SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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): July 1, 1997
--------------
SPECIALTY CARE NETWORK, INC.
- -------------------------------------------------------------------------------
(Exact Name of Registrant Specified in Charter)
Delaware 0-22019 62-1623449
- ------------------------------- ------------------------ --------------------
(State or Other Jurisdiction of (Commission File Number) (I.R.S. Employer
Incorporation) Identification No.)
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.
(a) Financial Statements of Ortho-Associates, P.A.
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Ortho-Associates, P.A.
d/b/a Park Place Therapeutic Center
We have audited the accompanying balance sheet of Ortho-Associates, P.A. d/b/a
Park Place Therapeutic Center as of December 31, 1996, and the related
statements of income and retained earnings, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Ortho-Associates, P.A. d/b/a
Park Place Therapeutic Center as of December 31, 1996, and the results of its
operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.
Fort Lauderdale, Florida /s/ LONDON WITTE & COMPANY, P.A.
May 31, 1997 ----------------------------------
London Witte & Company, P.A.
<PAGE>
ORTHO-ASSOCIATES, P.A.
d/b/a PARK PLACE THERAPEUTIC CENTER
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1996 1997
------------ ---------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash $ 442,168 $ 613,905
Accounts receivable, net 7,443,589 8,469,915
Stockholder advances, related parties 45,686 45,686
Receivables, other 20,439 39,091
Prepaid expenses 117,238 256,537
---------- ----------
Total current assets 8,069,120 9,425,134
---------- ----------
Property and equipment, net 23,812 131,582
---------- ----------
Other assets:
Marketable securities 35,768 187,232
Deposits 5,000 5,000
---------- ----------
Total other assets 40,768 192,232
---------- ----------
Total assets $8,133,700 $9,748,948
========== ==========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable, trade $ 81,849 $ 269,889
Accrued expenses 745,683 716,877
Due to Specialty Care Network, Inc. 0 208,000
Due to related parties 2,213,023 2,741,943
7% notes due to stockholders, related
parties 1,200,000 1,182,000
---------- ----------
Total current liabilities 4,240,555 5,118,709
---------- ----------
Total liabilities 4,240,555 5,118,709
---------- ----------
Stockholders' equity:
Common stock, $1 par value, authorized -
10,000 shares, issued and outstanding-
400 shares 400 400
Retained earnings 3,892,745 4,629,839
---------- ----------
Total stockholders' equity 3,893,145 4,630,239
---------- ----------
Total liabilities and stockholders' equity $8,133,700 $9,748,948
========== ==========
</TABLE>
See accompanying notes.
<PAGE>
ORTHO-ASSOCIATES, P.A.
d/b/a PARK PLACE THERAPEUTIC CENTER
STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, June 30,
1996 1996 1997
------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C>
Revenue, net $ 13,065,805 $ 6,475,853 $ 7,330,674
------------ ------------ ------------
Operating expenses:
Physician compensation 3,062,101 1,625,018 1,661,916
Salaries and benefits 3,870,358 2,021,360 1,901,645
Supplies, general and administrative
expenses 4,888,246 2,421,264 2,989,062
------------ ------------ ------------
Total operating expenses 11,820,705 6,067,642 6,552,623
------------ ------------ ------------
Operating income 1,245,100 408,211 778,051
Interest expense, net (82,055) (41,028) (40,957)
------------ ------------ ------------
Net income 1,163,045 367,183 737,094
Retained earnings, beginning of period 2,729,700 2,729,700 3,892,745
------------ ------------ ------------
Retained earnings, end of period $ 3,892,745 $ 3,096,883 $ 4,629,839
============ ============ ============
</TABLE>
See accompanying notes.
<PAGE>
ORTHO-ASSOCIATES, P.A.
d/b/a PARK PLACE THERAPEUTIC CENTER
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, June 30,
1996 1996 1997
------------- ------------ ------------
(Unaudited)
<S> <C> <C> <C>
Operating activities:
Cash received from patients and insurance
companies $ 11,298,486 $ 5,769,026 $ 6,304,348
Cash paid to suppliers and employees (11,602,591) (5,875,379) (6,320,458)
Interest expense, net (84,000) (42,000) (41,985)
Other 69,825 10,131 (18,652)
------------ ------------ ------------
Net cash used in operating activities (318,280) (138,222) (76,747)
------------ ------------ ------------
Cash flows from investing activities:
Purchases of marketable securities 0 0 (150,436)
Purchases of property and equipment 0 0 (112,000)
------------ ------------ ------------
Net cash used in investing activities 0 0 (262,436)
------------ ------------ ------------
Cash flows from financing activities:
Advances from related parties, net 724,066 521,891 510,920
------------ ------------ ------------
Net increase in cash 405,786 383,669 171,737
Cash, beginning of period 36,382 36,382 442,168
------------ ------------ ------------
Cash, end of period $ 442,168 $ 420,051 $ 613,905
============ ============ ============
Reconciliation of net income to net cash
used in operating activities:
Net income $ 1,163,045 $ 367,183 $ 737,094
Non-cash items
Depreciation 13,388 6,694 4,230
Accreted interest income (1,945) (972) (1,028)
Changes in current assets:
Accounts receivable (1,767,319) (706,827) (1,026,326)
Advances receivable 69,825 10,131 (18,652)
Prepaid expenses (32,888) (53,620) (139,299)
Changes in current liabilities:
Accounts payable, trade (47,103) (57,710) 188,040
Accrued expenses 284,717 296,899 (28,806)
Due to Specialty Care Network, Inc. 0 0 208,000
------------ ------------ ------------
Net cash used in operating activities $ (318,280) $ (138,222) $ (76,747)
============ ============ ============
</TABLE>
See accompanying notes.
<PAGE>
ORTHO-ASSOCIATES, P.A.
d/b/a PARK PLACE THERAPEUTIC CENTER
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
(Information pertaining to the six months ended
June 30, 1997 and 1996 and subsequent to June 30, 1997 is unaudited)
1. Description of the Business
Ortho-Associates, P.A. d/b/a Park Place Therapeutic Center (the "Company")
provides orthopaedic services to patients in the greater Fort Lauderdale
metropolitan area and, accordingly the patients who utilize such services
are from such area. The Company was formed in 1993 and is organized as a
professional corporation under the laws of the State of Florida. The
Company began operations in January 1994.
2. Summary of Significant Accounting Policies
The significant accounting policies followed by the Company are summarized
below.
Revenue Recognition
Professional fees and services rendered are recognized as revenue when the
physician and therapist provide the medical service to the patient. As
payment for such service is primarily paid by outside parties whose fees
are negotiated with the Company, revenues are adjusted to reflect such
reduction in fees. Such adjustments represent the difference between
charges at established rates and estimated amounts to be reimbursed to the
Company. Any difference between estimated adjustments and actual final
settlements are recognized when the final settlements are made. Interest
income recognized from patient accounts receivable is also included in net
revenue.
Property and equipment
Property and equipment are stated at cost and are depreciated using the
double declining balance method over the estimated useful lives of the
assets, ranging from five to seven years.
Financial statement estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
<PAGE>
ORTHO-ASSOCIATES, P.A.
d/b/a PARK PLACE THERAPEUTIC CENTER
NOTES TO FINANCIAL STATEMENTS - (continued)
2. Summary of Significant Accounting Policies (continued)
Marketable securities
The classification of marketable securities is determined at the date of
purchase. Securities categorized as held to maturity are carried at
amortized cost. Unrealized gains and losses are disclosed but not recorded,
and realized gains and losses are charged or credited to non-operating
income.
Estimated Medical Professional Liability Claims
The Company is insured for medical professional liability claims through a
retrospectively rated claims-made commercial insurance policy.
3. Accounts Receivable and Net Revenue
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1996 1997
------------- ------------
(Unaudited)
<S> <C> <C>
Gross patient accounts receivable $14,044,507 $15,980,972
Less allowances for contractual adjustments,
uncollectibles, and other adjustments 6,600,918 7,511,057
----------- -----------
Accounts receivable, net $ 7,443,589 $ 8,469,915
=========== ===========
Net revenue for the year ended December 31, 1996 consists of the
following:
Total patient billings and other $21,729,671
Less allowances for contractual adjustments,
uncollectibles, and other adjustments 8,663,866
-----------
Net revenue $13,065,805
===========
</TABLE>
<PAGE>
ORTHO-ASSOCIATES, P.A.
d/b/a PARK PLACE THERAPEUTIC CENTER
NOTES TO FINANCIAL STATEMENTS - (continued)
4. Property and Equipment, Net
Property and equipment, net at December 31, 1996 consists of the following:
Cost
Furniture and equipment $ 52,135
Therapy medical equipment 7,321
----------
Total cost 59,456
Accumulated depreciation 35,644
----------
Property and equipment, net $ 23,812
==========
The aggregate depreciation charged to operations is $13,388 for 1996.
5. Provision for Income Taxes
No provision for income taxes is included in the financial statements since
each stockholder has elected to individually report his respective share of
the Company's net income or loss.
For income tax purposes, the Company files its income tax returns on the
cash basis of accounting. Accordingly, revenues are reported when received
rather than when earned and expenses are reported when paid rather than
when incurred.
6. Related Party Transactions
The Company utilizes facilities and equipment from entities in which the
Company's stockholders are stockholders or partners. However, lease
agreements have not been executed between the parties. Therefore, such
leases are deemed to be on a month-to-month basis. Rent expense aggregated
$1,432,661 for 1996.
The Company employs the services of a company in which the Company's
stockholders are the sole stockholders. Such company provides marketing
services to the Company for a fee based on 5% of fees and services
collected. Marketing expense incurred with the related party aggregated
$576,823 for 1996.
<PAGE>
ORTHO-ASSOCIATES, P.A.
d/b/a PARK PLACE THERAPEUTIC CENTER
NOTES TO FINANCIAL STATEMENTS - (continued)
6. Related Party Transactions (continued)
Collection and billing services are provided by a company in which the
Company's stockholders are the sole stockholders for a fee based on 8% of
fees and services collected. Collection and billings services incurred with
the related party aggregated $922,916 for 1996.
The Company purchases medical supplies from a company in which an officer
owns substantially all stock of such company. Purchases of medical supplies
from the related party are not material.
Receivables from and payables to related parties resulting from the above
transactions, as well as, monies loaned to/from the related parties are
reflected in the balance sheet. The 7% notes due to stockholders are
uncollateralized and are payable upon demand. Interest expense to related
parties totaled $84,000 for 1996. Included in the balance sheet is $168,000
of accrued interest due to such related parties.
7. Litigation
The Company was a plaintiff in an action seeking restitution for monies
stolen by employees of a company who were engaged to perform janitorial
services. Prior to the mediation held in December of 1996, the Company
received $10,000 from a bond held by the janitorial franchise owner. The
case was settled in mediation and the Company received an additional
$85,000 in 1996. The $17,300 received in excess of the receivable was
applied against legal fees incurred.
<PAGE>
ORTHO-ASSOCIATES, P.A.
d/b/a PARK PLACE THERAPEUTIC CENTER
NOTES TO FINANCIAL STATEMENTS - (continued)
8. Marketable Securities
Marketable securities at December 31, 1996 consists of the following:
Debt securities
Municipal Bond @ Amortized Cost $ 35,768
=========
The following schedule reconciles the fair value and original cost of the
Company's marketable securities.
Held to
Maturity
--------
Debt securities
Cost basis $ 31,984
Gross unrealized holding gains 4,893
Gross unrealized holding losses 0
---------
Fair value $ 36,877
=========
There were no sales of marketable securities in 1996.
9. Concentration of Credit Risk
Given that the Company operates in the medical industry, government
regulations, insurance companies and technology directly influence the
operations of the Company.
10. Benefit Plan
The Company has a 401(k) plan covering substantially all employees with at
least 90 days of service. The Company contributes a discretionary amount to
the plan. The Company's expense was $0 for the year ended December 31,
1996.
<PAGE>
ORTHO-ASSOCIATES, P.A.
d/b/a PARK PLACE THERAPEUTIC CENTER
NOTES TO FINANCIAL STATEMENTS - (continued)
11. Fair Vale of Financial Instruments
The carrying values of the Company's financial instruments - cash, accounts
receivable, accrued expenses, and notes due to stockholders approximate
their fair value.
12. Operating Leases
The Company leases certain equipment under noncancelable operating leases.
The leases require the Company to pay all taxes, insurance and maintenance.
The following is a schedule of minimum future rentals on the leases as of
December 31, 1996.
Year ending December 31:
1997 $26,673
1998 20,843
1999 18,900
2000 3,150
-------
Total Minimum Future Rentals $69,566
=======
The aggregate rental cost of noncancelable leases is $22,910 for 1996.
<PAGE>
ORTHO-ASSOCIATES, P.A.
d/b/a PARK PLACE THERAPEUTIC CENTER
NOTES TO FINANCIAL STATEMENTS - (continued)
13. Unaudited Interim Financial Information
The balance sheet at June 30, 1997, and the Statements of Income and
Retained Earnings and Cash Flows for the six months ended June 30, 1996 and
1997 (interim financial statements) have been prepared by management and
are unaudited. The interim financial statements include all adjustments,
consisting of only normal recurring adjustments necessary for a fair
presentation of the interim results.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted from the interim financial
statements. The interim financial statements should be read in conjunction
with the December 31, 1996 audited financial statements appearing herein.
The results of the six months ended June 30, 1996 and 1997 may not be
indicative of operating results for the full respective years.
On July 8, 1997, with an effective date of July 1, 1997, Specialty Care
Network, Inc. (SCN) and the Company entered into an asset purchase
agreement and a management service agreement for a period of 40 years. In
connection with the management service agreement, SCN will provide
administrative services and manage the non-medical operations of the
Company. The physician stockholders of the Company and non-owner physicians
will continue to provide medical services through Ortho-Associates, P.A.
d/b/a Park Place Therapeutic Center. In connection with the aforementioned
agreements, SCN paid approximately $16.5 million to the Company. In
connection therewith, the Company paid compensation of approximately
$2,202,000 to its employees and incurred professional fees of approximately
$125,000. Neither of these amounts have been reflected in the operations of
the Company for the six months ended June 30, 1997 because such amounts
were generally contingent upon the successful completion of the SCN
transactions. However, the Company incurred $208,000 in consulting expense
for services rendered by SCN in June 1997 and such amount has been
reflected in the Company's operations. Also, the Company paid $112,000 to
affiliated companies on June 30, 1997 to acquire certain property and
equipment prior to the transactions with SCN.
(b) 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, other restricted equity
securities, 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, Reconstructive Orthopaedic Associates
Inc. 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
Southeastern Neurology Group, P.C. Southeastern Neurology Group II, P.C. July 1, 1997
Orthopaedic Surgery, Ltd. Orthopaedic Surgery Centers,
P.C. II July 1, 1997
Neal C. Small, M.D. & Associates, P.A. Associated Orthopaedics & Sports
Medicine, P.A. July 3, 1997
Neal C. Small, M.D., P.A. Associated Orthopaedics & Sports
Medicine, P.A. July 3, 1997
Alexander I. Glogau, M.D., P.A. Associated Orthopaedics & Sports
Medicine, P.A. July 3, 1997
Associated Arthroscopy Institute, Inc. Associated Arthroscopy Institute, Inc.(1) July 3, 1997
Access Medical Supply, Inc. d/b/a Access Medical Supply, Inc. d/b/a
Associated Physical Therapy Associated Physical Therapy(1) July 3, 1997
</TABLE>
<PAGE>
Unaudited Pro Forma Consolidated Financial Statements
of Specialty Care Network, Inc. and Subsidiary (continued)
Basis of Presentation (continued)
<TABLE>
<CAPTION>
Acquisition and
Prior Practices Affiliated Practices Affiliation Date
--------------- -------------------- ----------------
<S> <C> <C>
Allied Health Services, P.A. d/b/a Allied Health Services, P.A. d/b/a
Associated Occupational Rehabilitation Associated Occupational
Rehabilitation(1) July 3, 1997
Ortho-Associates, P.A. d/b/a Park Place Ortho-Associates, P.A. d/b/a Park
Therapeutic Center Place Therapeutic Center July 7, 1997
</TABLE>
- ----------
(1) Associated Arthroscopy Institute, Inc., Access Medical Supply, Inc. and
Allied Health Services, P.A. are entities asscociated with Associated
Orthopaedics & Sports Medicine, P.A., that provide ancillary services.
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
acquisitions of certain net assets of the Prior Practices that affiliated with
the Company during 1997 as if such transactions had occurred, and the related
Service Agreements were 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 the Prior Practices and
the entry into the Service Agreements occurred on January 1, 1997, except for
those Prior Practices that affiliated with the Company during 1996. Financial
information for Prior Practices that affiliated with the Company during 1996 is
reflected in the Company's consolidated income statement 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, 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 and the financial
statements of Ortho-Associates, P.A. d/b/a Park Place Therapeutic Center,
included in Item 7(a) above.
<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 $(14,862,223) (3) $ --
Accounts receivable, net 15,405,507 1,433,982 (1) 16,839,489
Loans to physician stockholders 1,107,514 -- 1,107,514
Prepaid expenses and inventories 1,090,137 (148,294) (5) 941,843
Prepaid and recoverable income taxes 95,765 -- 95,765
------------ ------------ ------------
Total current assets 32,561,146 (13,576,535) 18,984,611
Property and equipment, net 2,330,688 1,705,063 (1) 4,035,751
Intangible assets, net 204,513 -- 204,513
Management service agreements 17,658,711 39,609,331 (2) 57,268,042
Other assets 63,552 -- 63,552
------------ ------------ ------------
Total assets $ 52,818,610 $ 27,737,859 $ 80,556,469
============ ============ ============
Liabilities and stockholders' equity
Current liabilities:
Current portion of capital
lease obligations $ 198,074 $ 14,337 (1) $ 212,411
Accounts payable 79,994 198,744 (1) 278,738
Accrued expenses 662,735 215,099 (1) 1,775,004
897,170 (5)
Accrued payroll, incentive
compensation and
related expenses 1,560,122 34,901 (1) 1,595,023
Due to physician groups 3,529,801 -- 3,529,801
Deferred income taxes 857,745 28,910 (4) 886,655
------------ ------------ ------------
Total current liabilities 6,888,471 1,389,161 8,277,632
Line of credit -- 10,435,833 (3) 10,435,833
Capital lease obligations,
less current portion 842,884 62,328 (1) 905,212
Deferred income taxes 7,924,128 8,136,365 (4) 16,060,493
------------ ------------ ------------
Total liabilities 15,655,483 20,023,687 35,679,170
Stockholders' equity:
Preferred stock -- -- --
Common stock 15,343 743 (3) 16,086
Additional paid-in capital 36,951,575 2,613,636 (1) 44,665,004
39,609,331 (2)
(25,298,799) (3)
(8,165,275) (4)
(1,045,464) (5)
Retained earnings 196,209 -- 196,209
------------ ------------ ------------
Total stockholders' equity 37,163,127 7,714,172 44,877,299
------------ ------------ ------------
Total liabilities and stockholders'
equity $ 52,818,610 $ 27,737,859 $ 80,556,469
============ ============ ============
</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 $ 47,078,702 (6) $ 51,470,752
Costs and expenses:
Clinic expenses 2,820,743 34,385,471 (7) 37,206,214
General and administrative expenses 3,770,263 1,851,652 (8) 8,126,305
3,030,574 (9)
(526,184) (10)
------------ ------------ ------------
Total operating costs and expenses 6,591,006 38,741,513 45,332,519
------------ ------------ ------------
Income (loss) from operations (2,198,956) 8,337,189 6,138,233
Interest expense, net 78,498 1,868,887 (11) 1,947,385
------------ ------------ ------------
Income (loss) before income taxes (2,277,454) 6,468,302 4,190,848
Income tax benefit (expense) 506,071 (2,224,319) (12) (1,718,248)
------------ ------------ ------------
Net income (loss) ($ 1,771,383) $ 4,243,983 $ 2,472,600
============ ============ ============
Net income (loss) per share ($ 0.15) $ 0.19
============ ============
Weighted average number of common shares
and common share equivalents used in
computation 12,026,347 12,799,734
============ ============
</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 $ 8,954,972 (6) $25,791,823
Costs and expenses:
Clinic expenses 10,885,602 6,629,881 (7) 17,515,483
General and administrative expenses 2,874,008 261,544 (8) 4,063,511
927,959 (9)
----------- ---------- -----------
Total operating costs and expenses 13,759,610 7,819,384 21,578,994
----------- ---------- -----------
Income from operations 3,077,241 1,135,588 4,212,829
Interest (income) expense, net (253,140) 640,249 (11) 387,109
----------- ---------- -----------
Income before income taxes 3,330,381 495,339 3,825,720
Income tax expense (1,362,789) (205,756) (12) (1,568,545)
----------- ---------- -----------
Net income $ 1,967,592 $ 289,583 $2,257,175
=========== =========== ==========
Net income per share $ 0.14 $ 0.15
=========== ==========
Weighted average number of common shares
and common share equivalents used in
computation 14,227,709 14,971,065
=========== ==========
</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 the Prior Practices acquired subsequent to June 30, 1997
and of the liabilities assumed pursuant to the terms and conditions of the
agreements relating to the acquisitions of such assets (hereinafter
referred to as the "Mid-1997 Agreements"). See the following page for a
summary of the relevant acquisition activity.
In addition, the consolidated pro forma balance sheet reflects certain
excluded assets and liabilities that are comprised of the following
significant items: cash, accounts receivable of Ortho-Associates, P.A.
d/b/a Park Place Therapeutic Center ("Park Place"), prepaid expenses,
capital lease asset (office building), accrued physician compensation and
benefits that were retained by the owners of aforementioned Prior
Practices, and all bank indebtedness that was not paid prior to the closing
dates of the Acquisition Agreements. Accounts receivable of Prior
Practices, other than Park Place, were acquired by the Company under the
Acquisition Agreements and are reflected in the consolidated pro forma
balance sheet.
<PAGE>
Pro Forma Consolidated Balance Sheet Adjustments (continued)
<TABLE>
<CAPTION>
Plano, Texas
Physician Ortho-Associates,
Southeastern Practices and P.A. d/b/a Park
Orthopaedic Neurology Related Place Therapeutic
Surgergy, Ltd. Group, P.C. Entities(1) Center Totals
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Accounts receivable, net $ 353,971 $ 375,437 $ 704,574 $ -- $1,433,982
Property and equipment, net 130,713 307,247 1,017,103 250,000 1,705,063
---------- ---------- ---------- ---------- ----------
Assets acquired 484,684 682,684 1,721,677 250,000 3,139,045
---------- ---------- ---------- ---------- ----------
Current portion of capital lease
obligations -- -- 14,337 -- 14,337
Accounts payable 58,715 66,812 73,217 -- 198,744
Accrued expenses 46,274 37,838 80,987 50,000 215,099
Accrued payroll,incentive compensation
and related expenses 3,726 12,162 19,013 -- 34,901
Capital lease obligations, net of current
portion -- -- 62,328 -- 62,328
---------- ---------- ---------- ---------- ----------
Liabilities assumed 108,715 116,812 249,882 50,000 525,409
---------- ---------- ---------- ---------- ----------
Adjustments to additional paid-in capital $ 375,969 $ 565,872 $1,471,795 $ 200,000 $2,613,636
========== ========== ========== ========== ==========
</TABLE>
(1) The Plano, Texas physician practices and related entities include:
Neal C. Small, M.D. & Associates, P.A.
Neal C. Small, M.D., P.A.
Alexander I. Glogau, M.D., P.A.
Associated Arthroscopy Institute, Inc.
Access Medical Supply, Inc. d/b/a Associated Physical Therapy
Allied Health Services, P.A. d/b/a Associated Occupational Rehabilitation
<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 Mid-1997 Agreements, 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 Mid-1997 Agreements, 743,356 shares of the Company's
restricted common stock were issued, and the Company paid approximately
$25.3 million directly to the former physician stockholders of the Prior
Practices and Michael West, who provided administrative services to two of
the Prior Practices (Mr. West became an executive officer of the Company
after the completion of the relevant affiliation transactions). The Company
also issued to the physician stockholders of Park Place warrants to
purchase, in the aggregate, 544,681 shares of the Company's restricted
common stock at an exercise price of $14.69 per share. Such warrants expire
over a three year period ending in July 2000. In connection with its
acquisition of substantially all of the net assets of Orthopaedic Surgery,
Ltd., the Company granted one physician associated with such practice the
right, until June 30, 1998, to require the Company to purchase 74,844 of
the 159,643 shares of the Company's restricted common stock issued to the
physician as consideration for the acquisition transaction at a purchase
price equal to $11.21 per share.
The pro forma consolidated financial statements reflect (i) a
reclassification of $743 from additional paid-in capital to common stock
(ii) a decrease in cash and cash equivalents of $14,862,223 (iii) an
increase in the line of credit of $10,435,833 and (iv) a decrease in
additional paid in capital of $25,298,799 for the cash consideration paid
to the former physician stockholders of the Prior Practices and Mr. West.
The pro forma impact of noncash consideration has been reflected in pro
forma adjustments 1 and 2 above.
Under the terms of its Amended and Restated Revolving Loan and Security
Agreement, ("the Credit Agreement") the Company may borrow up to $35
million. The amounts borrowed are renewable for periods beyond June 30,
1998. The Company intends to renew the amount of its pro forma $10,435,833
short-term obligation under this agreement for an uninterrupted period
extending beyond one year from June 30, 1997, or to refinance such amounts
outstanding thereunder with a equity offering or long-term financing
arrangement.
<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 the
Prior Practices acquired under the Mid-1997 Agreements, 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 $28,910 increase in the short-term deferred tax liability,
(ii) a $8,136,365 increase in the long-term deferred tax liability and
(iii) a corresponding $8,165,275 reduction in additional paid-in capital.
Subsequent to the respective acquisition dates, to the extent that the
operations of the aforementioned Prior Practices have been assumed by the
Company, those operations will be reflected in the income tax returns of
the Company. Subsequent to the affiliation dates (which respectively are
the same dates as the acquisition dates), taxable income or loss of each
Affiliated Practice will be included in its separate income tax returns.
5. Reflects the incremental costs necessary to effectuate the Mid-1997
Agreements, including brokers' and finders' fees, resulting in a decrease
of $148,294 in prepaid expenses for costs paid through June 30, 1997, an
increase of $897,170 in accrued expenses and a corresponding reduction in
additional paid-in capital of $1,045,464.
<PAGE>
Pro Forma Consolidated Statements of Income Adjustments
<TABLE>
<CAPTION>
Year ended Six months
December 31, ended June 30,
1996 1997
------------- --------------
<S> <C> <C>
6. Reflects the following adjustments to net revenue:
(i) Recognition of service fee revenue based
on long-term service agreements $12,693,231 $2,325,091
(ii) Reimbursement of clinic operating expenses 34,385,471 6,629,881
---------- ----------
47,078,702 8,954,972
</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 50% 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 $14.2 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 $1.0 million. In
addition, 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.
<TABLE>
<S> <C> <C>
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 the Affiliated Practices
that affiliated with the Company in 1997 13,192,986 6,629,881
----------- ----------
34,385,471 6,629,881
</TABLE>
<PAGE>
Pro Forma Consolidated Statements of Income Adjustments (continued)
<PAGE>
<TABLE>
<CAPTION>
Year ended Six months
December 31, ended June 30,
1996 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 $ 261,544
----------- -----------
1,851,652 261,544
9. (i) Additional expense for amortization of Service Agreements over
the forty year life of the underlying agreements $ 990,233 $ 495,117
(ii) Annualized historical corporate general and administrative
expenses 2,040,341 432,842
----------- -----------
3,030,574 927,959
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 Prior
Practice acquisitions (assumed rate of borrowing of 7.40% per annum) 1,909,056 270,290
(iii) Elimination of interest income on cash and cash equivalents 11,870 369,959
----------- -----------
1,868,887 640,249
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% $(2,224,319) $ (205,756)
----------- -----------
(2,224,319) (205,756)
</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
December 31, Ended June 30,
1996 1997
----------- -----------
<S> <C> <C>
Shares distributed to the stockholders of the Prior Practices 8,402,471 743,356
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
Common stock equivalents attributable to the put rights allocated to a
former physician stockholder at Orthopaedic Surgery, Ltd. 30,031 --
Weighted average common shares outstanding, exclusive of the impact
of the above mentioned items 1,450,137 13,991,495
=========== ===========
12,799,734 14,971,065
=========== ===========
</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: September 15, 1997
