<PAGE> 1
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 MARCH 31, 1998
--------------------------------------------------
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.
- --------------------------------------------------------------------------------
(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
- --------------------------------------------------------------------------------
(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 April 30, 1998, 17,736,393 shares of the Registrant's common stock,
$.001 par value, were outstanding.
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Specialty Care Network, Inc. and Subsidiary
<TABLE>
<CAPTION>
INDEX
<S> <C>
PART I. FINANCIAL INFORMATION:
Item 1. Consolidated Condensed Balance Sheets -
March 31, 1998 and December 31, 1997.......................................................1
Consolidated Statements of Income -
Three Months Ended March 31, 1998 and 1997.................................................2
Consolidated Condensed Statements of Cash Flows -
Three Months Ended March 31, 1998 and 1997.................................................3
Notes to Consolidated Condensed Financial Statements.......................................5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................................7
PART II. OTHER INFORMATION:
Item 2. Changes in Securities.....................................................................10
Item 6. Exhibits and Reports on Form 8-K..........................................................10
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
Specialty Care Network, Inc. and Subsidiary
Consolidated Condensed Balance Sheets
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1998 1997
----------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 14,856,083 $ 3,444,517
Accounts receivable, net 32,921,234 25,957,367
Loans to physician stockholders 910,733 914,737
Prepaid expenses and other 1,661,861 796,903
----------------------------------
Total current assets 50,349,911 31,113,524
Property and equipment, net 8,119,401 5,276,219
Intangible assets, net 1,026,026 1,137,808
Management service agreements, net 116,364,655 100,732,431
Equity investment - 400,000
Advances to affiliates 1,263,361 522,022
Other assets 2,008,610 1,119,646
----------------------------------
Total assets $ 179,131,964 $ 140,301,650
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of capital lease obligations $ 211,222 $ 263,007
Accounts payable 911,851 701,087
Accrued payroll, incentive compensation and related
expenses 1,441,602 1,350,825
Accrued expenses 2,905,073 2,171,130
Due to physician group 11,239,000 -
Income taxes payable 94,908 944,632
Due to affiliated physician practices 4,238,047 2,885,602
Deferred income taxes 1,325,696 872,855
----------------------------------
Total current liabilities 22,367,399 9,189,138
Convertible note payable 5,579,439 -
Line-of-credit 46,225,000 33,000,000
Capital lease obligations, less current portion 881,118 885,141
Deferred income taxes 31,777,898 32,115,476
----------------------------------
Total liabilities 106,830,854 75,189,755
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, 17,736,393 and
17,703,293 shares issued and outstanding in 1998
and 1997, respectively 17,736 17,703
Common stock subscribed for issuance to physician group 470 -
Additional paid-in capital 65,897,566 60,995,177
Retained earnings 6,385,338 4,099,015
----------------------------------
Total stockholders' equity 72,301,110 65,111,895
----------------------------------
Total liabilities and stockholders' equity $ 179,131,964 $ 140,301,650
==================================
</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
--------------------------------
1998 1997
--------------------------------
<S> <C> <C>
Revenue:
Service fees $ 17,213,803 $ 7,297,553
Other 2,046,644 --
-------------------------------
19,260,447 7,297,553
Costs and expenses:
Clinic expenses 12,234,547 4,924,705
General and administrative expenses 2,642,150 1,116,737
-------------------------------
14,876,697 6,041,442
Income from operations 4,383,750 1,256,111
Other:
Interest income 61,320 158,520
Interest expense (666,024) (87,701)
-------------------------------
Income before income taxes 3,779,046 1,326,930
Income tax expense (1,492,723) (544,000)
-------------------------------
Net income $ 2,286,323 $ 782,930
===============================
Net income per common share (basic) $ 0.13 $ 0.06
===============================
Weighted average common shares outstanding
(basic) 17,731,273 12,786,995
===============================
Net income per common share (diluted) $ 0.13 $ 0.06
===============================
Weighted average number of common
shares and common share equivalents
used in computation (diluted) 18,272,034 13,466,505
===============================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
2
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Specialty Care Network, Inc. and Subsidiary
Consolidated Condensed Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
1998 1997
------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,286,323 $ 782,930
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation 402,276 266,640
Amortization 776,551 38,646
Gain on sale of equity investment (1,228,701) --
Non-cash compensation expense-stock options 27,501 --
Deferred income tax (benefit) expense 115,263 (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 (1,863,867) (1,913,058)
Loans to physician stockholders 4,004 --
Prepaid expenses and other assets (962,893) (785,191)
Accounts payable and accrued expenses 914,665 (414,194)
Accrued payroll, incentive compensation and
related expenses (34,223) (305,199)
Income taxes payable and prepaid and
recoverable income taxes, net (849,724) (758,783)
Due to affiliated physicians practices 1,352,445 1,461,052
----------- -----------
Net cash provided by (used in) operating activities 939,620 (1,729,374)
INVESTING ACTIVITIES
Purchases of property and equipment (2,811,106) (512,122)
Proceeds from sale of equity investment 1,075,000 --
Increase in other assets (15,263) --
Increase in intangible assets (90,138) --
Equity investment and related advances (1,061,339) --
Acquisitions of physician groups -- (134,992)
----------- -----------
Net cash used in investing activities $(2,902,846) $ (647,114)
</TABLE>
3
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Specialty Care Network, Inc. and Subsidiary
Consolidated Condensed Statements of Cash Flows (Unaudited)
(continued)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
1998 1997
---------------------------------
<S> <C> <C>
FINANCING ACTIVITIES
Proceeds from initial public offering, net of
current period offering costs $ -- $ 23,112,694
Proceeds from line-of-credit agreement 13,225,000 1,400,000
Principal repayments on line of credit agreement -- (5,577,681)
Principal repayments on capital lease obligations (55,808) (58,754)
Exercise of common stock options 205,600 --
-------------------------------
Net cash provided by financing activities 13,374,792 18,876,259
Net increase in cash and cash equivalents 11,411,566 16,499,771
Cash and cash equivalents at beginning of period 3,444,517 1,444,007
-------------------------------
Cash and cash equivalents at end of period $ 14,856,083 $ 17,943,778
===============================
Interest paid $ 684,131 $ 87,701
===============================
Income taxes paid $ 2,143,102 $ 1,405,000
===============================
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Effects of the acquisitions of the net assets of physician groups:
Assets acquired $ 21,654,833 $ 6,536,181
Liabilities assumed (252,977) (95,000)
Income tax liabilities assumed -- (2,623,189)
Convertible note payable issued (5,579,439) --
Cash outlay -- (134,992)
Due to physician group (11,239,000) --
-------------------------------
Common stock issued to effect acquisitions $ 4,583,417 $ 3,683,000
===============================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
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Specialty Care Network, Inc. and Subsidiary
Notes to Consolidated Condensed Financial Statements (Unaudited)
March 31, 1998
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, 1998 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1998. 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, 1997.
NEW ACCOUNTING PRONOUNCEMENTS
Reporting Comprehensive Income:
The Company adopted Statement of Financial Accounting Standards No. 130 ("SFAS
No. 130"), Reporting Comprehensive Income, during the first quarter of 1998.
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components (e.g., revenue, expenses, gains, loss, etc.) in a full
set of general purpose financial statements. SFAS No. 130 requires companies to
report a total for comprehensive income in condensed financial statements of
interim periods issued to shareholders with no similar requirement for
disclosure of its components. As the Company has no comprehensive income
amounts, the adoption of SFAS No. 130 currently has no impact on the Company's
financial presentation. If the Company has items of comprehensive income in
future periods, these items will be reported and displayed in accordance with
SFAS No. 130.
Earnings Per Share:
In 1997, Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"),
Earnings Per Share, was issued. SFAS No. 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to fully diluted earnings per share under the
previous method of reporting earnings per share. All earnings per share amounts
for all periods have been presented, and where appropriate, restated to conform
to SFAS No. 128 requirements.
5
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Specialty Care Network, Inc. and Subsidiary
Notes to Consolidated Condensed Financial Statements (Unaudited)
(continued)
NOTE 2 - PHYSICIAN PRACTICE AFFILIATION
Effective March 31, 1998, in connection with the acquisition, by asset purchase,
of substantially all of the assets and certain liabilities of Orlin & Cohen
Associates LLP ("OCOA"), total consideration was paid to OCOA consisting of
470,094 shares of common stock, a promissory note in the principal amount of
$5,579,000 and cash in the amount of $11,125,000. The cash payment was made to
OCOA in April 1998. In addition, the Company paid a brokers fee of $114,000 in
connection with the acquisition. The shares were issued in April 1998, and are
shown in the accompanying financial statements as common stock subscribed for
issuance to physician group. The promissory note is due in full on March 31,
2001, with annual interest payments due at the rate of 5%. The holder of the
note may convert the note into common stock of the Company at the conversion
ratio of one share of common stock for approximately $14.24 of note principal
and accrued interest. In addition to the consideration described above, the
Company may pay additional contingent consideration to OCOA based on growth
achieved by OCOA within the first three years of the service agreement.
NOTE 3 - GAIN ON SALE OF EQUITY INVESTMENT
In 1997, the Company purchased 50% of the outstanding membership interests in
West Central Ohio Group, Ltd. ("WCOG"), an Ohio limited liability company that
was formed to construct an ambulatory surgery center in Lima, Ohio, from the
physician owners of a practice affiliated with the Company (the "Ohio Physician
Owners"). In March 1998, the Company sold its entire interest in WCOG to the
Ohio Physician Owners and a company ("the Acquiring Company") for total
consideration of approximately $1,950,000. In addition, the Company was relieved
of its obligation to pay an amount equal to 25% of WCOG's first $6,000,000 of
net income as contingent consideration from the initial purchase of its
investment in WCOG. The sale resulted in a pre-tax gain of approximately
$1,200,000, which has been included in other revenue in the accompanying
financial statements. An officer and 50% stockholder of the Acquiring Company,
is the brother of the President and Chief Executive Officer of the Company.
6
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ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Statements in this section, including statements concerning the sufficiency of
funds available under the Company's line of credit and cash flows from
operations, 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, 1997,
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 159 physicians in 22 practices (the "Affiliated Practices")
located in 11 states. The Company also manages outpatient surgery centers,
outpatient magnetic resonance imaging (MRI) centers, physical therapy operations
and occupational medicine operations.
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.
RESULTS OF OPERATIONS
Revenue. The Company's service fee revenue, including reimbursement of clinic
expenses, increased by $9.9 million to $17.2 million for the three months ended
March 31, 1998 compared to $7.3 million for the same period in 1997. This
increase resulted primarily from the increase in affiliation transactions during
the latter part of 1997. The Company also generated other revenues totaling $2.0
million for the three months ended March 31, 1998. There were no comparable
other revenues for the same period of 1997. Other revenues for 1998 included a
pre-tax gain of $1.2 million from the sale of an equity investment (see Note 3
to the Consolidated Condensed Financial Statements) as well as revenues from
business consulting fees, medical director fees and other miscellaneous revenue.
7
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Costs and expenses. For the three months ended March 31, 1998, total costs and
expenses were $14.9 million compared to $6.0 million for the same period of
1997. Total clinic expenses were $12.2 million for the three months ended March
31, 1998, compared to $4.9 million for the same period of 1997. This increase is
primarily due to the increased affiliation transactions of the Company near the
end of 1997. Of the total costs and expenses, for the three months ended March
31, 1998, $2.6 million were general and administrative expenses, compared to
$1.1 million for the same period of 1997. General and administrative expenses
increased principally due to additional personnel and administrative expenses
required for the provision of services to the Affiliated Practices.
Interest expense. During the three months ended March 31, 1998, the Company
incurred interest expense of $666,000 compared to $88,000 for the same period of
1997. The increase was a result of an increase in the total borrowings
outstanding under the Company's credit facility with a bank (the "Credit
Facility"), which were made to fund the Company's ongoing affiliation
transactions. At March 31, 1998, $46.2 million was outstanding under the Credit
Facility.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had $28.0 million in working capital, up from
$21.9 million as of December 31, 1997. For the first three months of 1998, cash
flow provided by operations was $912,000 compared to cash flow used in
operations of $1.7 million for the same period of 1997.
During the three months ended March 31, 1998, the Company invested in property
and equipment of $2.8 million, related primarily to the purchase of magnetic
resonance imaging units at the affiliated practices. The Company borrowed $13.2
million under the Credit Facility primarily to fund the cash requirements of its
practice affiliation with Orlin & Cohen Associates LLP, which was effective
March 31, 1998. The total cash used in connection with the practice affiliation
of $11.2 million was paid in April 1998.
The Company's Credit Facility permits maximum borrowing of $75 million, subject
to certain limitations, including certain financial ratios, one of which is a
calculation of funded debt to cash flow. The Credit Facility may be used (i) to
fund the cash portion of affiliation transactions and (ii) for the development
of musculoskeletal focused surgery centers and other ancillary service
capabilities. As of March 31, 1998, the Company's effective rate of interest
under the Credit Facility was approximately 7.44% per annum.
8
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Management believes that funds available under the Credit Facility and cash flow
from operations will be sufficient to fund the Company's operations at its
current level for at least the next twelve months. However, the Company
anticipates that it will require additional funds to finance capital
expenditures relating to expansion of its business. The Company expects that
capital expenditures during 1998 will relate primarily to (i) affiliations with
additional practices, (ii) the development of ancillary facilities, (iii)
expansion and replacement of medical and office equipment for the Affiliated
Practices and (iv) the purchase of equipment for expansion of corporate offices.
The Company anticipates that, in order to fund expansion of its business, it may
incur from time to time additional short- and long-term bank indebtedness and
may issue equity or debt securities, the availability and terms of which will
depend on market and other conditions. There can be no assurance that sufficient
funds will be available on terms acceptable to the Company, if at all. If funds
are unavailable when needed, the Company may be compelled to modify its
expansion plans.
9
<PAGE> 12
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
Reference is made to the description of the Company's affiliation transaction in
Note 2 of the Notes to Consolidated Condensed Financial Statements included in
this report. The Company effected the foregoing transaction 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.
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.
EXHIBIT
NUMBER DESCRIPTION
11 Statement re: computation of per share earnings
27 Summary financial data schedule
(b) Reports on Form 8-K. No reports were filed on Form 8-K during the
period covered by this report.
10
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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: May 14, 1998 By: /s/ Paul Davis
--------------------- --------------------------------------
Paul Davis
Senior Vice President, Finance
(Principal Accounting Officer)
11
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Specialty Care Network, Inc. and Subsidiary
EXHIBIT INDEX
Exhibit 11 Computation of Per Share Earnings ................... 13
Exhibit 27 Summary Financial Data Schedule ..................... 14
12
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Specialty Care Network, Inc. and Subsidiary
Exhibit 11 - Computation of Per Share Earnings
<TABLE>
<CAPTION>
FOR THE FOR THE
THREE THREE
MONTHS MONTHS
ENDED MARCH ENDED MARCH
31, 1998 31, 1997
-----------------------------
<S> <C> <C>
Average shares outstanding 17,731,273 12,786,995
Effect of dilutive securities:
Employee stock options 540,761 679,510
-----------------------------
Weighted average number of
common shares and common
share equivalents used in computation 18,272,034 13,466,505
=============================
Net income $ 2,286,323 $ 782,930
=============================
Net income per common share (basic)
$ 0.13 $ 0.06
Net income per common share (diluted)
$ 0.13 $ 0.06
=============================
</TABLE>
13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> USDOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 14,856
<SECURITIES> 0
<RECEIVABLES> 71,875
<ALLOWANCES> 38,954
<INVENTORY> 0
<CURRENT-ASSETS> 50,350
<PP&E> 11,831
<DEPRECIATION> 3,712
<TOTAL-ASSETS> 179,132
<CURRENT-LIABILITIES> 22,367
<BONDS> 0
0
0
<COMMON> 18
<OTHER-SE> 72,283
<TOTAL-LIABILITY-AND-EQUITY> 179,132
<SALES> 17,214
<TOTAL-REVENUES> 19,260
<CGS> 0
<TOTAL-COSTS> 14,877
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 605
<INCOME-PRETAX> 3,779
<INCOME-TAX> 1,493
<INCOME-CONTINUING> 2,286
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,286
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0.13
</TABLE>
