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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): JUNE 14, 1999
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SPECIALTY CARE NETWORK, INC.
- -------------------------------------------------------------------------------
(Exact Name of Registrant Specified in Charter)
<TABLE>
<S> <C> <C>
DELAWARE 0-22019 62-1623449
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(State or Other Jurisdiction of (Commission File Number) (I.R.S. Employer
Incorporation) Identification No.)
</TABLE>
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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ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
RESTRUCTURING TRANSACTION
Effective June 15, 1999, Specialty Care Network, Inc. (the "Company") closed its
previously announced restructuring transaction through nine separate restructure
agreements involving the following nine practices: Floyd R. Jaggears, Jr., M.D.,
P.C., II; Riyaz H. Jinnah, M.D., II, P.A.; The Orthopaedic and Sports Medicine
Center, II, P.A.; Orthopaedic Associates of West Florida, P.A.; Orthopedic
Institute of Ohio, Inc.; Orthopaedic Surgery Centers, P.C. II; Princeton
Orthopaedic Associates, II, P.A.; Reconstructive Orthopaedic Associates, II,
P.C.; and Steven P. Surgnier, M.D., P.A., II.
Under the restructure agreements, the Company transferred, with respect to each
practice, all of its the accounts receivable relating to the practice; tangible
and intangible assets purchased or acquired by the Company in respect of the
practice, other than those disposed of in the ordinary course of business since
the date the Company affiliated with the practice; all prepaid expenses relating
to the practice; all inventory relating to the practice; and all other assets
relating to the practice. The amount receivable by the Company from each
practice and its physician owners for the assets sold to the practice generally
equals the sum of (1) the book value of the accounts receivable relating to the
practice on the effective date of closing; (2) the book value of all fixed
assets and other capital assets relating to the practice on the effective date
of closing; (3) the book value of all prepaid expenses relating to the practice
on the effective date of closing; (4) the book value of all notes and other
receivables the physician owners of the practice owe to the Company on the
effective date of closing; and (5) the cash balance of the practice's deposit
account on the effective date of closing, reduced by the book value of the
liabilities and obligations relating to the practice on the effective date of
closing.
In addition, the Company and each of the practices and their physician owners
entered into a management services agreement to replace the existing service
agreement. As consideration for the Company's agreement to enter into the
management services agreement, the practices and their physician owners have
agreed either to pay to the Company an additional amount of cash, or to pay cash
and return to the Company shares of its common stock.
Under the management services agreements, the Company will provide only limited
services to the practices. In addition, the terms of the management services
arrangements have been reduced, generally from forty year terms to five year
terms beginning from the initial affiliation date of the affected practice; the
management services agreements expire at various times between one year after
closing of the restructuring transaction and September 10, 2002. The practices
will pay reduced service fees to the Company. Six of the practices will pay
monthly service fees, while three agreed to pay a lump sum fee in connection
with the closing of the restructuring transaction, in lieu of the monthly fee
obligation.
With respect to the restructuring transaction, the Company has received to date
approximately $12.6 million and is scheduled to receive, by July 15, 1999, an
additional approximately $5.4 million. Most of these funds are being used to
reduce indebtedness. In addition, shares outstanding will be reduced by
3,303,379 shares.
Within 60 days after the date the restructuring transaction closes, the Company
will prepare, with respect to each practice, an unaudited balance sheet that
sets forth the net book value of the assets to be purchased by the practice and
the liabilities to be assumed by the practice as of the date of closing of the
transaction. The purchase price will be adjusted based on this balance sheet.
One of the practices that was to be subject to the restructuring transaction
failed to close. The Company is considering appropriate remedial action,
including possibly instituting litigation against the practice that failed to
close. In addition, one practice elected to utilize a per month payment for its
service fees payable under its management services agreement with the Company,
rather than a $1.8 million lump sum payment, as initially contemplated.
OTHER TRANSACTIONS
Effective June 14, 1999, the Company entered into a termination agreement with
Ortho-Associates, P.A. d/b/a Park Place Therapeutic Center ("PPTC"), which
terminates the affiliation of PPTC with the Company. The consideration paid to
the Company consists of payment for the tangible book value of PPTC assets
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and payment for the termination of the service agreement. In connection with the
termination agreement, the Company received a cash payment of $8,700,000.
Additionally, approximately 545,000 warrants were canceled in connection with
the PPTC termination agreement. The consideration is subject to adjustment based
on the calculation of the tangible book value as of June 14, 1999.
Effective June 16, 1999, the Company entered into a settlement agreement with
TOC Specialists, PL ("TOC") that resolves all legal disputes and litigation
between the Company and TOC. In connection with the settlement agreement, the
Company received a cash payment of $3,500,000 and 760,000 shares of the
Company's common stock in consideration for the tangible book value of the TOC
assets and the termination of the service agreement.
This report contains forward-looking statements, including statements concerning
the Company's ability to further reduce its indebtedness and shares outstanding.
Other risks and uncertainties are detailed in the Company's most recent Annual
Report on Form 10-K and subsequent filings with the Securities and Exchange
Commission.
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ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Pro Forma Financial Information (unaudited)
Unaudited Pro Forma Consolidated Financial Statements
Of Specialty Care Network, Inc. and Subsidiaries
Basis of Presentation
The following unaudited pro forma consolidated financial statements give effect
to the restructuring transaction; and the termination agreement with
Ortho-Associates, P.A. d/b/a Park Place Therapeutic Center and the settlement
agreement with TOC Specialists, PL (collectively, "the Other Transactions"). The
pro forma consolidated financial statements have been prepared by management
based upon the historical financial statements of Specialty Care Network, Inc.
and subsidiaries and certain preliminary estimates and assumptions deemed
appropriate by management. Neither expected benefits nor cost reductions
anticipated by the Company following consummation of the restructuring
transaction and the Other Transactions have been reflected in the pro forma
consolidated financial statements. The pro forma consolidated balance sheet as
of March 31, 1999 gives effect to the restructuring transaction and the Other
Transactions as if such transactions had occurred on March 31, 1999. The pro
forma consolidated statement of operations for the three months ended March 31,
1999 assumes the restructuring transaction and the Other Transactions had
occurred on January 1, 1999. The pro forma consolidated statement of operations
for the year ended December 31, 1998 assumes the restructuring transaction and
the Other Transactions had occurred on January 1, 1998. These pro forma
consolidated financial statements may not be indicative of actual results if the
transactions had occurred on the dates indicated or which may be realized in the
future.
The following unaudited pro forma consolidated financial statements should be
read in conjunction with the historical consolidated financial statements of the
Company, including the related notes thereto, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," that appear in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998, as
well as the historical consolidated financial statements of the Company,
including the related notes thereto, and "Management's Discussion and Analysis
of Financial Condition and Results of Operations," that appear in the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1999.
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Unaudited Pro Forma Consolidated Financial Statements of
Specialty Care Network, Inc. and Subsidiaries
Pro Forma Consolidated Balance Sheet
March 31, 1999
<TABLE>
<CAPTION>
RESTRUCTURING OTHER
SPECIALTY CARE TRANSACTION TRANSACTIONS
NETWORK, INC. PRO FORMA PRO FORMA FOOTNOTE
AND SUBSIDIARIES ADJUSTMENTS ADJUSTMENTS LEGEND PRO FORMA
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 3,771,282 $ 2,240,848 $ -- (1) $ 6,012,130
Accounts receivable, net 22,641,662 (13,577,974) (4,902,103) (2) 4,161,585
Due from affiliated practices in litigation, net 4,749,662 -- (3,699,401) (2) 1,050,261
Loans to physician stockholders 569,533 (120,649) (61,224) (2) 387,660
Prepaid expenses and other 1,391,597 (399,922) (390,917) (2) 600,758
Prepaid and recoverable income taxes 1,431,584 (3,068,726) 3,887,870 (3) 2,250,728
------------ ------------ ------------ ------------
Total current assets 34,555,320 (14,926,423) (5,165,775) 14,463,122
Property and equipment, net 9,626,563 (3,670,512) (1,605,331) (2) 4,350,720
Intangible assets, net 130,824 -- -- 130,824
Management service agreements, net 12,264,000 (5,676,459) (3,914,249) (4) 2,673,292
Advances to affiliates and other 867,009 -- -- 867,009
Equity investment in and advances to investee 2,056,755 -- 2,056,755
Other assets 1,714,598 (911,505) -- (2) 803,093
------------ ------------ ------------ ------------
Total assets $ 61,215,069 $(25,184,899) $(10,685,355) $ 25,344,815
============ ============ ============ ============
Liabilities and Stockholders' Equity:
Current portion of capital lease obligations $ 229,712 $ (122,815) $ (70,036) (2) $ 36,861
Accounts payable 375,356 (73,462) (72,131) (2) 229,763
Accrued payroll, incentive compensation and
related expenses 3,078,299 (1,435,315) (791,542) (2) 851,442
Accrued expenses 1,786,164 (81,953) -- (2) 1,704,211
Line-of-credit 44,377,377 (17,896,264) (12,192,000) (5) 14,289,113
Due to affiliated physician practices 2,743,576 (1,965,303) (157,629) (2) 620,644
Deferred income 514,466 1,471,372 -- (6) 1,985,838
Deferred income taxes 749,059 (624,451) (124,608) (7) --
Convertible debentures 589,615 (589,615) -- (8) --
------------ ------------ ------------ ------------
Total current liabilities 54,443,624 (21,317,806) (13,407,946) 19,717,872
Capital lease obligations, less current portion 648,597 (491,077) (47,342) (2) 110,178
Deferred income 1,035,991 769,476 -- (6) 1,805,467
------------ ------------ ------------ ------------
Total liabilities 56,128,212 (21,039,407) (13,455,288) 21,633,517
Stockholders equity:
Preferred stock -- -- -- --
Common stock 18,619 -- -- 18,619
Additional paid-in capital 67,011,806 -- -- 67,011,806
Accumulated deficit (57,979,895) (16,268) 4,337,813 (9) (53,658,350)
Treasury stock (3,963,673) (4,129,224) (1,567,880) (10) (9,660,777)
------------ ------------ ------------ ------------
Total stockholders' equity 5,086,857 (4,145,492) 2,769,933 3,711,298
------------ ------------ ------------ ------------
Total liabilities and stockholders' equity $ 61,215,069 $(25,184,899) $(10,685,355) $ 25,344,815
============ ============ ============ ============
</TABLE>
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Unaudited Pro Forma Consolidated Financial Statements of
Specialty Care Network, Inc. and Subsidiaries
Pro Forma Consolidated Statement of Operations
Three Months Ended March 31, 1999
<TABLE>
<CAPTION>
RESTRUCTURING OTHER
SPECIALTY CARE TRANSACTION TRANSACTIONS
NETWORK, INC. PRO FORMA PRO FORMA FOOTNOTE
AND SUBSIDIARIES ADJUSTMENTS ADJUSTMENTS LEGEND PRO FORMA
------------- ------------ ----------- -------- ------------
<S> <C> <C> <C> <C> <C>
Revenue:
Service fees $ 14,161,166 $ (6,360,401) $(3,689,425) (11) $ 4,111,340
Other 311,712 (140,024) -- (12) 171,688
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14,472,878 (6,500,425) (3,689,425) 4,283,028
------------- ------------ ----------- ------------
Costs and expenses:
Clinic expenses 9,575,632 (5,212,445) (2,642,927) (13) 1,720,260
General and administrative 3,553,977 (528,310) (210,750) (14) 2,814,917
Litigation and other costs 1,107,700 (280,345) (356,723) (15) 470,632
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14,237,309 (6,021,100) (3,210,400) 5,005,809
------------- ------------ ----------- ------------
Income (loss) from operations 235,569 (479,325) (479,025) (722,781)
Other:
Gain on sale of majority interest
in a subsidiary 221,258 -- -- 221,258
Interest income 63,338 -- -- 63,338
Interest expense (1,007,243) 392,635 259,080 (17) (355,528)
------------- ------------ ----------- ------------
Loss before income taxes (487,078) (86,690) (219,945) (793,713)
Income tax benefit 194,254 34,676 87,978 (18) 316,708
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Net loss $ (292,824) $ (52,014) $ (131,967) $ (476,805)
============= ============= ============ ============
Net loss per common share (basic) $ (0.02) $ (0.04)
============= ============
Weighted average number of common
shares used in computation (basic) 16,494,704 (3,303,379) (760,000) (19) 12,431,325
============= ============ =========== ============
Net loss per common share (diluted) $ (0.02) $ (0.04)
============= ============
Weighted average number of common
shares used in computation (diluted) 16,494,704 (3,303,379) (760,000) (19) 12,431,325
============= ============ =========== ============
</TABLE>
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Unaudited Pro Forma Consolidated Financial Statements of
Specialty Care Network, Inc. and Subsidiaries
Pro Forma Consolidated Statement of Operations
Year Ended December 31, 1998
<TABLE>
<CAPTION>
RESTRUCTURING OTHER
SPECIALTY CARE TRANSACTION TRANSACTIONS
NETWORK, INC. PRO FORMA PRO FORMA FOOTNOTE
AND SUBSIDIARIES ADJUSTMENTS ADJUSTMENTS LEGEND PRO FORMA
------------- ------------- ------------- ------------- -------------
Revenue:
<S> <C> <C> <C> <C> <C>
Service fees $ 76,649,778 $ (27,765,275) $ (16,540,190) (11) $ 32,344,313
Other 2,531,524 (843,019) -- (12) 1,688,505
------------- ------------- ------------- -------------
79,181,302 (28,608,294) (16,540,190) 34,032,818
------------- ------------- ------------- -------------
Costs and expenses:
Clinic expenses 55,188,411 (23,367,691) (12,611,532) (13) 19,209,188
General and administrative 14,468,537 (1,679,823) (522,536) (14) 12,266,178
Impairment loss on service
agreements 94,582,227 (46,800,682) (12,458,126) (15) 35,323,419
Litigation and other costs 3,564,392 (661,277) (573,533) (15) 2,329,582
Impairment loss on intangible assets
and other long-lived assets 3,316,651 (253,242) -- (16) 3,063,409
------------- ------------- ------------- -------------
171,120,218 (72,762,715) (26,165,727) 72,191,776
------------- ------------- ------------- -------------
Loss from operations (91,938,916) 44,154,421 9,625,537 (38,158,958)
Other:
Gain on sale of equity investment 1,240,078 -- -- 1,240,078
Interest income 187,450 -- -- 187,450
Interest expense (3,741,089) 1,447,592 946,843 (17) (1,346,654)
------------- ------------- ------------- -------------
Loss before income taxes (94,252,477) 45,602,013 10,572,380 (38,078,084)
Income tax benefit 32,466,391 (15,171,205) (4,228,952) (18) 13,066,234
------------- ------------- ------------- -------------
Net loss $ (61,786,086) $ 30,430,808 $ 6,343,428 $ (25,011,850)
============= ============= ============= =============
Net loss per common share (basic) $ (3.39) $ (1.76)
============= =============
Weighted average number of common
shares used in computation (basic) 18,237,827 (3,303,379) (760,000) (19) 14,174,448
============= ============= ============= =============
Net loss per common share (diluted) $ (3.39) $ (1.76)
============= =============
Weighted average number of common
shares used in computation (diluted) 18,237,827 (3,303,379) (760,000) (19) 14,174,448
============= ============= ============= =============
</TABLE>
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Notes to the Specialty Care Network, Inc. and Subsidiaries
Unaudited Pro Forma Consolidated Balance Sheet
Unaudited Pro Forma Consolidated Balance Sheet Adjustments:
1. The increase in cash reflects prepaid service fees paid by certain
practices that are parties to the restructuring transaction.
2. Represents the net book value of the assets purchased and liabilities
assumed by the practices that are parties to the restructuring transaction
or the Other Transactions.
3. Reflects the federal and state tax obligations and benefits due to the
restructuring transaction and the Other Transactions.
4. Reflects the write-off of the remaining net book value of the service
agreements for the practices that are parties to the restructuring
transaction or the Other Transactions.
5. Reduction to the amount outstanding under the credit facility to reflect the
amount of cash received and to be received in conjunction with the
restructuring transaction and the Other Transactions.
6. Reflects the prepayment of service fees by three of the practices that are
parties to the restructuring transaction.
7. Adjustment to the deferred tax obligation due to the restructuring
transaction and the Other Transactions.
8. Reflects the cancellation of convertible debentures payable to two
physicians in one of the practices that are party to the restructuring
transaction.
9. Represents the loss on the sale of assets and amendment and restatement of
service agreements with the practices that are parties to the restructuring
transaction and the gain related to the Other Transactions.
10. Reflects the estimated fair value of the common stock the Company will
receive in connection with the restructuring transaction at approximately
$1.25 per share and the estimated fair value of common stock the Company
will receive in connection with the Other Transactions at approximately
$2.06 per share.
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Notes to the Specialty Care Network, Inc. and Subsidiaries
Unaudited Pro Forma Consolidated Statement of Operations
Unaudited Pro Forma Consolidated Statement of Operations Adjustments:
11. Reflects the following adjustments to service fees revenue:
THREE MONTHS ENDED MARCH 31, 1999:
<TABLE>
<CAPTION>
RESTRUCTURING OTHER
TRANSACTION TRANSACTIONS
PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS
------------ -----------
<S> <C> <C>
Elimination of service fees under long-term service
agreements (including clinic expense reimbursement) $ (7,345,805) $(3,689,425)
Recognition of service fees based on restructured
service Agreements $ 985,404 $ --
------------ -----------
$ (6,360,401) $(3,689,425)
</TABLE>
YEAR ENDED DECEMBER 31, 1998:
<TABLE>
<CAPTION>
RESTRUCTURING OTHER
TRANSACTION TRANSACTIONS
PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS
------------- -------------
<S> <C> <C>
Elimination of service fees under long-term service
agreements (including clinic expense reimbursement) $ (31,682,509) $ (16,540,190)
Recognition of service fees based on restructured
service Agreements $ 3,917,234 $ --
------------- -------------
$ (27,765,275) $ (16,540,190)
</TABLE>
12. Reflects the reduction of other revenue associated with the practices that
are parties to the restructuring transaction.
13. Represents the elimination of clinic expenses for practices that are
parties to the restructuring transaction or the Other Transactions.
14. Reflects the reduction in amortization expense resulting from the write-off
of the net book value of the management service agreements for practices
that are parties to the restructuring transaction and the Other
Transactions.
15. Adjusts the impairment loss on service agreements and the expense for
litigation and other costs for the restructuring transaction and the Other
Transactions, in order to reflect the non-recurring nature of these items.
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16. Reflects the reduction in the impairment loss on other long-lived assets
related to the practices that are parties to the restructuring transaction
in order to reflect the non-recurring nature of these items.
17. Represents decreases in interest expense due to the repayment of debt with
the cash proceeds received from the restructuring transaction and the Other
Transactions.
18. Reflects adjustment of the income tax benefit using a combined federal and
state effective tax rate of 40%.
19. Reflects the effects of the shares of common stock the Company is
reacquiring in connection with the restructuring transaction and the Other
Transactions.
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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
----------------------------------
D. Paul Davis
Senior Vice President of
Finance/Chief Financial Officer
Dated: June 29, 1999
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