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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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): April 4, 1997
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SPECIALTY CARE NETWORK, INC.
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(Exact Name of Registrant Specified in Charter)
Delaware 0-22019 62-1623449
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(State or Other (Commission File (I.R.S. Employer
Jurisdiction of Number) Identification No.)
Incorporation)
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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(Former Name or Former Address, if Changed Since Last Report)
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<PAGE>
This amendment to the Company's Form 8-K dated April 21, 1997 amends
and modifies the Form 8-K to amend and restate Form 8-K in its entirety.
Item 2. Acquisition or Disposition of Assets.
On April 4, 1997, Specialty Care Network, Inc. (the "Company")
acquired, through merger, substantially all of the assets and certain
liabilities (the "Merger") of The Orthopaedic and Sports Medicine Center, P.A.,
a Maryland professional association ("OSMC"), pursuant to the terms of a Merger
Agreement, dated March 24, 1997, among the Company, OSMC, Marshall K. Steele,
III, M.D., Stephen E. Faust, M.D., Robert M. Verklin, M.D., Thomas J. Harries,
M.D., Edward S. Holt, M.D. and Thomas E. Dennis, M.D. (the "Agreement"). 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 OSMC was exchanged for aggregate consideration of $8,246,560
consisting of $3,579,042 in cash and 473,379 shares of Company Common Stock,
valued at $9.86 per share (the average of the closing share prices of Company
Common Stock during the two weeks preceding the execution of the Agreement). The
cash portion of the consideration paid for the assets pursuant to the Agreement
was from the Company's funds. 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 OSMC pursuant to the Merger include certain
equipment used by OSMC in the practice of orthopaedic medicine. In connection
with the Merger, the Company entered into a service agreement with The
Orthopaedic and Sports Medicine Center II, P.A., a new orthopaedic practice
formed by the former shareholders of OSMC, pursuant to which the Company has
agreed to provide management, administrative and development services to the new
practice. The Company will make available to the new practice the equipment it
acquired in the Merger.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(b) Pro Forma Financial Information (unaudited).
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<PAGE>
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 substantially all of the net assets of the Predecessor Practices
and The Orthopaedic and Sports Medicine Center, P.A. ("OSMC"), in exchange for
shares of the Company's common stock, cash and the assumption of certain
liabilities, and the effects of the service agreements described below. For
purposes of these pro forma consolidated financial statements, the terms
"Predecessor Practices" and "Initial Affiliated Practices" are defined to
include the following entities:
Predecessor Practices
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Reconstructive Orthopaedic Associates, Inc.
Princeton Orthopaedic Associates, P.A.
Tallahassee Orthopedic Clinic, Inc.
Greater Chesapeake Orthopaedic
Associates, LLC
Vero Orthopaedics, P.A.
Initial Affiliated Practices
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Reconstructive Orthopaedic Associates II, P.C.
Princeton Orthopaedic Associates II, P.A.
TOC Specialists, P.L.
Greater Chesapeake Orthopaedic
Associates, LLC
Vero Orthopaedics II, P.A.
Pursuant to the service agreements between the Company and each of the
Initial Affiliated Practices, which became effective on November 12, 1996, and
the service agreement, dated April 1, 1997, with the Orthopaedic and Sports
Medicine Center II, P.O. ("OSMC III"), the successor to OSMC. The Company
provides management, administrative and development services to the Initial
Affiliated Practices and OSMC II in return for a service fee (the Initial
Affiliated Practices and OSMC II are collectively referred to as the "Affiliated
Practices"). 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 unaudited 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 Predecessor Practices and OSMC, 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 as 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 March 31, 1997 gives
effect to the acquisition of substantially all of the assets and certain
liabilities of OSMC as if such transaction had occurred, and the related service
agreement was executed, on March 31, 1997. The pro forma consolidated statement
of operations for the year ended December 31, 1996 assumes that the acquisition
of the assets of the Predecessor Practices and OSMC and the entry into the
Service Agreements occurred on January 1, 1996. The pro forma consolidated
statement of income for the three months ended March 31, 1997 assumes that the
<PAGE>
acquisition of the assets of OSMC and the entry into the service agreement
between the Company and OSMC II, occurred on January 1, 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., 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.
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF
SPECIALTY CARE NETWORK, INC. AND SUBSIDIARY
PRO FORMA CONSOLIDATED BALANCE SHEET
MARCH 31, 1997
<TABLE>
<CAPTION>
Specialty Care Pro Forma
Network, Inc. Pro Forma Adjustment
& Subsidiary Adjustments Legend Pro Forma
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $17,943,778 ($3,579,042) (3) $14,364,736
Accounts receivable, net 15,287,133 1,057,124 (1) 16,344,257
Loans to physician stockholders 976,419 976,419
Prepaid expenses and inventories 1,066,060 (74,123) (5) 991,937
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Total current assets 35,273,390 (2,596,041) 32,677,349
Property and equipment, net 2,202,773 128,900 (1) 2,331,673
Intangible assets, net 173,072 173,072
Service agreements 6,166,513 13,265,100 (2) 19,431,613
Other assets 62,832 62,832
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Total assets $43,878,580 $10,797,959 54,676,539
================================== =================
Liabilities and stockholders' equity
Current liabilities:
Current portion of capital lease $169,931 $35,161 (1) $205,092
obligations
Accounts payable and accrued expenses 976,707 168,874 (1) 1,245,581
100,000 (5)
Accrued payroll, incentive compensation and
related expenses 760,682 760,682
Income taxes payable 470,492 470,492
Due to physician groups 5,220,374 5,220,374
Deferred income taxes 835,034 175,558 (4) 1,010,592
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Total current liabilities 8,433,220 479,593 8,912,813
Capital lease obligations, less current portion 876,235 23,809 (1) 900,044
Deferred income taxes 3,033,481 5,627,315 (4) 8,660,796
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Total liabilities 12,342,936 6,130,717 18,473,653
Stockholders' equity
Preferred stock -- --
Common stock 14,663 473 (3) 15,136
Additional paid-in capital 32,509,434 958,180 (1) 37,176,203
13,265,100 (2)
(3,579,515) (3)
(5,802,873) (4)
(174,123) (5)
Accumulated deficit (988,453) (988,453)
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Total stockholders' equity 31,535,644 4,667,242 36,202,886
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Total liabilities and stockholders' equity $43,878,580 $10,797,959 54,676,539
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</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 OPERATIONS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Specialty Care Pro Forma
Network, Inc. Pro Forma Adjustment
& Subsidiary Adjustments Legend Pro Forma
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<S> <C> <C> <C> <C>
Management fee revenue, including reimbursement of
clinical expenses $4,392,050 $33,771,957 (6) $38,164,007
Operating expenses:
Clinic expenses 2,820,743 24,607,159 (7) 27,427,902
Salaries, wages and benefits 1,917,891 971,073 (8) 2,888,964
General and administrative expenses 1,255,011 1,336,711 (9) 2,591,722
Costs to evaluate and acquire physician practices 597,361 (526,184) (10) 71,177
Interest expense, net 78,498 (52,039) (11) 26,459
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6,669,504 26,336,720 33,006,224
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Income (loss) from operations (2,277,454) 7,435,237 5,157,783
Income tax benefit 506,071 (2,620,762) (12) (2,114,691)
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Net income (loss) ($1,771,383) $4,814,475 $3,043,092
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Net income (loss) per share ($0.15) $0.24
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Weighted average number of common shares and
common share equivalents used in computation 12,026,347 12,947,106
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</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
THREE MONTHS ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
Specialty Care Pro Forma
Network, Inc. Pro Forma Adjustment
& Subsidiary Adjustments Legend Pro Forma
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Management fee revenue, including reimbursement of
clinical expenses $7,297,553 $1,119,106 (6) $8,416,659
Operating expenses:
Clinic expenses 4,924,705 853,669 (7) 5,778,374
Salaries, wages and benefits 703,959 10,000 (8) 713,959
General and administrative expenses 390,969 90,407 (9) 481,403
Costs to evaluate and acquire physician practices 21,782 21,782
Interest income, net (70,819) (70,819)
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5,970,623 954,076 6,924,699
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Income from operations 1,326,930 165,030 1,491,960
Income tax (expense) (544,000) (67,704) (12) (611,704)
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Net income $782,930 $97,326 $880,256
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Net income per share $0.06 $0.06
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Weighted average number of common shares and
common share equivalents used in computation 13,460,504 14,381,263
================= =================
</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 OSMC and the liabilities assumed pursuant to the
terms and conditions of the agreement relating to the acquisition of OSMC
assets (the "OSMC Agreement"), as follows.
Accounts receivable, net $1,057,124
Property and equipment, net 128,900
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Total assets acquired $1,186,024
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Capital lease obligations $ 58,970
Accounts payable and accrued expenses 168,874
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Total liabilities assumed $ 227,844
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Net assets acquired $ 958,180
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In addition, the consolidated pro forma balance sheet reflects certain
excluded assets and liabilities that are comprised of the following
significant items: cash, prepaid expenses, capital lease asset (office
building), accrued physician compensation and benefits that were retained
by the owners of OSMC, and all bank indebtedness of OSMC that was not paid
prior to the closing date of the OSMC Agreement.
2. Reflects the fair value allocation of the total consideration paid and
liabilities assumed in connection with the OSMC Agreement, including the
income tax effects of temporary differences, allocated to the long-term
service agreement intangible asset and a corresponding adjustment to
additional paid-in capital.
3. Pursuant to the OSMC Agreement, 460,196 shares of the Company's common
stock were issued, and the Company paid $3,579,042 directly to the former
stockholders of OSMC. In addition, on June 30, 1997, an additional 13,183
shares of the Company's common stock will be issued to the former
stockholders of OSMC. Accordingly, the pro forma consolidated financial
statements reflect (i) a reclassification of $473 from additional paid-in
capital to common stock and (ii) a decrease in cash and cash equivalents
and additional paid-in capital of $3,579,042 for consideration paid to the
former physician stockholders of OSMC. The Company is also required to make
additional payments to the former stockholders of OSMC contingent upon
their negotiation of a long-term agreement with a Maryland-based hospital.
Such contingent consideration, estimated to aggregate approximately $2
million, and the related estimated $250,000 increase to the Base Service
Fee, as defined in 6 below, are not included in the pro forma consolidated
financial statements.
4. Reflects the resulting deferred income taxes in accordance with Statement
of Accounting Standards No. 109, Accounting for Income Taxes, for the
Internal Revenue Code Section 481 net federal and state deferred tax
liabilities to be assumed by the Company based on the underlying cash basis
net assets of OSMC 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 $175,558
increase in the short-term deferred tax liability, (ii) a $5,627,315
increase in the long-term deferred tax liability, and (iii) a corresponding
$5,802,873 reduction in additional paid-in capital. Subsequent to April 1,
1997, to the extent that the operations of OSMC have been assumed by the
Company, those operations will be reflected in the income tax returns of
the Company. Taxable income or loss of OSMC II will be included in its
separate income tax return.
<PAGE>
5. Reflects the incremental costs necessary to effectuate the OSMC Agreement,
resulting in an increase of $100,000 in accrued expenses, a decrease of
$74,123 in prepaid expenses for costs paid through March 31, 1997 and a
corresponding reduction in additional paid-in capital of $174,123.
Pro Forma Consolidated Statements of Income/Operations Adjustments
<TABLE>
<CAPTION>
Year Ended Three months
December 31, Ended March 31,
1996 1997
--------------------------------------
<S> <C> <C>
6. Reflects the following adjustments to management fee revenue:
(i) Recognition of service fee revenue based on long-term service agreements $9,164,798 $265,437
(ii) Reimbursement of clinic operating expenses 24,607,159 853,669
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33,771,957 1,119,106
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 as revenue of the Affiliated Practices related to
professional services less amounts equal to certain clinic expenses of the
Affiliated Practices ("Clinic Expenses," as more fully defined in the Service
Agreements), not including physician owner compensation or most benefits to
physician owners) and (ii) amounts equal to Clinic Expenses. For the first three
years following affiliation, however, the portion of the service fees described
under clause (i) is specified to be the greater of the amount payable as
described under clause (i) above, or a fixed dollar amount (the "Base Service
Fee"), which was generally calculated by applying the respective Service Fee
Percentage to Adjusted Pre-Tax Income of the Affiliated Practice for the twelve
months prior to affiliation. The aggregate Base Service Fee for the Affiliated
Practices, exclusive of the potential additional service fee amount described in
note 3 above, is approximately $10.5 million. This Base Service Fee was used to
calculate the above pro forma management fee revenue adjustment for both periods
presented. For the three months ended March 31, 1997, as reflected on a pro
forma basis, the Affiliated Practices are below the Base Service Fee by
approximately $245,000 in the aggregate. In addition, with respect to its
management of certain facilities and ancillary services associated with certain
physician practices, the Company receives fees ranging from 2% to 8% of net
revenue.
7. Reflects the following adjustments to clinic expenses:
(i) Incremental clinic expenses for the Predecessor Practices for the period
ended November 11, 1996 $21,192,485 $ --
(ii) Incremental clinic expenses for OSMC 3,414,674 853,669
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24,607,159 853,669
8. Reflects the following adjustments to salaries, wages and benefits:
(i) Corporate office and officer compensation and fringe benefit expenses $971,073 $ 10,000
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971,073 10,000
9. Reflects the following adjustments to general and administrative expenses:
(i) Additional expense for amortization of service agreements $331,627 $ 82,907
(ii) Annualized historical corporate general and administrative expenses 1,005,084 7,500
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1,336,711 90,407
Adjustments to historical corporate general and administrative expenses are
based upon (i) projected operational requirements, including rent, insurance,
travel, recruiting and utilities and (ii) projected depreciation and
amortization based on projected capital asset and corporate financing
requirements.
<PAGE>
10. Reflects the following adjustment to costs to evaluate and acquire
physician practices: $ (526,184) $ --
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(526,184) --
11. Reflects the following adjustments to interest (income) expense:
(i) Elimination of convertible debentures $(52,039) $ --
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(52,039) --
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% $(2,620,762) $(67,704)
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(2,620,762) (67,704)
</TABLE>
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 Three Months
December 31, 1996 Ended March 31, 1997
-----------------------------------------
<S> <C> <C>
Shares distributed to stockholders of the Predecessor Practices
in November 1996 7,659,115
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 one of the Predecessor Practices 192,234
Common stock equivalents attributable to outstanding stock options 603,960 673,509
Common stock deemed to be issued to the physician stockholders
of OSMC, exclusive of contingent consideration 473,379 473,379
Common stock equivalents attributable to cash paid to the former
stockholders of OSMC 447,380 447,380
Weighted average common shares outstanding, exclusive of the impact
of the abovementioned items 1,450,137 12,786,995
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12,947,106 14,381,263
=========================================
</TABLE>
<PAGE>
(c) Exhibits.
2.1* Merger Agreement dated March 24, 1997 among the Company, OSMC,
Marshall K. Steele, III, M.D., Stephen E. Faust, M.D., Robert M.
Verklin, M.D., Thomas J. Harries, M.D., Edward S. Holt, M.D. and
Thomas R. Dennis, M.D.
2.2** Service Agreement dated April 1, 1997 among the Company, The
Orthopaedic and Sports Medicine Center II, P.A., Marshall K.
Steele, III, M.D., Stephen E. Faust, M.D., Robert M. Verklin,
Jr., M.D., Thomas J. Harries, M.D., Edward S. Holt, M.D., and
Thomas R. Dennis, M.D.
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* Incorporated herein by reference to Exhibit 10.28 of the Company's Annual
Report on Form 10-K for the year ended December 31, 1997.
** Portions of this exhibit were omitted and filed separately with the
Secretary of the Commission pursuant to an application for confidential
treatment filed with the Commission pursuant to Rule 406 under the
Securities Act.
SIGNATURE
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 hereunto duly authorized.
SPECIALTY CARE NETWORK, INC.
(Registrant)
By /s/ D. Paul Davis
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D. Paul Davis
Senior Vice President of Finance/Controller
Dated: June 19, 1997
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