SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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 September 30, 1997
----------------------------------
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)
Delaware 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
------------------
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 X No
--- ---
On October 31, 1997, 17,470,778 shares of the Registrant's common stock,
$.001 par value, were outstanding.
<PAGE>
Specialty Care Network, Inc. and Subsidiary
Index
<TABLE>
Part I. Financial Information:
<S> <C>
Item 1. Consolidated Condensed Balance Sheets -
September 30, 1997 and December 31, 1996...................................................1
Consolidated Statements of Income -
Three Months Ended September 30, 1997 and 1996
Nine Months Ended September 30, 1997 and 1996..............................................2
Consolidated Condensed Statements of Cash Flows -
Nine Months Ended September 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.......................................................13
Part II. Other Information:
Item 2. Changes in Securities.....................................................................15
Item 4. Submission of Matters to a Vote of Security Holders ......................................16
Item 6. Exhibits and Reports on Form 8-K..........................................................16
</TABLE>
<PAGE>
Part I. Financial Information
Specialty Care Network, Inc. and Subsidiary
Consolidated Condensed Balance Sheets
<TABLE>
<CAPTION>
September 30 December 31
1997 1996
------------ -----------
(Unaudited)
<S> <C> <C>
Assets
Cash and cash equivalents $ 3,085,099 $ 1,444,007
Accounts receivable, net 24,655,908 10,418,175
Loans to physician stockholders 1,791,156 976,419
Prepaid expenses and inventories 864,569 285,218
------------ -----------
Total current assets 30,396,732 13,123,819
Property and equipment, net 4,971,847 1,889,070
Prepaid offering costs -- 747,847
Equity investments 400,000 --
Intangible assets, net 380,017 193,906
Management service agreements, net 92,464,346 --
Other assets 192,320 58,483
------------ -----------
Total assets $128,805,262 $16,013,125
============ ===========
Liabilities and stockholders' equity
Current portion of capital lease obligations $ 160,658 $ 140,151
Accounts payable and accrued expenses 2,902,881 1,295,901
Accrued payroll, incentive compensation and related
expenses 1,248,449 1,065,881
Income taxes payable 1,463,061 1,229,275
Due to physician groups 5,055,621 1,087,057
Deferred income taxes 949,131 667,830
------------ -----------
Total current liabilities 11,779,800 5,486,095
Line-of-credit 24,965,931 4,177,681
Capital lease obligations, less current portion 909,841 964,769
Deferred income taxes 30,873,392 679,713
------------ -----------
Total liabilities 68,528,964 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, 17,458,627 and
11,045,015 shares issued and outstanding in 1997
and 1996, respectively 17,458 11,045
Additional paid-in capital 58,263,941 6,465,205
Retained earnings (accumulated deficit) 1,994,899 (1,771,383)
------------ -----------
Total stockholders' equity 60,276,298 4,704,867
------------ -----------
Total liabilities and stockholders' equity $128,805,262 $16,013,125
============ ===========
</TABLE>
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 Nine Months Ended
September 30 September 30
----------- ------------ ------------ -------------
1997 1996 1997 1996
----------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Net revenue $14,711,899 $ -- $31,548,750 $ --
Costs and expenses:
Clinic expenses 9,383,355 -- 20,149,267 --
General and administrative expenses 2,081,576 1,310,051 5,134,783 2,251,966
----------- ------------ ------------ -------------
11,464,931 1,310,051 25,284,050 2,251,966
Income (loss) from operations 3,246,968 (1,310,051) 6,264,700 (2,251,966)
Other:
Interest income 59,280 3,286 429,239 5,906
Interest expense (333,206) (21,787) (390,516) (39,254)
----------- ------------ ------------ -------------
Income (loss) before income taxes 2,973,042 (1,328,552) 6,303,423 (2,285,314)
Income tax expense (1,174,352) -- (2,537,141) --
----------- ------------ ------------ -------------
Net income (loss) $ 1,798,690 $(1,328,552) $ 3,766,282 $ (2,285,314)
=========== ============ ============ =============
Net income (loss) per share $ 0.11 $ (0.11) $ 0.25 $ (0.19)
=========== ============ ============ =============
Weighted average number of common
shares and common share equivalents
used in computation 17,111,772 11,841,211 15,197,025 12,087,835
=========== ============ ============ =============
</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>
Nine Months Ended September 30
1997 1996
------------------------------
<S> <C> <C>
Operating activities
Net income (loss) $ 3,766,282 $ (2,285,314)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 1,317,594 37,482
Deferred income tax benefit (923,197) --
Non-cash compensation expense--stock options 159,013 --
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 (8,681,693) --
Prepaid expenses and inventories and other
assets (713,188) (71,863)
Accounts payable and accrued expenses (805,048) 618,653
Accrued payroll, incentive compensation and
related expenses 137,816 496,939
Income taxes payable and prepaid and recoverable
income taxes, net 916,943 --
Due to physician groups 3,968,564 --
-----------
------------
Net cash used in operating activities (856,914) (1,204,103)
Investing activities
Purchases of property and equipment (1,305,025) (284,915)
Increase in intangible assets (275,103) --
Acquisitions of physician groups, net of cash acquired (38,890,502) --
----------- ------------
Net cash used in investing activities (40,470,630) (284,915)
Financing activities
Proceeds from initial public offering, net of
current period offering costs 22,939,338 --
Proceeds from line-of-credit agreement 26,365,931 --
Proceeds from convertible debentures -- 1,870,000
Prepaid offering costs -- (250,142)
Retirement of common stock -- (425)
Principal repayments on line of credit agreement (5,577,681) --
Principal repayments on capital lease obligations (164,929) --
Advances repaid to officers and stockholders -- (9,410)
Loans to physician stockholders (814,737) --
Exercise of common stock options 220,714 --
----------- ------------
Net cash provided by financing activities 42,968,636 1,610,023
Net increase in cash and cash equivalents 1,641,092 121,005
Cash and cash equivalents at beginning of period 1,444,007 11,100
=========== ============
Cash and cash equivalents at end of period $ 3,085,099 $ 132,105
=========== ============
</TABLE>
3
<PAGE>
Specialty Care Network, Inc. and Subsidiary
Consolidated Condensed Statements of Cash Flows (Unaudited)
(continued)
<TABLE>
<CAPTION>
Nine Months Ended September 30
1997 1996
-------------------------------
<S> <C> <C>
Supplemental cash flow information
Interest paid $ 315,140 $ --
===============================
Income taxes paid $ 2,543,394 $ --
===============================
Supplemental schedule of noncash investing and
financing activities
Effects of the acquisitions of the net assets of physician groups:
Assets acquired $101,426,736 $ --
Liabilities assumed (2,665,200) --
Income tax liabilities assumed (31,398,176) --
Cash outlay (38,890,502) --
-------------------------------
Common Stock issued $ 28,472,858 $ --
===============================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
<PAGE>
Specialty Care Network, Inc. and Subsidiary
Notes to Consolidated Condensed Financial Statements (Unaudited)
September 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 nine months ended September 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 September 30, 1997, the Company maintained approximately $800,000 in a money
market fund.
Equity Investments: The Company's investments in affiliated companies that are
not majority owned or controlled are accounted for using the equity method.
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, a substantial portion of the consideration paid to the physician owners
of the practice is restricted securities and cash, and is allocated to the
management 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
5
<PAGE>
Specialty Care Network, Inc. and Subsidiary
Notes to Consolidated Condensed Financial Statements (Unaudited)
(continued)
NOTE 1 - Basis of Presentation (continued)
common share equivalents outstanding. 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
nine months ended September 30, 1997 and 1996 or the three months ended
September 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 nine months ended September 30, 1997 and 1996 is not
expected to be material.
6
<PAGE>
Specialty Care Network, Inc. and Subsidiary
Notes to Consolidated Condensed Financial Statements (Unaudited)
(continued)
NOTE 2 - Physician Practice Affiliations
During the nine months ended September 30, 1997, the Company acquired
substantially all of the assets and certain liabilities of several physician
practices. The following is a summary of transactions entered into by the
Company during 1997:
o In March 1997, in connection with the acquisition, through merger, of
substantially all of the assets and certain liabilities of three
single physician practices in Florida, Maryland and Georgia, the
Company issued to the physician owners an aggregate of 441,844 shares
of Common Stock and paid approximately $135,000 in cash.
o On April 4, 1997, in connection with the acquisition, through merger,
of substantially all of the assets and certain liabilities of the The
Orthopaedic and Sports Medicine Center, P.A. ("OSMC"), the Company
issued to the physician owners of OSMC an aggregate 473,379 shares of
Common Stock and paid approximately $3,579,000 in cash.
o On July 1, 1997, in connection with the acquisition, through merger,
of substantially all of the assets and certain liabilities of
Southeastern Neurology Group, P.C. ("SNG"), the common stock of SNG
was exchanged for consideration of 120,155 shares of 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
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).
o On July 1, 1997, in connection with the acquisition, through merger,
of substantially all of the assets and certain liabilities of
Orthopaedic Surgery, Ltd. ("OSL"), the common stock of OSL was
exchanged for consideration of 339,839 shares of 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
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,
7
<PAGE>
Specialty Care Network, Inc. and Subsidiary
Notes to Consolidated Condensed Financial Statements (Unaudited)
(continued)
NOTE 2 - Physician Practice Affiliations (continued)
1998, to require the Company to purchase 74,844 of the 159,643 shares
of Common Stock issued to such physician as consideration for the OSL
merger at a purchase price equal to $11.21 per share.
o On July 3, 1997, in connection with the acquisition: (i) by merger
(the "NCS&A Merger") of substantially all of the assets and certain
liabilities of Neal C. Small, M.D. & Associates, P.A. ("NCS&A"); (ii)
by merger (the "NCS Merger") of substantially all of the assets and
certain liabilities of Neal C. Small, M.D., P.A. ("NCS"); and (iii) by
merger (the "AIG Merger") of substantially all of the assets and
certain liabilities of Alexander I. Glogau, M.D., P.A. ("AIG"), the
Company issued in each of the NCS&A Merger and AIG Merger 90,780
shares of Common Stock and paid approximately $405,000 in cash, and in
the NCS Merger, issued 90,780 shares of Common Stock.
o On July 3, 1997, in connection with the acquisition, by asset
purchase, of substantially all of the assets and certain liabilities
of Associated Arthroscopy Institute, Inc. ("AAI"), the Company paid
approximately $2,220,000 in cash to the physician owners of AAI.
o On July 3, 1997, in connection with the acquisition, by asset
purchase, of substantially all of the assets and certain liabilities
of Access Medical Supply, Inc. d/b/a Associated Physical Therapy
("APT"), the Company paid approximately $1,510,000 in cash to the
physician owners of APT.
o On July 3, 1997, in connection with the acquisition, by asset
purchase, of substantially all of the assets and certain liabilities
of Allied Health Services, P.A. d/b/a Associated Occupational
Rehabilitation ("AOR"), the Company paid approximately $430,000 to the
physician owners of AOR.
o On July 7, 1997, in connection with the acquisition, by asset
purchase, of certain assets of Ortho-Associates, P.A. d/b/a/ Park
Place Therapeutic Center ("PPTC"), the Company issued to the physician
owners warrants to purchase, in the aggregate, 544,681 shares of
Common Stock at an exercise price of $14.69 per share and paid
approximately $16,500,000 in cash, including a $500,000 finders fee.
o On July 16, 1997, in connection with the acquisition, by asset
purchase, of substantially all of the assets and certain liabilities
of Mid-Atlantic Orthopaedic Specialists, P.C. ("MAOS"), the common
stock of MAOS was exchanged for
8
<PAGE>
Specialty Care Network, Inc. and Subsidiary
Notes to Consolidated Condensed Financial Statements (Unaudited)
(continued)
NOTE 2 - Physician Practice Affiliations (continued)
consideration of 146,520 shares of Common Stock and approximately
$1,792,000 in cash.
o On July 22, 1997, in connection with the acquisition, through
merger, of substantially all of the assets and certain liabilities of
Drs. Howell, Ryder, Kells & Persons, Inc. ("HRKP"), the common stock
of HRKP was exchanged for 90,492 shares of Common Stock and
approximately $1,141,000 in cash. In addition to the consideration
paid to HRKP shareholders, the Company also issued 2,318 shares of
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.
o On August 29, 1997, in connection with the acquisition, through
merger, of substantially all of the assets and certain liabilities of
Northeast Florida Orthopaedics, Sports Medicine & Rehabilitation, P.A.
("NFO"), the common stock of NFO was exchanged for 31,319 shares of
Common Stock and approximately $802,000 in cash.
o On August 29, 1997, in connection with the acquisition, by asset
purchase, of substantially all of the assets and certain liabilities
of Steven P. Surgnier, M.D., P.A. ("Surgnier"), the common stock of
Surgnier was exchanged for 48,994 shares of Common Stock.
o On September 1, 1997, in connection with the acquisition, through
merger of substantially all of the assets and certain liabilities of
Orthopaedic Associates of West Florida, P.A. ("OAWF"), the common
stock of OAWF was exchanged for 332,983 shares of Common Stock and
approximately $3,799,000 in cash.
o On September 10, 1997, in connection with the acquisition: (i) by
merger (the "OSAL Merger"), of substantially all of the assets and
certain liabilities of Orthopedic Surgeons Associated of Lima, Inc.
("OSAL"); (ii) by merger (the "BJCL Merger"), of substantially all of
the assets and certain liabilities of Bone & Joint Center of Lima,
Inc. ("BJCL"); (iii) by merger (the "LOI Merger"), of substantially
all of the assets and certain liabilities of Lima Orthopedics, Inc.
("LOI"), the Company issued 498,244 shares of Common Stock and
approximately $1,115,000 in cash in the OSAL Merger; 97,473 shares of
Common Stock in the BJCL Merger and 77,670 shares of Common Stock and
approximately $255,000 in cash in the LOI Merger. Additionally,
effective September 10, 1997, the Company acquired,
9
<PAGE>
Specialty Care Network, Inc. and Subsidiary
Notes to Consolidated Condensed Financial Statements (Unaudited)
(continued)
NOTE 2 - Physician Practice Affiliations (continued)
by purchase, one-half of the outstanding membership interests of West
Central Ohio Group, Ltd., an Ohio limited liability company ("WCOG").
WCOG is in the process of constructing an orthopaedic institute in
Lima, Ohio (the "Institute"). It is anticipated that the Institute
will be operational in the spring of 1998. In connection with the
acquisition, the Company paid $400,000 in cash. In addition, the
Company has agreed to pay an amount equal to 25% of WCOG's first
$600,000 of net income as contingent consideration. The Company's
obligation to pay this contingent consideration will terminate in
September 2002.
These transactions were afforded the purchase method of accounting treatment.
PPTC and the successors to the other 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.
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 nine months ended September 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.
Summarized below is certain financial information of the Successor and
Predecessor Practices.
10
<PAGE>
Specialty Care Network, Inc. and Subsidiary
Notes to Consolidated Condensed Financial Statements (Unaudited)
(continued)
NOTE 3 - Summarized Physician Group Financial Information (continued)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30 Ended September 30
1997 1996 1997 1996
----------- ------------- ------------ ------------
(Successor (Predecessor (Successor (Predecessor
Practice) Practice) Practice) Practice)
<S> <C> <C> <C> <C>
Net patient revenue $3,225,839 $4,437,217 $13,081,119 $12,330,815
Total revenue 3,496,990 4,164,379 13,692,637 12,955,130
Total operating expenses 4,305,454 5,661,302 13,610,817 14,693,667
Income (loss) from operations (808,464) (1,448,077) 81,820 (1,738,537)
</TABLE>
Included in operating expenses is physician and officer compensation of
approximately $1,715,788 and $2,924,381 for the three months ended September 30,
1997 and 1996, respectively and $4,481,745 and $8,049,224 for the nine months
ended September 30, 1997 and 1996, respectively.
Effective July 1997, three of the Successor Practice's physicians discontinued
practicing with the Successor Practice. As a result, the operating results for
three and nine months ended September 30, 1997 are not comparable to the
operating results for the three and nine months ended September 30, 1996. 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.
11
<PAGE>
Specialty Care Network, Inc. and Subsidiary
Notes to Consolidated Condensed Financial Statements (Unaudited)
(continued)
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 then outstanding borrowings under the Credit
Facility.
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
The Company adopted an employee benefit plan covering substantially all
employees of the Company, which is designed to qualify under Section 401(k) of
the Internal Revenue Code of 1986, as amended. The plan includes a Company
matching contribution equal up to 4% of eligible employee salaries and a
discretionary defined contribution that is subject to final Board of Directors
approval.
12
<PAGE>
Item 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Statements in this section that address, among other things, the Company's plans
to assist its Affiliated practices are "forward looking statements." Actual
events or results may differ materially from those discussed in forward looking
statements as a result of various factors, including insufficient personnel and
capital resources, competition for payor contracts, shortage of qualified
physicians, changes in the regulatory environment and other factors discussed
below and in the Company's Annual Report on Form 10-K for the year ended
December 31, 1996, particularly under "Risk Factors" in item 1.
General
Specialty Care Network, Inc. (the "Company") is a physician practice management
company that focuses on musculoskeletal care. Currently, the Company is
affiliated with nineteen practices (the "Affiliated Practices") located in nine
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.
Accounting Treatment
Costs of obtaining management 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 that
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 nine months ending September 30, 1997, the Company
recorded net revenue (including reimbursement of clinic expenses) of
approximately $14.7 million and $31.5 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,
13
<PAGE>
Results of Operations (continued)
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 (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" 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 for each Affiliated Practice for the
twelve months prior to affiliation. The annual Base Service Fees for the
Affiliated Practices is approximately $19.5 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 $11.5
and $25.3 million during the three and nine months ending September 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, and depreciation and amortization of assets. In
addition to the operating expenses discussed above, the Company incurs
personnel and administrative expenses in connection with its corporate offices,
which provide management, administrative and development services to the
Affiliated Practices.
14
<PAGE>
Liquidity and Capital Resources
In February and March 1997, 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 "Credit Facility"). In addition, approximately $16.4
million of the proceeds were utilized in connection with affiliations with
physician practices during the nine months ended September 30, 1997.
The Company has a $45 million Credit Facility available for affiliation
transactions and working capital. The Credit Facility limits the amount
available for working capital to an aggregate of $5 million. 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 per annum
commitment fee on the unused portion of the Credit Facility is 0.30% as of
October 31, 1997, and the Company's effective interest rate is approximately
7.4%. As of October 31, 1997, the Company has borrowed $25.0 million under the
Credit Facility.
During 1997, the Company received a commitment from its principal lender to
increase the line of credit from $45 million to $75 million. The credit facility
will provide for a term of three years.
PART II. Other Information
Item 2. Changes in Securities
Reference is made to the description of the Company's affiliation transactions
in Note 2 of the Notes to Consolidated Condensed Financial Statements included
in this report. The Company effected the foregoing transactions 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 transactions complied with
the requirements of Rule 506 under the Act. In connection with the Park Place
Therapeutic Center transactions, the Company paid a finders fee of $500,000.
15
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
On September 12, 1997, the Company held its annual meeting of stockholders. At
the meeting, the stockholders voted on the election of ten members of the Board
of Directors and on approval of the Company's 1996 Equity Compensation Plan, as
amended.
The voting results on the two matters are set forth below.
1. Election of Directors:
Name of Nominee For Withheld
- --------------- --- --------
Robert E. Booth, Jr., M.D. 9,043,822 86,288
James L. Cain, M.D. 9,043,822 86,288
Peter H. Cheesbrough 9,043,822 86,288
Richard E. Fleming, Jr., M.D. 9,043,822 86,288
Thomas C. Haney, M.D. 9,043,822 86,288
Kerry R. Hicks 9,043,822 86,288
Patrick M. Jaeckle 9,043,822 86,288
Leslie S. Matthews, M.D. 9,043,822 86,288
Richard H. Rothman, M.D., Ph.D. 9,043,822 86,288
Mats Wahlstrom 9,043,822 86,288
2. Approval of the Specialty Care Network, Inc. 1996 Equity Compensation Plan,
as amended:
For Against Abstain Broker non-votes
--- ------- ------- ----------------
7,005,208 1,473,538 45,342 606,022
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.
16
<PAGE>
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 July 16, 1997
reporting information under Items 2 and 7. This report,
dated July 1, 1997, was subsequently amended by Forms
8-K/A-1 filed on August 4, 1997 and September 15, 1997.
ii. Form 8-K filed with the Commission on July 31, 1997
reporting information under Items 2 and 7. This report,
dated July 16, 1997, was subsequently amended by Form
8-K/A-1 filed on September 29, 1997.
iii. Form 8-K filed with the Commission on September 16, 1997
reporting information under Items 2 and 7. This report,
dated September 1, 1997, was subsequently amended by Form
8-K/A-1 filed on November 6, 1997.
iv. Form 8-K filed with the Commission on September 25, 1997
reporting information under Items 2 and 7. This report,
dated September 10, 1997, was subsequently amended by Form
8-K/A-1 filed on November 12, 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 six months ended June 30, 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: November 14, 1997 By: /s/ Paul Davis
---------------------------- ---------------------------------
Paul Davis
Senior Vice President, Finance
(Principal Accounting Officer)
18
<PAGE>
Specialty Care Network, Inc. and Subsidiary
Exhibit Index
Exhibit 11 Computation of Per Share Earnings.............................20
Exhibit 27. Summary Financial Data Schedule ............................21
19
<PAGE>
Specialty Care Network, Inc. and Subsidiary
Exhibit 11 - Computation of Per Share Earnings
<TABLE>
<CAPTION>
For the For the
Three Three For the Nine For the Nine
Months Months Months Months
Ended September Ended Ended September Ended September
30, 1997 September 30, 1997 30, 1996
30, 1996
--------------- ---------- --------------- ---------------
<S> <C> <C> <C> <C>
Average shares outstanding 16,572,817 1,265,001 14,860,463 1,511,625
Net effect of convertible debentures -- 2,020,901 -- 2,020,901
Affiliation 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 -- --
Net effect of common stock options
based on the treasury stock
method (using initial public
offering price in 1996) 538,955 603,960 336,562 603,960
---------- ---------- ---------- ----------
Weighted average number of
common shares and common
share equivalents used in computation 17,111,772 11,841,211 15,197,025 12,087,835
========== ========== ========== ==========
Net income (loss) 1,798,690 (1,328,552) 3,766,282 (2,285,314)
========== ========== ========== ==========
Net income (loss) per share $ 0.11 $ (0.11) $ 0.25 $ (0.19)
========== ========== ========== ==========
</TABLE>
20
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1.000
<CASH> 2,203,154
<SECURITIES> 881,945
<RECEIVABLES> 51,946,952
<ALLOWANCES> 27,291,044
<INVENTORY> 61,224
<CURRENT-ASSETS> 30,396,732
<PP&E> 7,961,249
<DEPRECIATION> 2,989,402
<TOTAL-ASSETS> 128,805,262
<CURRENT-LIABILITIES> 11,779,800
<BONDS> 0
0
0
<COMMON> 17,458
<OTHER-SE> 60,258,840
<TOTAL-LIABILITY-AND-EQUITY> 128,805,262
<SALES> 31,548,750
<TOTAL-REVENUES> 31,548,750
<CGS> 0
<TOTAL-COSTS> 25,284,050
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 38,723
<INCOME-PRETAX> 6,303,423
<INCOME-TAX> 2,537,141
<INCOME-CONTINUING> 3,766,282
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,766,282
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0.25
</TABLE>
