<PAGE> 1
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: May 27, 1998
PHYSICIANS' SPECIALTY CORP.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
DELAWARE
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(State of other jurisdiction of incorporation)
1-12759 58-2251438
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(Commission File Number) (IRS Employer Identification No.)
1150 Lake Hearn Drive, Suite 640, Atlanta, Georgia 30342
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(Address of principal executive offices) (Zip Code)
Registrant's telephone no. including area code: (404) 256-7535
--------------
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(Former Address, if changed since Last Report) (Zip Code)
<PAGE> 2
<TABLE>
<CAPTION>
Page
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<S> <C> <C> <C>
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) Financial Statements of the Businesses Acquired
General Information
EAR, NOSE & THROAT ASSOCIATES, P.C. (a medical practice whose shareholders own more
than 50% of the equity of Physicians' Domain, Inc.)
Report of Independent Public Accountants .................................................... F-2
Balance Sheets at December 31, 1997 and 1996 ................................................ F-3
Statements of Operations for the Two Years Ended December 31, 1997 .......................... F-4
Statements of Stockholders' Equity (Deficit) for the Two Years Ended December 31, 1997 ...... F-5
Statements of Cash Flows for the Two Years Ended December 31, 1997 .......................... F-6
Notes to Financial Statements ............................................................... F-7
Balance Sheet at March 31, 1998 (Unaudited) ................................................. F-16
Statement of Operations for the Three Months Ended March 31, 1998 (Unaudited) ............... F-17
(b) Pro Forma Financial Information
Unaudited Pro Forma Combined Financial Data ................................................. F-18
Unaudited Pro Forma Combined Statement of Operations for the Year Ended December 31, 1997.... F-19
Unaudited Pro Forma Combined Statement of Operations for the Three Months Ended March 31,
1998 ...................................................................................... F-20
Unaudited Pro Forma Combined Balance Sheet at March 31, 1998 ................................ F-21
Notes to Unaudited Pro Forma Combined Financial Data ........................................ F-22
(c) Exhibits
10.47 Management Services Agreement dated May 27, 1998 among the Registrant,
PSC Management Corp. and ENT Associates LLP.*
10.48 Management Services Agreement dated May 27, 1998 among the Registrant,
PSC Management Corp. and ENT Associates of New Jersey, P.C.*
10.49 Termination Letter terminating the Stock Purchase Agreement dated May 22,
1998 by and among the Registrant, PSC Acquisition Corp. and the other
parties named therein.*
10.50 Stock Purchase Agreement dated as of May 27, 1998 by and among the
Registrant, PSC Acquisition Corp. and the other parties named therein
(superseding the Stock Purchase Agreement dated as of May 1, 1998 by
and among the Registrant, PSC Acquisition Corp. and the other parties
named therein and filed as Exhibit 10.46 to the Registrant's Quarterly
Report on Form 10-Q for the three months ended March 31, 1998).*
10.51 Promissory Note in the Principal Amount of $6,401,986 issued by PSC
Acquisition Corp. and PSC Management Corp. and guarantied by the
Registrant to Kurzman & Eisenberg, LLP as agent for the parties named
therein.*
23.1 Consent of Arthur Andersen LLP
* Previously Filed.
</TABLE>
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<PAGE> 3
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.
PHYSICIANS' SPECIALTY CORP.
By: /s/ Robert A. DiProva
-----------------------------------
Robert A. DiProva
Executive Vice President and
Chief Financial Officer
Dated: August 3, 1998
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<PAGE> 4
GENERAL INFORMATION
Ear, Nose & Throat, Associates, P.C. represents more than 50% of the Physicians'
Domain, Inc. Acquisition. The financial statements and financial data of Ear,
Nose & Throat, Associates, P.C. are included in this filing as required under
the Exchange Act of 1934, as amended.
<PAGE> 5
EAR, NOSE & THROAT ASSOCIATES, P.C.
FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997 AND 1996
TOGETHER WITH
AUDITORS' REPORT
F-1
<PAGE> 6
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Ear, Nose & Throat
Associates, P.C.:
We have audited the accompanying balance sheets of EAR, NOSE & THROAT
ASSOCIATES, P.C. (a New York corporation) as of December 31, 1997 and 1996 and
the related statements of operations, stockholders' equity (deficit), and cash
flows for the years then ended. 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 financial position of Ear, Nose & Throat Associates,
P.C. as of December 31, 1997 and 1996 and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
April 13, 1998
F-2
<PAGE> 7
EAR, NOSE & THROAT ASSOCIATES, P.C.
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 116,371 $ 692
Accounts receivable, net of allowance for doubtful accounts of
$466,172 and $150,354 at December 31, 1997 and 1996,
respectively 2,431,055 1,809,818
Notes receivable for employee - 129,852
---------- ----------
Total current assets 2,547,426 1,940,362
EQUIPMENT, net 981,318 979,531
DUE FROM RELATED PARTIES 1,383,313 133,049
DEFERRED INCOME TAXES - 140,952
INTANGIBLE ASSETS, net 657,265 553,186
OTHER ASSETS, net 22,761 11,092
---------- ----------
Total assets $5,592,083 $3,758,172
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 298,816 $ 574,679
Due to related party 188,543 -
Accrued expenses 442,585 189,204
Accrued shareholder compensation 1,310,053 1,275,300
Current portion of long-term debt and capital lease obligations 2,855,801 678,333
---------- ----------
Total current liabilities 5,095,798 2,717,516
DEFERRED INCOME TAXES 6,538 -
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, LESS CURRENT PORTION 101,239 1,163,036
---------- ----------
Total liabilities 5,203,575 3,880,552
---------- ----------
COMMITMENTS AND CONTINGENCIES (NOTE 10)
STOCKHOLDERS' EQUITY:
Common stock, no par value; 200 shares authorized, 126 and 112
shares issued and outstanding at December 31, 1997 and 1996,
respectively - -
Additional paid-in capital 293,687 2,233
Retained earnings (deficit) 94,821 (124,613)
---------- ----------
Total stockholders' equity (deficit) 388,508 (122,380)
---------- ----------
Total liabilities and stockholders' equity $5,592,083 $3,758,172
========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE> 8
EAR, NOSE & THROAT ASSOCIATES, P.C.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
NET PATIENT SERVICE REVENUE $12,519,142 $7,758,807
----------- ----------
OPERATING EXPENSE:
Salaries, wages, and benefits 4,189,254 2,530,982
Compensation to stockholder-physicians 3,564,287 2,334,316
General and administrative expense 2,799,251 3,113,258
Physician practice management expense 944,415 -
Depreciation and amortization 405,777 326,433
----------- ----------
Total operating expenses 11,902,984 8,304,989
----------- ----------
INCOME (LOSS) FROM OPERATIONS 616,158 (546,182)
INTEREST EXPENSE (249,234) (122,076)
----------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 366,924 (668,258)
(PROVISION) BENEFIT FOR INCOME TAXES (147,490) 19,316
----------- ----------
NET INCOME (LOSS) $ 219,434 $ (648,942)
=========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 9
EAR, NOSE & THROAT ASSOCIATES, P.C.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
---------------- PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
-------- -------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 84 $ - $ 2,233 $ 524,329 $ 526,562
Stock dividend 28 - - - -
Net loss - - - (648,942) (648,942)
------ ------ -------- --------- ---------
BALANCE, DECEMBER 31, 1996 112 - 2,233 (124,613) (122,380)
Issuance of common stock--
practice acquisition 14 - 291,454 - 291,454
Net income - - - 219,434 219,434
------ ------ -------- --------- ---------
BALANCE, DECEMBER 31, 1997 126 $ 0 $293,687 $ 94,821 $388,508
====== ====== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 10
EAR, NOSE & THROAT ASSOCIATES, P.C.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 219,434 $ (648,942)
----------- -----------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Noncash expense 127,000 -
Depreciation and amortization 398,167 326,433
Provision (benefit) for deferred taxes 147,490 (19,316)
Changes in operating assets and liabilities, net of
effect from acquisitions:
Accounts receivable (457,207) 272,268
Prepayments and other 33,790 905
Due from related party
Accrued shareholder compensation 34,753 (47,796)
Accounts payable and accrued liabilities 149,061 477,649
----------- -----------
Total adjustments 433,054 1,010,143
----------- -----------
Net cash provided by operating activities 652,488 361,201
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan to related party, net (1,250,264) -
Repayment of employee and shareholder loans, net 2,852 193,937
Payment for acquisitions, net (185,000) (470,000)
Purchase of property and equipment, net (220,068) (629,134)
----------- -----------
Net cash used in investing activities (1,652,480) (905,197)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayments) borrowings from capital leases, net (379,159) 102,705
Repayments of note payable (1,814,215) (508,749)
Repayments of loans to physicians (135,955) (55,227)
Borrowings from physicians 60,000 298,102
Proceeds from issuance of note payable 3,385,000 706,668
----------- -----------
Net cash provided by financing activities 1,115,671 543,499
----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS 115,679 (497)
CASH AND CASH EQUIVALENTS BEGINNING OF YEAR 692 1,189
----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 116,371 $ 692
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE> 11
EAR, NOSE & THROAT ASSOCIATES, P.C.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
1. ORGANIZATION
Ear, Nose & Throat Associates, P.C. ("ENT") was incorporated on December
18, 1973 to provide treatment and management of diseases and disorders of
the ear, nose, throat, head, and neck. ENT has operations in Westchester
and Putnam Counties, New York.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 and disclosures in ENT's
financial statements and the accompanying notes. Actual results could
differ from those estimates.
CASH AND CASH EQUIVALENTS
ENT considers cash on deposit with financial institutions and all highly
liquid investments with original maturities of three months or less to be
cash and cash equivalents.
EQUIPMENT
Equipment is recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of depreciable assets
for financial statement reporting purposes. Maintenance and repairs are
charged to expense as incurred. The cost of renewals and betterments is
capitalized and depreciated over the applicable estimated useful lives.
The cost and accumulated depreciation of assets sold, retired, or
otherwise disposed of are removed from the accounts, and the related gain
or loss is credited or charged to income.
INTANGIBLE ASSETS
ENT'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, ENT 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
F-7
<PAGE> 12
and identifiable intangible assets acquired and liabilities assumed are
amortized using the straight-line method over a period of 25 years. At
December 31, 1997 and 1996, the amount of such intangible assets was
approximately $673,000 and $438,000 with related accumulated amortization
totaling $45,000 and $15,000, respectively.
Also included in intangible assets is a noncompete agreement ENT
entered into in conjunction with a buyout of a former shareholder. The
noncompete agreement stipulated that the former shareholder could not
engage in the practice of medicine specializing in the treatment and
management of diseases and disorders of the ear, nose, throat, head and
neck within a certain radius of his former office for a period of 48
months. At December 31, 1997 and 1996, the gross amount of this noncompete
agreement was $402,000 and the related accumulated amortization was
approximately $373,000 and $272,000, respectively.
NET PATIENT SERVICE REVENUE
Net patient service revenue is reported at estimated net realizable amounts
from patients, third-party payors, and others for services rendered.
Revenue under third-party payor agreements is subject to audit and
retroactive adjustment. Provisions for estimated third-party settlements
are provided in the period the related services are rendered. Differences
between estimated amounts accrued and final settlements are reported in the
year of settlement. ENT recognizes revenue as services are performed.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
ENT provides an allowance for doubtful accounts equal to the estimated
losses expected to be incurred in the collection of accounts receivable.
Bad debt expense during 1997 and 1996 was $315,818 and $16,695,
respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
ENT estimates that the carrying amounts of financial instruments, including
cash and cash equivalents, accounts receivable, and accounts payable,
approximated their fair values as of December 31, 1997 and 1996 due to the
relatively short maturity of these instruments. Notes payable and capital
leases approximated their fair value based on borrowings currently
available to ENT for similar terms and average maturities.
INCOME TAXES
ENT follows the practice of providing for income taxes based on Statement
of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes." SFAS No. 109 requires recognition of deferred tax liabilities and
assets for the expected future tax consequences of events that have been
included in the financial statements or tax returns.
INDUSTRY RISKS
The health care industry is subject to numerous laws and regulations at
all levels of government. These laws and regulations include, but are not
necessarily limited to, such matters as licensure, accreditation,
government health care program participation requirements, reimbursement
for patient services, and Medicare and Medicaid fraud and
F-8
<PAGE> 13
- 3 -
abuse. Recently, government activity has increased with respect to
investigations and allegations concerning possible violations of fraud and
abuse statutes and regulations by health care providers. Violations of
these laws could result in significant fines and penalties as well as
significant payments for services previously billed. ENT is subject to
similar regulatory reviews. A determination of liability under any such
laws could have a material effect on ENT's financial position, results of
operations, stockholders' equity, and cash flows.
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Cash paid during the year for interest $238,167 $122,076
Liabilities assumed in connection with
business acquired 17,000 56,666
</TABLE>
3. ACQUISITIONS
During 1997 and 1996, ENT acquired 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
four physician practices.
In connection with the acquisition of assets or equity of these practices,
ENT paid an aggregate of $655,000 in cash and issued 14 shares of common
stock (valued at the time of issuance at approximately $291,000). Upon
completion of these acquisitions, ENT entered into employment agreements
with the former owners for employment periods ranging from three to five
years. The acquisitions were accounted for under the purchase method of
accounting.
4. EQUIPMENT
Equipment at December 31, 1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
1997 1996 USEFUL LIVES
----------- ----------- -------------
<S> <C> <C> <C>
Medical equipment $ 1,643,756 $ 1,366,837 Seven years
Computer system and software 148,160 148,160 Three years
Furniture and fixtures 215,337 215,334 Seven years
Automobiles 47,952 47,952 Five years
Leasehold improvements 524,060 524,060 Three to five years
----------- -----------
Total cost 2,579,265 2,302,343
Less accumulated depreciation (1,597,947) (1,322,812)
----------- -----------
$ 981,318 $ 979,531
=========== ===========
</TABLE>
Depreciation expense was approximately $275,000 and $214,000 in 1997 and
1996, respectively.
F-9
<PAGE> 14
5. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
ENT's long-term debt and capital lease obligations as of December 31, 1997
and 1996 consist of the following:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Notes payable with interest payable monthly at rates varying from 6.5% to
9.65%; varying monthly principal payments; maturing on various dates from
December 31, 1997 through January 2002; secured by substantially all
assets and contract rights of the Company $ - $1,161,587
$92,000 note payable to a physician dated October 15,
1994; payable in monthly installments of $1,855,
including interest at 8%, through November 15, 1998 19,616 39,442
$150,000 note payable to a physician dated April 30, 1996; payable in
monthly installments of $2,083, including interest at 9.25%, through May
1, 2000 with a lump-sum payment of $50,000 due May 1, 2000 92,915 108,527
$181,111 note payable to a physician dated August 1, 1996;
payable in monthly installments of $8,109, including
interest at the rate of 7%, through August 1, 1998 63,200 152,654
$60,000 note payable to a physician dated June 1, 1997;
payable in monthly installments of $2,213, including
interest at 8%, through December 1, 1999 48,937 -
Capital lease obligations with interest rates ranging from 10.25% to
18.15%, payable monthly at various amounts;
maturing October 1998 through December 2002; secured by
leased assets - 379,159
$2,200,000 note payable to bank dated April 24, 1997;
payable in monthly installments of $45,935, including
interest at prime plus .75% (9.25% at December 31, 1997),
through May 2002 1,998,939 -
$400,000 note payable to bank dated October 30, 1997;
payable in monthly installments of $8,285, including
interest at prime plus .75% (9.25% at December 31, 1997)
through October 30, 2002 383,433 -
$350,000 note payable to bank dated April 24, 1997;
interest payable monthly at prime plus .75% (9.25% at
December 31, 1997), principal payment due annually on
outstanding balance 350,000 -
------------- ------------
Total 2,957,040 1,841,369
Less current maturities (2,855,801) (678,333)
------------- ------------
Long-term debt $ 101,239 $ 1,163,036
============= ============
</TABLE>
On April 24, 1997, ENT entered into a $2,950,000 term loan agreement (the
"Agreement") with Manufacturers and Traders Trust Company. The Agreement
consisted
F-10
<PAGE> 15
of a $2,200,000 term loan (the "Term Loan"), $350,000 revolving line of
credit (the "Revolver"), and a $400,000 grid term loan (the "Grid Loan").
ENT used the proceeds from the Term Loan to pay down its existing
bank notes payable and capital leases. The proceeds from the Grid Loan
were used to finance the purchase, installation, and implementation of the
new management software system and hardware for PDI (as defined), as
stipulated by the bank. The proceeds from the Revolver were used to fund
working capital.
Borrowings outstanding under the Agreement primarily incur interest at the
Bank's Prime Rate (8.5% at December 31, 1997) plus .75%. The Agreement is
presently secured by substantially all of ENT's assets, a gross receipts
security pledge, and personal guarantees of the stockholders, limited to
their proportional share of ENT.
The Agreement stipulates monthly interest and principal payments amortized
over 60 months on both the Grid Loan and the Term Loan. The Revolver
payments are monthly interest payments only, with an annual renewal period
required.
The Agreement contains certain restrictive covenants, including, among
other things, limitations on additional indebtedness, transfers of assets,
and mergers and acquisitions. In addition, ENT must maintain certain
financial covenants, including, among others, a minimum tangible net worth
and a debt service ratio. ENT was in default of one of its debt covenants
at December 31, 1997 and therefore, the Term Loan and Grid Loan have been
classified as current liabilities in the accompanying balance sheet.
The aggregate future maturities of long-term debt as of December 31, 1997
are as follows:
<TABLE>
<S> <C>
1998 $2,855,801
1999 44,215
2000 57,024
-----------
$2,957,040
===========
</TABLE>
6. INCOME TAXES
For all periods presented, the accompanying financial statements reflect
provisions for income taxes computed in accordance with the requirements
of SFAS No. 109.
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<PAGE> 16
The following summarizes the components of the income tax provision
(benefit):
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Current:
Federal $ - $ -
State - -
Deferred:
Federal 114,255 (16,071)
State 33,235 (3,245)
-------- --------
Total income tax provision (benefit) $147,490 $(19,316)
======== ========
</TABLE>
The provision (benefit) for income taxes differs from the amounts computed
by applying federal statutory rates due to the following:
<TABLE>
<CAPTION>
1997 1996
-------- ---------
<S> <C> <C>
Provision (benefit) computed at the federal
statutory rate $124,754 $(227,207)
State income taxes, net of federal income
tax benefit 21,134 (38,492)
Other
Permanent differences 16,021 39,136
(Decrease) increase in valuation allowance (14,419) 207,247
---------- ----------
Total income tax provision
(benefit) $147,490 $ (19,316)
========== ==========
</TABLE>
The tax effect of significant temporary differences representing deferred
tax assets and liabilities at December 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
Accrued liabilities $ 894,655 $ 814,450
Book over tax depreciation 83,211 58,767
Net operating loss carryforward 228,023 242,442
----------- -----------
Total deferred income tax
assets 1,205,889 1,115,659
----------- -----------
Deferred tax liabilities:
Accounts receivable 970,963 722,841
Tax over book amortization of goodwill 13,441 9,424
----------- -----------
Total deferred income tax
liabilities 984,404 732,265
----------- -----------
Valuation allowance (228,023) (242,442)
----------- -----------
Net deferred tax (liabilities) assets $ (6,538) $ 140,952
=========== ===========
</TABLE>
F-12
<PAGE> 17
ENT had income tax net operating loss carryforwards totaling approximately
$571,000 and $607,000 as of December 31, 1997 and 1996, respectively which
expire in 2010.
The increase in valuation allowance in 1996 is the result of the ENT's
valuation allowance for net operating loss carryforwards generated during
1996. The decrease in valuation allowance in 1997 is a result of the 1996
loss carryforwards utilized in 1997.
7. EMPLOYEE BENEFIT PLAN
401(k) PLAN
ENT initiated a 401(k) plan covering all of its eligible employees and
stockholders on May 1, 1997. Under the plan, employees generally may
contribute up to 15% of their pretax compensation. ENT makes a
discretionary contribution to each employee's account in an amount equal to
25% of the employee's contribution, up to 4% of the employee's
compensation. ENT contributed $19,845 to the plan during 1997.
PROFIT-SHARING PLAN
ENT also initiated a Profit-Sharing Plan ("Sharing Plan") covering all of
its eligible employees and stockholders. Under the Sharing Plan, ENT makes
a discretionary contribution to each employee's account based on a
percentage of the employee's compensation. This percentage can range from
1% to 15% of eligible compensation, with a 1997 percentage of 3.75%. ENT
contributed $222,154 to the Sharing Plan during 1997.
8. RELATED-PARTY TRANSACTIONS
During June 1995, an executive employee of ENT entered into an employee
agreement with the agreement stipulating an employee loan from ENT. The
original amount of the loan was for $50,000 with interest payable annually
at a rate of 6%. During 1996, ENT paid for certain expenses of the employee
and, accordingly, increased the loan balance outstanding. At December 31,
1996, the balance outstanding was approximately $127,000. During 1997, ENT
established a reserve of $127,000 against the outstanding balance which was
included as expense in the accompanying statement of operations.
In April 1997, ENT entered into a five-year management service agreement
(the "MSA") with Physicians' Domain Inc. ("PDI"). The stockholders of ENT
are more than 50% owners of PDI. The MSA stipulates that PDI will
provide financial and administrative management, enhancement of clinical
operations, network development, billing and collection, negotiation,
establishment, supervision, and maintenance of contracts and relationships
related to managed care contracts. In return, ENT pays a management fee
based on the number of full-time physicians and an additional annual amount
payable in monthly installments. ENT is also responsible for all the
operating and nonoperating expenses incurred by PDI on behalf of managing
ENT.
F-13
<PAGE> 18
During 1997, ENT incurred charges of approximately $955,000 related to the
MSA.
Upon completion of the debt financing during April 1997 (Note 5), ENT
allocated a portion of the repayments to PDI. This allocation is based on
cost incurred by ENT in assisting the start-up of PDI. This amount as well
as other start-up related charges not included in debt financing allocation
are included on the accompanying balance sheet.
9. STOCK DIVIDEND
ENT declared a stock dividend to all stockholders of record on June 1,
1996. The stock dividend was a dividend of 4 shares for every 12 shares
owned by the stockholders.
10. COMMITMENTS AND CONTINGENCIES
LITIGATION
ENT and its affiliated physician groups are insured with respect to medical
malpractice risks on a claims-made basis. In the opinion of management, the
amount of potential liability with respect to these claims will not
materially affect ENT's financial position or results of operations.
EMPLOYMENT AGREEMENTS
ENT has entered into employment agreements with the shareholders of ENT and
certain nonshareholder physicians. The agreements, which are substantially
similar, provide for compensation to the shareholders in the form of a
monthly salary based on respective collections. The employment agreements
also contain restrictive covenants relating to the treatment and management
of diseases and disorders of the ear, nose, throat, head and neck within 24
months after the employment agreements expire. The employment agreements
with the nonshareholder physicians are similar to the shareholder
agreements, except for the monthly salary which is based on annual
compensation, as defined. The physician employment agreements range from
three to five years.
OPERATING LEASES
ENT leases certain medical office facilities under noncancelable operating
lease agreements which expire in various years through 2006. Rental
expenses under these leases amounted to approximately $618,000 and $486,000
in 1997 and 1996, respectively.
Future minimum rental commitments under all noncancelable operating lease
agreements, excluding lease agreements that expire within one year, are as
follows as of December 31, 1997:
F-14
<PAGE> 19
<TABLE>
<S> <C>
1998 $ 665,799
1999 566,052
2000 528,160
2001 435,932
2002 179,544
Thereafter 253,070
-----------
Total $ 2,628,557
===========
</TABLE>
11. SUBSEQUENT EVENT
On March 30, 1998, ENT signed a definitive letter of intent with
Physicians' Specialty Corp. ("PSC"), a physicians' practice management
company. PSC has agreed to acquire substantially all of the tangible assets
of ENT and PDI. Upon final acquisition, a successor practice to ENT will
enter into a management agreement with PSC whereby PSC would manage the
practice for a fixed annual fee, as defined.
F-15
<PAGE> 20
EAR, NOSE & THROAT ASSOCIATES, P.C.
BALANCE SHEET
MARCH 31, 1998
(UNAUDITED)
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 137,249
Accounts receivable, net of allowance for doubtful
accounts of $801,704 at March 31, 1998 2,775,450
-----------
Total current assets 2,912,699
EQUIPMENT, net 915,226
DUE FROM RELATED PARTY, net 1,387,186
INTANGIBLE ASSETS, net 657,265
OTHER ASSETS, net 22,761
-----------
Total assets $ 5,895,137
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 239,957
Accrued expenses 461,021
Accrued shareholder compensation 1,310,053
Current portion of long-term debt and capital lease
obligations 2,834,520
----------
Total current liabilities 4,845,551
DEFERRED INCOME TAXES 6,538
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, LESS
CURRENT PORTION 0
----------
Total liabilities 4,852,089
----------
STOCKHOLDERS' EQUITY:
Common stock, no par value; 200 shares authorized, 126
shares issued and outstanding at March 31, 1998 -
Additional paid-in capital 293,687
Retained earnings 749,361
----------
Total stockholders' equity 1,043,048
----------
Total liabilities and stockholders' equity $5,895,137
==========
</TABLE>
F-16
<PAGE> 21
EAR, NOSE & THROAT ASSOCIATES, P.C.
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
<TABLE>
<S> <C>
NET PATIENT SERVICE REVENUE $3,398,524
----------
OPERATING EXPENSE:
Salaries, wages, and benefits 1,033,588
Compensation to stockholder-physicians 543,818
General and administrative expense 656,906
Physician practice management expense 385,999
Depreciation and amortization 66,090
----------
Total operating expenses 2,686,401
INCOME (LOSS) FROM OPERATIONS 712,123
INTEREST EXPENSE 57,582
----------
INCOME BEFORE INCOME TAXES 654,541
PROVISION FOR INCOME TAXES 0
----------
NET INCOME $ 654,541
==========
</TABLE>
F-17
<PAGE> 22
PHYSICIANS' SPECIALTY CORP.
UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The unaudited pro forma combined statements of operations give effect to the
acquisition of the tangible assets of Physicians' Domain, Inc. ("PDI") and the
acquisition of assets of three affiliated practices of PDI, Ear, Nose & Throat
Associates, P.C., Robert P. Green, M.D. & Steven H. Sacks, M.D., P.C. and
Chestnut ENT Associates, P.A. (collectively with PDI, the "Physicians' Domain
Group") and the management services agreements between the Company and the
physician practices as if such transactions had occurred on January 1, 1997 and
the unaudited pro forma combined balance sheet gives effect as if such
transactions had occurred on March 31, 1998.
The unaudited pro forma combined financial statements are presented for
illustrative purposes only and are not necessarily indicative of the operating
results or financial position that would have been achieved if the
above-mentioned transactions had been consummated at the beginning of the period
presented, nor are they necessarily indicative of the future operating results
of the Company. The unaudited pro forma combined financial statements do not
give effect to any cost savings or integration which may have resulted or may
result from these transactions.
F-18
<PAGE> 23
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
------------------------------------------------------------------------------------------
ADJUSTMENTS (1)
---------------------------------------
INITIAL
PHYSICIANS' PRACTICES PHYSICIANS'
SPECIALTY & THE ENT ADDITIONAL DOMAIN PRO FORMA PRO FORMA
CORP. NETWORKS PRACTICES GROUP ADJUSTMENTS COMBINED
----------- ----------- ---------- ----------- ------------ -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Management fees $ 10,974 $ 0 $ 0 $ 0 $ 25,483 (2) $ 36,457
Capitation revenue 3,619 1,257 0 0 4,876
Net patient service revenue 967 4,862 14,169 16,707 (35,442)(3) 1,263
----------- ------- -------- ------- -------- -----------
Net revenue 15,560 6,119 14,169 16,707 (9,959) 42,596
Expenses
Provider claims, wages
benefits 7,819 4,848 9,926 8,677 (13,692)(4) 17,578
General and administrative 4,371 1,166 3,795 5,900 15,232
Depreciation and
amortization 377 98 190 430 803 (5) 1,898
----------- ------- -------- ------- -------- -----------
Operating expenses 12,567 6,112 13,911 15,007 (12,889) 34,708
Operating income (loss) 2,993 7 258 1,700 2,930 7,888
Other (income) expense, net (429) 7 (17) 249 431 (6) 241
----------- ------- -------- ------- -------- -----------
Pretax income (loss) 3,422 0 275 1,451 2,499 7,647
Provision (benefit) for income
taxes 1,362 (40) 121 176 1,364 (7) 2,983
----------- ------- -------- ------- -------- -----------
Net income (loss) $ 2,060 $ 40 $ 154 $ 1,275 $ 1,135 $ 4,664
=========== ======= ======== ======= ======== ===========
Weighted average shares
outstanding (diluted) 4,966,778 6,909,325(8)
=========== ===========
Diluted earnings per share $ 0.42 $ 0.68
=========== ===========
</TABLE>
See notes to unaudited pro forma combined financial data.
F-19
<PAGE> 24
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998
---------------------------------------------------------------------------------------------
ADJUSTMENTS (1)
----------------------------
PHYSICIANS' PHYSICIANS'
SPECIALTY DOMAIN UNAUDITED PRO FORMA PRO FORMA
CORP. MURATA GROUP COMBINED ADJUSTMENTS COMBINED
----------- ----------- ----------- ---------- ----------- ----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Management fees $ 5,924 $ 0 $ 0 $ 5,924 $ 2,895 (2) $ 8,819
Capitation revenue 1,165 0 0 1,165 1,165
Net patient service revenue 309 78 4,446 4,833 (4,524)(3) 309
----------- ----- ------ -------- ------- ----------
Net revenue 7,398 78 4,446 11,922 (1,629) 10,293
Expenses
Provider claims, wages
benefits 3,319 52 1,808 5,179 (1,228)(4) 3,951
General and administrative 2,257 29 1,640 3,926 3,926
Depreciation and
admortization 283 1 72 356 105 (5) 461
----------- ----- ------ -------- ------- ----------
Operating expenses 5,859 82 3,520 9,461 (1,123) 8,338
Operating income (loss) 1,539 (4) 926 2,461 (506) 1,955
Other (income) expense, net (29) 0 0 (29) 96 (6) 67
----------- ----- ------ -------- ------- ----------
Pretax income (loss) 1,568 (4) 926 2,490 (602) 1,888
Provision (benefit) for income
taxes 611 0 7 618 118 (7) 736
----------- ----- ------ -------- ------- ----------
Net income (loss) $ 957 $ (4) $ 919 $ 1,872 $ (720) $ 1,152
=========== ===== ====== ======== ======= ==========
Weighted average shares
outstanding (diluted) 7,033,786 7,033,786(8)
=========== ==========
Diluted earnings per share $ 0.14 $ 0.16
=========== ==========
</TABLE>
F-20
<PAGE> 25
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------------------------------------------------------------------------
PHYSICIANS' PHYSICIANS' (10)
SPECIALTY DOMAIN ACQUISITION OFFERING PRO FORMA
CORP GROUP ADJUSTMENTS ADJUSTMENTS (9) AS ADJUSTED (9)
----------- ---------- ------------- ---------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 4,739 $ 0 ($ 9,213) $16,950 $12,476
Accounts receivable, net 11,135 3,805 0 14,940
Other current assets 437 0 0 437
------- ------ -------- ------- -------
Current assets 16,311 3,805 (9,213) 16,950 27,853
Property and equipment, net 3,851 2,619 6,470
Intangible assets, net 12,023 0 9,958 21,981
Other assets 440 0 0 440
------- ------ -------- ------- -------
Total assets $32,625 $6,424 $ 745 $16,950 $56,744
======= ====== ======== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable $ 0 $ 0 $ 0 $ 0
Accounts payable and
accrued expenses 4,916 0 550 5,466
Deferred taxes 367 217 584
------- ------ -------- ------- -------
Current liabilities 5,283 217 550 6,050
Subordinated seller notes 912 0 6,402 7,314
Stockholders' equity 26,430 6,207 (6,207) $16,950 43,380
------- ------ -------- ------- -------
Total liabilities and
stockholders' equity $32,625 $6,424 $ 745 $16,950 $56,744
======= ====== ======== ======= =======
</TABLE>
See notes to unaudited pro forma combined financial data.
F-21
<PAGE> 26
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The following is a summary of the adjustments reflected in the
Unaudited Pro Forma Combined Financial Statements assuming the acquisition of
assets or equity of the Company's affiliated practices and the consummation of
the acquisition of the Physicians' Domain Group had occurred on January 1, 1997
with respect to the unaudited pro forma combined statements of operations and as
of March 31, 1998 with respect to the unaudited pro forma combined balance
sheet.
(1) Reflects operations of acquired practices from January 1, 1997
through their respective date of acquisition by the Company.
(2) Management fees have been calculated based upon the management
services agreements. For providing services pursuant to the management services
agreements, the Company retains a fixed amount or varying percentage of all
revenue generated by or on behalf of physicians practicing at the practice
(after adjusting for, among other things, uncollectible accounts and contractual
allowances). The Company is responsible for the payment of operating expenses of
the affiliated practices, including salaries and benefits of non-medical
employees of the practice, lease obligations for office space and equipment and
medical and office supplies and the non-operating expenses of the affiliated
physician practice, including depreciation, amortization and interest.
Management fee adjustments under the management services agreements are
calculated as follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1997 MARCH 31, 1998
----------------- --------------
(IN THOUSANDS)
<S> <C> <C>
ATLANTA MARKET
Atlanta Ear Nose & Throat Associates, P.C................... $ 3,671 $ --
Additional Atlanta Practices ............................... 895 --
Ear, Nose & Throat Specialists, P.C. ....................... 860 --
Ear, Nose & Throat Specialists, Head & Neck Surgery, P.C. .. 1,173 --
Northside Ear, Nose & Throat Associates, P.C. .............. 321 --
Cobb Ear, Nose & Throat Associates, P.C. ................... 4,438 --
CHICAGO MARKET
Otolaryngology Medical & Surgical Associates, Ltd. ......... 2,056 --
SOUTH FLORIDA MARKET
Ear, Nose & Throat Associates of South Florida, P.A. ....... 4,128 --
James J. Murata, M.D., P.A. ................................ 585 78
------- -----
Pro Forma Patient Service Revenue ..................... $18,127 $ 78
Management Fee % ...................................... 12.5% 12.5%
------- -----
$ 2,266(A) $ 10(A)
</TABLE>
F-22
<PAGE> 27
<TABLE>
<S> <C> <C>
NORTH GEORGIA MARKET
Allatoona E.N.T. & Facial Plastic Surgery, P.C......... $ 608 $ --
Pro Forma Patient Service Revenue................. $ 608 $ --
Management fee % ................................. 15.0% --%
------- -----
$ 91(B) $ --(B)
PHYSICIANS' DOMAIN GROUP ACQUISITION........................ $ 2,045(C) $ 511(C)
------- ------
Pro Forma Management Fees (A) + (B) + (C)..... $ 4,402 $ 521
Pro Forma Practice Operating Expenses......... 21,081 $2,374
------- ------
Pro Forma Management Fee Adjustment........... $25,483 $2,895
======= ======
</TABLE>
Under the current management services agreements, the Company retains
on an annual basis 12.5% to 15.0% of affiliated physician practice revenue.
Under certain management services agreements, in the event the affiliated
practice's annual revenues exceed 150% of such practice's annual revenue in the
year prior to its affiliation with the Company (the "Threshold Amount"), the
Company will be entitled to receive incentive compensation (in lieu of the 12.5%
amount) for the remainder of such fiscal year in amounts ranging from 20% to 25%
of the affiliated practice's income (net practice revenue less practice
expenses), prior to the payment of physician compensation and benefits. In
connection with the Physicians' Domain Group transaction, the management
services agreements contain a fixed monthly management fee, subject to annual
escalation based on increases in the consumer price index after the fifth
anniversary of the date of the agreement.
There is no management fee adjustment for ENT & Allergy Associates, a
wholly-owned subsidiary of the Company, because physicians at ENT & Allergy
Associates are directly employed by the Company. See Note 3 below.
(3) Reflects the elimination of net patient service revenue for all
physician practices with which the Company has management services agreements
but does not directly employ the physicians of such practices, except for the
physicians of ENT & Allergy Associates.
(4) Reflects the elimination of physician compensation at the practices
in which the Company does not have an equity ownership. After the Company
collects its management fees pursuant to the management services agreements and
pays the operating and non-operating expenses, the remaining revenue is remitted
to the affiliated practice to pay physician compensation and benefits pursuant
to employment agreements between the practice and each individual physician and
to pay physician assistant compensation and benefits. The reduction of physician
compensation at ENT & Allergy Associates is a result of a contractual agreement
with the Company. Also reflects the net cost of additional employment contracts
entered into by the Company for certain management positions. The adjustments do
not include bonuses due to their subjective nature and requisite board approval
for the granting of bonuses based upon meeting certain profitability and
non-financial goals.
(5) Reflects amortization of intangibles and deferred organization
costs of the Company.
(6) Reflects interest expense in connection with the subordinated
promissory notes incurred in connection with certain of the Company's
acquisitions computed at the rate of approximately 6% per annum.
(7) Reflects the establishment of a provision for income taxes at an
estimated 39% effective tax rate, which consists of a 34% statutory federal tax
rate and an average state statutory tax rate of 5%.
F-23
<PAGE> 28
(8) Reflects weighted average shares outstanding for common stock and
stock equivalents (which have been calculated using the treasury stock method)
giving effect to the acquisition of James J. Murata, M.D., P.A.
Giving effect to the 2,307,540 shares sold by the Company at the public
offering price of $8.50 per share, the pro-forma diluted earnings per share for
the year ended December 31, 1997 and the three month period ended March 31, 1998
would have been $.55 and $.14, respectively, computed as follows:
<TABLE>
<CAPTION>
Year Ended Three Months Ended
December 31, 1997 March 31, 1998
----------------- ------------------
<S> <C> <C>
Pro Forma Combined Net Income $4,664 $1,152
Interest Income, Net of Taxes 380 95
------ ------
Pro Forma, as Adjusted 5,044 1,247
Weighted Average Shares 9,217 9,341
Outstanding (Diluted)
Diluted Earnings Per Share $ .55 $ .14
====== ======
</TABLE>
(9) Adjusted to reflect (i) the sale of 2,307,540 shares of common
stock offered by the Company at the public offering price of $8.50 per share.
The contemplated application of offering proceeds is depicted as follows:
<TABLE>
<S> <C>
Gross proceeds (2,307,540 shares at $8.50)............................. $19,614,090
-----------
Underwriting costs and expenses........................................ 2,464,090
Consulting fee......................................................... 200,000
-----------
2,664,090
-----------
Net proceeds...................................................... $16,950,000
===========
</TABLE>
(10) Reflects the acquisition of the tangible and identifiable
intangible assets of the Physicians' Domain Group.
F-24
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report dated April 13, 1998 included in this Form 8-K, into the Company's
previously filed Registration Statements File Nos. 333-41605 and 333-41609.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
July 29, 1998
