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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 10, 1997
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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
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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.
In addition, the pro forma consolidated balance sheet gives effect to the
acquisition by the Company of one-half of the outstanding membership interests
of West Central Ohio Group, Ltd., an Ohio limited liability company ("WCOG").
The pro forma consolidated statements of income for the year ended December 31,
1996 and the six months ended June 30, 1997 do not give effect to the
acquisition by the Company of the membership interests in WCOG as described
above, as WCOG had no operations other than initiation of the construction of a
an orthopaedic specialty hospital in Lima, Ohio prior to the acquisition date.
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 II,
Inc. 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
Orthopedic Surgeons of Lima, Inc. Orthopaedic Institute of Ohio, Inc. September 10, 1997
Bone & Joint Center of Lima, Inc. Orthopaedic Institute of Ohio, Inc. September 10, 1997
Lima Orthopedics, Inc. Orthopaedic Institute of Ohio, Inc. September 10, 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, the Prior Practices, WCOG (balance sheet only) 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 the Prior Practices and the Company's
investment in WCOG 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 Orthopedic Surgeons of
Lima, Inc., Bone & Joint Center of Lima, Inc. and Lima Orthopedics, Inc.
(collectively, Lima, Ohio Prior Practices) and the entry into the Service
Agreements occurred on January 1, 1997. Financial information for the other
Prior Practices 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, 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 $(1,769,848) (3) $13,092,375
Accounts receivable, net 15,405,507 850,615 (1) 16,256,122
Loans to physician stockholders 1,107,514 -- 1,107,514
Prepaid expenses and inventories 1,090,137 (7,090) (5) 1,083,047
Prepaid and recoverable income taxes 95,765 -- 95,765
----------- ----------- -----------
Total current assets 32,561,146 (926,323) 31,634,823
Property and equipment, net 2,330,688 45,000 (1) 2,375,688
Intangible assets, net 204,513 -- 204,513
Management service agreements 17,658,711 12,902,087 (2) 30,560,798
Investments -- 400,000 (6) 400,000
Other assets 63,552 -- 63,552
----------- ----------- -----------
Total assets $52,818,610 $12,420,764 $65,239,374
=========== =========== ===========
Liabilities and stockholders' equity
Current liabilities:
Current portion of capital lease $ 198,074 $ -- $ 198,074
obligations
Accounts payable 79,994 -- 79,994
Accrued expenses 662,735 75,000 (1) 872,735
135,000 (5)
Accrued payroll, incentive compensation
and related expenses 1,560,122 6,294 (1) 1,566,416
Due to physician groups 3,529,801 -- 3,529,801
Deferred income taxes 857,745 -- 857,745
----------- ----------- -----------
Total current liabilities 6,888,471 216,294 7,104,765
Capital lease obligations, less current
portion 842,884 -- 842,884
Deferred income taxes 7,924,128 5,605,277 (4) 13,529,405
----------- ----------- -----------
Total liabilities 15,655,483 5,821,571 21,477,054
Stockholders' equity:
Preferred stock -- -- --
Common stock 15,343 673 (3) 16,016
Additional paid-in capital 36,951,575 814,321 (1) 43,550,095
12,902,087 (2)
(1,770,521) (3)
(5,605,277) (4)
(142,090) (5)
400,000 (6)
Retained earnings 196,209 -- 196,209
----------- ----------- -----------
Total stockholders' equity 37,163,127 6,599,193 43,762,320
=========== =========== ===========
Total liabilities and stockholders' equity $52,818,610 $12,420,764 $65,239,374
=========== =========== ===========
</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 $32,909,890 (7) $37,301,940
Costs and expenses:
Clinic expenses 2,820,743 23,321,012 (8) 26,141,755
General and administrative expenses 3,770,263 1,851,652 (9) 7,458,624
2,362,893 (10)
(526,184) (11)
----------- ----------- -----------
Total operating costs and expenses 6,591,006 27,009,373 33,600,379
----------- ----------- -----------
Income (loss) from operations (2,198,956) 5,900,517 3,701,561
Interest expense, net 78,498 90,800 (12) 169,298
----------- ----------- -----------
Income (loss) before income taxes (2,277,454) 5,809,717 3,532,263
Income tax benefit (expense) 506,071 (1,954,299) (13) (1,448,228)
=========== =========== ===========
Net income (loss) $(1,771,383) $ 3,855,418 $ 2,084,035
=========== =========== ===========
Net income (loss) per share $ (0.15) $ 0.16
=========== ===========
Weighted average number of common shares
and common share equivalents used in
computation 12,026,347 12,699,734
=========== ===========
</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 $ 1,864,298 (7) $18,701,149
Costs and expenses:
Clinic expenses 10,885,602 1,091,384 (8) 11,976,986
General and administrative expenses 2,874,008 46,816 (9) 3,159,579
----------- ----------- -----------
Total operating costs and expenses 13,759,610 1,376,955 15,136,565
----------- ----------- -----------
Income from operations 3,077,241 487,343 3,564,584
Interest (income) expense, net (253,140) 40,420 (12) (212,720)
----------- ----------- -----------
Income before income taxes 3,330,381 446,923 3,777,304
Income tax expense (1,362,789) (185,906) (13) (1,548,695)
=========== =========== ===========
Net income $ 1,967,592 $ 261,017 $ 2,228,609
=========== =========== ===========
Net income per share $ 0.14 $ 0.15
=========== ===========
Weighted average number of common shares
and common share equivalents used in
computation 14,227,709 14,901,096
=========== =========== ===========
</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 acquisition of such assets (hereinafter referred
to as the "Mid-1997 Agreements"), as follows:
Lima, Ohio Prior
Practices
----------------
Accounts receivable, net 850,615
Property and equipment, net 45,000
-------
Assets acquired 895,615
Accrued expenses 75,000
Accrued payroll, incentive compensation
and related expenses 6,294
-------
Liabilities assumed 81,294
Adjustments to additional paid-in capital 814,321
=======
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 the Prior Practices, and
all bank indebtedness that was not paid prior to the closing date of the
Mid-1997 Agreements.
<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, the former physician stockholders of
the Lima, Ohio Prior Practices received 673,387 shares of the Company's
restricted common stock and approximately $1.8 million from the Company.
The pro forma consolidated financial statements reflect (i) a
reclassification of $673 from additional paid-in capital to common stock
(ii) a decrease in cash and cash equivalents of $1,769,848 and (iii) a
decrease in additional paid in capital of $1,770,521 for the cash
consideration paid to the former physician stockholders of the Lima, Ohio
Prior Practices. 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 the
Lima, Ohio 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 $5,605,277 increase in the long-term deferred
tax liability and (ii) a corresponding reduction in additional paid-in
capital. Subsequent to September 10, 1997, to the extent that the
operations of the Lima, Ohio Prior Practices have been assumed by the
Company, those operations will be reflected in the income tax returns of
the Company. In addition, taxable income or loss of the Orthopaedic
Institute of Ohio will be included in its separate income tax return.
5. Reflects the incremental costs necessary to effectuate the Mid-1997
Agreements, resulting in a decrease of $7,090 in prepaid expenses for costs
paid through June 30, 1997, an increase of $135,000 in accrued expenses and
a corresponding reduction in additional paid-in capital of $142,090.
6. Reflects the Company's investment of $400,000 in WCOG.
<PAGE>
Pro Forma Consolidated Statements of Income Adjustments
<TABLE>
<CAPTION>
Year ended Six months
December 31, ended June 30,
1996 1997
------------ --------------
<S> <C> <C>
7. Reflects the following adjustments to net revenue:
(i) Recognition of service fee revenue based on long-term service agreements
$ 9,588,878 $ 772,914
(ii) Reimbursement of clinic operating expenses 23,321,012 1,091,384
----------- ----------
32,909,890 1,864,298
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 $11.1 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 $.4 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.
8. 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 Orthopaedic Institute of Ohio, Inc. 2,128,527 1,091,384
----------- ----------
23,321,012 1,091,384
</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 9 through 11 reflect adjustments to general and administrative expenses
9. Corporate office and officer compensation and fringe benefit expenses $ 1,851,652 $ 46,816
----------- ----------
1,851,652 46,816
10. (i) Additional expense for amortization of Service Agreements over the forty
year life of the underlying agreements $ 322,552 $ 161,276
(ii) Annualized corporate general and administrative
expenses 2,040,341 77,479
----------- ----------
2,362,893 238,755
Adjustments to annualized 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.
11. Adjustment to costs to evaluate and acquire physician practices $ (526,184) $ --
----------- ----------
(526,184) --
12. 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 Mid-1997
acquisitions pursuant to the Mid-1997 agreements (assumed rate of
borrowing of 7.40% per annum) 130,969 10,914
(iii) Elimination of interest income on cash and cash equivalents 11,870 29,506
----------- ----------
90,800 40,420
13. 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% $(1,954,299) $ (185,906)
----------- ----------
(1,954,299) (185,906)
</TABLE>
<PAGE>
Pro Forma Consolidated Statements of Income Adjustments (continued)
14. 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 8,332,502 673,387
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
========== ==========
12,699,734 14,901,096
========== ==========
</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
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D. Paul Davis
Senior Vice President, Finance
(Principal Accounting Officer)
Dated: November 12, 1997
