliated physicians(5)......................... 674 1,143 1,955 1,570 2,560 Affiliated clinics(5)............................ 18 22 31 28 40 Number of states(5).............................. 11 15 20 19 22 Same-clinic revenue growth(6).................... 8.5% 11.6% 18.1% 16.3% 17.0% Primary care physician percentage(5)............. 52% 47% 51% 51% 54% IPA Operations(5): Markets.......................................... -- 7(7) 13 13 17 Members: Commercial..................................... -- 105,000(7) 180,000 158,000 283,000 Medicare....................................... -- 24,000(7) 38,000 35,000 60,000 -------- -------- -------- -------- ---------- Total members................................ -- 129,000(7) 218,000 193,000 343,000 Margin Data: Operating margin(8).............................. 7.1% 7.9% 8.9% 8.8% 9.1% Net margin....................................... 4.3% 4.8% 5.0% 4.9% 4.7% Net Physician Group and IPA Revenues: Net physician group revenues(9).................. $264,721 $406,036 $709,380 $493,628 $ 859,056 IPA revenues(10)................................. -- -- 146,975 99,840 171,778 -------- -------- -------- -------- ---------- Total........................................ $264,721 $406,036 $856,355 $593,468 $1,030,834 Percentage of Net Physician Group and IPA Revenues from:(11) Medicare/Medicaid................................ 36% 32% 24% 25% 23% Managed care..................................... 24% 25% 35% 36% 41% Private pay/other................................ 40% 43% 41% 39% 36%
Footnotes appear on the next page 5 7 - --------------- (1) Pro forma for all pending transactions and transactions completed after the beginning of the period as if such transactions were completed at the beginning of the period. See Unaudited Pro Forma Consolidated Financial Information. (2) Excluding the effect of the utilization of a net operating loss carryforward in 1993 and 1994, net earnings and net earnings per share would have been $5.1 million, or $0.20 per share, and $10.2 million, or $0.27 per share, in such years. (3) Adjusted to give effect to the application of the net proceeds to the Company of this offering, assuming a public offering price of $32.75. (4) Includes obligations under the Company's revolving credit agreement, mortgages, other notes payable and capital leases, convertible subordinated debentures, convertible subordinated notes payable to physician groups and deferred purchase price obligations. (5) As of the end of the period. (6) Represents the average net revenue growth achieved by affiliated clinics operated by the Company throughout both of the compared periods, adjusted for actual days of operation. (7) As of January 1, 1995. (8) Represents earnings before interest income, interest expense and income taxes as a percentage of net revenues. (9) Represents gross physician group revenue of clinics managed by the Company less provisions for doubtful accounts and contractual adjustments. (10) Represents capitation and risk pool payments received under managed care contracts entered into by IPAs managed by the Company. Excludes payments to hospitals under such managed care contracts. (11) As a percentage of combined IPA and net physician group revenue for IPAs and clinics affiliated with the Company at the end of the period. Except as otherwise specified (i) all information in this Prospectus assumes no exercise of the Underwriter's over-allotment option (See "Underwriting") and (ii) all share amounts reflect the three-for-two stock splits effected as stock dividends on December 15, 1994, September 15, 1995 and June 14, 1996. 6 8 RISK FACTORS In addition to the other information in this Prospectus, the following factors should be considered carefully in evaluating an investment in the shares of PhyCor Common Stock. This discussion also identifies important cautionary factors that could cause PhyCor's actual results to differ materially from those projected in forward looking statements of the Company made by, or on behalf of, the Company. In particular, PhyCor's forward looking statements, including those regarding the acquisition of additional clinics, the development of additional IPAs, the adequacy of PhyCor's capital resources, the future profitability of capitated fee arrangements and other statements regarding trends relating to various revenue and expense items, could be affected by a number of risks and uncertainties including those described below. No Assurance of Continued Rapid Growth. PhyCor's continued growth is dependent upon its ability to achieve significant consolidation of multi-specialty medical clinics, to sustain and enhance the profitability of those clinics and to develop and manage IPAs. The process of identifying suitable acquisition candidates and proposing, negotiating and implementing an economically feasible affiliation with a physician group or formation or management of a physician network is lengthy and complex. Clinic and physician network operations require intensive management in a dynamic marketplace increasingly subject to cost containment pressures. There can be no assurance that PhyCor will be able to sustain its historically rapid rate of growth. The success of PhyCor's strategy to develop and manage IPAs is largely dependent upon its ability to form networks of physicians, to obtain favorable payor contracts, to manage and control costs and to realize economies of scale. Many of the agreements entered into by physicians participating in PhyCor-managed IPAs are not exclusive arrangements. The physicians, therefore, could join competing networks or terminate their relationships with the IPAs. There can be no assurance that PhyCor will continue to be successful in acquiring additional physician practice assets, establishing new IPA networks or maintaining relationships with affiliated physicians. See "Business -- Physician Networks." Additional Financings. PhyCor's multi-specialty medical clinic acquisition and expansion program and its IPA development and management plans require substantial capital resources. The operations of its existing clinics require ongoing capital expenditures for renovation and expansion and the addition of costly medical equipment and technology utilized in providing ancillary services. PhyCor may also, in certain circumstances, acquire real estate in connection with clinic acquisitions. PhyCor will require additional financing for the development of additional IPAs and expansion and management of its existing IPAs. The Company expects that its capital needs over the next several years will exceed capital generated from operations. The Company plans to incur indebtedness and to issue, from time to time, additional debt or equity securities, including the issuance of Common Stock or convertible notes in connection with transactions with newly affiliated physician groups. PhyCor's bank credit facility requires the lenders' consent for borrowings in connection with the acquisition of certain clinic assets. There can be no assurance that sufficient financing will be available or available on terms satisfactory to PhyCor. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Competition. The business of providing health care related services is highly competitive. Many companies, including professionally managed physician practice management companies like the Company, have been organized to pursue the acquisition of medical clinics, manage such clinics, employ clinic physicians or provide services to IPAs. Large hospitals, other multi-specialty clinics and other health care companies, health maintenance organizations ("HMOs") and insurance companies are also involved in activities similar to those of PhyCor. Some of these competitors have longer operating histories and significantly greater resources than PhyCor. There can be no assurance that PhyCor will be able to compete effectively, that additional competitors will not enter the market, or that such competition will not make it more difficult to acquire the assets of multi-specialty clinics on terms beneficial to PhyCor. See "Business -- Multi-Specialty Medical Clinics" and "Business -- Physician Networks." Risks Associated with Managed Care and Capitation; Reliance on Physician Networks. Many of the payor contracts entered into on behalf of PhyCor-managed IPAs are based on capitated fee 7 9 arrangements. Under capitation arrangements, health care providers bear the risk, subject to certain loss limits, that the aggregate costs of providing medical services to the members will exceed the premiums received. Management fees are based, in part, upon a share of surplus, if any, of a capitated amount of revenue. Some agreements with payors also contain "shared risk" provisions under which PhyCor and the IPA can earn additional compensation based on utilization of hospital services by members and may be required to bear a portion of any loss in connection with such "shared risk" provisions. Any such losses could have a material adverse effect on PhyCor. The profitability of the managed IPAs is dependent upon the ability of the providers to effectively manage the per patient costs of providing medical services and the level of utilization of medical services. The management fees are also based upon a percentage of revenue collected by the IPAs. Any loss of revenue by the IPAs as a result of losing affiliated physicians, the termination of third party payor contracts or otherwise could have a material adverse effect on management fees derived by PhyCor from its management of IPAs. Through its service agreements, PhyCor also shares in capitation risk assumed by its affiliated physician groups. Managed care providers and management entities such as the Company are increasingly subject to liability claims arising from utilization management, provider compensation arrangements and other activities designed to control costs by reducing services. A successful claim on this basis against PhyCor or an affiliated clinic or IPA could have a material adverse effect on PhyCor. Risks of Changes in Payment for Medical Services. The profitability of PhyCor may be adversely affected by Medicare and Medicaid regulations, cost containment decisions of third party payors and other payment factors over which PhyCor has no control. The federal Medicare program has undergone significant legislative and regulatory changes in the reimbursement and fraud and abuse areas, including the adoption of the resource-based relative value scale ("RBRVS") schedule for physician compensation under Medicare, which has had and may continue to have a negative impact on PhyCor's revenue. Efforts to control the cost of health care services are increasing. Many of PhyCor's physician groups are becoming affiliated with provider networks, managed care organizations and other organized health care systems, which often provide fixed fee schedules or capitation payment arrangements which are lower than standard charges. Future profitability in the changing health care environment, with differing methods of payment for medical services, is likely to be affected significantly by management of health care costs, pricing of services and agreements with payors. Because PhyCor derives its revenues from the revenues generated by its affiliated physician groups and from its managed IPAs, further reductions in payments to physicians generally or other changes in payment for health care services could have an adverse effect on PhyCor. Additional Regulatory Risks. The health care industry and physicians' medical practices are highly regulated at the state and federal levels. Many state laws restrict the unlicensed practice of medicine, the splitting or sharing of fees with non-physician entities and the enforcement of non- competition agreements. Federal law prohibits the offer, payment, solicitation or receipt of any form of remuneration in return for the referral of Medicare or state health program patients or patient care opportunities, or in return for the purchase, lease or order of items or services that are covered by Medicare or state health programs. In addition, federal law requires that physician groups be included within a definition of "group practice" in order to be permitted to make referrals within the group. Federal antitrust law also prohibits conduct that may result in price-fixing or other anticompetitive conduct. Because of the structure of the relationships between PhyCor and the physician groups and its managed IPAs, there can be no assurance that review of PhyCor's business by courts or health care, tax, labor or other regulatory authorities will not result in determinations that could adversely affect the financial condition or results of operations of PhyCor or that the health care regulatory environment will not change in a manner that would restrict PhyCor's existing operations or limit the expansion of PhyCor's business or otherwise adversely affect PhyCor. In addition to civil and, in some cases, criminal penalties for violation of Medicare and Medicaid statutes, violators of these statutes may be excluded from participation in Medicare or state health programs. 8 10 Risks Associated with Straub Transaction. In connection with the transaction with Straub, the Company provides certain management services to both a physician group practice and a hospital owned by the group. Because the hospital is subject to extensive regulation and because hospital management companies have, in some instances, been viewed as referral sources by federal regulatory agencies, the relationship between PhyCor and the physician group could come under increased scrutiny under the Medicare fraud and abuse law. In late 1995, prior to its association with PhyCor, Straub was served with a federal search warrant in connection with an investigation into Straub's billings and receivables practices, including with respect to Medicare, Medicaid and CHAMPUS. The investigation is ongoing, and no determination can be made at this time as to its outcome. The Company is indemnified by the physician group affiliated with Straub against any penalties imposed as a result of the investigation, and PhyCor believes that such indemnity will be sufficient to satisfy any claims made against PhyCor as a successor to Straub, although no assurance can be given in that regard. In addition, the federal government could in certain circumstances suspend or prevent Straub from participating in government programs, which would have a negative impact on PhyCor's revenues under its service agreement with Straub. Tax Audit. PhyCor has been the subject of an audit by the Internal Revenue Service (the "IRS") since 1991, and the IRS has proposed adjustments relating to the timing of recognition for tax purposes of certain revenue and deductions relating to uncollectible accounts. One proposed adjustment is a recharacterization, for tax purposes only, of PhyCor's relationships with its affiliated physician groups. PhyCor disagrees with the positions asserted by the IRS including any recharacterization and intends to vigorously contest these proposed adjustments. The Company believes that any adjustments resulting from resolution of this disagreement would not affect reported net earnings of PhyCor but would defer tax benefits and change the levels of current and deferred tax assets and liabilities. For the years under audit and, potentially, for subsequent years, any such adjustments could result in material cash payments by the Company. PhyCor does not believe the resolution of this matter will have a material adverse effect on its financial condition, although there can be no assurance as to the outcome of this matter. Applicability of Insurance Regulations. PhyCor, through its IPAs, enters into contracts and joint ventures with licensed insurance companies, such as HMOs, whereby PhyCor and its IPAs assume risk in connection with providing medical services under capitation arrangements. To the extent PhyCor or its managed IPAs are in the business of insurance as a result of entering into such risk sharing arrangements, they are subject to a variety of regulatory and licensing requirements applicable to insurance companies or HMOs. In connection with multi-specialty medical clinic acquisitions, PhyCor has and may continue to acquire HMOs previously affiliated with such clinics. The HMO industry is highly regulated at the state level and is highly competitive. Additionally, the HMO industry has been subject to numerous legislative initiatives within the past several years. There can be no assurance that developments in any of these areas will not have an adverse effect on PhyCor's wholly-owned HMOs or on HMOs in which PhyCor has a partial ownership interest or other financial involvement. Risks Inherent in Provision of Medical Services. The physician groups with which PhyCor affiliates and the physicians participating in networks developed and managed by PhyCor are involved in the delivery of medical services to the public and, therefore, are exposed to the risk of professional liability claims. Claims of this nature, if successful, could result in substantial damage awards to the claimants which may exceed the limits of any applicable insurance coverage. Insurance against losses related to claims of this type can be expensive and varies widely from state to state. PhyCor does not control the practice of medicine by affiliated physicians or the compliance with certain regulatory and other requirements directly applicable to physicians, physicians networks and physician groups. PhyCor is indemnified under its service agreements for claims against the physician groups, maintains liability insurance for itself and negotiates liability insurance for the physicians affiliated with its clinics and under its management agreements for claims against the IPAs and physician members. Successful malpractice claims asserted against the physician groups, the managed IPAs, or PhyCor, however, could have a material adverse effect on PhyCor. 9 11 Impact of Health Care Regulatory Changes. The United States Congress and many state legislatures routinely consider proposals to reform or modify the health care system, including measures that would control health care spending, convert all or a portion of government reimbursement programs to managed care arrangements, and balance the federal budget by reducing spending for Medicare and state health programs. These measures can affect a health care company's cost of doing business and contractual relationships. For example, recent developments that affect the Company's activities include: (i) federal legislation requiring a health plan to continue coverage for individuals who are no longer eligible for group health benefits and prohibiting the use of "pre- existing condition" exclusions that limit the scope of coverage; (ii) a Health Care Financing Administration policy prohibiting restrictions in Medicare risk HMO plans on a physician's recommending to patients other health plans and treatment options; and (iii) regulations imposing restrictions on physician incentive provisions in physician provider agreements. There can be no assurance that such legislation, programs and other regulatory changes will not have a material adverse effect on PhyCor. Dependence on Affiliated Physicians. Substantially all of PhyCor's revenue is derived from service or management agreements with PhyCor's affiliated clinics, the loss of certain of which could have a material adverse effect on PhyCor. In addition, any material decline in revenue by PhyCor's affiliated physician groups, whether as a result of physicians leaving the affiliated physician groups or otherwise, could have a material adverse effect on PhyCor. PhyCor and one of its smallest affiliated physician groups, with respect to which PhyCor has an investment representing less than 1% of PhyCor's total assets, are in discussions which may result in the sale of the clinic assets. While discussions are in a preliminary stage and PhyCor does not believe the ultimate outcome of this situation will have a material adverse effect on PhyCor, there can be no certainty at this time as to the resolution of this matter and its impact on PhyCor. Risks Associated with PhyCor Management Corporation ("PMC"). PMC, an entity in which PhyCor owns a minority interest, has been organized to develop and manage IPAs and provide development and other services to physician organizations. PMC is managed by PhyCor and has a PhyCor executive officer on its Board of Directors. PMC expects to operate at a loss during its first few years of operations. PhyCor is recognizing a pro rata portion of PMC's losses equal to PhyCor's minority equity interest in PMC. PMC has been organized so as not to be consolidated with PhyCor. Changes in structure or accounting rules or the exercise by PhyCor of its option to purchase PMC's Class B Common Stock prior to such time, if any, as PMC shall have become profitable could result in PhyCor being required to consolidate the operations of PMC. Such consolidation could cause PhyCor to recognize a greater percentage of PMC's operating losses which could have a material adverse effect on PhyCor. See "Business -- Physician Networks." Anti-takeover Considerations. The Company is authorized to issue up to 10,000,000 shares of preferred stock, the rights of which may be fixed by the Board of Directors. In February 1994, the Board of Directors approved the adoption of a Shareholder Rights Plan (the "Rights Plan"). The Rights Plan is intended to encourage potential acquirors to negotiate with the PhyCor's Board of Directors and to discourage coercive, discriminatory and unfair proposals. PhyCor's stock incentive plans provide for the acceleration of the vesting of options in the event of a change in control, and PhyCor's Restated Charter provides for the classification of its Board of Directors into three classes, with each class of directors serving staggered terms of three years. Provisions in the executive officers' employment agreements provide for post-termination compensation, including payment of certain of the executive officers' salaries for 24 months, following a change in control. Most physician groups may terminate their service agreements with the Company in certain events, including a change in control of PhyCor which is not approved by a majority of PhyCor's Board of Directors. The former shareholders of North American Medical Management, Inc., an entity acquired by PhyCor in January 1995 which develops and manages IPAs, ("North American") have the right to repurchase the capital stock of North American in the event of a change of control which occurs prior to December 31, 1997. A change in control of PhyCor also constitutes an event of default under PhyCor's bank credit facility. The foregoing matters may, together or separately, have the effect of discouraging or making more difficult an acquisition or change of control of PhyCor. 10 12 USE OF PROCEEDS The net proceeds to the Company from the sale of the shares of Common Stock offered hereby will be approximately $200.9 million ($229.2 million if the Underwriters' over-allotment option is exercised in full). Of the proceeds, the Company intends to utilize approximately $193.0 million to repay the Company's outstanding indebtedness under the Company's bank credit facility which currently bears interest at the weighted average rate of 6.07% and is payable beginning July 2001. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." The Company utilized the proceeds of such indebtedness to finance the acquisition of certain physician practice assets and for working capital and other general corporate purposes. The Company will utilize any remainder of the net proceeds to finance future acquisitions of the assets of additional single-specialty and multi-specialty clinics and individual physician practices, to develop and manage additional IPAs, to fund deferred purchase price obligations or for working capital and other general corporate purposes. Until utilized for the above purposes, the Company will invest any remaining net proceeds in short-term, interest bearing, investment grade instruments such as treasury bills, repurchase agreements and commercial paper. There can be no assurance that any pending acquisitions will be successfully concluded or that the Company will be successful in developing and managing additional IPAs. The Company will not receive any of the proceeds from any sale of shares by the Selling Shareholders pursuant to any exercise of the Underwriters' over-allotment option. 11 13 CAPITALIZATION The following table sets forth the capitalization of the Company as of September 30, 1996, on an actual basis, on a pro forma basis to reflect the Straub transaction, the four asset acquisitions completed after September 30, 1996 and three additional pending transactions, and on an as adjusted basis to reflect the pro forma capitalization and the application of proceeds of this offering. See "Business -- Multi-Specialty Medical Clinics" and Unaudited Pro Forma Consolidated Financial Information.
SEPTEMBER 30, 1996 ------------------------------------- ACTUAL PRO FORMA AS ADJUSTED -------- ---------- ----------- (IN THOUSANDS) Current installments of long-term debt and obligations under capital leases................... $ 1,581 $ 12,743 $ 12,743 ======== ========== ========== Long-term debt: Revolving credit agreement......................... $ 58,000 $ 194,270 $ -- Mortgages and other notes payable.................. 4,325 35,399 35,399 Obligations under capital leases................... 1,556 5,759 5,759 4.5% Convertible Subordinated Debentures due 2003.. 200,000 200,000 200,000 Convertible subordinated notes payable to physician groups(1)....................................... 65,699 111,427 111,427 Purchase price payable............................. 56,900 88,035 88,035 Shareholders' equity: Preferred stock, no par value, 10,000,000 shares authorized; no shares outstanding............... -- -- -- Common stock, no par value, 250,000,000 shares authorized; 54,487,000 shares issued and outstanding(2).................................. 380,916 388,583 589,523 Retained earnings.................................. 50,793 50,793 50,793 -------- ---------- ---------- Total shareholders' equity...................... 431,709 439,376 640,316 -------- ---------- ---------- Total capitalization....................... $818,189 $1,074,266 $1,080,936 ======== ========== ==========
- --------------- (1) The convertible subordinated notes may be converted commencing on varying dates through 2001 at the option of the holders. (2) Excludes approximately (a) 7.7 million shares of Common Stock reserved for issuance pursuant to outstanding options at an aggregate weighted average exercise price of $13.23 per share, (b) approximately 900,000 shares of Common Stock reserved for issuance pursuant to outstanding warrants at an aggregate weighted average exercise price of $22.51 per share, (c) 2.8 million shares of Common Stock reserved for issuance pursuant to outstanding subordinated convertible notes at an aggregated weighted average conversion price of $24.23 per share and (d) approximately 5.2 million shares of Common Stock reserved for issuance pursuant to convertible subordinated debentures at a conversion price of $38.67 per share. See Notes 8, 9 and 12 of Notes to Consolidated Financial Statements. 12 14 SELECTED CONSOLIDATED FINANCIAL DATA The following table sets forth selected consolidated financial data which have been derived from the consolidated financial statements of the Company as of and for the years ended December 31, 1991 through 1995. The financial statements as of and for the years ended December 31, 1991 through 1995 have been audited by KPMG Peat Marwick LLP. The financial statements as of and for the nine month periods ended September 30, 1995 and 1996 are unaudited. The Company's Statement of Operations data for each of the years in the three-year period ended December 31, 1995 and the Balance Sheet data as of December 31, 1994 and 1995 should be read in conjunction with and are qualified in their entirety by the Consolidated Financial Statements and related notes included elsewhere in this Prospectus.
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ----------------------------------------------------------- --------------------- 1991 1992 1993 1994 1995 1995 1996 ------- -------- -------- -------- -------- -------- -------- STATEMENT OF OPERATIONS DATA: Net revenue.............. $90,065 $135,866 $167,381 $242,485 $441,596 $305,948 $535,562 Operating expenses: Clinic salaries, wages and benefits......... 36,440 51,264 63,202 88,443 166,031 114,132 204,493 Clinic supplies........ 13,289 19,265 25,031 37,136 67,596 46,899 81,459 Purchased medical services............. 6,201 10,122 8,920 11,778 17,572 12,571 15,295 Other clinic expenses............. 15,010 22,813 28,174 40,939 71,877 49,346 88,737 General corporate expenses............. 2,993 3,717 5,418 9,417 14,191 10,391 15,307 Rents and lease expense.............. 7,077 13,210 16,441 23,413 36,740 25,588 44,768 Depreciation and amortization......... 4,228 6,397 8,394 12,229 21,445 15,084 28,158 Interest income........ (348) (629) (309) (1,334) (1,816) (1,086) (2,792) Interest expense....... 3,842 4,481 3,878 3,963 5,230 3,666 10,761 Minority interest in earnings of consolidated partnerships......... -- -- -- -- 6,933 4,980 8,429 Provision for clinic restructuring(1)..... -- 18,566 -- -- -- -- -- ------- -------- -------- -------- -------- -------- -------- Net operating expenses........... 88,732 149,206 159,149 225,984 405,799 281,571 494,615 ------- -------- -------- -------- -------- -------- -------- Earnings (loss) before income taxes and extraordinary item............... 1,333 (13,340) 8,232 16,501 35,797 24,377 40,947 Income tax expense....... 575 405 1,092 4,826 13,923 9,469 15,765 ------- -------- -------- -------- -------- -------- -------- Earnings (loss) before extraordinary item............... 758 (13,745) 7,140 11,675 21,874 14,908 25,182 Extraordinary item -- tax benefit................ 297 -- -- -- -- -- -- ------- -------- -------- -------- -------- -------- -------- Net earnings (loss)............. $ 1,055 $(13,745)(2) $ 7,140(3) $ 11,675(3) $ 21,874 $ 14,908 $ 25,182 ======= ======== ======== ======== ======== ======== ======== Earnings (loss) before extraordinary item per share.................. $ 0.05 $ (0.57) $ 0.28 $ 0.32 $ 0.41 $ 0.29 $ 0.42 Extraordinary item per share.................. 0.02 -- -- -- -- -- -- ------- -------- -------- -------- -------- -------- -------- Net earnings (loss) per share Primary................ $ 0.07 $ (0.57) $ 0.28(3) $ 0.32(3) $ 0.41 $ 0.29 $ 0.42 ======= ======== ======== ======== ======== ======== ======== Fully Diluted.......... -- -- -- .31 -- -- -- ======= ======== ======== ======== ======== ======== ======== Weighted average shares outstanding Primary................ 14,236 23,942 25,869 36,329 53,510 51,786 60,555 Fully diluted.......... -- -- -- 43,427 -- -- --
13 15
DECEMBER 31, --------------------------------------------------- SEPTEMBER 30, 1991 1992 1993 1994 1995 1996 ------- -------- -------- -------- -------- ------------- BALANCE SHEET DATA: Working capital................................ $21,833 $ 35,920 $ 46,927 $ 80,533 $111,420 $168,759 Total assets................................... 92,538 141,442 171,174 351,385 643,586 989,872 Long-term debt(5).............................. 49,344 54,087 69,014 94,653 140,633 386,480 Total shareholders' equity..................... 25,466 53,879 70,005 184,125 388,822 431,709
- --------------- (1) Relates to the non-recurring pre-tax charge to earnings of $18.6 million incurred in connection with the restructuring and sale of assets of the Miller Medical Clinic, which was formerly affiliated with PhyCor. (2) Excluding the effect of the restructuring charge described in note (1), and a net operating loss carryforward, PhyCor's net earnings per share for 1992 would have been approximately $3.2 million and $.14 per share, respectively. (3) Excluding the effect of the utilization of a net operating loss carryforward to reduce income taxes in 1993 and 1994, net earnings and net earnings per share would have been $5.1 million, or $0.20 per share, and $10.2 million, or $0.27 per share, in such years. (4) Per share amounts and weighted average shares outstanding have been adjusted for the three-for-two stock splits effected in December 1994, September 1995 and June 1996. (5) Includes obligations under the Company's revolving credit agreement, mortgages, other notes payable and capital leases, convertible subordinated debentures, convertible subordinated notes payable to physician groups and deferred purchase price obligations. 14 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company acquires and operates primary care-oriented multi-specialty medical clinics and develops and manages IPAs. Substantially all of the Company's revenue in 1995 and most of its revenue in the first three quarters of 1996 was earned under its service agreements. Revenue earned under the service agreements is equal to the net revenue of the clinics, less amounts retained by physician groups. The service agreements contain financial incentives for the Company to assist the physician groups in increasing clinic revenues and controlling expenses. To increase clinic revenue, the Company works with the affiliated physician group to recruit additional physicians, merge other physicians practicing in the area into the affiliated physician groups, negotiate contracts with managed care organizations and provide additional ancillary services. To reduce or control expenses, among other things, PhyCor utilizes national purchasing contracts for key items, reviews staffing levels to make sure they are appropriate and assists the physicians in developing more cost-effective clinical practice patterns. The Company has increased its focus on the development of IPAs to enable the Company to provide services to a broader range of physician organizations, to enhance the operating performance of existing clinics and to further develop physician relationships. The Company develops IPAs that may include affiliated clinic physicians to enhance the clinics' attractiveness to managed care organizations. The Company has also begun assisting independent physicians in particular markets in developing new physician groups that enter into long-term agreements with the Company. The table below indicates the number of clinics and physicians affiliated with the Company and provides certain information with respect to the Company's IPA operations at the end of the periods indicated:
DECEMBER 31, SEPTEMBER 30, ---------------------------- ----------------- 1993 1994 1995 1995 1996 ------- ------- ------- ------- ------- Clinic operations: Number of affiliated clinics............. 18 22 31 28 40(1) Number of affiliated physicians.......... 674 1,143 1,955 1,570 2,560(1) IPA operations: Number of markets........................ -- 7(2) 13 13 17 Number of commercial members............. -- 105,000(2) 180,000 158,000 283,000 Number of Medicare members............... -- 24,000(2) 38,000 35,000 60,000
- --------------- (1) Since September 30, 1996, the Company has acquired certain operating assets of clinics in Hattiesburg, Mississippi, Toledo, Ohio, Roanoke, Virginia, Honolulu, Hawaii and Palm Springs, California. These clinics, in the aggregate, represent an additional 494 affiliated physicians. (2) As of January 1, 1995. During the first nine months of 1996, PhyCor acquired certain operating assets of ten multi-specialty clinics, including the South Bend Clinic, which the Company operated under a management agreement during November and December 1995, and numerous individual physician and single specialty practices, for a total consideration of $247.2 million. PhyCor also completed its acquisition of SPACO Management Company, Inc. (SPACO), an IPA management company in Dallas, Texas, and certain assets of Southwest Physician Associates, a 972-physician IPA associated with SPACO. The principal assets acquired were accounts receivable, property and equipment and service agreement costs, an intangible asset. The consideration for clinic asset acquisitions in the first nine months of 1996 consisted of approximately 67% cash, 25% liabilities assumed and 8% convertible notes, warrants and stock. The cash portion of the purchase price was funded by a combination of operating cash flow, proceeds from the issuance of convertible subordinated debentures, and borrowings under the Company's bank credit facility. Property and equipment acquired consists primarily of clinic operating equipment, although the Company does own certain 15 17 land and buildings. Service agreement costs are amortized over the life of the related service agreement, with recoverability assessed periodically. Since September 30, 1996, the Company has acquired the assets of four multi-specialty clinics with an aggregate of 307 physicians. In January 1997, PhyCor consummated its merger with Straub, an integrated health care system with a 152-physician multi-specialty clinic and 159-bed acute care hospital located in Honolulu, Hawaii. In connection with the merger, PhyCor entered into a long-term service agreement with the 152-physician group associated with Straub and will provide management services to a related 35-physician group. Currently, the Company has agreements in principle to acquire the assets of three additional multi-specialty physician clinics with an aggregate of approximately 160 physicians. These transactions are expected to be completed during the first quarter of 1997. RECENT OPERATING RESULTS The following table summarizes selected financial data of the Company for the three months and the years ended December 31, 1995 and 1996. All such information, other than the data for the year ended December 31, 1995, is derived from unaudited data. The Company believes that this information reflects all adjustments (consisting of only normally recurring adjustments) necessary for a fair presentation of the information for the periods presented:
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, -------------------- -------------------- 1995 1996 1995 1996 -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net revenue................................ $135,648 $230,763 $441,596 $766,325 Net earnings............................... 6,966 11,198 21,874 36,380 Earnings per common share.................. $ 0.12 $ 0.18 $ 0.41 $ 0.60 Weighted average shares and share equivalents.............................. 59,418 62,114 53,510 61,096
Net revenue increased from $135.6 million for the three months ended December 31, 1995 to $230.8 million for the three months ended December 31, 1996, an increase of 70.2%. Net revenue from the 23 service agreements in effect as of January 1, 1995 increased 13.5% in the fourth quarter. Same-clinic revenue growth resulted from the recruitment of new physicians, existing-market mergers and increases in net fees and patient volume. Net earnings increased from $7.0 million, or $0.12 per share, for the three months ended December 31, 1995 to $11.2 million, or $0.18 per share, for the three months ended December 31, 1996, increases of 60.0% and 50.0%, respectively. During the same time periods, the Company's weighted average shares outstanding increased to 62.1 million from 59.4 million. For the year ended December 31, 1996 compared to 1995, net revenue increased from $441.6 million to 766.3 million, an increase of 73.5%. Same-clinic revenue growth for 1996 was 16.1%. Net earnings increased from $21.9 million, or $0.41 per share, for the year ended December 31, 1995 to $36.4 million, or $0.60 per share, for the year ended December 31, 1996, increases of 66.2% and 46.3%, respectively. During the same time periods, the Company's weighted average shares outstanding increased to 61.1 million from 53.5 million. 16 18 RESULTS OF OPERATIONS The following table shows the percentage of net revenue represented by various expense categories reflected in the Company's Consolidated Statements of Operations:
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ----------------------- -------------- 1993 1994 1995 1995 1996 ----- ----- ----- ----- ----- Net revenue..................................... 100.0% 100.0% 100.0% 100.0% 100.0% Operating expenses: Clinic salaries, wages and benefits........... 37.8 36.5 37.6 37.3 38.2 Clinic supplies............................... 15.0 15.3 15.3 15.3 15.2 Purchased medical services.................... 5.3 4.8 4.0 4.1 2.8 Other clinic expenses......................... 16.8 16.9 16.3 16.2 16.6 General corporate expenses.................... 3.2 3.9 3.2 3.4 2.8 Rents and lease expense....................... 9.8 9.7 8.3 8.4 8.4 Depreciation and amortization................. 5.0 5.0 4.8 4.9 5.3 Interest income............................... (0.1) (0.5) (0.4) (0.4) (0.5) Interest expense.............................. 2.3 1.6 1.2 1.2 2.0 Minority interest in earnings of consolidated partnerships............................... -- -- 1.6 1.6 1.6 ----- ----- ----- ----- ----- Net operating expenses..................... 95.1 93.2 91.9 92.0 92.4 ----- ----- ----- ----- ----- Earnings before income taxes............... 4.9 6.8 8.1 8.0 7.6 Income tax expense.............................. 0.6 2.0 3.1 3.1 2.9 ----- ----- ----- ----- ----- Net earnings.................................. 4.3% 4.8% 5.0% 4.9% 4.7% ===== ===== ===== ===== =====
Nine Months Ended September 30, 1996 Compared to Nine Months Ended September 30, 1995 Net revenue increased from $114.0 million for the third quarter of 1995 to $196.4 million for the third quarter of 1996, an increase of 72.3%, and from $305.9 million to $535.6 million for the first nine months of 1995 compared to 1996, an increase of 75.1%. Net revenue from the 23 service agreements in effect for both periods increased by 14.8% for the third quarter and 17.0% for the first nine months of 1996 compared with the same periods in 1995. Same clinic growth resulted from the addition of new physicians, the expansion of ancillary services, increases in patient volume and increases in fees. The remaining increase was the result of the acquisition of clinic assets. During the third quarter and the first nine months of 1996, most categories of operating expenses were relatively unchanged as a percentage of net revenue when compared to the same periods in 1995, despite the large increase in the amount of such expenses resulting from acquisitions and clinic growth. The increase in clinic salaries, wages and benefits resulted from the acquisition of clinics with higher levels of these expenses compared to the existing base of clinics and the addition of primary care physicians at existing clinics. The ratio of staffing costs to net revenues is higher for primary care practices than for specialty care. The reductions in purchased medical services as a percentage of net revenue resulted from the Company's continuing efforts to reduce clinic operating costs by improving the productivity of non-physician personnel and limiting payments for outside medical services. While general corporate expenses decreased as a percentage of net revenue, the dollar amount of general corporate expenses increased as a result of the addition of corporate personnel to accommodate increased acquisition activity and to respond to increasing physician group needs for support in managed care negotiations, information systems implementation and clinical outcomes management programs. Income tax expense increased from the prior year as a result of the Company's increased profitability. The Company expects an effective tax rate of approximately 38.5% in 1996. 17 19 Year Ended December 31, 1995 Compared to Year Ended December 31, 1994 Net revenue increased from $242.5 million to $441.6 million for 1995, an increase of 82.1%. Net revenue from the 17 service agreements in effect during both periods increased 18.1% in 1995 compared with the same period in 1994. Same clinic growth resulted from the addition of new physicians, the expansion of ancillary services, increases in patient volume and increases in fees. The remaining increase was the result of the acquisition of clinic assets and the acquisition of North American. During 1995, most categories of operating expenses were relatively unchanged as a percentage of net revenue when compared to the same period in 1994, despite the large increase in the dollar amounts resulting from acquisitions and clinic growth. The increase in clinic salaries, wages and benefits resulted from the acquisition of clinics with higher levels of these expenses compared to the existing base of clinics and the addition of primary care physicians at the existing clinics. The ratio of staffing costs to net revenues is higher for primary care practices than for specialty care. The reductions in purchased medical services resulted from the Company's continuing efforts to reduce clinic operating costs by improving the productivity of non-physician personnel and limiting payments for outside medical services. While general corporate expenses decreased as a percentage of net revenue, the dollar amount of general corporate expenses increased as a result of the addition of corporate personnel and other costs to accommodate operations, increased acquisition activity and to respond to increasing physician needs for support in managed care negotiations, information systems implementation and clinical outcomes management programs. The decrease in other clinic expenses and rents and leases as a percentage of net revenue resulted from the acquisition of clinics with lower levels of these expenses compared to the existing base of clinics. Minority interest in earnings of consolidated partnerships relate to the IPA operations of North American, which was acquired in 1995. Income tax expense increased from the prior year as a result of the Company's increased profitability and the fact that benefits relating to net operating loss carryforwards were substantially consumed during 1994. The Company had an effective tax rate of approximately 39% in 1995. Year Ended December 31, 1994 Compared to Year Ended December 31, 1993 Net revenue increased from $167.4 million for 1993 to $242.5 million for 1994, an increase of $75.1 million, or 44.9%. Approximately $61.7 million, or 82.2% of the increase, was the result of the acquisition of clinic assets in 1993 and 1994. Net revenue from the 13 service agreements in effect for both years increased by $20.0 million, or 11.6%. Same clinic growth resulted from the addition of new physicians, the expansion of ancillary services, increases in patient volume and increases in fees. During 1994, most categories of operating expenses were relatively stable as a percentage of net revenue when compared to 1993, despite the large increase in the dollar amounts resulting from acquisitions and clinic growth. The reductions in clinic salaries, wages and benefits and purchased medical services resulted from the Company's continuing efforts to reduce clinic operating costs by improving the productivity of non-physician personnel and limiting payments for outside medical services. The increase in general corporate expenses is the result of the addition of corporate personnel to handle the increased acquisition activity and to respond to increasing physician needs for support in managed care negotiations, information systems implementation, and clinical outcomes management programs. Interest expense decreased as a result of decreased borrowing levels and the conversion of convertible debentures into Common Stock. Income tax expense increased dramatically from the prior year as a result of the Company's increased profitability and the fact that remaining net operating loss carryforwards, which significantly reduced tax expense in prior years, were fully used during 1994. Summary of Operations by Quarter The following table presents unaudited quarterly operating results for 1994 and 1995 and the first three quarters of 1996. The Company believes that all necessary adjustments have been 18 20 included in the amounts stated below to present fairly the quarterly results when read in conjunction with the Consolidated Financial Statements. Results of operations for any particular quarter are not necessarily indicative of results of operations for a full year or predictive of future periods.
1994 QUARTER ENDED 1995 QUARTER ENDED --------------------------------------- ------------------ MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 -------- ------- -------- ------- -------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net revenue.......... $49,765 $50,458 $63,183 $79,079 $92,764 $99,146 Earnings before taxes.............. 2,776 3,676 4,321 5,728 6,845 7,508 Net earnings......... 2,332 3,088 2,704 3,551 4,176 4,617 Net earnings per share.............. $ 0.08 $ 0.09 $ 0.07 $ 0.08 $ 0.09 $ 0.09 Adjusted earnings per share(1)........... $ 0.06 $ 0.06 $ 0.07 $ 0.08 $ 0.09 $ 0.09 1995 QUARTER ENDED 1996 QUARTER ENDED ------------------- ------------------------------ SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net revenue.......... $114,038 $135,648 $162,501 $176,643 $196,418 Earnings before taxes.............. 10,024 11,420 12,504 13,690 14,753 Net earnings......... 6,115 6,966 7,690 8,419 9,073 Net earnings per share.............. $ 0.11 $ 0.12 $ 0.13 $ 0.14 $ 0.15 Adjusted earnings per share(1)........... $ 0.11 $ 0.12 $ 0.13 $ 0.14 $ 0.15
- --------------- (1) Adjusted to exclude the effect of tax loss carryforwards. LIQUIDITY AND CAPITAL RESOURCES At September 30, 1996, the Company had $168.8 million in working capital, up from $111.4 million as of December 31, 1995. Also, the Company generated $14.3 million of cash flow from operations for the third quarter of 1996 compared to $11.5 million for the third quarter of 1995 and $36.7 million for the first nine months of 1995 compared to $28.6 million for the same period in 1995. At September 30, 1996, net accounts receivable of $249.5 million amounted to 74 days of net clinic revenue compared to $216.2 million and 70 days at June 30, 1996 and $152.3 million and 73 days at September 30, 1995. The increase is attributable to growth in revenues at the Company's clinics and seasonal factors affecting payments from some payors. During February 1996, the Company completed a public offering of convertible subordinated debentures, which mature in 2003. Gross and net proceeds from the offering were $200.0 million and approximately $194.4 million, respectively. The debentures were priced at par with a coupon rate of 4.5% and are convertible into the Company's common stock at $38.67 per share. The debentures may not be redeemed at the Company's option prior to February 15, 1998. From February 15, 1998 to February 15, 1999, the debentures may be redeemed only if the price of the Company's common stock exceeds $54.13. From February 15, 1999 to maturity, the debentures may be redeemed by the Company at prices decreasing from 102.572% of par value to par value. As a result of the issuance of convertible subordinated debentures during 1996, debt was 47.2% of total capitalization at September 30, 1996, compared to 26.6% at the end of 1995. In the first nine months of 1996, $6.3 million of convertible subordinated notes issued in connection with physician group asset acquisitions were converted into common stock. These conversions, option exercises and net earnings for the first nine months of 1996 resulted in an increase of $42.9 million in shareholders' equity compared to December 31, 1995. Capital expenditures during the first nine months of 1996 totaled $36.1 million. The Company is committed to make specified levels of capital expenditures, including the financing of the acquisition of the assets of physician practices, under its service agreements. The Company expects to make approximately $14 million in capital expenditures during the remainder of 1996. Effective January 1, 1995, the Company completed its acquisition of North American. The Company paid $20.0 million at closing and may make additional future payments pursuant to an earnout formula during 1996, 1997, and 1998 of up to an aggregate of $70.0 million. The total acquisition consideration may increase to a maximum of $130.0 million in the event of future acquisitions by North American of additional interests in IPA management entities. The first of such payments was made in 1996 and totaled approximately $13.9 million in cash. Of the future payments to be made, a portion may be payable in shares of the Company's common stock. In addition, 19 21 deferred acquisition payments are payable to physician groups in the event such physician groups attain predetermined financial targets during established periods of time following the acquisitions. If each group satisfied their applicable financial targets for the periods covered, the Company would be required to pay an aggregate of approximately $64.0 million of additional consideration over the next five years, of which $23.6 million would be payable during the remainder of 1997. The Company may exercise its option to acquire the outstanding Class B Common Stock of PMC before the end of 1997. In accordance with the terms of the option, the aggregate purchase price for these shares at that time would be approximately $18 to $19 million. Total consideration for the pending acquisition of Guthrie Clinic and three other clinic transactions with which the Company has reached agreements in principle is expected to be approximately $137.8 million of which approximately $58.5 million is expected to be paid in cash at closing. The remaining consideration will be payable in a combination of deferred cash payments, assumption of liabilities, subordinated convertible notes, warrants or common stock. PhyCor has been the subject of an audit by the IRS since 1991, and the IRS has proposed adjustments relating to the timing of recognition for tax purposes of certain revenue and deductions relating to uncollectible accounts. PhyCor disagrees with the positions asserted by the IRS and intends to vigorously contest these proposed adjustments. The Company believes that any adjustments resulting from resolution of this disagreement would not affect reported net earnings of PhyCor but would defer tax benefits and change the levels of current and deferred tax assets and liabilities. For the years under audit and, potentially, for subsequent years, any such adjustments could result in material cash payments by the Company. PhyCor does not believe the resolution of this matter will have a material adverse effect on its financial condition, although there can be no assurance as to the outcome of this matter. In July 1996, the Company completed modifications to its bank credit facility which included the revision of certain terms and conditions and the addition of six participating financial institutions. The Company's bank credit facility provides for a five year, $200.0 million revolving line of credit and a $100.0 million 364-day facility for use by the Company prior to July 2001, for acquisitions, working capital, capital expenditures and general corporate purposes. As of January 28, 1997, $193.0 million in borrowings were outstanding under the Company's bank credit facility. The bank credit facility provides that borrowings under the facility bear interest at the agent's base rate or .25% to .55% above the applicable Eurodollar rate. The Company is required to pay a facility fee of between .10% to .25% per annum on the commitments, payable quarterly in arrears, until the commitments are terminated. The total drawn cost of borrowings under the bank credit facility ranges from .375% to .75% above the applicable Eurodollar rate. The bank credit facility contains covenants which, among other things, require the Company to maintain certain financial ratios and impose certain limitations or prohibitions on the Company with respect to (i) the incurring of certain indebtedness, (ii) the creation of security interests on the assets of the Company, and (iii) the payment of cash dividends on, and the redemption or repurchase of, securities of the Company, investments and acquisitions. The Company is required to obtain bank consent for an acquisition with an aggregate purchase price of $50.0 million or more. The Company was in compliance with such covenants at December 31, 1996. At September 30, 1996, the Company had cash and cash equivalents of approximately $31.3 million and, as of January 28, 1997, has $106.2 million available under its bank credit facility. The Company believes that the combination of funds available from the proceeds of this offering and under its bank credit facility, together with cash reserves and cash flow from operations, will be sufficient to meet the Company's current planned acquisition, expansion, capital expenditures and working capital needs for the next 12 months. In addition, in order to provide the funds necessary for the continued pursuit of the Company's long-term expansion strategy, PhyCor expects to continue to incur, from time to time, additional short-term and long-term bank indebtedness and to issue equity and debt securities, the availability and terms of which will depend upon market and other conditions. There can be no assurance that such additional financing will be available on terms acceptable to the Company. 20 22 BUSINESS PhyCor is a physician practice management company that acquires and operates multi-specialty medical clinics and develops and manages IPAs. PhyCor's objective is to organize physicians into professionally managed networks that assist physicians in assuming increased responsibility for delivering cost-effective medical care while attaining high-quality clinical outcomes and patient satisfaction. The Company operates 45 clinics with approximately 3,070 physicians in 26 states. The Company also manages IPAs, which are networks of independent physicians, that include over 9,300 physicians in 17 markets. The Company's affiliated physicians provide capitated medical services to approximately 825,000 members, including approximately 105,000 Medicare members. PhyCor believes that primary care-oriented physician organizations are a critical element of organized health care systems, because physician decisions determine the cost and quality of care. PhyCor believes that physician-driven organizations, including multi-specialty medical clinics, IPAs and the combination of such organizations, present more attractive alternatives for physician consolidation than hospital or insurer/HMO-controlled organizations. The combination of PhyCor's multi-specialty medical clinic and IPA management capabilities and new group-formation efforts enables the Company to offer physician practice management services to substantially all types of physician organizations. INDUSTRY TRENDS In 1995, there were approximately 613,000 non-federal physicians in the United States, an increase of 82% from 1980. In 1994, physicians' direct billings aggregated approximately $180 billion, representing about 22% of total health care spending in the United States. In 1993, approximately 41% of practicing physicians were primary care physicians and the remainder were specialists. Two important trends have emerged in the physician sector in recent years. First, physicians have increasingly elected to practice medicine as part of a group practice rather than as a sole practitioner or partnership. As of 1995, 34% of physicians in the United States were part of a group practice, up from 26% in 1980. In 1995, there were approximately 19,500 group practices in the United States, 22% of which were multi-specialty oriented. The size of these clinics by number of physicians was as follows:
NUMBER NUMBER OF GROUP SIZE OF GROUPS PHYSICIANS ---------- --------- ---------- >100 Physicians........................................... 238 64,770 50-99..................................................... 226 15,193 10-49..................................................... 3,184 56,976 3-9....................................................... 15,830 73,871
The second major trend that has emerged in recent years is the rise of for-profit, professionally managed physician practice management companies ("PPMs"). PPMs emerged in the late 1980s in response to: (i) the desire of physicians to better position themselves competitively for managed care and integrated health care delivery systems; (ii) the desire of physicians to access professional-management expertise; (iii) the need of physicians for capital to expand clinic operations; (iv) physicians' desire for liquidity in their practice investments; and (v) the increasing business complexity of group practice operations. While the PPM industry has grown rapidly in recent years, the Company estimates that publicly traded PPMs represent less than 5% of total physician billings in the United States. The Company believes that the health care industry will continue to be driven by local market factors and that organized providers of health care, like IPAs, will play a significant role in delivering cost-effective, quality medical care. IPAs offer physicians an opportunity to participate in expanding 21 23 organized health care systems and assistance in contracting with insurance companies and HMOs and other large purchasers of health care services. Certain of the foregoing statistical information is derived from reports published by the Health Care Financing Administration and other industry sources. MULTI-SPECIALTY MEDICAL CLINICS A multi-specialty medical clinic provides a wide range of primary and specialty physician care and ancillary services through an organized physician group practice representing various medical specialties. Multi-specialty medical clinics historically have been locally owned organizations managed by practicing physicians. Management believes, based on patient and physician surveys and other data available to it, that the number of multi-specialty clinics and the number of physicians practicing in such clinics will continue to increase for a variety of reasons. - Multi-specialty clinics are favored by managed care organizations because of the large number and variety of physicians and services and the expectation that multi-specialty clinics will be able to control hospital utilization and total health care costs more effectively than other providers. - Multi-specialty clinics have the critical mass of primary care and specialist physicians and patients necessary to provide a comprehensive range of services as the focus of medical care shifts from the inpatient setting to alternate sites. In addition, multi-specialty clinics have the resources to assume responsibility for capitation arrangements and other managed care contracts for large patient groups. - Multi-specialty clinics are effectively positioned in the evolving health care environment because of their ability to control the cost and to improve the quality of care by affecting physician decisions. - Multi-specialty clinics, as physician-driven organizations, represent an attractive alternative to other physician consolidation models and are the practice model most likely to maximize the competitive position of physicians within organized health care networks. - Multi-specialty clinics are generally recognized for high quality medical care. - Multi-specialty clinics are more attractive to patients because of the convenience afforded by the availability of a wide range of primary and specialty care and ancillary services. - Multi-specialty clinics enable physicians to pool their resources to finance sophisticated medical equipment, technology and support services. The Company generates increased demand for the services and capabilities of its affiliated physician organizations and achieves growth through the addition of physicians, the expansion of managed care relationships and the addition and expansion of ancillary services. During 1996, the Company assisted its affiliated clinics in recruiting approximately 320 new physicians. The Company merged the practices of approximately 140 additional physicians into its existing clinics. The Company is also assisting formerly unaffiliated physicians in particular markets to develop new physician groups which enter into a long-term service agreements with the Company. In addition, the Company is developing physician networks around its physician groups to enhance managed care contracting and to provide the physician component of organized health care systems. Physicians in affiliated physician groups may participate in IPAs developed and managed by North American or PMC. See "Physician Networks." PhyCor is also positioning the clinics for participation in organized health care systems by establishing strategic alliances with HMOs, insurers, hospitals and other health care providers and by enhancing medical management systems. 22 24 The Company believes that continued growth will result from its demonstrated ability to improve and expand the health care services provided through its clinics, to enhance operating efficiency and profitability at the clinics, to earn and maintain the trust and confidence of the physician groups and to assist physicians in managing the operation of its clinics in a way that reduces the utilization and cost of health care services while achieving desired clinical outcomes.
PERCENTAGE OF NO. OF PHYCOR YEAR NUMBER OF PRIMARY CARE MEDICAL OPERATIONS SERVICE CLINIC LOCATION FOUNDED PHYSICIANS PHYSICIANS SPECIALTIES COMMENCED SITES ------ -------- ------- ---------- ------------- ----------- ---------- ------- Green Clinic................ Ruston, LA 1948 36 47% 16 Oct. 1988 2 Doctors' Clinic............. Vero Beach, FL 1969 39 46 19 Jan. 1989 5 Nalle Clinic................ Charlotte, NC 1921 119 54 23 Feb. 1990 10 Greeley Medical Clinic...... Greeley, CO 1933 40 55 15 Oct. 1990 4 Pueblo Physicians........... Pueblo, CO 1970 43 56 13 Sept. 1991 7 First Coast Medical Group... Jacksonville, FL 1921 103 68 18 Nov. 1991 54 Sadler Clinic............... Conroe, TX 1955 39 54 15 Jan. 1992 7 Diagnostic Clinic........... San Antonio, TX 1972 45 53 16 Jan. 1992 5 Virginia Physicians......... Richmond, VA 1923 108 74 18 Feb. 1992 17 Valley Diagnostic Medical and Surgical Clinic....... Harlingen, TX 1954 23 44 13 Aug. 1992 2 Laconia Clinic.............. Laconia, NH 1938 24 54 13 Sept. 1992 2 Olean Medical Group......... Olean, NY 1937 32 44 15 Nov. 1992 2 Holston Medical Group....... Kingsport, TN 1975 45 71 13 Jan. 1993 12 The Medical & Surgical Clinic of Irving.......... Irving, TX 1961 33 70 11 Mar. 1993 2 Simon-Williamson Clinic..... Birmingham, AL 1935 52 75 14 July 1993 9 Medical Arts Center......... Dixon, IL 1986 28 39 14 Oct. 1993 6 Medical Arts Clinic......... Corsicana, TX 1952 42 50 18 Jan. 1994 5 Lexington Clinic............ Lexington, KY 1920 160 47 25 Feb. 1994 22 Southern Plains Medical Center.................... Chickasha, OK 1946 32 53 15 Aug. 1994 2 Holt-Krock Clinic........... Fort Smith, AR 1921 155 44 23 Sept. 1994 20 Burns Clinic Medical Center.................... Petoskey, MI 1931 127 44 26 Oct. 1994 8 Boulder Medical Center...... Boulder, CO 1949 50 42 21 Oct. 1994 3 Tidewater Physicians Multi- specialty Group........... Newport News, VA 1993 69 83 11 Jan. 1995 30 Northeast Arkansas Clinic... Jonesboro, AR 1977 61 66 9 Mar. 1995 12 PAPP Clinic................. Newnan, GA 1939 39 51 11 May 1995 5 Ogden Clinic................ Ogden, UT 1968 43 51 18 June 1995 3 Arnett Clinic............... Lafayette, IN 1922 116 41 24 Aug. 1995 11 Casa Blanca Clinic.......... Mesa, AZ 1969 97 63 20 Sept. 1995 7 South Texas Medical Clinics................... Wharton, TX 1985 62 65 15 Nov. 1995 10 South Bend Clinic........... South Bend, IN 1916 55 58 19 Nov. 1995(1) 4 Guthrie Clinic.............. Sayre, PA 1910 229 42 29 Nov. 1995(2) 30 Arizona Physicians Center... Phoenix, AZ 1987 35 74 10 Jan. 1996 2 Clinics of North Texas...... Wichita Falls, TX 1995 73 51 21 Mar. 1996 6 Carolina Primary Care....... Columbia, SC 1995 30 100 3 May 1996 9 Harbin Clinic............... Rome, GA 1948 66 21 15 May 1996 7 Focus Health Services....... Denver, CO 1989 55 89 7 July 1996 16 Clark-Holder Clinic......... LaGrange, GA 1936 47 38 19 July 1996 5 Medical Arts Clinic......... Minot, ND 1958 44 52 19 Aug. 1996 1 Wilmington Health Associates................ Wilmington, NC 1971 43 40 13 Aug. 1996 5 Gulf Coast Medical Group.... Galveston, TX 1996 33 73 10 Aug. 1996 10 Hattiesburg Clinic.......... Hattiesburg, MS 1963 101 44 17 Oct. 1996 12 Toledo Clinic............... Toledo, OH 1926 80 18 19 Nov. 1996 10 Lewis-Gale Clinic........... Roanoke, VA 1909 106 49 23 Nov. 1996 14 Straub Clinic & Hospital.... Honolulu, HI 1921 187 52 26 Jan. 1997(3) 10 First Physicians Medical Group..................... Palm Springs, CA 1997 21 67 9 Feb. 1997 16
- --------------- (1) Entered into an interim management agreement effective November 1, 1995 and consummated the acquisition of certain assets and entered into a long-term service agreement effective January 1, 1996. (2) Entered into a series of agreements whereby PhyCor agreed to provide management services for up to five years and agreed to acquire certain assets of the clinic upon the occurrence of certain conditions. (3) Entered into an administrative services agreement effective October 1, 1996 and consummated the merger with Straub and entered into a long-term service agreement effective January 17, 1997. 23 25 In addition to the approximately 3,070 physicians affiliated with the Company, the PhyCor-affiliated physician groups employ approximately 430 physician extenders, which include physician assistants, nurse practitioners and other mid-level providers. The Company believes physician extenders comprise an important component of its integrated network strategy by efficiently expanding the level of services offered in its clinics. Upon the acquisition by PhyCor of a clinic's operating assets, the affiliated physician group simultaneously enters into a long-term service agreement with the Company. The Company, under the terms of the service agreement, provides the physician group with the equipment and facilities used in its medical practice, manages clinic operations, employs most of the clinic's non-physician personnel, other than certain diagnostic technicians, and receives a service fee. The physician groups offer a wide range of primary and specialty physician care and ancillary services. Approximately 53% of PhyCor's affiliated physicians are primary care providers. The primary care physicians are those in family practice, general internal medicine, obstetrics, pediatrics and emergency and urgent care. PhyCor works closely with its affiliated physician groups to recruit new physicians and merge sole practices or single specialty groups, especially primary care groups, into the clinics' physician groups. Substantially all of the physicians practicing in the clinics are certified or eligible to be certified by applicable specialty boards. PhyCor's affiliated physicians maintain full professional control over their medical practices, determine which physicians to hire or terminate and set their own standards of practice in order to promote high quality health care. Pursuant to its service agreements with physician groups, PhyCor manages all aspects of the clinic other than the provision of medical services, which is controlled by the physician groups. At each clinic, a joint policy board equally comprised of physicians and PhyCor personnel focuses on strategic and operational planning, marketing, managed care arrangements and other major issues facing the clinic. The joint policy board involves experienced health care managers in the decision making process and brings increased discipline and accountability to clinic operations. PhyCor is not engaged in the practice of medicine. Management believes its clinics have the opportunity to form relationships with managed care organizations, insurance companies and hospitals to create high-quality, cost-effective health care delivery systems. The Company is aligning its affiliated clinics with low-cost, high-quality hospitals and related providers in each of its markets and through various relationships is seeking to more closely coordinate the overall delivery of health care to patients. These plans may include participation by affiliated physicians in physician networks developed and managed by PhyCor or PMC. See "Physician Networks." Pursuant to certain of the Company's relationships with managed care organizations and insurance companies, responsibility for physician services, hospital utilization and overall medical management is assumed by the physician networks being developed by PhyCor-affiliated clinics. The Company believes that medical management performed within physician organizations can yield the greatest value in quality-driven, cost-effective health care and that premiums collected from purchasers of health care will be allocated based upon the value of the services performed by the health care provider members of organized health care systems. The Company has initiated the PhyCor Institute for Healthcare Management which provides practical managed care and medical management training for physicians affiliated or considering affiliation with PhyCor. Through the Institute's efforts, physicians in many locations work together to achieve "economies of intellect" and best practice performance through shared data and experience. These efforts emphasize outcomes measurement and management and are intended to improve the physicians' ability to attain optimal clinical outcomes and patient satisfaction, while emphasizing appropriate utilization of health care resources. The Company believes that, in the future, its ability to differentiate its physician organizations based upon quality clinical performance will increasingly impact financial performance. 24 26 The Company provides support for the selection and implementation of information systems at its clinics. The Company has selected certain practice management and other systems considered to be most effective for capitated risk management, provider profiling, outcomes analysis and automated patient records for implementation at its clinics. These systems are designed to allow physician organizations to successfully capture information that will enable them to more effectively manage the risk associated with capitated arrangements. The Company also negotiates national arrangements that provide cost savings to its clinics through economies of scale in malpractice insurance, supplies and equipment. In addition, PhyCor has a service improvement program that aligns staffing with the volume and service needs of its physician organizations and focuses on measuring and improving patient satisfaction. Upon assuming the operations of a clinic, the Company implements a standard set of business policies and reviews procedure coding practices in each clinic. PHYSICIAN NETWORKS PhyCor established its presence in the IPA management business in 1995 and believes that a significant opportunity exists to develop and manage IPAs. IPAs consolidate independent physicians by providing general organizational structure and management to the physician network. IPAs provide or contract for medical management services to assist physician networks in obtaining and servicing managed care contracts and enable previously unaffiliated physicians to assume and more effectively manage capitated risk. PhyCor manages IPAs with over 9,300 physicians in 17 markets. The Company establishes management companies through which all health plan contracts are negotiated. These management companies, in which physicians may have an equity interest, provide information and operating systems, actuarial and financial analysis, medical management and provider contract services to the IPA. PhyCor assists physicians in forming networks to develop a managed care delivery system in which the IPA accepts fiscal responsibility for providing a wide range of medical services. PhyCor intends to continue to develop primary care-oriented health care delivery systems in certain markets that do not have established managed care networks. In June 1995, PhyCor purchased a minority interest in PMC and manages PMC pursuant to a ten-year administrative services agreement. PMC develops and manages IPAs and provides other services to physician organizations. PhyCor has an option to purchase the remaining equity interest of PMC prior to the end of May 2005. 25 27 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The executive officers and directors of the Company are as follows:
NAME AGE POSITION ---- --- -------- Joseph C. Hutts............................ 55 Chairman of the Board, President, Chief Executive Officer and Director Derril W. Reeves........................... 53 Executive Vice President, Development and Director Richard D. Wright.......................... 51 Executive Vice President, Operations and Director Thompson S. Dent........................... 46 Executive Vice President, Corporate Services, Secretary and Director John K. Crawford........................... 38 Vice President, Treasurer and Chief Financial Officer Ronald B. Ashworth(1)...................... 51 Director Sam A. Brooks, Jr.(2)...................... 58 Director Winfield Dunn(1)........................... 69 Director C. Sage Givens(2).......................... 40 Director Joseph A. Hill, M.D.(1).................... 56 Director James A. Moncrief, M.D.(1)................. 61 Director
- --------------- (1) Member of Compensation Committee. (2) Member of Audit Committee. Mr. Hutts has served as Chairman of the Board, President, Chief Executive Officer and a director of the Company since its inception in 1988. Prior to becoming an officer of the Company, Mr. Hutts served at Hospital Corporation of America ("HCA") from 1977 to 1986 in various positions, including Vice President, Operations, Senior Vice President, Western Operations, and President of HCA Health Plans, a managed care subsidiary of HCA. Mr. Hutts then became Vice Chairman and Chief Operating Officer of EQUICOR -- Equitable HCA Corporation ("EQUICOR"), an employee benefits company, a position he held from October 1986 until June 1987. Mr. Hutts serves on the board of directors of Renal Care Group, Inc., a provider of nephrology services, and Quorum Health Group, Inc., an owner and operator of hospitals. Mr. Reeves, a director of the Company, has served as Executive Vice President, Development, since inception of the Company. Mr. Reeves served as Vice President of Sales and Marketing with HCA Management Company from 1977 until 1986, at which time he took the position of Senior Vice President, National Sales, with EQUICOR, a position he held until October 1987. Mr. Wright, a director of the Company, has served as Executive Vice President, Operations, since inception of the Company. Mr. Wright served in several international positions with HCA concluding in 1986 with the position of Chief Executive Officer of an 800,000 member HMO in Brazil. He returned to the United States in 1986 to assume the position of Senior Vice President, Development, for EQUICOR, a position he held from October 1986 until May 1987. Mr. Wright is a trustee of Helen Keller International. Mr. Dent, a director of the Company, has served as Executive Vice President, Corporate Services, since inception of the Company. Mr. Dent was selected to serve as Secretary of the Company in 1991. Mr. Dent served as Vice President of Development at EQUICOR, a position he held from October 1986 until March 1988. Prior to October 1986, Mr. Dent served as Director of Mergers and Acquisitions for HCA. Mr. Dent is a director of Healthcare Realty Trust Incorporated, a real estate investment trust. 26 28 Mr. Crawford has served as Vice President and Treasurer of the Company since 1993 and Chief Financial Officer since July 1994. From 1991 to 1993, Mr. Crawford served as Director of Clinic Financial Operations for the Company. Prior to joining the Company, from 1987 to 1991, Mr. Crawford served as a Senior Manager for KPMG Peat Marwick LLP, in Nashville, Tennessee, the Company's independent public accountants. Mr. Ashworth has served as a director of the Company since April 1992. Since 1991, Mr. Ashworth has served as Executive Vice President and Chief Operating Officer of the Sisters of Mercy Health System, St. Louis, Missouri, a system consisting of hospitals and affiliated health care entities serving a seven-state area in the central and southwestern United States. From 1986 to 1990, Mr. Ashworth served as Vice Chairman of Specialized Industries and Marketing for KPMG Peat Marwick LLP, the Company's independent public accountants. From 1978 to 1985, Mr. Ashworth served as National Director of the health care practice of KPMG Peat Marwick LLP. Mr. Ashworth is a director of the Franciscan Health System. Mr. Brooks has served as a director of the Company since February 1988. He is President, Chief Executive Officer and a director of Renal Care Group, Inc., a specialized provider of nephrology services. He is also President of MedCare Investments Corp., a health care investment company, and is Chairman of National Imaging Affiliates, Inc., an owner of outpatient diagnostic imaging centers. From 1986 to 1989, Mr. Brooks was President of Nationwide Health Properties, a health care real estate investment trust. From 1969 to 1986, Mr. Brooks served as Chief Financial Officer of HCA. Mr. Brooks is a director of Kinetic Concepts, Inc., a hospital bed manufacturer, Nationwide Health Properties and Quorum Health Group, Inc. Dr. Dunn, a former Governor of the State of Tennessee, has served as a director of the Company since August 1988. From 1979 to 1985, Dr. Dunn served as Senior Vice-President, Government Affairs, for HCA. From 1987 to 1991, Dr. Dunn served as Chairman of the Board of First Cumberland Bank. In 1993, Dr. Dunn became Chairman of the Board of Medshares Management Group, Incorporated, an owner and manager of home health care agencies. Ms. Givens has served as a director of the Company since December 1989. Since June 1995, Ms. Givens has served as the managing partner of Acacia Venture Partners, a private venture fund specializing in health care services. From 1987 to June 1995, Ms. Givens served as a general partner of First Century Management Company. Ms. Givens is a director of HEALTHSOUTH Corporation, a leading provider of rehabilitation and outpatient surgery services. Dr. Hill has served as a director of the Company since April 1989. He is a physician specializing in family practice at Doctors' Clinic in Vero Beach, Florida, a clinic managed by the Company. Dr. Hill joined Doctors' Clinic in 1973. Dr. Hill served as President of Doctors' Clinic from 1988 to 1991. Dr. Moncrief has served as a director of the Company since December 1988. He is a physician specializing in pediatrics and pediatric neurology at Green Clinic in Ruston, Louisiana, a clinic managed by the Company. Dr. Moncrief joined Green Clinic in 1966 and serves as its Medical Director. 27 29 PRINCIPAL AND SELLING SHAREHOLDERS The following table sets forth certain information regarding beneficial stock ownership as of December 31, 1996 (unless otherwise noted) and as adjusted to reflect the sale of the Common Stock offered hereby by (i) each director of the Company, (ii) all directors and officers as a group, (iii) each shareholder known by the Company to be the beneficial owner of more than 5% of the outstanding Common Stock, and (iv) the Selling Shareholders. Except as otherwise indicated, the persons or entities listed below have sole voting and investment power with respect to all shares shown to be beneficially owned by them, except to the extent such power is shared by a spouse under applicable law.
NUMBER OF SHARES PERCENT SUBJECT IF OVER- SHARES PERCENT PERCENT TO OVER- ALLOTMENT BENEFICIALLY BEFORE AFTER ALLOTMENT OPTION NAME OWNED(1) OFFERING(1) OFFERING(1)(2) OPTION EXERCISED(1)(3) ---- ------------ ----------- -------------- --------- --------------- Joseph C. Hutts(4)............. 350,771 * * -- * Derril W. Reeves(5)............ 495,418 * * -- * Thompson S. Dent(6)............ 481,778 * * -- * Richard D. Wright(7)........... 410,529 * * 40,000 * John K. Crawford(8)............ 66,045 * * 25,000 * Ronald B. Ashworth(9).......... 23,683 * * -- * Sam A. Brooks, Jr.(10)......... 35,323 * * -- * Winfield Dunn(11).............. 42,170 * * -- * C. Sage Givens(12)............. 29,513 * * -- * Joseph A. Hill, M.D.(13)....... 50,607 * * -- * James A. Moncrief, M.D.(14).... 50,510 * * -- * Putnam Investments, Inc.(15)... 6,501,598 11.9% 10.6% -- 10.5% Jennison Associates Capital Corp.(16).................... 5,280,429 9.6 8.6 -- 8.5 Pilgrim Baxter & Associates(17)............... 3,609,412 6.6 5.9 -- 5.8 Denver Investment Advisors, Inc.(18)..................... 2,894,198 5.3 4.7 -- 4.7 All directors and officers as a group (11 persons)(19)....... 2,024,072 3.6 3.2 65,000 3.1
- --------------- * Less than 1%. (1) The table above includes shares of the Company's Common Stock which an individual has a right to acquire, whether upon conversion of convertible securities or upon exercise of options and warrants, within 60 days of the date of this Prospectus. Such shares are deemed to be outstanding for the purposes of calculating the percentage ownership of the individual holding such shares, but are not deemed outstanding for purposes of computing the percentage of any other person shown on the table. (2) Assumes no exercise of the Underwriters' over-allotment option. (3) Assumes that the Underwriters' over-allotment option is exercised in full. (4) Includes options to purchase 206,885 shares of Common Stock and 21,581 shares of restricted Common Stock. Excludes unvested options to purchase 648,458 shares of Common Stock. (5) Includes options to purchase 197,843 shares of Common Stock and 18,950 shares of restricted Common Stock. Excludes unvested options to purchase 486,703 shares of Common Stock. (6) Includes options to purchase 197,843 shares of Common Stock and 20,656 shares of restricted Common Stock. Of these shares, 133,630 shares are held in three trusts by Mr. Dent for the benefit of members of his immediate family. Excludes unvested options to purchase 486,703 shares of Common Stock. 28 30 (7) Includes options to purchase 197,843 shares of Common Stock and 16,744 shares of restricted Common Stock. Of these shares, 5,347 shares are held by Mr. Wright for the benefit of his minor daughter. Excludes unvested options to purchase 486,703 shares of Common Stock. (8) Includes options to purchase 46,953 shares (21,953 shares after the offering) of Common Stock and 6,729 shares of restricted Common Stock. Of these shares, 1,270 shares are held in trust by Mr. Crawford for the benefit of his two minor daughters. Excludes unvested options to purchase 344,153 shares of Common Stock. (9) Includes options to purchase 19,125 shares of Common Stock and 787 shares of restricted Common Stock. (10) Includes options to purchase 29,250 shares of Common Stock and 617 shares of restricted Common Stock. (11) Includes options to purchase 37,688 shares of Common Stock and 999 shares of restricted Common Stock. (12) Includes options to purchase 20,813 shares of Common Stock and 999 shares of restricted Common Stock. (13) Includes options to purchase 20,813 shares of Common Stock and 999 shares of restricted Common Stock. (14) Includes options to purchase 20,813 shares of Common Stock and 617 shares of restricted Common Stock. (15) Of these shares, Putnam Investments, Inc., a registered investment adviser ("Putnam"), has shared voting power as to 86,796 shares and no voting power as to 6,414,802 shares. Putnam is a wholly-owned subsidiary of American Express Company. Putnam's address is One Post Office Square, Boston, Massachusetts 02109. Information is as of September 30, 1996 and is derived from Securities and Exchange Commission filings. (16) Of these shares, Jennison Associates Capital Corp., a registered investment adviser ("Jennison"), has shared voting power as to 3,852,343 shares and no voting power as to 330,986 shares. Jennison is a wholly-owned subsidiary of The Prudential Insurance Company of America. Jennison's address is 466 Lexington Avenue, New York, New York 10017. Information is as of September 30, 1996 and is derived from Securities and Exchange Commission filings. (17) Pilgrim Baxter & Associates, a registered investment adviser ("Pilgrim"), has shared voting power as to 3,609,412 shares. Pilgrim's address is 1255 Drummer Lane, Suite 300, Wayne, Pennsylvania 19087. Information is as of September 30, 1996 and is derived from Securities and Exchange Commission filings. (18) Denver Investment Advisors, Inc., a registered investment adviser ("Denver"), has no voting power as to 1,001,249 shares. Denver's address is 633 17th Street, Suite 1800, Denver, Colorado 80217. Information is as of September 30, 1996 and is derived from Securities and Exchange Commission filings. (19) Includes options to purchase 983,593 shares of Common Stock and 89,678 shares of restricted Common Stock. 29 31 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, the Underwriters named below (the "Underwriters"), through their representatives, Alex. Brown & Sons Incorporated, Equitable Securities Corporation, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Piper Jaffray Inc. and Salomon Brothers Inc have severally agreed to purchase from the Company the following respective numbers of shares of Common Stock set forth opposite their names below at the public offering price less the underwriting discounts and commissions set forth on the cover page of this Prospectus:
NUMBER OF UNDERWRITER SHARES ----------- --------- Alex. Brown & Sons Incorporated............................. Equitable Securities Corporation............................ Merrill Lynch, Pierce, Fenner & Smith Incorporated................................... Piper Jaffray Inc........................................... Salomon Brothers Inc........................................ --------- Total....................................................... 6,400,000 =========
The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent and that the Underwriters will purchase all shares of the Common Stock offered hereby if any of such shares are purchased. The Company has been advised by the representatives of the Underwriters that the Underwriters propose to offer the shares of Common Stock to the public at the public offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $ per share. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to certain other dealers. After the public offering, the offering price and the other selling terms may be changed by the representatives of the Underwriters. The Company and the Selling Shareholders have granted to the Underwriters an option, exercisable not later than 30 days after the date of this Prospectus, to purchase up to a maximum of 895,000 and 65,000 additional shares of Common Stock, respectively, at the public offering price less the underwriting discounts and commissions set forth on the cover page of this Prospectus. To the extent that the Underwriters exercise such option, each of the Underwriters will have a firm commitment to purchase approximately the same percentage thereof that the number of shares of Common Stock to be purchased by it shown in the above table bears to 6,400,000, and the Company and the Selling Shareholders will be obligated, pursuant to the option, to sell such shares to the Underwriters. The Underwriters may exercise such option only to cover over-allotments made in connection with the sale of the Common Stock offered hereby. If purchased, the Underwriters will offer such additional shares on the same terms as those on which the 6,400,000 shares are being offered. The Company and, if the Underwriters' over-allotment option is exercised, the Selling Shareholders, have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. The Company has agreed not to offer, sell or otherwise dispose of any shares of Common Stock, for a period of at least 45 days after the date of this Prospectus without the prior written consent of the representatives of the Underwriters, excepting securities issued by the Company pursuant to the conversion of existing convertible subordinated debentures, convertible subordinated notes, the exercise of outstanding warrants or stock option and purchase plans. In addition, the Company may issue securities in connection with acquisitions of the assets of additional physician groups, provided that the public sale of such securities remains subject to the 45 day lock-up. The executive officers of the Company have agreed not to offer, sell or otherwise dispose of any shares of Common 30 32 Stock for a period of at least 45 days after the date of this Prospectus without the prior written consent of the Underwriters. In connection with this offering, certain Underwriters and selling group members (if any) or their respective affiliates who are qualified registered market makers on the Nasdaq National Market may engage in passive market making on the Nasdaq National Market in accordance with Rule 10b-6A under the Exchange Act during the two business day period before the commencement of the offers or sales of the Common Stock. The passive market making transactions must comply with applicable volume and price limits and be identified as such. In general, a passive market maker may display its bid at a price not in excess of the highest independent bid for such security; if all independent bids are lowered before the passive market maker's bid, however, such bid must then be lowered when certain purchase limits are exceeded. Alex. Brown & Sons Incorporated, Equitable Securities Corporation and Salomon Brothers Inc participated as representatives of the underwriters in connection with the February 1996 public offering of the Company's 4.5% Convertible Subordinated Debentures due 2003. In such offering, such firms received customary commissions and allowed discounts by the Company. Each of the representatives of the Underwriters makes a market in the Common Stock. LEGAL MATTERS Certain legal matters with respect to the validity of the shares of Common Stock will be passed upon for the Company by Waller Lansden Dortch & Davis, A Professional Limited Liability Company, Nashville, Tennessee. Testa, Hurwitz & Thibeault, LLP is acting as counsel to the Underwriters in connection with certain legal matters relating to the shares of Common Stock offered hereby. EXPERTS The Consolidated Financial Statements of PhyCor as of December 31, 1994 and 1995, and for each of the years in the three-year period ended December 31, 1995, included elsewhere in the Registration Statement have been included in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, upon the authority of such firm as experts in accounting and auditing. 31 33 AVAILABLE INFORMATION The Company has filed a Registration Statement on Form S-3, including amendments thereto, relating to the Common Stock offered hereby (the "Registration Statement") with the Securities and Exchange Commission (the "Commission"). This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. Statements contained in this Prospectus as to the contents of any contract or other document referred to are not necessarily complete and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement or as previously filed with the Commission and incorporated herein by reference. For further information with respect to the Company and the Common Stock offered hereby, reference is made to such Registration Statement, exhibits and schedules. The Company is subject to the information requirements of the Exchange Act and, in accordance therewith, files reports, proxy statements and other information with the Commission. The Registration Statement, as well as such reports, proxy statements and other information, may be inspected and copied at prescribed rates at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices located at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, Suite 1300, New York, New York 10048. In addition, the Commission maintains a web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission at http://www.sec.gov. The Company's Common Stock is quoted on the Nasdaq National Market, and such reports, proxy statements and other information may be inspected at the offices of Nasdaq Operations, 1735 K Street, N.W., Washington, D.C. 20006. INCORPORATION OF CERTAIN INFORMATION BY REFERENCE The following documents or portions of documents filed by the Company (0-19786) with the Commission are incorporated herein by reference: (1) The Company's Annual Report on Form 10-K for the year ended December 31, 1995; (2) The Company's Quarterly Report on Form 10-Q for the three months ended March 31, 1996; (3) The Company's Quarterly Report on Form 10-Q for the three months ended June 30, 1996; (4) The Company's Quarterly Report on Form 10-Q for the three months ended September 30, 1996; (5) The Company's Current Report on Form 8-K, dated February 3, 1997; and (6) The description of the Company's Common Stock contained in the Company's Registration Statements on Form 8-A, dated January 8, 1992 and March 8, 1994, respectively. All reports and other documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus and prior to the termination of the offering of the Common Stock hereunder shall be deemed to be incorporated by reference in this Prospectus and to be part hereof from the filing date of such documents. Any statement contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein, or in any other subsequently filed document that also is incorporated or is deemed to be incorporated by reference herein, modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. Subject to the foregoing, all information appearing in this Prospectus is qualified in its entirety by the information appearing in the documents incorporated herein by reference. This Prospectus incorporates documents by reference which are not presented herein or delivered herewith. These documents are available upon written or oral request, at no charge, from the Company. Requests should be directed to the Company, 30 Burton Hills Boulevard, Suite 400, Nashville, Tennessee 37215, Attention: John K. Crawford, Vice President and Chief Financial Officer. 32 34 PHYCOR, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS CONSOLIDATED ANNUAL FINANCIAL STATEMENTS OF PHYCOR, INC. Independent Auditors' Report.............................. F-2 Consolidated Balance Sheets............................... F-3 Consolidated Statements of Operations..................... F-4 Consolidated Statements of Shareholders' Equity........... F-5 Consolidated Statements of Cash Flows..................... F-6 Notes to Consolidated Financial Statements................ F-7 CONSOLIDATED INTERIM FINANCIAL STATEMENTS OF PHYCOR, INC. Consolidated Balance Sheets............................... F-21 Consolidated Statements of Earnings....................... F-22 Consolidated Statements of Cash Flows..................... F-23 Notes to Unaudited Consolidated Financial Statements...... F-24 UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION: Basis of Presentation..................................... F-27 Balance Sheet -- September 30, 1996....................... F-28 Statement of Operations -- Nine Months Ended September 30, 1996................................................... F-29 Statement of Operations -- Year Ended December 31, 1995... F-30 Notes to Pro Forma Consolidated Financial Information..... F-31
F-1 35 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders PhyCor, Inc.: We have audited the consolidated balance sheets of PhyCor, Inc. and subsidiaries as of December 31, 1994 and 1995 and the related consolidated statements of income, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of PhyCor, Inc. and subsidiaries as of December 31, 1994 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Nashville, Tennessee February 13, 1996, except for Note (16) which is as of June 14, 1996 F-2 36 PHYCOR, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1994 AND 1995 (ALL DOLLAR AMOUNTS ARE EXPRESSED IN THOUSANDS)
1994 1995 -------- -------- ASSETS (NOTE 10) Current assets: Cash and cash equivalents................................. $ 6,460 $ 18,827 Accounts receivable, less allowances of $68,860 in 1994 and $82,205 in 1995.................................... 118,175 167,028 Inventories............................................... 5,840 8,939 Prepaid expenses and other assets......................... 14,407 22,727 -------- -------- Total current assets.............................. 144,882 217,521 Property and equipment, net (notes 4, 10, and 11)........... 58,761 108,813 Intangible assets (note 6).................................. 137,635 308,963 Other assets (note 5)....................................... 10,107 8,289 -------- -------- Total assets...................................... $351,385 $643,586 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current installments of long-term debt (note 10).......... $ 148 $ 587 Current installments of obligations under capital leases (note 11).............................................. 1,533 1,799 Accounts payable.......................................... 10,269 20,020 Income taxes payable...................................... -- 2,714 Due to physician groups (note 2).......................... 27,577 48,917 Salaries and benefits payable............................. 7,433 11,381 Other accrued expenses and liabilities.................... 17,389 20,683 -------- -------- Total current liabilities......................... 64,349 106,101 Long-term debt, excluding current installments (note 10).... 32,150 65,905 Obligations under capital leases, excluding current installments (note 11).................................... 1,261 1,637 Due to physician groups (note 2)............................ 9,755 13,722 Deferred tax credits and other liabilities (note 13)........ 8,258 8,030 Convertible subordinated notes payable to physician groups (notes 7 and 8)........................................... 22,832 59,369 Convertible subordinated debentures (notes 7 and 9)......... 28,655 -- -------- -------- Total liabilities................................. 167,260 254,764 -------- -------- Shareholders' equity (notes 8, 9, 12 and 16): Preferred stock, no par value, 10,000,000 shares authorized............................................. -- -- Common stock, no par value; 100,000,000 shares authorized; issued and outstanding, 37,899,000 shares in 1994 and 53,399,000 shares in 1995.............................. 180,388 363,211 Retained earnings......................................... 3,737 25,611 -------- -------- Total shareholders' equity........................ 184,125 388,822 -------- -------- Commitments and contingencies (notes 11, 12, 14, and 15) Total liabilities and shareholders' equity........ $351,385 $643,586 ======== ========
See accompanying notes to consolidated financial statements. F-3 37 PHYCOR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1993, 1994, AND 1995 (ALL AMOUNTS ARE EXPRESSED IN THOUSANDS, EXCEPT FOR EARNINGS PER SHARE)
1993 1994 1995 -------- -------- -------- Net revenue (note 2)........................................ $167,381 $242,485 $441,596 Operating expenses (income): Clinic salaries, wages and benefits....................... 63,202 88,443 166,031 Clinic supplies........................................... 25,031 37,136 67,596 Purchased medical services................................ 8,920 11,778 17,572 Other clinic expenses..................................... 28,174 40,939 71,877 General corporate expenses................................ 5,418 9,417 14,191 Rents and lease expense................................... 16,441 23,413 36,740 Depreciation and amortization............................. 8,394 12,229 21,445 Interest income........................................... (309) (1,334) (1,816) Interest expense.......................................... 3,878 3,963 5,230 Minority interest in earnings of consolidated partnerships........................................... -- -- 6,933 -------- -------- -------- Net operating expenses............................ 159,149 225,984 405,799 -------- -------- -------- Earnings before income taxes...................... 8,232 16,501 35,797 Income tax expense (note 13)................................ 1,092 4,826 13,923 -------- -------- -------- Net earnings...................................... $ 7,140 $ 11,675 $ 21,874 ======== ======== ======== Earnings per common share (note 16): Primary................................................... $ .28 $ .32 $ .41 Fully diluted............................................. -- $ .31 -- ======== ======== ======== Weighted average number of shares and share equivalents outstanding (note 16): Primary................................................... 25,869 36,329 53,510 Fully diluted............................................. -- 43,427 -- ======== ======== ========
See accompanying notes to consolidated financial statements. F-4 38 PHYCOR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1993, 1994, AND 1995 (ALL AMOUNTS ARE EXPRESSED IN THOUSANDS)
RETAINED EARNINGS COMMON STOCK (ACCUMU- ----------------- LATED SHARES AMOUNT DEFICIT) TOTAL ------ -------- -------- -------- Balances at December 31, 1992....................... 22,041 $ 68,957 $(15,078) $ 53,879 Issuance of common stock, net of placement commissions and offering expenses.............. 510 2,303 -- 2,303 Conversion of subordinated debentures to common stock.......................................... 377 2,117 -- 2,117 Conversion of notes payable to common stock....... 1,090 4,310 -- 4,310 Stock options exercised........................... 179 256 -- 256 Net earnings for the year ended December 31, 1993........................................... -- -- 7,140 7,140 ------ -------- -------- -------- Balances at December 31, 1993....................... 24,197 77,943 (7,938) 70,005 Issuance of common stock, net of placement commissions and offering expenses.............. 8,978 76,726 -- 76,726 Conversion of subordinated debentures to common stock.......................................... 4,113 23,129 -- 23,129 Conversion of notes payable to common stock....... 589 2,498 -- 2,498 Stock options exercised........................... 22 92 -- 92 Net earnings for the year ended December 31, 1994........................................... -- -- 11,675 11,675 ------ -------- -------- -------- Balances at December 31, 1994....................... 37,899 180,388 3,737 184,125 Issuance of common stock and warrants, net of placement commissions and offering expenses.... 7,835 127,773 -- 127,773 Conversion of subordinated debentures to common stock.......................................... 4,882 27,566 -- 27,566 Conversion of notes payable to common stock....... 2,670 26,405 -- 26,405 Stock options exercised and related tax benefits....................................... 113 1,079 -- 1,079 Net earnings for the year ended December 31, 1995........................................... -- -- 21,874 21,874 ------ -------- -------- -------- Balances at December 31, 1995....................... 53,399 $363,211 $ 25,611 $388,822 ====== ======== ======== ========
See accompanying notes to consolidated financial statements. F-5 39 PHYCOR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1993, 1994, AND 1995 (ALL AMOUNTS ARE EXPRESSED IN THOUSANDS)
1993 1994 1995 ------- -------- -------- Cash flows from operating activities: Net earnings.............................................. $ 7,140 $ 11,675 $ 21,874 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization........................... 8,394 12,229 21,445 Deferred income taxes................................... 492 1,566 2,948 Minority interests...................................... -- -- 729 Increase (decrease) in cash, net of effects of acquisitions, due to changes in: Accounts receivable, net.............................. (5,911) (9,496) (12,179) Inventories........................................... (281) (576) (1,280) Prepaid expenses and other assets..................... (1,795) (2,046) (1,749) Accounts payable...................................... (85) 1,646 5,474 Due to physician groups............................... (1,455) 29 8,595 Other accrued expenses and liabilities................ (175) (1,527) 2,204 ------- -------- -------- Net adjustments.................................... (816) 1,825 26,187 ------- -------- -------- Net cash provided by operating activities.......... 6,324 13,500 48,061 ------- -------- -------- Cash flows from investing activities: Payments for acquisitions, net............................ (29,882) (69,164) (145,075) Purchase of property and equipment........................ (7,369) (17,496) (29,292) Proceeds from sale of property and equipment.............. 10,386 -- -- Payments to acquire other assets.......................... (1,436) (4,488) (2,943) ------- -------- -------- Net cash used by investment activities............. (28,301) (91,148) (177,310) ------- -------- -------- Cash from financing activities: Net proceeds from issuance of stock and warrants.......... 178 59,131 113,594 Net proceeds from issuance of convertible debentures...... 52,518 -- -- Proceeds from long-term borrowings........................ 2,034 42,100 130,400 Repayment of long-term borrowings......................... (36,267) (17,115) (100,144) Repayment of obligations under capital leases............. (2,096) (3,170) (1,965) Loan costs incurred....................................... (342) (38) (269) ------- -------- -------- Net cash provided by financing activities.......... 16,025 80,908 141,616 ------- -------- -------- Net increase (decrease) in cash and cash equivalents........ (5,952) 3,260 12,367 Cash and cash equivalents -- beginning of year.............. 9,152 3,200 6,460 ------- -------- -------- Cash and cash equivalents -- end of year.................... $ 3,200 $ 6,460 $ 18,827 ======= ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period for: Interest.................................................. $ 3,668 $ 5,092 $ 4,674 Income taxes, net of refunds.............................. 356 2,828 10,760 ======= ======== ======== SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Effects of acquisitions (note 3): Assets acquired, net of cash.............................. $37,394 $172,441 $270,925 Liabilities assumed....................................... (5,605) (64,577) (50,015) Reduction (issuance) of convertible subordinated notes payable................................................. 451 (16,931) (62,942) Issuance of common stock.................................. (2,358) (17,438) (12,893) Cash received from disposition of clinic assets........... -- (4,331) -- ------- -------- -------- Payment for acquired assets........................ $29,882 $ 69,164 $145,075 ======= ======== ======== Capital lease obligations incurred to acquire equipment..... $ 422 $ 466 $ 173 Conversion of subordinated debentures and notes payable to common stock.............................................. 6,427 25,627 53,971 ======= ======== ========
See accompanying notes to consolidated financial statements. F-6 40 PHYCOR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993, 1994, AND 1995 (1) SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (a) Description of Business PhyCor, Inc. is a physician-driven medical management company that acquires and operates multispecialty medical clinics and develops and manages independent practice associations ("IPAs"). PhyCor's objective is to organize physicians into professionally managed networks that assist physicians in assuming increased responsibility for delivering cost-effective medical care while attaining high-quality clinical outcomes and patient satisfaction. The Company, through wholly-owned subsidiaries, acquires certain assets of and operates clinics under long-term service agreements with affiliated physician groups that practice exclusively through such clinics. The Company provides administrative and technical support for professional services rendered by the physician groups under service agreements. Under most service agreements, the Company is reimbursed for all clinic expenses, as defined in the agreement, and participates at varying levels in the excess of net clinic revenue over clinic expenses. As of December 31, 1995, the Company operated 31 multispecialty clinics in twenty states. The Company also manages IPAs which are networks of independent physicians. These IPAs include over 5,700 physicians in 13 markets in six states which provide capitated medical services to approximately 218,000 members, including approximately 38,000 Medicare members. (b) Principles of Consolidation The consolidated financial statements include the accounts of the Company and its majority owned subsidiaries, partnerships and other entities in which the company has more than 50% ownership interest or exercises control. All significant intercompany balances and transactions are eliminated in consolidation. (c) Cash and Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents as of December 31, 1995 include $2,139,000 of consolidated partnership cash. These balances may only be used for the operations of the respective partnerships. (d) Accounts Receivable Accounts receivable principally represent receivables from patients for medical services provided by physician groups. Such amounts are recorded net of contractual allowances and estimated bad debts. Accounts receivable are a function of net clinic revenue rather than net revenue of the Company (See note 2). (e) Inventories Inventories are comprised primarily of medical supplies, medications and other materials used in the delivery of health care services by the physician groups at the Company's clinics. The Company values inventories at the lower of cost or market with cost determined using the first-in, first-out (FIFO) method. F-7 41 PHYCOR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (f) Property and Equipment Property and equipment are stated at cost. Equipment held under capital leases is stated at the present value of minimum lease payments at the inception of the related leases. Depreciation of property and equipment is calculated using the straight-line method over the estimated useful lives of the assets. Equipment held under capital leases and leasehold improvements are amortized on a straight line basis over the shorter of the lease term or estimated useful life of the assets. When assets are retired or otherwise disposed of, the costs and related accumulated depreciation are removed from the accounts. The difference between the net book value of the assets and proceeds from disposition is recognized as gain or loss. Routine maintenance and repairs are charged to expenses as incurred, while betterments and renewals are capitalized. (g) Intangible Assets Clinic Service Agreements Costs of obtaining clinic service agreements are amortized using the straight-line method over the periods during which the agreements are effective, currently twenty-five to forty years. Clinic service agreements represent the exclusive right to operate the Company's clinics in affiliation with the related physician groups during the term of the agreements. In the event of termination of a service agreement, the related physician group is required to purchase all clinic assets, including the unamortized portion of intangible assets, generally at the current book value. Excess of Cost of Acquired Assets Over Fair Value Excess of cost of acquired assets over fair value (goodwill) is amortized using the straight line method over thirty years. Other Intangible Assets Other intangible assets include costs associated with obtaining long-term financing which are being amortized systematically over the terms of the related debt agreements. Amortization and Recoverability The Company periodically reviews its intangible assets to assess recoverability and impairments would be recognized in the statement of operations if a permanent impairment were determined to have occurred. Recoverability of intangibles is determined based on undiscounted future operating cash flows from the related business unit or activity. The amount of impairment, if any, is measured based on discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds. The assessment of the recoverability of intangible assets will be impacted if estimated future operating cash flows are not achieved. Amortization of intangibles amounted to $2,268,000, $3,518,000, and $7,441,000 for 1993, 1994 and 1995, respectively. (h) Income Taxes The Company is a corporation subject to Federal and state income taxes. Effective January 1, 1993, the Company adopted the provisions of Financial Accounting Standards Board Statement No. 109, Accounting for Income Taxes. Under the asset and liability method of Statement No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates F-8 42 PHYCOR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company adopted Statement No. 109 prospectively. There was no cumulative effect of the change in the method of accounting for income taxes. (i) Earnings Per Share Primary earnings per share have been computed by dividing net earnings by the weighted average number of common shares and common share equivalents outstanding during the periods. Common share equivalents included in determining earnings per share include shares issuable upon exercise of warrants and stock options and shares issuable upon conversion of certain debentures and notes payable, if dilutive. Fully diluted earnings per share have been computed by dividing net earnings plus convertible subordinated debenture and note interest and amortization expense (net of income taxes) by the weighted average number of common shares and common share equivalents after giving effect to the common stock equivalents noted above and those arising from the conversion of the convertible subordinated debentures and notes. (j) Use of Estimates Management of the Company has made certain estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (k) Reclassifications Certain prior year amounts have been reclassified to conform to the 1995 presentation. (2) NET REVENUE Revenue for multispecialty clinics is recorded at established rates reduced by allowances for doubtful accounts and contractual adjustments and amounts retained by physician groups. Contractual adjustments arise due to the terms of certain reimbursement and managed care contracts. Such adjustments represent the difference between charges at established rates and estimated recoverable amounts and are recognized in the period the services are rendered. Any differences between estimated contractual adjustments and actual final settlements under reimbursement contracts are reported as contractual adjustments in the year final settlements are made. IPA management revenue is recorded at the amount of capitation and risk pool payments due to the Company reduced by amounts retained by the IPA. F-9 43 PHYCOR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following represent amounts included in the determination of net revenue (in thousands):
1993 1994 1995 -------- -------- ---------- Gross physician group revenue.......................... $365,941 $581,156 $1,069,033 Less: Provisions for doubtful accounts and contractual adjustments....................................... 101,220 175,120 359,653 -------- -------- ---------- Net physician group revenue.................. 264,721 406,036 709,380 IPA revenue............................................ -- -- 146,975 Less amounts retained by physician groups and IPAs: IPAs................................................. -- -- 118,599 Physician groups..................................... 90,424 148,983 266,725 Clinic technical employee compensation............... 6,916 14,568 29,435 -------- -------- ---------- Net revenue.................................. $167,381 $242,485 $ 441,596 ======== ======== ==========
The Company derives substantially all of its net revenue from thirty-one physician groups located in twenty states with which it has service agreements. For the year ended December 31, 1995, one of these physician groups comprises 10% of the Company's net revenue. The Company's affiliated physician groups derived approximately 29% and 24% of their net revenues from services provided under the Medicare program for the years ended December 31, 1994 and 1995, respectively. Other than the Medicare program, the physician groups have no customers which represent more than 10% of aggregate net clinic revenue or 5% of accounts receivables at December 31, 1995. (3) ACQUISITIONS (a) Multispecialty Medical Clinics During 1993, 1994, and 1995, the Company, through wholly-owned subsidiaries, acquired certain operating assets of the following clinics:
CLINIC EFFECTIVE DATE LOCATION ------ -------------- -------- 1993: Holston Medical Group January 1, 1993 Kingsport, Tennessee The Medical & Surgical Clinic of Irving March 1, 1993 Irving, Texas Simon-Williamson Clinic July 1, 1993 Birmingham, Alabama Medical Arts Center October 1, 1993 Dixon, Illinois 1994: Medical Arts Clinic January 1, 1994 Corsicana, Texas Lexington Clinic (C) August 1, 1994 Lexington, Kentucky Southern Plains Medical Center August 1, 1994 Chickasha, Oklahoma Holt-Krock Clinic September 1, 1994 Fort Smith, Arkansas Burns Clinic Medical Center October 1, 1994 Petoskey, Michigan Boulder Medical Center October 1, 1994 Boulder, Colorado
F-10 44 PHYCOR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CLINIC EFFECTIVE DATE LOCATION ------ -------------- -------- 1995: Tidewater Physicians Multispecialty Group January 1, 1995 Newport News, Virginia Northeast Arkansas Clinic March 1, 1995 Jonesboro, Arkansas PAPP Clinic May 1, 1995 Newnan, Georgia Ogden Clinic June 1, 1995 Ogden, Utah Arnett Clinic August 1, 1995 Lafayette, Indiana Casa Blanca Clinic September 1, 1995 Mesa, Arizona South Texas Medical Clinics November 1, 1995 Wharton, Texas South Bend Clinic (A) November 1, 1995 South Bend, Indiana Guthrie Clinic (B) November 17, 1995 Sayre, Pennsylvania
- --------------- (A) The South Bend Clinic was operated by the Company under a management agreement between November 1, 1995 and December 31, 1995. Effective January 1, 1996 the Company completed the purchase of certain clinic operating assets and entered into a 40-year service agreement with the affiliated physician group. (B) The Company has entered into a series of agreements with Guthrie Clinic whereby the Company agreed to provide management services for up to five years and agreed, pending satisfaction of certain conditions, to acquire certain assets of the clinic prior to the termination or expiration of the interim management agreement. (C) The Lexington Clinic was operated by the Company under a management agreement between February 15, 1994 and July 31, 1994. In addition, the Company acquired certain operating assets of various individual physician practices and single specialty groups which were merged into clinics already operated by the Company. The Company acquires operating assets and liabilities in exchange for cash, convertible debentures, common stock or a combination thereof. Such consideration for the above clinic acquisitions and single specialty mergers was $37,394,000 for 1993, $172,441,000 for 1994, and $239,620,000 for 1995. The acquisitions were accounted for as purchases, and the accompanying consolidated financial statements include the results of their operations from the dates of acquisition. Simultaneous with each acquisition, the Company entered into a long-term service agreement with the clinic physician group. In conjunction with certain acquisitions, the Company is obligated to make deferred payments to physician groups. Such payments are included in due to physician groups in the accompanying balance sheets. On September 30, 1994, the Company completed the sale of the assets of the Winter Haven, Florida clinic back to the affiliated physician group and ended its service agreement with the physician group. No gain or loss was realized by the Company in connection with the transaction. (b) North American Medical Management, Inc. ("North American") Effective January 1, 1995, the Company completed its acquisition of North American, an operator and manager of IPAs. The Company paid $20.0 million at closing and may make additional future payments pursuant to an earn-out formula during 1996, 1997 and 1998 of up to an aggregate of $70.0 million. The total acquisition consideration may increase to a maximum of $130.0 million in the event of future acquisitions by North American of additional interest in IPA management entities. The first of such payments is expected to be made in the first quarter of 1996 and is expected to be approximately $12.9 million in cash. Of the future payments made, a portion is payable in shares of the Company's common stock. F-11 45 PHYCOR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (c) Pro Forma Information and Subsequent Event The unaudited consolidated pro forma results of all current, continuing operations, assuming all 1994 and 1995 acquisitions, and the 1994 disposition of the Winter Haven, Florida clinic had been consummated on January 1, 1994, are as follows (in thousands except for earnings per share):
1994 1995 -------- -------- - -- Net revenue................................................. $436,234 $494,927 Earnings before income taxes................................ 27,306 40,395 Net earnings................................................ 17,078 24,679 Earnings per common share................................... .36 .45 Weighted average number of shares and share equivalents outstanding............................................... 46,994 54,668
Effective January 1, 1996, the Company completed the purchase of certain clinic operating assets of Arizona Physicians Center, P.C., a 35-physician multispecialty clinic in Phoenix, Arizona, and entered into a 40-year service agreement with the physician group. (4) PROPERTY AND EQUIPMENT Property and equipment at December 31, are summarized as follows (in thousands):
1994 1995 -------- -------- Land and improvements....................................... $ 3,210 $ 3,677 Buildings and leasehold improvements........................ 18,654 42,779 Equipment................................................... 48,113 83,786 Equipment under capital leases.............................. 7,556 8,300 Construction in progress.................................... 1,458 4,666 -------- -------- 78,991 143,208 Less accumulated depreciation............................... 20,230 34,395 -------- -------- Net property and equipment................................ $ 58,761 $108,813 ======== ========
The sale and leaseback of real estate assets at the Vero Beach, Florida clinic, was completed with a real estate investment trust in 1993. Net proceeds from the sale were approximately $10.0 million. The excess of net proceeds over the net book value of assets sold was deferred and is being amortized over the term of the related lease. (5) INVESTMENT IN PHYCOR MANAGEMENT CORPORATION ("PMC") In June 1995, PhyCor purchased a minority interest in PMC and manages PMC pursuant to a ten-year administrative services agreement. PMC provides management information systems, claims administration, utilization and case management, quality assurance programs, physician credentialing and recruitment to physician organizations. PhyCor has an option to purchase the remaining equity interest of PMC prior to the end of May 2005 at increasing prices based on the issuance price of the stock plus a fixed annual return. In connection with the PMC transaction, the Company committed to establish a revolving line of credit of $2.0 million for PMC for a period of five years. F-12 46 PHYCOR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (6) INTANGIBLE ASSETS Intangible assets at December 31, consist of the following (in thousands):
1994 1995 -------- -------- Clinic service agreements................................... $132,922 $288,787 Excess of cost of acquired assets over fair value........... -- 16,583 Franchise rights............................................ 2,514 2,366 Other....................................................... 2,199 1,227 -------- -------- $137,635 $308,963 ======== ========
(7) FAIR VALUE OF FINANCIAL INSTRUMENTS As of December 31, 1994 and 1995, the fair value of the Company's cash and cash equivalents, accounts receivable, due to physician groups, accounts payable and accrued expenses approximated their carrying value because of the short maturities of those financial instruments. The fair value of the Company's long-term debt also approximates its carrying value since the related notes bear interest at current market rates. The estimated fair value of the convertible subordinated notes payable to physician groups was approximately $33,265,000 and $99,293,000 as of December 31, 1994 and 1995, respectively. The carrying value of these notes was $22,832,000 and $59,369,000 at December 31, 1994 and 1995, respectively. The estimated fair value of the Company's convertible subordinated debentures as of December 31, 1994 was $58,070,000, compared to a carrying value of $28,655,000. The estimated fair value of these convertible securities is based on the greater of their face value and the closing market value of the common shares into which they could have been converted at the respective balance sheet date. (8) CONVERTIBLE SUBORDINATED NOTES PAYABLE TO PHYSICIAN GROUPS At December 31, 1994 and 1995, the Company had outstanding subordinated convertible notes payable to affiliated physician groups in the aggregate principal amount of $22,832,000 and $59,369,000, respectively. These notes bear interest at rates of 6.0% to 7.0% and are convertible into shares of the Company's common stock at conversion prices ranging from $8.80 to $36.86 per share. A convertible subordinated note of $33,295,000 issued in connection with the Guthrie Clinic transaction will be convertible into approximately 903,000 shares of common stock upon the Company's acquisition of the clinic's assets. If the then current price of the common stock is less than the conversion price, PhyCor will pay the clinic the principal amount of the note. The remaining convertible notes may be converted into approximately 2,043,000 shares of common stock commencing on varying dates in 1996 and 1997 at the option of the holders. (9) CONVERTIBLE SUBORDINATED DEBENTURES At December 31, 1994, the Company had $28,655,000 of convertible subordinated debentures outstanding. The debentures had a coupon rate of 6.5% and were convertible into the Company's common stock at $5.87 per share. The Company called for redemption effective January 20, 1995, all outstanding debentures at a redemption price of 105.2% of par value plus accrued interest. In January 1995, prior to the redemption date, the debentures were converted into common stock of the Company. During February 1996, the Company completed a public offering of convertible subordinated debentures, which mature in 2003. Gross and net proceeds from the offering were $200,000,000 and F-13 47 PHYCOR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) approximately $194,500,000, respectively. The debentures were priced at par with a coupon rate of 4.5% and are convertible into the Company's common stock at $38.67 per share. The debentures may not be redeemed at the Company's option prior to February 15, 1998. From February 15, 1998 to February 15, 1999, the bonds may be redeemed only if the price of the Company's common stock exceeds $54.13. From February 15, 1999 to maturity, the bonds may be redeemed at prices decreasing from 102.572% of face value to face value. (10) LONG-TERM DEBT Long-term debt at December 31, consists of the following (in thousands):
1994 1995 ------- ------- Term loan and revolving credit agreement, bearing interest at rates of 6.19% to 8.68% at December 31, 1995........... $27,100 $58,300 Mortgages payable, bearing interest at rates ranging from 8.00% to 10.5%, secured by land, building, and certain equipment................................................. 4,244 7,767 Other notes payable......................................... 954 425 ------- ------- Total long-term debt.............................. 32,298 66,492 Less current installments................................... 148 587 ------- ------- Long-term debt, excluding current installments.............. $32,150 $65,905 ======= =======
In August 1995, the Company completed modifications to its bank credit facility ("Bank Credit Facility"), which included the revision of certain terms and conditions and the addition of three participating financial institutions. The revised Bank Credit Facility provides for a seven-year, $200,000,000 revolving credit and term loan facility for use by the Company prior to August 1997, for acquisitions, working capital, capital expenditures and general corporate purposes. Any outstanding borrowings convert to a five year term loan in August 1997. The amended Bank Credit Facility provides that borrowings under the facility bear interest at either the Agent's base rate or .25% to .5625% above the Agent's eurodollar rate. The Company is required to pay a facility fee of between .125% to .3125% per annum on the unused portion of commitments, payable quarterly in arrears, until the commitments are terminated. In February 1996, the Company repaid all amounts outstanding under the Bank Credit Facility. The Bank Credit Facility contains covenants which, among other things, require the Company to maintain certain financial ratios and impose certain limitations or prohibitions on the Company with respect to (i) the incurrence of certain indebtedness, (ii) the creation of security interest on the assets of the Company, and (iii) the payment of cash dividends on, and the redemption or repurchase of, securities of the Company, investments and acquisitions. The Company was in compliance with such covenants at December 31, 1995. The Company is required to obtain bank consent for an acquisition with an aggregate purchase price of $35.0 million or more. F-14 48 PHYCOR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The aggregate maturities of long-term debt at December 31, 1995, are as follows (in thousands): 1996........................................................ $ 587 1997........................................................ 3,568 1998........................................................ 12,360 1999........................................................ 12,417 2000........................................................ 12,481 Thereafter.................................................. 25,079 ------- $66,492 =======
(11) LEASES The Company has entered into operating leases of commercial property and clinic equipment with affiliated physician groups and third parties. Commercial properties under operating leases include clinic buildings, satellite operations, and administrative facilities. Capital leases relating to clinic equipment expire at various dates during the next five years. The future minimum lease payments under noncancelable operating leases and the present value of future minimum capital lease payments at December 31, 1995, are as follows (in thousands):
NET CAPITAL OPERATING LEASES LEASES ------- --------- 1996........................................................ $1,935 $ 3,953 1997........................................................ 1,117 3,690 1998........................................................ 650 2,581 1999........................................................ 154 2,184 2000........................................................ 15 2,028 Thereafter.................................................. -- 12,053 ------ ------- Total minimum lease payments........................... $3,871 $26,489 ======= Less amount representing interest (at rates ranging from 10% to 13%)................................................... 435 ------ Present value of net minimum capital lease payments.... 3,436 Less current installments of obligations under capital leases.................................................... 1,799 ------ Obligations under capital leases, excluding current installments.............................................. $1,637 ======
At December 31, 1995, equipment with a cost of approximately $8,300,000 and accumulated depreciation of approximately $5,246,000 was held under capital leases. Net payments under operating basis include total commitments of $351,502,000 reduced by amounts to be reimbursed under clinic service agreements of $325,013,000. Payments due under operating leases include $158,700,000 payable to physician groups and their affiliates. In the event of a service agreement termination, any related lease obligations are also terminated. Total rental expense for operating leases in 1993, 1994, and 1995 was approximately $16,370,000, $22,961,000, and $37,920,000, respectively. F-15 49 PHYCOR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (12) SHAREHOLDERS' EQUITY (a) Common Stock On April 15, 1994, the Company completed a public offering of 6,885,000 shares of its common stock. Net proceeds from the offering were approximately $58,700,000. On June 23, 1995, the Company completed an additional public offering of 6,955,000 shares of its common stock. Net proceeds from the offering were approximately $110,900,000. On November 18, 1994, the Company declared a three-for-two stock split effected in the form of a 50% stock dividend on outstanding shares distributed December 15, 1994 to shareholders of record on December 1, 1994. A second three-for-two stock split was declared on August 18, 1995 to shareholders of record on September 1, 1995. All common share and per share data included in the financial statements and footnotes thereto have been restated to reflect these stock splits. (b) Preferred Stock The Company has 10,000,000 shares of authorized but unissued preferred stock. The Company has reserved for issuance 500,000 shares of Series A Junior Participating Preferred Stock issuable in the event of certain change-in-control events. (c) Warrants Warrants to purchase 778,159 shares of common stock were outstanding at December 31, 1995. In February 1992, the Company issued a warrant to purchase 42,187 shares of its common stock at an exercise price of $4.74 per share, exercisable at any time prior to February 1998. In June 1995, the Company issued warrants for the purchase of 348,001 shares of common stock in connection with the PMC offering, which consisted of the warrants and shares of PMC's Class B common stock. The exercise price of the warrants is $15.40. The warrants are exercisable at any time prior to May 2005. In November 1995, in connection with the agreements with Guthrie Clinic, the Company issued a warrant to purchase 387,967 shares of the common stock at an exercise price of $25.78 per share. The warrant is exercisable on the date of closing of the acquisition of the assets of the clinic, after the satisfaction of certain conditions. (d) 1988 Stock Incentive Plan and Other Stock Plans The Company has reserved 9,000,000 shares of its Common Stock for issuance pursuant to options to be granted under its 1988 Stock Incentive Plan (the Plan). Options have been granted to employees and directors of the Company, and will expire ten years after the date on which they were granted. The exercise price of the options is the estimated fair market value of the Company's common stock on the date the options are granted. In addition to options granted under the Plan, the Company has granted options for the purchase of 25,312 shares of its common stock to a director of the Company and a consultant. The Company also established an employee stock purchase plan, and reserved 843,750 common shares for the plan. During 1994 and 1995, approximately 97,000 and 66,000 shares were issued relative to the plan. Shares issued under the employee stock purchase plan will generally be priced at the lower of 85% of the fair market value of the Company's common stock on the first or the last trading days of the plan year. F-16 50 PHYCOR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Under the directors' stock plan, 337,500 shares of its common stock are reserved for issuance. Beginning in 1995, options issued under the directors' plan will generally be exercisable at the fair market value of the Company's common stock when the options are granted. Options to purchase 89,437 shares of common stock were outstanding at December 31, 1995. During 1995, 9,090 shares were issued relative to the directors' stock plan. The following represents a summary of options outstanding at December 31, 1995:
EXERCISABLE AT NUMBER EXERCISE DECEMBER 31, DATE OF GRANT OF SHARES PRICE 1995 ------------- --------- ------------ ----------------- 1988............................................... 25,312 $2.97 25,312 1989............................................... 79,087 2.97-3.26 79,087 1990............................................... 192,293 4.15 192,293 1991............................................... 185,748 4.15 123,832 1992............................................... 691,050 3.33-4.74 386,522 1993............................................... 1,206,234 4.22- 8.45 6,750 1994............................................... 2,273,897 8.15-12.22 -- 1995............................................... 2,900,208 11.14-25.67 40,500 --------- -------- 7,553,829 854,296 ========= ========
Options become exercisable in installments over periods ranging up to 60 months following the date of grant. All options become exercisable in full upon the occurrence of certain extraordinary events such as a tender offer for the stock of the Company. For options granted through December 31, 1995, the following summarizes the earliest periods in which options may be exercised: Currently exercisable....................................... 854,296 1996...................................................... 624,414 1997...................................................... 1,310,900 1998...................................................... 2,106,529 1999...................................................... 1,704,453 2000...................................................... 953,237 --------- 7,553,829 =========
(13) INCOME TAX EXPENSE Current income tax expense for the years ended December 31, 1993, 1994, and 1995, consists of (in thousands):
1993 1994 1995 ------ ------ ------- Current: Federal................................................... $ -- $2,199 $ 9,476 State..................................................... 600 1,061 1,499 Deferred: Federal................................................... -- 1,302 2,564 State..................................................... 492 264 384 ------ ------ ------- $1,092 $4,826 $13,923 ====== ====== =======
F-17 51 PHYCOR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Total income tax expense differed from the amount computed by applying the U.S. Federal income tax rate of 34 percent in 1993 and 1994 and 35 percent in 1995 to earnings before income taxes and extraordinary item as a result of the following (in thousands):
1993 1994 1995 ------- ------- ------- Computed "expected" tax expense............................. $ 2,799 $ 5,610 $12,529 Increase (reduction) in income taxes resulting from: Net operating loss carryforwards (utilized)............... (2,366) (3,662) -- State income taxes, net of federal income tax benefit..... 721 875 1,224 Reduction of goodwill of acquired entity.................. -- 1,951 -- Increase in deferred tax rate............................. -- -- 160 Other..................................................... (62) 52 10 ------- ------- ------- Total income tax expense.......................... $ 1,092 $ 4,826 $13,923 ======= ======= =======
The tax effects of temporary differences that give rise to significant portions of the deferred tax asset and deferred tax liability are presented below (in thousands):
DECEMBER 31, DECEMBER 31, 1994 1995 ------------ ------------ Deferred tax assets: Reserves for incurred but not reported self-insurance claims............................ $ 511 $ 555 Operating loss carryforwards........................ 1,421 4,208 Deferred gain on sale and leaseback................. 304 304 Alternative Minimum Tax credit...................... 1,114 -- Other............................................... 561 1,288 ------- ------- Total gross deferred tax asset.............. 3,911 6,355 Less valuation allowance............................ (1,380) (2,520) ------- ------- Net deferred tax asset...................... $ 2,531 $ 3,835 ======= ======= Deferred tax liability: Plant and equipment, principally due to differences in depreciation.................................. $ 2,385 $ 3,463 Capital leases...................................... 2,035 1,814 Clinic service agreements........................... 2,962 4,658 Prepaid expenses.................................... 1,060 1,293 Other............................................... 78 265 ------- ------- Total deferred tax liability................ $ 8,520 $11,493 ======= =======
The significant components of the deferred tax expense as of December 31, 1994 and 1995 are as follows (in thousands):
1994 1995 ------- ------ Change in net deferred tax liability........................ $ 5,497 $1,669 Deferred taxes of acquired entities......................... (912) 1,279 Decrease in valuation allowance for deferred tax assets..... (3,019) -- ------- ------ Deferred tax expense...................................... $ 1,566 $2,948 ======= ======
The valuation allowance for deferred tax assets as of December 31, 1995 was $2,520,000. The net change in the total valuation allowance, which primarily relates to federal and state net operating F-18 52 PHYCOR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) loss carryforwards, for the year ended December 31, 1995 was an increase of $1,140,000. The increase in the valuation reserve relates to deferred tax assets of entities acquired during 1995. As of December 31, 1995, the Company had approximately $6,000,000 of federal and $28,000,000 of state net operating loss carryforwards which begin to expire in 2003. The utilization of these carryforwards is subject to the future level of taxable income of the applicable subsidiaries. (14) EMPLOYEE BENEFIT PLANS As of January 1, 1989, the Company adopted the PhyCor, Inc. Savings and Profit Sharing Plan. The Plan is a defined contribution plan covering substantially all employees. Company contributions are based on specified percentages of employee compensation. The Company funds contributions as accrued. The contributions for 1993, 1994, and 1995 amounted to $1,635,000, $2,265,000, and $3,976,000, respectively. In connection with certain of the Company's acquisitions, the Company adopted employee retirement plans previously sponsored solely by the physician groups. The Company has recognized as expense its required contributions to be made to the plans of approximately $526,000, $1,016,000, and $1,248,000 relative to its employees for 1993, 1994 and 1995, respectively. (15) COMMITMENTS AND CONTINGENCIES (a) Employment Agreements The Company has entered into employment agreements with certain of its management employees, which include, among other terms, noncompetitive provisions and salary and benefits continuation. (b) Commitments to Physician Groups Under the terms of certain of its service agreements, the Company is committed to provide capital for the improvement and expansion of clinic facilities. Each such service agreement specifies the amount of the commitment and the period over which payments are to be made. The commitments vary depending on such factors as total capital expenditures, the number of physicians practicing at each clinic, and the cost of specific planned projects. All projects funded under these commitments must be approved by the Company before they commence. The Company is also committed to provide, under certain circumstances, advances to physician groups to principally finance the recruitment of new physicians. These advances will be repaid out of the physician groups' share of future clinic revenue. At December 31, 1994 and 1995, $712,000 and $672,000, respectively, of such advances were outstanding. (c) Litigation The Company is subject to various claims and legal actions which arise in the ordinary course of business. The Company has malpractice insurance to protect against such claims or legal actions. In the opinion of management, the ultimate resolution of such matters will be adequately covered by the insurance and will not have a material adverse effect on the Company's financial position or results of operations. F-19 53 PHYCOR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (d) Insurance The Company and its affiliated physician groups are insured with respect to medical malpractice risks on a claims-made basis. Management is not aware of any claims against it or its affiliated physician groups which might have a material impact on the Company's financial position. (e) Contingent Consideration In connection with the acquisition of clinic operating assets, the Company is contingently obligated to pay an estimated additional $33,838,000 in future years, depending on the achievement of certain financial and operational objectives by the related physician groups. Such liability, if any, will be recorded in the period in which the outcome of the contingency becomes known. Any payment made will be allocated among the assets acquired and will not immediately be charged to expense. (16) SUBSEQUENT EVENT On May 10, 1996, the Company declared a three-for-two stock split effected in the form of a 50% stock dividend on outstanding shares distributed June 14, 1996 to shareholders of record on May 31, 1996. All common shares and per share data included in the consolidated financial statements and notes thereto are restated to reflect the stock split. F-20 54 PHYCOR, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1995 AND SEPTEMBER 30, 1996 (UNAUDITED) (ALL DOLLAR AMOUNTS ARE EXPRESSED IN THOUSANDS)
DECEMBER 31, SEPTEMBER 30, 1995 1996 ------------ ------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................. $ 18,827 $ 31,283 Accounts receivable, net.................................. 167,028 249,541 Inventories............................................... 8,939 13,765 Prepaid expenses and other assets......................... 22,727 32,292 -------- -------- Total current assets.............................. 217,521 326,881 Property and equipment, net................................. 108,813 143,536 Intangible assets........................................... 308,963 504,648 Other assets................................................ 8,289 14,807 -------- -------- Total assets...................................... $643,586 $989,872 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current installments of long-term debt.................... $ 587 $ 277 Current installments of obligations under capital leases................................................. 1,799 1,304 Accounts payable.......................................... 20,020 22,861 Income taxes payable...................................... 2,714 1,379 Due to physician groups................................... 48,917 66,944 Salaries and benefits payable............................. 11,381 20,580 Other accrued expenses and liabilities.................... 20,683 44,777 -------- -------- Total current liabilities......................... 106,101 158,122 Long-term debt, excluding current installments.............. 65,905 62,325 Obligations under capital leases, excluding current installments.............................................. 1,637 1,556 Convertible subordinated debentures......................... -- 200,000 Convertible subordinated notes payable to physician groups.................................................... 59,369 65,699 Due to physician groups..................................... 13,722 56,900 Deferred tax credits and other liabilities.................. 8,030 13,561 -------- -------- Total liabilities................................. 254,764 558,163 -------- -------- Shareholders' equity: Preferred stock, no par value; 10,000,000 shares authorized............................................. -- -- Common stock, no par value; 250,000,000 shares authorized; issued and outstanding, 53,399,000 shares in 1995 and 54,487,000 in 1996..................................... 363,211 380,916 Retained earnings......................................... 25,611 50,793 -------- -------- Total shareholders' equity........................ 388,822 431,709 -------- -------- Total liabilities and shareholders' equity........ $643,586 $989,872 ======== ========
See accompanying notes to consolidated financial statements. F-21 55 PHYCOR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 (ALL AMOUNTS ARE EXPRESSED IN THOUSANDS, EXCEPT FOR EARNINGS PER SHARE)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------- 1995 1996 1995 1996 -------- -------- -------- -------- (UNAUDITED) Net revenue....................................... $114,038 $196,418 $305,948 $535,562 Operating expenses (income): Clinic salaries, wages and benefits............. 42,320 74,727 114,132 204,493 Clinic supplies................................. 17,799 30,383 46,899 81,459 Purchased medical services...................... 4,469 5,371 12,571 15,295 Other clinic expenses........................... 18,673 32,191 49,346 88,737 General corporate expenses...................... 3,468 5,032 10,391 15,307 Rents and lease expense......................... 9,790 16,729 25,588 44,768 Depreciation and amortization................... 5,532 10,596 15,084 28,158 Interest income................................. (515) (755) (1,086) (2,792) Interest expense................................ 708 4,206 3,666 10,761 Minority interests in earnings of consolidated partnerships................................. 1,770 3,185 4,980 8,429 -------- -------- -------- -------- Net operating expenses.................. 104,014 181,665 281,571 494,615 -------- -------- -------- -------- Earnings before income taxes............ 10,024 14,753 24,377 40,947 Income tax expense................................ 3,909 5,680 9,469 15,765 -------- -------- -------- -------- Net earnings............................ $ 6,115 $ 9,073 $ 14,908 $ 25,182 ======== ======== ======== ======== Earnings per common share......................... $ .11 $ .15 $ .29 $ .42 ======== ======== ======== ======== Weighted average number of shares and share equivalents outstanding......................... 58,172 60,843 51,786 60,555 ======== ======== ======== ========
See accompanying notes to consolidated financial statements. F-22 56 PHYCOR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 (ALL DOLLAR AMOUNTS ARE EXPRESSED IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- --------------------- 1995 1996 1995 1996 -------- -------- --------- --------- (UNAUDITED) Cash flows from operating activities: Net earnings............................................ $ 6,115 $ 9,073 $ 14,908 $ 25,182 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization......................... 5,532 10,596 15,084 28,158 Minority interests.................................... (696) 192 1,285 1,586 Increase (decrease) in cash, net of effects of clinic acquisitions, due to changes in: Accounts receivable................................. (5,113) (14,594) (11,342) (30,219) Inventories......................................... (404) (1,362) (1,173) (2,307) Prepaid expenses and other assets................... 66 (3,059) (1,807) (9,164) Accounts payable.................................... 1,474 1,588 1,620 (2,907) Due to physician groups............................. 1,078 4,637 5,731 7,243 Other accrued expenses and liabilities.............. 3,419 7,189 4,327 19,166 -------- -------- --------- --------- Net adjustments.................................. 5,356 5,187 13,725 11,556 -------- -------- --------- --------- Net cash provided by operating activities........ 11,471 14,260 28,633 36,738 -------- -------- --------- --------- Cash flows from investing activities: Payments for clinic operating assets, net of cash acquired.............................................. (45,246) (57,434) (109,543) (179,124) Purchase of property and equipment...................... (6,337) (12,606) (19,987) (36,069) Investments in other assets............................. 1,505 (820) (616) (1,675) -------- -------- --------- --------- Net cash used by investment activities........... (50,078) (70,860) (130,146) (216,868) -------- -------- --------- --------- Cash flows from financing activities: Net proceeds from issuance of convertible debentures.... -- -- -- 194,395 Proceeds from long-term borrowings...................... 42,000 50,000 114,100 100,000 Repayment of long-term borrowings....................... (128) (100) (99,764) (104,464) Repayment of obligations under capital leases........... (478) (450) (1,343) (1,270) Net proceeds (expense) from issuance of stock and warrants.............................................. (48) 924 113,358 4,010 Loan costs incurred..................................... (58) (85) (201) (85) -------- -------- --------- --------- Net cash provided by financing activities........ 41,288 50,289 126,150 192,586 -------- -------- --------- --------- Net increase (decrease) in cash and cash equivalents...... 2,681 (6,311) 24,637 12,456 Cash and cash equivalents -- beginning of period.......... 28,416 37,594 6,460 18,827 -------- -------- --------- --------- Cash and cash equivalents -- end of period................ $ 31,097 $ 31,283 $ 31,097 $ 31,283 ======== ======== ========= ========= SUPPLEMENTAL SCHEDULE OF INVESTING ACTIVITIES: Effects of acquisitions: Assets acquired, net of cash............................ $ 95,593 $ 88,422 $ 188,600 $ 274,366 Liabilities assumed..................................... (31,210) (36,487) (62,283) (135,936) Payment of deferred purchase price obligations.......... 6,821 16,944 15,285 60,793 Issuance of convertible subordinated notes payable...... (13,085) (4,438) (19,186) (12,667) Issuance of common stock and warrants................... (12,873) (7,007) (12,873) (7,432) -------- -------- --------- --------- Payments for clinic operating assets............. $ 45,246 $ 57,434 $ 109,543 $ 179,124 ======== ======== ========= ========= SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Capital lease obligations incurred to acquire equipment............................................... $ 70 $ 278 $ 131 $ 464 ======== ======== ========= ========= Conversion of subordinated debentures and notes payable to common stock........................... $ 18,255 $ 110 $ 51,499 $ 6,252 ======== ======== ========= =========
See accompanying notes to consolidated financial statements. F-23 57 PHYCOR, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 (1) BASIS OF PRESENTATION The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial reporting and in accordance with Rule 10-01 of Regulation S-X. In the opinion of management, the unaudited interim financial statements contained in this report reflect all adjustments, consisting of only normal recurring accruals which are necessary for a fair presentation of the financial position and the results of operations for the interim periods presented. The results of operations for any interim period are not necessarily indicative of results for the full year. These financial statements, footnote disclosures and other information should be read in conjunction with the financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1995. (2) ACQUISITIONS During 1995 and through September 30, 1996, the Company, through wholly-owned subsidiaries, acquired certain operating assets of the following clinics:
CLINIC EFFECTIVE DATE LOCATION ------ -------------- -------- 1995: Tidewater Physicians Multispecialty Group.................................. January 1, 1995 Newport News, Virginia Northeast Arkansas Clinic................. March 1, 1995 Jonesboro, Arkansas PAPP Clinic............................... May 1, 1995 Newnan, Georgia Ogden Clinic.............................. June 1, 1995 Ogden, Utah Arnett Clinic............................. August 1, 1995 Lafayette, Indiana Casa Blanca Clinic........................ September 1, 1995 Mesa, Arizona South Texas Medical Clinics............... November 1, 1995 Wharton, Texas South Bend Clinic(A)...................... November 1, 1995 South Bend, Indiana Guthrie Clinic(B)......................... November 17, 1995 Sayre, Pennsylvania 1996: Arizona Physicians Center................. January 1, 1996 Phoenix, Arizona Clinics of North Texas.................... March 1, 1996 Wichita Falls, Texas Carolina Primary Care..................... May 1, 1996 Columbia, South Carolina Harbin Clinic............................. May 1, 1996 Rome, Georgia Focus Health Services..................... July 1, 1996 Denver, Colorado Clark-Holder Clinic....................... July 1, 1996 LaGrange, Georgia Medical Arts Clinic....................... August 1, 1996 Minot, North Dakota Wilmington Health Associates.............. August 1, 1996 Wilmington, North Carolina Gulf Coast Medical Group.................. August 1, 1996 Galveston, Texas
- --------------- (A) The South Bend Clinic was operated by the Company under a management agreement between November 1, 1995 and December 31, 1995. Effective January 1, 1996, the Company completed the purchase of certain clinic operating assets and entered into a 40-year service agreement with the affiliated physician group. (B) The Company has entered into a series of agreements with Guthrie Clinic whereby the Company agreed to provide management services for up to five years and agreed, pending F-24 58 PHYCOR, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) satisfaction of certain conditions, to acquire certain assets of the clinic prior to the termination or expiration of the interim management agreement. During the third quarter, the Company also completed its acquisition of SPACO Management Company, Inc. (SPACO), an IPA management company in Dallas, Texas, and certain assets of Southwest Physician Associates, a 972-physician IPA associated with SPACO. In addition, the Company acquired various individual physician practices and single specialty groups which were merged into clinics already operated by the Company. The acquisitions were accounted for as purchases, and the accompanying consolidated financial statements include the results of their operations from the dates of their respective acquisitions. Simultaneous with each acquisition, the Company entered into a long-term service agreement with the related clinic physician group. The service agreements are 40 years in length. In conjunction with certain acquisitions, the Company is obligated to make deferred payments to physician groups. Such payments are included in amounts due to physician groups in the accompanying balance sheets. Effective January 1, 1995, the Company completed its merger with North American Medical Management, Inc. ("North American"), an operator and manager of independent practice associations (IPAs). North American IPAs provide capitated medical services through over 6,000 affiliated physicians. The Company may make future payments for the North American acquisition pursuant to an earn-out formula during 1996, 1997, and 1998 of up to an aggregate of $70 million, subject to adjustment to a maximum of $130 million in the event of future acquisitions by North American of additional interests in IPA management entities. The first of such payments was made in the first quarter of 1996. Of the future payments made, a portion may be payable in shares of the Company's common stock. The unaudited consolidated pro forma results of all current, continuing operations assuming all 1995 and 1996 acquisitions, excluding the Guthrie Clinic which is operated under a management agreement, had been consummated on January 1, 1995 are as follows (in thousands, except for earnings per share):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------- 1995 1996 1995 1996 -------- -------- -------- -------- Net revenue....................................... $155,134 $199,347 $461,221 $584,951 Earnings before income taxes...................... 12,657 14,864 34,700 44,111 Net earnings...................................... 7,721 9,141 21,205 27,128 Earnings per common share......................... .13 .15 .40 .45 Weighted average number of shares and share equivalents outstanding......................... 59,423 60,853 53,267 60,726
(3) NET REVENUE Revenue for all physician groups is recorded at established rates reduced by allowances for doubtful accounts and contractual adjustments. Contractual adjustments arise due to the terms of certain reimbursement and managed care contracts. Such adjustments represent the difference between charges at established rates and estimated reimbursable amounts and are recognized by the physician groups in the period the services are rendered. Any differences between estimated contractual adjustments and actual final settlements under reimbursement contracts are recorded by the physician groups as contractual adjustments in the period final settlements are made. F-25 59 PHYCOR, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following represent amounts included in the determination of net revenue (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------- ---------------------- 1995 1996 1995 1996 -------- -------- -------- ---------- Gross physician group revenues............ $275,566 $488,208 $741,644 $1,343,844 Less: Provisions for doubtful accounts and contractual adjustments.............. 93,504 179,649 248,016 484,788 -------- -------- -------- ---------- Net physician group revenue..... 182,062 308,559 493,628 859,056 IPA revenue............................... 38,209 58,926 99,840 171,778 Less amounts retained by physician groups and IPAs IPAs.................................... 30,772 45,727 80,059 136,985 Physician groups........................ 67,718 112,443 187,028 323,197 Clinic technical employee compensation......................... 7,743 12,897 20,433 35,090 -------- -------- -------- ---------- Net revenue..................... $114,038 $196,418 $305,948 $ 535,562 ======== ======== ======== ==========
(4) CAPITALIZATION During February 1996, the Company completed a public offering of convertible subordinated debentures, which mature in 2003. Gross and net proceeds from the offering were $200,000,000 and approximately $194,400,000, respectively. The debentures were priced at par with a coupon rate of 4.5% and are convertible into the Company's common stock at $38.67 per share. The debentures may not be redeemed at the Company's option prior to February 15, 1998. From February 15, 1998 to February 15, 1999, the debentures may be redeemed only if the price of the Company's common stock exceeds $54.13. From February 15, 1999 to maturity, the debentures may be redeemed by the Company at prices decreasing from 102.572% of face value to face value. On May 15, 1996, the Company's shareholders approved an amendment to the Company's Restated Charter which increased from 100,000,000 shares to 250,000,000 shares the number of authorized shares of the Company's Common Stock. On May 10, 1996, the Company declared a three-for-two split effected in the form of a 50% stock dividend on outstanding shares distributed June 14, 1996 to shareholders of record on May 29, 1996. All common shares and per share data included in the financial statements and footnotes thereto are restated to reflect the stock split. (5) SUBSEQUENT EVENTS Since September 30, 1996, the Company has completed the purchase of certain operating assets of Hattiesburg Clinic, a 100-physician multi-specialty clinic based in Hattiesburg, Mississippi, Toledo Clinic, a 80-physician multi-specialty clinic based in Toledo, Ohio, Lewis-Gale Clinic, a 106-physician multi-specialty clinic based in Roanoke, Virginia, and First Physicians Medical Group, a 21-physician multi-specialty clinic based in Palm Springs, California. The Company has also entered into a 40-year service agreement with each of these physician groups. In January 1997, PhyCor consummated its merger with Straub Clinic & Hospital, Incorporated, an integrated health care system with a 152-physician multi-specialty clinic and 159-bed acute care hospital located in Honolulu, Hawaii. In connection with the merger, PhyCor will also provide management services to a related 35-physician group. F-26 60 PHYCOR, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION BASIS OF PRESENTATION The accompanying pro forma consolidated balance sheet as of September 30, 1996 and the related pro forma consolidated statements of operations for the year ended December 31, 1995 and the nine months ended September 30, 1996, give effect to all completed 1995, 1996 and 1997 acquisitions, and the pending acquisitions of Guthrie Clinic Ltd. and clinics in Washington and Florida, as if they had occurred on the first day of 1995. The pro forma information is based on the historical financial statements of PhyCor and the acquired entities giving effect to the acquisitions under the purchase method of accounting, and the assumptions and adjustments in the accompanying notes to the pro forma consolidated financial information. The pro forma statements have been prepared by PhyCor management based on the unaudited financial statements of the acquired entities adjusted when necessary, to the basis of accounting used in the historical financial statements of PhyCor. Such adjustments include modifying the pro forma consolidated statements of operations to reflect operations as if the related service agreement had been in effect during the year presented. Additional general corporate expenses which would have been required to support the operations of the acquired clinics are not included in the consolidated pro forma results of operations. These pro forma statements may not be indicative of the results that would have occurred if the acquisitions had been in effect on the date indicated or which may be obtained in the future. The pro forma financial statements should be read in conjunction with the consolidated financial statements and notes of PhyCor and subsidiaries contained elsewhere or incorporated by reference herein. F-27 61 PHYCOR, INC. AND SUBSIDIARIES PRO FORMA CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 1996 (IN THOUSANDS) (UNAUDITED)
ASSETS ACQUIRED EFFECTS OF PRO AND ACQUISITIONS FORMA PHYCOR LIABILITIES AND RELATED CONSOLIDATED HISTORICAL ASSUMED FINANCINGS TOTALS ---------- ----------- ------------ ------------ ASSETS Current assets: Cash and cash equivalents.................... $ 31,283 $ 12,983 $ -- $ 44,266 Accounts receivable, net..................... 249,541 102,155 -- 351,696 Other current assets......................... 46,057 8,536 -- 54,593 -------- -------- -------- ---------- Total current assets................. 326,881 123,674 -- 450,555 Property and equipment, net.................... 143,536 54,923 -- 198,459 Intangible assets.............................. 504,648 -- 176,920 681,568 Other assets................................... 14,807 18,790 -- 33,597 -------- -------- -------- ---------- Total assets......................... $989,872 $197,387 $176,920 $1,364,179 ======== ======== ======== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current installments of long-term debt....... $ 277 $ 10,289 $ -- $ 10,566 Current installments of obligations under capital leases............................ 1,304 873 -- 2,177 Accounts payable............................. 22,861 22,089 -- 44,950 Due to physician groups...................... 66,944 666 18,876 86,486 Other accrued expenses and liabilities....... 66,736 36,059 -- 102,795 -------- -------- -------- ---------- Total current liabilities............ 158,122 69,976 18,876 246,974 Long-term debt, excluding current installments................................. 62,325 31,074 136,270 229,669 Obligations under capital leases, excluding current installment.......................... 1,556 4,203 -- 5,759 Convertible subordinated debentures............ 200,000 -- -- 200,000 Convertible subordinated notes payable to physician groups............................. 65,699 -- 45,728 111,427 Due to physician groups........................ 56,900 -- 31,135 88,035 Other long-term liabilities.................... 13,561 29,378 -- 42,939 -------- -------- -------- ---------- Total liabilities.................... 558,163 134,631 232,009 924,803 Shareholders' equity: Common stock................................. 380,916 -- 7,667 388,583 Retained earnings............................ 50,793 -- -- 50,793 -------- -------- -------- ---------- Total shareholders' equity........... 431,709 -- 7,667 439,376 -------- -------- -------- ---------- Total liabilities and shareholders' equity............................. $989,872 $134,631 $239,676 $1,364,179 ======== ======== ======== ==========
See accompanying notes to pro forma consolidated financial information. F-28 62 PHYCOR, INC. AND SUBSIDIARIES PRO FORMA CONSOLIDATED STATEMENT OF INCOME NINE MONTHS ENDED SEPTEMBER 30, 1996 (ALL AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT FOR EARNINGS PER SHARE) (UNAUDITED)
CONSOLIDATED RESULTS FOR COMPLETED COMPLETED PROBABLE PRO FORMA HISTORICAL TRANSACTIONS ADJUSTMENTS TRANSACTIONS TRANSACTIONS ADJUSTMENTS TOTAL ---------- ------------ ----------- ------------ ------------ ----------- --------- Revenue Net revenue.......... $535,562 $ 2,156 $ 142,362(B) $680,080 $ -- $ 96,254(B) $734,288 (42,046)(F) Net patient service revenue............ -- 375,207 (375,207)(A) -- 141,499 (141,499)(A) -- -------- -------- --------- -------- -------- --------- -------- 535,562 377,363 (232,845) 680,080 141,499 (87,291) 734,288 Direct clinic expenses............. 389,984 202,295 (101,203) 491,076 80,300 (31,349)(F) 540,027 Physician compensation and benefits......... -- 125,123 (125,123)(A) -- 53,340 (53,340)(A) -- General corporate expenses............. 15,307 -- -- 15,307 -- -- 15,307 Rents and leases....... 44,768 20,607 (6,186) 59,189 2,730 (3,086)(F) 58,833 Interest, net.......... 7,969 5,859 2,523(D) 16,351 2,034 155(D) 17,063 (1,477)(F) Depreciation and amortization......... 28,158 5,661 3,194(E) 37,013 2,857 1,652(E) 39,430 (2,092)(F) Minority interests in earnings of consolidated partnerships......... 8,429 -- -- 8,429 -- -- 8,429 -------- -------- --------- -------- -------- --------- -------- Earnings before income taxes..... 40,947 17,818 (6,050) 52,715 238 2,246 55,199 Income tax expense..... 15,765 (6) 4,536(C) 20,295 -- 957(C) 21,252 -------- -------- --------- -------- -------- --------- -------- Net earnings....... $ 25,182 $ 17,824 $ (10,586) $ 32,420 $ 238 $ 1,289 $ 33,947 ======== ======== ========= ======== ======== ========= ======== Earnings per share..... $ .42 $ .53 $ .54 ======== ======== ======== Weighted average number of shares outstanding.......... 60,555 61,669 62,992 ======== ======== ========
See accompanying notes to pro forma consolidated financial information F-29 63 PHYCOR, INC. AND SUBSIDIARIES PRO FORMA CONSOLIDATED STATEMENT OF INCOME YEAR ENDED DECEMBER 31, 1995 (ALL AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT FOR EARNINGS PER SHARE) (UNAUDITED)
CONSOLIDATED RESULTS FOR COMPLETED COMPLETED PROBABLE PRO FORMA HISTORICAL TRANSACTIONS ADJUSTMENTS TRANSACTIONS TRANSACTIONS ADJUSTMENTS TOTAL ---------- ------------ ----------- ------------ ------------ ----------- --------- Revenue: Net revenue.......... $441,596 $ 2,478 $ 318.233(B) $762,307 $ -- $ 116,747(B) $874,541 (4,513)(F) Net patient service revenue............ -- 705,504 (705,504)(A) -- 171,555 (171,555)(A) -- -------- -------- --------- -------- -------- --------- -------- 441,596 707,982 (387,271) 762,307 171,555 (59,321) 874,541 Direct clinic expenses. 323,076 364,432 (131,115) 556,393 96,602 (3,430)(F) 649,565 Physicians' compensation and benefits............. -- 272,135 (272,135)(A) -- 69,952 (69,952)(A) -- General corporate expenses............. 14,191 -- -- 14,191 -- -- 14,191 Rents and leases....... 36,740 38,291 (10,057) 64,974 3,477 (86)(F) 68,365 Interest, net.......... 3,414 9,980 4,319(D) 17,713 3,152 (231)(D) 20,531 (103)(F) Depreciation and amortization......... 21,445 11,235 6,391(E) 39,071 3,694 2,277(E) 44,712 (330)(F) Minority interest in earnings of consolidated partnerships......... 6,933 -- -- 6,933 -- -- 6,933 -------- -------- --------- -------- -------- --------- -------- Earnings before income taxes..... 35,797 11,909 15,326 63,032 (5,322) 12,534 70,244 Income tax expense..... 13,923 (2,566) 13,187 24,544 -- 2,813 27,357 -------- -------- --------- -------- -------- --------- -------- Net earnings....... $ 21,874 $ 14,475 $ 2,139 $ 38,488 $ (5,322) $ 9,721 $ 42,887 ======== ======== ========= ======== ======== ========= ======== Earnings per share..... $ .41 $ .68 $ .74 ======== ======== ======== Weighted average number of shares outstanding.......... 53,510 56,407 57,730 ======== ======== ========
See accompanying notes to pro forma consolidated financial information. F-30 64 The accompanying pro forma consolidated financial information presents the pro forma consolidated financial position of PhyCor and subsidiaries as of September 30, 1996 and the results of their operations for the nine months ended September 30, 1996 and the year ended December 31, 1995. PhyCor acquired certain operating assets of Tidewater Physicians Multispecialty Group, Northeast Arkansas Clinic, PAPP Clinic, Ogden Clinic, Arnett Clinic, Casa Blanca Clinic, South Texas Medical Clinics and North American Medical Management, Inc. ("North American") in 1995. In 1996, PhyCor acquired certain operating assets of South Bend Clinic, Arizona Physicians Center, Clinics of North Texas, Carolina Primary Care, Harbin Clinic, Clark-Holder Clinic, Focus Health Services, Wilmington Health Associates, Medical Arts Clinic, SPACO Management Company, Gulf Coast Medical Group, Hattiesburg Clinic, Toledo Clinic, and Lewis-Gale Clinic. In 1997 PhyCor merged with Straub Clinic and Hospital and acquired certain operating assets of First Physician Medical Group. In addition, PhyCor expects to acquire the assets of Guthrie Clinic Ltd. and clinics in Washington, California and Florida. The accompanying pro forma combined balance sheet includes the acquired assets, assumed liabilities and effects of financing, as if the pending transactions had been completed on September 30, 1996. The accompanying pro forma consolidated statements of operations reflects the pro forma results of operations of PhyCor, as if the pending transactions had been completed on the first day of the period presented. PRO FORMA CONSOLIDATED BALANCE SHEET The adjustments reflected in the pro forma consolidated balance sheet are to reflect the values of assets acquired and liabilities assumed in connection with transactions completed after September 30, 1996, and other pending transactions, and to reflect the effects of borrowings, the issuance of subordinated convertible notes and common stock and to reflect the recording of intangible assets acquired. PRO FORMA CONSOLIDATED STATEMENTS OF INCOME Certain amounts in the historical columns have been combined and reclassified in order to conform to the PhyCor presentation. The adjustments reflected to the pro forma consolidated statements of operations are as follows: (A) To eliminate net patient service revenue and physician compensation and benefits in total as such will be retained by the physician groups. (B) To accrue net revenue resulting from service agreements related to clinics acquired. Amounts were calculated based upon actual clinic results for the period, as adjusted, under the terms of the related service agreements. (C) To record estimated federal and state income taxes at a combined rate of approximately 39% in 1995 and 38.5% in 1996. (D) To reflect interest on acquisition-related borrowings. Interest was calculated at an annual rate of 6.25%. (E) To record amortization of the intangible assets. The asset is amortized over a period of 40 years. (F) To remove the results of the Guthrie Clinic while under the management agreement. F-31 65 ------------------------------------------------------ ------------------------------------------------------ NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING SHAREHOLDERS OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. ------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary.................... 3 Risk Factors.......................... 7 Use of Proceeds....................... 11 Capitalization........................ 12 Selected Consolidated Financial Data................................ 13 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 15 Business.............................. 21 Management............................ 26 Principal and Selling Shareholders.... 28 Underwriting.......................... 30 Legal Matters......................... 31 Experts............................... 31 Available Information................. 32 Incorporation of Certain Information by Reference........................ 32 Index to Financial Statements......... F-1
------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ 6,400,000 SHARES PhyCor(R) COMMON STOCK ------------------- PROSPECTUS ------------------- ALEX. BROWN & SONS INCORPORATED EQUITABLE SECURITIES CORPORATION MERRILL LYNCH & CO. PIPER JAFFRAY INC. SALOMON BROTHERS INC , 1997 ------------------------------------------------------ ------------------------------------------------------ 66 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. Commission Registration Fee................................. $ 73,600 National Association of Securities Dealers, Inc. Fee........ 24,788 Nasdaq Listing Fee.......................................... 17,500 * State Qualification Expenses (including legal fees)......... 5,000 * Printing Expenses........................................... 150,000 * Legal Fees and Expenses..................................... 75,000 * Auditors' Fees and Expenses................................. 100,000 * Transfer Agent's Fees and Expenses.......................... 2,000 * Travel and Miscellaneous Expenses........................... 352,112 -------- * Total....................................................... $800,000 ========
- --------------- * Estimated ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. (a) Article 8 of the Registrant's Amended Bylaws provides as follows: The Corporation may indemnify, and upon request may advance expenses to, any person (or the estate of any person) who was or is a party to, or is threatened to be made a party to, any threatened, pending or completed action, suit or proceeding, whether or not by or in the right of the Corporation, and whether civil, criminal, administrative, investigative or otherwise, by reason of the fact that such person is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against any liability incurred in the action, suit or proceeding, despite the fact that such person has not met the standard of conduct set forth in Section 48-18-502(a) of the Tennessee Business Corporation Act (the "Act") or would be disqualified for indemnification under Section 48-18-502(d) of the Act, if a determination is made by the person or persons enumerated in Section 48-18-502(b) of the Act that the director or officer seeking indemnification is liable for (i) any breach of the duty of loyalty to the Corporation or its shareholders, (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law or (iii) voting for or assenting to a distribution in violation of the Act. Section 7 of the Registrant's Restated Charter provides as follows: The Corporation shall indemnify, and upon request shall advance expenses to, in the manner and to the full extent permitted by law, any person (or the estate of any person) who was or is a party to, or is threatened to be made a party to, any threatened, pending or completed action, suit or proceeding, whether or not by or in the right of the Corporation, and whether civil, criminal, administrative, investigative or otherwise, by reason of the fact that such person is or was a director, officer, or employee of the Corporation, or is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust or other enterprise (an "indemnitee"). The indemnification provided herein shall not be deemed to limit the right of the Corporation to indemnify any other person for any such expenses to the full extent permitted by law, nor shall it be deemed exclusive of any other rights to which any person seeking indemnification from the Corporation may have or hereafter acquire under this Charter or the Bylaws of the Corporation or under any agreement or vote of shareholders or disinterested directors or otherwise, both as to action in II-1 67 his official capacity and as to action in another capacity while holding such office; provided, however, that the Corporation shall not indemnify any such indemnitee in connection with a proceeding (or part thereof) if a judgment or other final adjudication adverse to the indemnitee establishes his liability (i) for any breach of the duty of loyalty to the Corporation or its shareholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law or (iii) under Section 48-18-304 of the Tennessee Business Corporation Act. (b) In addition to the foregoing provisions of the Amended Bylaws and Restated Charter of the Registrant, directors, officers, employees and agents of the Registrant may be indemnified by the Registrant, pursuant to the provisions of Section 48-18-501 et seq. of the Tennessee Code Annotated. (c) In addition, the Registrant maintains directors and officers liability insurance. (d) The Underwriting Agreement (set forth as Exhibit 1 hereto) provides for the indemnification by the Underwriters of the Registrant, each of the Registrant's directors, each of the Registrant's officers who signs this Registration Statement and each person who controls the Registrant within the meaning of the Securities Act of 1933, as amended. ITEM 16. EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS - ------- ----------------------- 1 -- Form of Underwriting Agreement 4.1 -- Restated Charter of the Registrant(1) 4.2 -- Amendment to Restated Charter of the Registrant(2) 4.3 -- Amendment to Restated Charter of the Registrant(3) 4.4 -- Amended Bylaws of the Registrant(1) 4.5 -- Specimen of Common Stock Certificate(4) 4.6 -- Shareholder Rights Agreement, dated February 18, 1994, between the Registrant and First Union National Bank of North Carolina(5) 5 -- Opinion of Waller Lansden Dortch & Davis, A Professional Limited Liability Company 23.1 -- Consent of KPMG Peat Marwick LLP 23.2 -- Consent of Waller Lansden Dortch & Davis, A Professional Limited Liability Company (included in Exhibit 5) 24 -- Power of Attorney (included on page II-4)
- --------------- (1) Incorporated by reference to Exhibit 3.2 filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994, Commission No. 0-19786. (2) Incorporated by reference to Exhibit 4.2 filed with the Registrant's Registration Statement on Form S-3, Registration No. 33-93018. (3) Incorporated by reference to Exhibit 4.3 filed with the Registrant's Registration Statement on Form S-3, Registration No. 33-98528. (4) Incorporated by reference to Exhibit 4.2 filed with the Registrant's Registration Statement on Form S-1, Registration No. 33-44123. (5) Incorporated by reference to exhibits filed with the Registrant's Annual Report on Form 8-K dated February 18, 1994, Commission No. 0-19786. ITEM 17. UNDERTAKINGS. The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities II-2 68 Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant, pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted against the registrant by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b) (1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 69 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Nashville, State of Tennessee, on February 4, 1997. PHYCOR, INC. By: /s/ JOSEPH C. HUTTS ------------------------------------ Joseph C. Hutts, Chairman of the Board, President and Chief Executive Officer KNOW ALL MEN BY THESE PRESENTS, each person whose signature appears below on this Registration Statement hereby constitutes and appoints Joseph C. Hutts and John K. Crawford and each of them, with full power to act without the other, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities (until revoked in writing) to sign any and all amendments to this Registration Statement (including post-effective amendments and amendments thereto) and any registration statement relating to the same offering as this Registration Statement that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing, ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
NAME TITLE DATE ---- ----- ---- /s/ JOSEPH C. HUTTS Chairman of the Board, February 4, 1997 - ----------------------------------------------------- President and Chief Joseph C. Hutts Executive Officer (Principal Executive Officer) and Director /s/ DERRIL W. REEVES Executive Vice President, February 4, 1997 - ----------------------------------------------------- Development and Director Derril W. Reeves /s/ JOHN K. CRAWFORD Vice President and Chief February 4, 1997 - ----------------------------------------------------- Financial Officer (Principal John K. Crawford Financial Officer and Principal Accounting Officer) /s/ THOMPSON S. DENT Executive Vice President, February 4, 1997 - ----------------------------------------------------- Corporate Services and Thompson S. Dent Director
II-4 70
NAME TITLE DATE ---- ----- ---- /s/ RICHARD D. WRIGHT Executive Vice President, February 4, 1997 - ----------------------------------------------------- Operations and Director Richard D. Wright /s/ RONALD B. ASHWORTH Director February 4, 1997 - ----------------------------------------------------- Ronald B. Ashworth /s/ SAM A. BROOKS, JR. Director February 4, 1997 - ----------------------------------------------------- Sam A. Brooks, Jr. /s/ WINFIELD DUNN Director February 4, 1997 - ----------------------------------------------------- Winfield Dunn /s/ C. SAGE GIVENS Director February 4, 1997 - ----------------------------------------------------- C. Sage Givens /s/ JOSEPH A. HILL, M.D. Director February 4, 1997 - ----------------------------------------------------- Joseph A. Hill, M.D. /s/ JAMES A. MONCRIEF, M.D. Director February 4, 1997 - ----------------------------------------------------- James A. Moncrief, M.D.
II-5 71 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS - ------- ----------------------- 1 -- Form of Underwriting Agreement 4.1 -- Restated Charter of the Registrant(1) 4.2 -- Amendment to Restated Charter of the Registrant(2) 4.3 -- Amendment to Restated Charter of the Registrant(3) 4.4 -- Amended Bylaws of the Registrant(1) 4.5 -- Specimen of Common Stock Certificate(4) 4.6 -- Shareholder Rights Agreement, dated February 18, 1994, between the Registrant and First Union National Bank of North Carolina(5) 5 -- Opinion of Waller Lansden Dortch & Davis, A Professional Limited Liability Company 23.1 -- Consent of KPMG Peat Marwick LLP 23.2 -- Consent of Waller Lansden Dortch & Davis, A Professional Limited Liability Company (included in Exhibit 5) 24 -- Power of Attorney (included on page II-4)
- --------------- (1) Incorporated by reference to Exhibit 3.2 filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994, Commission No. 0-19786. (2) Incorporated by reference to Exhibit 4.2 filed with the Registrant's Registration Statement on Form S-3, Registration No. 33-93018. (3) Incorporated by reference to Exhibit 4.3 filed with the Registrant's Registration Statement on Form S-3, Registration No. 33-98528. (4) Incorporated by reference to Exhibit 4.2 filed with the Registrant's Registration Statement on Form S-1, Registration No. 33-44123. (5) Incorporated by reference to exhibits filed with the Registrant's Annual Report on Form 8-K dated February 18, 1994, Commission No. 0-19786. EX-1 2 UNDERWRITING AGREEMENT 1 EXHIBIT 1 6,400,000 SHARES PHYCOR, INC. COMMON STOCK (No Par Value) UNDERWRITING AGREEMENT February , 1997 ALEX. BROWN & SONS INCORPORATED EQUITABLE SECURITIES CORPORATION MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED PIPER JAFFRAY INC. SALOMON BROTHERS INC As Representatives of the Several Underwriters c/o Alex. Brown & Sons Incorporated One South Street Baltimore, Maryland 21202 Gentlemen: PhyCor, Inc., a Tennessee corporation (the "Company") proposes to sell to the several underwriters (the "Underwriters") named in Schedule I hereto for whom you are acting as representatives (the "Representatives") an aggregate of 6,400,000 shares of the Company's Common Stock, no par value (the "Firm Shares"). The Company and certain executive officers of the Company (the "Selling Shareholders") also propose to sell at the Underwriters' option an aggregate of up to 960,000 additional shares of the Company's Common Stock (the "Option Shares") as set forth below. The respective amounts of the Firm Shares to be purchased by the several Underwriters are set forth opposite their names on Schedule I hereto. The respective amounts of the Option Shares to be sold by the Company and each of the Selling Shareholders are set forth on Schedule II. The Company and the Selling Shareholders are sometimes referred to herein collectively as the "Sellers." As the Representatives, you have advised the Company and the Selling Shareholders (a) that you are authorized to enter into this Agreement on behalf of the several Underwriters, and (b) that the several Underwriters are willing, acting severally and not jointly, to purchase the numbers of Firm Shares set forth opposite their respective names in Schedule I, plus their pro rata portion of the Option Shares if you elect to exercise the over-allotment option in whole or in part for the accounts of the several Underwriters. The Firm Shares and the Option Shares (to the extent the aforementioned option is exercised) are herein collectively called the "Shares." In consideration of the mutual agreements contained herein and of the interests of the parties in the transactions contemplated hereby, the parties hereto agree as follows: 1. Representations and Warranties of the Company and the Selling Shareholders. (a) The Company represents and warrants to each of the Underwriters as follows: (i) A registration statement on Form S-3 (File No. 333- ) with respect to the Shares has been carefully prepared by the Company in conformity with the requirements of the Securities Act of 1933, as amended, (the "Act") and the Rules and Regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") thereunder and has been filed with the Commission under the Act. The Company has complied with the conditions for the use of Form S-3. Copies of such registration statement, including any amendments thereto, the preliminary prospectuses (meeting the requirements of Rule 430A of 2 the Rules and Regulations) contained therein and the exhibits, financial statements and schedules, as finally amended and revised, have heretofore been delivered by the Company to you, and, to the extent applicable, were identical to the electronically transmitted copies thereof filed with the Commission pursuant to the Commission's Electronic Data Gathering, Analysis and Retrieval System ("EDGAR"), except to the extent permitted by Regulation S-T. Such registration statement, together with any registration statement filed by the Company pursuant to Rule 462(b) of the Act, herein referred to as the "Registration Statement," which shall be deemed to include all information omitted therefrom in reliance upon Rule 430A and contained in the Prospectus referred to below, has become effective under the Act and no post-effective amendment to the Registration Statement has been filed as of the date of this Agreement. "Prospectus" means (a) the form of prospectus first filed by the Company with the Commission pursuant to its Rule 424(b) or (b) the term sheet or abbreviated term sheet filed by the Company with the Commission pursuant to Rule 424(b)(7) together with the last preliminary prospectus included in the Registration Statement filed prior to the time it becomes effective or filed pursuant to Rule 424(a) under the Act that is delivered by the Company to the Underwriters for delivery to purchasers of the Shares. Each preliminary prospectus included in the Registration Statement prior to the time it becomes effective is herein referred to as a "Preliminary Prospectus." Any reference herein to the Registration Statement, any Preliminary Prospectus or the Prospectus shall be deemed to refer to and include the documents incorporated by reference therein, as of the date of such Registration Statement, Preliminary Prospectus or Prospectus, as the case may be, and, in the case of any reference herein to any Prospectus, also shall be deemed to include any documents incorporated by reference therein, and any supplements or amendments thereto, filed with the Commission after the date of filing of the Prospectus under Rule 424(b) or Rule 430A, and prior to the termination of the offering of the Shares by the Underwriters. For purposes of this Agreement, all references to the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or supplement to any of the foregoing shall be deemed to include the respective copies thereof filed with the Commission pursuant to EDGAR. (ii) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Tennessee, with corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement; each of the subsidiaries of the Company listed in Schedule III hereto (collectively, the "Subsidiaries") has been duly incorporated and is validly existing and in good standing under the laws of the jurisdiction of its incorporation, with power and authority to own or lease its properties and conduct its business as described in the Registration Statement; the Company and each of the Subsidiaries are duly qualified to transact business in all jurisdictions in which the conduct of their business requires such qualification; the outstanding shares of capital stock of each of the Subsidiaries have been duly authorized and validly issued, are fully paid and non-assessable and such shares of capital stock in each Subsidiary are wholly owned by the Company free and clear of all liens, encumbrances and security interests other than the pledge of shares of the capital stock of the Subsidiaries to Citibank, N.A., as agent, pursuant to the Company's Fifth Amended and Restated Revolving Credit and Term Loan Agreement with Citibank dated as of July 22, 1996, as the same may be amended from time to time; and no options, warrants or other rights to purchase, agreements or other obligations to issue or other rights to convert any obligations into shares of capital stock or ownership interests in the Subsidiaries are outstanding, except to the extent set forth in the Registration Statement, including the exhibits thereto. The Subsidiaries are the only subsidiaries, direct or indirect, of the Company. (iii) The outstanding shares of Common Stock, including all outstanding shares of Common Stock to be sold by the Selling Shareholders, have been duly authorized and validly issued and are fully paid and non-assessable; the portion of the Shares to be issued and sold by the Company have been duly authorized and when issued and paid for as contemplated herein will be validly issued, fully paid and non-assessable; shares of Common Stock to be sold by the 2 3 Selling Shareholders will be at the time of their sale to the Underwriters hereunder, validly issued, fully paid and non-assessable. No person or entity holds a right to require or participate in the registration under the Act of shares of Common Stock of the Company which right has not been waived by the holder thereof as to the offering contemplated hereby and by the Registration Statement, or satisfied by participation by such holder in the offering. No person or entity has any preemptive or other right of participation or first refusal with respect to any of the Shares or the issue thereof by the Company or the sale thereof by the Company and the Selling Shareholders, which rights have not been waived. (iv) The information set forth under the caption "Capitalization" in the Prospectus is true and correct in all material respects as of the dates set forth therein. The Shares conform with the statements concerning them set forth and incorporated by reference in the Registration Statement. (v) The Commission has not issued an order preventing or suspending the use of any Preliminary Prospectus or Prospectus relating to the proposed offering of the Shares nor instituted proceedings for that purpose. The Registration Statement contains and the Prospectus and any amendments or supplements thereto will contain all statements which are required to be stated therein by, and in all respects conform or will conform, as the case may be, to the requirements of, the Act and the Rules and Regulations. The documents incorporated by reference in the Prospectus, at the time they are filed with the Commission will conform in all respects to the requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or the Act, as applicable, and the Rules and Regulations of the Commission thereunder. Neither the Registration Statement nor any amendment thereto, any Preliminary Prospectus, and neither the Prospectus nor any amendment or supplement thereto, contains or will contain, as the case may be, any untrue statement of a material fact or omits or will omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the Company makes no representations or warranties as to information contained in or omitted from the Registration Statement or the Prospectus, or any such amendment or supplement, in reliance upon, and in conformity with, written information furnished to the Company by or on behalf of any Underwriter through the Representatives, specifically for use in the preparation thereof. (vi) The historical consolidated financial statements of the Company and the Subsidiaries, together with related notes and schedules as set forth or incorporated by reference in the Registration Statement, present fairly the financial position and the results of operations and cash flows of the Company and Subsidiaries consolidated, at the indicated dates and for the indicated periods. Such financial statements have been prepared in accordance with generally accepted principles of accounting, consistently applied throughout the periods involved, and all adjustments necessary for a fair presentation of results for such periods have been made. The pro forma financial statements and other pro forma financial information set forth in the Registration Statement and the Prospectus fairly present the information required to be presented therein, have been prepared in accordance with the Commission's rules and guidelines with respect to pro forma financial statements, have been properly compiled on the pro forma bases described therein, and, in the opinion of the Company, the assumptions used in the preparation thereof are reasonable and the adjustments used therein are appropriate to give effect to the transactions or circumstances referred to therein. The summary pre-transaction financial information set forth in the Registration Statement materially complies with that certain letter dated September 16, 1991 from the Commission to the Company, presents fairly the information shown therein and has been compiled on a basis consistent with the notes thereto. The summary financial and statistical data included in the Registration Statement presents fairly the information shown therein and have been compiled on a basis consistent with the financial statements presented therein. 3 4 (vii) There is no action or proceeding pending or, to the knowledge of the Company, threatened against the Company, any of the Subsidiaries or any of the medical practice groups, including, without limitation, clinics, IPAs and other groups and individual practitioners, with which the Company or the Subsidiaries have service agreements (collectively, the "Practice Groups"), and, to the knowledge of the Company, there is no action or proceeding pending against any individual physicians practicing in any Practice Group, before any court or administrative agency which the Company has reason to believe is likely to result in any material adverse change in the business or condition of the Company and of the Subsidiaries taken as a whole, except as set forth in the Registration Statement. (viii) The Company and the Subsidiaries have good and marketable title to all of the properties and assets reflected in the financial statements (or as described in the Registration Statement) hereinabove described, subject to no lien, mortgage, pledge, charge or encumbrance of any kind except those reflected in such financial statements (or as described in the Registration Statement) or which are not material in amount. The Company and the Subsidiaries occupy leased properties under valid and binding leases and, as to rented properties, occupy such properties as tenants-at-will pursuant to valid and binding agreements, except where the failure to have such leases or agreements would not have a material adverse effect on the Company and its Subsidiaries. (ix) The Company and the Subsidiaries have (i) filed all Federal, State and foreign income tax returns which have been required to be filed, (ii) paid all taxes indicated by said returns and all assessments received by them or any of them to the extent that such taxes have become due, and (iii) adequately provided for all tax liabilities in the financial statements of the Company, except (a) where the failure to do so would not have a material adverse effect on the Company and its Subsidiaries and (b) with respect to matters described in the "Tax Audit" paragraph under the caption "Risk Factors" in the Registration Statement. (x) Since the respective dates as of which information is given in the Registration Statement, as it may be amended or supplemented, there has not been any material adverse change or any development involving a prospective material adverse change in or affecting the condition, financial or otherwise, of the Company and its Subsidiaries taken as a whole or the earnings, business affairs, management, or business prospects of the Company and its Subsidiaries taken as a whole, whether or not occurring in the ordinary course of business, and there has not been any material transaction entered into by the Company or the Subsidiaries, other than transactions in the ordinary course of business and changes and transactions contemplated by the Registration Statement, as it may be amended or supplemented. The Company and the Subsidiaries have no material contingent obligations which are not disclosed in the Registration Statement, as it may be amended or supplemented. (xi) Neither the Company nor any of the Subsidiaries is or with the giving of notice or lapse of time or both, will be, in violation of or in default under its Restated Charter or By-laws or under any agreement, lease, contract, indenture or other instrument or obligation to which it is a party or by which it or any of its properties is bound and which default is of material significance in respect of the business or financial condition of the Company and the Subsidiaries taken as a whole. The execution and delivery of this Agreement and the consummation of the transactions herein contemplated and the fulfillment of the terms hereof will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, (i) any indenture, mortgage, deed of trust or other agreement or instrument to which the Company or any Subsidiary is a party, except for any such breach or default which would not have a material adverse effect or the Company or any of its Subsidiaries, singly or in the aggregate, or (ii) the Restated Charter or By-laws of the Company or any order, rule or regulation applicable to the Company or any Subsidiary of any court or of any regulatory body or administrative agency or other governmental body having jurisdiction. 4 5 (xii) Each approval, consent, order, authorization, designation, declaration or filing by or with any regulatory, administrative or other governmental body necessary in connection with the execution and delivery by the Company of this Agreement and the consummation of the transactions herein contemplated (except such additional steps as may be required by the National Association of Securities Dealers, Inc. (the "NASD") or may be necessary to qualify the Shares for public offering by the Underwriters under State securities or Blue Sky laws) has been obtained or made and is in full force and effect. (xiii) To the Company's knowledge, the Company, each of the Subsidiaries and each Practice Group is conducting its business in material compliance with all the laws, rules and regulations of the jurisdictions in which they are conducting businesses, including those relating to healthcare. Without limiting the foregoing, the Company, each of the Subsidiaries and, to the Company's knowledge, each Practice Group and each physician practicing in such jurisdictions owns or possesses and is operating in compliance with the terms, provisions and conditions of all authorizations, approvals, orders, licenses, registrations, certificates and permits of and from all governmental regulatory officials and bodies necessary to conduct their respective businesses, except where the failure to comply, individually or in the aggregate, would not have a material adverse effect on the Company and the Subsidiaries, taken as a whole; as to the Company and each Subsidiary and, to the Company's knowledge, as to each Practice Group, each such authorization, approval, order, license, registration, other certificate and permit of and from such governmental regulatory officials and bodies is valid and in full force and effect and there is no proceeding pending or, to the Company's knowledge, threatened (or any basis therefor) which may cause any such authorization, approval, order, license, registration, other certificate or permit of and from all governmental regulatory officials and bodies that is material to the conduct of the business of the Company and the Subsidiaries taken as a whole as presently conducted to be revoked, withdrawn, cancelled, suspended or not renewed. The Company has not been made aware of, or been put on notice that, any physician in a Practice Group is not practicing in material compliance with all such laws and regulations. (xiv) The Company and each of the Subsidiaries owns or possesses adequate licenses or other rights to use all patents, patent applications, trademarks, trademark applications, service marks, service mark applications, tradenames, copyrights, trade secrets and know-how or other information (collectively, "Intellectual Property") described in the Prospectus (or the documents incorporated by reference therein) as owned by or used by it or which is necessary to the conduct of its business as now conducted or proposed to be conducted as described in the Prospectus (or the documents incorporated by reference therein). The Company is not aware of any infringement of or conflict with the rights of claims of others with respect to any of the Company's Intellectual Property which could have a material adverse effect on the business or financial condition of the Company. The Company is not aware of any infringement of any of the Company's Intellectual Property rights by any third party which could have a material adverse effect on the business or financial condition of the Company. (xv) KPMG Peat Marwick LLP, who have certified certain of the financial statements filed with the Commission as part of the Registration Statement, are independent public accountants as required by the Act and the Rules and Regulations. (xvi) Neither the Company nor, to the Company's knowledge, any of its affiliates, has taken or may take, directly or indirectly, any action designed to cause or result in, or which has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of stock to facilitate the sale or resale of the Shares. The Company acknowledges that the Underwriters may engage in passive market making transactions in the Shares on the Nasdaq National Market in accordance with Rule 10b-6A under the Exchange Act (or any successor Rules). 5 6 (xvii) The Company is not, and after giving effect to the issuance of the Shares will not be, an "investment company" within the meaning of the Investment Company Act of 1940, as amended, and the Company is not, nor will be subject to regulation under said act. (xviii) The Company confirms as of the date hereof that it is in compliance with all provisions of Section 1 of Laws of Florida, Chapter 92-198, An Act Relating to Disclosure of Doing Business with Cuba, and the Company further agrees that if it commences engaging in business with the government of Cuba or with any person or affiliate located in Cuba after the date the Registration Statement becomes or has become effective with the Commission or with the Florida Department of Banking and Finance (the "Department"), whichever date is later, or if the information reported or incorporated by reference in the Prospectus, if any, concerning the Company's business with Cuba or with any person or affiliate located in Cuba changes in any material way, the Company will provide the Department notice of such business or change, as appropriate, in a form acceptable to the Department. (xix) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (xx) The Company and each of its Subsidiaries carry, or are covered by, insurance in such amounts and covering such risks as is adequate for the conduct of their respective businesses and the value of their respective properties and as is customary for companies engaged in similar industries. (xxi) The Company is in compliance in all material respects with all presently applicable provisions of the Employee Retirement Income Security Act of 1974, as amended, including the regulations and published interpretations thereunder ("ERISA"); no "reportable event" (as defined in ERISA) has occurred with respect to any "pension plan" (as defined in ERISA) for which the Company would have any liability; the Company has not incurred and does not expect to incur liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, and "pension plan" or (ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended, including the regulations and published interpretations thereunder (the "Code"); and each "pension plan" for which the Company would have any liability that is intended to be qualified under Section 401(a) of the Code has been issued a favorable determination letter from the Internal Revenue Service with respect to its qualification under Section 401(a) of the Code, and the Company is aware of no occurrence, whether by action or by failure to act, which would cause the revocation of such determination letter or the loss of such qualification. (b) Each of the Selling Shareholders severally represents and warrants as of the date hereof and the Option Closing Date, as the case may be, to each of the Underwriters as follows: (i) Such Selling Shareholder has and at the Option Closing Date (as such date is hereinafter defined) will have good and valid title to the Option Shares to be sold by such Selling Shareholder, free of any liens, encumbrances, equities and claims, and full right, power and authority to effect the sale and delivery of such Option Shares; and upon the delivery of and payment for such Option Shares pursuant to this Agreement, good and valid title thereto, free of any liens, encumbrances, equities and claims, will be transferred to the several Underwriters. (ii) Such Selling Shareholder has full right, power and authority to execute and deliver this Agreement. the Power of Attorney and the Custody Agreement (as hereinafter defined) and to perform its obligations under such agreements. The execution and delivery of this Agreement 6 7 and the consummation by such Selling Shareholder of the transactions herein contemplated and the fulfillment by such Selling Shareholder of the terms hereof will not result in a breach of any of the terms and provisions of, or constitute a default under, any indenture, mortgage, deed of trust or other agreement or instrument to which such Selling Shareholder is a party, or of any order, rule or regulation applicable to the Selling Shareholder of any court or of any regulatory body or administrative agency or other governmental body having jurisdiction. (iii) Such Selling Shareholder has not taken and will not take, directly or indirectly, any action designed to, or which has constituted, or which might reasonably be expected to cause or result in stabilization or manipulation of the price of the Common Stock of the Company and, other than as permitted by the Act, the Selling Shareholder will not distribute any prospectus or other offering material in connection with the offering of the Shares. (iv) Without having undertaken to determine independently the accuracy or completeness of either the representations and warranties of the Company contained herein or the information contained in the Registration Statement and documents incorporated by reference therein, such Selling Shareholder has no reason to believe that the representations and warranties of the Company contained in this Section 1 are not true and correct, is familiar with the Registration Statement and has no knowledge of any material fact, condition or information not disclosed in the Registration Statement and documents incorporated by reference therein which has adversely affected or may adversely affect the business of the Company and the Subsidiaries taken as a whole; and the sale of the Option Shares by such Selling Shareholder pursuant hereto is not prompted by any information concerning the Company or any of the Subsidiaries which is not set forth in the Registration Statement and documents incorporated by reference therein. The information pertaining to such Selling Shareholder under the caption "Selling Shareholders" in the Prospectus is complete and accurate in all material aspects. 2. Purchase, Sale and Delivery of the Firm Shares. On the basis of the representations, warranties and covenants herein contained, and subject to the conditions herein set forth, the Company agrees to sell to the Underwriters and each Underwriter agrees, severally and not jointly, to purchase, at a price of $ per share, the number of Firm Shares set forth opposite the name of each Underwriter in Schedule I hereof, subject to adjustments in accordance with Section 9 hereof. The number of Firm Shares to be purchased by each Underwriter from the Company shall be as nearly as practicable in the same proportion to the total number of Firm Shares being sold by the Company as the number of Firm Shares being purchased by each Underwriter bears to the total number of Firm Shares to be sold hereunder. The obligations of the Company and the Selling Shareholder shall be several and not joint. Certificates in negotiable form for the total number of the Shares to be sold hereunder by the Selling Shareholders have been placed in custody with Waller Lansden Dortch & Davis PLLC, as custodian (the "Custodian"), pursuant to the Letter of Transmittal and Custody Agreement (the "Custody Agreement") executed by each Selling Shareholder for delivery of all Option Shares to be sold hereunder by the Selling Shareholders. The Selling Shareholders specifically agree that the Option Shares represented by the certificates held in custody for such Selling Shareholders under the Custody Agreement are subject to the interests of the Underwriters hereunder, that the arrangements made by the Selling Shareholders for such custody are to that extent irrevocable, and that the obligations of the Selling Shareholders hereunder shall not be terminable by any act or deed of the Selling Shareholders (or by any other person, firm or corporation, including the Company, the Custodian or the Underwriters) or by operation of law (including the death of any Selling Shareholder) or by the occurrence of any other event or events, except as set forth in the Custodian Agreement. If any such event should occur prior to the delivery to the Underwriters of the Option Shares hereunder, certificates for the Option Shares shall be delivered by the Custodian in accordance with the terms and conditions of this Agreement as if such event has not occurred. The Custodian is authorized to receive and acknowledge receipt of the proceeds of sale of the Shares held by it against delivery of such Shares. 7 8 Payment for the Firm Shares to be sold hereunder is to be made by wire transfer in same-day funds, payable to the order of the Company, against delivery of certificates therefor to the Representatives for the several accounts of the Underwriters. Such payment and delivery are to be made at the offices of Alex. Brown & Sons Incorporated, One South Street, Baltimore, Maryland, at 10:00 a.m., Baltimore time, on the third business day after the date of this Agreement, or at such other time and date not later than five business days thereafter as you and the Company shall agree upon, such time and date being herein referred to as the "Closing Date." (As used herein, "business day" means a day on which the New York Stock Exchange is open for trading and on which banks in New York are open for business and not permitted by law or executive order to be closed.) The certificates for the Firm Shares will be delivered in such denominations and in such registrations as the Representatives request in writing not later than the second full business day prior to the Closing Date, and will be made available for inspection by the Representatives at least one business day prior to the Closing Date. In addition, on the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company and the Selling Shareholders hereby grant an option to the several Underwriters to purchase the Option Shares at the price per share as set forth in the first paragraph of this Section 2. The maximum number of Option Shares to be sold by the Company and the Selling Shareholders is 960,000. The option granted hereby may be exercised in whole or in part by giving written notice (i) at any time before the Closing Date and (ii) only once thereafter within 30 days after the date of this Agreement, by you, as Representatives of the several Underwriters, to the Company and the Custodian setting forth the number of Option Shares as to which the several Underwriters are exercising the option, the names and denominations in which the Option Shares are to be registered and the time and date at which such certificates are to be delivered. If the option granted by the Company and the Selling Shareholders is exercised by the several Underwriters for less than all of the Option Shares, the Underwriters will purchase from the Selling Shareholders the maximum number of Option Shares to be sold by each such Selling Shareholder, as set forth beside such Selling Shareholder's name on Schedule II, before the Underwriters purchase any Option Shares from the Company. If the option granted hereby is exercised for less than the maximum number of Option Shares being offered by the Selling Shareholders, the respective number of Option Shares to be sold by each of the Selling Shareholders listed on Schedule II hereto shall be determined on a pro rata basis in accordance with the number of shares set forth opposite their names on Schedule II hereto, adjusted by you in such manner as to avoid fractional shares. The time and date at which certificates for Option Shares are to be delivered shall be determined by the Representatives but shall not be earlier than three nor later than 10 full business days after the exercise of such option, nor in any event prior to the Closing Date (such time and date being herein referred to as the "Option Closing Date"). If the date of exercise of the option is three or more days before the Closing Date, the notice of exercise shall set the Closing Date as the Option Closing Date. The number of Option Shares to be purchased by each Underwriter shall be in the same proportion to the total number of Option Shares being purchased as the number of Firm Shares being purchased by such Underwriter bears to 6,400,000, adjusted by you in such manner as to avoid fractional shares. The option with respect to the Option Shares granted hereunder may be exercised only to cover over-allotments in the sale of the Firm Shares by the Underwriters. You, as Representatives of the several Underwriters, may cancel such option at any time prior to its expiration by giving written notice of such cancellation to the Company. To the extent, if any, that the option is exercised, payment for the Option Shares shall be made on the Option Closing Date in New York Clearing House funds by certified or bank cashier's check drawn to the order of the Company for the Option Shares to be sold by it and to the order of "Waller Lansden Dortch & Davis, A Professional Limited Liability Company, Custodian" for the Option Shares to be sold by the Selling Shareholders, against delivery of certificates therefor at the offices of Alex. Brown & Sons Incorporated, One South Street, Baltimore, Maryland. 3. Offering by the Underwriters. It is understood that the several Underwriters are to make a public offering of the Firm Shares as soon as the Representatives deem it advisable to do so. The 8 9 Firm Shares are to be initially offered to the public at the initial public offering price set forth in the Prospectus. The Representatives may from time to time thereafter change the public offering price and other selling terms. To the extent, if at all, that any Option Shares are purchased pursuant to Section 2 hereof, the Underwriters will offer them to the public on the foregoing terms. It is further understood that you will act as the Representatives for the Underwriters in the offering and sale of the Shares in accordance with a Master Agreement Among Underwriters entered into by you and the several other Underwriters. 4. Covenants of the Company and the Selling Shareholders. (a) The Company covenants and agrees with the several Underwriters and the Selling Shareholders that: (i) The Company will (A) prepare and timely file with the Commission under Rule 424(b) of the Rules and Regulations a Prospectus containing information previously omitted at the time of effectiveness of the Registration Statement in reliance on Rule 430A of the Rules and Regulations, (B) not file any amendment to the Registration Statement or supplement to the Prospectus of which the Representatives shall not previously have been advised and furnished with a copy or to which the Representatives shall have reasonably objected in writing or which is not in compliance with the Rules and Regulations and (C) file on a timely basis all reports and any definitive proxy or information statements required to be filed by the Company with the Commission subsequent to the date of the Prospectus and prior to the termination of the offering of the Shares by the Underwriters. To the extent applicable, the copies of the Registration Statement and each amendment thereto (including all exhibits filed therewith), any Preliminary Prospectus or Prospectus (in each case, as amended or supplemented) furnished to the Underwriters will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. (ii) The Company will advise the Representatives promptly when the Registration Statement or any post-effective amendment thereto shall have become effective; of the receipt of any comments from the Commission; of any request of the Commission for amendment of the Registration Statement or for supplement to the Prospectus or for any additional information, and of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the use of the Prospectus or of the institution of any proceedings for that purpose, and the Company will use its best efforts to prevent the issuance of any such stop order preventing or suspending the use of the Prospectus and to obtain as soon as possible the lifting thereof, if issued. (iii) The Company will cooperate with the Representatives in endeavoring to qualify the Shares for sale under the securities laws of such jurisdictions as the Representatives may reasonably have designated in writing and will make such applications, file such documents, and furnish such information as may be reasonably required for that purpose, provided the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction where it is not now so qualified or required to file such a consent. The Company will, from time to time, prepare and file such statements, reports, and other documents, as are or may be required to continue such qualifications in effect for so long a period as the Representatives may reasonably request for distribution of the Shares. (iv) The Company will deliver to, or upon the order of, the Representatives, from time to time, as many copies of any Preliminary Prospectus as the Representatives may reasonably request. The Company will deliver to, or upon the order of, the Representatives during the period when delivery of a Prospectus is required under the Act, as many copies of the Prospectus in final form, or as thereafter amended or supplemented, as the Representatives may reasonably request. The Company will deliver to the Representatives at or before the Closing Date, four signed copies of the Registration Statement and all amendments thereto including all exhibits filed therewith, and will deliver to the Representatives such number of copies of the Registration Statement, including documents incorporated by reference therein, but without 9 10 exhibits, and of all amendments thereto, as the Representatives may reasonably request. To the extent applicable, all such documents shall be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. (v) The Company will comply with the Act and the rules and regulations of the Commission thereunder, and the Exchange Act, and the rules and regulations of the Commission thereunder, so as to permit the completion of the distribution of the Shares as contemplated in this Agreement and the Prospectus. If during the period in which a prospectus is required by law to be delivered by an Underwriter or dealer any event shall occur as a result of which, in the judgment of the Company or in the opinion of counsel for the Underwriters, it becomes necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances existing at the time the Prospectus is delivered to a purchaser, not misleading, or, if it is necessary at any time to amend or supplement the Prospectus to comply with any law, the Company promptly will either (i) prepare and file with the Commission an appropriate amendment to the Registration Statement or supplement to the Prospectus or (ii) prepare and file with the Commission an appropriate filing under the Exchange Act which shall be incorporated by reference in the Prospectus so that the Prospectus as so amended or supplemented will not, in the light of the circumstances when it is so delivered, be misleading, or so that the Prospectus will comply with the law. (vi) The Company will make generally available to its security holders, as soon as it is practicable to do so, but in any event not later than 15 months after the effective date of the Registration Statement, an earnings statement (which need not be audited) in reasonable detail, covering a period of at least 12 consecutive months beginning after the effective date of the Registration Statement, which earnings statement shall satisfy the requirements of Section 11(a) of the Act and Rule 158 of the Rules and Regulations and will advise you in writing when such statement has been so made available. (vii) The Company will, for a period of five years from the Closing Date, deliver to the Representatives copies of annual reports and copies of all other documents, reports and information (including similar documents, reports and information with respect to significant subsidiaries, as that term is defined in the Rules and Regulations, which are not consolidated in the Company's financial statements) furnished by the Company to its stockholders generally or filed with any securities exchange pursuant to the requirements of such exchange or with the Commission pursuant to the Act or the Securities Exchange Act of 1934, as amended. To the extent applicable, such reports or documents shall be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. (viii) No offering, sale, short sale or other disposition of any Common Stock of the Company or other securities convertible into or exchangeable for Common Stock or derivative of Common Stock will be made for a period of 45 days after the date of this Agreement, directly or indirectly, by the Company otherwise than hereunder or with the prior written consent of the Representatives except that the Company may, without such consent, issue shares to directors pursuant to the Company's restricted stock plan, grant options pursuant to its option plans described in the Prospectus, issue shares upon the exercise of options and warrants or the conversion of securities outstanding on the date of this Agreement and described in the Prospectus and, in addition, may issue Common Stock or securities convertible into, or exchangeable or exercisable for, shares of Common Stock in connection with the acquisition of the operating assets of additional Practice Groups if the terms of issuance or legal restrictions thereon provide that such Common Stock or securities shall not be sold publicly prior to the expiration of the 45 day period hereinabove referenced. 10 11 (ix) The Company will use its best efforts to list, subject to notice of issuance, the Shares on The Nasdaq National Market ("NMS"). (x) The Company will apply the net proceeds from the sale of the Shares for the purposes set forth in the Prospectus. (xi) The Company is familiar with the Investment Company Act of 1940, as amended, and the rules and regulations thereunder and has in the past conducted and will in the future conduct its affairs in such a manner as to ensure that the Company was not and will not be an "investment company" within the meaning of said Act and such rules and regulations. (xii) The Company has caused each executive officer of the Company to furnish to you, on or prior to the date of this agreement, a letter or letters, in form and substance satisfactory to the Underwriters, pursuant to which each such person shall agree not to: (A) offer to sell, contract to sell, transfer or otherwise dispose of, directly or indirectly, any shares of Common Stock, any options, rights or warrants to purchase any shares of Common Stock (including any stock appreciation right, or similar right with an exercise or conversion privilege at a price related to, or derived from, the market price of the Common Stock) or any securities convertible into or exchangeable for shares of Common Stock owned directly by such person or with respect to which such person has the power of disposition (including, without limitation, shares of Common Stock which such person may be deemed to beneficially own in accordance with the rules and regulations promulgated under the Exchange Act); or (B) engage in any hedging transactions with respect to the Common Stock that may have an impact on the market price of the Common Stock for a period beginning on the date of such letters and expiring 45 days following the date the Registration Statement is declared effective by the Commission (the "Lockup Period"), directly or indirectly ("Lockup Agreements"); provided, however, such officers, directors and specified shareholders shall be permitted to make the following transfers: (i) transfers made by gift, provided the donee thereof agrees in writing to be bound by the terms of the Lockup Agreement; (ii) transfers to the transferor's affiliates, as such term is defined in Rule 405 promulgated under the Securities Act, provided that each transferee agrees in writing to be bound by the terms of the Lockup Agreement; (iii) transfers made with the prior written consent of Alex. Brown & Sons Incorporated; and (iv) transfers pursuant to the Registration Statement. (xiii) The Company will maintain a transfer agent and, if necessary under the jurisdiction of incorporation of the Company, a registrar for the Common Stock. (xiv) The Company will not take, directly or indirectly, any action designed to cause or result in, or that has constituted or might reasonably be expected to constitute, the stabilization or manipulation of the price of any securities of the Company. (b) Each of the Selling Shareholders covenants and agrees with the several Underwriters and the Company that: (i) Such Selling Shareholder will not: (A) offer to sell, contract to sell, transfer or otherwise dispose of, directly or indirectly, any shares of Common Stock, any options, rights or warrants to purchase any shares of Common Stock (including any stock appreciation right, or similar right with an exercise or conversion privilege at a price related to, or derived from, the market price of the Common Stock) or any securities convertible into or exchangeable for shares of Common Stock owned directly by such Selling Shareholder or with respect to which such Selling Shareholder has the power of disposition (including, without limitation, shares of Common Stock which such Selling Shareholder may be deemed to beneficially own in accordance with the rules and regulations promulgated under the Exchange Act); or (B) engage in any hedging transactions with respect to the Common Stock that may have an impact on the market price of the Common Stock during the Lockup Period, directly or indirectly, otherwise than hereunder or with the prior written consent of Alex. Brown & Sons 11 12 Incorporated; provided, however, such Selling Shareholder shall be permitted to make the following transfers: (i) transfers of Common Stock made by gift, provided the donee thereof agrees in writing to be bound by the terms hereof; (ii) transfers to the transferor's affiliates, as such term is defined in Rule 405 promulgated under the Securities Act, provided that each transferee agrees in writing to be bound by the terms hereof; (iii) transfers made with the prior written consent of Alex. Brown & Sons Incorporated; and (iv) transfers pursuant to the Registration Statement. (ii) In order to document the Underwriters' compliance with the reporting and withholding provisions of the Tax Equity and Fiscal Responsibility Act of 1982 and the Interest and Dividend Tax Compliance Act of 1983 with respect to the transactions herein contemplated, the Selling Shareholders agree to deliver to you prior to or at the Closing Date a properly completed and executed United States Treasury Department Form W-9 (or other applicable form or statement specified by Treasury Department regulations in lieu thereof). (iii) Such Selling Shareholder will not take, directly or indirectly, any action designed to cause or result in, or that has constituted or might reasonably be expected to constitute, the stabilization or manipulation of the price of any securities of the Company. 5. Costs and Expenses. The Company will pay all costs, expenses and fees incident to the performance of the obligations of the Company and the Selling Shareholders under this Agreement, including, without limiting the generality of the foregoing, the following: accounting fees of the Company; the fees and disbursements of counsel for the Company and the Selling Shareholders, the cost of printing and delivering to, or as requested by, the Underwriters copies of the Registration Statement, Preliminary Prospectuses, the Prospectus, all documents incorporated by reference in the foregoing, this Agreement, the Master Agreement Among Underwriters, the Underwriters' internal Selling Memorandum, the Underwriters' Questionnaire, the Invitation Letter, the Power of Attorney, the Custody Agreement, the Blue Sky Survey and any supplements or amendments thereto; the filing fees of the Commission; the filing fees and expenses, including the fees and disbursements of counsel for the Underwriters, incident to securing any required review by NASD of the terms of the sale of the Shares; the additional listing fee of NMS and the expenses, including the fees and disbursements of counsel for the Underwriters, incurred in connection with the qualification of the Shares under State securities or Blue Sky laws. To the extent, if at all, that any of the Selling Shareholders engages special legal counsel to represent such Selling Shareholder in connection with this offering, the fees and expenses of such counsel shall be borne by such Selling Shareholder. Any transfer taxes imposed on the sale of the Shares to the several Underwriters will be paid by the Sellers pro rata. The Sellers shall not, however, be required to pay for any of the Underwriters expenses (other than those related to qualification under State securities or Blue Sky laws and NASD review) except that, if this Agreement shall not be consummated because the conditions in Section 6 hereof are not satisfied, or because this Agreement is terminated by the Representatives pursuant to Section 12 hereof, or by reason of any failure, refusal or inability on the part of the Company or the Selling Shareholders to perform any undertaking or satisfy any condition of this Agreement or to comply with any of the terms hereof on their part to be performed, unless such failure to satisfy said condition or to comply with said terms be due to the default or omission of any Underwriter, then the Company shall reimburse the several Underwriters for reasonable out-of-pocket expenses, including fees and disbursements of counsel, reasonably incurred in connection with investigating, marketing and proposing to market the Shares or in contemplation of performing their obligations hereunder; but the Company and the Selling Shareholders shall not in any event be liable to any of the several Underwriters for damages on account of loss of anticipated profits from the sale by them of the Shares. 6. Conditions of Obligations of the Underwriters. The several obligations of the Underwriters to purchase the Firm Shares on the Closing Date and the Option Shares, if any, on the Option Closing Date are subject to the accuracy, as of the Closing Date or the Option Closing Date, as the case may be, of the representations and warranties of the Company and the Selling Shareholders 12 13 contained herein, and to the performance by the Company and the Selling Shareholders of their covenants and obligations hereunder and to the following additional conditions: (a) The Registration Statement and all post-effective amendments thereto shall have become effective and any and all filings required by Rule 424 and Rule 430A of the Rules and Regulations shall have been made, and any request of the Commission for additional information (to be included in the Registration Statement or otherwise) shall have been disclosed to the Representatives and complied with to their reasonable request. No stop order suspending the effectiveness of the Registration Statement, as amended from time to time, shall have been issued and no proceedings for that purpose shall have been taken or, to the knowledge of the Company or the Selling Shareholders, shall be contemplated by the Commission and no injunction, restraining order, or order of any nature by a federal or state court of competent jurisdiction shall have been issued as of the Closing Date or Option Closing Date, as the case may be, which would prevent the issuance of the Shares. (b) The Representatives shall have received on the Closing Date or the Option Closing Date, as the case may be, the opinion of Waller Lansden Dortch & Davis, A Professional Limited Liability Company ("WLDD"), counsel for the Company and the Selling Shareholders, and the opinion of Carolyn Forehand, General Counsel for the Company, each dated the Closing Date or the Option Closing Date, as the case may be, addressed to the Underwriters which collectively provide that: (i) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Tennessee, with corporate power and authority to own its properties and conduct its business as described in the Prospectus; each of the Subsidiaries has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, with corporate power and authority to own its properties and conduct its business as described in the Prospectus. The Company and each of the Subsidiaries are duly qualified to transact business in all jurisdictions in which the conduct of their business as described in the Prospectus and based on inquiry of officers of the Company requires such qualification, or in which the failure to qualify would have a materially adverse effect upon the business of the Company and the Subsidiaries taken as a whole, based, as to matters of fact, upon a certificate of officers of the Company; and the outstanding shares of capital stock of each of the Subsidiaries have been duly authorized and validly issued, are fully paid and non-assessable and are wholly owned by the Company; and, to such counsel's knowledge, the outstanding shares of capital stock of each of the Subsidiaries is owned free and clear of all liens, encumbrances and security interests, other than the pledge of shares of the capital stock of the Subsidiaries to Citibank, N.A., as agent, pursuant to the Company's Fifth Amended and Restated Revolving Credit and Term Loan Agreement with Citibank dated as of July 22, 1996, as the same may be amended from time to time, and no options, warrants or other rights to purchase, agreements or other obligations to issue or other rights to convert any obligations into any shares of capital stock of the Subsidiaries are outstanding except as described in or contemplated by the Registration Statement, including the exhibits thereto. (ii) The Company had authorized and outstanding capital stock as of the dates indicated as set forth under the caption "Capitalization" in the Prospectus; the authorized shares of its Common Stock have been duly authorized; the outstanding shares of its Common Stock, including the outstanding shares of Common Stock to be sold by the Selling Shareholders, have been duly authorized and validly issued and are fully paid and non-assessable; all of the Shares conform to the description thereof contained in the Prospectus; the certificates for the Shares, assuming they are in the form of the specimen certificate received by such counsel, are in due and proper form; the shares of Common Stock, including the Option Shares, if any, to be sold by the Company and the Selling Shareholders pursuant to this Agreement have been duly authorized and will be validly 13 14 issued, fully paid and non-assessable when issued and paid for as contemplated by this Agreement; and no preemptive rights of shareholders exist with respect to any of the Shares or the issue and sale thereof. (iii) The Registration Statement has become effective under the Act and, to the best of the knowledge of such counsel, no stop order proceedings with respect thereto have been instituted or are pending or threatened under the Act. (iv) The Registration Statement, all Preliminary Prospectuses, the Prospectus and each amendment or supplement thereto and documents incorporated by reference therein comply as to form in all material respects with the requirements of the Act or the Exchange Act, as applicable, and the applicable rules and regulations thereunder (except that such counsel need express no opinion as to the financial statements, schedules and other financial and statistical information included therein). The conditions for the use of Form S-3, set forth in the General Instructions thereto, have been satisfied. (v) The statements under the captions "Risk Factors," "Business," and "Principal and Selling Shareholders" in the Prospectus, insofar as such statements constitute a summary of documents referred to therein or matters of law, are accurate summaries in all material respects and fairly present the information called for with respect to such documents and matters. Such counsel does not know of any laws, rules or regulations or legal or governmental proceedings applicable to the business of the Company and the Subsidiaries required to be described in the Registration Statement or the Prospectus that are not described as required. (vi) Such counsel does not know of any contracts or documents required to be filed as exhibits to the Registration Statement or described in the Registration Statement or the Prospectus or incorporated by reference therein which are not so filed or described as required or incorporated by reference, and such contracts and documents as are summarized in the Registration Statement or the Prospectus are fairly summarized in all material respects. (vii) Such counsel knows of no material legal proceedings pending or threatened against the Company or any of the Subsidiaries, except as described in the Prospectus. (viii) The execution and delivery of this Agreement and the consummation of the transactions herein contemplated (A) do not and will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, the Restated Charter, as amended, or By-laws, as amended, of the Company, or any agreement or instrument known to such counsel to which the Company is a party or by which the Company may be bound; (B) will not violate any material statute, rule or regulation applicable to the Company; and (C) does not require submission or approval of, or any other action by, any Federal or state authority that regulates the provision of healthcare services by the Company in the jurisdictions in which the Company conducts its business. (ix) The Company holds all licenses, authorizations, consents, approvals, certificates and permits (individually, a "Permit") from any regulatory body or administrative agency or other governmental body having jurisdiction that are applicable to the operations of the Company as now conducted or proposed to be conducted as described in the Prospectus, all of which permits are current except where the failure to so hold or comply with any Permit would not have, singly or in the aggregate, a material adverse effect on the business or financial condition of the Company. To the knowledge of such counsel, there are no proceedings, pending or threatened, and such counsel knows of no circumstances that could lead counsel to believe that any such proceedings are imminent, relating to the revocation or modification of any such Permit which, singly or in the aggregate if the subject of an unfavorable decision, ruling or finding, could have a material adverse effect on 14 15 the business or financial condition of the Company. The provisions of the Company's service agreements and other business arrangements described in the Prospectus or incorporated by reference therein and the operations of the Company in accordance with the terms thereof are in material compliance with applicable law and government regulation. (x) This Agreement has been duly authorized, executed and delivered by the Company. (xi) No approval, consent, order, authorization, designation, declaration or filing by or with any regulatory, administrative or other governmental body is necessary in connection with the execution and delivery of this Agreement and the consummation of the transactions herein contemplated (other than as may be required by the NASD or as required by State securities and Blue Sky laws as to which such counsel need express no opinion) except such as have been obtained or made, specifying the same. (xii) This Agreement has been duly authorized, executed and delivered on behalf of each of the Selling Shareholders. (xiii) Each of the Selling Shareholders has full legal right, power and authority, and any approval required by law (other than as required by State securities and Blue Sky laws as to which such counsel need express no opinion), to sell, assign, transfer and deliver the portion of the Shares to be sold by such Selling Shareholder. (xiv) The Power of Attorney and the Custody Agreement executed and delivered by each of the Selling Shareholders is a valid, irrevocable instrument legally sufficient for the purposes intended. (xv) The Underwriters (assuming that they are bona fide purchasers within the meaning of the Uniform Commercial Code) have acquired good and marketable title to the Shares being sold by the Selling Shareholders on the Option Closing Date, free and clear of all claims, liens, encumbrances and security interests whatsoever. (xvi) Except as described in or contemplated by the Prospectus, to the knowledge of such counsel, there are no outstanding securities of the Company convertible or exchangeable into or evidencing the right to purchase or subscribe for any shares of capital stock of the Company and there are no outstanding or authorized options, warrants or rights of any character obligating the Company to issue any shares of its capital stock or any securities convertible or exchangeable into or evidencing the right to purchase or subscribe for any shares of such stock; and except as described in the Prospectus, to the knowledge of such counsel, there is no holder of any securities of the Company or any other person who has the right, contractual or otherwise, to cause the Company to sell or otherwise issue to them, or to permit them to underwrite the sale of, any of the Shares or the right to have any Common Stock or other securities of the Company included in the Registration Statement or the right, as a result of the filing of the Registration Statement, to require registration under the Act of any Common Stock or other securities of the Company. In rendering such opinion WLDD may rely as to matters governed by the laws of states other than Tennessee, Delaware or Federal laws on local counsel in such jurisdictions, provided that in each case WLDD shall state that they believe that they and the Underwriters are justified in relying on such other counsel, and, as to the matters set forth in subparagraphs (xiii), (xiv) and (xv), exclusively as to factual matters, upon contractual representations made by the Selling Shareholders. In addition to the matters set forth above, such opinion shall also include a statement to the effect that nothing has come to the attention of such counsel which leads them to believe that the Registration Statement, as of the time it became effective under the Act (but after giving effect to the changes incorporated pursuant to Rule 430A under the Act), and as of the Closing Date or Option Closing Date, as the case may be, contained an untrue statement of a 15 16 material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus or any amendment or supplement thereto, on the date it was filed pursuant to Rule 424(b), and as of the Closing Date or Option Closing Date, as the case may be, or any of the documents incorporated by reference therein, as of the date of effectiveness of the Registration Statement or, in the case of documents incorporated by reference in the Prospectus after the date of effectiveness of the Registration Statement, as of the respective dates when such documents were filed with the Commission and the Registration Statement and the Prospectus, or any amendment or supplement thereto, as of the Closing Date or the Option Closing Date, as the case may be, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading (except that such counsel need express no view as to financial statements, schedules and other financial information included therein). With respect to such statement, Waller Lansden Dortch & Davis may state that their belief is based upon the procedures set forth therein, but is without independent check and verification. (c) The Representatives shall have received from Testa, Hurwitz & Thibeault, LLP counsel for the Underwriters, an opinion dated the Closing Date or the Option Closing Date, as the case may be, substantially to the effect specified in subparagraphs (ii), (iii), (iv) and (x) of Paragraph (b) of this Section 6, and that the Company is a validly organized and existing corporation under the laws of the State of Tennessee. In rendering such opinion Testa, Hurwitz & Thibeault, LLP may rely as to all matters governed other than by Delaware or Federal laws on the opinion of counsel referred to in Paragraph (b) of this Section 6. In addition to the matters set forth above, such opinion shall also include a statement to the effect that nothing has come to the attention of such counsel which leads them to believe that the Registration Statement, as of the time it became effective under the Act (but after giving effect to changes incorporated pursuant to Rule 430A under the Act), contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus or any amendment or supplement thereto, on the date it was filed pursuant to Rule 424(b) and the Registration Statement and the Prospectus, or any amendment or supplement thereto, as of the Closing Date or the Option Closing Date, as the case may be, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading (except that such counsel need express no view as to financial statements, schedules and other financial information included therein). With respect to such statement, Testa, Hurwitz & Thibeault may state that their belief is based upon the procedures set forth therein, but is without independent check and verification. (d) The Representatives shall have received at or prior to the Closing Date from Testa, Hurwitz & Thibeault, LLP a memorandum or summary, in form and substance satisfactory to the Representatives, with respect to the qualification for offering and sale by the Underwriters of the Shares under the State securities or Blue Sky laws of such jurisdictions as the Representatives may reasonably have designated to the Company. (e) The Representatives shall have received on the date hereof, Closing Date and the Option Closing Date, as the case may be, a signed letter from KPMG Peat Marwick LLP, dated the date hereof, the Closing Date and the Option Closing Date, as the case may be, in form and substance satisfactory to you, confirming that they are independent public accountants within the meaning of the Act and the applicable published Rules and Regulations thereunder and stating that in their opinion the financial statements and schedules examined by them and included in the Registration Statement comply in form in all material respects with the applicable accounting requirements of the Act and the related published Rules and Regulations; and containing such other statements and information as is ordinarily included in accountants' 16 17 "comfort letters" to underwriters with respect to the financial statements and certain financial and statistical information contained in the Registration Statement and Prospectus. (f) The Representatives shall have received on the Closing Date or the Option Closing Date, as the case may be, a certificate or certificates of the Chief Executive Officer and the Principal Financial and Accounting Officer of the Company to the effect that, as of the Closing Date or the Option Closing Date, as the case may be, each of them severally represents as follows: (i) The Registration Statement has become effective under the Act and no stop order suspending the effectiveness of the Registration Statement has been issued, and no proceedings for such purpose have been taken or are, to his knowledge, contemplated by the Commission. (ii) He does not know of any litigation instituted or threatened against the Company of a character required to be disclosed in the Registration Statement which is not so disclosed; he does not know of any material contract required to be filed as an exhibit to the Registration Statement which is not so filed; and the representations and warranties of the Company contained in Section 1 hereof are true and correct as of the Closing Date or the Option Closing Date, as the case may be. (iii) He has carefully examined the Registration Statement and the Prospectus and, in his opinion, as of the effective date of the Registration Statement, the statements contained in the Registration Statement, including any document incorporated by reference therein, were true and correct in all material respects, and such Registration Statement and Prospectus or any document incorporated by reference therein did not omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading and, in his opinion, since the effective date of the Registration Statement, no event has occurred which should have been set forth in a supplement to or an amendment of the Prospectus which has not been so set forth in such supplement or amendment. (iv) Since the respective dates as of which information is given in the Registration Statement and Prospectus, there has not been any material adverse change or any development involving a prospective material adverse change in or affecting the condition, financial or otherwise, of the Company and its Subsidiaries or the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company and the Subsidiaries, whether or not arising in the ordinary course of business; (v) All of the representations and warranties of the Company contained in this Underwriting Agreement are true and correct on and as of the date hereof and on and as of the Closing Date or the Option Closing Date, as the case may be, with the same force and effect as if made on and as of the Closing Date or the Option Closing Date, as the case may be, except for representations and warranties made as of a specific date, which were true and correct as of such date; (vi) Each of the conditions specified in Section 6 of this Underwriting Agreement has been, as of the Closing Date or the Option Closing Date, as the case may be, satisfied in all respects; and (vii) The Company has performed and/or complied with all of its agreements and covenants required to be performed or complied with under this Underwriting Agreement as of or prior to the Closing Date or the Option Closing Date, if any, as the case may be. 17 18 (g) The Representatives shall have received on the Option Closing Date, if any, a certificate of each Selling Shareholder to the effect that, as of the Option Closing Date each such Selling Shareholder shall represent as follows: (i) All of the representations and warranties of such Selling Shareholder contained in this Underwriting Agreement are true and correct on and as of the date hereof and on and as of the Closing Date with the same force and effect as if made on and as of the Closing Date except for representations and warranties made as of a specific date, which were true and correct as of such date; and (ii) Such Selling Shareholder has performed and/or complied with all of such Selling Shareholder's agreements and covenants required to be performed or complied with under this Underwriting Agreement as of or prior to the Closing Date. (h) The Company and the Selling Shareholders shall have furnished to the Representatives such further certificates and documents confirming the representations and warranties contained herein and related matters as the Representatives may reasonably have requested. (i) The Firm Shares and Option Shares, if any, have been approved for designation upon notice of issuance on The Nasdaq National Market. (j) All filings required to have been made pursuant to Rules 424 or 430A under the Act have been made. (k) Since the respective dates as of which information is given in the Registration Statement and Prospectus, there has not been any material adverse change or any development involving a prospective adverse change in or affecting the condition, financial or otherwise, of the Company or the earnings, business affairs, management or business prospects of the Company whether or not arising in the ordinary course of business. (l) The Lockup Agreements described in Section 4(a)(xii) are in full force and effect. The opinions and certificates mentioned in this Agreement shall be deemed to be in compliance with the provisions hereof only if they are in all material respects reasonably satisfactory to the Representatives and to Testa, Hurwitz & Thibeault, LLP, counsel for the Underwriters. If any of the conditions hereinabove provided for in this Section 6 shall not have been fulfilled when and as required by this Agreement to be fulfilled, the obligations of the Underwriters hereunder may be terminated by the Representatives by notifying the Company of such termination in writing or by telegram at or prior to the Closing Date or the Company and the Selling Shareholders prior to the Option Closing Date, as the case may be. In such event, the Selling Shareholder, the Company and the Underwriters shall not be under any obligation to each other (except to the extent provided in Sections 5 and 8 hereof). 7. Conditions of the Obligations of the Sellers. The obligations of the Sellers to sell and deliver the portion of the Shares required to be delivered as and when specified in this Agreement are subject to the conditions that at the Closing Date or the Option Closing Date, as the case may be, no stop order suspending the effectiveness of the Registration statement shall have been issued and in effect or proceedings therefor initiated or threatened. 8. Indemnification. (a) The Company and each of the Selling Shareholders, jointly and severally, agree to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of the Act against any losses, claims, damages or liabilities to which such Underwriter or such controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained or incorporated by reference in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, or (ii) the 18 19 omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse each Underwriter and each such controlling person upon demand for any legal or other expenses reasonably incurred by such Underwriter or such controlling person in connection with investigating or defending any such loss, claim, damage, liability, action or proceeding and expenses reasonably incurred in responding to a subpoena or governmental inquiry whether or not such underwriter or controlling person is a party to the related action or proceeding; provided, however, that the Company and the Selling Shareholders will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement, or omission or alleged omission made or incorporated by reference in the Registration Statement, any Preliminary Prospectus, the Prospectus, or such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by or through the Representatives specifically for use in the preparation thereof. In no event, however, shall the liability of the Selling Shareholders for indemnification under this Section 8(a) exceed the proceeds received by such Selling Shareholder from the Underwriters in the offering; and provided further that the Company shall not be liable to any Underwriter pursuant to this subsection (a) with respect to any Preliminary Prospectus to the extent that such loss, claim, damage or liability of such Underwriter results from the fact that such Underwriter sold securities in any case where delivery of a Prospectus is required by the Act if the Company has previously furnished copies of the Prospectus to such Underwriter and the loss, claim, damage or liability of such Underwriter results from an untrue statement or omission of a material fact contained in, or the omission of a material fact from, such Preliminary Prospectus which was corrected in the Prospectus and such Underwriter failed to deliver such corrected Prospectus to a purchaser of Shares as required by the Act. This indemnity agreement will be in addition to any liability which the Company or the Selling Shareholder may otherwise have. (b) Each Underwriter severally and not jointly will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed the Registration Statement, the Selling Shareholders, and each person, if any, who controls the Company or the Selling Shareholders within the meaning of the Act, against any losses, claims, damages or liabilities to which the Company or any such director, officer, Selling Shareholder or controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained or incorporated by reference in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made; and will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer, Selling Shareholder or controlling person in connection with investigating or defending any such loss, claim, damage, liability, action or proceeding; provided, however, that each Underwriter will be liable in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission has been made or incorporated by reference in the Registration Statement, any Preliminary Prospectus, the Prospectus or such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by or through the Representatives specifically for use in the preparation thereof. This indemnity agreement will be in addition to any liability which such Underwriter may otherwise have. (c) In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to this Section 8, such person (the "indemnified party") shall promptly notify the person against whom such indemnity may be sought (the "indemnifying party") in writing. No indemnification provided for in Section 8(a) or (b) shall be available to any party who shall fail to give notice as provided in this Section 8(c) if the party to whom notice was not given was unaware of the proceeding to which such notice would have related and was prejudiced by the failure to give such notice, but the failure to 19 20 give such notice shall not relieve the indemnifying party or parties from any liability which it or they may have to the indemnified party for contribution or otherwise than on account of the provisions of Section 8(a) or (b). In case any such proceeding shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party and shall pay as incurred the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel at its own expense. Notwithstanding the foregoing, the indemnifying party shall pay as incurred the fees and expenses of the counsel retained by the indemnified party in the event (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that the indemnifying party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees and expenses of more than one separate firm for all such indemnified parties. Such firm shall be designated in writing by you in the case of parties indemnified pursuant to Section 8(a) and by the Company and the Selling Shareholder in the case of parties indemnified pursuant to Section 8(b). The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent but if settled with such consent or if there be a final judgement for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. In addition, the indemnifying party will not, without the prior written consent of the indemnified party, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action or proceeding, of which indemnification may be sought hereunder (whether or not any indemnified party is an actual or potential party to such claim, action or proceeding) unless such settlement, compromise or consent includes an unconditional release of the indemnified party from all liability arising out of such claim, action or proceeding. (d) If the indemnification provided for in this Section 8 is unavailable to or insufficient to hold harmless an indemnified party under Section 8(a) or (b) above in respect of any losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Selling Shareholder on the one hand and the Underwriters on the other from the offering of the Shares. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law or if the indemnified party failed to give the notice required under Section 8(c) above, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company and the Selling Shareholders on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions or proceedings in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Shareholders on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company and the Selling Shareholder bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Selling Shareholders on the one hand or the Underwriters on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. 20 21 The Company, the Selling Shareholders and the Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 8(d) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 8(d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to above in this Section 8(d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (d), (i) no Underwriter shall be required to contribute any amount in excess of the underwriting discounts and commissions applicable to the Shares purchased by such Underwriter, (ii) no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation, and (iii) the Selling Shareholders shall not be required to contribute any amount in excess of the proceeds received by the Selling Shareholder from the Underwriters in the offering. The Underwriters' obligations in this Section 8(d) to contribute are several in proportion to their respective underwriting obligations and not joint. (e) In any proceeding relating to the Registration Statement, any Preliminary Prospectus, the Prospectus or any supplement or amendment thereto, each party against whom contribution may be sought under this Section 8 hereby consents to the jurisdiction of any court having jurisdiction over any other contributing party, agrees that process issuing from such court may be served upon him or it by any other contributing party and consents to the service of such process and agrees that any other contributing party may join him or it as an additional defendant in any such proceeding in which such other contributing party is a party. (f) Any losses, claims, damages, liabilities or expenses for which an indemnified party is entitled to indemnification or contribution under this Section 8 shall be paid by the indemnifying party to the indemnified party as such losses, claims, damages, liabilities or expenses are incurred. The indemnity and contribution agreements contained in this Section 8 and the representations and warranties of the Company set forth in this Agreement shall remain operative and in full force and effect, regardless of (i) any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter, the Company, its directors or officers or any persons controlling the Company, (ii) acceptance of any Shares and payment therefor hereunder, and (iii) any termination of this Agreement. A successor to any Underwriter, or to the Company, its directors or officers, or any person controlling the Company, shall be entitled to the benefits of the indemnity, contribution and reimbursement agreements contained in this Section 8. 9. Default by Underwriters. If on the Closing Date or the Option Closing Date, as the case may be, any Underwriter shall fail to purchase and pay for the portion of the Shares which such Underwriter has agreed to purchase and pay for on such date (otherwise than by reason of any default on the part of the Company or the Selling Shareholder), you, as Representatives of the Underwriters, shall use your best efforts to procure within 24 hours thereafter one or more of the other Underwriters, or any others, to purchase from the Company and the Selling Shareholders such amounts as may be agreed upon and upon the terms set forth herein, the Firm Shares or Option Shares, as the case may be, which the defaulting Underwriter or Underwriters failed to purchase. If during such 24 hours you, as such Representatives, shall not have procured such other Underwriters, or any others, to purchase the Firm Shares or Option Shares, as the case may be, agreed to be purchased by the defaulting Underwriter or Underwriters, then (a) if the aggregate number of shares with respect to which such default shall occur does not exceed 10% of the Firm Shares or Option Shares, as the case may be, covered hereby, the other Underwriters shall be obligated, severally, in proportion to the respective numbers of Firm Shares or Option Shares, as the case may be, which they are obligated to purchase hereunder, to purchase the Firm Shares or Option Shares, as the case may be, which such defaulting Underwriter or Underwriters failed to purchase, or (b) if the aggregate number of shares of Firm Shares or Option Shares, as the case may be, with respect to 21 22 which such default shall occur exceeds 10% of the Firm Shares or Option Shares, as the case may be, covered hereby, the Company and the Selling Shareholder or you as the Representatives of the Underwriters will have the right, by written notice given within the next 24-hour period to the parties to this Agreement, to terminate this Agreement without liability on the part of the non-defaulting Underwriters or of the Company or of the Selling Shareholders except to the extent provided in Section 8 hereof. In the event of a default by any Underwriter or Underwriters, as set forth in this Section 9, the Closing Date or Option Closing Date, as the case may be, may be postponed for such period, not exceeding seven days, as you, as Representatives, may determine in order that the required changes in the Registration Statement or in the Prospectus or in any other documents or arrangements may be effected. The term "Underwriter" includes any person substituted for a defaulting Underwriter. Any action taken under this Section 9 shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. 10. Default by Selling Shareholders. If on the Option Closing Date, if any, any of the Selling Shareholders fails to sell the Option Shares which such Selling Shareholders have agreed to sell on such date as set forth in Schedule II hereto, the Company agrees that it will sell that number of shares of Common Stock to the Underwriters which represents the Option Shares which such Selling Shareholders have failed to so sell, as set forth in Schedule II hereto, or such lesser number as may be requested by the Representatives. 11. Notices. All communications hereunder shall be in writing and, except as otherwise provided herein, will be mailed, delivered or telegraphed and confirmed as follows: if to the Underwriters, to Alex. Brown & Sons Incorporated, One South Street, Baltimore, Maryland 21202, Attention: Steven H. Schuh; with a copy to Alex. Brown & Sons Incorporated, One South Street, Baltimore, Maryland 21202 Attention: General Counsel; if to the Company or the Selling Shareholders, to PhyCor, Inc., 30 Burton Hills Boulevard, Suite 500, Nashville, Tennessee 37215, Attention: Joseph C. Hutts, President. 12. Termination. This Agreement may be terminated by you by notice to the Sellers as follows: (a) At any time prior to the earlier of (i) the time the Shares are released by you for sale by notice to the Underwriters, or (ii) 11:30 a.m. on the first business day following the date of this Agreement; (b) At any time prior to the Closing Date if any of the following has occurred: (i) since the respective dates as of which information is given in the Registration Statement and the Prospectus, any material adverse change, or any development involving a prospective material adverse change, in or affecting the condition, financial or otherwise, of the Company and its Subsidiaries taken as a whole or the earnings, business affairs, management or business prospects of the Company and its Subsidiaries taken as a whole, whether or not arising in the ordinary course of business, (ii) any outbreak or escalation of hostilities or declaration of war or national emergency after the date hereof or other national or international calamity or crisis or change in economic or political conditions if the effect of such outbreak, escalation, declaration, emergency, calamity, crisis or change on the financial markets of the United States would, in your reasonable judgment, make the offering or delivery of the Shares impracticable or inadvisable, (iii) suspension of trading in securities on the New York Stock Exchange, the American Stock Exchange or NASDAQ or limitation on prices (other than limitations on hours or numbers of days of trading) for securities on either such Exchange or NASDAQ, (iv) the enactment, publication, decree or other promulgation of any federal or state statute, regulation, rule or order of any court or other governmental authority which in your reasonable opinion materially and adversely affects or will materially and adversely affect the business or operations of the Company, (v) declaration of a banking moratorium by either Federal or New York State authorities, (vi) the taking of any action by any Federal, State or local government or agency in 22 23 respect of its monetary or fiscal affairs which in your reasonable opinion has a material adverse effect on the securities markets in the United States or (vii) the suspension of trading of the Company's Common Stock on the Nasdaq National Market; or (c) As provided in Sections 6 and 9 of this Agreement. This Agreement also may be terminated by you, by notice to the Company, as to any obligation of the Underwriters to purchase the Option Shares, upon the occurrence at any time prior to the Option Closing Date of any of the events described in subparagraph (b) above or as provided in Sections 6 and 9 of this Agreement. 13. Successors. This Agreement has been and is made solely for the benefit of the Underwriters, the Company and the Selling Shareholder and their respective successors, executors, administrators, heirs and assigns, and the officers, directors and controlling persons referred to herein, and no other person will have any right or obligation hereunder. The term "successors" shall not include any purchaser of the Shares merely because of such purchase. No purchaser of Shares from any Underwriter shall be deemed a successor or assign merely because of such purchase. 14. Information Provided by Underwriters. The Company, the Selling Shareholders and the Underwriters acknowledge and agree that the only information furnished or to be furnished by any Underwriter to the Company for inclusion in any Prospectus or the Registration Statement consists of the information set forth in the last paragraph on the front cover page (insofar as such information relates to the Underwriters), information provided in connection with Item 502(d) of Regulation S-K under the Act and information under the caption "Underwriting" in the Prospectus. 15. Miscellaneous. The reimbursement, indemnification and contribution agreements contained in this Agreement and the representations, warranties and covenants in this Agreement shall remain in full force and effect regardless of (a) any termination of this Agreement, (b) any investigation made by or on behalf of any Underwriter or controlling person thereof, or by or on behalf of the Company or its directors or officers and (c) delivery of and payment for the Shares under this Agreement the other covenants of the Company in this Agreement shall remain in full force and effect regardless of (a) any investigation made by or on behalf of any underwriter or controlling person and (b) delivery of any payment for the Shares under this Agreement. 23 24 This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Maryland. If the foregoing letter is in accordance with your understanding of our agreement, please sign and return to us the enclosed duplicates hereof, whereupon it will become a binding agreement among the Selling Shareholders, the Company and the several Underwriters in accordance with its terms. It is understood that your acceptance of this letter on behalf of each of the Underwriters is pursuant to the authority set forth in a form of Agreement among Underwriters, the form of which shall be submitted to the Company for examination, upon request, but without warranty on your part as to the authority of the signers thereof. Any person executing and delivering this Agreement as Attorney-in-Fact for a Selling Shareholder represents by so doing that he has been duly appointed as Attorney-in-Fact by such Selling Shareholder pursuant to a validly existing and binding Power of Attorney which authorizes such Attorney-in-Fact to take such action. Very truly yours, PHYCOR, INC. By: ________________________ President Selling Shareholders listed on Schedule II By: ________________________ Attorney-in-Fact The foregoing Underwriting Agreement is hereby confirmed and accepted as of the date first above written. ALEX. BROWN & SONS INCORPORATED EQUITABLE SECURITIES CORPORATION MERRILL, LYNCH, PIERCE, FENNER & SMITH INCORPORATED PIPER JAFFRAY INC. SALOMON BROTHERS INC As Representatives of the several Underwriters listed on Schedule I By: ALEX. BROWN & SONS INCORPORATED By: __________________________ Authorized Officer 24 25 SCHEDULE I SCHEDULE OF UNDERWRITERS
NUMBER OF FIRM SHARES UNDERWRITER TO BE PURCHASED - ----------- --------------------- Alex. Brown & Sons Incorporated............................. Equitable Securities Corporation............................ Merrill, Lynch, Pierce, Fenner & Smith Incorporated......... Piper Jaffray Inc........................................... Salomon Brothers Inc........................................ --------- Total............................................. 6,400,000 =========
25 26 SCHEDULE II SCHEDULE OF OPTION SHARES TO BE SOLD BY THE COMPANY AND SELLING SHAREHOLDERS
NUMBER OF OPTION SHARES TO BE NAME OF SELLER SOLD - -------------- ------------ PhyCor, Inc................................................. 895,000 Richard D. Wright........................................... 40,000 John K. Crawford............................................ 25,000 ------- Total........................................ 960,000 =======
26 27 SCHEDULE III SCHEDULE OF SUBSIDIARIES
PERCENT OWNED DIRECTLY BY NAME AND ADDRESS PHYCOR, INC. ---------------- ------------- PhyCor of Ruston, Inc., a Louisiana corporation............. 100% 1200 South Farmerville Street Ruston, Louisiana 71270 PhyCor of Vero Beach, Inc., a Florida corporation........... 100% 2300 Fifth Avenue Vero Beach, Florida 32960 PhyCor of Nashville, Inc., a Tennessee corporation.......... 100% 30 Burton Hills Blvd. Suite 500 Nashville, Tennessee 37215 PhyCor of Charlotte, Inc., a Tennessee corporation.......... 100% 1350 So. Kings Drive Charlotte, North Carolina 28207 PhyCor of Winter Haven, Inc., a Tennessee corporation....... 100% 635 First Street North Winter Haven, Florida 33881 PhyCor of Greeley, Inc., a Tennessee corporation............ 100% 1900 16th Street Greeley, Colorado 80631 PhyCor of Jacksonville, Inc., a Tennessee corporation....... 100% 2005 Riverside Avenue Jacksonville, Florida 32204 PhyCor of Pueblo, Inc., a Tennessee corporation............. 100% 2004 Lake Avenue Pueblo, Colorado 81004 PhyCor of Conroe, Inc., a Tennessee corporation............. 100% 3205 West Davis Street Conroe, Texas 77304 PhyCor of San Antonio, Inc., a Tennessee corporation........ 100% 4607 Medical Drive P.O. Box 29249 San Antonia, Texas 78284-3100 PhyCor of Richmond, Inc., a Tennessee corporation........... 100% 7702 Partham Road Richmond, Virginia 23294 PhyCor of Harlingen, Inc., a Tennessee corporation.......... 100% 2200 Haine Drive Harlingen, Texas 78550 PhyCor of Laconia, Inc., a Tennessee corporation............ 100% 724 Main Street Laconia, New Hampshire 03246 PhyCor of Olean, Inc., a Tennessee corporation.............. 100% 535 Main Street Olean, New York 14760 PhyCor of Kingsport, Inc., a Tennessee corporation.......... 100% 2112 Brookside Drive, Suite 200 Kingsport, Tennessee 37660
27 28
PERCENT OWNED DIRECTLY BY NAME AND ADDRESS PHYCOR, INC. ---------------- ------------- PhyCor of Irving, Inc., a Tennessee corporation............. 100% 2023 West Park Drive Irving, Texas 75061 PhyCor of Cleburne, Inc., a Tennessee corporation........... 100% 505 North Ridgeway Drive Cleburne, Texas 76033 PhyCor of Birmingham, Inc., a Tennessee corporation......... 100% 833 Princeton Avenue, S.W. Birmingham, Alabama 35211 PhyCor of Dixon, Inc., a Tennessee corporation.............. 100% 102 South Hennegin Avenue Dixon, Illinois 61021 PhyCor of Kentucky, Inc., a Tennessee corporation........... 100% 30 Burton Hills Boulevard, Suite 500 Nashville, Tennessee 37215 PhyCor of Fort Smith, Inc., a Tennessee corporation......... 100% 30 Burton Hills Boulevard, Suite 500 Nashville, Tennessee 37215 PhyCor of Northeast Arkansas, Inc., a Tennessee corporation............................................... 100% 30 Burton Hills Boulevard, Suite 500 Nashville, Tennessee 37215 PhyCor of Boulder, Inc., a Tennessee corporation............ 100% 30 Burton Hills Boulevard, Suite 500 Nashville, Tennessee 37215 PhyCor of Newnan, Inc., a Tennessee corporation............. 100% 30 Burton Hills Boulevard, Suite 500 Nashville, Tennessee 37215 PhyCor of Freeport, Inc., a Tennessee corporation........... 100% 30 Burton Hills Boulevard, Suite 500 Nashville, Tennessee 37215 PhyCor of Northern Michigan, Inc., a Tennessee corporation............................................... 100% 30 Burton Hills Boulevard, Suite 500 Nashville, Tennessee 37215 PhyCor of Chickasha, Inc., a Tennessee corporation.......... 100% 30 Burton Hills Boulevard, Suite 500 Nashville, Tennessee 37215 PhyCor of Corsicana, Inc., a Tennessee corporation.......... 100% 30 Burton Hills Boulevard, Suite 500 Nashville, Tennessee 37215 PhyCor of Ogden, a Tennessee corporation.................... 100% 30 Burton Hills Boulevard, Suite 500 Nashville, Tennessee 37215 PhyCor of Tidewater, Inc., a Tennessee corporation.......... 100% 30 Burton Hills Boulevard, Suite 500 Nashville, Tennessee 37215 North American Medical Management Inc., a Tennessee corporation............................................... 100% 30 Burton Hills Boulevard, Suite 500 Nashville, Tennessee 37215
28 29
PERCENT OWNED DIRECTLY BY NAME AND ADDRESS PHYCOR, INC. ---------------- ------------- IPA Management Associates, Inc., a Texas corporation........ 0% 800 W. Airport Freeway, Suite 1020, L.B. 6086, Irving, Texas 75062 Managed Care Management Associates, Inc., a Texas corporation............................................... 0% 1235 North Loop West, Suite 450, Houston, Texas 77008 Sun State Medical Group, Inc., an Arizona corporation....... 0% 13000 N. 103rd Avenue, Suite 63, Sun City, Arizona 85351 North American Medical Management -- Tennessee, Inc., a Tennessee corporation............................................... 0% 500 Tallan Building, Two Union Square, Chattanooga, Tennessee 37402 North American Medical Management -- Florida, Inc., a Florida corporation....................................... 0% 1201 Hayes Street, Suite 105, Tallahassee, Florida 32301 North American Medical Management -- Illinois, Inc., an Illinois corporation...................................... 0% 33 N. LaSalle Street, Chicago, Illinois 60602 North American Medical Management -- North Carolina, Inc., a North Carolina corporation................................ 0% 327 Hillsborough Street, Raleigh, North Carolina 27603 North American Medical Marketing, Inc., a California corporation............................................... 0% 45951 Citrus View Drive, Hemet, California 92344
29 EX-5 3 OPINION OF WALLER LANSDEN DORTCH & DAVIS 1 EXHIBIT 5 February 5, 1997 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Re: PhyCor, Inc. Registration Statement on Form S-3 Ladies and Gentlemen: We are acting as counsel to PhyCor, Inc., a Tennessee corporation (the "Registrant"), in connection with the preparation of a Registration Statement on Form S-3 (the "Registration Statement") to be filed with the Securities and Exchange Commission registering up to 7,360,000 shares of Common Stock, no par value per share (the "Common Stock"), of the Registrant to be sold by the Registrant and certain selling shareholders to the underwriters represented by Alex. Brown & Sons Incorporated, Equitable Securities Corporation, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Piper Jaffray Inc. and Salomon Brothers Inc (the "Underwriters"), pursuant to the Underwriting Agreement between the Registrant and the Underwriters, a form of which was filed as Exhibit 1 to the Registration Statement (the "Underwriting Agreement"). In connection with this opinion, we have examined and relied upon such records, documents and other instruments as in our judgment are necessary and appropriate in order to express the opinions hereinafter set forth and have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals, and the conformity to original documents of all documents submitted to us as certified or photostatic copies. Based upon the foregoing, we are of the opinion that the shares of Common Stock being sold by the Registrant will be, when issued and delivered in the manner and on the terms described in the Registration Statement and the Underwriting Agreement (after the Registration Statement is declared effective), and the shares of Common Stock being sold by certain selling shareholders are, duly authorized, validly issued, fully paid and non-assessable. 2 February 5, 1997 Page 2 We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and further consent to the reference to us under the caption "Legal Matters" in the prospectus included in the Registration Statement. Very truly yours, WALLER LANSDEN DORTCH & DAVIS, A PROFESSIONAL LIMITED LIABILITY COMPANY EX-23.1 4 CONSENT OF KPMG PEAT MARWICK, LLP 1 EXHIBIT 23.1 The Board of Directors and Shareholders PhyCor, Inc.: We consent to the use of our report included herein and to the references to our firm under the headings "Selected Consolidated Financial Data" and "Experts" in the prospectus. KPMG PEAT MARWICK LLP Nashville, Tennessee February 5, 1997 -----END PRIVACY-ENHANCED MESSAGE-----