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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report: January 8, 1999
PHYSICIANS' SPECIALTY CORP.
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(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)
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Item 2. Acquisition or Disposition of Assets.
As previously reported under Item 5 of a current report on Form 8-K
dated October 28, 1998, Physicians' Specialty Corp. (the "Company"), pursuant to
an asset acquisition agreement, acquired 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 on October 12, 1998 (the "Transaction"). Cleveland
ENT had previously been affiliated with MedPartners, Inc. ("MedPartners"). In
connection with the Transaction, the Company entered into a clinic services
agreement with Cleveland ENT (the "Management Services Agreement") maintaining
the percentage of net income management fee structure which existed in the
MedPartners/Cleveland ENT Clinic Services Agreement. In connection therewith,
the Company granted Cleveland ENT a one time option to unwind the transaction
with the Company 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. The Company paid approximately $4,200,000 (consisting of cash and
borrowings under the Company's credit facility) in connection with the
Transaction. Cleveland ENT's option to unwind the Transaction expired on
December 15, 1998.
On January 8, 1999, the Company amended the Management Services
Agreement with Cleveland ENT to provide that, effective January 1, 1999, the
Company would receive a management fee equal to 12.5% of all net clinic revenue
(after adjustment for contractual allowances) generated by Cleveland ENT.
Cleveland ENT also agreed to pay the Company an additional $300,000 for
management services provided during the period from October 1, 1998 through
December 31, 1998.
Simultaneously with the amendment to the Management Services Agreement,
the Company entered into a financing arrangement with the physicians at
Cleveland ENT (the "Cleveland Physicians"). Pursuant to the terms of the
financing arrangement, the Company loaned $1,475,000 to the Cleveland Physicians
(the "Loan"). The Loan bears interest at a rate of 6% per annum and matures on
the earlier of January 14, 2000, the termination of the Management Services
Agreement or the termination of the employment of three or more of the
Physicians. In addition, the Company granted the Physicians the right and option
(the "Put Option") to require the Company to purchase from the Physicians all of
the common stock (the "Stock") of a newly organized corporate entity owned by
the Physicians, which holds two corporate domain names. The Put Option may be
exercised by the Physicians commencing January 10, 2000 and expiring on March 1,
2000. In the event the Physicians exercise the Put Option, the Company would be
required to purchase the Stock for approximately $2.0 million in cash and the
issuance of a subordinated promissory note in the principal amount of $520,000
(the "Put Purchase Price"). The cash portion of the Put Purchase Price would be
reduced by any amounts owed by the Physicians to the Company pursuant to the
Loan or any other obligations. The subordinated promissory note would bear
interest at a rate of 6% per annum and would be payable in four equal annual
installments commencing on the first anniversary of the date of issuance of the
note.
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The Company also agreed to indemnify the Physicians for certain
matters, included tax matters, in connection with or arising out of the
Transaction.
Item 7. Financial Statements, Pro Forma Financial Statements and
Exhibits.
(c) Exhibits
10.56 First Amendment to Amended and Restated Clinic Services
Agreement effective as of January 1, 1999 by and among
Cleveland Ear, Nose and Throat Center, Inc., PSC Management
Corp. and the Registrant.
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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
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Robert A. DiProva
Executive Vice President and
Chief Financial Officer
Dated: January 12, 1999
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FIRST AMENDMENT TO
AMENDED AND RESTATED CLINIC SERVICES AGREEMENT
THIS FIRST AMENDMENT TO AMENDED AND RESTATED CLINIC SERVICES AGREEMENT
(the "Amendment"), made as of the 1st day of January, 1999 (the "Effective
Date"), by and among CLEVELAND EAR, NOSE, AND THROAT CENTER, INC., an Ohio
corporation ("Practice"); PSC MANAGEMENT CORP., a Delaware corporation
("Manager"); and PHYSICIANS' SPECIALTY CORP., a Delaware corporation ("Parent").
WITNESSETH:
WHEREAS, Practice, Manager and Parent entered into that certain Amended
and Restated Clinic Services Agreement dated as of October 1, 1998 (the
"Agreement");
WHEREAS, Practice, Manager and Parent desire to amend the Agreement in
accordance with the terms and conditions contained herein.
NOW THEREFORE, in consideration of the premises and the mutual promises
and covenants herein contained, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged by the parties to
this Agreement, Practice, Manager and Parent hereby agree as follows:
1. DEFINITIONS.
Capitalized terms used in this Amendment that are not otherwise defined
herein shall have the meanings ascribed to them in the Agreement.
2. CLINIC EXPENSES.
Section 1.2 of the Agreement is hereby amended by amending the
definition of "Clinic Expenses" therein by adding new subsection (i) as follows:
"(i) Manager Compensation to Manager under Section 5.1 and Appendix A of this
Agreement" after the words "Advisory Board" in subsection (h) thereof, and by
re-lettering current subsection "(i)" to subsection "(j)".
3. CAPITAL IMPROVEMENTS AND EXPANSION.
Section 2.2(e) of the Agreement is hereby amended to add after the word
"conditions" in the last line the following: "; provided, however, that should
the Advisory Board fail to approve an expansion plan or capital expenditure
involving an expenditure or investment of $10,000 or more ("Capital Project"),
Manager agrees that Practice will be permitted to fund the proposed Capital
Project (without Manager approval or funding) and the technical component or
non-professional services revenues derived from such Practice funded Capital
Project will be excluded from Net Clinic Revenues for purposes of calculating
"Manager Compensation" under Section 5.1 and Appendix A."
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4. LIQUIDATED DAMAGES. Section 4.8 of the Agreement is amended by
adding the following sentence to the end thereof: "Liquidated damages payable by
a Physician under his Employment Agreement shall be paid to Manager unless
waiver of the obligation is granted by the Advisory Board."
5. COMPENSATION TO MANAGER, DRAWS.
Section 5.1 of the Agreement is hereby amended to provide that as
compensation for services rendered in connection with the Agreement ("Manager
Compensation"), Manager shall receive compensation determined as set forth on
Appendix A attached hereto and made a part hereof, which amends, restates and
replaces in its entirety Appendix A to the Agreement.
Section 5.3(a) of the Agreement is hereby amended by deleting
the next to last sentence therefrom. Section 5.3(a) shall therefore read as
follows:
(a) Following the end of each month, Manager shall make an
estimate of the collection percentage ("Estimated Collection
Percentage") for such month's gross production. The Estimated
Collection Percentage may vary depending on historical collection
percentages, changes in fee schedules, changes in third party
reimbursement, bad debt write-offs and similar adjustments. The
Estimated Collection Percentage will then be applied to such month's
gross production, resulting in estimated Net Clinic Revenues for such
month. Clinic Expenses will then be subtracted from estimated Net
Clinic Revenues, resulting in estimated Pre-Distribution Margin for
such month. Manager shall pay Practice such amount by the 15th day of
the following month.
6. DETERMINATION AND PAYMENT OF PRACTICE COMPENSATION.
Section 5.4(a) of the Agreement is hereby amended by deleting same in
its entirety and inserting in lieu thereof the following:
(a) Within one hundred twenty (120) days after the end of each
calendar year, Manager will adjust the Estimated Collection Percentage
based on actual net cash collections attributable to the gross
production for such year, and shall determine actual Net Clinic
Revenues and actual Pre-Distribution Margin. Within thirty (30) days
after the end of such one hundred twenty (120) day period, Manager
shall cause payment to be made to Practice in the amount of any
Pre-Distribution Margin unpaid for such year, as determined from the
financial statements prepared by Manager pursuant to Section 3.7.
7. TERMINATION.
Section 6.2(b)(iii) of the Agreement is hereby amended by deleting the
words "minus Manager Compensation" therefrom. Section 6.2(b)(iii) shall
therefore read as follows:
(iii) Manager fails to remit to Practice the balance of the
Pre-Distribution Margin when due and payable hereunder and such failure
continues uncured for a period
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of ten (10) days after Manager's receipt of written notice from
Practice specifying such failure.
8. REPURCHASE OF ASSETS.
Section 6.4(a)(v) of the Agreement is amended by deleting same in its
entirety and inserting in lieu thereof the following:
(v) Purchase from Manager the service agreement costs and any
other intangible assets of Manager primarily relating to the operation
of the Clinic (other than those intangible assets accounted for in
Section 6.4(a)(ii)), including goodwill, at book value as if purchase
accounting were used to record the transaction, which transaction
includes, without limitation this Agreement and the Asset Purchase
Agreement, and any shares or intangible assets that may be acquired
under that certain Put Agreement between the Physician Shareholders,
Parent and Manager dated as of the date of this Amendment, and as
adjusted through the last day of the month most recently ended prior to
the date of such expiration or earlier termination, in accordance with
GAAP to reflect the amortization or depreciation of restrictive
covenants and intangibles, including goodwill; and
9. GOVERNING LAW. This Amendment shall be interpreted, construed and
enforced in accordance with the laws of the State of Ohio, applied without
giving effect to any conflicts-of-law principles.
10. CAPTIONS. The captions or headings in this Amendment are made for
convenience and general reference only and shall not be construed to describe,
define or limit the scope or intent of the provisions of this Amendment.
11. SEVERABILITY.
Section 14.5 of the Agreement is hereby amended by deleting same in its
entirety and inserting in lieu thereof the following:
The provisions of the Agreement shall be several, and if any
provision of the Agreement (as amended) shall be determined to be
invalid, void or unenforceable in whole or in part by a court of
competent jurisdiction, the same shall not invalidate the remaining
provisions of the Agreement.
12. COUNTERPARTS. This Amendment may be executed in several
counterparts, each of which, when so executed, shall be deemed to be an
original, and such counterparts shall, together, constitute and be one and the
same instrument.
13. BINDING EFFECT. This Amendment shall be binding on and shall inure
to the
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benefit of the parties hereto, and their successors and permitted assigns.
14. RATIFICATION. The Agreement, as amended by this Amendment, shall
remain in full force and effect and is hereby ratified and confirmed.
IN WITNESS WHEREOF, Practice, Manager and Parent have duly executed
this Amendment on the day and year first above written.
CLEVELAND EAR, NOSE AND THROAT
PHYSICIANS' SPECIALTY CORP. CENTER, INC.
BY: /s/ Gerald R. Benjamin BY: /s/ Michael Papsidero, M.D.
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ITS: Vice Chairman ITS: President
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PSC MANAGEMENT CORP.
BY: /s/ Gerald R. Benjamin
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ITS: Vice President
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By execution below, the undersigned Physician Shareholders agree to
continue to be bound by the terms of the Agreement, as amended by this
Amendment.
/s/ Michael Papsidero, M.D. /s/ John M. Dobrowski, M.D.
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MICHAEL PAPSIDERO, M.D. JOHN M. DOBROWSKI, M.D.
/s/ Bert M. Brown, M.D. /s/ Matthew C. McDonnell, M.D.
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BERT M. BROWN, M.D. MATTHEW C. MCDONNELL, M.D.
/s/ Toribio C. Flores, M.D. /s/ Howard L. Levine, M.D.
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TORIBIO C. FLORES, M.D. HOWARD L. LEVINE, M.D.
/s/ Sanford M. Timen, M.D. /s/ Richard B. Smith, M.D.
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SANFORD M. TIMEN, M.D. RICHARD B. SMITH, M.D.
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APPENDIX A
TO
CLINIC SERVICES AGREEMENT
A. Manager Compensation. As compensation for services rendered in
connection with the Clinic ("Manager Compensation"), Manager shall
receive $300,000 (in addition to amounts payable pursuant to Section
5.1 of Appendix A as in effect prior to the date of this Amendment) for
the period October 1, 1998 through December 31, 1998 (payable $50,000
per month on February 15, 1999, March 15, 1999, April 15, 1999, May 15,
1999, June 15, 1999, and July 15, 1999), and thereafter during the term
of the Agreement twelve and one-half percent (12 1/2%) of the Net
Clinic Revenues on a monthly basis.
