SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A-1
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): March 3, 1997
SPECIALTY CARE NETWORK, INC.
----------------------------
(Exact Name of Registrant Specified in Charter)
Delaware 0-22019 62-1623449
- ---------------- ---------------- -------------------
(State or Other (Commission File (I.R.S. Employer
Jurisdiction of Number) Identification No.)
Incorporation)
44 Union Boulevard, Suite 600
Lakewood, Colorado 80228
- ---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (303) 716-0041
<PAGE>
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(b) Pro Forma Financial Information (unaudited).
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
OF SPECIALTY CARE NETWORK, INC. AND SUBSIDIARY
Basis of Presentation
The following unaudited pro forma consolidated statements of income give effect
to acquisitions by Specialty Care Network, Inc. (the "Company"), a Delaware
corporation, of substantially all of the net assets of the Predecessor Practices
and Medical Rehabilitation Specialists, P.A. ("MRS"), in exchange for shares of
the Company's common stock, cash and the assumption of certain liabilities, and
the effects of the service agreements described below. For purposes of these pro
forma consolidated financial statements, the terms "Predecessor Practices" and
"Initial Affiliated Practices" are defined to include the following entities:
<TABLE>
<CAPTION>
Predecessor Practices Initial Affiliated Practices
--------------------- -----------------------------
<S> <C>
Reconstructive Orthopaedic Associates, Inc. Reconstructive Orthopaedic Associates II, P.C.
Princeton Orthopaedic Associates, P.A. Princeton Orthopaedic Associates II, P.A.
Tallahassee Orthopedic Clinic, Inc. TOC Specialists, P.L.
Greater Chesapeake Orthopaedic Greater Chesapeake Orthopaedic
Associates, LLC Associates, LLC
Vero Orthopaedics, P.A. Vero Orthopaedics II, P.A.
</TABLE>
Pursuant to the service agreements between the Company and each of the Initial
Affiliated Practices, which became effective on November 12, 1996, and the
service agreement, dated March 3, 1997, with Medical Rehabilitation Specialists
II, P.A. ("MRS II"), the successor to MRS, the Company provides management,
administrative and development services to the Initial Affiliated Practices and
MRS II in return for a service fee (the Initial Affiliated Practices and MRS II
are collectively referred to as the "Affiliated Practices"). The Affiliated
Practices retain, among other things, sole responsibility for all aspects of the
practice of medicine. All service agreements described herein are collectively
referred to as the "Service Agreements."
The unaudited pro forma consolidated statements of income have been prepared by
the Company based upon the historical financial statements of Specialty Care
Network, Inc. and subsidiary, the Predecessor Practices and MRS, and certain
preliminary estimates and assumptions deemed appropriate by management of the
Company. These pro forma consolidated statements of income may not be indicative
of actual results if the transactions had occurred on the dates indicated or
which may be realized in the future. Neither expected benefits nor cost
reductions anticipated by the Company following consummation of the
aforementioned acquisition transactions and the execution of the Service
Agreements have been reflected in the pro forma consolidated statements of
income; however, additional estimated future corporate overhead and direct costs
of the Company have been reflected in the pro forma consolidated statements of
income. A pro forma consolidated balance sheet has not been presented because
the acquisition of substantially all of the net assets of MRS was reflected in
the Company's March 31, 1997 consolidated balance sheet, included in the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997.
The pro forma consolidated statement of income for the year ended December 31,
1996 assumes that the acquisition of the assets of the Predecessor Practice and
MRS and the entry into the Service Agreements occurred on January 1, 1996. The
pro forma consolidated statement of income for the three months ended March 31,
1997 assumes that the acquisition of the assets of MRS and the entry into the
service agreement between the Company and MRS II occurred on January 1, 1997.
The pro forma consolidated statements of income should be read in conjunction
with the historical financial statements of the Company and Reconstructive
Orthopaedic Associates II, P.C., including the related notes thereto, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," that appear in the Company's Annual Report on Form 10-K for the
year ended December 31, 1996, as well as the historical consolidated financial
statements of the Company, including the related notes thereto, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," that appear in the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1997.
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
SPECIALTY CARE NETWORK, INC. AND SUBSIDIARY
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Specialty Care Pro Forma
Network, Inc. Pro Forma Adjustment
& Subsidiary Adjustments Legend Pro Forma
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Management fee revenue, including reimbursement of
clinical expenses $4,392,050 $29,771,557 (1) $34,163,607
Operating expenses:
Clinic expenses 2,820,743 21,355,007 (2) 24,175,750
Salaries, wages and benefits 1,917,891 971,073 (3) 2,888,964
General and administrative expenses 1,255,011 1,100,254 (4) 2,355,265
Costs to evaluate and acquire physician practices 597,361 (526,184) (5) 71,177
Interest expense, net 78,498 (52,039) (6) 26,459
---------- ----------- -----------
6,669,504 22,848,111 29,517,615
---------- ----------- -----------
Income (loss) from operations (2,277,454) 6,923,446 4,645,992
Income tax benefit (expense) 506,071 (2,410,928) (7) (1,904,857)
---------- ----------- -----------
Net income (loss) ($1,771,383) $4,512,518 $2,741,135
=========== =========== ===========
Net income (loss) per share ($0.15) $0.22
=========== ===========
Weighted average number of common shares and
common share equivalents used in computation 12,026,347 12,280,641
=========== ===========
</TABLE>
See accompanying notes to unaudited pro forma consolidated statements of income.
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
SPECIALTY CARE NETWORK, INC. AND SUBSIDIARY
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
THREE MONTHS ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
Specialty Care Pro Forma
Network, Inc. Pro Forma Adjustment
& Subsidiary Adjustments Legend Pro Forma
----------------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Management fee revenue, including reimbursement of
clinical expenses $7,297,553 $79,337 (1) $7,376,890
---------- ------- ----------
Operating expenses:
Clinic expenses 4,924,705 27,087 (2) 4,951,792
Salaries, wages and benefits 703,959 10,000 (3) 713,959
General and administrative expenses 390,996 31,292 (4) 422,288
Costs to evaluate and acquire physician practices 21,782 - 21,782
Interest income, net (70,819) - (70,819)
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5,970,623 68,379 6,039,002
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Income from operations 1,326,930 10,958 1,337,888
Income tax (expense) (544,000) (4,534) (7) (548,534)
---------- ------- ----------
Net income $782,930 $6,424 $789,354
========== ======= ==========
Net income per share $0.06 $0.06
========== ==========
Weighted average number of common shares and
common share equivalents used in computation 13,460,504 13,714,798
========== ==========
</TABLE>
See accompanying notes to unaudited pro forma consolidated statements of income.
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
OF SPECIALTY CARE NETWORK, INC. AND SUBSIDIARY
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS INCOME
Pro Forma Consolidated Statements of Income Adjustments
<TABLE>
<CAPTION>
Year Ended Three months
December 31, Ended March 31,
1996 1997
------------ ---------------
<S> <C> <C>
1. Reflects the following adjustments to management fee revenue:
(i) Recognition of service fee revenue based on long-term service agreements $8,416,550 $52,250
(ii) Reimbursement of clinic operating expenses 21,355,007 27,087
---------- -------
29,771,557 79,337
</TABLE>
Pursuant to the terms of the Service Agreements, the above fees consist of the
following: (i) service fees based on a percentage (the "Service Fee Percentage")
ranging from 20% to 33% of the Adjusted Pre-Tax Income of the Affiliated
Practices (defined as revenue of the Affiliated Practices related to
professional services less amounts equal to certain clinic expenses of the
Affiliated Practices ("Clinic Expenses," as more fully defined in the Service
Agreements), not including physician owner compensation or most benefits to
physician owners) and (ii) amounts equal to Clinic Expenses. However, for the
first three years following affiliation, the portion of the service fees
described under clause (i) is specified to be the greater of the amount payable
as described under clause (i) above, or a fixed dollar amount (the "Base Service
Fee"), which was generally calculated by applying the respective Service Fee
Percentage to Adjusted Pre-Tax Income of the Affiliated Practice for the twelve
months prior to affiliation. The aggregate annual Base Service Fee for the
Affiliated Practices is approximately $9.9 million. This Base Service Fee was
used to calculate the above pro forma management fee revenue adjustment for both
periods presented. For the three months ended March 31, 1997, as reflected on a
pro forma basis, the Affiliated Practices are below the Base Service Fee by
approximately $245,000 in the aggregate. In addition, with respect to its
management of certain facilities and ancillary services associated with certain
physician practices, the Company receives fees ranging from 2% to 8% of net
revenue.
<TABLE>
<S> <C> <C>
2. Reflects the following adjustments to clinic expenses:
(i) Incremental clinic expenses for the Predecessor Practices for the period
ended November 11, 1996 21,192,485 --
(ii) Incremental clinic expenses for MRS 162,522 27,087
---------- ------
21,355,007 27,087
3. Reflects the following adjustments to salaries, wages and benefits:
(i) Corporate office and officer compensation and fringe benefit expenses 971,073 10,000
---------- ------
971,073 10,000
4. Reflects the following adjustments to general and administrative expenses:
(i) Additional expense for amortization of service agreements 95,170 23,792
(ii) Annualized historical corporate general and administrative expenses 1,005,084 7,500
---------- ------
1,100,254 31,292
</TABLE>
Adjustments to historical corporate general and administrative expenses are
based upon (i) projected operational requirements, including rent, insurance,
travel, recruiting and utilities and (ii) projected depreciation and
amortization based on projected capital asset and corporate financing
requirements.
<PAGE>
<TABLE>
<S> <C> <C>
5. Reflects the following adjustment to costs to evaluate and acquire
physician practices (526,184) --
---------- ------
(526,184) --
6. Reflects the following adjustments to interest (income) expense:
(i) Elimination of convertible debentures (52,039) --
---------- ------
(52,039) --
7. Reflects the following adjustment to the provision for income taxes:
(i) Provide for an expected combined federal and state effective income tax
rate of 41.0% (2,410,928) (4,534)
---------- ------
(2,410,928) (4,534)
</TABLE>
8. The computation of pro forma net income per share is based upon the weighted
average common shares outstanding and common stock equivalents, using the
treasury stock method at the $8.00 initial public offering price for any
transaction deemed to have transpired before the date of the Company's
initial public offering, calculated as follows:
<TABLE>
<CAPTION>
Year Ended Three Months
December 31, 1996 Ended March 31, 1997
----------------- --------------------
<S> <C> <C>
Shares distributed to stockholders of the Predecessor Practices
in November 1996 7,659,115
Shares issued to Tallahassee Orthopedic Clinic, Inc. in October 1996 100,000
Shares converted from debt and accrued interest into common stock by
debenture holders in November 1996 2,020,901
Common stock equivalents arising from cash paid to certain physician
stockholders of one of the Predecessor Practices 192,234
Common stock equivalents attributable to outstanding stock options 603,960 673,509
Common stock deemed to be issued to the physician stockholder
of MRS 243,833 243,833
Common stock equivalents attributable to cash paid to the former
stockholder of MRS 10,461 10,461
Weighted average common shares outstanding, exclusive of the impact
of the abovementioned items 1,450,137 12,786,995
---------- ----------
12,280,641 13,714,798
========== ==========
</TABLE>
<PAGE>
SIGNATURE
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.
SPECIALTY CARE NETWORK, INC.
(Registrant)
By: /s/ D. Paul Davis
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Senior Vice President of Finance/Controller
Dated: August 1, 1997
<PAGE>
