SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 1997
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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 0-22019
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Specialty Care Network, Inc.
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(Exact Name of Registrant as Specified in its Charter)
Delware 62-1623449
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
44 Union Boulevard, suite 600, Lakewood, Colorado 80228
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (303) 716-0041
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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 registrant
was required to file such reports). And (2) has been subject to such filing
requirements for the past 90 days. Yes ___ No _X_
On July 31, 1997, 16,326,172 shares of the Registrant's common stock, $.001
par value, were outstanding.
<PAGE>
Specialty Care Network, Inc. and Subsidiary
Index
Part I. Financial Information:
Item 1. Consolidated Condensed Balance Sheets -
June 30, 1997 and December 31, 1996.........................1
Consolidated Statements of Income -
Three Months Ended June 30, 1997 and 1996
Six Months Ended June 30, 1997 and 1996.....................2
Consolidated Condensed Statements of Cash Flows -
Six Months Ended June 30, 1997 and 1996.....................3
Notes to Consolidated Condensed Financial Statements........5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................14
Part II. Other Information:
Item 2. Change in Securities.......................................16
Item 5. Other Matters..............................................16
Item 6. Exhibits and Reports on Form 8-K...........................16
<PAGE>
Part I. Financial Information
Specialty Care Network, Inc. and Subsidiary
Consolidated Condensed Balance Sheets
<TABLE>
<CAPTION>
June 30 December 31
1997 1996
------------ ------------
(Unaudited)
<S> <C> <C>
Assets
Cash and cash equivalents $ 14,862,223 $ 1,444,007
Accounts receivable, net 15,405,507 10,418,175
Loans to physician stockholders 1,107,514 976,419
Prepaid expenses and inventories 1,090,137 285,218
Prepaid and recoverable income taxes 95,765 --
------------ ------------
Total current assets 32,561,146 13,123,819
Property and equipment, net 2,330,688 1,889,070
Prepaid offering costs -- 747,847
Intangible assets, net 204,513 193,906
Management service agreements 17,658,711 --
Other assets 63,552 58,483
------------ ------------
Total assets $ 52,818,610 $ 16,013,125
============ ============
Liabilities and stockholders' equity
Current portion of capital lease obligations $ 198,074 $ 140,151
Accounts payable and accrued expenses 742,729 1,295,901
Accrued payroll, incentive compensation and related
expenses 1,560,122 1,065,881
Income taxes payable -- 1,229,275
Due to physician groups 3,529,801 1,087,057
Deferred income taxes 857,745 667,830
------------ ------------
Total current liabilities 6,888,471 5,486,095
Line-of-credit -- 4,177,681
Capital lease obligations, less current portion 842,884 964,769
Deferred income taxes 7,924,128 679,713
------------ ------------
Total liabilities 15,655,483 11,308,258
Stockholders' equity:
Preferred stock, $0.001 par value, 2,000,000
shares authorized, no shares issued or outstanding -- --
Common stock, $0.001 par value, 50,000,000
shares authorized, 15,343,486 and
11,045,015 shares issued and outstanding in 1997
and 1996, respectively 15,343 11,045
Additional paid-in capital 36,951,575 6,465,205
Retained earnings (accumulated deficit) 196,209 (1,771,383)
------------ ------------
Total stockholders' equity 37,163,127 4,704,867
============ ============
Total liabilities and stockholders' equity $ 52,818,610 $ 16,013,125
============ ============
</TABLE>
1
See accompanying notes to consolidated condensed financial statements.
<PAGE>
Specialty Care Network, Inc. and Subsidiary
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------- -------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Management fee revenue, including
reimbursement of clinic expenses $ 9,539,298 $ -- $ 16,836,851 $ --
Costs and expenses:
Clinic expenses 5,960,897 -- 10,885,602 --
Salaries, wages and benefits 854,965 548,160 1,558,924 613,246
General and administrative expenses 823,838 174,934 1,214,834 221,263
Costs to evaluate and acquire
physician practices 78,468 52,406 100,250 107,406
Interest (income) expense, net (182,321) 9,536 (253,140) 14,847
------------ ------------ ------------ ------------
7,535,847 785,036 13,506,470 956,762
------------ ------------ ------------ ------------
Income (loss) before income taxes 2,003,451 (785,036) 3,330,381 (956,762)
Income tax expense 818,789 -- 1,362,789 --
------------ ------------ ------------ ------------
Net income (loss) $ 1,184,662 $ (785,036) $ 1,967,592 $ (956,762)
============ ============ ============ ============
Net income (loss) per share $ 0.08 $ (0.06) $ 0.14 $ (0.08)
============ ============ ============ ============
Weighted average number of common
shares and common share equivalents
used in computation 15,457,149 12,266,210 14,227,709 12,266,210
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
2
<PAGE>
Specialty Care Network, Inc. and Subsidiary
Consolidated Condensed Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30
1997 1996
------------ ------------
<S> <C> <C>
Operating activities
Net income (loss) $ 1,967,592 $ (956,762)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 585,359 15,372
Deferred income tax benefit (314,078) --
Non-cash compensation expense--stock options 97,862 --
Changes in operating assets and liabilities,
net of the non-cash effects of
the acquisitions of the net assets
of physician groups:
Accounts receivable, net (3,646,574) --
Prepaid expenses and inventories and other
assets (809,988) (68,729)
Prepaid offering costs -- (100,000)
Accounts payable and accrued expenses (994,958) 186,389
Accrued payroll, incentive compensation
and related expenses 494,241 200,000
Income taxes payable and prepaid and
recoverable income taxes, net (641,883) --
Due to physician groups 2,442,744 --
------------ ------------
Net cash used in operating activities (819,683) (723,730)
Investing activities
Purchases of property and equipment (707,414) (240,960)
Acquisitions of physician groups, net of cash acquired (3,788,158) --
------------ ------------
Net cash used in investing activities (4,495,572) (240,960)
Financing activities
Proceeds from initial public offering, net of
current period offering costs 22,939,338 --
Proceeds from line-of-credit agreement 1,400,000 --
Proceeds from convertible debentures -- 1,555,000
Principal repayments on line of credit agreement (5,577,681) --
Principal repayments on capital lease obligations (117,805) --
Advances repaid to officers and stockholders -- (9,410)
Loans to physician stockholders (131,095) --
Exercise of common stock options 220,714 --
------------ ------------
Net cash provided by financing activities 18,733,471 1,545,590
Net increase in cash and cash equivalents 13,418,216 580,900
Cash and cash equivalents at beginning of period 1,444,007 11,100
------------ ------------
Cash and cash equivalents at end of period $ 14,862,223 $ 592,000
============ ============
</TABLE>
3
<PAGE>
Specialty Care Network, Inc. and Subsidiary
Consolidated Condensed Statements of Cash Flows (Unaudited)
(continued)
<TABLE>
<CAPTION>
Six Months Ended June 30
1997 1996
------------ ------------
<S> <C> <C>
Supplemental cash flow information
Interest paid $ 87,701 $ --
============ ============
Income taxes paid $ 2,318,750 $ --
============ ============
Supplemental schedule of noncash investing and
financing activities
Effects of the acquisitions of the net assets
of physician groups:
Assets acquired $ 19,329,639 $ --
Liabilities assumed (495,629) --
Income tax liabilities assumed (7,748,408) --
Cash outlay (3,788,158) --
------------ ------------
$ 7,297,444 $ --
============ ============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
<PAGE>
Specialty Care Network, Inc. and Subsidiary
Notes to Consolidated Condensed Financial Statements (Unaudited)
June 30, 1997
NOTE 1 - Basis of Presentation
The accompanying unaudited consolidated condensed financial statements of
Specialty Care Network, Inc. and subsidiary (collectively the "Company") have
been prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, these statements include all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation of the results of the interim periods reported herein.
Operating results for the three and six months ended June 30, 1997 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1996.
Cash and Cash Equivalents: The Company considers all highly liquid investments
with a maturity of three months or less when purchased to be cash equivalents.
At June 30, 1997, the Company maintained approximately $13.1 million in a money
market fund.
Service Agreements: In connection with its affiliation with a physician group,
the Company enters into a long-term service agreement with the physician group.
The Company's acquisition, through an asset purchase, a share exchange and a
merger, of substantially all of the assets of five physician groups on November
12, 1996, were accounted for pursuant to Securities and Exchange Commission
Staff Accounting Bulletin No. 48, "Transfers of Nonmonetary Assets by Promoters
or Shareholders." In connection with subsequent affiliations with practice
groups, consideration paid to the physician owners of the practice is restricted
securities and cash, and a substantial portion of the consideration is
allocated to the service agreement. The Company also recognizes the income tax
effects of temporary differences related to all identifiable acquisition
intangible assets, including the service agreements. Such service agreements are
amortized over the term of the underlying agreements, which is generally forty
years.
Reclassifications: Certain amounts from the December 31, 1996 consolidated
balance sheet have been reclassified in order to conform to the current
presentation.
Net Income Per Share (1997): Net income per share of common stock is computed by
dividing net income by the weighted average number of common shares and any
dilutive common share equivalents outstanding, including stock options to
purchase
5
<PAGE>
Specialty Care Network, Inc. and Subsidiary
Notes to Consolidated Condensed Financial Statements (Unaudited)
(continued)
NOTE 1 - Basis of Presentation (continued)
approximately 500,000 shares of common stock that were granted during the
quarter ended June 30, 1997. Fully diluted net income per share is not
materially different from primary net income per share.
Net Loss Per Share (1996): Net loss per common share is based upon the weighted
average number of common and common equivalent shares outstanding during the
period. Primary and fully diluted loss per share are the same. Pursuant to
Securities and Exchange Commission Staff Accounting Bulletins and staff policy,
common and common share equivalents issued during the 12-month period prior to
the Company's initial public offering at prices below the public offering price
are presumed to have been issued in contemplation of the public offering, even
if antidilutive, and have been included in the calculation as if these common
and common equivalent shares were outstanding for the entire period presented
(using the treasury stock method and the initial public offering price of $8.00
per share for the Company's common stock).
The Company used a portion of the proceeds from the initial public offering of
its common stock (see Note 4) to repay borrowings under the Company's Revolving
Loan and Security Agreement (the "Credit Facility"). If shares issued to repay
amounts outstanding under the Company's Credit Facility were outstanding for the
six months ended June 30, 1997 and 1996 or the three months ended June 30 1996,
the net income (loss) per common share would not have changed from the amounts
reported.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share, which is required to
be adopted on December 31, 1997. At that time, the Company will be required to
change the method currently used to compute earnings per share and to restate
all prior periods. Under the new requirements for calculating primary earnings
per share, the dilutive effect of stock options will be excluded. The impact of
Statement No. 128 on the calculation of primary and fully diluted earnings per
share for the three and six months ended June 30, 1997 and 1996 is not expected
to be material.
NOTE 2 - Physician Practice Acquisitions
In March 1997, the Company acquired, through merger, substantially all of the
assets and certain liabilities of three single physician practices in Florida,
Maryland and Georgia.
6
<PAGE>
Specialty Care Network, Inc. and Subsidiary
Notes to Consolidated Condensed Financial Statements (Unaudited)
(continued)
NOTE 2 - Physician Practice Acquisitions (continued)
The aggregate consideration paid was 409,222 common shares of the Company and
approximately $135,000 in cash. These transactions were afforded the purchase
method of accounting treatment. The successors to the physician practices
entered into service agreements with terms that were generally consistent with
those contained in the service agreements discussed in Note 11 to the Company's
Annual Report on Form 10-K
In April 1997, the Company acquired, through merger, substantially all of the
assets and certain liabilities of the predecessor to The Orthopaedic and Sports
Medicine Center II, P.A., a Maryland professional association ("OSMC"). The
aggregate consideration paid to the physician owners of OSMC's predecessor was
473,379 shares of the Company's common stock and approximately $3,579,000 in
cash. This transaction was afforded the purchase method of accounting treatment.
In addition, in the event OSMC enters into a joint venture with a specified
hospital prior to August 31, 1997, the former physician owners of the
predecessor to OSMC will receive additional consideration from the Company of
approximately $900,000 in cash and 115,000 shares of the Company's common stock.
The Company and OSMC entered into a service agreement with terms that were
generally consistent with those contained in the service agreements discussed in
Note 11 to the Company's Annual Report on Form 10-K.
NOTE 3 - Summarized Physician Group Financial Information
Reconstructive Orthopaedic Associates II, P.C. (successor to Reconstructive
Orthopaedic Associates, Inc.) is an orthopaedic physician practice serving
Philadelphia, Pennsylvania and its surrounding communities. This physician group
is the only practice that contributed in excess of 20% of the Company's
management fee revenue, exclusive of reimbursed clinic expenses, for the three
and six months ended June 30, 1997.
Reconstructive Orthopaedic Associates, Inc. (the "Predecessor Practice") entered
into an agreement on November 12, 1996, whereby the Company acquired, through
merger, substantially all the net assets of the Predecessor Practice. Concurrent
with the acquisition, the physician shareholders of the Predecessor Practice
formed Reconstructive Orthopaedic Associates II, P.C. (the "Successor Practice")
and entered into a long-term service agreement with the Company. This
transaction constitutes a disposition of certain net practice assets with no
significant change in the operations or ownership between the Predecessor and
Successor Practices, and effectively represents a continuation of the business.
7
<PAGE>
Specialty Care Network, Inc. and Subsidiary
Notes to Consolidated Condensed Financial Statements (Unaudited)
(continued)
NOTE 3 - Summarized Physician Group Financial Information (continued)
Summarized below is certain financial information of the Successor and
Predecessor Practices.
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30 Ended June 30
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
(Successor (Predecessor (Successor (Predecessor
Practice) Practice) Practice) Practice)
Net patient revenue $5,190,618 $3,918,439 $9,855,280 $7,893,598
Total revenue 5,513,905 4,515,137 10,195,647 8,790,751
Total operating expenses 5,218,529 4,975,395 9,305,363 9,032,365
Income (loss) from operations 295,376 (469,104) 890,284 (250,460)
</TABLE>
Effective July 1997, three of the Successor Practice's physicians discontinued
practicing with the Successor Practice. While these physicians remain subject to
the service agreement with the Successor Practice, the Company is negotiating a
new service agreement with such physicians.
The Company and the Successor Practice have been advised that the Department of
Health and Human Services is conducting an inquiry regarding Reconstructive
Orthopaedic Associates, Inc. and physicians formerly associated with that
practice, including two of the Company's directors. The inquiry appears to be
concerned with the submission of claims for Medicare reimbursement by the
practice. The Company has not been contacted by the Department of Health and
Human Services in connection with the inquiry.
NOTE 4 - Initial Public Offering
The Company received net proceeds from its initial public offering of
approximately $22 million, including proceeds derived from the exercise of the
underwriters' overallotment option. Approximately $5.6 million of the proceeds
were utilized to repay all outstanding borrowings under the Credit Facility.
8
<PAGE>
Specialty Care Network, Inc. and Subsidiary
Notes to Consolidated Condensed Financial Statements (Unaudited)
(continued)
NOTE 5 - Contingency
On January 8, 1997, the Company was sued by Michael A. Feiertag, M.D. (a former
physician at Vero Orthopaedics, P.A.) for alleged breach of his employment
agreement. In May 1997, the action was settled, and on July 3, 1997, the action
was dismissed with prejudice. Pursuant to the settlement, the Company paid
approximately $25,000. All other settlement payments to Dr. Feiertag were made
by the physicians of the affiliated practice with which Dr. Feiertag was
employed.
NOTE 6 - Employee Benefit Plan
During the six months ended June 30, 1997, the Company adopted an employee
benefit plan covering substantially all employees of the Company designed to
qualify under Section 401(k) of the Internal Revenue Code of 1986, as amended.
The plan includes a Company matching contribution equal to up to 4% of eligible
employee salaries and a discretionary defined contribution that is subject to
final Board of Directors approval.
NOTE 7 - Subsequent Events
On July 1, 1997, the Company acquired, through merger, substantially all of the
assets and certain liabilities of Southeastern Neurology Group, P.C., a Virginia
professional corporation ("SNG"), pursuant to the terms of a Merger Agreement,
dated June 30, 1997. SNG was a neurology/physiatry group headquartered in
Portsmouth, Virginia. In connection with the merger, the common stock of SNG was
exchanged for 120,155 shares of the Company's common stock and approximately
$1,995,000 in cash. In addition to the consideration paid to the SNG
shareholders, the Company also issued 4,102 shares of its common stock and paid
$69,000 in cash to an administrator of the practice as consideration for
services rendered to SNG by such administrator in connection with the
transaction (the administrator, Michael West, became an executive officer of the
Company after the merger transaction and two other merger transactions,
described below, with practices for which Mr. West was an administrator). The
assets acquired from SNG include certain equipment used by SNG in the practice
of medicine. The Company also entered into a service agreement with Southeastern
Neurology Group II, P.C., a new practice formed by the former shareholders of
SNG, pursuant to which the Company has agreed to provide management,
administrative and development services to the new practice. The Company will
make available to the new practice the equipment it acquired in the SNG merger.
9
<PAGE>
Specialty Care Network, Inc. and Subsidiary
Notes to Consolidated Condensed Financial Statements (Unaudited)
(continued)
NOTE 7 - Subsequent Events (continued)
On July 1, 1997, the Company acquired, through merger, substantially all of the
assets and certain liabilities of Orthopaedic Surgery, Ltd., a Virginia
professional corporation ("OSL"), pursuant to the terms of a Merger Agreement,
dated June 30, 1997. OSL was an orthopaedic practice headquartered in
Portsmouth, Virginia. In connection with the merger, the common stock of OSL was
exchanged for consideration of 339,839 shares of the Company's common stock and
approximately $2,158,000 in cash. In addition to the consideration paid to the
OSL shareholders, the Company also issued 6,920 shares of its common stock and
paid $120,000 in cash to Michael West, who was an administrator of OSL, as
consideration for services rendered to OSL by Mr. West in connection with the
transaction. Furthermore, the Company granted one physician associated with OSL
the right, until June 30, 1998, to require the Company to purchase 74,844 of the
159,643 shares of Company's common stock issued to such physician as
consideration for the OSL merger at a purchase price equal to $11.21 per share.
The assets acquired from OSL include certain equipment used by OSL in the
practice of orthopaedic medicine. In connection with the OSL merger, the Company
entered into a service agreement with Orthopaedic Surgery Centers, P.C. II
("OSC"), a new orthopaedic practice formed by the former shareholders of OSL,
pursuant to which the Company has agreed to provide management, administrative
and development services to the new practice. The original service agreement,
dated June 30, 1997, was amended on July 22, 1997 to include two physicians who
became affiliated with the Company in connection with the Company's acquisition
of substantially all of the assets and certain liabilities of Drs. Howell,
Ryder, Kells & Persons, Inc. ("HRKP") described below. The Company will make
available to the new practice the equipment it acquired in the OSL and HRKP
mergers.
On July 3, 1997, the Company acquired: (i) by merger (the "NSC&A Merger"),
substantially all of the assets and certain liabilities of Neal C. Small, M.D. &
Associates, P.A., a Texas professional association ("NCS&A"); (ii) by merger
(the "NCS" Merger"), substantially all of the assets and certain liabilities of
Neal C. Small, M.D., P.A., a Texas professional association ("NCS"); and (iii)
by merger (the "AIG Merger"), substantially all of the assets and certain
liabilities of Alexander I. Glogau, M.D., P.A., a Texas professional association
("AIG"), in each case pursuant to the terms of a Merger Agreement, dated July 3,
1997. NCS&A, NCS and AIG were orthopaedic and sports medicine practices
headquartered in Plano, Texas. The consideration paid by the Company in each of
the NCS&A Merger and AIG Merger was 90,780 shares of its common stock and
approximately $405,000 in cash. In the NCS Merger, the
10
<PAGE>
Specialty Care Network, Inc. and Subsidiary
Notes to Consolidated Condensed Financial Statements (Unaudited)
(continued)
Note 7 - Subsequent Events (continued)
consideration paid by the Company was 90,780 shares of its common stock. The
assets acquired from NCS&A, NCS and AIG include certain equipment used in the
practice of orthopaedic and sports medicine. In connection with the NSC&A
Merger, NCS Merger and AIG Merger, the Company entered in a service agreement
with Associated Orthopaedics & Sports Medicine, P.A., a new practice formed by
the former shareholders of NCS&A, NCS and AIG, pursuant to which the Company has
agreed to provide management, administrative and development services to the new
practice. The Company will make available to the new practice the equipment
acquired in the NCS&A Merger, NCS Merger and AIG Merger.
On July 3, 1997, the Company acquired substantially all of the assets and
certain liabilities of Associated Arthroscopy Institute, Inc., a Texas
corporation ("AAII"), pursuant to the terms of an Asset Purchase Agreement,
dated July 3, 1997. AAII, which is owned by the former stockholders of NSC&A,
NCS and AIG, operated an ambulatory surgery center in Plano, Texas. Pursuant to
the terms of the AAII Agreement, the Company paid consideration of approximately
$2,220,000 in cash. In connection with the acquisition, the Company entered into
a service agreement with AAII pursuant to which the Company has agreed to
provide management, administrative and development services to AAII. The Company
will make available to AAII the equipment it acquired in the AAII acquisition.
On July 3, 1997, the Company acquired substantially all of the assets and
certain liabilities of Access Medical Supply, Inc. d/b/a Associated Physical
Therapy, a Texas corporation ("APT"), pursuant to the terms of an Asset Purchase
Agreement, dated July 3, 1997. APT, which is owned by the former stockholders of
NSC&A, NCS and AIG, operated a physical therapy center in Plano, Texas. Pursuant
to the terms of the APT purchase agreement, the Company paid consideration of
approximately $1,510,000 in cash. In connection with the APT acquisition, the
Company entered into a service agreement with APT pursuant to which the Company
has agreed to provide management, administrative and development services to
APT. The Company will make available to APT the equipment it acquired in the APT
acquisition.
On July 3, 1997, the Company acquired substantially all of the assets and
certain liabilities of Allied Health Services, P.A. d/b/a Associated
Occupational Rehabilitation, a Texas professional association ("AOR"), pursuant
to the terms of an Asset Purchase Agreement, dated July 3, 1997. AOR, which is
owned by the former stockholder of NSC&A and NCS operated an occupational
therapy center in Plano, Texas. Pursuant to
11
Specialty Care Network, Inc. and Subsidiary
Notes to Consolidated Condensed Financial Statements (Unaudited)
(continued)
Note 7 - Subsequent Events (continued)
the terms of the AOR agreement, the Company paid consideration of approximately
$430,000 in cash. In connection with the AOR acquisition, the Company entered
into a service agreement with AOR pursuant to which the Company has agreed to
provide management, administrative and development services to AOR. The Company
will make available to AOR the equipment it acquired in the AOR acquisition.
On July 7, 1997, the Company acquired, by asset purchase, certain assets of
Ortho-Associates, P.A. d/b/a Park Place Therapeutic Center, a Florida
professional service corporation ("PPTC"), pursuant to the terms of an Asset
Purchase Agreement, dated July 7, 1997. PPTC is an orthopaedic practice
headquartered in Plantation, Florida. In connection with the PPTC purchase,
certain assets (excluding accounts receivable) were acquired for consideration
of approximately $16,000,000 in cash and warrants to purchase, in the aggregate,
544,681 shares of the Company's common stock at an exercise price of $14.69 per
share. The warrants expire over a three year period ending in July 2000. In
addition, the Company paid a finder's fee of $500,000 in connection with the
PPTC purchase. The assets acquired from PPTC include certain equipment used by
PPTC in the practice of orthopaedic medicine. In connection with the PPTC
purchase, the Company entered into a service agreement with PPTC, pursuant to
which the Company has agreed to provide management, administrative and
development services to the practice. The Company will make available to the
practice the equipment it acquired in the PPTC purchase.
On July 16, 1997, the Company acquired, through merger, substantially all of the
assets and certain liabilities of Mid-Atlantic Orthopaedic Specialists, P.C., a
Maryland professional corporation ("MAOS"), pursuant to the terms of a Merger
Agreement, dated June 30, 1997. MAOS is an orthopaedic practice located in
Hagerstown, Maryland. In connection with the MAOS merger, the common stock of
MAOS was exchanged for consideration of 146,520 shares of the Company's common
stock and approximately $1,792,000 in cash. The assets acquired from MAOS
include certain equipment used by MAOS in the practice of orthopaedic medicine.
In connection with the MAOS merger, the Company entered into a service agreement
with Mid-Atlantic Orthopaedic Specialists/Drs. Cirincione, Milford, Stowell and
Amalfitano, P.C., a new orthopaedic practice formed by the former shareholders
of MAOS, pursuant to which the Company has agreed to provide management,
administrative and development services to the new practice. The Company will
make available to the new practice the equipment it acquired in the MAOS merger.
12
<PAGE>
Specialty Care Network, Inc. and Subsidiary
Notes to Consolidated Condensed Financial Statements (Unaudited)
(continued)
NOTE 7 - Subsequent Events (continued)
On July 22, 1997, the Company acquired, through merger, substantially all of the
assets and certain liabilities of Drs. Howell, Ryder, Kells & Persons, Inc., a
Virginia professional corporation ("HRKP"), pursuant to the terms of a Merger
Agreement, dated June 30, 1997. HRKP was a two physician orthopaedic practice
with its headquarters in Suffolk, Virginia. In connection with the HRKP merger,
the common stock of HRKP was exchanged for 90,492 shares of the Company's common
stock and approximately $1,141,000 in cash. In addition to the consideration
paid to the HRKP shareholders, the Company also issued 2,318 shares of its
common stock to Michael West, who was the administrator of the practice, as
consideration for services rendered to HRKP by Mr. West in connection with the
HRKP merger. The assets acquired from HRKP include certain equipment used by
HRKP in the practice of medicine. In connection with the HRKP merger, the OSC
Service Agreement was amended to enable the two physician owners of HRKP to
become parties to the agreement.
Accounting Treatment and Other
Each of the aforementioned merger and acquisition transactions will be afforded
the purchase method of accounting treatment. Such transactions have been
financed through the Company's available cash and cash equivalents and
approximately $16.5 million from its existing Revolving Loan and Security
Agreement with a bank.
13
<PAGE>
Item 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Statements in this Form 10-Q concerning the Company's future prospects are
"forward looking statements" under the federal securities laws. There can be no
assurances that future results will be achieved and actual results could differ
materially from those in the forward looking statements. Important factors that
could cause actual results to differ materially are discussed below in the
section "Results of Operations."
General
Specialty Care Network, Inc. (the "Company") is a physician practice management
company that focuses exclusively on musculoskeletal disease state management.
Currently, the Company is affiliated with sixteen practices (the "Affiliated
Practices") located in seven states. The Company also manages two outpatient
surgery centers, one outpatient magnetic resonance imaging (MRI) center, three
physical therapy operations and one occupational medicine operation.
Recent Affiliations
Reference is made to Note 7 of the Notes to Consolidated Condensed Financial
Statements included in this report for information regarding recent
affiliations.
Accounting Treatment
The acquisition of the net assets of certain practices in July 1997 for cash and
restricted securities will be accounted for by the purchase method. Future
acquisitions also will most likely be accounted for by the purchase method.
Costs of obtaining clinic service agreements are amortized using the
straight-line method over the life of the agreements, generally forty years.
Under the service agreements between the Company and each of the Affiliated
Practices, the Company has the exclusive right to provide management,
administrative and development services during the term of the agreement. In
event of termination of a service agreement, the related Affiliated Practice is
required to purchase all of the clinic assets, usually including the unamortized
portion of intangible assets, and assume all contracts, payables and leases
which relate to the performance of the Company's obligations which are performed
at the practice locations under the service agreement.
Results of Operations
Revenue. During the three and six months ending June 30, 1997, the Company
recorded service fees (including reimbursement of clinic expenses) of
approximately $9.5 and
14
<PAGE>
$16.8 million, respectively. During 1996, the Company was in its start-up
phase and consequently the results are not comparable with 1997 results.
In connection with its affiliation with Affiliated Practices, the Company enters
into Service Agreements with the Affiliated Practices. Pursuant to the terms of
the service agreements, the Company, among other things, provides facilities and
management, administrative and development services, and employs most
non-medical personnel, in return for management service fees. Such fees are
payable monthly and consist of the following: (i) service fees based on a
percentage (the "Service Fee Percentage") ranging from 20%-50% of the Adjusted
Pre-Tax Income of the Affiliated Practices related to professional services less
amounts equal to certain clinic expenses of the Affiliated Practices ("Clinic
Expenses," as defined more fully in the Service Agreements), not including
physician owner compensation or most benefits to physician owners, and (ii)
amounts equal to Clinic Expenses. Generally, for the first three years following
affiliation, the portion of the service fees described under clause (i) is
subject to a fixed dollar minimum (the "Base Service Fee"), which was generally
determined by applying the respective Service Fee Percentage to Adjusted Pre-Tax
Income for each Affiliated Practice for the twelve months prior to affiliation.
The annual Base Service Fees for Affiliated Practices, including the July 1997
affiliations, is approximately $16.4 million in the aggregate.
Significant factors that influence revenue of the Affiliated Practices include
patient volume, number of physicians, specialty and subspecialty mix, payor mix
and associated ancillary services. The Company plans to assist the Affiliated
Practices by providing management, capital and other resources required to
develop new services, and by assisting in the recruitment of additional
physicians to its Affiliated Practices and in securing managed care contracts.
Operating Expenses. The operating costs of the Company were approximately $7.7
and $13.8 million during the three and six months ending June 30, 1997,
respectively. During 1996, the Company was in its start-up phase and
consequently the results are not comparable with 1997 results.
The operating expenses incurred by the Company include the salaries, wages and
benefits of personnel (other than physician owners and certain technical medical
personnel), supplies, expenses involved in administering the clinical practices
of the Affiliated Practices, as well as depreciation and amortization of assets.
In addition, the Company has and will continue to incur personnel and
administrative expenses in connection with its corporate offices, which provide
management, administrative and development services to the Affiliated Practices.
Liquidity and Capital Resources
In February and March 1996, the Company received net proceeds from its initial
public offering of approximately $22 million. Approximately $5.6 million of the
proceeds were utilized to repay all outstanding borrowings under its credit
facility with a bank (the
15
<PAGE>
"Credit Facility"). In addition, approximately $16.4 million of the
proceeds were utilized in connection with affiliations with physician practices
from March through July 1997.
The Company has a $35 million Credit Facility available for acquisitions and
working capital. The Credit Facility limits the amount available for working
capital to an aggregate of $5 million. The minimum interest rates at which the
Company can borrow are the prime rate minus .25% or LIBOR plus 1.50%. The Credit
Facility is secured by substantially all of the assets of the Company and
contains several affirmative and negative covenants, including covenants
limiting the Company's ability to incur additional indebtedness and limiting the
Company's ability to, and restricting the terms upon which the Company can,
affiliate with physician practices in the future. Additionally, the Company is
prohibited from paying any dividends without written approval from the bank. The
minimum per annum commitment fee on the unused portion of the Credit Facility is
0.20%. As of July 31, 1997, the Company has borrowed $16.5 million of the amount
available.
PART II. Other Information
Item 1. Legal Proceedings
The information in Note 5 of the Notes to Consolidated Condensed Financial
Statements included in this report is incorporated herein by reference.
Item 2. Changes in Securities
Reference is made to the description of the Company's merger with the
predecessor of OSMC (including the issuance of 473,379 shares of common stock of
the Company), included in the second paragraph of Note 2 of the Notes to
Consolidated Condensed Financial Statements included in this report. The Company
effected the foregoing transaction in reliance on the exemption from
registration provided under Section 4(2) of the Securities Act of 1933. In this
regard, the Company believes the transaction complied with the requirements of
Rule 506 under the Act. No commissions were paid in connection with the
transaction.
Item 5. Other Information
The information in the last paragraph of Note 3 of the Notes to Consolidated
Condensed Financial Statements included in this report is incorporated herein by
reference.
16
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits The following is a list of exhibits filed as part of this
quarterly report on Form 10-Q.
Exhibit
Number Description
11 Statement re: computation of per share earnings
27 Summary financial data schedule
(b) Reports on Form 8-K. During the period covered by this report,
the Company filed the following Current Reports on Form 8-K:
i. Form 8-K filed with the Commission on April 21, 1997 reporting
information under Items 2 and 7, as amended by Form 8-K/A-1 filed with
the Commission on June 20, 1997. The date of the report was April 4,
1997.
ii. Form 8-K filed with the Commission on June 2, 1997 reporting
information under Items 2 and 7. This report was subsequently amended
by Form 8-K/A-1 filed on August 4, 1997. The date of the report was
March 3, 1997.
Financial statements included:
Each Form 8-K described above, as amended, included unaudited pro
forma consolidated financial statements of the Company and subsidiary
for the year ended December 31, 1996 and for the three months ended
March 31, 1997.
17
<PAGE>
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.
SPECIALTY CARE NETWORK, INC.
Date: By: /s/ Paul Davis
---------------------- -------------------------------------
Paul Davis
Senior Vice President, Finance
(Principal Accounting Officer)
18
<PAGE>
Specialty Care Network, Inc.
Exhibit Index
Exhibit 11 Computation of Per Share Earnings .........................20
Exhibit 27 Summary Financial Data Schedule............................21
19
Specialty Care Network, Inc. and Subsidiary
Exhibit 11 - Computation of Per Share Earnings
<TABLE>
<CAPTION>
For the Three For the Three For the Six For the Six
Months Ended Months Ended Months Ended Months Ended
June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Average shares outstanding 15,182,757 1,690,000 13,991,495 1,690,000
Net effect of convertible debentures -- 2,020,901 -- 2,020,901
Acquisition shares issued -- 7,659,115 -- 7,659,115
Dividends paid to promoters, using the
treasury stock method -- 192,234 -- 192,234
Stock sold to Tallahassee Orthopedic
Clinic, P.A -- 100,000 -- 100,000
Net effect of common stock options based on
the treasury stock method (using
initial public offering price
in 1996) 274,392 603,960 236,214 603,960
------------ ------------ ------------ ------------
Weighted average number of
common shares and common
share equivalents used in computation 15,457,149 12,266,210 14,227,709 12,266,210
============ ============ ============ ============
Net income (loss) $ 1,184,662 $ (785,036) $ 1,967,592 $ (956,762)
============ ============ ============ ============
Net income (loss) per share $ 0.08 $ (0.06) $ 0.14 $ (0.08)
============ ============ ============ ============
</TABLE>
20
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 1,783,865
<SECURITIES> 13,078,358
<RECEIVABLES> 32,676,978
<ALLOWANCES> 17,271,471
<INVENTORY> 61,224
<CURRENT-ASSETS> 32,561,146
<PP&E> 5,035,970
<DEPRECIATION> 2,705,282
<TOTAL-ASSETS> 52,818,610
<CURRENT-LIABILITIES> 6,888,471
<BONDS> 0
0
0
<COMMON> 15,343
<OTHER-SE> 37,147,784
<TOTAL-LIABILITY-AND-EQUITY> 52,818,610
<SALES> 16,836,851
<TOTAL-REVENUES> 16,836,851
<CGS> 0
<TOTAL-COSTS> 13,759,610
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (253,140)
<INCOME-PRETAX> 3,330,381
<INCOME-TAX> 1,362,789
<INCOME-CONTINUING> 1,967,592
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,967,592
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.14
</TABLE>
