<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q/A
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to ___________________
Commission file Number: 001-12759
Physicians' Specialty Corp.
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(Exact Name of Registrant as Specified in its charter)
<TABLE>
<S> <C>
Delaware 58-2251438
- ------------------------------- --------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
</TABLE>
1150 Lake Hearn Drive, Suite 640 Atlanta, Georgia 30342
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(Address of principal executive offices)
404-256-7535
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(Registrant's telephone number, including area code)
N/A
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(Former name or former address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
There were 8,975,646 shares of the Registrants' common stock, par value $.001
per share, outstanding as of November 13, 1998.
<PAGE> 2
Part 1: Financial Information
Item 1: Financial Statements
PHYSICIANS' SPECIALTY CORP.
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,798,144 $ 5,351,639
Accounts receivable, net of allowance for doubtful
accounts of $683,733 and $261,714 in
1998 and 1997, respectively 15,277,166 9,273,565
Notes receivable 80,000 81,682
Prepayments and other 1,149,280 335,650
----------- -----------
Total current assets 21,304,590 15,042,536
PROPERTY AND EQUIPMENT, net 7,532,013 3,431,707
INTANGIBLE ASSETS, net 24,136,929 11,793,777
INVESTMENT IN UNCONSOLIDATED SUBSIDIARY 5,308,584 --
OTHER ASSETS 314,035 330,338
----------- -----------
Total Assets $58,596,151 $30,598,358
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Due to physicians $ 1,062,123 $ 1,177,009
Accounts payable and accrued expenses 2,904,723 3,057,880
Deferred income taxes 851,701 338,218
----------- -----------
Total current liabilities 4,818,547 4,573,107
SUBORDINATED SELLER NOTES 7,563,701 911,715
----------- -----------
Total liabilities 12,382,248 5,484,822
SHAREHOLDERS' EQUITY:
Common stock, $.001 par value; 50,000,000 shares authorized
issued: 8,975,646 in 1998 and 6,503,098 in 1997 8,975 6,503
Additional paid-in capital 41,062,216 23,401,657
Retained earnings 5,142,712 1,705,376
----------- -----------
Total shareholders' equity 46,213,903 25,113,536
----------- -----------
Total liabilities and shareholders' equity $58,596,151 $30,598,358
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
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PHYSICIANS' SPECIALTY CORP.
Consolidated Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES
Patient service revenues $ 410,793 $ 339,886 $ 984,317 $ 660,061
Capitation revenues 1,208,506 1,135,825 3,519,180 2,493,376
Management fees 9,185,413 3,462,249 22,344,815 6,287,909
Earnings in unconsolidated subsidiary 267,440 -- 267,440 --
---------- ----------- ---------- -----------
Net revenue 11,072,152 4,937,960 27,115,752 9,441,346
EXPENSES
Provider claims, wages, benefits 4,868,739 2,436,570 12,149,296 4,980,961
General and administrative 3,376,666 1,409,034 8,196,425 2,531,771
Depreciation and amortization 519,987 130,166 1,206,107 226,721
----------- ---------- ----------- -----------
Operating expenses 8,765,392 3,975,770 21,551,828 7,739,453
Operating income (loss) 2,306,760 962,190 5,563,924 1,701,893
Other income (expense) (83,773) 126,877 69,786 259,376
----------- ---------- ----------- -----------
Pretax income (loss) 2,222,987 1,089,067 5,633,710 1,961,269
Provision for income taxes 866,343 424,736 2,196,374 764,895
----------- ---------- ----------- -----------
Net income (loss) $ 1,356,644 664,331 $ 3,437,336 $ 1,196,374
=========== ========== =========== ===========
Earnings per share:
Basic earnings per share $ 0.15 $ 0.11 $ 0.45 $ 0.27
Diluted earnings per share $ 0.15 $ 0.11 $ 0.42 $ 0.27
Weighted average shares
Outstanding
Basic 8,866,514 6,211,618 7,699,863 4,389,746
Diluted 9,298,644 6,279,665 8,199,259 4,457,756
</TABLE>
See accompanying notes to consolidated financial statements
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PHYSICIAN'S SPECIALTY CORP.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------------
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,437,336 $ 1,196,374
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,206,107 226,721
Compensation expense 32,987 48,000
Increase in accounts receivable (2,262,251) (901,134)
(Increase) decrease in prepayments and other (796,903) 89,482
Increase (decrease) in accounts payable and accrued liabilities (605,272) (1,378,133)
------------ ------------
Total Adjustments (2,425,332) (1,915,064)
------------ ------------
Net cash (used in) provided by operating activities 1,012,004 (718,690)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment for acquisitions, net of cash acquired (16,721,158) (1,498,000)
Purchase of property and equipment (1,494,855) (284,824)
------------ ------------
Net cash used in investing activities (18,216,013) (1,782,824)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock, net of offering costs 16,577,826 15,408,094
Borrowing under short-term debt 72,685 170,000
Repayment of short-term debt 0 (2,258,562)
Repayment of long-term debt 0 0
Deferred offering costs 0 0
------------ ------------
Net cash provided by financing activities 16,650,511 13,319,532
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (553,498) 10,818,018
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,351,639 123,540
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,798,141 $ 10,941,558
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
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<PAGE> 5
Physicians' Specialty Corp.
Notes to the Consolidated Financial Statements (Unaudited)
September 30, 1998
NOTE 1. ORGANIZATION
Physicians' Specialty Corp. (the "Company") was organized in July 1996 to
provide comprehensive physician practice management services to physician
practices and health care providers specializing in the treatment and management
of diseases and disorders of the ear, nose, throat, head and neck ("ENT") and
related specialties. The Company commenced its business activities upon
consummation of the reorganization, as described in Note 3, and its initial
public offering ("IPO") on March 26, 1997. The Company provides financial and
administrative management, enhancement of clinical operations, network
development and payor contracting services, including the negotiation and
administration of capitated arrangements. The Company has operations in greater
Atlanta, Georgia; Chicago, Illinois; Birmingham, Alabama; the South Florida
area; Southern New York and Northern New Jersey and in metropolitan Cleveland,
Ohio.
NOTE 2. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly owned and unconsolidated subsidiaries and have been prepared in
accordance with generally accepted accounting principles for interim financial
reporting and in accordance with Rule 10-01 of Regulation S-X. Accordingly, they
do not include all of the information and notes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, the accompanying unaudited consolidated financial statements contain
all adjustments (consisting of normal recurring items) necessary for a fair
presentation of the results for the interim periods presented. These financial
statements and footnote disclosures should be read in conjunction with the
audited financial statements and the notes thereto included in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1997.
NOTE 3. REORGANIZATION
The Company acquired substantially all of the assets (other than certain
excluded assets such as employment agreements and patient charts, records and
files) and certain liabilities of (i) Atlanta Ear, Nose & Throat Associates,
P.C., (ii) ENT & Allergy Associates, Inc. (iii) Metropolitan Ear, Nose & Throat,
P.C., (iv) Atlanta Head and Neck Surgery, P.C. and (v) Ear, Nose & Throat
Associates, P.C. (collectively, the "Initial Practices"), and all of the
outstanding shares of common stock of three corporations holding managed care
contracts (the "ENT Networks") in March 1997 (the "Reorganization"). In
connection with the acquisition of assets of the Initial Practices and the
common stock of the ENT Networks, the Company issued an aggregate of 3,104,755
shares of its Common Stock (valued at the time of issuance at approximately
$24.8 million).
POST REORGANIZATION ACQUISITIONS THROUGH JUNE 30, 1998
Since the Reorganization, the Company acquired (a) substantially all of the
assets (other than certain excluded assets such as employment agreements and
patient charts, records and files) and assumed certain contractual liabilities
of (i) Allatoona Ear, Nose & Throat Associates, P.C, (ii) Ear Nose & Throat
Specialists, P.C., (iii) Ear, Nose & Throat Specialists, Head & Neck Surgery,
P.C., (iv) Northside Ear, Nose & Throat Associates, P.C., (v) Otolaryngology
Medical & Surgical Associates, Ltd., (vi) Cobb Ear, Nose & Throat Associates,
P.C., (vii) James J. Murata. M.D., P.A., (viii) John C. Westerkamm, M.D., P.A.,
(ix) Napoleon G. Bequer, M.D., P.A. and (b) the stock of six professional
associations owned by seven ENT physicians and a partnership owned and operated
by the professional associations in Palm Beach and Broward Counties, Florida.
In connection with the acquisition of assets or equity of these practices,
the Company (i) paid an aggregate of approximately $5.5 million in cash, (ii)
discharged approximately $260,000 of liabilities, (iii) issued an aggregate of
629,171 shares of Common Stock (valued at an aggregate of approximately $4.8
million), (iv) agreed to issue an aggregate of 319,735 additional shares of
Common Stock (valued at an aggregate of approximately $2.9 million) to four of
the affiliated practices beginning in September 1998, (v) issued subordinated
convertible promissory notes in the aggregate principal amount of approximately
$912,000, which notes mature in October 2000 and accrue interest at a rate of
5.61% per annum and are convertible into shares of Common Stock at a conversion
price of $10.00 per share (vi) issued a subordinated promissory note in the
principal amount of $250,000 which note matures in April 2000 and accrues
interest at a rate of 6% per annum, (vii) issued non-interest bearing contingent
subordinated promissory notes in the
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aggregate principal amount of approximately $3.0 million. The payment of these
notes is contingent upon the physicians or practice holding such notes reaching
certain performance targets. Substantially all of these contingent notes are
payable by the Company, at the Company's option, in shares of Common Stock,
valued at the average closing price of the Common Stock for the ten trading days
preceding the date of delivery of such shares. In connection with these
acquisitions, the Company paid an aggregate of approximately $492,000 to Premier
HealthCare, an affiliate of the Company's Vice Chairman and Secretary, for
advisory services rendered.
On May 27, 1998, pursuant to a Stock Purchase Agreement, the Company,
through PSC Acquisition Corp., a wholly-owned subsidiary of the Company,
acquired (i) substantially all of the tangible assets and assumed certain
contractual liabilities of Physicians' Domain, Inc., a White Plains, New York
based ENT physician practice management company ("Physicians' Domain") and (ii)
the stock of three corporations that are successors to three ENT physician
practices affiliated with Physicians' Domain employing an aggregate of 20
physicians and 16 allied health care professionals with 11 clinical offices in
Southern New York and Northern New Jersey (collectively, "PDI"). In connection
with the PDI transaction, the Company (i) paid approximately $5.4 million in
cash, (ii) discharged approximately $3.8 million of liabilities of PDI and (iii)
issued a subordinated long-term promissory note in the principal amount of
approximately $6.4 million , which note matures in May 2003, accrues interest at
a rate of 6.0% per annum, payable quarterly, is secured by the fixed assets
acquired by the Company in the transaction and is subordinate to senior
indebtedness, including borrowings under the Company's credit facility. In
addition, the Company will pay an additional $500,000, in cash or shares of
Common Stock at the Company's option, if the PDI practices achieve stipulated
performance targets. Pursuant to the stock purchase agreement. The physicians at
PDI have the right to nominate one member to the Board of Directors of the
Company, Steven H. Sacks, M.D., a nominee of the physicians at PDI, was
appointed to the Board of Directors of the Company on August 12, 1998. In
connection with the PDI transaction, the Company paid approximately $260,000 to
Premier HealthCare for advisory services rendered
The Company also entered into management services agreements with two
newly organized ENT practices employing the 20 ENT physicians in connection with
the PDI transaction. The management services agreements provide for an aggregate
fixed annual management fee of approximately $2.0 million, plus reimbursement of
practice operating expenses. Pursuant to the management services agreements, the
fixed management fee is subject to annual increases after May 27, 2003
consistent with the annual percentage increase in the consumer price index for
the prior year. The management services agreements also provide for mutually
agreed increases in the fixed management fee upon (i) the management by the
Company of ancillary business developed or acquired or (ii) the acquisition of
additional physician practices which are merged into the existing PDI practices.
The Company used a portion of the net proceeds received from the Company's
public offering in May 1998 to pay the cash component of and to discharge the
indebtedness of PDI assumed by the Company in connection with the PDI
transaction.
ACQUISITIONS FROM JULY 1, 1998 THROUGH SEPTEMBER 30, 1998
During the three month period ended September 30, 1998, the Company
acquired substantially all of the assets (other than certain excluded assets
such as employment agreements and patient charts, records and files), of (i)
Robert H. Maliner, M.D., P.A., ("Maliner"), and (ii) James R. Leonard, M.D.,
P.C. ("Leonard").
In addition, on August 31, 1998, PSC Ambulatory Surgery, Ltd., a Georgia
limited partnership (the "PSC Partnership"), of which the Company is the sole
general partner and Atlanta Ear, Nose & Throat Associates, P.C. ("Atlanta ENT"),
one of the Company's affiliated practices, is the sole limited partner, acquired
in the aggregate a 17.5% limited partnership interest in Atlanta Surgery Center,
Ltd., a Georgia limited partnership ("Atlanta Surgery Center"). The aggregate
purchase price was paid by the Company (the "Purchase Price"). Pursuant to the
terms of the transaction, the Company and Atlanta ENT own 99% and 1%,
respectively of the partnership interest in the PSC Partnership; provided that
Atlanta ENT has an option to purchase up to 40% of the partnership interest from
the Company for an amount equal to the percentage of the PSC Partnership
acquired by Atlanta ENT multiplied by the Purchase Price. Atlanta Surgery Center
operates three (multi-specialty ambulatory surgery centers, consisting of 14
operating rooms, in the metropolitan Atlanta area. As a result of the
transaction, effective July 1, 1998, the PSC Partnership will receive 17.5% of
the distributions made by Atlanta Surgery Center and the Company and Atlanta ENT
will receive their pro rata share of such distributions based on their ownership
interest in the PSC Partnership.
In connection with the Maliner, Leonard and the Atlanta Surgery Center
transactions completed by the Company during the three month period ended
September 30, 1998, the Company, (i) paid an aggregate of $5,455,000 in cash,
(ii) issued an aggregate of 34,552 shares of Common Stock of the Company, (iii)
agreed to issue an aggregate of 34,552 shares of Common Stock of the Company and
(iv) issued a $150,000 non-interest bearing contingent promissory note which is
payable, at the Company's option, in cash or the Company's Common Stock, upon
the holder achieving certain performance targets. In connection with these
transactions, the
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<PAGE> 7
Company paid approximately $219,500 in fees to Premier HealthCare, an affiliate
of the Company's Vice Chairman and Secretary, for advisory services rendered.
NOTE 4. PUBLIC OFFERINGS
On March 26, 1997, the Company completed its IPO of 2,200,000 shares of its
Common Stock. The net proceeds of the IPO were approximately $14,275,000 and a
portion of which were used for repayment of indebtedness of the acquired
practices, repayment of indebtedness of the Company, payment of a consulting
fee, and for general corporate purposes and working capital requirements.
On May 15, 1998, the Company completed a public offering of 2,050,263 shares
of its Common Stock (i) 2,000,000 of which shares were sold by the Company and
(ii) 50,263 of which were sold by certain stockholders of the Company. On May
19, 1998 the Company's underwriters exercised their option to purchase 307,540
additional shares of Common Stock from the Company to cover over-allotments. The
net proceeds to the Company from the offering and exercise of the over-allotment
shares were approximately $16,520,000, with approximately $5,400,000 and
$3,800,000 respectively, used to pay the cash portion of the purchase price of
the PDI transaction and to repay outstanding indebtedness of PDI.
On May 12, 1998 the Company also registered under the Securities Act of
1933, as amended (the "Act"), an aggregate of 3,146,514 shares of Common Stock,
of which (i) 2,750,000 shares may be issued from time to time by the Company in
connection with potential future affiliation transactions with ENT physicians or
related specialty practices or the merger with or acquisition by the Company of
other related businesses or assets, (ii) 220,000 shares of Common Stock are
issuable upon exercise of warrants issued to the representatives of the
underwriters in the IPO which may be sold from time to time by the holders of
the warrants after issuance and (iii) 176,514 shares of Common Stock are
issuable in December 1998 in connection with a practice asset acquisition
completed in December 1997, which may be sold from time to time by the physician
stockholders after issuance.
NOTE 5. MANAGEMENT FEE REVENUE
The Company records revenue on a management fee basis as derived from
physician practices managed by the Company. Management fees are composed of (i)
a varying percentage of affiliated practice patient service revenue (typically
12.5%), (ii) a fixed management fee in connection with the PDI affiliation of
approximately $2,045,000 per year, subject to certain increases, and (iii)
reimbursement of practice operating expenses (excluding compensation to
physicians and physician assistants). Management fee revenue earned by the
Company is detailed as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
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1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Percentage of affiliated practice patient service
revenue and fixed management fee $2,293,343 $ 955,953 $ 5,509,388 $1,685,626
Reimbursement of practice operating expenses 6,892,070 2,506,296 16,835,427 4,602,283
--------- --------- ---------- ---------
Total management fee revenue $9,185,413 $3,462,249 $22,344,815 $6,287,909
========== ========== =========== ==========
</TABLE>
There currently exists wide disparity in the methods of recording revenue in
the physician practice management (PPM) industry. The Company believes the
following unaudited supplemental information, which includes patient service
revenue of both owned as well as managed practices ("system wide" revenue)
allows a reader of the Company's financial statements to evaluate comparability
with other PPM companies recording patient services revenue on a consolidated
basis for financial reporting purposes. The unaudited supplemental "system wide"
information is being presented for supplemental purposes only and should be read
in conjunction with the Company's financial statements.
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Supplemental System Wide Information
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Supplemental Net Patient Service
Revenue:
Owned Practice $ 410,793 $ 339,886 $ 984,317 $ 660,061
Managed Practices 14,239,478 6,266,398 37,246,145 11,397,240
----------- ---------- ----------- -----------
Total Supplemental Patient
Service Revenue 14,650,271 6,606,284 38,230,462 12,057,301
Plus:
Capitation Revenue $ 1,208,506 $1,135,825 $ 3,519,180 $ 2,493,376
Management Fees 486,349 42,486 813,039 130,804
Earnings in unconsolidated subsidiary 267,440 0 267,440 0
----------- ---------- ----------- -----------
Total Supplemental
System wide Revenue $16,612,566 $7,784,595 $42,830,121 $14,681,481
Less:
Amounts Retained by
Physicians Groups 5,540,414 2,846,635 15,714,369 5,240,135
----------- ---------- ----------- -----------
Total Net Revenue $11,072,152 $4,937,960 $27,115,752 $ 9,441,346
=========== ========== =========== ===========
</TABLE>
NOTE 6. INTANGIBLE ASSETS
The Company's physician practice acquisitions involve the purchase of
tangible and intangible assets and the assumption of certain liabilities of the
acquired practices. As part of the purchase price allocation, the Company
allocates the purchase price to the tangible and identifiable intangible assets
acquired and liabilities assumed based on estimated fair market values. Costs of
acquisitions in excess of the net estimated fair value of tangible and
identifiable intangible assets acquired and liabilities assumed are amortized
using the straight line method over a period of 25 years. At September 30, 1998,
the amount of such intangible assets was approximately $24,907,000, with
accumulated amortization totaling approximately $770,000.
NOTE 7. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." SFAS No. 130 is designed to improve the reporting of
changes in equity from period to period. SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997. The adoption of SFAS No. 130 for fiscal
1998 was not material to the Company's financial statements.
In March 1998, the Emerging Issues Task Force of the FASB issued its
Consensus on Issue 97-2 ("EITF 97-2"). EITF 97-2 addresses certain specific
matters pertaining to the physician practice management industry. EITF 97-2
would be effective for the Company for its year ending December 31, 1998. EITF
97-2 addresses the ability of physician practice management companies to
consolidate the results of physician practices with which it has an existing
contractual relationship. The Company is in the process of analyzing the effect
of all its contractual relationships but currently believes that certain
contracts would meet the criteria of EITF 97-2 for consolidating the results of
operations of the related physician practices, which would require the Company
to restate its prior period financial statements to conform to such
consideration. The Company anticipates incorporating the provisions of EITF97-2
effective for its year ending December 31, 1998. EITF 97-2 also has addressed
the accounting method for future combinations with individual physician
practices. The Company believes that, based on the criteria set forth in EITF
97-2, virtually all of its future acquisitions of individual physician practices
will continue to be accounted for under the purchase method of accounting.
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NOTE 8. EARNINGS PER SHARE
The Company has calculated its basic and diluted earnings per share in
accordance with SFAS No. 128, "Earnings Per Share". Basic earnings per share are
calculated by dividing net income available to common stockholders by the
weighted average number of common shares outstanding for the periods presented.
Diluted earnings per share reflects the potential dilution that could occur if
securities and other contracts to issue common stock where exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity.
A reconciliation of the number of weighted average shares used in
calculating basic and diluted earnings per share is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average number of common
shares outstanding - basic 8,866,514 6,211,618 7,699,863 4,389,746
Effect of potentially dilutive shares outstanding 312,354 68,047 393,901 68,010
Effect of convertible debt 119,776 -- 105,495 --
--------- --------- --------- ---------
Weighted average number of common shares
Outstanding - diluted 9,298,644 6,279,665 8,199,259 4,457,756
========= ========= ========= =========
</TABLE>
NOTE 9. CREDIT AGREEMENT
On July 31, 1998, the Company closed on a four year $45 million amended and
restated senior credit facility syndicated by Nationsbanc Montgomery Securities
LLC. Syndicate lenders include NationsBank, N.A., PNC Bank and Rabobank
Nederland (the "Credit Facility"). The Credit Facility replaced the Company's
$20 million senior credit facility. Borrowings under the Credit Facility (i) are
secured by the assignment to the banks of the Company's stock in all of its
subsidiaries and the Company's accounts receivable, including the accounts
receivable assigned to the Company by affiliated practices pursuant to
management services agreements, (ii) are guaranteed by all subsidiaries
(including future subsidiaries) and (iii) restrict the Company from pledging its
assets to any other party. Advances under the Credit Facility will be used to
fund acquisitions and working capital, will be governed by a borrowing base
related primarily to the Company's earnings before interest, taxes, depreciation
and amortization ("EBITDA") and will bear interest, at the Company's option,
based upon either a prime-based or LIBOR-based rate. EBITDA is used by the
Company as an indicator of a company's ability to incur and service debt. EBITDA
should not be considered an alternative to operating income, net income, cash
flows or any other measure of performance as determined in accordance with
generally accepted accounting principles, as an indicator of operating
performance, or as a measure of liquidity. The Credit Facility contains
affirmative and negative covenants which, among other things, require the
company to maintain certain financial ratios (including maximum indebtedness to
pro forma EBITDA, maximum indebtedness to capital, minimum net worth, minimum
current ratio and minimum fixed charges coverage), limit the amounts of
additional indebtedness, dividends, advances to officers, shareholders and
physicians, acquisitions, investments and advances to subsidiaries, and restrict
changes in management and the Company's business. As of November 13, 1998, the
Company had approximately $3.7 million of borrowings under the Credit Facility.
NOTE 10. SUBSEQUENT EVENTS
On October 12, 1998, pursuant to an asset acquisition agreement, the Company
completed the acquisition of the assets of Cleveland Ear, Nose and Throat
Center, Inc. ("Cleveland ENT"), a ten physician ENT physician practice with
eight allied health care professionals and eight clinical offices in
metropolitan Cleveland, Ohio. Cleveland ENT had previously been affiliated with
MedPartners, Inc. ("MedPartners"). In connection with the transaction, the
Company entered into an amended and restated Clinic Services Agreement with
Cleveland ENT maintaining the percentage of net income management fee structure
which existed in the MedPartners/Cleveland ENT Clinic Services Agreement. The
Company is discussing modifying the percentage of net income arrangement
consistent with the Company's historical practices. In connection therewith, the
Company has granted Cleveland ENT a one time option, which expires on December
15, 1998, to unwind the transaction with the Company as of December 31, 1998 and
repurchase all Cleveland ENT non-medical assets acquired by the Company for a
total cash purchase price equal to the price paid by the Company to MedPartners
for such assets, plus amounts invested by the Company in Cleveland ENT.
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<PAGE> 10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHYSICIANS' SPECIALTY CORP.
DATE December 1, 1998 /s/ Robert A. DiProva
---------------- ----------------------------------------
Robert A. DiProva
Executive Vice President and
Chief Financial Officer
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