SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q/A-1
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 1997
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OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
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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 (I.R.S. Employer Identification No.)
of Incorporation or Organization)
44 Union Boulevard, Suite 600, Lakewood, Colorado 80228
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (303) 716-0041
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Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes No X
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On April 30, 1997, 15,059,151 shares of the Registrant's common stock,
$.001 par value, were outstanding.
This amendment to the Company's Form 10-Q for the quarterly period ended March
31, 1997 amends and modifies the Form 10-Q to amend and restate in its entirety
Item 1 of Part 1.
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Part I. Financial Information
Specialty Care Network, Inc. and Subsidiary
Consolidated Condensed Balance Sheets
<TABLE>
<CAPTION>
March 31 December 31
1997 1996
(Unaudited)
<S> <C> <C>
Assets
Cash and cash equivalents $17,943,778 $ 1,444,007
Accounts receivable, net 15,287,133 13,090,440
Loans to physician stockholders 976,419 976,419
Prepaid expenses and inventories 1,066,060 285,218
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Total current assets 35,273,390 15,796,084
Property and equipment, net 2,202,773 1,889,070
Prepaid offering costs - 747,847
Intangible assets, net 173,072 193,906
Management service agreements 6,166,513 -
Other assets 62,832 58,483
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Total assets $43,878,580 $18,685,390
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Liabilities and stockholders' equity
Current portion of capital lease obligations $ 169,931 $ 140,151
Accounts payable and accrued expenses 976,707 1,295,901
Accrued payroll, incentive compensation and related
expenses 760,682 1,065,881
Income taxes payable 470,492 1,229,275
Due to physician groups 5,220,374 3,759,322
Deferred income taxes 835,034 667,830
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Total current liabilities 8,433,220 8,158,360
Line-of-credit - 4,177,681
Capital lease obligations, less current portion 876,235 964,769
Deferred income taxes 3,033,481 679,713
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Total liabilities 12,342,936 13,980,523
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, 14,662,575 and
11,045,015 shares issued and outstanding in 1997
and 1996, respectively 14,663 11,045
Additional paid-in capital 32,509,434 6,465,205
Accumulated deficit (988,453) (1,771,383)
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Total stockholders' equity 31,535,644 4,704,867
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Total liabilities and stockholders' equity $43,878,580 $18,685,390
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</TABLE>
See accompanying notes to consolidated condensed financial statements.
1
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Specialty Care Network, Inc. and Subsidiary
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31
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1997 1996
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<S> <C> <C>
Management fee revenue, including reimbursement
of clinic expenses $ 7,297,553 $ -
Costs and expenses:
Clinic expenses 4,924,705 -
Salaries, wages and benefits 703,959 65,086
General and administrative expenses 390,996 46,329
Costs to evaluate and acquire physician practices 21,782 55,000
Interest (income) expense, net (70,819) 5,311
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5,970,623 171,726
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Income (loss) before income taxes 1,326,930 (171,726)
Income tax expense 544,000 -
Net income (loss) $ 782,930 $ (171,726)
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Net income (loss) per share $ 0.06 $
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Weighted average number of common shares and
common share equivalents used in computation $13,460,504 $12,266,210
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</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>
Three Months Ended March 31
1997 1996
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<S> <C> <C>
Operating activities
Net income (loss) $ 782,930 $(171,726)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization 305,286 -
Deferred income tax benefit (102,217) -
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 (1,913,058) -
Prepaid expenses and inventories and other assets (785,191) (63,869)
Accounts payable and accrued expenses (414,194) 65,573
Accrued payroll, incentive compensation and related expenses (305,199) -
Income taxes payable (758,783) -
Due to physician groups 1,461,052 -
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Net cash used in operating activities (1,729,374) (170,022)
Investing activities
Purchases of property and equipment (512,122) (110,930)
Acquisitions of physician groups (134,992) -
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Net cash used in investing activities (647,114) (110,930)
Financing activities
Proceeds from initial public offering and underwriters' overallotment, net
of current period offering costs 23,112,694 -
Proceeds from line-of-credit agreement 1,400,000 -
Proceeds from convertible debentures - 500,500
Principal repayments on line of credit agreement (5,577,681) -
Principal repayments on capital lease obligations (58,754) -
Advances from officers and stockholders - -
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Net cash provided by financing activities 18,876,259 500,500
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Net increase in cash and cash equivalents 16,499,771 219,548
Cash and cash equivalents at beginning of period 1,444,007 11,100
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Cash and cash equivalents at end of period $17,943,778 $230,648
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Supplemental cash flow information
Interest paid $ 87,701 $ -
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Income taxes paid $ 1,405,000 $ -
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Supplemental schedule of noncash investing and financing activities
Effects of the acquisitions of the net assets of physician groups:
Assets acquired $ 6,536,181 $ -
Liabilities assumed (95,000) -
Income tax liabilities assumed (2,623,189) -
Cash outlay (134,992) -
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$ 3,683,000 $ -
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</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
<PAGE>
Specialty Care Network, Inc. and Subsidiary
Notes to Consolidated Condensed Financial Statements (Unaudited)
March 31, 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 months ended March 31, 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 March 31, 1997, the Company maintained approximately $16.5 million in a money
market fund.
Service Agreements: In connection with its affiliation with a physician group,
the Company enters into a long-term service agreement with the physician group.
The Company's acquisition, through an asset purchase, a share exchange and a
merger, of substantially all of the assets of five physician groups on November
12, 1996, were accounted for pursuant to Securities and Exchange Commission
Staff Accounting Bulletin No. 48, "Transfers of Nonmonetary Assets by Promoters
or Shareholders". In connection with subsequent affiliations with practice
groups, a substantial portion of the consideration paid to the physician owners
of the practice is allocated to the service agreement. The Company also
recognizes the income tax effects of temporary differences related to all
identifiable acquisition intangible assets, including the service agreements.
Such service agreements are amortized over the term of the underlying
agreements, which are generally forty years.
Net Income per Share (1997): Net income per share of common stock is computed by
dividing net income by the weighted average number of common shares and any
dilutive common share equivalents outstanding, including stock options to
purchase 132,500 shares of common stock granted on March 24, 1997. Fully diluted
net income per share is not materially different from primary net income per
share.
4
<PAGE>
Specialty Care Network, Inc. and Subsidiary
Notes to Consolidated Condensed Financial Statements (Unaudited)
(continued)
NOTE 1 - Basis of Presentation (continued)
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 three months ended March 31, 1997 and 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 quarters ended March 31, 1997 and 1996 is not expected to be
material.
NOTE 2 - Physician Practice Acquisitions
In March 1997, the Company acquired, through merger, substantially all of the
assets and certain liabilities of three single physician practices in Florida,
Maryland and Georgia. The aggregate consideration paid was 409,222 common shares
of the Company and approximately $135,000 in cash. These transactions were
afforded the purchase method of accounting treatment. The successors to the
physician practices entered into service agreements with terms that were
substantially identical to those contained in the service agreements discussed
in Note 11 to the Company's Annual Report on Form 10-K.
5
<PAGE>
Specialty Care Network, Inc. and Subsidiary
Notes to Consolidated Condensed Financial Statements (Unaudited)
(continued)
NOTE 3 - Summarized Physician Group Financial Information
Reconstructive Orthopaedic Associates II, P.C. (successor to Reconstructive
Orthopaedic Associates, Inc.) is an orthopaedic physician practice which
services 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 months ended March 31, 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.
For the Three Months
Ended March 31
1997 1996
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(Successor (Predecessor
Practice) Practice)
Net patient revenue $4,664,662 $3,975,159
Total revenue $4,681,742 $4,275,614
Total operating expenses $4,086,834 $4,056,970
Income (loss) from operations $ 594,908 $ 218,644
NOTE 4 - Initial Public Offering
In February and March 1997, the Company received net proceeds from its initial
public offering (including proceeds derived from the exercise of the
underwriters' overallotment option) of approximately $22.3 million.
Approximately $5.6 million of the proceeds were utilized to repay all
outstanding borrowings under the Credit Facility
6
<PAGE>
Specialty Care Network, Inc. and Subsidiary
Notes to Consolidated Condensed Financial Statements (Unaudited)
(continued)
NOTE 5 - Contingency
On January 8, 1997, the Company was sued by Michael A. Feiertag, M.D. (a former
physician at Vero Orthopaedics, P.A.) for alleged breach of his employment
agreement. Dr. Feiertag is seeking damages in excess of $500,000. The Company
filed an answer to the complaint denying liability and intends to vigorously
contest the action. On February 3, 1997, the Company initiated proceedings to
have the case removed to the United States District Court for the Southern
District of Florida. The Company believes that the ultimate resolution of the
case will not have a material adverse effect on the Company's financial position
or result of operations.
NOTE 6 - Subsequent Event
On April 4, 1997, the Company acquired, through merger, substantially all of the
assets and certain liabilities of the predecessor to The Orthopaedic and Sports
Medicine Center II, P.A., a Maryland professional association ("OSMC"), pursuant
to the terms of a an agreement dated March 24, 1997. OSMC is an orthopaedic
practice with headquarters in Annapolis, Maryland and additional offices in
Prosten and Severna Park, Maryland. In connection with the merger, the common
stock of the predecessor to OSMC was exchanged for $3,579,042 in cash and
473,379 shares of the Company's common stock. The cash portion of the
consideration was paid from the Company's available funds. The transaction will
be afforded the purchase method of accounting treatment. In addition, based on
current estimates, it is anticipated that in the event the practice enters into
a joint venture with a specified hospital prior to July 31, 1997, the practice
will receive additional consideration from the Company of approximately $900,000
in cash and 115,000 shares of Company Common Stock.
The assets acquired from the predecessor to OSMC pursuant to the merger include
certain equipment used in the practice of orthopaedic medicine. In connection
with the acquisition, the Company entered into a long-term service agreement
with OSMC., a new orthopaedic practice formed by the former physician
shareholders of the predecessor to OSMC, pursuant to which the Company has
agreed to provide management, administrative and development services to OSMC.
In return, the Company will earn a service fee based on a percentage of adjusted
pre-tax income, subject to a minimum base service fee for the first three years
of the service agreement.
7
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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: June__, 1997 By: /s/ D. Paul Davis
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D. Paul Davis
Senior Vice President of
Finance/Controller
(Principal Accounting Officer)
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