SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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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): September 1, 1997
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SPECIALTY CARE NETWORK, INC.
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(Exact Name of Registrant Specified in Charter)
Delaware 0-22019 62-1623449
- ---------------------------- ------------------------ -------------------
(State or Other Jurisdiction (Commission File Number) (I.R.S. Employer
of Incorporation) Identification No.)
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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<PAGE>
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Pro Forma Financial Information (unaudited)
Unaudited Pro Forma Consolidated Financial Statements
of Specialty Care Network, Inc. and Subsidiary
Basis of Presentation
The following unaudited pro forma consolidated financial statements give effect
to acquisitions by Specialty Care Network, Inc. (the "Company"), a Delaware
corporation, of certain net assets of the Prior Practices, in exchange for
shares of the Company's restricted 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
"Prior Practices" and "Affiliated Practices" are defined to include the
following entities:
<TABLE>
<CAPTION>
Acquisition and
Prior Practices Affiliated Practices Affiliation Date
--------------- -------------------- ----------------
<S> <C> <C>
Reconstructive Orthopaedic Associates, Inc. Reconstructive Orthopaedic Associates II, P.C. November 12, 1996
Princeton Orthopaedic Associates, P.A. Princeton Orthopaedic Associates II, P.A. November 12, 1996
Tallahassee Orthopedic Clinic, Inc. TOC Specialists, P.L. November 12, 1996
Greater Chesapeake Orthopaedic Greater Chesapeake Orthopaedic
Associates, LLC Associates, LLC November 12, 1996
Vero Orthopaedics, P.A. Vero Orthopaedics II, P.A. November 12, 1996
Orthopaedic Associates of West Florida, P.A. Orthopaedic Associates of West Florida II, P.A. September 1, 1997
</TABLE>
<PAGE>
Unaudited Pro Forma Consolidated Financial Statements
of Specialty Care Network, Inc. and Subsidiary (continued)
Basis of Presentation (continued)
Pursuant to the service agreements between the Company and each of the
Affiliated Practices, the Company provides management, administrative and
development services to the Affiliated Practices in return for a service fee.
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 pro forma consolidated financial statements have been prepared by the
Company based upon the historical financial statements of Specialty Care
Network, Inc. and subsidiary and the Prior Practices, and certain preliminary
estimates and assumptions deemed appropriate by management of the Company. These
pro forma consolidated financial statements 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 financial statements; however,
additional estimated future corporate overhead and direct costs of the Company
have been reflected in the pro forma consolidated financial statements.
The pro forma consolidated balance sheet as of June 30, 1997 gives effect to the
acquisition of certain net assets of Orthopaedic Associates of West Florida,
P.A. ("OAWF"), as if such transaction had occurred, and the related Service
Agreement was executed, on June 30, 1997.
<PAGE>
Unaudited Pro Forma Consolidated Financial Statements
of Specialty Care Network, Inc. and Subsidiary (continued)
Basis of Presentation (continued)
The pro forma consolidated statement of income for the year ended December 31,
1996 assumes that the following occurred on January 1, 1996: (i) the acquisition
of certain net assets of the Prior Practices and the entry into the Service
Agreements and (ii) conversion of the Company's $1.87 million convertible
debentures and accrued interest thereon into the Company's common stock. The pro
forma consolidated statement of income for the six months ended June 30, 1997
assumes that the acquisition of certain net assets of OAWF and the entry into
the Service Agreement with Orthopaedic Associates of West Florda II, P.A. ("OAWF
II") occurred on January 1, 1997. Financial information for Prior Practices that
affiliated with the Company during 1996 is reflected in the Company's
consolidated statement of income for the six months ended June 30, 1997.
The pro forma consolidated financial statements should be read in conjunction
with the historical financial statements of the Company and Reconstructive
Orthopaedic Associates II, P.C. (successor to Reconstructive Orthopaedic
Associates, Inc.), 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, and the historical 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 June 30, 1997.
<PAGE>
Unaudited Pro Forma Consolidated Financial Statements of
Specialty Care Network, Inc. and Subsidiary
Pro Forma Consolidated Balance Sheet
June 30, 1997
<TABLE>
<CAPTION>
Specialty Care Pro Forma
Network, Inc. Pro Forma Adjustment Pro
and Subsidiary Adjustments Legend Forma
-------------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $14,862,223 $(3,798,637) (3) $11,063,586
Accounts receivable, net 15,405,507 1,071,839 (1) 16,477,346
Loans to physician stockholders 1,107,514 - 1,107,514
Prepaid expenses and inventories 1,090,137 (7,338) (5) 1,082,799
Prepaid and recoverable income taxes 95,765 - 95,765
----------- ----------- -----------
Total current assets 32,561,146 (2,734,136) 29,827,010
Property and equipment, net 2,330,688 70,274 (1) 2,400,962
Intangible assets, net 204,513 - 204,513
Management service agreements 17,658,711 11,146,814 (2) 28,805,525
Other assets 63,552 - 63,552
----------- ----------- -----------
Total assets $52,818,610 $ 8,482,952 $61,301,562
=========== =========== ===========
Liabilities and stockholders' equity
Current liabilities:
Current portion of capital lease obligations $ 198,074 $ - $ 198,074
Accounts payable 79,994 14,397 (1) 94,391
Accrued expenses 662,735 50,000 (5) 717,735
5,000 (1)
Accrued payroll, incentive compensation
and related expenses 1,560,122 16,153 (1) 1,576,275
Due to physician groups 3,529,801 - 3,529,801
Deferred income taxes 857,745 - 857,745
----------- ----------- -----------
Total current liabilities 6,888,471 85,550 6,974,021
Capital lease obligations, less current portion 842,884 - 842,884
Deferred income taxes 7,924,128 5,000,975 (4) 12,925,103
----------- ----------- -----------
Total liabilities 15,655,483 5,086,525 20,742,008
Stockholders' equity:
Preferred stock - - -
Common stock 15,343 333 (3) 15,676
Additional paid-in capital 36,951,575 1,106,563 (1) 40,347,669
11,146,814 (2)
(3,798,970) (3)
(5,000,975) (4)
(57,338) (5)
Retained earnings 196,209 - 196,209
----------- ----------- -----------
Total stockholders' equity 37,163,127 3,396,427 40,559,554
----------- ----------- -----------
Total liabilities and stockholders' equity $52,818,610 $ 8,482,952 $61,301,562
=========== =========== ===========
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial statements.
<PAGE>
Unaudited Pro Forma Consolidated Financial Statements of
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 Pro
and Subsidiary Adjustments Legend Forma
-------------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Net revenue $ 4,392,050 $33,742,244 (6) $38,134,294
Costs and expenses:
Clinic expenses 2,820,743 24,495,180 (7) 27,315,923
General and administrative expenses 3,770,263 1,851,652 (8) 7,414,748
2,319,017 (9)
(526,184) (10)
----------- ----------- -----------
Total operating costs and expenses 6,591,006 28,139,665 34,730,671
----------- ----------- -----------
Income (loss) from operations (2,198,956) 5,602,579 3,403,623
Interest expense, net 78,498 240,930 (11) 319,428
----------- ----------- -----------
Income (loss) before income taxes (2,277,454) 5,361,649 3,084,195
Income tax benefit (expense) 506,071 (1,770,591) (12) (1,264,520)
----------- ----------- -----------
Net income (loss) $(1,771,383) $ 3,591,058 $ 1,819,675
=========== =========== ===========
Net income (loss) per share ($0.15) $0.15
=========== ===========
Weighted average number of common shares
and common share equivalents used in
computation 12,026,347 12,359,330
=========== ===========
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial statements.
<PAGE>
Unaudited Pro Forma Consolidated Financial Statements of
Specialty Care Network, Inc. and Subsidiary
Pro Forma Consolidated Statement of Income
Six Months Ended June 30, 1997
<TABLE>
<CAPTION>
Specialty Care Pro Forma
Network, Inc. Pro Forma Adjustment Pro
and Subsidiary Adjustments Legend Forma
-------------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Net revenue $16,836,851 $2,307,810 (6) $19,144,661
Costs and expenses:
Clinic expenses 10,885,602 1,705,789 (7) 12,591,391
General and administrative expenses 2,874,008 36,093 (8) 3,109,171
199,070 (9)
----------- ---------- -----------
Total operating costs and expenses 13,759,610 1,940,952 15,700,562
----------- ---------- -----------
Income from operations 3,077,241 366,858 3,444,099
Interest (income) expense, net (253,140) 86,753 (11) (166,387)
----------- ---------- -----------
Income before income taxes 3,330,381 280,105 3,610,486
Income tax expense (1,362,789) (117,510) (12) (1,480,299)
----------- ---------- -----------
Net income $ 1,967,592 $ 162,595 $ 2,130,187
=========== ========== ===========
Net income per share $ 0.14 $ 0.15
=========== ===========
Weighted average number of common shares
and common share equivalents used in
computation 14,227,709 14,560,692
=========== ===========
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial statements.
<PAGE>
Unaudited Pro Forma Consolidated Financial Statements
of Specialty Care Network, Inc. and Subsidiary
Notes to Pro Forma Consolidated Financial Statements
Pro Forma Consolidated Balance Sheet Adjustments
1. Reflects the fair value allocation of the consideration paid for the
tangible assets of OAWF and of the liabilities assumed pursuant to the
terms and conditions of the agreement relating to the acquisition of such
assets (hereinafter referred to as the "OAWF Agreement"), as follows:
Accounts receivable, net $1,071,839
Property and equipment, net 70,274
----------
Assets acquired 1,142,113
----------
Accounts payable 14,397
Accrued expenses 5,000
Accrued payroll, incentive compensation
and related expenses 16,153
----------
Liabilities assumed 35,550
----------
Adjustments to additional paid-in capital $1,106,563
==========
Certain excluded assets and liabilities were not acquired or assumed by the
Company. Such assets and liabilities are comprised of the following
significant items: cash, prepaid expenses, accrued physician compensation
and benefits that were retained by the owners of OAWF, and all bank
indebtedness that was not paid prior to the closing date of the OAWF
Agreement.
<PAGE>
Pro Forma Consolidated Balance Sheet Adjustments (continued)
2. Reflects the fair value allocation of the consideration paid and
liabilities assumed in connection with the OAWF Agreement, including the
income tax effects of temporary differences, allocated to the long-term
service agreement intangible asset and a corresponding adjustment to
additional paid-in capital.
3. Pursuant to the OAWF Agreement, the former physician stockholders of OAWF
received 332,983 shares of the Company's restricted common stock and
approximately $3.8 million from the Company.
The pro forma consolidated financial statements reflect (i) a
reclassification of $333 from additional paid-in capital to common stock
(ii) a decrease in cash and cash equivalents of $3,798,637 and (iii) a
decrease in additional paid in capital of $3,798,970 for the cash
consideration paid to the former physician stockholders of OAWF. The pro
forma impact of noncash consideration has been reflected in pro forma
adjustments 1 and 2 above.
<PAGE>
Pro Forma Consolidated Balance Sheet Adjustments (continued)
4. Reflects the resulting deferred income taxes in accordance with Statement
of Financial Accounting Standards No. 109, Accounting for Income Taxes, for
the net federal and state deferred tax liabilities to be assumed by the
Company, pursuant to Section 481 of the Internal Revenue Code of 1986, as
amended, based on the underlying cash basis of certain net assets of OAWF
acquired under the OAWF Agreement, and the income tax effects of temporary
differences related to all identifiable acquisition intangible assets,
including service agreements. This pro forma adjustment results in (i) a
$5,000,975 increase in the long-term deferred tax liability and (ii) a
corresponding reduction in additional paid-in capital. Subsequent to
September 1, 1997, to the extent that the operations of OAWF have been
assumed by the Company, those operations will be reflected in the income
tax returns of the Company. Taxable income or loss of OAWF II will be
included in its separate income tax returns.
5. Reflects the incremental costs necessary to effectuate the OAWF Agreement,
resulting in a decrease of $7,338 in prepaid expenses for costs paid
through June 30, 1997, an increase of $50,000 in accrued expenses and a
corresponding reduction in additional paid-in capital of $57,338.
<PAGE>
Pro Forma Consolidated Statements of Income Adjustments
<TABLE>
<CAPTION>
Year ended Six months ended
December 31, 1996 June 30, 1997
----------------- ----------------
<S> <C> <C>
6. Reflects the following adjustments to net revenue:
(i) Recognition of service fee revenue based on long-term service agreements
$ 9,247,064 $ 602,021
(ii) Reimbursement of clinic operating expenses 24,495,180 1,705,789
----------- ----------
$33,742,244 $2,307,810
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 generally as revenue of the Affiliated
Practices related to professional services less amounts equal to certain
clinic expenses of the Affiliated Practices, not including physician owner
compensation or most benefits to physician owners ("Clinic Expenses," as
more fully defined in the Service Agreements)) 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 of each Affiliated Practice for the twelve months
prior to affiliation. The aggregate annual Base Service Fee for the
Affiliated Practices is approximately $10.7 million. This Base Service Fee
was used to calculate the above pro forma service fee revenue adjustment
for both periods presented. For the six months ended June 30, 1997, as
reflected on a pro forma basis, the aggregate service fees that would be
payable based on the Service Fee Percentages of the Affiliated Practices
are below the aggregate Base Service Fee by approximately $.5 million.
With respect to its management (and, in certain instances, ownership) of
certain facilities and ancillary services associated with certain of the
Affiliated Practices, the Company receives fees based on a percentage of
net revenue or pre-tax income related to such facilities and services.
7. Reflects the following adjustments to clinic expenses:
(i) Incremental clinic expenses for the Affiliated Practices that affiliated
with the Company in 1996 $21,192,485 $ -
(ii) Incremental clinic expenses for OAWF 3,302,695 1,705,789
----------- ----------
$24,495,180 $1,705,789
</TABLE>
<PAGE>
Pro Forma Consolidated Statements of Income Adjustments (continued)
<TABLE>
<CAPTION>
Year ended Six months ended
December 31, 1996 June 30, 1997
----------------- ----------------
<S> <C> <C>
Items 8 through 10 reflect adjustments to general and administrative expenses
8. Corporate office and officer compensation and fringe benefit expenses $ 1,851,652 $ 36,093
----------- ---------
1,851,652 36,093
9. (i) Additional expense for amortization of Service Agreements over the forty
year life of the underlying agreements $ 278,676 $ 139,338
(ii) Annualized corporate general and administrative
expenses 2,040,341 59,732
----------- ---------
2,319,017 199,070
Adjustments to historical corporate general and administrative expenses are
based upon (i) projected operational requirements, including rent,
insurance, travel, recruiting and utilities and (ii) depreciation and
amortization based on projected capital asset and corporate financing
requirements.
10. Adjustment to costs to evaluate and acquire physician practices $ (526,184) $ -
----------- ---------
(526,184) -
11. Reflects the following adjustments to interest (income) expense:
(i) Elimination of interest expense on convertible debentures $ (52,039) $ -
(ii) Incremental interest on borrowings necessary to effectuate the OAWF
acquisition (assumed rate of borrowing of 7.40% per annum) 281,099 23,425
(iii)Elimination of interest income on cash and cash equivalents 11,870 63,328
----------- ---------
240,930 86,753
12. 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% $(1,770,591) $(117,510)
----------- ---------
(1,770,591) (117,510)
</TABLE>
<PAGE>
Pro Forma Consolidated Statements of Income Adjustments (continued)
13. 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 Six months ended
December 31, 1996 June 30, 1997
----------------- ----------------
<S> <C> <C>
Shares distributed to the stockholders of the Prior Practices 7,992,098 332,983
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 the Prior Practices 192,234 -
Common stock equivalents attributable to outstanding stock options 603,960 236,214
Weighted average common shares outstanding, exclusive of the impact
of the above mentioned items 1,450,137 13,991,495
---------- ----------
12,359,330 14,560,692
========== ==========
</TABLE>
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 1996 calculation as if these common and common equivalent
shares were outstanding for the entire year ended December 31, 1996.
<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.
By: /s/ D. Paul Davis
-------------------------------
D. Paul Davis
Senior Vice President, Finance
(Principal Accounting Officer)
Dated: November 6, 1997
