1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported):
February 26, 1997 (January 17, 1997)
------------------------------------
PhyCor, Inc.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Tennessee 0-19786 62-13344801
-------------- --------------- ----------------
(State or Other (Commission File (I.R.S. Employer
Jurisdiction of Number) Identification
Incorporation) Number)
30 Burton Hills Boulevard
Suite 400
Nashville, Tennessee 37215
-------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(615) 665-9066
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(Registrant's telephone number, including area code)
Not Applicable
-----------------------------------------------------------
(Former name or former address, if changed since last report)
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2
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements of Business Acquired and Potential
Acquisitions
The following financial statements of Straub Clinic & Hospital, Incorporated
("Straub") and the following summary pre-transaction information regarding
Straub, Guthrie Clinic, Ltd., Hattiesburg Clinic Professional Association and
Lewis-Gale Clinic, Inc. prepared pursuant to Item 7(a) of Form 8-K are attached
hereto on Pages F-2 through F-33 and are filed as a part of this report:
CONSOLIDATED FINANCIAL STATEMENTS OF STRAUB CLINIC & HOSPITAL,
INCORPORATED:
Report of Independent Accountants..................................................................... F-2
Consolidated Balance Sheets........................................................................... F-3
Consolidated Statements of Operations................................................................. F-4
Consolidated Statements of Changes in Stockholders' Deficiency........................................ F-5
Consolidated Statements of Cash Flow.................................................................. F-7
Notes to the Consolidated Financial Statements........................................................ F-9
UNAUDITED SUMMARY PRE-TRANSACTION FINANCIAL INFORMATION:
Introduction..........................................................................................F-24
Straub Clinic & Hospital, Incorporated................................................................F-25
Guthrie Clinic, Ltd...................................................................................F-28
Hattiesburg Clinic Professional Association...........................................................F-30
Lewis-Gale Clinic, Inc. and Subsidiaries..............................................................F-32
2
3
(b) Pro Forma Financial Information
The following pro forma financial information of PhyCor, Inc. prepared pursuant
to Item 7(b) of Form 8-K is attached hereto on Pages F-34 through F-38 and is
filed as a part of this report:
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION:
Basis of Presentation.................................................................................F-34
Balance Sheet - September 30, 1996....................................................................F-35
Statement of Operations - Nine Months Ended September 30, 1996........................................F-36
Statement of Operations - Year Ended December 31, 1995................................................F-37
Notes to Pro Forma Consolidated Financial Information.................................................F-38
(c) Exhibits
Exhibit
Number Description
23 Consent of Coopers & Lybrand L.L.P.
3
4
INDEX TO FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS OF STRAUB CLINIC & HOSPITAL,
INCORPORATED:
Report of Independent Accountants..................................................................... F-2
Consolidated Balance Sheets........................................................................... F-3
Consolidated Statements of Operations................................................................. F-4
Consolidated Statements of Changes in Stockholders' Deficiency........................................ F-5
Consolidated Statements of Cash Flow.................................................................. F-7
Notes to the Consolidated Financial Statements........................................................ F-9
UNAUDITED SUMMARY PRE-TRANSACTION FINANCIAL INFORMATION:
Introduction..........................................................................................F-24
Straub Clinic & Hospital, Incorporated................................................................F-25
Guthrie Clinic, Ltd...................................................................................F-28
Hattiesburg Clinic Professional Association...........................................................F-30
Lewis-Gale Clinic, Inc. and Subsidiaries..............................................................F-32
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION:
Basis of Presentation.................................................................................F-34
Balance Sheet - September 30, 1996....................................................................F-35
Statement of Operations - Nine Months Ended September 30, 1996........................................F-36
Statement of Operations - Year Ended December 31, 1995................................................F-37
Notes to Pro Forma Consolidated Financial Information.................................................F-38
F-1
5
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders
Straub Clinic & Hospital, Incorporated
We have audited the accompanying consolidated balance sheets of Straub
Clinic & Hospital, Incorporated and subsidiaries (the Company) as of December
31, 1995 and 1994, and the related consolidated statements of operations,
changes in stockholders' deficiency and cash flows for each of the three years
in the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Straub Clinic &
Hospital, Incorporated and subsidiaries as of December 31, 1995 and 1994, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1995 in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Honolulu, Hawaii
April 23, 1996
F-2
6
STRAUB CLINIC & HOSPITAL, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
------------------- -------------------
1996 1995 1995 1994
-------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Restricted cash..................................... $ 1,898 $ 2,122 $ 1,729 $ 898
Receivables from customers.......................... 27,720 32,795 30,646 41,036
Receivables from related parties.................... 2,891 2,334 2,806 1,200
Prepaid expenses and other.......................... 3,885 2,267 3,669 2,088
-------- -------- -------- --------
Total current assets........................ 36,394 39,518 38,850 45,222
Property And Equipment, Net........................... 31,751 29,968 31,790 30,574
Deferred Income Taxes................................. 10,218 4,247 9,496 4,247
Cash Surrender Value of Life Insurance................ 3,524 1,558 3,051 1,178
Receivables from Related Parties...................... 979 962 898 917
Other Assets.......................................... 5,351 3,695 4,796 4,228
-------- -------- -------- --------
$ 88,217 $ 79,948 $ 88,881 $ 86,366
======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses............... $ 13,544 $ 12,411 $ 15,871 $ 14,571
Notes payable....................................... 7,412 3,882 8,723 3,882
Accrued payroll and vacation........................ 8,793 7,952 9,086 7,984
Taxes, other than income............................ 2,457 2,290 2,517 3,061
Deferred income taxes............................... 1,641 -- 1,622 --
Current obligation under capital leases............. 717 -- 717 --
Income taxes payable................................ 1,737 -- 571 --
Other accrued liabilities........................... 1,620 1,863 1,621 1,838
-------- -------- -------- --------
Total current liabilities................... 37,921 28,398 40,728 31,336
-------- -------- -------- --------
Noncurrent Liabilities:
Notes payable, excluding current installments....... 25,661 38,686 28,231 43,068
Notes payable to stockholders....................... 1,824 1,879 1,852 1,962
Deferred compensation payable....................... 22,303 20,647 21,703 20,523
Obligation under capital leases, excluding current
installments..................................... 2,463 -- 2,797 --
Other noncurrent liabilities........................ 7,796 5,650 5,230 5,430
-------- -------- -------- --------
Total noncurrent liabilities................ 60,047 66,862 59,813 70,983
-------- -------- -------- --------
Commitments and Contingent Liabilities
Preferred Stock, Subject to Mandatory Redemption
Requirements:
Series C, Preferred shares....................... 10,199 10,199 10,199 11,338
-------- -------- -------- --------
Stockholders' Equity:
Preferred stock..................................... 155 155 155 155
Common stock........................................ 2,007 1,837 1,854 1,820
Retained earnings (deficit)......................... (12,071) (17,377) (13,827) (19,208)
Excess of redemption amount over basis of assets
acquired......................................... (9,981) (9,981) (9,981) (9,981)
Treasury stock...................................... (60) (145) (60) (77)
-------- -------- -------- --------
Total stockholders' deficiency.............. (19,950) (25,511) (21,859) (27,291)
-------- -------- -------- --------
$ 88,217 $ 79,948 $ 88,881 $ 86,366
======== ======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
7
STRAUB CLINIC & HOSPITAL, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS SIX MONTHS ENDED
ENDED JUNE 30, JUNE 30,
----------------- -------------------
1996 1995 1996 1995
------- ------- -------- --------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
INCOME:
Patient services, net................................. $42,614 $42,704 $ 85,067 $ 86,729
Capitation premiums earned............................ 7,954 7,077 15,694 14,003
Other operating revenues and other income............. 772 685 1,683 1,854
-------- -------- -------- --------
Total income.................................. 51,340 50,466 102,444 102,586
-------- -------- -------- --------
Costs And Expenses:
Salaries and wages.................................... 24,278 23,488 47,983 47,736
Drugs, medical and surgical supplies.................. 4,182 4,291 8,483 8,633
Taxes, other than income.............................. 3,381 3,524 7,421 7,678
Rent.................................................. 2,021 2,065 4,080 3,993
Bad debts............................................. 776 2,545 3,281 4,982
Interest.............................................. 1,502 1,685 2,959 3,392
Depreciation and amortization......................... 930 873 1,748 1,727
Provision for professional liability claims........... 1,045 1,154 2,012 2,466
Other................................................... 10,616 9,357 21,341 20,148
-------- -------- -------- --------
Total expenses................................ 48,731 48,982 99,308 100,755
-------- -------- -------- --------
Income before income taxes.............................. 2,609 1,484 3,136 1,831
PROVISION (CREDIT) FOR INCOME TAXES..................... 1,148 -- 1,380 --
-------- -------- -------- --------
NET INCOME.............................................. $ 1,461 $ 1,484 $ 1,756 $ 1,831
======== ======== ======== ========
YEARS ENDED DECEMBER 31,
------------------------------
1995 1994 1993
-------- -------- --------
INCOME:
Patient services, net........................................ $169,856 $170,989 $159,745
Capitation premiums earned................................... 28,574 24,061 16,657
Other operating revenues and other income.................... 2,965 8,960 2,447
-------- -------- --------
Total income......................................... 201,395 204,010 178,849
-------- -------- --------
Costs And Expenses:
Salaries and wages........................................... 95,801 96,031 85,513
Drugs, medical and surgical supplies......................... 17,418 17,098 15,090
Taxes, other than income..................................... 14,357 14,056 12,477
Rent......................................................... 10,057 10,763 10,580
Bad debts.................................................... 8,462 6,809 8,669
Interest..................................................... 6,522 5,745 5,113
Depreciation and amortization................................ 3,410 3,522 3,474
Provision for professional liability claims.................. 3,371 4,617 2,274
Other.......................................................... 39,395 41,320 32,720
-------- -------- --------
Total expenses....................................... 198,793 199,961 175,910
-------- -------- --------
Income before income taxes..................................... 2,602 4,049 2,939
PROVISION (CREDIT) FOR INCOME TAXES............................ (2,991) (4,278) (30)
-------- -------- --------
NET INCOME..................................................... $ 5,593 $ 8,327 $ 2,969
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
8
STRAUB CLINIC & HOSPITAL, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' DEFICIENCY
RETAINED
PREFERRED COMMON EARNINGS
STOCK STOCK (DEFICIT)
--------- ------- ---------
(IN THOUSANDS, EXCEPT SHARE
INFORMATION)
Equity (Deficit), December 31, 1992............................ $ 1,930 $1,752 $(30,260)
Net income for the year........................................ -- -- 2,969
9% Series B dividends.......................................... -- -- (8)
Retirement of 7% preferred stock............................... (1,775) -- --
Issuance of Series C preferred stock........................... -- -- --
Purchase of 153,072 shares treasury common stock............... -- -- --
Issuance of 136,064 shares treasury common stock............... -- -- --
Purchase of 125 shares treasury Series B preferred stock....... -- -- --
------- ------ --------
Equity (Deficit), December 31, 1993............................ 155 1,752 (27,299)
Net income..................................................... -- -- 8,327
9% Series B dividends.......................................... -- -- (8)
2% Series C dividends.......................................... -- -- (228)
Issuance of common stock....................................... -- 68 --
Purchase of 68,032 shares treasury common stock................ -- -- --
Issuance of 306,144 shares treasury common stock............... -- -- --
Purchase of 50 shares treasury Series B preferred stock........ -- -- --
------- ------ --------
Equity (Deficit), December 31, 1994............................ 155 1,820 (19,208)
Net income..................................................... -- -- 5,593
9% Series B dividends.......................................... -- -- (8)
2% Series C dividends.......................................... -- -- (204)
Issuance of common stock....................................... -- 34 --
Purchase of 119,056 shares treasury common stock............... -- -- --
Issuance of 136,064 shares treasury common stock............... -- -- --
------- ------ --------
Equity (Deficit), December 31, 1995............................ 155 1,854 (13,827)
Net income (Unaudited)......................................... -- -- 1,756
Issuance of stock (Unaudited).................................. -- 153 --
------- ------ --------
Balance, June 30, 1996 (Unaudited)............................. $ 155 $2,007 $(12,071)
======= ====== ========
F-5
9
STRAUB CLINIC & HOSPITAL, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' DEFICIENCY -- (CONTINUED)
EXCESS OF
REDEMPTION
AMOUNT
OVER BASIS
OF ASSETS TREASURY
ACQUIRED STOCK TOTAL
---------- -------- --------
(IN THOUSANDS, EXCEPT SHARE
INFORMATION)
Equity (Deficit), December 31, 1992........................... $ -- $ (281) $(26,859)
Net income for the year....................................... -- -- 2,969
9% Series B dividends......................................... -- -- (8)
Retirement of 7% preferred stock.............................. -- -- (1,775)
Issuance of Series C preferred stock.......................... (9,981) -- (9,981)
Purchase of 153,072 shares treasury common stock.............. -- (153) (153)
Issuance of 136,064 shares treasury common stock.............. -- 136 136
Purchase of 125 shares treasury Series B preferred stock...... -- (13) (13)
------- ----- --------
Equity (Deficit), December 31, 1993........................... (9,981) (311) (35,684)
Net income.................................................... -- -- 8,327
9% Series B dividends......................................... -- -- (8)
2% Series C dividends......................................... -- -- (228)
Issuance of common stock...................................... -- -- 68
Purchase of 68,032 treasury common stock...................... -- (68) (68)
Issuance of 306,144 shares treasury common stock.............. -- 307 307
Purchase of 50 shares treasury Series B preferred stock....... -- (5) (5)
------- ----- --------
Equity (Deficit), December 31, 1994........................... (9,981) (77) (27,291)
Net income.................................................... -- -- 5,593
9% Series B dividends......................................... -- -- (8)
2% Series C dividends......................................... -- -- (204)
Issuance of common stock...................................... -- -- 34
Purchase of 119,056 shares treasury common stock.............. -- (119) (119)
Issuance of 136,064 shares treasury common stock.............. -- 136 136
------- ----- --------
Equity (Deficit), December 31, 1995........................... (9,981) (60) (21,859)
Net income (Unaudited)........................................ -- -- 1,756
Issuance of stock (Unaudited)................................. -- -- 153
------- ----- --------
Balance, June 30, 1996 (Unaudited)............................ $ (9,981) $ (60) $(19,950)
======= ===== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
10
STRAUB CLINIC & HOSPITAL, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND EQUIVALENTS
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
------------------- ---------------------------------
1996 1995 1995 1994 1993
-------- -------- --------- --------- ---------
(UNAUDITED)
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from patients and
others.............................. $104,246 $109,693 $ 208,475 $ 200,037 $ 164,855
Cash paid to suppliers and employees... (94,402) (98,301) (185,845) (190,131) (156,566)
Interest paid.......................... (2,959) (3,392) (6,434) (5,843) (5,180)
Income tax (paid) received, net........ (917) -- (26) 22 --
-------- -------- --------- --------- ---------
Net cash provided by operating
activities................... 5,968 8,000 16,170 4,085 3,109
-------- -------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................... (1,709) (1,121) (3,025) (3,933) (552)
Proceeds from sale of equipment........ -- -- -- 446 139
Other investments...................... -- -- (232) 527 364
-------- -------- --------- --------- ---------
Net cash used in investing
activities................... (1,709) (1,121) (3,257) (2,960) (49)
-------- -------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term
debt................................ -- -- 747 32,369 2,655
Payments of long-term debt............. (1,160) (1,071) (4,796) (45,224) (5,753)
Payments on capital lease
obligations......................... (334) -- (35) -- --
Net borrowings (payments) on the
revolving line of credit
agreement........................... (2,748) (4,533) (7,911) 12,869 --
Issuance of treasury stock............. -- -- 136 306 136
Purchase of treasury stock............. -- (68) (119) (73) (104)
Increase in restricted cash............ (170) (1,224) (830) (898) --
Issuance of common stock............... 153 17 34 -- --
Other.................................. -- -- (139) (474) 6
-------- -------- --------- --------- ---------
Net cash used in financing
activities................... (4,259) (6,879) (12,913) (1,125) (3,060)
-------- -------- --------- --------- ---------
CASH INCREASE (DECREASE) IN CASH AND
EQUIVALENTS............................ -- -- -- -- --
CASH AND EQUIVALENTS AT BEGINNING OF
YEAR................................... -- -- -- -- --
-------- -------- --------- --------- ---------
CASH AND EQUIVALENTS AT END OF YEAR...... $ -- $ -- $ -- $ -- $ --
======== ======== ========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
11
STRAUB CLINIC & HOSPITAL, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
SIX MONTHS ENDED YEARS ENDED
JUNE 30, DECEMBER 31,
----------------- ---------------------------
1996 1995 1995 1994 1993
------- ------- ------- ------- -------
(UNAUDITED)
(IN THOUSANDS)
Net income....................................... $ 1,756 $ 1,831 $ 5,593 $ 8,327 $ 2,969
------- ------- ------- ------- -------
Adjustments to reconcile net income to net cash
provided by operating activities:
Pension curtailment gain....................... $ -- $ -- $ -- $(5,603) $ --
Depreciation and amortization.................. 1,748 1,727 3,410 3,522 3,474
Deferred pension and other compensation........ 599 107 (866) 2,218 2,304
Provision for losses from patient claims....... 450 233 (709) 411 (868)
Income taxes................................... 1,380 -- (2,991) (4,278) (30)
Other.......................................... 1,068 135 (91) (561) (1,089)
Decrease (increase) in --
Accounts receivable......................... 1,862 7,107 7,850 1,892 (3,990)
Prepaid expenses and other.................. (216) (179) 321 (730) 212
Increase (decrease) in --
Accounts payable and other accrued
expenses.................................. (2,326) (2,158) 3,094 (2,355) (898)
Accrued payroll and vacation................ (293) (32) 1,102 1,119 695
Taxes, other than income, payable........... (60) (771) (544) 123 330
------- ------- ------- ------- -------
Total adjustments...................... 4,212 6,169 10,576 (4,242) 140
------- ------- ------- ------- -------
Net cash provided by operating activities........ $ 5,968 $ 8,000 $16,169 $ 4,085 $ 3,109
======= ======= ======= ======= =======
Supplemental Schedule of Noncash Investing
Activities:
Obligations under capital lease for acquisition
of equipment and computer software.......... $ -- $ -- $ 3,549 $ -- $ --
======= ======= ======= ======= =======
The Straub Partnership Plan of Complete Liquidation and Dissolution was
executed in 1993. In conjunction with this Plan, the following assets and
liabilities of the Partnership were transferred to Straub Clinic & Hospital,
Incorporated at December 31, 1993:
Cash....................................................................... $ 16
Investment in Straub Clinic & Hospital, Incorporated....................... 1,775
Land....................................................................... 3,169
Other assets............................................................... 17
Notes payable.............................................................. (2,405)
Accrued interest payable to partners and former partners................... (178)
Deferred rental income..................................................... (384)
-------
$ 2,010
=======
The accompanying notes are an integral part of the consolidated financial
statements.
F-8
12
STRAUB CLINIC & HOSPITAL, INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
All amounts shown as of and for the periods ended June 30, 1996 and 1995
are unaudited.
1. ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany transactions
have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Significant estimates by management include the following:
- Allowance for doubtful accounts receivable and contractual adjustments.
- Estimated useful lives of property and equipment and computer software.
- Realizability of deferred tax assets.
- Liability for patient malpractice claims.
It is reasonably possible that the estimates by management may change in
the near term and that such changes would be significant to the financial
position and operations of the Company.
RESTRICTED CASH
The Company maintains restricted cash accounts as required under the
Company's revolving line of credit agreement and a certain equipment lease.
INVESTMENTS
Cash equivalents include investments in various money market funds and
other highly liquid debt instruments purchased with a maturity of three months
or less. Instruments with original maturities over three months are presented as
short-term investments. Such investments are carried at cost which approximates
market.
The Company participates in medical partnerships and accounts for its
investments at cost adjusted for its equity in the partnerships' income or
losses.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, with depreciation and
amortization computed principally on the straight-line method over the estimated
useful lives.
INCOME TAXES
Provisions for income taxes are based on revenues and expenses included in
the consolidated statements of operations for the period in which the provision
is made. Deferred tax liabilities and assets are determined based on the
differences between the financial statement carrying amounts and tax bases of
assets and liabilities using enacted tax rates in effect in the years in which
the differences are expected to reverse.
F-9
13
STRAUB CLINIC & HOSPITAL, INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Recurring temporary differences arise principally from reporting on an accrual
method for financial reporting purposes and on the cash basis for income tax
purposes; capitalization of certain interest costs for financial
reporting purposes and the expensing of such costs for tax purposes; and the use
of accelerated cost recovery rates for certain property and equipment for tax
purposes.
REVENUES FROM SERVICES
The Company provides both inpatient and outpatient hospital services and
clinic services in Hawaii. Revenues are recorded at established billing rates
net of contractual allowances which represent the differences between billing
rates and amounts receivable under Medicare, Medicaid, cost-based programs and
other contractual agreements.
Medicare and Medicaid provide for reimbursement of hospital patients
principally at a predetermined specific rate for each discharge based on the
patient's diagnosis. The Medicaid payment rate excludes certain capital and
medical education related costs which are reimbursed based on reasonable cost.
Revenue from services reimbursed under Medicare, Medicaid and other
contractual programs are recorded at the estimated reimbursable amounts. Final
determination of the amounts earned may be subject to review by the fiscal
intermediary or a peer review organization. Final determinations by the fiscal
intermediary have been made through the year ended December 31, 1992 (December
31, 1994 as of June 30, 1996) for Medicare and Medicaid programs. Subsequent
years' reviews have not been finalized by the fiscal intermediary. In the
opinion of management, adequate provision has been made for any adjustments that
may result from such reviews.
COMPUTER SOFTWARE
Capitalized computer software costs for software development, included in
deferred charges and other assets, are amortized using the straight-line method
over five to seven years. At December 31, 1995 and 1994, the amount capitalized
net of amortization was $2,144 and $1,831, respectively. At June 30, 1996 and
1995 these amounts were $1,938 and $1,456, respectively.
PENSION COSTS
The Company uses the projected unit credit actuarial method for determining
pension costs for financial reporting purposes.
The Company's funding policy is to contribute annually an amount not less
than the minimum required by the Employee Retirement Income Security Act of 1974
plus additional amounts which may be approved by the Company.
F-10
14
STRAUB CLINIC & HOSPITAL, INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. FAIR VALUE OF FINANCIAL INSTRUMENTS
NONCURRENT RECEIVABLES
Noncurrent receivables consist primarily of notes receivable from physician
stockholders. The carrying amount approximates fair value based on interest
rates currently extended to the physician stockholders for receivables with
similar maturities.
CASH SURRENDER VALUE OF LIFE INSURANCE
The carrying amount approximates fair value based on the amount that would
be paid upon surrender of the policy.
LONG-TERM DEBT
The carrying value of notes payable approximates fair value based on
interest rates currently available to the Company for loans with similar
maturities.
3. RECEIVABLES
Receivables consisted of the following:
JUNE 30, DECEMBER 31,
----------------- -----------------
1996 1995 1995 1994
------- ------- ------- -------
(UNAUDITED)
Current
Accounts, net of allowances for doubtful
accounts and contractual adjustments of
$54,200 and $44,822 at June 30, 1996 and
1995, $47,223 in December 31, 1995 and
$49,545 in December 31, 1994................. $27,720 $32,795 $30,604 $40,998
Other........................................... -- -- 42 38
------- ------- ------- -------
27,720 32,795 30,646 41,036
------- ------- ------- -------
Noncurrent
Other........................................... 322 200 306 346
------- ------- ------- -------
$28,042 $32,995 $30,952 $41,382
======= ======= ======= =======
Accounts receivable are due primarily from hospital and clinic patients
residing in the State of Hawaii and various health care insurance providers.
RECEIVABLES FROM RELATED PARTIES
Receivables from stockholders and employees bearing annual interest at 12%
and payable in monthly installments consisted of the following:
JUNE 30, DECEMBER 31,
--------------- ---------------
1996 1995 1995 1994
------ ------ ------ ------
(UNAUDITED)
Stockholders and employees -- current................. $ 151 $ 168 $ 108 $ 130
Stockholders and employees -- noncurrent.............. 979 962 898 917
------ ------ ------ ------
$1,130 $1,130 $1,006 $1,047
====== ====== ====== ======
F-11
15
STRAUB CLINIC & HOSPITAL, INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Amounts currently due from The Doctors Clinic for management fees,
unreimbursed expenses and cash advances consisted of the following:
JUNE 30, DECEMBER 31,
--------------- ---------------
1996 1995 1995 1994
------ ------ ------ ------
(UNAUDITED)
Receivable from The Doctors Clinic, net of estimated
allowance for uncollectible amounts of $1,312 as of
June 30, 1996 and $1,600 as of December 31, 1995.... $2,740 $2,166 $2,698 $1,070
====== ====== ====== ======
4. PROPERTY AND EQUIPMENT
At December 31, 1995 and 1994, property and equipment consisted of the
following:
JUNE 30, DECEMBER 31,
------------------- -------------------
1996 1995 1995 1994
-------- -------- -------- --------
(UNAUDITED)
Hospital and Clinic buildings and............. $ 32,732 $ 31,338 $ 32,524 $ 31,295
Parking garage and improvements............... 2,232 2,232 2,232 2,232
Furniture and equipment....................... 20,770 25,112 20,592 24,674
Leasehold improvements........................ 8,717 7,423 7,585 7,292
Equipment under capital leases................ 2,812 -- 2,812 --
-------- -------- -------- --------
67,263 66,105 65,745 65,493
Less accumulated depreciation and
amortization................................ (39,781) (40,542) (38,613) (38,816)
-------- -------- -------- --------
27,482 25,563 27,132 26,677
Construction in progress...................... 639 775 1,028 267
Land.......................................... 3,630 3,630 3,630 3,630
-------- -------- -------- --------
$ 31,751 $ 29,968 $ 31,790 $ 30,574
======== ======== ======== ========
5. NOTES PAYABLE
Notes payable consisted of the following:
JUNE 30, DECEMBER 31,
--------------------- ---------------------
1996 1995 1995 1994
------- ------- ------- -------
(UNAUDITED)
Bank loans
Note payable $368 monthly including interest
(10.5625% at December 31, 1995) maturing
January 1, 2004. The interest rate is
fixed through December 1997 and will be
adjusted in 1998 and 2001 at the bank's
then prevailing interest rate on similar
loans or at a floating rate of 1.5% over
the bank's prime rate. The Company must
maintain certain net income levels and
other stipulated covenants during the
term of the loan. Certain property and
equipment, and a general security
agreement for substantially all Company
assets are pledged as collateral......... $22,880 $24,731 $23,837 $25,600
------- ------- ------- -------
F-12
16
STRAUB CLINIC & HOSPITAL, INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, DECEMBER 31,
1996 1995 1995 1994
------- ------- ------- -------
(UNAUDITED)
Revolving line of credit agreement expiring in
January 1998. The maximum available under
this agreement is the lesser of $20,000 or a
percentage of the Company's patient accounts
receivable as defined in the agreement. At
December 31, 1995 the maximum available was
approximately $13,000. Interest rate at the
bank's prime rate plus 1.5% (10.25% at
December 31, 1995). The interest calculated
is added to the outstanding balance of the
credit agreement. The Company must maintain
certain net worth and working capital levels
and comply with certain stipulated covenants
throughout the term of the agreement. The
entire patient accounts receivable of the
Company is pledged as collateral. The
Company is required to maintain a restricted
cash deposit account which amounted to
$1,541 at December 31, 1995. All cash
receipts from patient accounts receivable
are required to be deposited into the
restricted cash deposit account. All
withdrawals from this account must be
authorized by the bank. The bank withdraws
all amounts in this account on a daily basis
to reduce outstanding borrowings of the
Company. At December 31, 1995, certain cash
receipts were not deposited into the
restricted cash deposit account. The Company
has informed the bank of this violation. The
bank has not taken any action against the
Company as a result of the violation........ 2,211 8,335 4,958 12,869
Loan payable with interest (9.75% at
December 31, 1995) at 1.25% over bank
prime rate. The loan is repayable in
monthly payments of principal and
interest of $57 through April 1997.
Certain office leases are pledged as
collateral............................... $ 494 $ 1,137 $ 800 $ 1,366
------- ------- ------- -------
Total bank loans.................... 25,585 34,203 29,595 39,835
------- ------- ------- -------
F-13
17
STRAUB CLINIC & HOSPITAL, INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, DECEMBER 31,
1996 1995 1995 1994
------- ------- ------- -------
(UNAUDITED)
Former stockholders and administrators
7% unsecured notes payable to former
stockholder; approximately $38 payable
monthly plus
interest................................. 2,607 3,088 2,832 2,609
10% unsecured promissory notes, payable to
present or former stockholders maturing
at various dates......................... 1,092 1,275 1,169 1,388
2% unsecured promissory notes, payable to
former stockholders maturing at various
dates.................................... 1,545 1,712 1,628 616
Other notes payable to former stockholders
including amounts due for land
appreciation............................. 688 819 776 882
------- ------- ------- -------
Total former stockholders and
administrators notes.............. 5,932 6,894 6,405 5,495
------- ------- ------- -------
Other
8% promissory note. The loan was repaid in
1995..................................... -- 472 -- 457
8.81% note payable with monthly payments of
principal and interest of $18,450 through
May 2000. Certain medical equipment is
pledged as collateral.................... 729 813 805 881
8.62% note payable with monthly payments of
principal and interest at $1,852 through
May 2000. Certain medical equipment is
pledged as collateral.................... 72 88 80 95
8.6% note payable with monthly payments of
principal and interest at $428 through
August 2000. Certain medical equipment is
pledged as collateral.................... 18 21 20 23
------- ------- ------- -------
Balance carried forward............. 819 1,394 905 1,456
------- ------- ------- -------
Other......................................... 737 77 49 164
------- ------- ------- -------
Total other................................... 1,556 1,471 954 1,620
------- ------- ------- -------
Total notes payable........................... 33,073 42,568 36,954 46,950
Less current portion.......................... 7,412 3,882 8,723 3,882
------- ------- ------- -------
Long-term portion............................. $25,661 $38,686 $28,231 $43,068
======= ======= ======= =======
The $23.8 million note payable and $5 million outstanding under the
revolving line of credit agreement require the Company to comply with certain
subjective covenants. These subjective covenants allow the lending banks to
accelerate repayment of debt if there is a "material adverse change" in the
Company's financial condition or operations. Management is not aware of any
events that would cause the lending banks to accelerate repayment of the debt.
In November 1995, the Emerging Issues Task Force (EITF) of the Financial
Accounting Standards Board concluded in Issue No. 95-22 that borrowings
outstanding under a revolving credit agreement that includes both a subjective
acceleration clause and a requirement to maintain a lock-box arrangement,
whereby remittances from the borrower's customers reduce the debt outstanding,
are considered short-term obligations. Based on the EITF's conclusion, the
amount outstanding on the revolving line of credit of $4,958 was included
F-14
18
STRAUB CLINIC & HOSPITAL, INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
in the current portion of notes payable as of December 31, 1995. Management is
not aware of any events that would cause the lending bank to demand repayment of
the debt outstanding before January 1998.
At December 31, 1995 annual maturities of notes payable subsequent to 1996
are as follows:
YEAR ENDING DECEMBER 31,
-------------------------------------------------------------------
1997............................................................... $ 3,536
1998............................................................... 3,564
1999............................................................... 3,826
2000............................................................... 3,871
Thereafter......................................................... 13,434
-------
$28,231
=======
NOTES PAYABLE TO STOCKHOLDERS
JUNE 30, DECEMBER 31,
--------------- ---------------
1996 1995 1995 1994
------ ------ ------ ------
(UNAUDITED)
Unsecured notes payable to stockholders and administrators
requiring monthly interest payments, at 2% over the bank
base rate but not more than 13% and not less than 9%, for
the first ten years and at 9.75% thereafter; principal
payable upon termination of employment or twenty-five years
from date of note, whichever occurs first................... $1,824 $1,879 $1,852 $1,962
====== ====== ====== ======
At December 31, 1995 annual maturities of notes payable to stockholders
subsequent to 1995 are as follows:
YEAR ENDING DECEMBER 31,
--------------------------------------------------------------------
1996................................................................ $ --
1997................................................................ --
1998................................................................ --
1999................................................................ --
2000................................................................ --
Thereafter.......................................................... 1,852
------
$1,852
======
F-15
19
STRAUB CLINIC & HOSPITAL, INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES
The provision for income taxes consisted of the following:
THREE MONTHS
ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30, YEARS ENDED DECEMBER 31,
----------------- ----------------- ---------------------------
1996 1995 1996 1995 1995 1994 1993
------- ------- ------- ------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
Current
Federal............... $ 1,278 $ 2,984 $ 2,102 $ 3,284 $ 5,931 $ 219 $ --
State................. 226 452 314 498 798 33 --
------- ------- ------- ------- ------- ------- -------
1,504 3,436 2,416 3,782 6,729 252 --
------- ------- ------- ------- ------- ------- -------
Benefit from operating
loss carryforward
Federal............... -- (2,984) (290) (3,284) (5,264) (219) --
State................. -- (452) (43) (498) (798) (33) --
------- ------- ------- ------- ------- ------- -------
-- (3,436) (333) (3,782) (6,062) (252) --
------- ------- ------- ------- ------- ------- -------
Hawaii capital goods
excise tax credit..... -- -- -- -- (31) (31) (30)
------- ------- ------- ------- ------- ------- -------
1,504 -- 2,083 -- 636 (31) (30)
------- ------- ------- ------- ------- ------- -------
Deferred
Federal............... (303) 517 (612) 669 149 2,128 887
State................. (53) 77 (91) 100 23 322 134
------- ------- ------- ------- ------- ------- -------
(356) 594 (703) 769 172 2,450 1,021
------- ------- ------- ------- ------- ------- -------
Change in valuation
allowance
Federal............... -- (517) -- (669) (3,299) (5,816) (887)
State................. -- (77) -- (100) (500) (881) (134)
------- ------- ------- ------- ------- ------- -------
-- (594) -- (769) (3,799) (6,697) (1,021)
------- ------- ------- ------- ------- ------- -------
$ 1,148 $ -- $ 1,380 $ -- $(2,991) $(4,278) $ (30)
======= ======= ======= ======= ======= ======= =======
F-16
20
STRAUB CLINIC & HOSPITAL, INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the net deferred tax asset were as follows:
JUNE 30, DECEMBER 31,
----------------- -----------------
1996 1995 1995 1994
------- ------- ------- -------
(UNAUDITED)
Deferred tax assets:
Deferred compensation........................... $ 8,345 $ 7,846 $ 8,376 $ 8,073
Liability for patient claims.................... 1,958 2,145 1,787 2,056
Obligation under capital leases................. 1,208 -- 1,335 --
Net operating loss carryforward................. -- 2,614 333 6,395
Alternative minimum tax credit carryforward..... 658 -- 658 --
------- ------- ------- -------
12,169 12,605 12,489 16,524
Deferred tax liabilities:
Book over tax current assets.................... (3,199) (4,543) (3,804) (7,703)
Tax over book depreciation...................... (393) (785) (811) (775)
------- ------- ------- -------
(3,592) (5,328) (4,615) (8,478)
------- ------- ------- -------
8,577 7,277 7,874 8,046
Valuation allowance............................... -- (3,030) -- (3,799)
------- ------- ------- -------
$ 8,577 $ 4,247 $ 7,874 $ 4,247
======= ======= ======= =======
A reconciliation of the Company's effective tax rate with the statutory
Federal income tax rate is as follows:
THREE MONTHS SIX MONTHS
ENDED ENDED YEARS ENDED DECEMBER
JUNE 30, JUNE 30, 31,
------------- ------------- ----------------------
1996 1995 1996 1995 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
Statutory Federal income tax rate........... 34% 34% 34% 34% 34% 34% 34%
Statutory Hawaii income tax rate, net of
Federal income tax benefit................ 4 4 4 4 4 4 4
Hawaii capital goods excise tax credit...... -- -- -- -- (1) (1) (1)
Nondeductible penalty....................... -- -- -- -- -- 15 --
Keyman life insurance proceeds.............. -- -- -- -- (7) -- --
Change in valuation allowance............... -- (40) -- (41) (146) (165) (35)
Other items, net............................ 6 2 6 3 1 7 (3)
-- --
--- --- ---- ---- ---
44% --% 44% --% (115)% (106)% (1)%
== === == === ==== ==== ===
The valuation allowance at December 31, 1995 and 1994, was reduced by
$3,799 and $6,697, respectively, as a result of a $172 and $2,450, respectively,
decrease in net deferred tax assets and management's re-evaluation of the
realizability of the net deferred tax assets. A partial valuation allowance of
$3,799 was provided for in 1994. Due to continued operating profits and expected
future operating profits, management believes that it is more likely than not
that the Company will realize all of the tax benefit associated with future
deductible temporary differences and net operating loss carryforwards prior to
their expiration, therefore, no valuation allowance was provided for as of June
30, 1996 and December 31, 1995. If the Company's estimates of future taxable
income are reduced, a valuation allowance will be required through a charge to
expense.
The alternative minimum tax credit carryforward can be carried forward
indefinitely and used to reduce future Federal income taxes.
F-17
21
STRAUB CLINIC & HOSPITAL, INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1995, the Company has unused tax operating loss
carryforwards amounting to $876,000 which expire in the following years:
2007.................................................................. $428
2010.................................................................. 448
----
$876
====
At June 30, 1996 and December 31, 1995, the Company's current income taxes
payable amounted to $1,737 and $571, respectively.
7. PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION REQUIREMENTS
The Company's Series C 2% cumulative nonvoting preferred stock has a par
value of $1 per share and is nonparticipating with preference in dissolution at
par value. The stock has a mandatory sale and redemption feature triggered by
one or more of the following events: (i) the holder dies; (ii) the holder
becomes insolvent, makes an assignment for the benefit of creditors, is declared
bankrupt, or has his/her assets administered in any type creditors' proceeding;
(iii) the holder's employment with the corporation is terminated; or (iv) the
holder loses his/her license to practice medicine in the State of Hawaii. Upon
any of the proceeding events, the holder or the holder's beneficiary is required
to sell and the Company is required to purchase all of the holder's stock. The
purchase price of stock under the mandatory redemption feature will be the par
value of the shares plus accumulated but unpaid dividends accrued through the
date of purchase. There were 15,000,000 shares authorized. At June 30, 1996,
December 31, 1995, 1994 and 1993, shares issued and outstanding amounted to
10,199,288, 10,199,288, 11,337,572 and 11,990,870, respectively.
Changes in Series C, 2% preferred stock for June 30, 1996 and December 31,
1995, 1994 and 1993 are as follows:
JUNE 30, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1993 1994
----------- ------------ ------------ ------------
(UNAUDITED)
Series C, 2%
Balance at beginning of period....... $10,199 $ 11,338 $ 11,991 $ --
Issuance of shares................... -- -- -- 11,991
Retirement of shares................. -- (1,139) (653) --
------- ------- ------- -------
Balance at end of period............... $10,199 $ 10,199 $ 11,338 $ 11,991
======= ======= ======= =======
8. STOCKHOLDERS' EQUITY
In 1993, the Company retired all 17,750 authorized, issued and outstanding
shares of 7% noncumulative, nonvoting and nonparticipating preferred stock at
the par value of $100 per share.
The Company's Series B 9% cumulative nonvoting preferred stock has a par
value of $100 per share, redeemable at the option of the Company at par value.
There were 2,500 shares authorized and 1,550 shares issued at June 30, 1996,
December 31, 1995, 1994 and 1993.
F-18
22
STRAUB CLINIC & HOSPITAL, INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Changes in Series B, 9% preferred stock for June 30, 1996 and December 31,
1995, 1994 and 1993 are as follows:
JUNE 30, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994 1993
----------- ------------ ------------ ------------
(UNAUDITED)
Series B, 9%
Balance at beginning of period....... $ 155 $155 $155 $155
Issuance of shares................... -- -- -- --
Retirement of shares................. -- -- -- --
---- ---- ---- ----
Balance at end of period............. $ 155 $155 $155 $155
==== ==== ==== ====
The Company's common stock has a par value of $1 per share. At June 30,
1996 there were 50,000,000 shares authorized. At December 31, 1995, 1994 and
1993, there were 2,000,000 shares authorized. At June 30, 1996, there were
2,006,944 shares issued. At December 31, 1995, 1994 and 1993, there were
1,853,872, 1,819,856 and 1,751,824 shares issued, respectively.
Treasury stock, recorded primarily at par value, consisted of 600 Series B
preferred shares at June 30, 1996, December 31, 1995 and 1994, and 550 Series B
preferred shares at December 31, 1993 and 17,008 and 255,120 common shares at
December 31, 1994 and December 31, 1993, respectively.
Changes in treasury stock Preferred Series B and common stock shares at
June 30, 1996 and December 31, 1995, 1994 and 1993 are as follows:
JUNE 30, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994 1993
----------- ------------ ------------ ------------
(UNAUDITED)
PREFERRED SERIES B
Balance at beginning of period....... $60 $ 60 $ 55 $ 42
Purchase of 125 shares............... -- -- -- 13
Purchase of 50 shares................ -- -- 5 --
--- ----- ----- -----
Balance at end of period............. 60 60 60 55
--- ----- ----- -----
COMMON STOCK
Balance at beginning of period....... -- 17 255 238
Purchase of 153,072 shares........... -- -- -- 153
Issuance of 136,064 shares........... -- -- -- (136)
Purchase of 68,032 shares............ -- -- 68 --
Issuance of 306,144 shares........... -- -- (306) --
Purchase of 119,056 shares........... -- 119 -- --
--- ----- ----- -----
Issuance of 136,064 shares........... -- (136) -- --
--- ----- ----- -----
Balance at end of period............. -- -- 17 255
--- ----- ----- -----
Total treasury stock......... $60 $ 60 $ 77 $ 310
=== ===== ===== =====
9. EMPLOYEE BENEFITS
PROFIT-SHARING AND 401(K) AND PENSION PLANS
The Company has noncontributory profit-sharing and 401(k) savings and
defined benefit pension plans covering substantially all of its employees. The
contribution to the profit-sharing and 401(k) savings plan is determined by the
Board of Directors. The pension benefits are based on years of service and
specified percentages of the employee's final average compensation.
F-19
23
STRAUB CLINIC & HOSPITAL, INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net pension expense (benefit) included in other costs and expenses for
1995, 1994 and 1993 were as follows:
1995 1994 1993
------- ------- -------
Service cost representing benefits earned during the
year.................................................... $ -- $ 1,484 $ 1,542
Interest cost on the projected benefit obligation......... 1,935 2,157 2,206
Return on plan assets..................................... (4,698) (2,204) (586)
Net amortization and deferral............................. 2,401 (88) (1,942)
------- ------- -------
Net pension expense (benefit)............................. $ (362) $ 1,349 $ 1,220
======= ======= =======
The funded status and accrued (prepaid) pension expense at December 31,
1995 and 1994 were as follows:
1995 1994
------- -------
Actuarial present value of projected benefit obligation based upon
employment service to date and current salary levels
Vested employees................................................. $28,026 $23,503
Nonvested employees.............................................. 835 839
------- -------
Accumulated benefit obligation..................................... 28,861 24,342
Additional amounts related to projected salary increases........... -- --
------- -------
Projected benefit obligation....................................... 28,861 24,342
Plan assets available for benefits consisting of listed marketable
equity securities, guaranteed and other investment contracts and
real estate (including land with fair value of $9,500 leased to
the Company)..................................................... 29,063 24,586
------- -------
Excess of projected benefit obligation over plan assets (assets
over projected benefit obligation) at year end................... (202) (244)
Unrecognized differences in actual plan assets and projected
benefit obligations from that assumed............................ (1,420) 214
Unrecognized net assets, amortized over 15 years................... 283 340
Excess benefit (unrecognized prior service cost) for plan
amendments, amortized over 13 years.............................. 795 827
------- -------
Accrued (prepaid) pension expense at December 31................. $ (544) $ 1,137
======= =======
The actuarial computation of projected benefit obligation at December 31,
1995 and 1994 was based upon a 7% and 8% discount rate, respectively. Upon
consideration of historical returns on plan assets and future expectations, the
assumed long-term rate of return on plan assets was 9% in 1995 and 1994. In
addition, there was no assumed salary increase over the remaining service lives
of employees in 1995 and 4% was assumed for 1994.
Effective December 31, 1994, the Board of Directors approved an amendment
to the pension plan which resulted in the freezing of benefits due to
participants at the December 31, 1994 levels. As a result, the Company
recognized a curtailment gain of $5,602 in 1994. The curtailment gain was
included in other operating revenues and other income in the Company's
consolidated financial statements.
The Company's profit sharing and 401(k) savings plan provides for employees
to voluntarily defer compensation until retirement, disability or termination.
The plan also provides for employer matching of employee contributions up to
levels specified in the agreement. Matching contributions amounted to $775, $882
and $612 in 1995, 1994 and 1993, respectively.
F-20
24
STRAUB CLINIC & HOSPITAL, INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DEFERRED COMPENSATION PLANS
The Company has several voluntary deferred compensation plans for doctors
and administrators. These plans enable participants to defer receipt of a
portion of their compensation until retirement or termination from the Company.
One of the plans provides for a pre-retirement or post-retirement survivor
benefit payable to a designated beneficiary.
In 1974, the Company adopted a stock plan for its doctors/stockholders
which provided for the repurchase of the Company's common stock upon termination
and payment of stock appreciation based on length of service. In 1991, the plan
was amended, effective January 1, 1991 to freeze participation in the plan and
to set the participants' benefits at the vested levels at December 31, 1990.
At December 31, 1995 and 1994, the deferred compensation liability of the
above plans amounted to $22,043 and $21,244, respectively.
10. LEASED ASSETS AND LEASE COMMITMENTS
At December 31, 1995, the Company was committed under long-term real
property and equipment leases expiring at various dates to 2010. On one of the
real property leases with the Company's Pension Plan the provisions of the lease
require renegotiated rentals beginning 1987 and every five years thereafter, but
in no event would the rentals be less than the rentals in the preceding period.
Certain leases for operating and medical equipment and computer software are
classified as capital leases.
Substantially all leases require that the Company pay taxes, maintenance,
insurance and certain other operating expenses applicable to the leased
property.
Following is a schedule of future rental commitments under capital leases,
together with the present value of the net rental commitment as of December 31,
1995:
1996................................................................ $1,051
1997................................................................ 1,051
1998................................................................ 749
1999................................................................ 725
2000................................................................ 667
------
4,243
Less amount representing interest................................... 729
------
Present value of lease payments..................................... 3,514
Less current obligation............................................. 717
------
$2,797
======
The total remaining minimum commitments under operating leases, including
$696 to the Pension Plan, as of December 31, 1995, based on present effective
rates are as follows:
YEAR REAL PROPERTY EQUIPMENT TOTAL
---------------------------------------------------- ------------- --------- -------
1996................................................ $ 3,795 $ 1,982 $ 5,777
1997................................................ 2,367 1,446 3,813
1998................................................ 2,310 1,200 3,510
1999................................................ 1,540 1,153 2,693
2000................................................ 752 26 778
Thereafter.......................................... 5,819 -- 5,819
------- ------- -------
$16,583 $ 5,807 $22,390
======= ======= =======
F-21
25
STRAUB CLINIC & HOSPITAL, INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For 1995, 1994 and 1993, rental expenses (including rent to the Pension
Plan of $696) for operating leases amounted to $10,057, $10,763 and $10,580,
respectively.
11. CONTINGENCIES AND COMMITMENTS
PROFESSIONAL LIABILITY CLAIMS AND OTHER LEGAL PROCEEDINGS
The Company is insured for professional liability risk on a claims-made
basis. At December 31, 1995, such coverage included $1,000 per claim and $3,000
in the annual aggregate with a self-insurance retention limit of $250 per claim
with no annual aggregate limit.
To provide for the Company's share of professional liability risks for
incurred and incurred but not reported claims, the Company has provided for
accrued patient claims amounting to $4,702 and $5,411 at December 31, 1995 and
1994, respectively, which are discounted using 7.5%. The undiscounted liability
was $5,905 and $6,803 as of December 31, 1995 and 1994, respectively. The
liability is estimated by management based upon the Company's historical loss
experience and recommendations from an outside actuary. While management
believes that liability is adequate, the ultimate liability may be in excess of
or less than the amounts provided. The methods for making such estimates and for
establishing the resulting liability are continually reviewed, and any
adjustments are reflected in earnings currently.
There are various other claims and lawsuits pending against the Company
involving complaints which arose in the normal course of the Company's
operations. In the opinion of management, the resolution of these claims will
not have a material adverse effect on the business, operating results, or
financial position of the Company.
OTHER COMMITMENTS
In connection with its participation in the State of Hawaii QUEST program,
the Company has a $1,000 standby letter of credit in favor of the State of
Hawaii, Department of Human Services. The maximum commitment from the bank for
the standby letter of credit is $1,200. There were no drawings under this letter
of credit at December 31, 1995 and 1994.
At December 31, 1995, the Company was also a guarantor on borrowings of
$213 of certain doctors and administrators.
OTHER
In 1995 an investigative agency of the Federal government initiated an
investigation of the Company's Medicare billings and receivables. The Company is
also conducting its own internal investigation of any wrongdoing in this matter.
The investigations are not yet complete and it is uncertain whether any
assertions for any wrongdoing will be made by the government. The Company has
engaged Arent Fox, a law firm in Washington D.C., and Strategic Management
Systems to assist in its internal investigation.
12. INVESTMENTS IN AFFILIATES
At December 31, 1995 and 1994, the Company had investments in the following
partnerships as general partner:
DIRECT
OWNERSHIP
-------------
1995 1994
---- ----
Kidney Stone Center.................................................... 33% 33%
The Doctors Clinic..................................................... 45 45
Combined Technologies.................................................. 34 50
F-22
26
STRAUB CLINIC & HOSPITAL, INCORPORATED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Condensed financial information based upon the latest available financial
statements (unaudited) relating to the Company's investments in affiliates is
presented below:
DECEMBER 31,
----------------
1995 1994
------- ------
(UNAUDITED)
Assets (principally accounts receivable, property, plant and
equipment)........................................................ $11,560 $4,988
Liabilities......................................................... 9,303 2,830
------- ------
Equity.............................................................. $ 2,257 $2,158
======= ======
Revenues............................................................ $13,754 $9,213
Costs and expenses.................................................. 13,165 8,711
------- ------
Net income.......................................................... $ 589 $ 502
======= ======
The Company's equity in net income of these affiliates is included in other
operating revenues and other income.
13. DISSOLUTION OF STRAUB PARTNERSHIP
On December 31, 1993, the Executive Committee of Straub Partnership
executed the plan of complete liquidation and dissolution of the Partnership
(the Plan). The Plan provided for the transfer of all the Partnership's assets
and liabilities to the Company. In exchange for this transfer, the Partners
collectively received 11,990,870 shares of $1 par Series C 2% nonvoting,
cumulative, nonparticipating preferred stock (Preferred Stock) of the Company.
The excess of the value of preferred stock issued over the historical cost of
the assets and liabilities assumed of $9,981 was charged to stockholders'
equity. A substantial portion of the assets transferred include land previously
leased by the Company. At December 31, 1992, the land was appraised at $25,000.
F-23
27
INTRODUCTION TO PRE-TRANSACTION FINANCIAL INFORMATION
The accompanying summary pre-transaction financial information is
presented to provide information regarding Straub Clinic & Hospital,
Incorporated ("Straub"), Guthrie Clinic, Ltd. ("Guthrie Clinic"), Hattiesburg
Clinic Professional Association ("Hattiesburg Clinic") and Lewis-Gale Clinic,
Inc. ("Lewis-Gale Clinic") financial activities prior to their affiliation with
PhyCor, Inc. The information was obtained from the acquired entities and has
not been audited or independently verified by the Company. The information is
presented on the accrual basis of accounting, except for that of Hattiesburg
Clinic which is presented on the modified cash basis of accounting. Many
disclosures required by generally accepted accounting principles are not
presented. Accordingly, the summary pre-transaction financial information
presented herein is not intended to present the financial position or results
of operations of the acquired entities in accordance with generally accepted
accounting principles or the published rules and regulations of the Securities
and Exchange Commission.
Pre-transaction financial information for certain physician groups has
not been presented as they are immaterial individually and in the aggregate.
F-24
28
STRAUB CLINIC & HOSPITAL, INCORPORATED
AND SUBSIDIARIES
SUMMARY PRE-TRANSACTION FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1996
(UNAUDITED)
(IN THOUSANDS)
ASSETS
Current assets:
Restricted cash $ 1,403
Receivables 32,208
Prepaid expenses and other 4,286
--------
Total current assets 37,897
Property and equipment, net 31,594
Other assets 19,229
--------
Total $ 88,720
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 13,002
Notes payable 9,694
Other accrued liabilities 15,654
--------
Total current liabilities 38,350
--------
Noncurrent liabilities:
Notes payable, excluding current installments 28,425
Deferred compensation payable 22,727
Other noncurrent liabilities 9,231
--------
Total noncurrent liabilities 60,383
--------
Preferred stock, subject to mandatory redemption requirements:
Series C, preferred shares 10,199
--------
Stockholders' equity:
Preferred stock 155
Common stock 2,024
Retained earnings (deficit) (12,350)
Excess of redemption amount over basis of assets
acquired (9,981)
Treasury stock (60)
--------
Total stockholders' deficiency (20,212)
--------
Total $ 88,720
========
See accompanying notes to summary pre-transaction financial information.
F-25
29
STRAUB CLINIC & HOSPITAL, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
(IN THOUSANDS)
Income:
Patient services, net $127,230
Capitation premiums earned 23,071
Other operating revenues and other income 2,652
--------
Total income 152,953
--------
Costs and Expenses:
Salaries and wages 72,688
Drugs, medical and surgical supplies 13,018
Taxes, other than income 11,027
Rent 7,332
Bad debts 5,182
Interest 4,352
Depreciation and amortization 2,613
Provision for professional liability claims 3,011
Other 31,090
--------
Total expenses 150,313
--------
Income before income taxes 2,640
Income tax expense 1,162
--------
Net income $ 1,478
========
See accompanying notes to summary pre-transaction financial information.
F-26
30
STRAUB CLINIC & HOSPITAL, INCORPORATED AND SUBSIDIARIES
NOTES TO SUMMARY PRE-TRANSACTION FINANCIAL INFORMATION
SEPTEMBER 30, 1996
(1) PURPOSE OF SUMMARY FINANCIAL INFORMATION AND DESCRIPTION OF TRANSACTION
Pre-transaction summary financial information is presented to provide
relevant available financial information of the medical practices affiliated or
expected to affiliate with PhyCor, Inc. for an appropriate period of time prior
to the execution of service and other agreements. The notes to the summary
pre-transaction financial information are not intended to and do not represent
adequate disclosures under generally accepted accounting principles.
Straub Clinic & Hospital, Incorporated and Subsidiaries ("Straub") is
a Hawaii professional corporation owned by physicians which practice in a
multi-specialty medical clinic and hospital based in Honolulu, Hawaii. As of
October 1, 1996, PhyCor entered into an interim administrative services
agreement with Straub. On January 17, 1997, PhyCor completed the merger with
Straub and entered into a long-term service agreement for medical support
services with Straub, Inc., a Hawaii professional corporation ("New Straub").
The shareholders of New Straub consist of the former shareholders of Straub.
(2) METHOD OF ACCOUNTING
The summary pre-transaction financial information has been prepared
using the accounts of Straub and its wholly-owned subsidiaries which are
maintained on the accrual basis of accounting.
(3) INCOME TAXES
Straub is subject to federal and state income taxes. Provisions for
income taxes are based on revenues and expenses included in the consolidated
statements of operations for the period in which the provision is made.
Deferred tax liabilities and assets are determined based on the differences
between the financial statement carrying amounts and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse. Recurring temporary differences arise
principally from reporting on an accrual method for financial reporting
purposes and on the cash basis for income tax purposes; capitalization of
certain interest costs for financial reporting purposes and the expensing of
such costs for tax purposes; and the use of accelerated cost recovery rates for
certain property and equipment for tax purposes.
F-27
31
GUTHRIE CLINIC, LTD.
SUMMARY PRE-TRANSACTION FINANCIAL INFORMATION
BALANCE SHEETS
JUNE 30, 1996 AND SEPTEMBER 30, 1996
(UNAUDITED)
(IN THOUSANDS)
ASSETS
June 30, September 30,
1996 1996
------- -------
Current assets:
Cash and cash equivalents $ 4,821 $ 4,108
Accounts receivable, net 17,406 16,398
Other current assets 1,740 3,593
------- -------
Total current assets 23,967 24,099
Property and equipment, net 30,881 31,295
Other assets, net 1,371 793
------- -------
Total $56,219 $56,187
======= =======
LIABILITIES AND NET DEFICIT
Current liabilities $26,322 $20,852
Long-term debt, excluding current installments 43,510 43,536
Other liabilities 800 7,619
------- -------
Total liabilities 70,632 72,007
Net deficit (14,413) (15,820)
------- -------
Total $56,219 $56,187
======= =======
See accompanying notes to summary pre-transaction financial information.
GUTHRIE CLINIC, LTD.
STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30, 1996 AND THREE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
(IN THOUSANDS)
June 30, September 30,
1996 1996
-------- -------
Net clinic revenue $ 94,726 $24,748
Less: physician compensation and benefits 44,568 11,110
-------- -------
Net clinic revenue in excess of physicians
compensation and benefits 50,158 13,638
Clinic operating expenses 52,054 13,976
Depreciation and amortization 2,234 572
Interest expense, net 2,551 657
-------- -------
Net earnings (loss) before income tax
expense (6,681) (1,567)
Income tax expense 4,619 3
-------- -------
Net loss $(11,300) $(1,570)
======== =======
See accompanying notes to summary pre-transaction financial information.
F-28
32
GUTHRIE CLINIC, LTD.
NOTES TO SUMMARY PRE-TRANSACTION FINANCIAL INFORMATION
JUNE 30, 1996 AND SEPTEMBER 30, 1996
(1) PURPOSE OF SUMMARY FINANCIAL INFORMATION AND DESCRIPTION OF TRANSACTION
Pre-transaction summary financial information is presented to provide
relevant available financial information of the physician groups affiliated or
expected to affiliate with PhyCor, Inc. for an appropriate period of time prior
to the execution of service and other agreements. The notes to the summary
pre-transaction financial information are not intended to and do not represent
adequate disclosures under generally accepted accounting principles.
The Guthrie Clinic, Ltd. ("Guthrie Clinic") is a tax-exempt
corporation in Sayre, Pennsylvania. Effective November 17, 1995, Guthrie Clinic
entered into a series of agreements whereby Guthrie Clinic will receive
management services from PhyCor, Inc. for up to five years. Guthrie Clinic
expects to complete a transaction with PhyCor, Inc. to sell certain operating
assets and enter into a long-term service agreement prior to the termination of
the management agreement.
(2) METHOD OF ACCOUNTING
The summary pre-transaction financial information has been prepared
using Guthrie Clinic's accounts which are maintained on the accrual basis of
accounting.
(3) INCOME TAXES
Income tax expense recorded for the year ended June 30, 1996
represents the balance of a settlement with the Internal Revenue Service
("IRS") for the tax years ending 1986, 1987 and 1988 relating to Guthrie
Clinic, Ltd., a predecessor company organized as a taxable entity. Guthrie
Clinic, along with Guthrie Healthcare System, a previously affiliated company,
is involved in an examination by the IRS for the year ended June 30, 1992.
Estimated costs to settle portions of the audit unrelated to its tax exempt
status are reflected in the accompanying summary pre-transaction financial
information.
F-29
33
HATTIESBURG CLINIC PROFESSIONAL ASSOCIATION
SUMMARY PRE-TRANSACTION FINANCIAL INFORMATION
BALANCE SHEETS
JUNE 30, 1996 AND SEPTEMBER 30, 1996
(UNAUDITED)
(IN THOUSANDS)
ASSETS
June 30, September 30,
1996 1996
---- ----
Current assets:
Cash $ 1,196 $ 1,167
Other current assets 1,419 1,413
--------- ---------
Total current assets 2,615 2,580
Property and equipment, net 1,200 1,399
Other assets, net 25 76
--------- ---------
Total $ 3,840 $ 4,055
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities $ 3,693 $ 2,234
Stockholders' equity 147 1,821
--------- ---------
Total $ 3,840 $ 4,055
========= =========
See accompanying notes to summary pre-transaction financial information.
HATTIESBURG CLINIC PROFESSIONAL ASSOCIATION
STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30, 1996 AND THREE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
(IN THOUSANDS)
June 30, September 30,
1996 1996
--------- ---------
Net clinic revenue $ 63,762 $ 17,945
Less: physician compensation and benefits 25,202 4,936
--------- ---------
Net clinic revenue in excess of physicians
compensation and benefits 38,560 13,009
Clinic operating expenses 38,195 9,960
Depreciation and amortization 332 100
Interest expense 33 4
--------- ---------
Net earnings $ -- $ 2,945
========= =========
See accompanying notes to summary pre-transaction financial information.
F-30
34
HATTIESBURG CLINIC PROFESSIONAL ASSOCIATION
NOTES TO SUMMARY PRE-TRANSACTION FINANCIAL INFORMATION
JUNE 30, 1996 AND SEPTEMBER 30, 1996
(1) PURPOSE OF SUMMARY FINANCIAL INFORMATION AND DESCRIPTION OF TRANSACTION
Pre-transaction summary financial information is presented to provide
relevant available financial information of the physician groups affiliated or
expected to affiliate with PhyCor, Inc. for an appropriate period of time prior
to the execution of service and other agreements. The notes to the summary
pre-transaction financial information are not intended to and do not represent
adequate disclosures under generally accepted accounting principles.
The Hattiesburg Clinic Professional Association ("Hattiesburg Clinic")
is a professional association which is owned by physicians which practice in a
multi-specialty medical clinic in Hattiesburg, Mississippi. Hattiesburg Clinic
has an affiliate, Professional Leasing Corporation ("PLC"), a partnership which
owns the property, plant, and equipment of Hattiesburg Clinic and leases such
to Hattiesburg Clinic. Effective October 1, 1996, Hattiesburg Clinic and PLC
completed a transaction with PhyCor, Inc. and a subsidiary to sell certain
operating assets and enter into a long-term service agreement for operations of
the clinic.
(2) METHOD OF ACCOUNTING
The summary pre-transaction financial information has been prepared
using Hattiesburg Clinic's accounts which are maintained on the modified cash
basis of accounting.
(3) INCOME TAXES
Hattiesburg Clinic is subject to Federal and state income taxes.
Income taxes are expensed when paid.
F-31
35
LEWIS-GALE CLINIC, INC. AND SUBSIDIARIES
SUMMARY PRE-TRANSACTION FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND SEPTEMBER 30, 1996
(UNAUDITED)
(IN THOUSANDS)
ASSETS
December 31, September 30,
1995 1996
--------- ---------
Current assets:
Cash $ 387 $ 1,523
Accounts receivable, net 13,342 15,886
Other current assets 1,788 704
--------- ---------
Total current assets 15,517 18,113
Property and equipment, net 1,842 1,868
Other assets, net 51 47
--------- ---------
Total $ 17,410 $ 20,028
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities $ 8,223 $ 2,737
Other liabilities 24 5,187
--------- ---------
Total liabilities 8,247 7,924
Shareholders' equity 9,163 12,104
--------- ---------
Total $ 17,410 $ 20,028
========= =========
See accompanying notes to summary pre-transaction financial information.
LEWIS-GALE CLINIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995 AND NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
(IN THOUSANDS)
December 31, September 30,
1995 1996
--------- ---------
Net clinic revenue $ 69,459 $ 51,135
Less: physician compensation and benefits 29,271 21,865
--------- ---------
Net clinic revenue in excess of physicians
compensation and benefits 40,188 29,270
Clinic operating expenses 39,348 27,215
Depreciation and amortization 736 478
Interest expense, net 52 24
--------- ---------
Net earnings before income taxes 52 1,553
Income tax expense 3 606
--------- ---------
Net earnings $ 49 $ 947
========= =========
See accompanying notes to summary pre-transaction financial information.
F-32
36
LEWIS-GALE CLINIC, INC. AND SUBSIDIARIES
NOTES TO SUMMARY PRE-TRANSACTION FINANCIAL INFORMATION
DECEMBER 31, 1995 AND SEPTEMBER 30, 1996
(UNAUDITED)
(1) PURPOSE OF SUMMARY FINANCIAL INFORMATION AND DESCRIPTION OF TRANSACTION
Pre-transaction summary financial information is presented to provide
relevant available financial information of the physician groups affiliated or
expected to affiliate with PhyCor, Inc. for an appropriate period of time prior
to the execution of service and other agreements. The notes to the summary
pre-transaction financial information are not intended to and do not represent
adequate disclosures under generally accepted accounting principles.
Lewis-Gale Clinic, Inc. ("Lewis-Gale") is a corporation which is owned
by physicians that practice in a multi-specialty medical clinic based in Salem,
Virginia. Effective November 1, 1996, Lewis-Gale completed a transaction with
PhyCor, Inc. and a subsidiary to sell certain operating assets and enter into a
long-term service agreement for operation of the clinic.
(2) CONSOLIDATION
The summary pre-transaction financial information includes the
accounts of Lewis-Gale and its wholly-owned subsidiaries, Braeburn Prescription
Pharmacy, Inc. and Lewis-Gale Clinic Child Care Center, Inc. Intercompany
transactions have been eliminated in consolidation.
(3) METHOD OF ACCOUNTING
The summary pre-transaction financial information has been prepared
using Lewis-Gale accounts which are maintained on the accrual basis of
accounting.
(4) INCOME TAXES
Income taxes are provided for the tax effects of transactions reported
in the financial statements and consist of taxes currently due plus deferred
taxes. Deferred taxes are provided for the temporary differences between the
financial reporting basis and the income tax basis of Lewis-Gale's assets and
liabilities. The principal temporary difference results form the Clinic's use
of the modified cash basis of accounting for income tax reporting purposes and
the accrual basis of accounting for financial reporting purposes.
F-33
37
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-34
38
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-35
39
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-36
40
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-37
41
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-38
42
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
PHYCOR, INC.
By: /s/ John K. Crawford
------------------------------
John K. Crawford
Vice President and Chief
Financial Officer
Date: February 25, 1997
43
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
23 Consent of Coopers & Lybrand L.L.P.