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): December 31, 1998
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SPECIALTY CARE NETWORK, INC.
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(Exact Name of Registrant Specified in Charter)
Delaware 0-22019 62-1623449
- ---------------------------- ------------------------ -------------------
(State or Other Jurisdiction (Commission File Number) (I.R.S. Employer
of Incorporation) Identification No.)
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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<PAGE>
Item 2. Acquisition or Disposition of Assets
Effective December 31, 1998, Specialty Care Network, Inc. (the "Company")
entered into transactions with four of its affiliated practices, Orlin & Cohen
Orthopedic Associates, LLP; Greater Chesapeake Orthopaedic Associates, LLC; Vero
Orthopaedics II, P.A.; and Medical Rehabilitation Specialists, II, P.A
collectively, (the "Agreements"). Under the terms of the Agreements, the Company
sold to each of the practices the accounts receivable, fixed assets and certain
other assets relating to the respective practices. In addition, the Company
amended and restated its existing 40-year service agreements with the practices
and their physicians. Generally, the service agreements have been restated as
short-term Management Services Agreements, under which the Company will provide
substantially reduced services to the practices as compared with the former
service agreements. The practices will pay significantly reduced service fees
under the Management Services Agreements, which will terminate on various dates
between November 2001 and March 2003.
In connection with the sale of assets and amendment and restatement of the
service agreements, the Company is being paid approximately $8.5 million
(including approximately $1.6 million in prepayment of fees payable under the
Management Services Agreements by two of the practices), 2,124,959 shares of the
Company's common stock and the cancellation of a note payable by the Company to
one of the practices in the principal amount of $5,454,439. The cash payable to
the Company is evidenced by promissory notes that are payable in full on or
before January 31, 1999. The cash consideration is subject to adjustment based
on the calculation, as of December 31, 1998, of the tangible book value of the
assets purchased by the practices. In addition, the Company has agreed to adjust
the consideration paid by three of the practices if it closes a similar
transaction with an affiliated practice prior to December 31, 1999, on financial
terms that are materially more favorable to such practice than the terms agreed
upon by the three practices. Based on preliminary figures, the Company estimates
that it will record a loss, net of estimated tax benefits, on the sale of assets
and amendment and restatement of the service agreements of approximately $7.8
million, primarily due to the write-off of the net book value of the long-term
service agreements.
The Company intends to use the cash proceeds of these transactions to reduce the
principal amount payable under its bank credit facility. As a result of the cash
payment and cancellation of its note previously payable to one of the practices,
the Company will reduce its indebtedness by approximately $14 million.
This report contains forward-looking statements, including statements concerning
the pay down of amounts under the Company's credit facility. 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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<PAGE>
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 sale of assets and amendment and restatement of the service agreements by
the Company under the terms of the Agreements. The pro forma consolidated
financial statements have been prepared by the Company based upon the historical
financial statements of Specialty Care Network, Inc. and subsidiaries 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 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
Agreements have been reflected in the pro forma consolidated financial
statements. The pro forma balance sheet as of September 30, 1998 gives effect to
the Agreements as if such transactions had occurred, and the related amended and
restated service agreements were executed, on September 30, 1998. The pro forma
consolidated statement of income for the nine months ended September 30, 1998
assumes the Agreements were executed on January 1, 1998. The pro forma
consolidated statement of income for the year ended December 31, 1997 assumes
the Agreements were executed on January 1, 1997, except for the agreement with
Orlin & Cohen Associates, LLC, ("OCOA"). OCOA initially affiliated with the
Company in March 1998; and therefore no historical or pro forma activity is
shown related to OCOA for the year ended December 31, 1997.
The following unaudited pro forma 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, 1997, 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 September 30, 1998.
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<PAGE>
Unaudited Pro Forma Consolidated Financial Statements of
Specialty Care Network, Inc. and Subsidiaries
Pro Forma Balance Sheet
September 30, 1998
<TABLE>
<CAPTION>
Specialty Care Pro Forma
Network, Inc. Pro Forma Adjustment
and Subsidiaries Adjustments Legend Pro Forma
---------------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 369,119 $ -- $ 369,119
Accts receivable, net 35,801,184 (8,629,767) (1) 27,171,417
Prepaid expenses and other 1,877,863 (203,702) (1) 1,674,161
Loans to physician stockholders 693,940 (258,914) (1) 435,026
------------- ------------- -------------
Total current assets 38,742,106 (9,092,383) 29,649,723
Property and equipment, net 11,304,861 (844,731) (1) 10,460,130
Intangible assets, net 2,180,232 -- 2,180,232
Management service agreements, net 114,647,029 (19,675,422) (2) 94,971,607
Advances to affiliates 1,606,938 -- 1,606,938
Other assets 2,508,599 -- 2,508,599
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Total assets $ 170,989,765 $ (29,612,536) 141,377,229
============= ============= =============
Current portion - capital
lease obligations $ 94,148 (700) (1) $ 93,448
Accounts payable 359,239 (255,209) (1) 104,030
Accrued personnel costs 1,863,914 (397,458) (1) 1,466,456
Accrued expenses 3,194,914 (39,662) (1) 3,155,252
Income taxes payable 89,784 2,620,512 (3) 2,710,296
Due to affiliated
physician practices 4,735,305 (1,095,214) (1) 3,640,091
Deferred taxes 1,280,047 -- 1,280,047
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Total current liabilities 11,617,351 832,269 12,449,620
Long term portion - capital
lease obligations 881,118 (1,199) (1) 879,919
Deferred income -- 1,578,500 (4) 1,578,500
Convertible note payable 5,454,439 (5,454,439) (5) --
Line of credit 48,225,000 (8,538,266) (5) 39,686,734
Deferred income taxes 30,969,549 (8,066,923) (3) 22,902,626
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Total liabilities 97,147,457 (19,650,058) 77,497,399
Common stock 18,619 -- 18,619
Treasury stock (1,307,474) (2,124,959) (6) (3,432,433)
Additional paid-in capital 66,963,833 -- 66,963,833
Retained earnings 8,167,330 (7,837,519) (7) 329,811
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Total equity 73,842,308 (9,962,478) 63,879,830
Total liabilities and equity $ 170,989,765 $ (29,612,536) $ 141,377,229
============= ============= =============
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial statements.
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<PAGE>
Unaudited Pro Forma Consolidated Financial Statements of
Specialty Care Network, Inc. and Subsidiaries
Pro Forma Consolidated Statement of Income
Nine months ended September 30, 1998
<TABLE>
<CAPTION>
Specialty Care Pro Forma
Network, Inc. Pro Forma Adjustment
and Subsidiaries Adjustments Legend Pro forma
---------------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues:
Service fees $ 55,963,990 $ (8,408,703) (8) $ 47,555,287
Other 3,147,500 (570,618) (8) 2,576,882
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59,111,490 (8,979,321) 50,132,169
Costs and expenses:
Clinic expenses 39,857,918 (6,526,230) (9) 33,331,688
General and administrative
expenses 9,977,359 (370,024) (10) 9,607,335
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49,835,277 (6,896,254) 42,939,023
Income (loss) from operations 9,276,213 (2,083,067) 7,193,146
Other: -- --
Interest income 141,355 -- 141,355
Interest expense (2,698,668) 584,620 (11) (2,114,048)
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Income (loss) before income taxes 6,718,900 (1,498,447) 5,220,453
Income tax (expense) benefit (2,650,585) 599,379 (12) (2,051,206)
Net income (loss) $ 4,068,315 $ (899,068) $ 3,169,247
============ ============ ============
Net income per common share (basic) $ 0.22 $ 0.20
============ ============
Weighted average number of common
shares used in computation (basic) 18,117,349 15,992,390
============ ============
Net income per common share (diluted) $ 0.22 $ 0.19
============ ============
Weighted average number of common shares
and common share equivalents used in
computation (diluted) 18,489,022 16,364,063
============ ============
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial statements.
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<PAGE>
Unaudited Pro Forma Consolidated Financial Statements of
Specialty Care Network, Inc. and Subsidiaries
Pro Forma Consolidated Statement of Income
Year ended December 31, 1997
<TABLE>
<CAPTION>
Specialty Care Pro Forma
Network, Inc. Pro Forma Adjustment
and Subsidiaries Adjustments Legend Pro forma
---------------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Revenues:
Service fees $ 45,966,531 $ (5,672,430) (8) $ 40,294,101
Other 3,689,390 (253,665) (8) 3,435,725
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49,655,921 (5,926,095) 43,729,826
Costs and expenses:
Clinic expenses 31,644,618 (3,690,563) (9) 27,954,055
General and administrative expenses 7,861,015 (79,308) (10) 7,781,707
------------ ------------ ------------
39,505,633 (3,769,871) 35,735,762
Income (loss) from operations 10,150,288 (2,156,224) 7,994,064
Other:
Interest income 536,180 -- 536,180
Interest expense (942,144) 293,656 (11) (648,488)
------------ ------------ ------------
Income (loss) before income taxes 9,744,324 (1,862,568) 7,881,756
Income tax (expense) benefit (3,873,926) 745,027 (12) (3,128,899)
Net income (loss) $ 5,870,398 $ (1,117,541) $ 4,752,857
============ ============ ============
Net income per common share (basic) $ 0.38 $ 0.34
============ ============
Weighted average number of common
shares used in computation (basic) 15,559,368 13,893,971
============ ============
Net income per common share (diluted) $ 0.37 $ 0.33
============ ============
Weighted average number of common shares
and common share equivalents used in
computation (diluted) 16,071,153 $ 14,405,756
============ ============
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial statements.
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<PAGE>
Unaudited Pro Forma Consolidated Financial Statements
Of Specialty Care Network, Inc. and Subsidiaries
Notes to Pro Forma Consolidated Financial Statements
Pro Forma Balance Sheet Adjustments
1. Represents the book value of the assets purchased and liabilities assumed
by four of the Company's affiliated practices pursuant to the terms and
conditions of the Agreements.
2. Reflects the write-off of the net book value of the management service
agreements for the four affiliated practices who were party to the
Agreements.
3. Reflects the resulting current income taxes payable and resulting income
tax effects of temporary differences related to the sale of assets and
amendment and restatement of the service agreements.
4. Reflects the prepayment by two of the practices, of fees payable under the
service agreements that have been amended and restated as Management
Service Agreements. Service fee revenue will be recognized over the terms
of the underlying amended and restated Management Service Agreements.
5. Represents the reduction in principal amount payable under the Company's
bank credit facility for the amount of cash received in connection with the
sale of assets and amendment and restatement of the service agreements, as
well as the cancellation of a note payable to one of the practices.
6. Reflects the Company's common stock received in connection with the sale of
assets and amendment and restatement of the service agreements.
7. Represents the loss on the sale of assets and amendment and restatement of
the service agreements.
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<PAGE>
Pro Forma Consolidated Statements of Income Adjustments
8. Reflects the following adjustments to service fees and other revenue:
<TABLE>
<CAPTION>
Nine Months
Year ended ended
December 31, September 30,
1997 1998
------------ -------------
<S> <C> <C>
(i) Elimination of service fees and
other revenue under long-term service
agreements (including clinic
expense reimbursement) ($6,904,696) ($10,650,772)
(ii) Recognition of service fees based
on amended and restated service
agreements 978,601 1,671,451
----------- ------------
($5,926,095) (8,979,321)
</TABLE>
9. Represents the elimination of clinic expenses for the four affiliated
practices who were party to the Agreements.
10. Reflects the reduction in amortization of service agreements resulting from
the write-off of the net book value of the management service agreements
for the four affiliated practices who were party to the Agreements.
11. Represents the decrease in interest expense due to the repayment of debt
with the cash proceeds received from the sale of assets and amendment and
restatement of service agreements.
12. Reflects an adjustment for the provision for income taxes using a combined
federal and state effective rate of 40%.
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<PAGE>
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: _______________________________
D. Paul Davis
Senior Vice President of
Finance/Chief Financial Officer
Dated: January 15, 1999
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