SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the fiscal year ended December 31, 1996
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from ______ to ______
Commission File Number 0-26806
SHERIDAN HEALTHCARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-3252967
(State or other jurisdiction of (IRS Employer ID Number)
incorporation or organization)
4651 SHERIDAN STREET, SUITE 400, HOLLYWOOD, FLORIDA 33021
(Address of principal executive offices, including zip code)
954/987-5822
(Registrant's telephone number, including area code)
Securities registered under Section 12(b)of the Act: None
Securities registered under Section 12(g)of the Act:COMMON STOCK, PAR VALUE $.01
(Title of Class)
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 the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant was approximately $31.1 million as of March 17, 1997. For
purposes of this determination, shares held by non-affiliates includes all
outstanding shares except for shares of non-voting Class A common stock and
shares held by officers, directors and shareholders beneficially owning 10% or
more of the Registrant's outstanding common stock. The aggregate market value
was computed based on the closing sale price of the Registrant's common stock on
March 17, 1997, as reported on the NASDAQ National Market.
As of March 17, 1997, there were 6,417,998 shares of the Registrant's
voting Common Stock, $.01 par value per share outstanding and 296,638 shares of
the Registrant's non-voting Class A Common Stock, $.01 par value per share
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement relating to the Registrant's
Annual Meeting of Stockholders anticipated to be held on May 15, 1997 are
incorporated by reference into Part III of this Form 10-K.
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PART I
This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
those set forth in the forward-looking statements. Certain factors that might
cause such a difference are discussed in the section entitled "Certain Factors
Affecting Future Operating Results" under Item 7 of this Form 10-K.
ITEM 1. BUSINESS
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GENERAL
The Company is a physician practice management company which provides
specialist physician services at hospitals and ambulatory surgical facilities in
the areas of anesthesia, neonatology, pediatrics, and emergency services and
owns and operates, or manages, office-based primary care, obstetrical and
rheumatology practices. The Company derives substantially all of its revenue
from the medical services provided by the physicians who are employed by the
Company or whose practices are managed by the Company. The Company generates
revenue from its specialist physician services by directly billing third-party
payors or patients on a fee-for-service or discounted fee-for-service basis. In
addition, several hospitals at which the Company provides specialist physician
services pay subsidies to the Company to supplement revenue from billings to
third-party payors. The Company generates revenue from its office-based
physician services pursuant to various payment arrangements, including
shared-risk capitation arrangements, fee-for-service or discounted
fee-for-service arrangements and other capitation arrangements.
The Company's objective is to expand its business by increasing the number
of hospitals and other health care facilities at which it provides specialist
physician services, providing physician services in additional specialties to
existing hospital customers and acquiring additional physician practices. One of
the Company's key strategies is to create integrated physician groups,
consisting of both hospital-based and office-based physicians in various
complementary specialties, that support the Company's hospital customers. As of
March 17, 1997, the Company employed, or managed the practices of, approximately
210 physicians practicing under 42 specialty service contracts with 27 health
care facilities and at 21 office locations. The Company currently intends to
sell certain office-based practices consisting of nine office locations at which
the Company employs approximately 16 physicians. See "Operations - Office-based
Physician Services" below for more information.
OPERATIONS
HOSPITAL-BASED PHYSICIAN SERVICES. The Company currently provides or
manages hospital-based physician services at 22 hospitals and five ambulatory
surgery facilities located in Florida, New York, Texas, Virginia and West
Virginia. These services are provided by approximately 160 physicians who are
employed by the Company or whose practices are managed by the Company, of which
75 are anesthesiologists, 45 are neonatologists or pediatricians, and 40 are
emergency room physicians. The Company also has entered into an agreement to
provide management services relating to the operation of anesthesia departments
at six hospitals located in California.
In most of its arrangements with hospitals and ambulatory surgery
facilities, the Company is responsible for recruiting and employing physicians
and other health care professionals who provide health care services at the
facility. In addition, the Company provides a comprehensive range of support
services, including contracting with third-party payors, billing and
collections, malpractice risk management, quality assurance, and physician
recruiting and credentialling. By entering into a contract with the Company, a
hospital substantially reduces its responsibilities related to the contracted
specialty, and eliminates the administrative burdens related to providing
physician coverage, since the Company provides the contracted services on a
24-hour a day, 365-day a year basis.
For each hospital or ambulatory surgery facility, the Company appoints a
supervising physician who assumes an on-site leadership role with respect to all
aspects of the services provided by the Company. In addition to providing
physician services, this physician supervises the other physicians and other
health care professionals at the facility, participates in the recruitment,
promotion and compensation of physicians and other health care professionals
employed or managed by the Company, and serves as a coordinator between the
Company and other personnel at the facility.
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Since its inception, and unlike many of its competitors, the Company has
directly employed most of its hospital-based specialist physicians and other
health care professionals. The Company currently has employment agreements with
most of its hospital-based physicians, which generally provide for terms of
between one and five years and include non-competition provisions. The Company
also employs advanced registered nurse practitioners, certified nurse midwives
and physician assistants who provide services in accordance with written
protocols. The compensation structure for physicians and other health care
professionals is intended to be competitive within the geographic market in
which they are employed.
The Company and its predecessors have been providing and managing
hospital-based physician services for more than 40 years. All of the Company's
specialist physician services were in the area of anesthesia until 1994, when
the Company began to deliver emergency physician services. In 1996, the Company
further expanded the scope of its hospital-based services to include neonatology
and pediatrics. Except for one acquisition in March 1996, the Company has
expanded its hospital-based services business entirely by being awarded new
contracts for its services. In March 1996 the Company acquired a 43-physician
neonatology and pediatric practice which delivered specialist physician services
at 11 hospitals in Florida and Virginia. This acquisition added neonatology and
pediatrics to the Company's hospital-based physician services.
OFFICE-BASED PHYSICIAN SERVICES. The Company currently employs, or manages
the practices of, approximately 50 office-based physicians, of which 33 are
primary care physicians, 11 are obstetricians, and six are rheumatologists. The
practices of these physicians are conducted at 21 office locations, all of which
are in Florida. The Company also provides primary care physician services to
hospitalized members of a managed care organization through a panel services
agreement with the managed care organization. All of the physician office
locations are leased by the Company under long-term lease arrangements, except
for one location, which is owned by the Company.
In November 1996, the Company announced that in connection with a change in
its strategic direction, it intends to sell non-strategic office-based physician
practices. One of these non-strategic office locations was sold by the Company
in December 1996 and another one was sold in February 1997. The Company
currently intends to sell the remaining non-strategic practices, which consist
of nine office locations, at which the Company currently employs 10 primary care
physicians and six rheumatologists.
The Company's primary focus in its office-based services business is to
expand its obstetrical practices and to acquire additional obstetrical
practices. Office-based obstetrical practices complement the Company's
hospital-based services business because a significant number of obstetrical
patients require anesthesia and/or neonatology physician services. The Company
currently employs, or manages the practices of, 11 office-based obstetricians
practicing in five office locations.
The Company commenced its office-based services business in 1994 by
acquiring a four-location primary care practice that employed nine physicians.
The Company completed an additional eleven acquisitions of office-based primary
care, obstetrical and rheumatology practices during the period from December
1994 to October 1996. In addition, the Company entered into two long-term
management agreements in 1996, under which it manages the practices of certain
office-based physicians in exchange for a fee. Substantially all of the
Company's office-based revenue has been derived from acquired physician
practices and the two management agreements.
The Company has employment agreements with substantially all of its
office-based physicians, which generally provide for terms of between one and
five years and include non-competition provisions. The Company also employs
nurses, other clinical personnel and administrative personnel for its
office-based operations.
ACQUISITIONS. The Company typically acquires a physician practice by paying
the owners of the practice a multiple of the expected post-acquisition earnings
of the practice, and entering into long-term employment agreements with the
former physician owners of the practice. These employment agreements range from
three to ten years in length and typically provide for base compensation and
employee benefits and may contain incentive compensation provisions based on
increases in productivity and efficiency.
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MANAGEMENT AGREEMENTS. In some cases, as an alternative to acquiring a
physician practice, the Company enters into a long-term management agreement
with the practice. In connection with a management agreement, the Company
typically purchases the accounts receivable, furniture and equipment of the
practice, and may pay for additional intangible rights, including restrictive
covenant agreements with the practice's affiliated physicians.
MANAGED CARE
A substantial majority of the Company's total revenue is derived from
third-party payors under various managed care arrangements. Such arrangements
include negotiated discounted fee-for-service arrangements for the Company's
hospital-based and office-based physician services, and shared-risk capitation
and other capitation arrangements with certain of the Company's office-based
primary care practices.
Approximately 90% of the Company's shared-risk capitation revenue is
derived from a single third-party payor, Humana Medical Plan ("Humana"). The
Company does not have a written contract with Humana with respect to these
shared-risk capitation arrangements. The revenue under these arrangements is
generated by certain primary care practices which were acquired by the Company
between September 1994 and February 1995. Since the respective acquisition dates
of these practices, the shared-risk capitation arrangements between the Company
and Humana have been patterned on the terms of the contracts that were in effect
prior to the Company's acquisition of these practices.
As discussed above under "Operations - Office-based Physician Services,"
the Company currently intends to sell certain of its office-based physician
practices. The practices being sold include substantially all of the Company's
shared-risk capitation business.
CONCENTRATION OF REVENUE
A significant portion of the Company's revenue is derived from delivering
or managing hospital-based physician services at multiple hospitals which are
under common ownership. Of the Company's total net revenue in 1996,
approximately $18.2 million, or 19.6%, was derived from anesthesia and
neonatology services delivered at three hospitals owned and operated by the
South Broward Hospital District. In addition, approximately $17.1 million, or
18.4% of the Company's total net revenue in 1996, was derived from anesthesia,
neonatology, pediatric and emergency services delivered at 12 hospitals owned
and operated by Columbia/HCA Healthcare Corp. In addition, approximately $11.0
million, or 11.9% of the Company's total net revenue in 1996, was derived from
anesthesia, neonatology, pediatric, emergency and management services delivered
at 11 hospitals owned and operated by OrNda Healthcorp, which was recently
acquired by Tenet Healthcare Corporation ("Tenet"). In addition, approximately
$1.9 million, or 2.0% of the Company's total net revenue in 1996, was derived
from anesthesia, neonatology and pediatric services delivered at three hospitals
owned and operated by Tenet.
A significant portion of the Company's revenue from both hospital-based and
office-based physician services is derived from various arrangements, including
fee-for-service and capitation arrangements, with Humana and its affiliates.
During 1996, the Company derived total net revenue of approximately $19.3
million from Humana and its affiliates, which accounted for 20.8% of the
Company's total net revenue.
INFORMATION SYSTEMS
The Company has developed and continues to develop sophisticated management
information systems to support both its current level of operations and its
growth strategy. The Company has physician billing and collection systems it
utilizes in connection with its hospital-based physician services. These billing
and collection systems, which have been tailored to the Company's requirements,
enable the Company to accommodate numerous and diverse payment arrangements with
third-party payors.
During the period from 1994 to 1996, the Company collaborated with IBM
Corporation and its affiliates in an attempt to develop an integrated, open
architecture billing and collection, referral management, pharmacy management,
and electronic medical record system. This project was designed to produce a
comprehensive information system that would be used to effectively manage the
Company's shared-risk capitation business. As discussed above, the Company is
currently in the process of selling several primary care practices which include
substantially all of the Company's shared-risk capitation business. The
comprehensive information system has not been completed, and because the Company
intends to sell the operations for which it was designed, its completion is no
longer being pursued by the Company. As a result, the cost of the computer
software and certain computer equipment related to this project, which was an
aggregate of approximately $800,000, was written off to expense during 1996, and
is included in the $17.4 million write-down of office-based net assets recorded
during 1996. See Note 1(i) to the Company's consolidated financial statements
for more information on the write-down.
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Although the comprehensive information system was not completely developed,
certain components of it were completed and have been implemented by the
Company. The Company is currently utilizing the billing and collections
component of this system in several of its owned and managed office-based
practices and the Company may implement this component into other office-based
practices in the future. The license agreement between the Company and IBM
Corporation permits the Company to place these key elements of the system at an
unlimited number of practice sites owned or managed by the Company at no
additional license cost. Alternatively, the Company may replace this billing and
collection system with an alternative system that does not contain features
designed to manage shared-risk capitation business, which are no longer relevant
to the Company's growth strategy.
CONTRACTUAL ARRANGEMENTS
The Company uses a variety of contractual arrangements with respect to the
physicians which it employs, manages, or with which it is otherwise affiliated.
The particular contractual arrangement used in each case is influenced by a
number of factors including the desires of physicians, the type of practice in
which the physicians are engaged, financial considerations, statutory
limitations on the corporate practice of medicine and other regulatory concerns,
and, with respect to newly-affiliated practices, the terms of any pre-existing
contracts.
The Company has structured its acquisitions of, or affiliations with,
physician practices as asset purchases, mergers, stock purchases and management
agreements. In connection with any of these transactions, the Company typically
pays the owners of the practice a multiple of expected post-acquisition earnings
of the practice, or a multiple of expected earnings from a management agreement,
as applicable. In the case of some management agreements, the Company acquires
the accounts receivable, furniture, fixtures and equipment of the practice and
pays the owner of the practice the estimated fair market value of these assets.
In connection with certain management agreements, the Company purchases an
option to acquire the practice being managed for a nominal amount.
In connection with the acquisition of a physician practice, the Company
typically enters into employment agreements with the physician owners and other
key management personnel. These agreements typically provide for a base salary,
incentive compensation, terms of between three and ten years, and
non-competition provisions. The compensation structure for physicians is
intended to be competitive within the geographic market in which each physician
is employed. The Company also has employment agreements with nearly all of the
hospital-based and office-based physicians which it employs outside the context
of an acquisition of a practice.
In connection with a management services agreement, the Company typically
manages all aspects of the practice other than the provision of medical
services, which is controlled by the physician. The Company typically is
responsible for all leases for office space and equipment, hires all
non-clinical office personnel and provides comprehensive management services,
including physician recruiting and credentialling, managed care contracting,
malpractice risk management, utilization review, billing and collections, and
management information systems. In exchange for these services, the practice
pays the Company a management fee.
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The Company has management services arrangements with three practices that
are affiliates of the Company, Sheridan Medical Healthcorp, P.C. ("Sheridan
NY"), Sheridan Healthcare of Texas, P.A. ("Sheridan TX"), and Arthritis and
Rheumatic Disease Specialties, P.A. ("ARDS"). Each of these three affiliates is
owned by Gilbert Drozdow, M.D., who is an executive officer and a stockholder of
the Company. These affiliates pay the Company a management fee that is based on
expenses incurred by the Company plus either a percentage fee based on net
revenues, or a flat fee, depending upon local laws or regulations, subject to a
limitation that the fee not exceed the amount that would be charged for similar
services by an unaffiliated third party. These affiliated practices are included
in the Company's consolidated financial statements, and the related management
fees are eliminated in consolidation.
The Company has contractual arrangements with hospitals and ambulatory
surgery centers which govern its delivery of hospital-based physician services.
The agreements governing such operations are generally for terms of between one
and five years and provide for termination upon 60 to 180 days notice, although
the Company has a number of agreements which have terms of at least five years
and are terminable only for cause. These agreements generally grant the Company
the exclusive right to provide certain physician services at the particular
health care facility and directly bill third-party payors for its services,
subject to a requirement that the Company's fees be approved by the health care
facility. The Company has agreed with certain facilities to charge third-party
payors the same rates for services delivered at such facilities as the Company
charges those third-party payors for services delivered at other facilities
within designated geographic areas. A number of these contractual arrangements
are not in writing, were established either through a course of conduct or
through oral understandings, and are terminable by either party at will.
In addition to contracts pursuant to which the Company is responsible for
the provision of medical services, the Company has a five-year contract with a
hospital company to provide management services relating to the operation of
anesthesia departments at six hospitals located in California.
The Company is paid for its hospital-based physician services by
third-party payors pursuant to a number of arrangements, including discounted
fee-for-service and global fee or per diem arrangements. In addition, the
Company has arrangements with several hospitals under which the Company receives
a contractual subsidy or income guarantee from the hospital to supplement
revenue from billings to third-party payors.
Pursuant to a panel services agreement with a health maintenance
organization, the Company is responsible for providing inpatient physician care
to members of that organization who are admitted to certain hospitals, and for
managing the utilization of hospital services by those patients. In exchange for
its services, the Company is paid a fixed monthly fee by the health maintenance
organization.
GOVERNMENT REGULATION
Because the Company is a participant in the health care industry, its
operations and relationships are subject to extensive and increasing regulation
by a number of governmental entities at the federal, state and local levels. The
Company is also subject to laws and regulations relating to business
corporations in general. The Company believes its operations are in material
compliance with applicable laws. Nevertheless, because the Company is involved
in many aspects of the health care industry, much of the Company's business
operations have not been the subject of state or federal regulatory
interpretation and there can be no assurance that a review of the Company's
business by courts or regulatory authorities will not result in a determination
that could adversely affect the operations of the Company or that the health
care regulatory environment will not change so as to restrict the Company's
existing operations or their expansion.
A significant portion of the Company's revenue is derived from delivering
medical services to patients who are covered under various Medicare and Medicaid
health care programs. Approximately 14.0% of the Company's total net revenue in
1996 was derived from the assignment of Medicare and Medicaid benefits to the
Company by patients of the Company's affiliated physicians. In addition,
approximately 11.5% of the Company's total net revenue in 1996 was derived from
capitation payments from health maintenance organizations for patients who had
assigned their Medicare or Medicaid benefits to the health maintenance
organizations. As a result, any change in reimbursement regulations, policies,
practices, interpretations or statutes could adversely affect the operations of
the Company.
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The office-based physician practices which the Company currently intends to
sell include substantially all of the Company's revenue that is derived from
capitation payments from health maintenance organizations for patients who have
assigned their Medicare or Medicaid benefits to the health maintenance
organizations.
The federal Medicare program adopted a system of reimbursement of physician
services, known as the resource based relative value scale ("RBRVS"), which took
effect in 1992 and was implemented on December 31, 1996. The Company expects
that the RBRVS fee schedule and other future changes in Medicare reimbursement
will result in some cases in a reduction and in some cases in an increase,
compared to historical levels, in the reimbursement rates received by the
Company for services rendered to Medicare beneficiaries.
The laws of many states prohibit business corporations such as the Company
from practicing medicine and employing physicians to practice medicine and
certain self-referral laws and regulations restrict the activities of physicians
who are employed by entities in which they have ownership interests. The
structure of the Company's operations in certain states is influenced by the
laws prohibiting business corporations from practicing medicine and the
structure of the Company's arrangements with physicians, who may be restricted
by self-referral laws, is influenced by those self-referral laws and
regulations.
Sheridan NY, Sheridan TX, and ARDS are each wholly-owned by Gilbert
Drozdow, M.D., who is an executive officer and a stockholder of the Company. The
Company has a management services arrangement with each of Sheridan NY, Sheridan
TX and ARDS, under which each of those companies delegates to the Company
responsibility for the provision to them of all management services, personnel,
bookkeeping and accounting services, and billing and collection services, to the
extent permitted by law. In exchange, the Company receives a management fee.
This management services agreement is terminable by a party (i) if the other
party fails to perform in any material respect any material obligation, which
failure is not cured within 60 days after notice or (ii) upon the application
for, or consent to, the appointment of a receiver, trustee or liquidator of all
or a substantial part of the other party's assets, the filing of a petition in
bankruptcy or consent to an involuntary petition in bankruptcy by the other
party and certain other events.
Expansion of the operations of the Company to certain other jurisdictions
could require additional structural and organizational modifications of the
Company's form of relationship with hospitals or physician practices. Those
changes, if any, could have an adverse effect on the Company. The laws in most
states regarding the corporate practice of medicine and the laws relating to
self-referral have been subject to limited judicial and regulatory
interpretation and, therefore, no assurances can be given that if the Company's
activities are challenged that they will be found to be in compliance with all
applicable laws and regulations.
In addition to prohibiting the practice of medicine, numerous states
prohibit entities like the Company from engaging in certain health care related
activities such as fee-splitting with physicians. Florida, for instance, enacted
in April 1992 a Patient Self-Referral Act that severely restricts patient
referrals for certain services, prohibits mark-ups of certain procedures,
requires disclosure of ownership in businesses to which patients are referred
and places other regulations on health care providers. The Company believes that
its Florida practices fit within the group practice exemption contained in the
Patient Self-Referral Act. However, investments or contractual relationships
with businesses not specifically operated by the Company would, in some cases,
be prohibited. The Company believes that it is likely that other states will
adopt similar legislation. Accordingly, expansion of the operations of the
Company to certain jurisdictions may require it to comply with such
jurisdictions' regulations which could lead to structural and organizational
modifications of the Company's form of relationship with hospitals or physician
practices in those states. Those changes, if any, could have an adverse effect
on the Company.
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Certain provisions of the Social Security Act, commonly referred to as the
"Anti-kickback Statute," prohibit the offer, payment, solicitation or receipt of
any form of remuneration in return for the referral of Medicare or state health
program patients or patient care opportunities, or in return for the
recommendation, arrangement, purchase, lease, or order of items or services that
are covered by Medicare or state health programs. The Anti-kickback Statute is
broad in scope and has been broadly interpreted by courts in many jurisdictions.
Read literally, the statute places at risk many business arrangements,
potentially subjecting such arrangements to lengthy, expensive investigations
and prosecutions initiated by federal and state governmental officials. Many
states have adopted similar prohibitions against payments intended to induce
referrals of Medicaid and other third-party payor patients. The Company believes
that it has not violated the Anti-kickback Statute. Violation of the
Anti-kickback Statute is a felony, punishable by fines up to $25,000 per
violation and imprisonment for up to five years. In addition, the Department of
Health and Human Services may impose civil penalties excluding violators from
participation in Medicare or state health programs.
In July 1991 and November 1992, in part to address concerns regarding the
Anti-kickback Statute, the federal government published regulations that provide
exceptions, or "safe harbors," for transactions that will be deemed not to
violate the Anti-kickback Statute. Among the safe harbors included in the
regulations were provisions relating to the sale of practitioner practices,
management and personal services agreements, and employee relationships. A
proposed regulation establishing additional safe harbors was published in
September 1993 that would offer new protections under the Anti-kickback Statute
to eight activities, including referrals within group practices consisting of
active investors. Final regulations have not yet been published. Proposed
amendments to clarify these safe harbors were published in July 1994 which, if
adopted, would cause substantive retroactive changes to the 1991 regulations.
Although the Company believes that it is not in violation of the Anti-kickback
Statute, some of its operations do not fit within any of the existing or
proposed safe harbors, and, accordingly, there can be no assurance that the
Company's practices will not be found to be in violation of the statute, and any
such finding could have a material adverse effect on the Company.
Significant prohibitions against physician referrals were enacted by
Congress in the Omnibus Budget Reconciliation Act Of 1993. These prohibitions,
commonly known as "Stark II," amended prior physician self-referral legislation
known as "Stark I" by dramatically enlarging the field of physician-owned or
physician-interested entities to which the referral prohibitions apply.
Effective January 1, 1995, Stark II prohibits, subject to certain exemptions, a
physician or a member of his immediate family from referring Medicare or
Medicaid patients to an entity providing "designated health services" in which
the physician has an ownership or investment interest, or with which the
physician has entered into a compensation arrangement including the physician's
own group practice. The designated health services include radiology and other
diagnostic services, radiation therapy services, physical and occupational
therapy services, durable medical equipment, parenteral and enteral nutrients,
equipment, supplies, prosthetics, orthotics, outpatient prescription drugs, home
health services, and inpatient and outpatient hospital services. The penalties
for violating Stark II include a prohibition on payment by these government
programs and civil penalties of as much as $15,000 for each violative referral
and $100,000 for participation in a "circumvention scheme." The Stark
legislation is broad and ambiguous and interpretative regulations clarifying the
provisions of Stark II have not been issued. While the Company believes it is in
compliance with the Stark legislation, there can be no assurance this is the
case. Future regulations could require the Company to modify the form of its
relationships with physician groups. Moreover, the violation of Stark I or II by
the Company could result in significant fines or penalties and exclusion from
participation in the Medicare and Medicaid programs. Such penalties or
exclusion, if applied to the Company, could result in significant loss of
reimbursement which would adversely affect the Company.
On March 27, 1996, the United States Department of Health and Human
Services promulgated regulations pursuant to the requirements of the Omnibus
Budget Reconciliation Act Of 1990 concerning physician incentive plans. The
regulations provide that physician incentive plans may operate only if no
specific payment is made directly or indirectly under the plan as an inducement
to reduce or limit medically necessary services furnished to a specific
enrollee. These regulations only apply to enrollees who are entitled to Medicare
or Medicaid benefits under a prepaid health plan. The Company is currently
evaluating these regulations to determine the effect, if any, of the regulations
on the Company's current operations, including its contractual arrangements with
its physicians and prepaid health plans. There can be no assurance that these
new regulations will not have a material adverse effect on the Company's
business, financial condition or results of operations.
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Because the Company intends to maintain certain of the health care
practices that it acquires as separate legal entities, they may be deemed
competitors subject to a range of antitrust laws which prohibit anti-competitive
conduct, including price fixing, concerted refusals to deal and division of
market. The Company intends to comply with such state and federal laws as may
affect its operations, but there is no assurance that the review of the
Company's business by courts or regulatory authorities will not result in a
determination that could adversely affect the operation of the Company.
There are also state and federal civil and criminal statutes imposing
substantial penalties, including civil and criminal fines and imprisonment, on
health care providers which fraudulently or wrongfully bill governmental or
other third-party payors for health care services. The federal law prohibiting
false billings allows a private person to bring a civil action in the name of
the United States government for violations of its provisions. The Company
believes it is in material compliance with such laws, but there is no assurance
that the Company's activities will not be challenged or scrutinized by
governmental authorities. Moreover, technical Medicare and other reimbursement
rules affect the structure of physician billing arrangements. The Company
believes it is in material compliance with such regulations, but regulatory
authorities may differ and in such event the Company may have to modify its
physician billing arrangements. Noncompliance with such regulations may
adversely affect the operation of the Company and subject it to penalties and
additional costs.
Laws in all states regulate the business of insurance and the operation of
HMOs. Many states also regulate the establishment and operation of networks of
health care providers. While these laws do not generally apply to the hiring and
contracting of physicians by other health care providers or to companies which
participate in capitated arrangements, there can be no assurance that regulatory
authorities of the states in which the Company operates would not apply these
laws to require licensure of the Company's operations as an insurer, as an HMO
or as a provider network. The Company believes that it is in compliance with
these laws in the states in which it does business, but there can be no
assurance that future interpretations of insurance laws and health care network
laws by the regulatory authorities in these states or in the states into which
the Company may expand will not require licensure or a restructuring of some or
all of the Company's operations.
9
<PAGE>
COMPETITION
The provision of health care services and physician practice management
services are both highly competitive businesses in which the Company competes
for contracts with numerous entities in the health care industry. The Company
also competes with traditional providers and managers of health care services
for the recruitment of employed or managed physicians. In addition, the Company,
in pursuing its growth strategy, faces competitive pressures for the acquisition
of the assets of, and the provision of management services to, additional
hospital-based and office-based physician practices. Several companies, both
publicly and privately held, that have longer operating histories and greater
resources than the Company are pursuing the acquisition of the assets of
physician practices and management contracts with physician practices. There can
be no assurance that the Company will be able to continue to compete effectively
with such competitors, that additional competitors will not enter the market, or
that such competition will not make it more difficult to acquire the assets of,
and provide management services to, physician practices on terms beneficial to
the Company.
CORPORATE LIABILITY AND INSURANCE
The risk of physician malpractice liability is inherent in the Company's
business. In order to mitigate this risk, the Company maintains professional
liability insurance on a claims-made basis. The Company has a primary
malpractice insurance policy which covers losses incurred by the Company up to a
limit of $1.0 million per individual claim and a limit of $7.5 million per
calendar year for all claims combined. In addition, the Company has a secondary
malpractice insurance policy which covers losses in excess of the primary policy
limits, up to a limit of $5.0 million per individual claim and a limit of $5.0
million per calendar year for all claims combined. Under the primary policy, the
Company is required to pay a self-insured retention amount equal to the first
$150,000 of losses for each individual claim up to a maximum aggregate
self-insured retention amount of $900,000 for all claims in one calendar year.
Defense costs in excess of these self-insured retention amounts are paid by the
Company's insurer. The Company also maintains directors' and officers' liability
insurance and general liability insurance on a claims-made basis.
TRADEMARKS
The Company has rights to a trademark and a service mark for "Sheridan
Healthcare, Inc." and "Sheridan Healthcorp, Inc." registered with the U.S.
Patent and Trademark Office. The Company also has a pending application for a
trademark and a service mark for "Sheridan Children's Healthcare Services, Inc."
EMPLOYEES
As of March 17, 1997, the Company had approximately 680 employees,
substantially all of whom were full-time. Of the total number of employees,
approximately 200 were physicians and approximately 480 were non-physician
clinical and administrative support personnel.
ITEM 2. PROPERTIES
----------
The Company leases substantially all of the office space required by its
operations, including its corporate headquarters in Hollywood, Florida and its
physician office locations, at an aggregate monthly rental expense of
approximately $210,000. The Company currently leases approximately 45,000 square
feet of office space for its corporate headquarters. This lease is for a term of
ten years, which expires in 2005, and provides for a monthly rental payment of
approximately $68,000 (adjusted for certain operating expenses). In March 1997,
the Company notified the lessor of its corporate headquarters that it intends to
reduce the size of its office space by approximately 9,000 square feet, pursuant
to an option contained in the lease agreement, which will reduce the monthly
rental payment by approximately $12,000 beginning in July 1997. The Company also
leases office space for its physician practices under leases with remaining
terms which expire at various dates from 1997 to 2007, and monthly rental
payments ranging from $1,200 to $13,300. In addition, the Company owns a 3,000
square foot one-story building in Miami, Florida, which is used as a primary
care office. The Company considers its facilities to be adequate and suitable
for its current needs.
10
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
-----------------
From time to time, the Company is party to various claims, suits and
complaints. In October 1996, the Company and certain of its directors, officers
and legal advisors were named as defendants in a lawsuit filed in the Circuit
Court of the Seventeenth Judicial Circuit in and for Broward County, Florida by
certain former physician stockholders of the Predecessor, which was formerly
named Southeastern Anesthesia Management Associates, Inc. The claim alleges that
the defendants engaged in a conspiracy of fraud and deception for personal gain
in connection with inducing the plaintiffs to sell their stock in the
Predecessor to the Company, as well as legal malpractice and violations of
Florida securities laws. The claim seeks damages of at least $10 million and the
imposition of a constructive trust and disgorgement of stock and options held by
certain members of the Company's management. The Company believes the lawsuit is
without merit and intends to vigorously defend against it.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
---------------------------------------------------------------------
The common stock of the Company is traded on the Nasdaq National Market
under the symbol SHCR. There is no established trading market for the Company's
non-voting Class A common stock. The high and low sales prices of the Company's
common stock each calendar quarter, as reported by the Nasdaq National Market,
were as follows:
<TABLE>
<CAPTION>
1997(1) 1996 1995 (2)
--------------- --------------- ---------------
HIGH LOW HIGH LOW HIGH LOW
---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C>
First Quarter.................. 10 1/16 5 5/8 13 8 1/4 --- ---
Second Quarter................. --- --- 11 3/4 7 3/8 --- ---
Third Quarter.................. --- --- 10 1/4 8 --- ---
Fourth Quarter................. --- --- 8 3/4 4 5/8 13 5/8 8 1/4
<FN>
(1) Through March 17, 1997.
(2) The Company's common stock was first traded publicly on October 31, 1995.
</FN>
</TABLE>
On March 25, 1997, the closing sale price of the Company's common stock was
$8.125. As of March 17, 1997, there were approximately 1,300 holders of the
common stock of the Company, including 54 holders of record. As of March 17,
1997, there was one holder of non-voting Class A common stock. The approximate
number of holders of the Company's common stock was determined based on
information obtained from certain investment brokerage firms and mailing
services used by other investment brokerage firms. The Company has not declared
or paid any cash dividends on its common stock. The Company's revolving credit
facility prohibits the payment of cash dividends prior to repayment of the
outstanding balance under the credit facility in full.
11
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The following selected financial data have been derived from the audited
financial statements of the Company and its Predecessor. (See Note 1 to the
Company's consolidated financial statements for an explanation of the
Predecessor.) The financial statements of the Predecessor as of and for the
years ended December 31, 1992 and 1993 have been audited by Peed, Koross,
Finkelstein & Crain, P.A. The financial statements of the Predecessor for the
period from January 1, 1994 to November 28, 1994 and of the Company as of
December 31, 1994, 1995 and 1996 and for the period from November 29, 1994 to
December 31, 1994 and the years ended December 31, 1995 and 1996 have been
audited by Arthur Andersen LLP. The combined statement of operations data for
1994 combines the audited results of operations of the Predecessor for the
period from January 1, 1994 to November 28, 1994 and of the Company for the
period from November 29, 1994 to December 31, 1994. This combined information is
presented to provide meaningful period to period comparisons. The financial data
set forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements of the Company and the Predecessor and the notes thereto
included elsewhere in this report.
<TABLE>
<CAPTION>
COMPANY COMBINED COMPANY PREDECESSOR
--------------------------- ------------ ------------ ---------------------------------------
PERIOD FROM PERIOD FROM
YEAR ENDED NOVEMBER 29, JANUARY 1, YEAR ENDED
DECEMBER 31, YEAR ENDED 1994 TO 1994 TO DECEMBER 31,
-------------------------- DECEMBER 31, DECEMBER 31, NOVEMBER 28, ------------------------
1996 1995 1994 1994 1994 1993 1992
----------- ----------- ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA (IN THOUSANDS):
Net revenue................ $ 92,767 $ 64,665 $ 38,624 $ 5,129 $ 33,495 $ 29,891 $ 27,594
Operating expenses:
Direct facility expenses.. 66,125 47,477 26,531 4,089 22,442 19,971 18,706
Provision for bad debts.... 3,605 2,324 1,909 159 1,750 1,742 1,642
Salaries and benefits...... 6,967 5,398 3,127 452 2,675 2,495 1,763
General and administrative. 4,561 3,976 2,581 297 2,284 1,666 1,341
Write-down of office-based
net assets............... 17,360 --- --- --- --- --- ---
Physician stockholders'
payroll in excess of
base salary (1).......... --- --- 1,949 --- 1,949 3,644 5,706
Loss on dissolution of
subsidiary............... --- --- --- --- --- 886 ---
Transaction costs.......... --- --- 372 372 --- --- ---
Amortization............... 2,491 2,630 270 173 97 --- ---
Depreciation............... 1,023 559 177 65 112 44 46
----------- ---------- --------- ---------- ---------- ---------- ----------
Operating income (loss).... (9,365) 2,301 1,708 (478) 2,186 (557) (1,610)
Interest expense, net....... 2,572 4,254 634 341 293 --- ---
Other expense............... --- --- --- --- --- 227 ---
----------- ---------- --------- ---------- ---------- ---------- ----------
Income (loss) before income
taxes and extraordinary
item..................... (11,937) (1,953) 1,074 (819) 1,893 (784) (1,610)
Income tax expense (benefit) 189 (456) 460 (177) 637 (303) (638)
----------- ---------- --------- ---------- ---------- ---------- ----------
Income (loss) before
extraordinary item....... (12,126) (1,497) 614 (642) 1,256 (481) (972)
Extraordinary item.......... --- (2,184) --- --- --- --- ---
----------- ----------- ----------- ----------- ---------- ----------- ----------
Net income (loss).......... $ (12,126) $ (3,681) $ 614 $ (642) $ 1,256 $ (481) $ (972)
=========== =========== =========== =========== ========== =========== ==========
Loss before extraordinary
item per share............. $ (1.84) $ (1.05) $ (.36)
Net loss per share.......... (1.84) (1.86) (.36)
</TABLE>
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
--------------------------------------------------------- -----------------------
DECEMBER 31, DECEMBER 31,
--------------------------------------------------------- -----------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (IN THOUSANDS):
Working capital ............. $ 8,336 $ 4,299 $ 1,338 $ 1,659 $ 1,431
Total assets................. 73,408 64,373 54,127 8,356 8,161
Long-term debt, net.......... 21,367 11,365 30,581 101 303
Stockholders' equity......... 35,958 42,669 13,361 130 642
<FN>
(1) Physician stockholders' payroll in excess of base salary represents amounts paid to physician stockholders of
the Predecessor in excess of the market compensation rate for the physician services provided to the Predecessor
by those stockholders. Such payments ceased upon the Company's acquisition of the Predecessor on November 28, 1994.
</FN>
</TABLE>
12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
-----------------------------------------------------------------------
CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
those set forth in the forward-looking statements. Certain factors that might
cause such a difference include the following: fluctuations in the volume of
services delivered by the Company's affiliated physicians, changes in the
reimbursement rates for those services, uncertainty about the ability to collect
the appropriate fees for those services, fluctuations in the cost and
utilization rates of referral services used by patients that are subject to
shared-risk capitation arrangements, the loss of significant hospital or
third-party payor relationships, and changes in the number of patients using the
Company's physician services.
GENERAL
The Company is a physician practice management company which provides
specialist physician services at hospitals and ambulatory surgical facilities in
the areas of anesthesia, neonatology, pediatrics and emergency services and owns
and operates, or manages, office-based primary care, obstetrical and
rheumatology practices. The Company derives substantially all of its revenue
from the medical services provided by the physicians who are employed by the
Company or whose practices are managed by the Company. The Company generates
revenue from its specialist physician services by directly billing third-party
payors or patients on a fee-for-service or discounted fee-for-service basis. In
addition, several hospitals at which the Company provides specialist physician
services pay subsidies to the Company to supplement revenue from billings to
third-party payors. The Company generates revenue from its office-based
physician services pursuant to various payment arrangements, including
shared-risk capitation arrangements, fee-for-service or discounted
fee-for-service arrangements, and other capitation arrangements.
Prior to September 1994, the Company generated substantially all of its
revenue from specialist physician services delivered at hospitals and ambulatory
surgical facilities. From September 1994 to October 1996, the Predecessor and
the Company completed twelve acquisitions of office-based primary care,
obstetrical and rheumatology practices for an aggregate purchase price of $26.3
million, as described below. These twelve acquisitions accounted for
substantially all of the Company's office-based revenue during the three years
ended December 31, 1996. In March 1996, the Company completed the acquisition of
a 43-physician hospital-based neonatology and pediatric practice for $4.2
million in cash and approximately 658,000 shares of the Company's common stock.
All of these acquisitions were accounted for as purchases, and accordingly, the
Company's financial statements include the operations of each of the acquired
practices beginning on each respective date of acquisition. During the year
ended December 31, 1996, 68.9% of the Company's net revenue was derived from
specialist physician services delivered at hospitals and ambulatory surgical
facilities, and the remaining 31.1% was derived from office-based physician
practices.
On November 28, 1994, the Company acquired all of the outstanding common
stock of Sheridan Healthcorp, Inc. (the "Predecessor") for approximately $43.3
million (the "1994 Acquisition"). As a result of this transaction, the Company
incurred significant interest expense in 1995, which was related to the debt
incurred to finance the transaction, and has incurred significant goodwill
amortization expense since November 28, 1994. Prior to the 1994 Acquisition,
physician stockholders of the Predecessor received compensation payments in
excess of the market compensation rate for the physician services provided to
the Predecessor by those stockholders. Such payments ceased upon consummation of
the 1994 Acquisition. The period-to-period comparisons set forth below include a
comparison of the 1995 results of the Company to the combined results of the
Predecessor for the period from January 1, 1994 to November 28, 1994, and the
Company for the period from November 29, 1994 to December 31, 1994. The Company
believes that this full year-to-full year comparison is more meaningful than a
partial year comparison would be.
On September 1, 1994, the Predecessor acquired a four-facility primary care
practice for approximately $8.7 million in cash and deferred payments. From
December 1, 1994 to March 1, 1995, the Company completed five acquisitions of
primary care and obstetrical practices for an aggregate of approximately $4.5
million in cash and deferred payments. On June 5, 1995, the Company acquired a
13
<PAGE>
three-facility primary care practice for $3.0 million in cash. In a transaction
related to the June 1995 acquisition, one of the principal physicians operating
the acquired practice assigned a panel services agreement with a health
maintenance organization to the Company for approximately $1.3 million in cash
and deferred payments and approximately 35,000 shares of common stock of the
Company. In another transaction related to the June 1995 acquisition, the
Company agreed to make a deferred payment of $700,000 to a physician employed by
the acquired practice, which was paid during the fourth quarter of 1995. This
payment was treated as a bonus for accounting purposes, and accordingly, was
charged to expense in its entirety during 1995. From January 1, 1996 to October
4, 1996, the Company completed five acquisitions of primary care, obstetrical
and rheumatology practices for an aggregate of approximately $8.2 million in
cash and deferred payments.
As discussed above under "Operations - Office-based Physician Services,"
the Company sold one office-based practice location in December 1996, sold a
second office-based location in February 1997, and currently intends to sell
several other practices. The office-based practices which have been sold, and
which the Company currently intends to sell, include the four-facility practice
acquired on September 1, 1994, two primary care practices acquired in February
1995 and two rheumatology practices acquired in 1996.
Under shared-risk capitation arrangements, which accounted for
approximately 15.4% of the Company's net revenue in 1996, the Company receives a
fixed monthly amount from a managed care organization in exchange for providing,
or arranging the provision of, substantially all of the health care services
required by members of the managed care organization. The Company generally
provides all of the primary care services required under such arrangements, and
refers its patients to unaffiliated specialist physicians, hospitals, and other
health care providers which deliver the remainder of the required health care
services. The Company's profitability under such arrangements is dependent upon
its ability to effectively manage the use of specialist physician, hospital and
other health care services by its patients.
Commencing in 1994, the Company made significant investments in personnel,
computer equipment, computer software and other infrastructure costs in order to
effectively manage all of the acquired physician practices, particularly those
practices which derive a majority of their revenue from shared-risk capitation
arrangements. These investments resulted in significant increases in salaries
and benefits, general and administrative expenses, and capital expenditures
during 1995 and 1996, compared to prior years. The Company's office-based
physician practices generated net revenues of $28.9 million and $20.8 million in
1996 and 1995, and incurred operating losses of $2.0 million and $1.5 million in
1996 and 1995. The $1.5 million operating loss in 1995 includes a $700,000 bonus
paid to a physician employed by a practice acquired by the Company in June 1995,
as discussed above. Due to the Company's decision to sell certain office-based
practices, as discussed above, it has discontinued its investment in computer
software and equipment that was designed to support its shared-risk capitation
business.
On November 4, 1996, the Company announced a change in its strategic
direction, which was to place more emphasis on its hospital-based business and
to reduce its emphasis on the primary care business, and its intent to dispose
of non-strategic office-based physician practices. Due to this change in
strategic direction, the Company wrote down certain assets related to its
office-based operations to their estimated realizable values, and accrued
certain liabilities for commitments that no longer have value to the Company's
future operations. These adjustments resulted in a $17.4 million charge to
earnings in 1996. See Note 1(i) to the Company's consolidated financial
statements for more information.
The accompanying consolidated financial statements include disclosure of
net revenue and operating income for each of the Company's two divisions, the
hospital-based services division and the office-based services division. Under
the Company's new strategic direction, as discussed above, the Company intends
to integrate its hospital-based and office-based operations together by forming
multi-specialty physician networks that support its hospital customers. The
Company expects that it will make investments and incur expenses in its
office-based operations that are designed to increase the earnings from its
hospital-based operations. Therefore, the Company believes that it will no
longer be meaningful to report operating income separately for these two
divisions. In addition, the Company currently intends to sell several of its
office-based practices, as discussed above. The Company anticipates that after
such practices are sold, its office-based operations will be less material to
its consolidated financial statements than they are currently. Therefore, the
Company does not expect to report operating income separately for these two
divisions in the future.
14
<PAGE>
As a result of the 1994 Acquisition and several acquisitions of physician
practices made by the Company and its Predecessor, goodwill constitutes a
substantial percentage of the total assets of the Company, and the Company's
results of operations include substantial expenses for goodwill amortization.
Goodwill is the excess of the purchase price of acquired businesses over the
fair value of the net assets of those acquired businesses (which net assets
include any separately identifiable intangible assets). As of December 31, 1996,
the Company's total assets were approximately $73.4 million, of which
approximately $46.1 million, or 62.8%, was goodwill. Of the total goodwill at
December 31, 1996, $29.3 million is related to the 1994 Acquisition, and $16.8
million is related to several acquisitions of physician practices completed by
the Predecessor and the Company, as described above.
The goodwill related to the 1994 Acquisition represents the going concern
value of the Company, which consists of the Company's market position and
reputation, its relationships with its customers and affiliated physicians, the
relationships between its affiliated physicians and their patients, and other
similar intangible assets. Since these assets are believed by the Company to
have useful lives of an indefinite length, and the Company is not aware of any
facts or circumstances that would limit the useful lives of these assets, this
goodwill is being amortized over 40 years. The Company also acquired other
intangible assets as part of the 1994 Acquisition, including the value of the
Company's physician employee workforce, management team, non-physician employee
workforce and computer software. These intangible assets have been capitalized
separately from goodwill and are being amortized over their estimated useful
lives, which range from five to seven years.
The goodwill related to the acquisitions of physician practices also
represents the going concern value of those practices. However, since the going
concern value of an individual physician practice, or a small group of
practices, is subject to a higher degree of risk than the Company as a whole and
may be more adversely affected by changes in the health care industry, this
goodwill is being amortized over shorter periods ranging from 10 to 20 years.
The Company continuously evaluates all components of goodwill and other
intangible assets to determine whether there has been any impairment of the
carrying value of goodwill or such other intangible assets or their useful
lives. The Company is not aware of any such impairment at the current time,
except for the impairment included in the $17.4 million write-down of
office-based net assets discussed above, which resulted primarily from the
Company's change in strategic direction.
15
<PAGE>
RESULTS OF OPERATIONS
The following table shows certain statement of operations data expressed as
a percentage of net revenue:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994(1)
------- -------- -------
<S> <C> <C> <C>
Net revenue............................................. 100.0% 100.0% 100.0%
Operating expenses:
Direct facility expenses............................. 71.3 73.4 68.7
Provision for bad debts.............................. 3.9 3.6 4.9
Salaries and benefits................................ 7.5 8.3 8.1
General and administrative........................... 4.9 6.1 6.7
Write-down of office-based net assets................ 18.7 --- ---
Physician stockholders' payroll in
excess of base salary............................. --- --- 5.0
Transaction costs.................................... --- --- 1.0
Amortization......................................... 2.7 4.1 0.7
Depreciation......................................... 1.1 0.9 0.5
----- ----- -----
Total operating expenses.......................... 110.1 96.4 95.6
----- ----- -----
Operating income (loss)................................. (10.1)% 3.6% 4.4%
===== ===== =====
<FN>
(1) Represents combined data of the Predecessor for the period from January 1, 1994 to November 28, 1994,
the date of the 1994 Acquisition, and of the Company for the period from November 29, 1994 to
December 31, 1994. This combined information is presented to provide meaningful period-to-period
comparisons.
</FN>
</TABLE>
Year Ended December 31, 1996 Compared To Year Ended December 31, 1995
Net revenue increased $28.1 million, or 43.5%, from $64.7 million in 1995
to $92.8 million in 1996. Net revenue from hospital-based services increased
$20.1 million, from $43.8 million in 1995 to $63.9 million in 1996. Of this
increase, $10.0 million was due to the addition of several new contracts for
hospital-based services, and $9.7 million was due to the acquisition of a
hospital-based neonatology and pediatric practice in March 1996, as described in
Note 2 to the accompanying consolidated financial statements. Net revenue from
office-based services increased $8.1 million, from $20.8 million in 1995 to
$28.9 million in 1996. This increase was primarily due to several acquisitions
of office-based physician practices from February 1995 to October 1996, as
described in Note 2 to the accompanying consolidated financial statements, which
were partially offset by a decline in the number of patients served under
shared-risk capitation arrangements.
Direct facility expenses increased $18.6 million, or 39.3%, from $47.5
million in 1995 to $66.1 million in 1996. Direct facility expenses include all
operating expenses that are incurred at the location of the physician practice,
including salaries, employee benefits, referral claims (in the case of
shared-risk capitation business), office expenses, medical supplies, insurance
and other expenses. The increase in direct facility expenses was primarily due
to several acquisitions of physician practices and several new contracts for
hospital-based services, as discussed in the preceding paragraph. As a
percentage of net revenue, direct facility expenses decreased from 73.4% in 1995
to 71.3% in 1996. The direct facility expense percentage for hospital-based
services decreased from 64.7% in 1995 to 61.0% in 1996. This decrease was
primarily due to a decrease in payroll and employee benefits for clinical
personnel, and a decrease in malpractice expense, both as a percentage of net
revenue, in same-store contracts for hospital-based services. The direct
facility expense percentage for office-based services increased from 91.7% in
1995 to 94.0% in 1996. This increase was primarily due to increased utilization
of referral specialists and hospital services by patients served under
shared-risk capitation arrangements.
The provision for bad debts increased $1.3 million, or 55.1%, from $2.3
million in 1995 to $3.6 million in 1996. This increase was primarily due to a
43.5% increase in net revenue, as discussed above. As a percentage of net
revenue, the provision for bad debts increased slightly from 3.6% in 1995 to
3.9% in 1996.
16
<PAGE>
Salaries and benefits increased $1.6 million, or 29.1%, from $5.4 million
in 1995 to $7.0 million in 1996. This increase was primarily due to the
acquisition of a hospital-based neonatology and pediatric practice in March
1996, as discussed above, an increase in the Company's general corporate
organization to support growth of the Company, and the development of the
Company's primary care management infrastructure, which occurred primarily in
the second and third quarters of 1995. As a percentage of net revenue, salaries
and benefits decreased from 8.3% in 1995 to 7.5% in 1996 primarily due to a
43.5% increase in net revenue, as discussed above.
General and administrative expense increased $585,000, or 14.7%, from $4.0
million in 1995 to $4.6 million in 1996. This increase was primarily due to the
acquisition of a hospital-based neonatology and pediatric practice in March
1996, as discussed above, an expansion of the corporate office, and increases in
various office expenses to support the increase in the number of employees
indicated in the preceding paragraph. As a percentage of net revenue, general
and administrative expense decreased from 6.1% in 1995 to 4.9% in 1996 primarily
due to a 43.5% increase in net revenue, as discussed above.
Due to a change in the Company's strategic direction, as discussed above
under "General," the Company wrote down certain assets related to its
office-based operations to their estimated realizable values, and accrued
certain liabilities for commitments that no longer have value to the Company's
future operations. These adjustments resulted in a $17.4 million charge to
earnings in 1996. See Note 1(i) to the accompanying consolidated financial
statements for more information.
Amortization expense decreased $139,000, or 5.3%, from $2.6 million in 1995
to $2.5 million in 1996. This decrease was primarily due to a $700,000 bonus
paid to a physician employed by a practice acquired by the Company in 1995,
which was included in amortization expense during 1995, as discussed above under
"General," which was partially offset by amortization of the goodwill related to
several acquisitions of physician practices from February 1995 to October 1996,
as discussed in Note 2 to the accompanying consolidated financial statements.
Operating income decreased $11.7 million, from operating income of $2.3
million in 1995 to an operating loss of $9.4 million in 1996. This decrease was
primarily due to the $17.4 million write-down discussed above. Excluding this
write-down, operating income increased $5.7 million, from $2.3 million in 1995
to $8.0 million in 1996. Operating income from hospital-based services increased
by $6.4 million, from $9.3 million in 1995 to $15.7 million in 1996, primarily
due to the addition of several new contracts for hospital-based services, the
acquisition of a hospital-based neonatology and pediatric practice in March
1996, and cost reductions implemented in same-store contracts, as discussed
above. The operating loss from office-based services increased $471,000, from
$1.5 million in 1995 to $2.0 million in 1996. The decline in operating results
was primarily due to increased utilization of referral specialists and hospital
services by patients served under shared-risk capitation arrangements, which was
partially offset by the $700,000 bonus paid to an office-based physician in
1995, as discussed above.
Interest expense decreased $1.7 million, from $4.3 million in 1995 to $2.6
million in 1996. This decrease was primarily due to the repayment of $26.1
million of long-term debt with the proceeds of the Company's initial public
offering in November 1995, which was partially offset by additional debt
incurred during 1996 to finance acquisitions of physician practices.
Year Ended December 31, 1995 Compared To Year Ended December 31, 1994
Net revenue increased $26.0 million, or 67.4%, from $38.6 million in 1994
to $64.7 million in 1995. Net revenue from office-based services increased by
$15.9 million, from $4.9 million in 1994 to $20.8 million in 1995. This increase
was primarily due to the fact that the Company entered the office-based services
business on September 1, 1994, resulting in only four months of office-based
revenue in 1994. In addition, the Company made six acquisitions of office-based
practices from December 1994 to June 1995, which resulted in increased revenue
in 1995. See Note 2 to the Company's consolidated financial statements for more
information on acquisitions. Net revenue from hospital-based services increased
by $10.1 million, from $33.7 million in 1994 to $43.8 million in 1995, primarily
due to the addition of several new contracts for hospital-based services during
both 1994 and 1995.
17
<PAGE>
Direct facility expenses increased $21.0 million, or 78.9%, from $26.5
million in 1994 to $47.5 million in 1995, primarily due to the acquisitions of
office-based practices and the addition of new hospital-based contracts, as
discussed above. As a percentage of net revenue, direct facility expenses
increased from 68.7% in 1994 to 73.4% in 1995, primarily due to the acquired
office-based practices. The acquired office-based practices have higher direct
facility expenses as a percentage of net revenue than the Company's
hospital-based services business primarily because revenues received under the
shared-risk capitation arrangements under which certain of such practices
operate include amounts which must, in turn, be paid by the Company for
specialist physician services and inpatient hospital services that are delivered
by unaffiliated health care providers with which the Company subcontracts.
The provision for bad debts increased $415,000, or 21.7%, from $1.9 million
in 1994 to $2.3 million in 1995. As a percentage of net revenue, the provision
for bad debts decreased from 4.9% in 1994 to 3.6% in 1995, primarily due to the
fact that the acquired office-based practices have relatively little bad debt
expense as the majority of the net revenue from these practices consists of
capitation payments, which are typically paid currently.
Salaries and benefits increased $2.3 million, or 72.6%, from $3.1 million
in 1994 to $5.4 million in 1995. This increase was primarily due to the
development of the Company's primary care management infrastructure, and an
increase in its general corporate organization to support future growth of the
Company. As a percentage of net revenue, salaries and benefits increased from
8.1% in 1994 to 8.3% in 1995.
General and administrative expense increased $1.4 million, or 54.0%, from
$2.6 million in 1994 to $4.0 million in 1995. This increase was due to increases
in various office expenses to support the increase in the number of employees
indicated in the preceding paragraph. As a percentage of net revenue, general
and administrative expense decreased from 6.7% in 1994 to 6.1% in 1995 due to a
64.7% increase in net revenue, as discussed above.
Physician stockholders' payroll in excess of base salary decreased from
$1.9 million in 1994 to zero in 1995, as such excess payroll ceased being paid
upon consummation of the 1994 Acquisition.
Amortization expense increased $2.4 million, from $270,000 in 1994 to $2.6
million in 1995, primarily due to amortization of the goodwill and other
intangible assets related to the 1994 Acquisition, and amortization of the
goodwill and other intangible assets related to the acquired physician
practices.
Interest expense increased $3.6 million, from $634,000 in 1994 to $4.3
million in 1995, primarily due to interest on the long-term debt related to the
1994 Acquisition and long-term debt incurred to finance the acquisition of
physician practices from September 1994 to June 1995.
Income tax expense decreased $916,000, from income tax expense of $460,000
in 1994 to an income tax benefit of $456,000 in 1995. This decrease was
primarily due to a loss before income tax of $2.0 million in 1995 compared to
income before income tax of $1.1 million in 1994.
The Company incurred extraordinary expenses of $2.2 million in 1995 due to
the early repayment of a senior subordinated note and the outstanding balance
under the existing senior credit facility with the proceeds of the Company's
initial public offering. See Note 1(j) to the Company's consolidated financial
statements for more information on extraordinary expenses.
LIQUIDITY AND CAPITAL RESOURCES
On March 12, 1997, the Company established a new $35 million revolving
credit facility with NationsBank, National Association (South) ("NationsBank"),
which was used to repay the outstanding balance under the previous facility,
which was $25.2 million. The new credit facility bears interest at the London
interbank offered rate plus an applicable margin which is subject to quarterly
adjustment based on a leverage ratio defined in the credit agreement. As of
March 17, 1997, the applicable margin was 1.63%. There are no principal payments
due under the new credit facility until the maturity date of March 11, 2000. See
Note 12 to the Company's consolidated financial statements for more information
on the new credit facility.
18
<PAGE>
The amount that can be borrowed under the new credit facility is restricted
by a leverage ratio defined in the credit agreement. The outstanding balance
under the new credit facility was $25.7 million at March 17, 1997. Based on the
value of the leverage ratio as of March 17, 1997, the Company had additional
borrowing availability of $9.3 million. Certain conditions must be met,
including the maintenance of certain financial ratios, and in certain
circumstances, the approval of NationsBank must be obtained, in order to use the
credit facility to finance acquisitions of physician practices. There can be no
assurance that the Company will be able to satisfy such conditions in order to
use its credit facility to finance any future acquisitions.
The Company was not in compliance with certain covenants under the previous
credit agreement as of December 31, 1996, due to the $17.4 million write-down of
office-based net assets, as discussed above under "General." However, the
outstanding balance under the previous credit facility was paid in full in March
1997, and the Company would have been in compliance with all covenants in the
new credit agreement as of December 31, 1996, if the new credit agreement had
been in effect at that date.
The Company's principal uses of cash during the year ended December 31,
1996 were to finance acquisitions of physician practices ($13.8 million), to
make payments on long-term debt ($4.4 million), and to finance increases in
accounts receivable ($3.5 million). The $3.5 million increase in accounts
receivable was primarily due to new contracts for hospital-based services added
during the year ended December 31, 1996. The Company met its cash needs during
this period primarily through borrowings under its revolving credit facility
with NationsBank of Florida, N.A. ("NationsBank Florida") ($13.2 million) and
its net income, excluding non-cash expenses (write-down of office-based net
assets, amortization and depreciation) ($8.7 million).
On November 1, 1995, the Company established a $45 million revolving credit
facility with NationsBank Florida, which was used primarily to finance
acquisitions of physician practices in 1996. The outstanding balance under the
credit facility increased from $9.7 million at December 31, 1995 to $20.0
million at December 31, 1996, primarily due to several acquisitions of physician
practices completed during 1996. The outstanding balance increased from $20.0
million at December 31, 1996 to $25.7 million at March 17, 1997, primarily due
to the acquisition of an office-based obstetrical practice in March 1997 ($3.1
million), and the repayment of a note payable that was due in January 1997
($765,000).
The Company completed an initial public offering of its common stock on
November 3, 1995, in which it issued 3,825,000 shares of common stock at $13.00
per share, and which generated net proceeds of approximately $44.8 million to
the Company. Of the total proceeds, $16.1 million was used to redeem the
Company's redeemable preferred stock, $26.1 million was used to repay long-term
debt, $1.5 million was used to pay accrued dividends on convertible preferred
stock, and $1.0 million was used to pay certain deferred payments in connection
with the June 1995 acquisition of a primary care practice. In addition, an
outstanding convertible promissory note for $5.0 million, which was issued in
June 1995, was converted into approximately 182,000 shares of common stock in
November 1995.
In March 1996, the Company issued approximately 658,000 shares of common
stock as partial consideration for an acquisition of a hospital-based physician
practice completed in March 1996, as discussed in Note 2 to the accompanying
consolidated financial statements.
In order to provide funds necessary for the Company's future expansion
strategies, it will be necessary for the Company to incur, from time to time,
additional long-term bank indebtedness and/or to issue equity or debt
securities, depending on market and other conditions. There can be no assurance
that such additional financing will be available on terms acceptable to the
Company.
Net cash used by operating activities was $3.5 million in 1995 compared to
$5.3 million of cash provided by operating activities in 1996. This improvement
of $8.8 million was primarily due to an increase in net income, excluding the
$17.4 million write-down of office-based net assets, from a net loss of $3.7
million in 1995 to net income of $5.2 million in 1996. The increase in the
Company's net income was primarily due to an increase in operating income from
hospital-based services, as discussed above under "Results of Operations," and a
decrease in interest expense due to the repayment of long-term debt with the
proceeds of the Company's initial public offering, as discussed above.
19
<PAGE>
Net cash used by investing activities increased from $7.9 million in 1995
to $14.8 million in 1996, primarily due to an increase in cash used for
physician practice acquisitions from $7.4 million in 1995 to $13.8 million in
1996 and an increase in capital expenditures from $471,000 in 1995 to $1.2
million in 1996. The increase in capital expenditures was primarily due to the
development of the Company's integrated management information system for its
office-based operations (the "Information System") and the relocation of certain
office-based physician practices. The development of the Information System has
not been completed, and since the Company currently intends to sell the
physician practices for which it was designed, its completion is no longer being
pursued by the Company. As a result, the cost of the computer software and
certain computer equipment related to this system, which was an aggregate of
approximately $800,000, was written off to expense in 1996, and is included in
the $17.4 million write-down of office-based net assets.
Net cash provided by financing activities increased slightly from $8.8
million in 1995 to $9.6 million in 1996. Net borrowings on long-term debt,
excluding transactions related to the initial public offering in November 1995,
increased from $8.7 million in 1995 to $9.6 million in 1996. The net borrowings
were used primarily to finance acquisitions in 1996, and to finance acquisitions
and increases in accounts receivable in 1995.
20
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
INDEX TO FINANCIAL STATEMENTS
-----------------------------
Page
----
Report of Independent Certified Public Accountants-
Sheridan Healthcare, Inc............................................... 22
Report of Independent Certified Public Accountants-
Southeastern Anesthesia Management Associates, Inc..................... 23
Consolidated Balance Sheets as of December 31, 1996 and 1995............. 24
Consolidated Statements of Operations for the Years ended December 31,
1996 and 1995, the Period from November 29, 1994 to December 31,
1994, and the Period from January 1, 1994 to November 28, 1994....... 25
Consolidated Statements of Stockholders' Equity for the Years ended
December 31, 1996 and 1995, the Period from November 29, 1994 to
December 31, 1994, and the Period from January 1, 1994 to
November 28, 1994.................................................... 26
Consolidated Statements of Cash Flows for the Years ended December 31,
1996 and 1995, the Period from November 29, 1994 to December 31, 1994,
and the Period from January 1, 1994 to November 28, 1994.............. 27
Notes to Consolidated Financial Statements................................ 28
21
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
To the Stockholders of
Sheridan Healthcare, Inc.:
We have audited the accompanying consolidated balance sheets of Sheridan
Healthcare, Inc. (a Delaware corporation) and subsidiaries as of December 31,
1996 and 1995, and the related consolidated statements of operations,
stockholders' equity and cash flows for the years ended December 31, 1996 and
1995 and for the period from inception (November 29, 1994) to December 31, 1994.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sheridan Healthcare
Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for the years ended December 31, 1996 and 1995
and the period from November 29, 1994 to December 31, 1994, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Miami, Florida,
February 21, 1997 (except for the matter discussed
in Note 12, as to which the date is March 17, 1997).
22
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
To the Stockholders of
Sheridan Healthcare, Inc.:
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Southeastern Anesthesia Management
Associates, Inc. (a Florida corporation, formerly a professional association)
and subsidiaries for the period from January 1, 1994 to November 28, 1994. These
financial statements are the responsibility of Southeastern's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Southeastern Anesthesia Management Associates, Inc. and subsidiaries for the
period from January 1, 1994 to November 28, 1994, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Miami, Florida,
March 17, 1995.
23
<PAGE>
<TABLE>
SHERIDAN HEALTHCARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................................... $ --- $ ---
Accounts receivable, less allowances of $1,277 and $737............................ 18,717 11,040
Income tax refunds receivable...................................................... 570 760
Deferred income taxes.............................................................. 1,154 ---
Other current assets............................................................... 1,845 1,029
---------- -----------
Total current assets............................................................. 22,286 12,829
Property and equipment, net of accumulated depreciation of $2,637 and $635............ 3,730 3,767
Goodwill, net of accumulated amortization of $17,756 and $1,760....................... 46,111 45,417
Intangible assets, net of accumulated amortization of $1,942 and $1,140............... 1,281 2,360
---------- -----------
Total assets..................................................................... $ 73,408 $ 64,373
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................... $ 222 $ 357
Amounts due for acquisitions....................................................... 558 559
Accrued salaries and benefits...................................................... 2,798 2,236
Self-insurance accruals............................................................ 3,170 1,615
Refunds payable.................................................................... 1,952 910
Accrued lease obligations.......................................................... 971 502
Other accrued expenses............................................................. 3,090 1,381
Current portion of long-term debt.................................................. 1,189 970
---------- -----------
Total current liabilities........................................................ 13,950 8,530
Long-term debt........................................................................ 21,367 11,365
Amounts due for acquisitions.......................................................... 2,133 1,809
Commitments and contingencies (Note 8)
Stockholders' equity:
Preferred stock, par value $.01; 5,000 shares authorized; none issued.............. --- ---
Common stock, par value $.01; 31,000 shares authorized:
Voting; 6,418 and 5,773 shares issued and outstanding............................ 64 58
Class A non-voting; 297 shares issued and outstanding............................ 3 3
Additional paid-in capital......................................................... 61,129 55,720
Excess purchase price distributed to management stockholders....................... (7,541) (7,541)
Retained earnings (deficit)........................................................ (17,697) (5,571)
---------- -----------
Total stockholders' equity ...................................................... 35,958 42,669
---------- -----------
Total liabilities and stockholders' equity....................................... $ 73,408 $ 64,373
========== ===========
</TABLE>
See accompanying notes.
25
<PAGE>
<TABLE>
SHERIDAN HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
COMPANY PREDECESSOR
------------------------------------- ------------
PERIOD FROM PERIOD FROM
NOVEMBER 29, JANUARY 1,
YEAR ENDED DECEMBER 31, 1994 TO 1994 TO
------------------------ DECEMBER 31, NOVEMBER 28,
1996 1995 1994 1994
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Net revenue................................................... $ 92,767 $ 64,665 $ 5,129 $ 33,495
Operating expenses:
Direct facility expenses................................... 66,125 47,477 4,089 22,442
Provision for bad debts.................................... 3,605 2,324 159 1,750
Salaries and benefits...................................... 6,967 5,398 452 2,675
General and administrative................................. 4,561 3,976 297 2,284
Write-down of office-based net assets...................... 17,360 --- --- ---
Physician stockholders' payroll in excess of base salary... --- --- --- 1,949
Transaction costs.......................................... --- --- 372 ---
Amortization............................................... 2,491 2,630 173 97
Depreciation............................................... 1,023 559 65 112
---------- ---------- ----------- ------------
Total operating expenses................................. 102,132 62,364 5,607 31,309
---------- ---------- ----------- ------------
Operating income (loss)....................................... (9,365) 2,301 (478) 2,186
Interest expense, net......................................... 2,572 4,254 341 293
---------- ---------- ----------- ------------
Income (loss) before income taxes and extraordinary item...... (11,937) (1,953) (819) 1,893
Income tax expense (benefit).................................. 189 (456) (177) 637
---------- ---------- ----------- ------------
Income (loss) before extraordinary item....................... (12,126) (1,497) (642) 1,256
Extraordinary item (Note 1(j))................................ --- (2,184) --- ---
---------- ---------- ----------- ------------
Net income (loss)............................................. $ (12,126) (3,681) (642) $ 1,256
========== ============
Dividends on convertible preferred stock...................... 1,363 134
---------- -----------
Net loss attributable to common stockholders.................. $ (5,044) $ (776)
========== ===========
Loss before extraordinary item per share...................... $ (1.84) $ (1.05) $ (.36)
Net loss per share............................................ (1.84) (1.86) (.36)
Weighted average shares of common stock
and common stock equivalents outstanding................... 6,587 2,713 2,174
</TABLE>
See accompanying notes.
26
<PAGE>
<TABLE>
SHERIDAN HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<CAPTION>
COMMON STOCK ADDITIONAL
------------------ PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------- ---------- -------- -------
<S> <C> <C> <C> <C> <C>
THE PREDECESSOR
Balance, December 31, 1993............................................... 1 $ --- $ 1 $ 129 $ 130
Net income............................................................... --- --- --- 1,256 1,256
------ ------- ---------- -------- -------
Balance, November 28, 1994............................................... 1 $ --- $ 1 $ 1,385 $ 1,386
====== ======= ========== ======== =======
</TABLE>
<TABLE>
EXCESS
PURCHASE
CONVERTIBLE PREFERRED STOCK PRICE
CLASS A --------------------------- DISTRIBUTED
COMMON STOCK COMMON STOCK CLASS A CLASS B ADDITIONAL TO RETAINED
------------- ------------- ------------- ------------- PAID-IN SUBSCRIPTIONS MANAGEMENT EARNINGS
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE STOCKHOLDERS (DEFICIT) TOTAL
------ ------ ------ ------ ------ ------ ------ ------ --------- ------------- ------------ --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
THE COMPANY
Issuance of common
and preferred stock
at inception
(November 29, 1994) .. 410 $ 4 --- $ --- 350 $ 17,500 79 $3,929 $ 234 $ (238) $ (7,541) $ 249 $14,137
Dividends on convertible
preferred stock....... --- --- --- --- --- --- --- --- --- --- --- (134) (134)
Net loss............... --- --- --- --- --- --- --- --- --- --- --- (642) (642)
----- ------ ----- ----- ----- ------- ---- ------ ------- ------- ------- -------- -------
Balance,
December 31, 1994..... 410 4 --- --- 350 17,500 79 3,929 234 (238) (7,541) (527) 13,361
Issuance of common
stock in initial
public offering....... 3,825 38 --- --- --- --- --- --- 44,802 --- --- --- 44,840
Conversion of
convertible preferred
stock to common stock
and redeemable
preferred stock and
redemption of
redeemable preferred
stock................. 1,321 13 297 3 (350) (17,500) (79) (3,929) 5,342 --- --- --- (16,071)
Conversion of
convertible note to
common stock.......... 182 2 --- --- --- --- --- --- 4,882 --- --- --- 4,884
Issuance of common
stock in acquisition.. 35 1 --- --- --- --- --- --- 460 --- --- --- 461
Collection of
subscriptions receivable --- --- --- --- --- --- --- --- --- 238 --- --- 238
Dividends on convertible
preferred stock...... --- --- --- --- --- --- --- --- --- --- --- (1,363) (1,363)
Net loss............... --- --- --- --- --- --- --- --- --- --- --- (3,681) (3,681)
----- ------ ----- ----- ----- ------- ---- ------ ------- ------- ------- -------- -------
Balance,
December 31, 1995..... 5,773 58 297 3 --- --- --- --- 55,720 --- (7,541) (5,571) 42,669
Issuance of common
stock in acquisition.. 658 6 --- --- --- --- --- --- 5,417 --- --- --- 5,423
Treasury shares purchased
and retired........... (13) --- --- --- --- --- --- --- (8) --- --- --- (8)
Net loss............... --- --- --- --- --- --- --- --- --- --- --- (12,126)(12,126)
----- ------ ----- ----- ----- ------- ---- ------ ------- ------- ------- -------- -------
Balance,
December 31, 1996..... 6,418 $ 64 297 $ 3 --- $ --- --- $ --- $61,129 $ --- $(7,541)$(17,697)$35,958
===== ====== === ===== ===== ======= ==== ====== ======= ======= ======= ======== =======
</TABLE>
See accompanying notes.
27
<PAGE>
<TABLE>
SHERIDAN HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<CAPTION>
COMPANY PREDECESSOR
------------------------------------- ------------
PERIOD FROM PERIOD FROM
NOVEMBER 29, JANUARY 1,
YEAR ENDED DECEMBER 31, 1994 TO 1994 TO
----------------------- DECEMBER 31, NOVEMBER 28,
1996 1995 1994 1994
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).......................................... $ (12,126) $ (3,681) $ (642) $ 1,256
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities:
Write-down of office-based net assets.................... 17,360 --- --- ---
Amortization............................................. 2,491 2,630 173 97
Depreciation............................................. 1,023 559 65 112
Provision for bad debts.................................. 3,605 2,324 159 1,750
Net interest amortization on subordinated debt........... --- 425 --- ---
Provision for deferred stockholder compensation.......... --- --- --- 242
Deferred income taxes.................................... (1,154) (167) (1,080) ---
Changes in operating assets and liabilities:
Accounts receivable...................................... (7,076) (5,214) (749) (2,731)
Income tax refunds receivable............................ 190 (760) --- ---
Other current assets..................................... (486) 17 (525) (56)
Other assets............................................. 207 --- 424 8
Accounts payable and accrued liabilities................. 1,229 349 2,200 1,157
---------- ---------- ------------ ------------
Net cash provided (used) by operating activities......... 5,263 (3,518) 25 1,835
Cash flows from investing activities:
Acquisitions of physician practices........................ (12,517) (7,419) (1,000) (3,264)
Investments in management agreements....................... (1,245) --- --- ---
Sale of physician practices................................ 193 --- --- ---
Capital expenditures....................................... (1,245) (471) (97) (357)
---------- ---------- ------------ ------------
Net cash used by investing activities.................... (14,814) (7,890) (1,097) (3,621)
Cash flows from financing activities:
Borrowings on long-term debt............................... 13,997 15,465 991 4,892
Issuance of convertible promissory note.................... --- 5,000 --- ---
Borrowings on long-term debt in connection
with acquisition of Predecessor.......................... --- --- 22,791 ---
Payments on long-term debt................................. (4,438) (39,282) (165) (1,676)
Issuance of common stock in public offering................ --- 44,840 --- ---
Redemption of redeemable preferred stock................... --- (16,071) --- ---
Issuance of common and preferred stock in
connection with acquisition of Predecessor............... --- --- 21,429 ---
Acquisition of Predecessor................................. --- --- (43,275) ---
Dividends on convertible preferred stock................... --- (1,363) (134) ---
Collection of subscriptions receivable..................... --- 238 --- ---
Treasury shares purchased and retired...................... (8) --- --- ---
---------- ---------- ------------ ------------
Net cash provided by financing activities................ 9,551 8,827 1,637 3,216
---------- ---------- ------------ ------------
Increase (decrease) in cash and cash equivalents.............. --- (2,581) 565 1,430
Cash and cash equivalents, beginning of period................ --- 2,581 2,016 586
---------- ---------- ------------ ------------
Cash and cash equivalents, end of period...................... $ --- $ --- $ 2,581 $ 2,016
========== ========== ============ ============
Cash paid for interest........................................ $ 2,588 $ 3,779 $ 90 $ 135
Cash paid for income taxes.................................... 2,110 1,971 --- ---
Capital leases entered into................................... --- 1,887 312 ---
</TABLE>
See accompanying notes.
28
<PAGE>
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SIGNIFICANT ACCOUNTING POLICIES
-------------------------------
(a) Organization
Sheridan Healthcare, Inc. (the "Company") was established in November 1994
concurrently with its purchase of the common stock of Sheridan Healthcorp, Inc.
(formerly, Southeastern Anesthesia Management Associates, Inc.) (the
"Predecessor") (the "1994 Acquisition") for $43.3 million in cash. The
acquisition was accounted for as a purchase, and accordingly, the purchase price
was allocated to the net assets acquired based on their estimated fair market
values at the date of acquisition. The management group of the Predecessor held
approximately 20% of its outstanding common stock prior to the acquisition and
became the management group of the Company, holding approximately 18% of its
outstanding common stock and equivalents after the acquisition. Accordingly, 18%
of the purchase price was considered a distribution to management stockholders
in excess of their basis in the common stock of the Predecessor, which was
approximately $249,000. Such excess is reflected as "Excess purchase price
distributed to management stockholders" in stockholders' equity and was not
allocated to the net assets acquired.
As a result of the allocation of the purchase price, $31.2 million of the
purchase price was allocated to goodwill as shown below (in thousands):
<TABLE>
<S> <C>
Purchase price...................................................................... $ 43,275
Excess purchase price distributed to management stockholders....................... (7,541)
-----------
Purchase price to be allocated.................................................... 35,734
Net assets acquired:
Working capital................................................................... 4,365
Property and equipment............................................................ 1,236
Intangible assets (see Note (f)).................................................. 1,880
Unamortized goodwill related to previous acquisition ............................. 7,316
Other assets...................................................................... 609
Long-term debt.................................................................... (9,580)
Deferred income taxes............................................................. (1,247)
-----------
Total net assets acquired...................................................... 4,579
-----------
Goodwill related to the 1994 Acquisition............................................ $ 31,155
===========
</TABLE>
In connection with the 1994 Acquisition, the Company paid $372,000 of legal
expenses and other transaction costs which were incurred by the Predecessor's
stockholders. Such costs have been expensed and reflected as "Transaction costs"
in the accompanying statement of operations for the period from November 29,
1994 to December 31, 1994.
The accompanying financial statements for 1996, 1995 and the period from
November 29, 1994 to December 31, 1994 include the Company and its subsidiaries.
The accompanying financial statements for the period from January 1, 1994 to
November 28, 1994 include the Predecessor and its subsidiaries. The accompanying
financial statements for the period prior to November 29, 1994 are not
necessarily comparable to the accompanying financial statements for the periods
subsequent to November 28, 1994 due to the 1994 Acquisition.
29
<PAGE>
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In addition to the subsidiaries of the Company and the Predecessor, the
accompanying financial statements include certain affiliates of the Company,
since the non-medical operations of such affiliates are considered to be
unilaterally and perpetually controlled by the Company due to management
services agreements between such affiliates and the Company. Although such
affiliates are not subsidiaries of the Company, inclusion of them in the
accompanying consolidated financial statements is necessary to fairly present
the financial position and results of operations of the Company. The stockholder
of such affiliates is an officer and stockholder of the Company and the
management services agreements between such affiliates and the Company are
terminable only under limited conditions, such as bankruptcy of the Company.
Accordingly, control of such affiliates by the Company is not considered to be
temporary.
A summary of the combined balance sheets of such affiliates at December 31,
1996 and 1995, and the combined statements of operations of such affiliates for
the years ended December 31, 1996 and 1995 is as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Cash and cash equivalents............................................ $ 31 $ ---
Accounts receivable, net............................................. 3,791 2,313
Other current assets................................................. 172 77
Property and equipment, net.......................................... 98 ---
----------- -----------
Total assets....................................................... $ 4,092 $ 2,390
=========== ===========
Accounts payable and accrued expenses................................ $ 1,214 $ 658
Intercompany liabilities............................................. 1,601 1,159
Stockholder's equity................................................. 1,277 573
----------- -----------
Total liabilities and stockholder's equity......................... $ 4,092 $ 2,390
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995
---------- ----------
<S> <C> <C>
Net revenue.......................................................... $ 15,359 $ 7,201
Direct facility expenses............................................. (11,451) (5,184)
Management fees to the Company....................................... (3,304) (1,655)
Other, net........................................................... 21 (45)
---------- ----------
Net income......................................................... $ 625 $ 317
========== ==========
</TABLE>
All significant intercompany balances and transactions have been eliminated
in consolidation.
(b) Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
30
<PAGE>
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(c) Accounts Receivable And Net Revenue
The Company derives substantially all of its revenues, and the Predecessor
derived substantially all of its revenues, from various third-party payors
including Medicare and Medicaid programs, health maintenance organizations,
commercial insurers and others. The amount of payments received from such
third-party payors is dependent upon mandated payment rates in the case of the
Medicare and Medicaid programs, and negotiated payment rates in the case of
other third-party payors, as well as the specific benefits included in each
patient's applicable health care coverage. The Company records, and the
Predecessor recorded, an allowance for contractual adjustments which represents
the difference between billed charges and expected collections from third-party
payors. Accordingly, net revenue and accounts receivable are reflected in the
consolidated financial statements net of contractual allowances.
The Company receives a significant portion of its revenue pursuant to
shared-risk capitation arrangements with certain health maintenance
organizations. Under these arrangements, the Company generally agrees to provide
certain health care services to enrollees of the health maintenance organization
in exchange for a fixed amount per enrollee per month. The Company directly
provides primary care services to the enrollees and subcontracts with specialist
physicians, hospitals and other health care providers to provide the remainder
of the health care services to the enrollees. In order for such shared-risk
capitation arrangements to be profitable for the Company, the Company must
properly manage the utilization of health care services by its patients who are
subject to such arrangements. There can be no assurance that the revenue
received by the Company under such arrangements will be adequate to cover the
cost of the health care services it is required to provide.
(d) Charity Care
The Company and the Predecessor have agreed with certain hospitals to
provide charity care to patients who are unable to pay. Such patients are
identified based on financial information obtained from the patients and
subsequent analysis. Since management does not expect payment for such charity
care, the estimated charges related to such patients are included in the
provision for bad debts.
(e) Goodwill
Approximately $29.3 million of the total amount of goodwill, net of
accumulated amortization, at December 31, 1996, is related to the 1994
Acquisition. Such goodwill represents the Company's market position and
reputation, its relationships with its customers and affiliated physicians, the
relationships between its affiliated physicians and their patients, and other
similar intangible assets. Management believes that such assets have useful
lives of indefinite length, and accordingly, such goodwill is being amortized on
a straight-line basis over 40 years.
The remaining $16.8 million of the total amount of goodwill, net of
accumulated amortization, at December 31, 1996, is related to several
acquisitions of physician practices by the Company and its Predecessor. Such
goodwill represents the general reputation of the practices in the communities
they serve, the collective experience of the management and other employees of
the practices in managing health care services delivered under capitation
arrangements, contracts with health maintenance organizations, relationships
between the physicians and their patients, patient lists, and other similar
intangible assets. The Company evaluates the underlying facts and circumstances
related to each acquisition and establishes an appropriate amortization period
for the related goodwill. The goodwill related to these physician practice
acquisitions is being amortized on a straight-line basis over periods ranging
from 10 to 20 years.
31
<PAGE>
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company continuously evaluates whether events have occurred or
circumstances exist which impact the recoverability of the carrying value of
goodwill, pursuant to Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." See Note (i) below for a description of an adjustment to reduce
the carrying values of certain components of goodwill to their net realizable
values during 1996.
Separately identifiable intangible assets related to the 1994 Acquisition
and the physician practice acquisitions are included in intangible assets,
separate from goodwill, and are discussed in Note (f) below.
(f) Intangible Assets
Intangible assets consist primarily of the physician employee workforce,
non-physician employee workforce, management team and computer software acquired
in the 1994 Acquisition, deferred acquisition costs, deferred loan costs and
non-compete covenants related to certain acquisitions of physician practices.
These intangible assets are being amortized over the lives of the underlying
assets or agreements, which range from five to seven years. See Note (i) below
for a description of an adjustment to reduce the carrying values of certain
intangible assets to their net realizable values during 1996.
(g) Amounts Due For Acquisitions
Amounts due for acquisitions includes obligations to the former
stockholders of certain physician practices acquired by the Company. These
payments are being made over the terms of the employment agreements between the
Company and the former stockholders, which range from three to five years. It
also includes termination benefits payable to the former stockholders of an
acquired practice, which are payable beginning in 2001 or upon termination of
their employment by the Company, whichever is later.
(h) Fair Value Of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments," requires disclosure of the fair value of
certain financial instruments. Accounts receivable, other current assets,
accounts payable, accrued expenses and long-term debt are reflected in the
financial statements at cost which approximates fair value.
(i) Write-down Of Office-based Net Assets
On November 4, 1996, the Company announced a change in its strategic
direction, which was to place more emphasis on its hospital-based business and
to reduce its emphasis on the primary care business, and its intent to dispose
of non-strategic office-based physician practices. Due to this change in
strategic direction, the Company wrote down certain assets related to its
office-based operations to their estimated realizable values, and accrued
certain liabilities for commitments that no longer have value to the Company's
future operations. These adjustments resulted in a $17.4 million charge to
earnings in 1996, which is comprised of adjustments to the following assets and
liabilities (in thousands):
<TABLE>
<S> <C>
Goodwill............................................................................ $ 13,878
Property and equipment.............................................................. 1,045
Intangible assets................................................................... 430
Accrued expenses.................................................................... 2,007
-----------
Total write-down................................................................. $ 17,360
===========
</TABLE>
32
<PAGE>
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
One of the physician practices that comprise the non-strategic practices
referred to above was sold by the Company in December 1996, and the Company
currently intends to sell several other non-strategic practices.
(j) Extraordinary Item
In November 1995, the Company incurred extraordinary expenses of
approximately $2,184,000 in connection with the early repayment of its senior
subordinated note and the outstanding balance under its senior credit facility
with the proceeds of the initial public offering (see Note 10). The
extraordinary expenses consist of the write-off of an unamortized original issue
discount on the senior subordinated note ($1,224,000), a prepayment penalty on
the senior subordinated note ($300,000), and the write-off of unamortized
deferred loan costs related to the senior credit facility and the senior
subordinated note ($660,000).
(k) Net Income (Loss) Per Share
Net income (loss) per share is equal to net income (loss) attributable to
common stockholders divided by the weighted average number of shares of common
stock outstanding. Net income attributable to common stockholders is equal to
net income (loss) less dividends on convertible preferred stock. Common stock
equivalents, which consist of stock options issued to employees and directors,
are not included in the determination of the net loss per share in 1996 and 1995
since they would have the effect of reducing the net loss per share. Common
stock equivalents are included in the determination of the net loss per share
for the period from November 29, 1994 to December 31, 1994 because they consist
of stock options issued within one year prior to the date of the Company's
initial public offering (see Note 10) at exercise prices less than the initial
public offering price, which are included even though they have an antidilutive
effect on the net loss per share.
(2) ACQUISITIONS
------------
In September 1994, the Predecessor acquired a four-facility primary care
practice for cash and notes in an aggregate amount originally estimated to be
$7.9 million, which included certain contingent obligations of the Predecessor.
The purchase price is currently estimated to be $8.7 million, including the
effect of certain adjustments to the purchase price recorded in 1995 based on
subsequent information. The acquisition was accounted for as a purchase, and
accordingly, the purchase price was allocated to the net assets acquired based
on their estimated fair market values. As a result of this allocation, $8.2
million of the purchase price was allocated to goodwill, as shown below (in
thousands):
<TABLE>
<S> <C>
Purchase price..................................................................... $ 8,723
Net assets acquired:
Working capital (deficit)........................................................ (355)
Property and equipment........................................................... 868
-----------
Net assets acquired........................................................... 513
-----------
Goodwill related to the acquisition................................................ $ 8,210
===========
</TABLE>
33
<PAGE>
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In December 1994, the Company acquired an obstetrical practice for $1.4
million in cash and deferred payments. The acquisition was accounted for as a
purchase, and accordingly, the purchase price was allocated to the net assets
acquired based on their estimated fair market values. As a result of this
allocation, $841,000 of the purchase price was allocated to goodwill, as shown
below (in thousands):
<TABLE>
<S> <C>
Purchase price..................................................................... $ 1,437
Net assets acquired:
Working capital.................................................................. 118
Property and equipment........................................................... 78
Intangible assets................................................................ 400
-----------
Net assets acquired........................................................... 596
-----------
Goodwill related to the acquisition................................................ $ 841
===========
</TABLE>
During the period from February to June 1995, the Company made five
acquisitions of office-based physician practices for an aggregate of $6.1
million in cash and deferred payments. In a transaction related to one of those
acquisitions, one of the principal physicians operating the acquired practices
assigned a panel services agreement with a health maintenance organization to
the Company for $400,000 in cash plus deferred payments of $935,000 and
approximately 35,000 shares of common stock of the Company. These acquisitions,
including the assignment of the panel services agreement, were accounted for as
purchases, and accordingly, the purchase prices were allocated to the net assets
acquired based on their fair market values. As a result of these allocations,
$7.3 million of the aggregate purchase price was allocated to goodwill, as shown
below (in thousands):
<TABLE>
<S> <C>
Aggregate purchase price........................................................... $ 7,880
Net assets acquired:
Working capital.................................................................. 144
Property and equipment........................................................... 358
Intangible assets................................................................ 30
-----------
Net assets acquired........................................................... 532
-----------
Goodwill related to the acquisitions............................................... $ 7,348
===========
</TABLE>
In addition to the purchase prices described above, the Company agreed to
make a deferred payment of $700,000 to a physician employed by one of the
acquired practices, which was paid during the fourth quarter of 1995. This
payment was treated as a bonus for accounting purposes and, accordingly, was
charged to expense in its entirety during 1995.
In March 1996, the Company acquired a hospital-based physician practice for
$4.2 million in cash and approximately 658,000 shares of the Company's common
stock. The acquisition was accounted for as a purchase, and accordingly, the
purchase price was allocated to the net assets acquired based on their fair
market values. As a result of this allocation, $9.8 million of the purchase
price was allocated to goodwill, as shown below (in thousands):
<TABLE>
<S> <C>
Purchase price..................................................................... $ 9,644
Net assets acquired:
Working capital.................................................................. 1,407
Property and equipment........................................................... 78
Accrued termination benefits..................................................... (1,100)
Long-term debt................................................................... (500)
-----------
Net assets acquired........................................................... (115)
-----------
Goodwill related to the acquisition................................................ $ 9,759
===========
</TABLE>
34
<PAGE>
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
During the period from January to October 1996, the Company made five
acquisitions of office-based physician practices for an aggregate of $8.2
million in cash and deferred payments. These acquisitions were accounted for as
purchases, and accordingly, the purchase price of each acquisition was allocated
to the net assets acquired based on their estimated fair market values. As a
result of these allocations, $6.8 million of the aggregate purchase price was
allocated to goodwill, as shown below (in thousands):
<TABLE>
<S> <C>
Aggregate purchase price........................................................... $ 8,210
Net assets acquired:
Working capital.................................................................. 830
Property and equipment........................................................... 670
Intangible assets................................................................ 60
Long-term debt................................................................... (130)
-----------
Net assets acquired........................................................... 1,430
-----------
Goodwill related to the acquisitions............................................... $ 6,780
===========
</TABLE>
All of the above acquisitions, including the assignment of the panel
services agreement in June 1995, were accounted for as purchases, and
accordingly, the operations of the acquired practices are included in the
Company's consolidated financial statements beginning on each respective date of
acquisition.
The following table summarizes the pro forma consolidated results of
operations of the Company as though the acquisitions of physician practices
discussed above had occurred at the beginning of the period presented. The pro
forma consolidated results of operations shown below do not necessarily
represent what the consolidated results of operations of the Company would have
been if these acquisitions had actually occurred at the beginning of the period
presented, nor do they represent a forecast of the consolidated results of
operations of the Company for any future period.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
PRO FORMA RESULTS OF OPERATIONS:
Net revenue.......................................................... $ 96,780 $ 83,476
Loss before income taxes and extraordinary item...................... (11,463) (1,732)
Loss before extraordinary item....................................... (11,652) (1,276)
Net loss............................................................. (11,652) (4,823)
Loss before extraordinary item per share............................. (1.73) (.78)
Net loss per share................................................... (1.73) (1.43)
</TABLE>
35
<PAGE>
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(3) PROPERTY AND EQUIPMENT
----------------------
Property and equipment is stated at cost less accumulated depreciation, and
is depreciated using straight-line and accelerated methods over the estimated
useful lives of the assets. Maintenance and repairs are charged to expense when
incurred and improvements are capitalized. Upon the sale or retirement of
assets, the cost and accumulated depreciation are removed from the balance sheet
and any gain or loss is recognized currently.
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Equipment............................................................ $ 2,355 $ 1,490
Furniture and fixtures............................................... 2,259 1,543
Computer software.................................................... 806 642
Building and improvements............................................ 947 727
----------- -----------
Total, at cost..................................................... 6,367 4,402
Accumulated depreciation and amortization............................ (2,637) (635)
----------- -----------
Property and equipment, net........................................ $ 3,730 $ 3,767
=========== ===========
</TABLE>
At December 31, 1996, the net book value of property and equipment related
to capital lease obligations was $1,350,000. See Note l(i) for a description of
an adjustment to reduce the carrying values of certain components of property
and equipment to their net realizable values during 1996.
(4) LONG-TERM DEBT
--------------
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Revolving credit facility, maturing in February 1997,
at prime plus .25% interest (8.5% at December 31, 1996),
secured by substantially all assets of the Company ............... $ 19,982 $ 9,700
Capital lease obligations, payable in aggregate monthly installments
of $45 as of December 31, 1996, including interest ranging from
4% to 10%, maturing at various dates through 2001, secured by
property and equipment............................................ 1,809 2,035
Note payable, interest at 8%, maturing in January 1997............... 765 ---
Note payable, interest at 8.5%, maturing in March 1996............... --- 600
----------- -----------
Total debt........................................................ 22,556 12,335
Less - Current portion............................................... (1,189) (970)
----------- -----------
Total long-term debt.............................................. $ 21,367 $ 11,365
=========== ===========
</TABLE>
Annual maturities of long-term debt as of December 31, 1996 are as follows
(in thousands):
<TABLE>
<S> <C>
1997............................................................................... $ 1,189
1998............................................................................... 492
1999............................................................................... 482
2000............................................................................... 20,389
2001............................................................................... 4
-----------
Total............................................................................ $ 22,556
===========
</TABLE>
36
<PAGE>
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The outstanding balance under the previous credit facility was originally
due on February 28, 1997. During February 1997, the maturity date was extended
to March 17, 1997. On March 12, 1997, the Company established a new $35 million
revolving credit facility, which was used to repay the outstanding balance under
the previous credit facility. Since the outstanding balance under the previous
facility was refinanced on March 12, 1997 using the new credit facility, and
there are no principal payments due in 1997 under the new facility, the balance
is classified as long-term on the accompanying consolidated balance sheet. See
Note 12 for more information on the new credit facility.
The Company was not in compliance with certain covenants under the previous
credit agreement as of December 31, 1996, due to the $17.4 million write-down of
office-based net assets, which is discussed in Note 1(i). However, the
outstanding balance under the previous credit facility was paid in full in March
1997, and the Company would have been in compliance with all covenants in the
new credit agreement as of December 31, 1996, if the new credit agreement had
been in effect at that date.
(5) 401(K) PROFIT SHARING PLANS
---------------------------
The Company maintains, and the Predecessor maintained, 401(k) Profit
Sharing Plans (the "Plans"), which are defined contribution plans covering
substantially all employees who meet certain age and service requirements. For
the three years ended December 31, 1996, the Company and the Predecessor made
matching contributions to the Plans equal to varying percentages of the
employees' contributions, and made other employer contributions to the Plans,
all at the discretion of the Company's Board of Directors. There was no expense
related to the Plans for the year ended December 31, 1996. Aggregate expense
related to the Plans was $501,000 for the year ended December 31, 1995, $75,000
for the period from November 29, 1994 to December 31, 1994 and $925,000 for the
period from January 1, 1994 to November 28, 1994.
(6) INCOME TAXES
------------
Current income tax expense (benefit) represents the income tax payable
(refund receivable) for the period. Deferred income tax expense (benefit)
represents the change in the balance of deferred income taxes during the period.
In accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," the Company recognizes deferred income taxes for
the tax consequences in future years of differences between the tax basis and
the financial reporting basis of assets and liabilities based on the tax rates
expected to be applicable to the future periods in which such tax consequences
will occur.
The provision (benefit) for income taxes consists of the following (in
thousands):
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
--------------------------------------- -------------
PERIOD FROM PERIOD FROM
NOVEMBER 29, JANUARY 1,
YEAR ENDED DECEMBER 31, 1994 TO 1994 TO
------------------------- DECEMBER 31, NOVEMBER 28,
1996 1995 1994 1994
----------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
Current................................... $ 1,343 $ (289) $ 903 $ 637
Deferred.................................. (1,154) (167) (1,080) ---
----------- ---------- ----------- -------------
Total.................................. $ 189 $ (456) $ (177) $ 637
=========== ========== =========== =============
Federal................................... $ (27) $ (349) $ (144) $ 543
State..................................... 216 (107) (33) 94
----------- ---------- ----------- -------------
Total................................... $ 189 $ (456) $ (177) $ 637
=========== ========== =========== =============
</TABLE>
37
<PAGE>
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
None of the income tax benefit for the year ended December 31, 1995 has
been allocated to the extraordinary item, since the existence of the
extraordinary item did not affect the amount of the income tax benefit. A
reconciliation of the tax provision (benefit) at the statutory federal rate of
34% to the actual income tax expense (benefit) is as follows (in thousands):
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
------------------------------------- -------------
PERIOD FROM PERIOD FROM
NOVEMBER 29, JANUARY 1,
YEAR ENDED DECEMBER 31, 1994 TO 1994 TO
----------------------- DECEMBER 31, NOVEMBER 28,
1996 1995 1994 1994
--------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Tax provision (benefit) at the
federal statutory rate................. $ (3,721) $ (664) $ (278) $ 644
State income taxes........................ (433) (71) (22) 62
Valuation allowance for
deferred tax assets.................... 2,122 --- --- ---
Non-deductible portion of write-down
of office-based net assets............. 1,279 --- --- ---
Non-deductible goodwill amortization...... 516 --- --- ---
Income of affiliates that cannot be
offset against net operating
losses of the Company.................. 296 279 --- ---
Non-deductible legal expenses............. --- --- 150 ---
Other, net................................ 130 --- (27) (69)
---------- --------- ------------ ------------
Total.................................. $ 189 $ (456) $ (177) $ 637
========== ========= ============ ============
</TABLE>
Deferred income taxes were related to the following timing differences at
December 31, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Write-down of office-based net assets............................... $ 4,211 $ ---
Accrual basis income of cash basis affiliates....................... (1,272) ---
Net operating loss carryforwards.................................... --- 1,170
Self-insurance accruals............................................. 933 630
Conversion from cash to accrual basis............................... (398) (743)
Bad debt reserve.................................................... --- 712
Amounts due for acquisitions........................................ (342) ---
Goodwill............................................................ --- 422
Other, net.......................................................... 144 ---
----------- -----------
Total............................................................ 3,276 2,191
Valuation allowance................................................. (2,122) (2,191)
----------- -----------
Net deferred income taxes........................................ $ 1,154 $ ---
=========== ===========
</TABLE>
Because the realization of a portion of the net deferred tax assets is not
more likely than not, due to the Company's loss carryforward for book purposes,
a valuation allowance has been established.
38
<PAGE>
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(7) DEFERRED PHYSICIAN STOCKHOLDER COMPENSATION
-------------------------------------------
Under the employment agreements between the Predecessor and its physician
stockholders, physician stockholders were eligible to receive deferred
compensation upon their death or extended disability after five years of
employment or upon termination of their employment for any other reason after 10
years of employment. The minimum deferred compensation payable to a physician
stockholder was $150,000 plus an additional $10,000 per full year of employment
after 10 years with a maximum amount of deferred compensation of $250,000. These
deferred compensation arrangements were terminated in connection with the 1994
Acquisition, and the related liability as of November 28, 1994 was not assumed
by the Company.
(8) COMMITMENTS AND CONTINGENCIES
-----------------------------
(a) Major Customers
The Company generates, and the Predecessor generated, a majority of its net
revenue by delivering physician services at hospitals and ambulatory surgery
centers with which it has exclusive contracts or other similar arrangements. The
Company's delivery of services at one particular hospital accounted for 12.0%
and 13.7% of its total net revenue in 1996 and 1995 and 16.3% of its total net
revenue in the period from November 29, 1994 to December 31, 1994. The
Predecessor's delivery of services at that hospital accounted for 24.7% of its
total net revenue in the period from January 1, 1994 to November 28, 1994. No
other facility accounted for 10% or more of the Company's or the Predecessor's
total net revenue.
In addition, the Company derived 20.8% and 29.5% of its total net revenue
in 1996 and 1995 and 38.5% of its total net revenue in the period from November
29, 1994 to December 31, 1994 from a single third-party payor. The Predecessor
derived 27.6% of its total net revenue in the period from January 1, 1994 to
November 28, 1994 from the same third-party payor. No other third-party payor or
other customer accounted for 10% or more of the Company's or the Predecessor's
net revenue.
(b) Employment Agreements
The Company has employment contracts with certain executives, physicians
and other clinical and administrative employees. Future annual minimum payments
under such employment agreements as of December 31, 1996 are as follows (in
thousands):
<TABLE>
<S> <C>
1997............................................................................... $ 4,453
1998............................................................................... 3,060
1999............................................................................... 2,827
2000............................................................................... 2,183
2001............................................................................... 1,343
Thereafter......................................................................... 3,338
-----------
Total .......................................................................... $ 17,204
===========
</TABLE>
(c) Self-insurance
Due to the nature of its business, the Company occasionally becomes
involved as a defendant in medical malpractice lawsuits, some of which are
currently ongoing, and is subject to the attendant risk of substantial damage
awards. The Company maintains professional and general liability insurance on a
claims-made basis in amounts deemed appropriate by management, based upon
historical claims and the nature and risks of its business. There can be no
assurance, however, that an existing or future claim or claims will not exceed
the limits of available insurance coverage, that any insurer will remain solvent
and able to meet its obligations to provide coverage for any such claim or
claims or that such coverage will continue to be available with sufficient
limits and at a reasonable cost to adequately and economically insure the
Company's operations in the future. A judgment against the Company in excess of
such coverage could have a material adverse effect on the Company.
39
<PAGE>
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The liability for self-insurance accruals includes estimates of the
ultimate costs related to both reported claims and claims incurred but not
reported. The estimate of claims incurred but not reported was $2,095,000 and
$794,000 at December 31, 1996 and 1995. An analysis of the self-insurance
accrual is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995
---------- -----------
<S> <C> <C>
Balance, beginning of year........................................... $ 1,615 $ 1,188
Provision for self-insurance......................................... 1,252 634
Self-insurance accruals related to acquired physician practices...... 439 317
Payments made for claims............................................. (136) (124)
Transfer to, and paid as, professional fee accruals.................. --- (400)
---------- -----------
Balance, end of year.............................................. $ 3,170 $ 1,615
========== ===========
</TABLE>
During the period from November 29, 1994 to December 31, 1994, the Company
increased its self-insurance accrual by approximately $500,000 as a result of a
claims review performed and medical incidents identified during the period.
(d) Litigation
In October 1996, the Company and certain of its directors, officers and
legal advisors were named as defendants in a lawsuit filed in the Circuit Court
of the Seventeenth Judicial Circuit in and for Broward County, Florida by
certain former physician stockholders of the Predecessor, which was formerly
named Southeastern Anesthesia Management Associates, Inc. The claim alleges that
the defendants engaged in a conspiracy of fraud and deception for personal gain
in connection with inducing the plaintiffs to sell their stock in the
Predecessor to the Company, as well as legal malpractice and violations of
Florida securities laws. The claim seeks damages of at least $10 million and the
imposition of a constructive trust and disgorgement of stock and options held by
certain members of the Company's management. The Company believes the lawsuit is
without merit and intends to vigorously defend against it.
(e) Lease Commitments
The Company leases office space and furniture and equipment for its
physician practice locations and administrative office under various
non-cancellable operating leases. Rent expense under operating leases was
$2,399,000 and $1,716,000 in 1996 and 1995, $26,000 in the period from November
29, 1994 to December 31, 1994, and $288,000 in the period from January 1, 1994
to November 28, 1994. Future annual minimum payments under non-cancellable
operating leases as of December 31, 1996 are as follows (in thousands):
<TABLE>
<S> <C>
1997.............................................................................. $ 2,444
1998.............................................................................. 2,217
1999.............................................................................. 1,945
2000.............................................................................. 1,670
2001.............................................................................. 1,338
Thereafter........................................................................ 4,398
-----------
Total.......................................................................... $ 14,012
===========
</TABLE>
40
<PAGE>
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(9) OPERATING RESULTS BY DIVISION
-----------------------------
The Company's operations consist of the hospital-based services division
and the office-based services division. The hospital-based services division
provides specialist physician services at hospitals and ambulatory surgical
facilities in the areas of anesthesia, neonatology, pediatrics and emergency
services. The office-based services division owns and operates, or manages,
office-based primary care, obstetrical and rheumatology practices. The following
table shows net revenue and operating income for each of the Company's two
divisions.
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
------------------------------------- ------------
PERIOD FROM PERIOD FROM
NOVEMBER 29, JANUARY 1,
YEAR ENDED DECEMBER 31, 1994 TO 1994 TO
----------------------- DECEMBER 31, NOVEMBER 28,
1996 1995 1994 1994
---------- ---------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net revenue:
Hospital-based services................ $ 63,885 $ 43,848 $ 3,469 $ 30,226
Office-based services.................. 28,882 20,817 1,660 3,269
----------- ---------- ------------ ------------
Total net revenue.................... $ 92,767 $ 64,665 $ 5,129 $ 33,495
=========== ========== ============ ============
Operating income (loss):
Hospital-based services................ $ 15,716 $ 9,270 $ 19 $ 2,817
Office-based services.................. (1,955) (1,484) 149 363
Write-down of office-based net assets.. (17,360) --- --- ---
General corporate expenses............. (5,766) (5,485) (646) (994)
----------- ---------- ------------ ------------
Total operating income (loss)........ $ (9,365) $ 2,301 $ (478) $ 2,186
=========== ========== ============ ============
</TABLE>
Under the Company's new strategic direction, as discussed in Note 1(i), the
Company intends to integrate its hospital-based and office-based operations
together in such a way that it will no longer be meaningful to report operating
income separately for these two divisions. Therefore, the Company does not
expect to report operating income separately for these two divisions in the
future.
(10) STOCKHOLDERS' EQUITY
--------------------
The issued and outstanding common stock of the Predecessor consisted of
1,069 shares of Class A Common Stock ($.01 par value, 3,000 shares authorized)
and 336 shares of Class B Common Stock ($.01 par value, 1,000 shares
authorized).
In connection with the 1994 Acquisition, management of the Company
subscribed to purchase 409,900 shares of the Company's Class A voting common
stock at a purchase price of $0.58 per share. Also in connection with the 1994
Acquisition, the Company issued 350,000 and 78,572 shares of Class A and Class B
Convertible Preferred Stock, respectively, at a purchase price of $50 per share.
Each share of Class A and Class B Convertible Preferred Stock was convertible,
at the option of the holder, into one-fourth of a share of Class A voting and
Class B non-voting common stock, respectively, and three-fourths of a share of
Redeemable Preferred Stock. The Class A and Class B Convertible Preferred Stock
accrued dividends on a cumulative basis at 7.5% per annum, and had a liquidation
value of $50 per share.
41
<PAGE>
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In June 1995, the Company issued a convertible promissory note for $5.0
million, which was convertible into 181,671 shares of common stock. The
noteholder also received a warrant to purchase up to an additional 45,410 shares
of the Company's common stock at an exercise price of $0.58 per share which
becomes exercisable in three installments if, through the substantial efforts of
the noteholder, the Company consummates transactions with physician practices
(generally either by acquiring such practices or entering into agreements to
manage such practices) which collectively result in certain increases in the
Company's earnings during certain measurement periods. The first installment,
which consisted of 15,146 shares, expired unexercised in December 1996. The
remaining two installments of 15,132 shares each will either become exercisable
or will expire unexercised in September 1997 and June 1998.
The Company completed an initial public offering of its common stock on
November 3, 1995, in which it issued 3,825,000 shares of common stock at a price
of $13.00 per share. In connection with the public offering (i) the Company
increased the amount of authorized preferred stock to 5,000,000 shares and
increased the amount of authorized common stock to 31,000,000 shares, (ii) all
of the outstanding Class A and Class B Convertible Preferred Stock was converted
into 1,321,377 shares of Class A Common Stock, 296,638 shares of Class B Common
Stock, and 321,429 shares of Redeemable Preferred Stock, (iii) all of the
Redeemable Preferred Stock was redeemed by the Company for an aggregate amount
of $16.1 million, (iv) the Class A voting common stock was redesignated as
"Common Stock" and the Class B non-voting common stock was redesignated as
"Class A Common Stock," and (v) a 15.10-to-one stock split was effected as a
stock dividend. The 15.10-to-one stock split has been retroactively reflected in
the accompanying consolidated financial statements.
The initial public offering generated net proceeds to the Company of $44.8
million. Of the total proceeds, $16.1 million was used to redeem the Company's
redeemable preferred stock, $26.1 million was used to repay long-term debt, $1.5
million was used to pay accrued dividends on convertible preferred stock, and
$1.1 million was used to pay certain deferred payments in connection with the
acquisition of a physician practice in June 1995.
In March 1996, the Company issued approximately 658,000 shares of its
common stock as partial consideration for an acquisition of a hospital-based
physician practice, as discussed in Note 2.
(11) STOCK OPTIONS
-------------
The Company adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," ("SFAS 123") in 1996. The Company has
elected to continue using Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," in accounting for employee stock
options. Each stock option has an exercise price equal to the market price on
the date of grant and, accordingly, no compensation expense has been recorded
for any stock option grants.
42
<PAGE>
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In 1995 the Company adopted the 1995 Stock Option Plan, under which 750,000
shares of common stock were reserved for issuance. Options granted under the
1995 Stock Option Plan become exercisable either over time, or upon the
attainment of defined operating goals. All stock options granted expire ten
years after the date of grant. Stock option activity has been as follows:
<TABLE>
<CAPTION>
1996 1995
--------------------- ----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICE OF SHARES PRICE
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Balance, beginning of year................ 321,461 $ 8.82 --- $ ---
Granted during year....................... 608,071 7.17 382,382 10.01
Terminated during year.................... (335,071) 10.51 (53,421) 16.84
Forfeited during year..................... (40,550) 12.32 (7,500) 12.50
-------- -------
Balance, end of year................... 553,911 $ 5.73 321,461 $ 8.82
======== =======
Exercisable at end of year......... 131,283 $ 3.38 64,604 $ 2.63
</TABLE>
There were no stock options outstanding in 1994. The weighted average fair
value per share as of the grant date was $4.15 for stock options granted in 1996
and $6.82 for stock options granted in 1995. The determination of the fair value
of all stock options granted in 1996 and 1995 was based on (i) risk-free
interest rates of 6.2% to 6.5%, depending on the expected life of each option,
(ii) expected option lives of 3 to 6 years, depending on the vesting provisions
of each option, (iii) expected volatility in the market price of the Company's
common stock of 78%, and (iv) no expected dividends on the underlying stock.
Stock options outstanding at December 31, 1996 consisted of the following:
<TABLE>
<CAPTION>
TOTAL OUTSTANDING EXERCISABLE
------------------------------------------------------ -----------------------
WEIGHTED AVERAGE WEIGHTED
RANGE OF NUMBER ---------------------- NUMBER AVERAGE
EXERCISE OF EXERCISE REMAINING OF EXERCISE
PRICES SHARES PRICE LIFE SHARES PRICE
--------------- ------- -------- --------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
$.58 107,840 $ .58 7.9 years 75,486 $ .58
$5.75 to $8.13 362,571 6.38 9.1 years 44,131 5.80
$8.75 to $13.00 83,500 9.54 9.3 years 11,666 12.36
------- -------
Total 553,911 $ 5.73 8.9 years 131,283 $ 3.38
======= =======
</TABLE>
The following table summarizes the pro forma consolidated results of
operations of the Company as though the fair value based accounting method in
SFAS 123 had been used in accounting for stock options.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995
-------- --------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
PRO FORMA RESULTS OF OPERATIONS:
Loss before extraordinary item....................................... $ (13,047) $ (1,789)
Net loss............................................................. (13,047) (3,973)
Loss before extraordinary item per share............................. (1.98) (1.16)
Net loss per share................................................... (1.98) (1.97)
</TABLE>
43
<PAGE>
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(12) SUBSEQUENT EVENT
----------------
On March 12, 1997, the Company established a new $35 million revolving
credit facility. The new credit facility bears interest at the London interbank
offered rate plus an applicable margin which is subject to quarterly adjustment
based on a leverage ratio defined in the credit agreement. As of March 17, 1997,
the applicable margin was 1.63%. There are no principal payments due under the
new credit facility until the maturity date of March 11, 2000. The new revolving
credit facility contains various restrictive covenants that include, among other
requirements, the maintenance of certain financial ratios, various restrictions
regarding acquisitions, sales of assets, liens and dividends, and limitations
regarding investments, additional indebtedness and guarantees. The Company is
currently in compliance with all covenants in the new credit agreement. The
additional amount that can be borrowed under the new credit facility is
determined by a leverage ratio defined in the credit agreement. The outstanding
balance under the new credit facility was $25.7 million at March 17, 1997. Based
on the value of the leverage ratio as of March 17, 1997, the Company had
additional borrowing availability of $9.3 million.
44
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE
--------------------------------------------------------------
To the Stockholders of
Sheridan Healthcare, Inc.:
We have audited in accordance with generally accepted auditing standards, the
financial statements of Sheridan Healthcare, Inc. and subsidiaries for the years
ended December 31, 1996 and 1995 and the period from November 29, 1994 to
December 31, 1994 included in this Form 10-K, and have issued our report thereon
dated February 21, 1997. Our audits were made for the purpose of forming an
opinion on the basic financial statements taken as a whole. The accompanying
Schedule II is the responsibility of the Company's management and is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, fairly states, in all material
respects, the financial data required to be set forth therein in relation to the
basic financial statements takes as a whole.
ARTHUR ANDERSEN LLP
Miami, Florida,
February 21, 1997.
45
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE
--------------------------------------------------------------
To the Stockholders of
Sheridan Healthcare, Inc.:
We have audited in accordance with generally accepted auditing standards, the
financial statements of Southeastern Anesthesia Management Associates, Inc. and
subsidiaries for the period from January 1, 1994 to November 28, 1994 included
in this Form 10-K, and have issued our report thereon dated March 17, 1995. Our
audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The accompanying Schedule II is the responsibility
of the Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states, in all material respects, the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Miami, Florida,
March 17, 1995.
46
<PAGE>
<TABLE>
<CAPTION>
SHERIDAN HEALTHCARE, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1996 and 1995,
for the Period from November 29, 1994 to December 31, 1994, and
for the Period from January 1, 1994 to November 28, 1994
(in thousands)
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
PERIOD EXPENSES DEDUCTIONS PERIOD
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
ACCOUNTS RECEIVABLE ALLOWANCES:
THE COMPANY
Year ended December 31, 1996.................... $ 737 $ 3,605 $ 3,065 $ 1,277
=========== ========== ========== ==========
Year ended December 31, 1995.................... $ 463 $ 2,324 $ 2,050 $ 737
=========== ========== ========== ==========
Period from November 29, 1994 to
December 31, 1994............................. $ 418 $ 159 $ 114 $ 463
=========== ========== ========== ==========
THE PREDECESSOR
Period from January 1, 1994 to
November 28, 1994............................. $ 431 $ 1,750 $ 1,763 $ 418
=========== ========== ========== ==========
</TABLE>
47
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
-------------------------------------------------------------------
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The Proxy Statement for the Company's Annual Meeting of Stockholders
anticipated to be held on May 15, 1997, which Proxy Statement is to be filed
with the Securities and Exchange Commission pursuant to Rule 14a-6(b), contains
under the captions "Proposal One: Election of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance" information required by Item 10 of
Form 10-K as to directors and executive officers of the Company and is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
The Proxy Statement for the Company's Annual Meeting of Stockholders
anticipated to be held on May 15, 1997, which Proxy Statement is to be filed
with the Securities and Exchange Commission pursuant to Rule 14a-6(b), contains
under the caption "Compensation of Directors and Executive Officers" information
required by Item 11 of Form 10-K and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The Proxy Statement for the Company's Annual Meeting of Stockholders
anticipated to be held on May 15, 1997, which Proxy Statement is to be filed
with the Securities and Exchange Commission pursuant to Rule 14a-6(b), contains
under the caption "Security Ownership of Management and Certain Beneficial
Owners" information required by Item 12 of Form 10-K and is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The Proxy Statement for the Company's Annual Meeting of Stockholders
anticipated to be held on May 15, 1997, which Proxy Statement is to be filed
with the Securities and Exchange Commission pursuant to Rule 14a-6(b), contains
under the caption "Certain Transactions" information required by Item 13 of Form
10-K and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
(a) 1. Financial Statements: See Item 8.
2. Financial Statement Schedules: See Item 8.
48
<PAGE>
3. Exhibits:
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 Third Amended and Restated Certificate of Incorporation (incorporated
herein by reference to such exhibit filed as an exhibit to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995).
3.2 Amended and Restated By-laws (incorporated herein by reference to such
exhibit filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1995).
4.1 Specimen certificate for shares of Common Stock of the Company
(incorporated herein by reference to such exhibit filed as an exhibit
to the Company's Registration Statement on Form S-1 (File No.
33-93290) filed on June 8, 1995, as amended (the "Registration
Statement").
4.2 Amended and Restated Stockholders' Agreement by and among SAMA
Holdings, Inc. and the TA Investors, as defined therein, the
NationsBank Investors, as defined therein, Summit Hospital Corporation
and the additional parties listed on Schedule B thereto, amended and
restated as of June 5, 1995, and effective as of November 28, 1994
(incorporated herein by reference to such exhibit filed as an exhibit
to the Registration Statement).
4.3 Amendment to Stockholders' Agreement by and among SAMA Holdings, Inc.
and the TA Investors, as defined therein, the NationsBank Investors,
as defined therein, Summit Hospital Corporation and the additional
parties listed in Schedule B thereto, as amended and restated as of
June 5, 1995, and effective as of November 28, 1994, dated as of
October 27, 1995 (incorporated herein by reference to such exhibit
filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1995).
10.1 Revolving Credit Agreement by and between NationsBank of Florida, N.A.
and the Company, dated as of November 1, 1995 (incorporated herein by
reference to such exhibit filed as an exhibit to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1995).
10.2 Class A Voting Common Stock Purchase Warrant between SAMA Holdings,
Inc. and Summit Hospital Corporation dated as of June 1, 1995
(incorporated herein by reference to such exhibit filed as an exhibit
to the Registration Statement).
10.3 Service Agreement by and between SAMA Holdings, Inc. and Summit
Hospital Corporation dated as of June 5, 1995 (incorporated herein by
reference to such exhibit filed as an exhibit to the Registration
Statement).
10.4 Stockholders' Agreement by and among SAMA Holdings, Inc. and the
Investors listed on the signature page thereto, dated as of June 5,
1995 (incorporated herein by reference to such exhibit filed as an
exhibit to the Registration Statement).
10.5 Amended and Restated Group Physician Agreement dated as of June 5,
1995 by and between CAC-Ramsey, Inc. and Sheridan Healthcorp, Inc.
(incorporated herein by reference to such exhibit filed as an exhibit
to the Registration Statement).
10.6 Executive Physician Employment Agreement dated as of June 5, 1995 by
and between Sheridan Healthcorp, Inc. and Valerio Toyos, M.D.
(incorporated herein by reference to such exhibit filed as an exhibit
to the Registration Statement).
49
<PAGE>
3. Exhibits (cont'd):
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.7 Employment Agreement of Lewis Gold, M.D. effective as of November 28,
1994 by and among SAMA Holdings, Inc., Southeastern Anesthesia
Management Associates, Inc. and Lewis Gold (incorporated herein by
reference to such exhibit filed as an exhibit to the Registration
Statement).
10.8 Employment Agreement of Mitchell Eisenberg, M.D. effective as of
November 28, 1994 by and among SAMA Holdings, Inc., Southeastern
Anesthesia Management Associates, Inc. and Mitchell Eisenberg
(incorporated herein by reference to such exhibit filed as an exhibit
to the Registration Statement).
10.9 Executive Employment Agreement of Jay Martus effective as of January
1, 1995 by and among SAMA Holdings, Inc., Southeastern Anesthesia
Management Associates, Inc. and Jay Martus (incorporated herein by
reference to such exhibit filed as an exhibit to the Registration
Statement).
10.10 Executive Employment Agreement of Gilbert Drozdow, M.D. dated
January 1, 1995 by and among SAMA Holdings, Inc., Southeastern
Anesthesia Management Associates,Inc.and Gilbert Drozdow (incorporated
herein by reference to such exhibit filed as an exhibit to the
Registration Statement).
10.11 Letter Agreement dated as of June 23, 1995 from the Company to Dennis
L. Gates regarding employment (incorporated herein by reference to
such exhibit filed as an exhibit to the Registration Statement).
10.12 Non-Competition and Non-Disclosure Agreement dated as of June 23,
1995 between the Company and Dennis L. Gates (incorporated herein by
reference to such exhibit filed as an exhibit to the Registration
Statement).
10.13 Sheridan Healthcare, Inc. Amended and Restated 1995 Stock Option
Plan (incorporated herein by reference to such exhibit filed as an
exhibit to the Company's Annual Report on Form 10-K for the year ended
December 31, 1995).
10.14 Agreement and License of Packaged Software dated April 10, 1989, as
amended, by and between Medical Software Specialties, Inc. and
Southeastern Anesthesia Management Associates, P.A., as amended
(incorporated herein by reference to such exhibit filed as an exhibit
to the Registration Statement).
10.15 Anesthesiology Agreement by and between South Broward Hospital
District and Pavilack, Karch, Lipton, Baran & Ast, P.A., d/b/a
Anesthesia Associates of Hollywood, dated as of September 25, 1990, as
amended (incorporated herein by reference to such exhibit filed as an
exhibit to the Registration Statement).
10.16 Participation Agreement by and between Health Options, Inc. and
Southeastern Anesthesia Management Associates ER Physicians, dated as
of February 8, 1995, as amended, including the attached schedule of
participating physicians who have signed the agreement (form of
agreement incorporated herein by reference to such exhibit filed as an
exhibit to the Registration Statement).
10.17 Participation Agreement by and between Health Options, Inc. and
Southeastern Anesthesia Management Associates P.A. dated as of
September 30, 1991 (incorporated herein by reference to such exhibit
filed as an exhibit to the Registration Statement).
50
<PAGE>
3. Exhibits (cont'd):
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.18 Form of Health Options Participation Agreement by and between Health
Options, Inc. and Individual Physician, including the attached
schedule of participating physicians who have signed the Agreement,
and including a reimbursement change letter (form of agreement
incorporated herein by reference to such exhibit filed as an exhibit
to the Registration Statement).
10.19 Provider Participation Agreement by and between PCA Health Plans of
Florida, Inc. and Southeastern Anesthesia Management Associates, P.A.,
dated as of July 1, 1994 (incorporated herein by reference to such
exhibit filed as an exhibit to the Registration Statement).
10.20 Referral Services Agreement by and between Family Health Plan, Inc.
and Southeastern Anesthesia Management Associates, P.A., dated as of
July 1, 1994 (incorporated herein by reference to such exhibit filed
as an exhibit to the Registration Statement).
10.21 Agreement by and between CAC-Ramsay and Southeastern Anesthesia
Management Associates, Inc., dated as of February 1, 1995
(incorporated herein by reference to such exhibit filed as an exhibit
to the Registration Statement).
10.22 Physician Agreement dated April 1, 1990 by and between Pavilack,
Karch, Lipton, Baran & Ast, P.A., d/b/a Anesthesia Associates of
Hollywood, and Humana Medical Plan, Inc., Humana Plan of Florida,
Inc. and Humana Health Insurance Company of Florida, Inc.
(incorporated herein by reference to such exhibit filed as an exhibit
to the Registration Statement).
10.23 Preferred Patient Care Agreement by and between Blue Cross and Blue
Shield of Florida, Inc. and Individual Physicians, with attached
schedule of physicians who have signed the agreement, and including a
reimbursement change letter (form of agreement incorporated herein by
reference to such exhibit filed as an exhibit to the Registration
Statement).
10.24 Form of Blue Cross and Blue Shield of Florida Traditional Program
Participating Physician Agreement, with attached schedule of
signatories, and including a reimbursement change letter (form of
agreement incorporated herein by reference to such exhibit filed as an
exhibit to the Registration Statement).
10.25 Physician Agreement by and between AMSA, Inc. and Humana Medical
Plan, Inc., Humana Health Plan, Inc., and Humana Insurance Company
(incorporated herein by reference to such exhibit filed as an exhibit
to the Registration Statement).
10.26 Form of Letter of Agreement for Specialty Services by and between
Primedica Healthcare, Inc. and each Individual Specialty Provider,
with attached schedule of participating specialty providers who have
signed the agreement (form of agreement incorporated herein by
reference to such exhibit filed as an exhibit to the Registration
Statement).
10.27 Form of Memorandum of Agreement for Specialty Services by and between
Primedica Healthcare, Inc. and each Individual Specialty Provider,
with attached schedule of participating specialty providers who have
signed the agreement (form of agreement incorporated herein by
reference to such exhibit filed as an exhibit to the Registration
Statement).
51
<PAGE>
3. Exhibits (cont'd):
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.28 Management Services Agreement, dated as of November 28, 1994, between
AMSA, Inc., a Florida corporation, and Anesthesiologists' Management
Services Associates, P.C., a New York professional corporation
(incorporated herein by reference to such exhibit filed as an exhibit
to the Registration Statement).
10.29 Amendment No. 1, dated as of July 28, 1995, to the Employment
Agreement effective as of November 28, 1994 by and among SAMA
Holdings, Inc., Southeastern Anesthesia Management Associates, Inc.
and Lewis Gold (incorporated herein by reference to such exhibit filed
as an exhibit to the Registration Statement).
10.30 Amendment No. 1, dated as of July 28, 1995, to the Employment
Agreement effective as of November 28, 1994 by and among SAMA
Holdings, Inc., Southeastern Anesthesia Management Associates, Inc.
and Mitchell Eisenberg (incorporated herein by reference to such
exhibit filed as an exhibit to the Registration Statement).
10.31 Amendment No. 1, dated as of August 1, 1995, to the Executive
Employment Agreement dated as of January 1, 1995 by and among SAMA
Holding, Inc., Southeastern Anesthesia Management Associates, Inc. and
Jay Martus (incorporated herein by reference to such exhibit filed as
an exhibit to the Registration Statement).
10.32 Amendment No.1, dated as of August 1, 1995, to the Executive
Employment Agreement dated as of January 1, 1995 by and among SAMA
Holdings, Inc., Southeastern Anesthesia Management Associates, Inc.
and Gilbert Drozdow (incorporated herein by reference to such exhibit
filed as an exhibit to the Registration Statement).
10.33 Master Equipment Lease Agreement dated as of June 12, 1995 by and
between NationsBanc Leasing Corporation and the Company (incorporated
herein by reference to such exhibit filed as an exhibit to the
Registration Statement).
10.34 First Addendum to Management Services Agreement, dated as of
September 1, 1995, by and between AMSA, Inc., Sheridan Medical
Healthcorp, P.C., and Sheridan Healthcorp, Inc.
10.35 Agreement and Plan of Merger, by and among Sheridan Healthcare, Inc.,
Sheridan Acquisition Corp., Inc., Neonatology Certified, Inc., and the
additional parties listed on Exhibit C attached thereto, dated as of
March 14, 1996 (incorporated herein by reference to such exhibit filed
as an exhibit to the Company's Report on Form 8-K filed as of March
14, 1996).
10.36 Stock Purchase Agreement, by and among Sheridan Healthcare, Inc.,
Children's Hospital Services, Inc., and the parties listed on Exhibit
C attached thereto, dated as of March 14, 1996 (incorporated herein by
reference to such exhibit filed as an exhibit to the Company's Report
on Form 8-K filed as of March 14, 1996).
10.37 Investment and Stockholders' Agreement, by and among Sheridan
Healthcare, Inc., and the parties listed on Schedule A attached
thereto, dated as of March 14, 1996 (incorporated herein by reference
to such exhibit filed as an exhibit to the Company's Report on Form
8-K filed as of March 14, 1996).
10.38 Emergency Medicine Services Agreement, dated as of June 1, 1996, by
and between Wyckoff Heights Medical Center and Sheridan Medical
Healthcorp, P.C. 3. Exhibits (cont'd):
52
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.39 Executive Employment Agreement, dated as of August 9, 1996, by and
between Sheridan Healthcorp, Inc., Sheridan Healthcare, Inc. and
Michael F. Schundler.
11.1 Statement regarding computation of per share earnings.
21.1 Schedule of Subsidiaries.
27 Financial Data Schedule.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the last quarter of the year
ended December 31, 1996.
53
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
SHERIDAN HEALTHCARE, INC.
(Registrant)
Date: March 28, 1997 By: /s/Michael F. Schundler
--------------------------------
Michael F. Schundler
Chief Financial Officer
(principal financial officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Mitchell Eisenberg, M.D. Chairman of the Board, March 28, 1997
- ---------------------------- President, Chief Executive
Mitchell Eisenberg, M.D. Officer (Principal Executive
Officer)
/s/ Robert W. Daly Director March 28, 1997
- ----------------------------
Robert W. Daly
/s/ Lewis D. Gold, M.D. Executive Vice President, March 28, 1997
- ---------------------------- Director
Lewis D. Gold, M.D.
/s/ Henry E. Golembesky, M.D. Director March 28, 1997
- -----------------------------
Henry E. Golembesky, M.D.
/s/ Neil A. Natkow, D.O. Director March 28, 1997
- -----------------------------
Neil A. Natkow, D.O.
/s/ Michael F. Schundler Chief Financial Officer March 28, 1997
- ----------------------------- (Principal Financial and
Michael F. Schundler Accounting Officer)
54
FIRST ADDENDUM TO MANAGEMENT SERVICES AGREEMENT
-----------------------------------------------
THIS FIRST ADDENDUM TO MANAGEMENT SERVICES AGREEMENT (the "First Addendum")
is executed and delivered as of September 1, 1995 (the "Execution Date") by and
between AMSA, INC., a Florida corporation (the "Manager"); SHERIDAN MEDICAL
HEALTHCORP, P.C., a New York professional corporation f/k/a ANESTHESIOLOGISTS'
MANAGEMENT SERVICES ASSOCIATES, P.C. ("PC"); and, SHERIDAN HEALTHCORP, INC., a
Florida corporation ("Sheridan").
PRELIMINARY STATEMENTS
1. The Manager and PC entered into a Management Services Agreement, dated
as of November 28, 1994, with a term commencing on November 28, 1994 and
expiring on November 27, 1995 (the "Agreement"). All capitalized terms not
defined in this First Addendum shall have the meanings given them in the
Agreement. The Agreement and this First Addendum shall be collectively, the
"Agreement".
2. The parties desire to amend the Agreement pursuant to the terms of this
First Addendum. In the event of any inconsistency between the terms of this
First Addendum and the Agreement, then the terms of this First Addendum shall
control.
3. The Manager desires to be released and discharged from all liability to
PC in connection with the Agreement. The Manager is a wholly-owned subsidiary of
Sheridan. Sheridan is willing to assume all of the Manager's obligations and
liabilities under the Agreement, whether arising before or after the execution
and delivery of this First Addendum.
NOW THEREFORE, for and in consideration of the mutual covenants contained
in this First Addendum and the Agreement, the Manager, PC and Sheridan agree as
follows:
AGREEMENT
1. Name Change. Effective May 16, 1995, PC amended its corporate name to
Sheridan Medical Healthcorp, P.C. References to PC throughout the Agreement and
the First Amendment shall mean Sheridan Medical Healthcorp, P.C.
2. Assignment and Assumption.
(a) Sheridan agrees to perform and be bound by all the terms of the
Agreement in all respects as if it were the original party, AMSA, INC. ("AMSA"),
under the Agreement and to assume all of the obligations and liabilities of the
Manager under the Agreement, whether arising before of after the execution and
delivery of this Addendum.
1
<PAGE>
(b) AMSA assigns to Sheridan all of its rights, title and interest in the
Agreement. PC releases and discharges AMSA from all future obligations under the
Agreement after August 31, 1995. Effective September 1, 1995 all references to
the Manager throughout the Agreement shall mean Sheridan Healthcorp, Inc.
(c) PC accepts Sheridan as the substituted Manager to the Agreement and
agrees to continue to be bound by the terms of the Agreement in all respects as
if Sheridan was originally named as the Manager in the Agreement.
3. Section 10 of the Agreement, Term and Termination is amended by
replacing the existing Section 10(a) with the following provision:
(a) Term. This Agreement shall commence on the Effective Date and, unless
terminated pursuant to the terms, shall expire on November 27, 2001 (the
"Term"). The Term shall be automatically renewed for additional seven-year terms
on the seventh Anniversary of the Effective Date and each subsequent seventh
Anniversary thereafter unless previously terminated pursuant to the terms of
this Agreement or otherwise mutually agreed between the parties of their intent
not to renew the Term or Terms.
4. Section 16(b) of the Agreement, Notices, is amended by replacing the
existing addresses with the following:
If to the Manager: Sheridan Healthcorp, Inc.
4651 Sheridan Street, Suite 400
Hollywood, FL 33021
ATTN: Jay A. Martus, Esq.
Vice President and General Counsel
If to PC: Sheridan Medical Healthcorp, P.C.
4651 Sheridan Street, Suite 400
Hollywood, FL 33021
ATTN: Gilbert Drozdow, M.D.
President
5. All other provisions of the Agreement not expressly amended by the terms
of this First Addendum remain unchanged and in full force and effect.
2
<PAGE>
AMSA, PC and Sheridan have each caused this First Addendum to be executed
and delivered by their duly authorized officers as of the Execution Date.
AMSA: PC:
AMSA, INC., SHERIDAN MEDICAL HEALTHCORP, P.C.,
a Florida corporation a New York professional corporation
By: _____________________________ By: _____________________________
Jay A. Martus, Esq. Gilbert Drozdow, M.D.
Vice President and General Counsel President
SHERIDAN:
SHERIDAN HEALTHCORP, INC.,
a Florida corporation
By: _____________________________
Jay A. Martus, Esq.
Vice President and General Counsel
EMERGENCY MEDICINE SERVICES AGREEMENT
By and Between
WYCKOFF HEIGHTS MEDICAL CENTER,
a New York not-for-profit corporation,
and
SHERIDAN MEDICAL HEALTHCORP, P.C.,
a New York professional corporation
Dated as of June 1, 1996
1
<PAGE>
TABLE OF CONTENTS
Page
Preliminary Statements..............................1
Section 1 Emergency Department; Commencement of Services..............2
Section 2 Operation of Emergency Department...........................2
Section 2.A Emergency Medicine Services.................................2
Section 2.B Staff Coverage..............................................4
Section 2.C Physician Qualifications....................................5
Section 2.D Standards of Operation.....................................10
Section 2.E Staff Membership and Approval..............................11
Section 2.F Quality Assurance..........................................12
Section 3 Facilities Provided by the Hospital........................13
Section 4 Insurance..................................................14
Section 4.A Sheridan's Insurance Obligations...........................14
Section 4.B Hospital's Insurance Obligations...........................15
Section 5 Compensation...............................................15
Section 5.A Billing for Patient Services...............................15
Section 5.B Compensation for Hospital Services.........................16
Section 6 Independent Contractor.....................................18
Section 7 Assignments Prohibited.....................................19
Section 8 Term of Agreement..........................................19
Section 9 Termination................................................19
Section 10 Indemnification............................................21
Section 11 Access of Books and Records................................21
Section 12 Compliance with Applicable Law.............................22
Section 13 Severability...............................................22
Section 14 Notices....................................................23
Section 15 Headings...................................................23
Section 16 Construction...............................................23
Section 17 Entire Agreement; No Waiver; Governing Law;
Venue; Waiver of Trial by Jury............................24
Execution Pages............................................25
2
<PAGE>
AGREEMENT
BETWEEN
WYCKOFF HEIGHTS MEDICAL CENTER
AND
SHERIDAN MEDICAL HEALTHCORP, P.C.
THIS AGREEMENT, made this day of 1st day of June, 1996, by and between
WYCKOFF HEIGHTS MEDICAL CENTER, a New York not-for-profit corporation (the
"Hospital"); and, SHERIDAN MEDICAL HEALTHCORP, P.C., a New York professional
corporation ("Sheridan").
WHEREAS, the Hospital is a licensed Article 28 hospital in New York City,
New York, with divisions located at Wyckoff Heights Medical Center, Brooklyn,
New York (the "Wyckoff Division") and Jackson Heights Hospital, Queens, New York
(the "Jackson Heights Division"); and
WHEREAS, Sheridan is a New York professional corporation authorized to do
business in the State of New York, and has experience in the provision of
physician staffing and services for hospital emergency medicine departments; and
WHEREAS, the parties hereto desire Sheridan to provide physician staffing,
administrative and professional services (collectively, the "Services") to the
Emergency Departments at the Wyckoff and Jackson Heights Divisions
(individually, an "ER Division" and collectively, the "Department") of the
Hospital;
NOW, THEREFORE, in consideration of the mutual promises set forth herein,
the parties hereto agree as follows:
1
<PAGE>
1. EMERGENCY DEPARTMENT; COMMENCEMENT OF SERVICES. Hospital retains
Sheridan and Sheridan agrees to be retained to provide the Services in the
Department on an exclusive basis in accordance with the terms of this Agreement.
Sheridan shall commence the provision of Services pursuant to this Agreement on
May 31, 1996. Upon Hospital's request, Sheridan shall provide comparable
services to Hospital at any additional facility operated, controlled or managed
by Hospital, upon such terms and conditions to be separately negotiated by
Sheridan and Hospital.
2. OPERATION OF EMERGENCY DEPARTMENT. At all times during the Term of this
Agreement, Sheridan shall be responsible for providing the day-to-day physician
staffing of the Department as follows:
A. EMERGENCY MEDICINE SERVICES.Sheridan shall provide in the Department,
through its employed or contracted emergency medicine physicians (a "Physician"
or the "Physicians"), physician services in the Department, which are usually
and customarily rendered in emergency medicine departments, including, but not
limited to:
(i) evaluating and treating the acute medical needs of every patient
submitting him/herself to the Department for medical care, regardless of ability
to pay. In the event that an individual requests treatment by his/her personal
physician, however, such patient shall be treated by the Physician on duty only
if the patient becomes distressed and, in the opinion of the Physician on duty,
requires immediate assistance;
(ii)consulting with and assisting members of the Medical Staff of the
Hospital concerning matters within the competence of the Physicians and P.A.s;
(iii) serving on such Hospital medical staff and other HospitaL
committees as may be reasonably required by Hospital from time to time and
participating in all activities pertaining to Hospital and Medical Staff
relations;
3
<PAGE>
(iv) participating in Hospital's teaching and residency programs as
requested by Hospital, and cooperating and assisting in the development of a
teaching and residency program in emergency medicine, if so requested by
Hospital;
(v) cooperating and assisting in the training and scheduling of all
Department personnel, including but not limited to Hospital's physicians,
nurses, allied health professionals, technicians, medical students, residents
and fellows;
(vi) analyzing quality assurance and professional performance data, in
accordance with Hospital's quality assurance policies and procedures, including
without limitation the use of such information with respect to the Medical
Staff's biennial reappointment process;
(vii) overseeing compliance with quality management programs and
patient management policies and protocols developed by Sheridan and approved by
Hospital and the Department with respect to risk management, Joint Commission
or the Accreditation of Healthcare Organizations ("JCAHO"), American
Osteopathic Association ("AOA"), and patient management standards, including,
but not limited to mechanisms for periodic patient satisfaction surveys;
(viii) becoming actively involved in the communities served by Hospital
through educational and other programs to promote the services of Hospital and
develop community recognition and support; and,
(ix) operating the Department in a cost efficient and effective
manner, subject to the budgeting systems and constraints established by
Hospital, including, upon Hospital's request, participating in the preparation
of operating and capital budgets for the Department which will include
projections of revenues and expenditures and recommendations for more cost
effective methods.
4
<PAGE>
B. STAFF COVERAGE.Sheridan shall provide sufficient staff for the provision
of emergency medicine services for all patients of the Department, as follows.
1. PHYSICIANS.Sheridan shall provide sufficient staff for physician
coverage twenty-four (24) hours per day, seven (7) days per week, 365 days per
year, at each ER Division during the Term. Sheridan shall increase or decrease
physician coverage in each ER Division as warranted by patient volume; provided
however, that physician coverage shall not fall below the minimum coverage
requirements stated above. Sheridan shall implement any increased physician
coverage in the event that the average number of patient visits at either ER
Division exceeds 2.5 visits per hour, as determined on the basis of any two-week
period during the Term. Any subsequent decrease in physician coverage may be
implemented by Sheridan in the event that the average number of patient visits
to either ER Division falls below 2.5 visits per hour, as determined on the
basis of any two-week period during the Term.
In the event that Hospital establishes a residency program in
emergency medicine, Sheridan shall provide Physicians board certified in
emergency medicine to the extent required by any program.
2. PHYSICIAN'S ASSISTANTS. In addition to the Physicians described
above, Sheridan shall also provide or arrange for physician's assistant ("P.A.")
staffing for the Wyckoff ER Division twelve (12) hours per day, seven (7) days
per week, 365 days per year during the Term. P.A. coverage may be temporarily
increased by Sheridan at the Wyckoff ER Division at any time when, Hospital and
Sheridan mutually agree that patient volume exceeds the capability of the
existing staff at the Wyckoff ER Division to provide appropriate patient care.
P.A. coverage may be reduced or eliminated in the event that the Hospital and
Sheridan mutually agree that improvements in the level and scope of the
Department's nursing service provided by the Hospital renders the P.A. coverage
excessive or no longer necessary.
5
<PAGE>
Sheridan shall require that all Physicians or P.A.s employed or
engaged by Sheridan wear name tags while on duty at the Hospital. Such name
tags shall clearly identify each Physician or P.A. as an employee or
contrtactor of Sheridan. At Hospital's request, Sheridan shall post a sign in
each ER Division notifying patients that the Physicians and P.A.s providing
services in the Department are employed by Sheridan and not by the Hospital.
Sheridan shall provide that an adequate number of Physicians on staff are
on-call 24 hours per day, 365 days per year, to provide continuous availability
of clinical coverage in the event of an emergency, a disaster or transitory
excessive patient case load. Any on-call staff shall be available by available
by pager to respond to Hospital's call within thirty (30) minutes.
C. PHYSICIAN QUALIFICATIONS. In theevent that Hospital provides Sheridan
with written notice that any Physician employed or engaged by Sheridan is in
violation of Hospital's written personnel standards and policies (which notice
shall state the nature of that violation), Sheridan shall take appropriate
action to discontinue that individual's work at the Hospital in accordance with
those standards and policies. Sheridan shall immediately remove any Physician
from that Hospital, in its sole discretion, reasonably deems to be an immediate
threat to the safety or well-being of Hospital's patients, staff or visitors.
All Physicians shall:
(i) be licensed to practice medicine in the State of New York and
maintain Federal DEA numbers;
(ii) be board-eligible in a primary care specialty;
(iii) agree to adhere to the ethics and principles of the American
College of Emergency Physicians ("ACEP")
(iv) fulfill all Continuing Medical Education ("CME") requirements as
needed to maintain New York licensure and to meet all CME standards and all
standards of ACEP;
(v) achieve and maintain Advanced Cardiac Life Support ("ACLS")
6
<PAGE>
certification;
(vi) undergo an in-depth pre-employment screening process by
Sheridan, including thorough checking of at least three (3) references with the
Data Release Department of the American Medical Association as a back-up.
Sheridan shall review the American Medical Association Physician Profile Service
("AMAPPS") file of each physician candidate, inform the Hospital regarding the
results of such review, and take any necessary and/or appropriate action based
upon information revealed from such file. In accordance with the Hospital's
Medical Staff Bylaws, physician candidates may be granted temporary privileges
prior to completion of the AMAPPS review process; and,
(vii) be individually credentialed by Hospital. Physician candidates
shall be required to undergo Hospital credentials review procedures as provided
in Hospital's Medical Staff Bylaws for granting of medical staff membership, and
Sheridan shall ensure that no physician shall work in the Department unless he
or she has been granted such staff privileges and maintains medical staff
membership in good standing.
Additionally, Sheridan agrees that it will support Hospital's
filing of an application to be designated as a 911 EMS receiving station.
Sheridan agrees that its Physicians shall achieve Basic Cardiac Life Support
"BCLS") and ACLS certification within thirty (30) days of the execution of
this Agreement and shall meet any other specific physician qualifications for
the EMS program within ninety (90) days of the Hospital's approval as a 911
EMS receiving station. Sheridan's agreement in this regard is conditioned upon
Hospital's agreement to work with Sheridan in good faith at all times during
this process to ensure that the required credentialling of the Physicians
and P.A.s is accomplished on a timely basis.
(1) DEPARTMENT DIRECTOR. A mutually acceptable physician shall be recruited
by Sheridan and appointed by Hospital as Director of the Department (the
"Director"). The Director shall be board-certified in emergency medicine or
board certified in internal medicine, surgery or family practice, with extensive
emergency department clinical and managerial experience and shall achieve and
maintain Advanced Trauma Life Support ("ATLS") certification within six (6)
months of appointment. The Director will be responsible for direct overall
supervision of all Department Physicians and P.A.s and for integration of the
Department into the Hospital organization.
During the absence of the Director for vacation, sick leave, or for any
other short-term reason, Sheridan shall provide a substitute Director and notify
Hospital. The substitute Director shall be appointed subject to the consent of
Hospital, which consent shall not be unreasonably withheld. The substitute
Director shall be a physician hired by Sheridan to work at Hospital, be
privileged at Hospital and be board-certified or board-eligible and in the
process of obtaining board certification. In the event of the Director's death,
disability, resignation, termination of employment with Sheridan or retirement,
or at the Hospital's option, the substitute Director shall continue to perform
under the terms and conditions of this Agreement until Hospital approves the
appointment of a new Director recruited by Sheridan who meets all of the
criteria established for the Director, which approval shall not be unreasonably
withheld.
7
<PAGE>
Sheridan shall be responsible for ensuring that the Director or the
substitute Director is on site during normal business hours to handle
administrative and unusual patient disposition issues as well as to provide
back-up clinical coverage in the event of an emergency, a disaster or excessive
patient case load. The Director and/or the substitute Director shall be on-call
at all times, shall be available by pager and shall respond by telephone or in
person to Hospital's call within thirty (30) minutes.
The Director shall be a member of the Medical Board and of such additional
committees of the Medical Staff and Hospital as required by the Medical Director
of the Hospital, and shall have general authority to carry out the terms of this
Agreement. In addition to the above, the Director shall be responsible for
carrying out duties and responsibilities including but not limited to:
(a) supervising, on a day-to-day basis, the delivery of emergency
medical care in the Department, resolving all conflicts arising among Department
professionals, responding, in conjunction with the Medical Director, to all
patient concerns and complaints relating to Department services, and acting as
a liaison among medical staff, nursing staff and administration in matters
relating to the Department;
(b) monitoring and making recommendations with respect to the care
provided in the Department by both Sheridan personnel and Hospital staff members
as part of Hospital's quality assurance program, and ensuring that all Sheridan
personnel comply with all requirements of regulatory and accreditation bodies,
and with all bylaws, rules, regulations, and other written policies and
procedures of Hospital and the Department with respect to the operation of the
Department and Hospital's quality assurance program;
8
<PAGE>
(c) monitoring and reporting to Hospital on the status of all
Physicians and P.A.s with respect to the credentialling requirements established
by Hospital's Credentials Committee and regularly evaluating physician
performance and conduct, including, but not limited to: (a)an evaluation of each
new physician before the start of service in order to recommend acceptance of
the physician for full service, an extension of the probationary period or
termination of that physician; (b) one annual performance appraisal of each
Physician working in the Department; (c) taking any necessary or advisable
corrective disciplinary measures;
(d) developing, recommending, and, at the Hospital's direction,
implementing and maintaining, all policies and procedures pertinent to emergency
medical care and updating those policies and procedures at least annually;
(e) developing, recommending, and, at Hospital's direction,
implementing and maintaining, written quality assurance and risk management
programs which meet the requirements of the JCAHO, the AOA and the Medical
Staff plan for emergency medicine services;
(f) conferring from time to time with Hospital administration and
consulting as to the organization and management of the Department in order
to enhance its public service capabilities, efficiency, and quality of care;
(g) supervising and participating in, as required, the educational
activities of the Department, serving as a liaison with physician staff to
provide educational programs at Hospital,including CME seminars, and in the
development of training programs for nursing personnel and allied healthcare
providers, and ensuring that all Department Physicians and P.A.s remain
current in emergency medicine and continuing education requirements;
(h) attending Medical Staff meetings and administrative meetings
relating to the operation of the Department, serving the Medical Board and on
other appropriate Medical Staff committees and actively participating in and
attending all required Hospital committee meetings;
9
<PAGE>
(i) assisting in the budget process and control of resources in
accordance with Hospital policies and assisting Hospital in the preparation
and implementation of an annual departmental business plan;
(j) actively participating with city,county and state Emergency
Medicine Services Councils and maintaining an active dialogue with area EMS
agencies and participation in EMS activities; and,
(k) consulting with Hospital on nursing staff personnel and
policies, clerical and financial staff personnel and policies and any other
policies which affect the delivery of emergency medical care in the Department.
D. STANDARDS OF OPERATION.
(i) COMPLIANCE WITH LAWS, RULES AND ACCREDITING BODIES. The
Physicians and P.A.s shall conduct their activities in the Department in
accordance with all applicable state, federal and local laws, rules and
regulations and with the requirements and standards of the JCAHO, AOA, ACEP, and
the policies, practices, rules or regulations as may be established from time
to time by the Board of Trustees and/or the Medical Staff of Hospital pursuant
to Hospital and Medical Staff Bylaws. The Physicians and the Director will be
bound by the standards of conduct and bylaws of Hospital applicable to members
of Hospital's Medical Staff including those pertaining to relations with
administration, staff and patients. Hospital shall provide Sheridan and the
Director with updated copies of all applicable Hospital and Medical Staff
Bylaws, policies and procedures.
(ii) NO DISCRIMINATION. Sheridan shall ensure that all patients who
present themselves to the Department are examined, managed and treated
appropriately regardless of race, color, creed, handicap, sex, age, sexual
orientation, marital status or ability to pay.
(iii) PROVISION OF EMERGENCY MEDICINE SERVICES. Physicians furnished
by Sheridan to the Hospital shall not provide inpatient medical services or
treatment to patients except in the case of medical emergencies and shall not
admit patients to the Hospital, except to the service of an active member of
Hospital's medical staff. In the event a patient requires admission to the
Hospital and does not indicate a physician of choice, that patient shall be
admitted to the service of the physician on call.
10
<PAGE>
E. STAFF MEMBERSHIP AND APPROVAL. Any Physician, including the Director,
whose staff privileges are removed or restricted by Hospital shall not work in
the Department. Upon the termination of this Agreement or upon the termination
of the affiliation of any Physician with Sheridan for any reason, the Department
staff membership and Department clinical privileges of that Physician shall
be automatically terminated by Hospital without further action and without
providing opportunity for hearing or other due process. Sheridan shall
specifically require that each Physician agree in writing to waive all rights
and due process privileges set forth in the Hospital Medical Staff Bylaws with
respect to termination or other limitation of Medical Staff membership or
clinical privileges.
F. QUALITY ASSURANCE.
(i) ASSISTANCE IN HOSPITAL'S QUALITY ASSURANCE PROGRAM. As part of
Hospital's overall quality assurance program, Sheridan shall assist in
establishing procedures to assure the consistency and quality of all services
provided in the Department by physicians, nurses, allied health professionals,
and other technical and non-medical personnel, in accordance with Hospital
policies and the policies of licensing, accrediting and/or review organizations.
Sheridan personnel shall serve on such committees as may be appropriate in
connection therewith.
(ii) PARTICIPATION IN TEACHING AND RESIDENCY PROGRAMS.Sheridan shall
participate in and cooperate with Hospital's various teaching and residency
programs which may be necessary or advisable to ensure Hospital's overall
compliance with accrediting requirements, and perform such other related
functions within Hospital as may be reasonably requested by Hospital. Sheridan
shall ensure that all Physicians and P.A.s remain current in emergency medicine
and continuing education requirements.
(iii) DEPARTMENT INSPECTION. Sheridan shall assist Hospital in the
periodic evaluation of all emergency room equipment to determine whether the
equipment is being maintained in a safe condition and being utilized in a safe
and efficient manner. Further, Sheridan shall advise Hospital with respect to
the selection of additional and replacement equipment for the Department,
provided, however, that Hospital shall have the final authority in deciding
whether or not to purchase such additional and/or replacement equipment.
(iv) CONSULTATION REGARDING SUPPLIES AND SUPPORT SERVICES. Sheridan
shall advise Hospital regarding requisitions for medical and administrative
supplies and support services required for the operation of the Department. In
connection therewith, Sheridan shall request appropriate nursing personnel to
submit such requisitions through regular purchasing channels in accordance with
established Hospital policies and practices.Except pursuant to the prior written
approval of Hospital,Sheridan shall not engage in direct purchasing or otherwise
contract any liability on behalf of Hospital and shall neither charge the credit
of Hospital nor incur any obligations or enter into any agreement for or on
behalf of Hospital in the operation of the Department or otherwise.
11
<PAGE>
3. FACILITIES PROVIDED BY HOSPITAL. During the Term of this Agreement,
Hospital shall, at its expense, provide the following facilities,services and
supplies, necessary to comply with applicable laws, rules and regulations for
the proper and efficient operation of the Department and to permit Sheridan
to adequately perform its duties under this Agreement:
A. The area and facilities presently occupied by or for the use of the
Department, or comparable facilities at the Hospital, including medical
equipment, office space, furniture, files, office equipment, instruments, a
private sleeping room upon request, and related items presently in the
Department, or comparable furnishings and equipment;
B. maintenance of all items referred to in subparagraph (A) hereof and
replacements thereof as necessary;
C. suitable staffing, consisting of qualified registered nurses, licensed
practical nurses, technicians, venapuncturists and clerical personnel, as
necessary to ensure effective and efficient patient care, as well as a qualified
nursing supervisor to oversee nursing functions; all such personnel shall be and
remain employees or contractors of the Hospital, and shall not be employees
and/or contractors of Sheridan with respect to any services provided pursuant to
this Agreement;
D. services including, but not limited to, janitorial, security, in-house
messenger, laundry, electricity, gas, water, heat, patient system, telephone,
and other utilities;
E. supplies such as chemicals, paper, stationery, and similar items
necessary for the proper and effective operation of the Department;
12
<PAGE>
F. maintenance of medical records of Hospital patients treated by the
Physicians and P.A.s. All medical records shall be and remain the property of
the Hospital; provided that Hospital shall provide Sheridan with one legible
copy each day of the Department patient records containing the patient billing
and physician service information, subject to state and federal law regarding
the confidentiality of medical records; and further provided that Hospital shall
make available to Sheridan the registration log of the Department to be copied
at the Hospital by a Sheridan representative acceptable to the Hospital, which
representative shall be given reasonable access to the Hospital's copying
machines for the purpose of copying the Department registration log ; and
G. secure parking for Physicians and P.A.s at Hospital's usual rates.
4. INSURANCE.
A.SHERIDAN'S INSURANCE OBLIGATIONS. Sheridan will provide and maintain
professional liability insurance, with limits of no less than One Million
Dollars ($ 1,000,000.00) per claim and Three Million Dollars ($ 3,000,000.00)
annual aggregate, covering the professional conduct of Sheridan, each Physician,
and the Director. At Hospital's request, Sheridan shall review the insurance
coverage provided under this Agreement. Said coverage may be adjusted by mutual
agreement of the parties.
Sheridan shall be solely responsible for any insurance required by virtue
of Sheridan's status as employer, including but not limited to workers
compensation insurance and unemployment insurance for each employee of Sheridan.
Sheridan shall furnish to Hospital certificates of insurance evidencing
all of such coverage at the commencement of this Agreement and annually
thereafter. In addition, Sheridan shall provide Hospital with at least thirty
(30) days' prior written notice of any reduction, cancellation or termination
of any such insurance from Sheridan's insurance carrier. Sheridan shall
immediately notify Hospital of any such change and of any and all claims filed
against Sheridan or against any of the Physicians, the P.A.s and/or employees
relating to the services rendered pursuant to this Agreement.
B. HOSPITAL'S INSURANCE OBLIGATIONS.Hospital shall provide general liability
insurance coverage for operation of the Department in such amounts as ordinarily
carried for such purposes by Hospital. In satisfaction of this obligation,
Hospital may provide coverage under an actuarial determined self-insurance plan.
Upon request of Sheridan, Hospital shall furnish evidence of such coverage.
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5. COMPENSATION.
A. BILLING FOR PATIENT SERVICES.
(i) Hospital shall cooperate with Sheridan to furnish data reasonably
necessary to enable Sheridan to bill for the professional component of patient
care services as provided by the Physicians and the P.A.s. Sheridan shall bill
patients directly, on a fee-for-service basis, for services rendered by the
Physicians and the P.A.s. Sheridan shall charge Hospital patients only for the
professional component of such services and shall not charge any Hospital
patient for the technical component.
Sheridan shall provide Hospital with a copy or copies of each fee
schedule upon request. All fees for emergency medicine services shall be
comparable with fees charged for the same or similar services elsewhere in the
community, and shall not violate any law or regulation governing fees,
including without limitation, Federal Medicare and Medicaid statutes and
regulations. With respect to services rendered by Sheridan to persons covered by
Medicare, Sheridan agrees to accept Medicare assignments as payment in full
and shall not bill such patients for any amounts except for the co-insurance
and deductible amounts which are the direct responsibility of the patient under
applicable rules and regulations regarding Medicare coverage.
Sheridan shall assume the costs associated with such billing,
including the costs of preparing, mailing and collecting the invoices,and shall
indicate on each invoice that it is billing only for the professional component
of the Physician services.
(ii) Hospital shall bill patients directly for the non-professional
component of services rendered. Hospital shall be solely responsible for
its own billing and collection with regard to such non-professional
component.
B. COMPENSATION FOR SERVICES. In consideration for the Services rendered
by Sheridan with respect to the administration and operation of the Department
and the fulfillment of its teaching responsibilities, Hospital shall
compensate Sheridan as follows:
(i) Hospital shall make an initial payment of Two Hundred Sixty-Six
Thousand Six Hundred Sixty-Seven Dollars ($266,667.00) on the execution date of
the Agreement, which shall be applied to and constitute payment in full of the
final payment due in the final month of the Agreement. In the event that this
Agreement is terminated prior to the completion of the Term or any renewal term
described in Section 8, Sheridan shall immediately return such payment in full
to Hospital, less any accrued but unpaid amounts owed by Hospital pursuant to
this Section 5.B.
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(ii) Commencing on July 1, 1996 and continuing throughout the Term of
this Agreement, and except as provided in the next succeeding sentence, Hospital
shall pay to Sheridan the sum of Two Hundred Sixty-Six Thousand Six Hundred
Sixty-Seven Dollars ($266,667.00) per month for emergency medicine services
rendered to the Hospital (the "Emergency Services Compensation"). In the event
that the Jackson Heights Division permanently closes its ER Division, upon
ninety (90) days prior written notice to Sheridan, then the Emergency Services
Compensation shall be reduced to Two Hundred Twenty-Five Thousand Dollars
($225,000.00) per month, commencing on the first day of the month following the
ninety (90) days prior written notice and continuing throughout the remainder of
the Term. Each monthly payment of Emergency Services Compensation shall be due
on the first day of the month in which the Services are to be rendered. If any
Emergency Services Compensation is not paid within thirty (30) days of the date
each monthly payment is due, then the unpaid amount shall accrue interest until
paid at a rate of interest equal to Citibank, N.A.'s prime rate, as announced
from time to time, plus 3/4 percent. Further, all payment obligations of the
Hospital pursuant to this subsection shall survive the termination of this
Agreement.
(iii) Hospital understands,agrees and acknowledges that Sheridan has
entered into this Agreement with the expectation that in addition to the
Emergency Services Compensation, Sheridan shall be entitled to bill and collect
from the State of New York the amount of 100 percent (100%) of the Medicaid
allowable fees for the emergency services Sheridan provides to the Hospital's
Medicaid patients pursuant to this Agreement. In the event that there is a
change in circumstances concerning federal or state laws or regulations or other
pronouncements or policies governing the Medicaid reimbursement system which
either limits, substantially delays or precludes Sheridan from receiving
Medicaid fees for services rendered, Hospital agrees, as an inducement to
Sheridan's entering into this Agreement, to restructure the subsidy arrangement
so as to increase the subsidy amount paid to Sheridan by the amount of Medicaid
allowable fees not then paid to Sheridan. Hospital further agrees that
Sheridan's entitlement to the foregoing adjustment shall accrue upon the
effective date of the regulatory change.
6. INDEPENDENT CONTRACTOR.
A. The parties hereto expressly understand and agree that Sheridan and
Hospital are independent contractors, and that no relationship of employer or
employee is created by this Agreement. None of the Physicians or P.A.s
performing services for Sheridan pursuant to this Agreement shall be employees
or contractors of Hospital, and no Physician or P.A. shall have any claim under
this Agreement or otherwise against Hospital for salary, vacation pay, sick
leave, or retirement benefits of any kind. No Sheridan employee or independent
contractor shall be eligible to participate in any benefit program provided by
Hospital for Hospital employees.
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B. PAYMENT OF OBLIGATIONS. Except as set forth in this Agreement, each
party hereto shall be exclusively liable for its own debts, obligations, acts
and omissions, including administrative and corporate expenses, the payment of
any required payroll, fringe benefits, unemployment and workers' compensation
insurance, and the payment of all withholding, Social Security and other taxes
and benefits.
7. ASSIGNMENTS PROHIBITED. Sheridan shall not assign its interest in and
obligations under this Agreement to any entity without the prior written consent
of Hospital, which shall not be unreasonably withheld.
8. TERM OF AGREEMENT. The term of this Agreement shall be from May 31, 1996
until May 30, 1999 (the "Term"). This Agreement may be renewed for three (3)
year terms upon mutual agreement of the parties hereto.
9. TERMINATION. This Agreement may be terminated at any time upon the
occurrence of any one of the following events:
(i) by either party upon the dissolution of the other;
(ii) by either party, upon the other's entrance, either voluntarily or
involuntarily, into any form of bankruptcy, including an assignment for the
benefit of creditors;
(iii) by either party, in the event the other is responsible for revocation
or suspension of any required license or other operating authority, or the
taking of other disciplinary action by an appropriate regulatory authority, for
failure to comply with applicable laws, rules or regulations with respect to
operation of the Department;
(iv) by either party in the event that federal, state or local legal or
administrative requirements adopted subsequent to execution of this Agreement
render this Agreement or any part thereof illegal or otherwise untenable, and
the parties, after good faith negotiation for at least sixty (60) days, are
unable to reach agreement on a way to satisfy such new requirements;
(v) by either party upon a material breach of this Agreement by the other,
where the breaching party fails to cure such breach within sixty (60) days of
the receipt of notice thereof; or
(vi) by both parties upon written agreement;
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(vii) by Hospital, in the event of cancellation of or a material change in
Sheridan's insurance coverage required pursuant to this Agreement;
(viii) by Hospital, in the event of conduct by any Physician or P.A. which,
in the fair and reasonable opinion of Hospital endangers the welfare of any
Hospital patient or is otherwise in violation of the bylaws, rules and
regulations of Hospital or the Medical Staff, where, after written notice from
the Hospital, Sheridan fails to promptly remove such Physician or P.A.from
Hospital premises and from his/her position at Hospital upon written notice by
the Hospital; or,
(ix) by Sheridan, if Hospital fails to make any Emergency Services
Compensation Payments required hereunder within thirty (30) days following the
date on which any payment is due; provided that Sheridan shall provide
reasonable prior notice to Hospital that Sheridan has not received payment so as
to permit Hospital to make such payment prior to the expiration of the thirty
(30) day period.
C. EFFECT OF TERMINATION. Upon termination of this Agreement, neither party
shall have any further obligation, and, except with respect to obligations
accruing prior to the date of termination or provisions herein, which, by their
express terms, survive termination of this Agreement for any reason, Hospital's
obligation to make payments to Sheridan shall cease as of the date of
termination. In the event that this Agreement terminates on or after the first
(1st) day of a month, Hospital's final monthly payment obligation shall be the
pro rata share of that monthly payment. In addition, as noted in Section 5.B
hereof, in the event that this Agreement is terminated for any reason before the
end of the Term or any renewal Terms, Sheridan shall repay to Hospital its
entire initial Two Hundred Sixty-Six Thousand Six Hundred Sixty-Seven Dollar
($266,667.00) initial payment, less any amounts accrued but unpaid amounts owed
by Hospital pursuant to Section 5.B. Both parties agree to cooperate with each
other during the termination process in order to assure continuity of care to
patients being served pursuant to this Agreement.
10. INDEMNIFICATION.
A. Hospital shall indemnify and hold harmless Sheridan, its governing body,
officers, agents, physicians, and employees from and against any and all
liabilities, claims, losses, damages, lawsuits, judgments, and expenses
(including reasonable attorneys' fees) to the extent that they proximately arise
out of any act or omission by Hospital or any of their agents or employees
acting in connection with this Agreement or the provision of services hereunder.
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B. Sheridan shall indemnify and hold harmless the Hospital, its governing
body, and their officers, medical staff, agents and employees from and against
any and all liabilities, claims, losses, lawsuits, judgments and expenses
(including reasonable attorneys' fees) to the extent that they proximately arise
out of any act or omission by Sheridan or any of its Physicians, P.A.s, agents
or employees acting in connection with this Agreement or the provision of
services hereunder.
11. ACCESS TO BOOKS AND RECORDS.
A. Sheridan shall, at all times as Hospital may reasonably request, make
available to the Division Administrator responsible for the Hospital, or his
designee, all of its books and other financial records relating to Sheridan's
performance of services hereunder. Hospital shall have the right to examine and
audit such books and records.
B. To the extent required by applicable law, Sheridan shall make available
to the United States Department of Health and Human Services ("HHS"), the New
York State Health Care Finance Administration, the State of New York, and the
Medicare or Medicaid intermediary, this Agreement and its books, documents and
records necessary to verify the nature and extent of costs of services furnished
hereunder. Sheridan shall maintain and continue to make available all such
books, documents and records for a period of no less than four (4) years after
the services are completed under this Agreement. If Sheridan carries out any of
the duties of the Agreement hereunder through a subcontract having a value or
cost of $10,000 or more over a twelve month period, such subcontract shall
contain a clause to the effect that, until the expiration of four years after
the furnishing of such services pursuant to such subcontract, the subcontractor
shall make available upon written request to the Secretary of HHS or upon
request to the Comptroller General of the United States or any of their duly
authorized representatives, copies of the subcontract necessary to verify the
nature and extent of the costs of such subcontract.
12. COMPLIANCE WITH ALL APPLICABLE LAW.
A. Notwithstanding any other provision in this Agreement, Hospital remains
responsible for ensuring that any service provided pursuant to this Agreement
complies with all pertinent provisions of federal, state and local statutes,
rules and regulations.
B. Sheridan represents that its employees providing services hereunder have
been informed of and trained in the confidentiality and disclosure requirements
of New York statutes and regulations, including those provisions concerning
HIV/AIDS related information, and Sheridan and its employees agree to comply
with such requirements.
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13. SEVERABILITY. If any provision of this Agreement or the application of
any provision hereof to any person or circumstance is held invalid, the
remainder of this Agreement and the application of such provision to other
persons or circumstances shall not be affected unless the invalid provision
substantially impairs the benefits of the remaining portions of this Agreement.
14. NOTICES. All notices hereunder shall be given in writing, by certified
mail, return receipt requested, addressed as hereafter provided, or to such
other addresses or person as either party may designate in writing:
If to Hospital: Wyckoff Heights Medical Center
374 Stockholm Street
Brooklyn, New York 11237
Attention: Division Administrator
With a copy to: Preferred Health Network, Inc.
45th Avenue at Parsons Boulevard
Flushing, New York 11355
Attention: Vice President, Legal Affairs
If to Sheridan: Sheridan Medical Healthcorp, P.C.
4651 Sheridan Street, Suite 400
Hollywood Florida 33021
ATTN: Jay A. Martus, Esq., General Counsel
15. HEADINGS. Paragraph headings are for reference only and shall not be
considered in the construction of this Agreement.
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16. CONSTRUCTION. This Agreement shall be construed without regard to any
presumption or other rule requiring construction against the party causing this
Agreement to be drafted, including any presumption of superior knowledge or
responsibility based upon a party's business or profession or any professional
training, experience, education or degrees of any member, agent, officer or
employee of any party. If any words in this Agreement have been stricken out or
otherwise eliminated (whether or not any other words or phrases have been added)
and the stricken words initialed by the party against whom the words are
construed, then this Agreement shall be construed as if the words so stricken
out or otherwise eliminated were never included in this Agreement and no
implication or inference shall be drawn from the fact that those words were
stricken out or otherwise eliminated.
17. ENTIRE AGREEMENT; NO WAIVER; GOVERNING LAW; VENUE; WAIVER OF TRIAL BY JURY.
This Agreement contains the entire Agreement of the parties and shall not be
amended, waived or modified except in writing, signed by both parties. The
waiver by a party of a breach of any provision of this Agreement shall not
operate or be construed as a waiver of any subsequent breach.
This Agreement shall be governed by the laws of the State of New York. Any
and all proceedings relating to this Agreement and/or the services rendered
hereunder shall be maintained in the courts of the State of New York located in
Kings County, or the federal district courts sitting in Kings County, New York,
which courts shall have exclusive jurisdiction for such purpose. The parties
accept the exclusive personal jurisdiction of such courts for the purpose of any
suit, action or proceeding with respect to this Agreement. In addition, the
parties knowingly, intentionally and irrevocably waive, to the fullest extent
permitted by law, any objection to the laying of venue of any suit, action or
proceeding relating to this Agreement, or any judgment entered by any court
brought in the State of New York, Kings County. The parties knowingly and
intentionally waive any claim that any suit, action or proceeding brought in the
State of New York, Kings County, has been brought in an inconvenient forum. IN
ADDITION, THE PARTIES WAIVE ALL RIGHTS TO
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ANY TRIAL BY JURY IN ALL LITIGATION RELATING TO OR ARISING OUT OF THIS
AGREEMENT.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their duly authorized representative, the day and year first set forth above.
HOSPITAL:
WYCKOFF HEIGHTS MEDICAL CENTER,
a New York not-for-profit corporation
By: __________________________________
Dominic Gio
Division Administrator
SHERIDAN:
SHERIDAN MEDICAL HEALTHCORP, P.C.,
a New York professional corporation
By: __________________________________
Gilbert Drozdow, M.D.
President
EXECUTIVE EMPLOYMENT AGREEMENT
------------------------------
THIS EXECUTIVE EMPLOYMENT AGREEMENT (the "Agreement") dated as of August 9,
1996 (the "Execution Date"), is entered into by and among SHERIDAN HEALTHCORP,
INC., a Florida corporation (the "Company"); SHERIDAN HEALTHCARE, INC., a
Delaware corporation (the "Parent"); and, MICHAEL F. SCHUNDLER (the
"Executive").
PRELIMINARY STATEMENTS
1. The Company is in the business of providing a full range of medical
services to health care facilities, including but not limited to, medical
offices, hospitals and ambulatory surgical centers located in southern Florida,
through physicians and other health care providers duly licensed under the laws
of the State of Florida.
2. Executive has extensive experience in managing the day-to-day
administrative and operational functions of corporations.
3. The Company desires to employ Executive as Chief Operating Officer and
Executive desires to be employed by the Company as its Chief Operating Officer,
on this Agreement's terms and conditions.
4. The Company's Board of Directors, or an appropriate designated committee
of the Board, has duly approved the execution of this Agreement.
In consideration of the parties' mutual promises and covenants contained in
this Agreement, the parties agree as follows:
AGREEMENT
1. EFFECTIVENESS OF AGREEMENT. This Agreement shall become effective as of
July 15, 1996 (the "Commencement Date").
2. EMPLOYMENT. Subject to the provisions contained in this Agreement, the
Company shall employ the Executive as its Chief Operating Officer, and the
Executive agrees that he will be employed as the Chief Operating Officer of the
Company, upon the terms and conditions of this Agreement.
3. TERM OF EMPLOYMENT. Subject to the provisions contained in this
Agreement, the term of the Executive's employment pursuant to this Agreement
shall commence on the Commencement Date and shall expire on June 30, 2001. The
period during which the Executive serves as an executive of the Company in
accordance with and subject to the provisions of this Agreement shall be the
"Term of Employment".
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4. EMPLOYMENT DUTIES.
(a) During the Term of Employment, the Executive shall: (i) serve as
an employee of the Company with the title and responsibilities of Chief
Operating Officer or similar title and responsibilities reasonably determined by
the Board of Directors; (ii) perform all other duties and responsibilities as
may be determined by the Board of Directors of the Company consistent with the
Executive's title and position as an executive officer of the Company; (iii)
upon request of the Board of Directors of the Company, shall serve as an officer
and/or director of the Company, the Parent and any of their subsidiaries and
Affiliates (as defined below); and, (iv) render all services reasonably incident
to the foregoing. The Executive shall report directly to the Company's Chief
Executive Officer. The Executive agrees during his employment under this
Agreement to use his best efforts in, and shall devote his full working time,
attention, skill and energies to the advancement of the interests of the
Company, the Parent and their subsidiaries and Affiliates (as defined below) and
to the performance of his duties and responsibilities under this Agreement.
(b) In performing his duties under this Agreement, the Executive
shall comply with and follow all reasonable policies, standards, rules and
regulations established by the Company from time to time and shall be bound by
and comply with the terms and conditions of other agreements to which the
Company is a party.
(c) In performing his duties under this Agreement, the Executive
agrees not to unlawfully discriminate against anyone on the basis of to race,
color, creed, sex, age, religion or health status.
(d) During and subsequent to the Term of Employment, the Executive
agrees that he shall immediately notify the Company of any and all incidents,
unfavorable occurrences, notices or claims made arising out of his services
during the Term of Employment as soon as he becomes aware of this information
and shall cooperate in any investigation and in the defense of any and all
incidents, unfavorable occurrences, notices and claims.
(d) During and subsequent to the Term of Employment, the Executive
shall assign, account and pay to the Company all accounts receivable,
compensation and any other form of remuneration due from or paid by any source
other than the Company attributable to services he has rendered in his
professional capacity on behalf of the Company, the Parent or any of their
subsidiaries or Affiliates during the Term of Employment or sums which come into
his possession which are attributable to the services of other employees of the
Company, the Parent or any of their subsidiaries or Affiliates, including but
not limited to, fees for medical services, teaching, lecturing, consulting,
research, court testimony and publication of articles of a professional nature
(collectively the "Company Receivables"). Executive appoints the Company as his
or her attorney in fact to execute, deliver and/or endorse checks, applications
for payments, insurance claim forms or other instruments or documents,
convenient or required in the exclusive discretion of the Company to fully
collect, secure and realize all sums due in respect to services provided during
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the Term of Employment. This power of attorney is coupled with an interest, is
irrevocable and shall survive the expiration or termination of this Agreement
for a time period without limitation. All Company Receivables shall be the sole
property of the Company. In no event shall the Executive be entitled to any
portion of the Company Receivables, or the proceeds from Company Receivables,
during the Term of Employment or after the termination of this Agreement,
whether or not Company Receivables may have been derived in any way from the
performance of the Executive pursuant to the terms of this Agreement. Medical
and/or business expense reimbursements received by Executive pursuant to any
formal plan of the Company shall not be considered a Company Receivable for
purposes of this Section.
5. COMPENSATION.
(a) During the Term of Employment, the Company shall pay the
Executive as compensation for the performance of his duties under this
Agreement, a salary at an annual rate of Two Hundred Thousand Dollars
($200,000.00) per annum during the Term of Employment. The salary may be
adjusted annually by the Board of Directors in its discretion to reflect the
market rate for senior executives with skills, experience and responsibilities
comparable to the skills, experience and responsibilities of the Executive in
Southern Florida in the county and municipality in which the Executive works,
provided that any adjustment shall be consistent with the Company's practices
for all of its senior executives as in effect from time to time and the salary
not be lower than Two Hundred Thousand Dollars ($200,000.00) per annum. The
Executive's salary shall be subject to withholding under applicable law and
shall be payable in period installments in accordance with the Company's usual
practice for its senior executives, as in effect from time to time.
(b) The Executive shall be eligible for an annual incentive bonus
determined by the Board of Directors of the Company to reward his contributions
to the ongoing success of the Company.
6. BENEFITS.
(a) During the Term of Employment, the Executive shall be entitled
to participate in or benefit from any and all pension, profit sharing, dental
and/or life insurance plans (collectively, the "Benefits") as may be in effect
from time to time for senior executives of the Company. The Executive's
participation shall be subject to: (i) the terms of the applicable plan
documents; (ii) policies of the Company generally applicable to senior
executives; and, (iii) the discretion of the Board of Directors of the Company
or any administrative or other committee provided for in or contemplated by
those plans, including discretion with respect to creation, maintenance and
continuation of particular benefits, plans and arrangements.
(b) The Company shall promptly reimburse the Executive for all
reasonable business expenses incurred by the Executive during the Term of
Employment in accordance with the Company's practices for senior executives of
the Company, as in effect from time to time.
(c) During the Term of Employment, the Executive shall be entitled
to accrue paid five (5) weeks paid vacation time during each calendar year of
employment under this Agreement and ten (10) paid sick days each calendar year
of employment under this Agreement. Vacation and sick days shall be used within
the calendar year in which they accrue, and vacation time shall only be used at
the times and intervals mutually agreed upon between Executive and the Company.
The Executive shall not be entitled to any additional compensation for any
unused vacation and sick days. For purposes of this Section 6(c), the term
"calendar year" shall mean the one year period commencing on January 1 and
ending on December 31 of each year during the Term of Employment, pro-rated for
partial years.
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7. TERMINATION OF EMPLOYMENT OF THE EXECUTIVE. During the Term of
Employment, this Agreement may be terminated as follows:
(a) At any time by the mutual consent of the Executive and the
Company. Upon termination of this Agreement pursuant to this Section 7(a), all
obligations of the Company under this Agreement shall immediately terminate,
other than those obligations with respect to earned but unpaid salary.
(b) At any time for cause by the Company, upon delivery of written
notice to the Executive. For purposes of this Agreement, a termination shall be
for cause if the Board of Directors of the Company reasonable determines that:
(i) the Executive has committed an act of fraud, embezzlement,
misappropriation or breach of fiduciary duty against the Company or
has been convicted by a court of competent jurisdiction or has plead
guilty or nolo contendere to any felony; or,
(ii) the Executive has committed a material breach of any of the
covenants, terms or provisions of Sections 8, 9, or 11 of this
Agreement; or,
(iii) the Executive has substantially failed to perform his
duties under this Agreement, including by committing a material breach
of any of the covenants, terms or provisions of this Agreement (other
than Sections 8, 9 or 11), which failure or breach has not been
remedied within a reasonable time specified by the Company that is not
less than thirty (30) days after delivery of written notice of that
failure or breach to the Executive by the Company; or,
(iv) the Executive has breached his obligations contained in
Section 12 of this Agreement.
Upon termination for cause as provided in this Section 7(b): (i)
all obligations of the Company under this Agreement shall immediately
terminate, other than those obligations with respect to earned but
unpaid salary; and, (ii) the Company shall have any and all rights and
remedies under this Agreement and applicable law.
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(c) Upon the Executive's death or permanent disability (as
defined below) continuing for a period of one hundred eighty (180)
days. For the purposes of this Agreement, "permanent disability" or
"permanently disabled" is defined as the inability of the Executive,
by reason of injury, illness or similar cause, to perform a major part
of the duties and responsibilities which the Executive had been
performing pursuant to this Agreement prior to the date of disability
in connection with the conduct of the business and affairs of the
Company.
Upon termination in the event of the Executive's death or
permanent disability as provided in this Section 7(c), the rights and
obligations of the parties shall be as described in Section 7(e),
provided that in the case of the Executive's death, any payments shall
be made to the Executive's estate.
(d) At any time by the Executive upon ninety (90) days prior
written notice to the Company. Upon termination of this Agreement
pursuant to this Section 7(d), all obligations of the Company under
this Agreement shall immediately terminate, other than those
obligations with respect to earned but unpaid salary.
(e) At any time without cause (as defined in Section 7(b)) by the
Company upon written notice to the Executive of not less than thirty
(30) days. In the event of termination of the Executive by the Company
pursuant to this Section 7(e), the Company shall: (i) pay the
Executive the Executive's salary according to the terms of Section
5(a) of this Agreement from the date of termination through a date
that is twelve (12) months from the date of termination; and, (ii)
continue the Executive's benefits as provided in Section 6 of this
Agreement from the effective date of termination through a date that
is twelve (12) months from the date of that termination. Payment of
the amounts contemplated by this Section 7(e) is agreed by the parties
to this Agreement to be in full satisfaction and compromise of any
claims arising out of any termination of the Executive's employment
pursuant to this Section 7(e).
(f) Upon written notice by the Executive upon the continuation of
any of the following (without the Executive's written consent) after
written notice by the Executive to the Company and the failure by the
Company to remedy that event within thirty (30) days after receipt of
the notice: (i) the Company has failed to pay the Executive the salary
provided for in Section 5(a); (ii) the Company fails to make available
to the Executive any benefit plan or compensation plan (including any
pension, profit sharing, life insurance, health, accidental death or
dismemberment or disability plan) that has been made available
generally to the senior executives of the Company or reduces the
Benefits to which the Executive is entitled so that they are not at
least equivalent in nature to those Benefits available at that time to
the employees of the Company generally, provided that nothing in this
Section 7(f) shall be construed to mean that the Company shall be
constrained in any manner from amending or eliminating any benefit or
compensation plan as it is applied to the Executive and other senior
executives of the Company generally; (iii) the principal offices of
the Company are moved and the Executive is required to move, in order
to fulfill his duties and obligations under this Agreement, to a
location outside Broward County in the State of Florida; (iv) after an
unrelated third party, either through a merger, stock acquisition or
other business combination in an extraordinary transaction, acquires
and exerts control over the Company or the Parent (a "Change in
Control") in a manner which results in a material change in
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Executive's duties or compensation, and Executive has remained with
the Company at least six (6) months after the Change in Control; or
(v) the Company has substantially failed to perform its obligations
under this Agreement, including by committing a material breach of any
of the covenants, terms or provisions of this Agreement or by
assigning to the Executive duties which significantly differ from
those contemplated by this Agreement, which failure or breach has not
been remedied within a reasonable time specified by the Executive that
is not less than thirty (30) days after delivery of written notice by
the Executive to the Company. The notice of default by the Executive
to the Company in accordance with the foregoing sentence shall specify
the default by the Company and shall specify the Company a reasonable
time, not less than thirty (30) days, to conform its performance to
its obligations under this Agreement. The Executive shall have no
right of termination under this Section 7(f) in the event the relevant
default is cured within the relevant period. The rights and
obligations of the parties to this Agreement shall be as described in
Section 7(e) in the event of any termination.
(g) Upon the expiration of the Term of Employment as described in
Section 3 of this Agreement. Upon any termination as provided in
Section 7(g), all obligations of the Company under this Agreement
shall immediately terminate, other than those obligations with respect
to earned but unpaid salary.
8. NON-COMPETITION.
(a) Except as provided below, during the Term of Employment and
for the Non-Competition Period (as defined below), the Executive shall
not, without the express written consent of the Company, directly or
indirectly, engage in any activity which is, or participate or invest
in or assist (whether as owner, part-owner, stockholder, partner,
director, officer, trustee, employee, agent, independent contractor,
or consultant, or in any other capacity) any Competitive Enterprise
(as defined below), except that the Executive may make passive
investments in a Competitive Enterprise, the shares of which are
publicly traded, if that investment constitutes less than one percent
of the equity of that enterprise. Without implied limitation, the
foregoing covenant shall include hiring or attempting to hire for or
on behalf of any Competitive Enterprise any officer or other employee
of the Company or any Affiliate of the Company, encouraging any
officer or employee to terminate his or her relationship or employment
with the Company or any Affiliate of the Company, soliciting for or on
behalf of any Competitive Enterprise any client or customer of the
Company or any Affiliate of the Company, and diverting to any Person
(as defined below) any client or business opportunity of the Company
or any Affiliate of the Company.
(b) The term "Non-Competition Period" shall mean the period
commencing on the last days of employment pursuant to this Agreement
and ending on the earliest of : (i) the date the Company's Board of
Directors elects in its sole discretion; or, (ii) the first
anniversary of the last day of the Term of Employment.
6
<PAGE>
(c) For purposes of this Section 8, the term "Person" shall mean
an individual, a corporation, an association, a partnership, an
estate, a trust and any other entity or organization. The term
"Affiliate" shall mean, as to any Person: (i) each direct or indirect
subsidiary of that Person; (ii) each other Person of which that Person
is a direct or indirect subsidiary; and, (iii) each other direct or
indirect subsidiary of that other Person. The term "Competitive
Enterprise" shall mean any Persons, the activities, products or
services of which: (i) are competitive with the activities, products
or services of the Company, the Parent, or any of their subsidiaries
or Affiliates; and, (ii) include the: (A) provision of medical
services, including without limitation, the provision of anesthesia
services, pain management services, emergency room services, primary
medical care services and radiology services; (B) provision of
services in the area of managed care, third party payors, provider
networks, IPAs, TPAs, PHOs, MSOs, HMOs, capitation pools, and other
similar arrangements (collectively, the "Payor Services"); or, (C)
provision of administrative services for medical services and Payor
Services, including without limitation, quality assurance services,
utilization management services, billing services, recruitment
services and medical management information services.
(d) In furtherance and not in limitation of the foregoing
restrictions, during the Term of Employment and the Non-Competition
Period, the Executive shall not devote any time to consulting,
lecturing or engaging in other self-employment or employment
activities without the prior written consent of the Company.
9. BUSINESS OPPORTUNITIES. The Executive agrees, while he is employed by
the Company, to offer or otherwise make known or available to the Company, the
Parent, or any of their subsidiaries or Affiliates, as directed by the Company
and without additional compensation or consideration, any business prospects,
contracts or other business opportunities that he may discover, find, develop or
otherwise have available to him in any field in which the Company is engaged,
and further agrees that any prospects, contracts or other business opportunities
shall be the property of the Company.
10. REPRESENTATIONS AND WARRANTIES OF EXECUTIVE.
(a) The Executive represents and warrants to the Company that:
(i) the Executive is able to enter into and perform all duties under
this Agreement; (ii) the Executive is in good physical and mental
health and does not suffer from any illness or disability which could
prevent him from fulfilling his responsibilities under this Agreement;
(iii) the Executive is not a party to or bound by any agreement,
arrangement or understanding that would interfere with, hinder or
conflict with the performance of his duties under this Agreement; and,
(iv) none of the representations or warranties made by Executive in
this Agreement or in any interviews, references, resumes or curricula
vitae submitted to the Company or in any insurance applications or any
other applications submitted to any third party in connection with
this Agreement, contains or will contain any untrue statement of a
material fact, or omits or will omit to state a material fact
necessary in order to make the statements or provisions in this
Agreement not misleading or incomplete.
7
<PAGE>
(b) The Executive agrees to immediately notify the Company of any
fact or circumstance which occurs or is discovered during the Term of
Employment, which in itself or with the passage of time and/or the
combination with other reasonably anticipated factors does render or
will render any of these representations and warranties to be untrue.
11. CONFIDENTIALITY.
(a) The Executive acknowledges that as a result of the Executive's
employment with the Company, the Executive has and will necessarily become
informed of, and have access to, certain valuable and confidential information
of the Company, the Parent and their subsidiaries and Affiliates, including,
without limitation, trade secrets, technical information, plans, lists of
patients, data, records, fee schedules, computer programs, manuals, processes,
methods, intangible rights, contracts, agreements, licenses, personnel
information and the identity of health care providers (collectively, the
"Confidential Information"), and that the Confidential Information, even though
it may be contributed, developed or acquired in whole or in part by Executive,
is the Company's exclusive property to be held by Executive in trust and solely
for the Company's benefit. Accordingly, except as required by law or for the
performance of Executive's duties under this Agreement, the Executive shall not,
at any time, either during or subsequent to the Term of Employment, use, reveal,
report, publish, copy, transcribe, transfer or otherwise disclose to any person,
corporation or other entity, any of the Confidential Information without the
prior written consent of the Company, except to officers and employees of the
Company and other persons who are in a contractual or fiduciary relationship
with the Company and except for information which legally and legitimately is or
becomes of general public knowledge from authorized sources other than the
Executive.
(b) Upon the termination of this Agreement, the Executive shall
promptly deliver to the Company all Company property and possessions, including
all drawings, manuals, letters, notes, notebooks, reports, copies, deliverable
Confidential Information and all other materials relating to the Company's
business which are in the Executive's possession or control.
12. SUBSTANCE ABUSE POLICY. It is the Company's policy (the "Policy") that
none of its employees shall use or abuse any controlled substances at any time
(other than those medications lawfully prescribed by a medical doctor in a
reasonable diagnosis and which do not interfere with the Executive's capacity to
perform his obligations under this Agreement) or be under the influence of
alcohol or be affected by the use of alcohol during the time period required to
perform their duties and obligations under any employment agreements. Company
and Executive both acknowledge and agree that the purpose of this Policy is for
the benefit of the Company, the Executive and the individuals whom they serve.
8
<PAGE>
In compliance with this Policy, Executive agrees to submit to random
drug testing immediately upon the Company's request. Testing may include, but
shall not be limited to, the taking of blood and urine samples and utilization
of gas chromatography. In the event that a positive test result is reached
indicating a violation of the Company's Policy, Executive may, at his own
expense and subject to the supervision and approval of the Company of the manner
and testing facilities utilized, elect to have a second drug test performed, at
a time which is no longer than two days after the initial positive results were
received by the Company and the Executive. The Company may, in its sole and
absolute discretion, terminate Executive for cause pursuant to Section 10(c) of
this Agreement in the event either: (i) a positive test result is received in
the initial drug test and Executive fails to exercise his or her option for a
second test in the manner provided for in this Section; or, (ii) positive test
results are received from both tests. In the event that the second test result
is negative, the Company may, at any time, retest Executive pursuant to the
terms of this Section.
13. SPECIFIC PERFORMANCE; SEVERABILITY. It is specifically understood and
agreed that the event of a breach by the Executive of any of the provisions of
this Agreement (including without limitation, Sections 8, 9 or 12 and the
obligations referred to and incorporated in this Agreement) is likely to result
in irreparable injury to the Company, that the remedy at law alone will be an
inadequate remedy for any breach and in addition to any other remedy it may
have, the Company shall be entitled to enforce the specific performance of this
Agreement by the Executive through both temporary and permanent injunction
relief and through any other appropriate equitable relief, without the necessity
of showing or proving actual damages. If any provision of this Agreement is held
for any reason to be invalid, illegal or unenforceable in any respect, including
without limitation, geographic scope, duration or functional coverage, that
invalidity, illegality or unenforceability shall not affect the validity,
legality and enforceability of any other provision of this Agreement; this
Agreement shall be construed as if that invalid, illegal or unenforceable
provision had been limited or modified (consistent with its general intent) to
the extent necessary to make it valid, legal and enforceable, or if it shall not
be possible to limit or modify the invalid, illegal or unenforceable provision
or part of a provision, then this Agreement shall be construed as if that
invalid, illegal or unenforceable provision or part of a provision had ever been
contained in this Agreement.
14. NOTICES. All notices, requests, demands and other communications under
this Agreement shall be in writing and shall be deemed to have been duly given
if delivered personally or mailed by certified or registered mail, return
receipt requested, addressed as follows:
To the Company: Sheridan Healthcorp, Inc.
4651 Sheridan Street, Suite 400
Hollywood, FL 33021
(954) 987-5822
ATTN: Jay A. Martus, Esq.
Vice President and General Counsel
9
<PAGE>
To the Executive: Mr. Michael F. Schundler
1163 Fairlake Trace
No. 1511
Fort Lauderdale, Florida 33326
15. MISCELLANEOUS.
(a) SURVIVAL. The provisions of Sections 7, 8, 10, 11, 13, and 15
shall survive the termination of this Agreement for a time period
without limitation.
(b) ENTIRE AGREEMENT; Waiver. This Agreement contains the entire
understanding of the parties and merges and supersedes any prior or
contemporaneous agreements between the parties relating to this
Agreement's subject matter. This Agreement may not be modified or
terminated orally, and no modification, termination or attempted
waiver of any of the provisions shall be binding unless in writing and
signed by the party against whom it is sought to be enforced; provided
however, that the Executive's compensation may be increased at any
time by the Company without in any way affecting any of the other
terms and conditions of this Agreement, which in all other respects
shall remain in full force and effect. Failure of a party to enforce
one or more of the provisions of this Agreement or to require at any
time performance of any of the obligations under this Agreement shall
not be construed to be a waiver of any provisions by a party nor to in
any way affect the validity of this Agreement or a party's right to
enforce any provision of this Agreement, nor to preclude a party from
taking any other action at any time which it would legally be entitled
to take.
(c) MERGERS AND CONSOLIDATION; Successors and Assigns. Executive
shall not have the right to assign or delegate this personal service
Agreement, or any of his rights or obligations under this Agreement,
without the Company's consent. The Company may freely assign and
delegate all of its rights and duties under this Agreement. Except as
otherwise provided in Section 7(f)(iv), the parties each agree that
upon the sale of all or substantially all of the assets, business and
goodwill of the Company or all or substantially all of the stock of
the Company to another company or any other entity, or upon the merger
or consolidation of the Company with another company or any other
entity, this Agreement shall inure to the benefit of, and be binding
upon, both Executive and the Company and any entity purchasing the
assets, business, goodwill or stock or surviving merger or
consolidation.
(d) ADDITIONAL ACTS. Executive and the Company each agrees to
execute, acknowledge and deliver all further instruments, agreements
or documents and do all further acts that are necessary or expedient
to carry out this Agreement's intended purposes.
(f) HEADINGS. The headings of the paragraphs of this Agreement
have been inserted for convenience of reference only and shall in no
way restrict or otherwise affect the construction of the terms or
provisions of this Agreement. References in this Agreement to Sections
are to the sections of this Agreement.
10
<PAGE>
(g) CONSTRUCTION. This Agreement shall be construed without
regard to any presumption or other rule requiring construction against
the party causing this Agreement to be drafted, including any
presumption of superior knowledge or responsibility based upon a
party's business or profession or any professional training,
experience, education or degrees of any member, agent, officer or
employee of any party. If any words in this Agreement have been
stricken out or otherwise eliminated (whether or not any other words
or phrases have been added) and the stricken words initialed by the
party against whom the words are construed, this Agreement shall be
construed as if the words so stricken out or otherwise eliminated were
never included in this Agreement and no implication or inference shall
be drawn from the fact that those words were stricken out or otherwise
eliminated.
(h) COUNTERPARTS. This Agreement may be executed in multiple
counterparts, each of which shall be deemed to be an original and all
of which together shall be deemed to be one and the same instrument.
(i) GOVERNING LAW. This Agreement is made and executed and shall
be governed by the laws of the State of Florida, without regard to its
conflicts of laws principles.
(j) NO THIRD PARTY BENEFICIARIES. All obligations of the Company
under this Agreement are imposed solely and exclusively for the
benefit of Executive, and no other person will have standing to
enforce, be entitled to or be deemed to be the beneficiary of any of
these obligations.
(l) LITIGATION; PREVAILING PARTY. In the event of any arbitration
or litigation, including appeals, with regard to this Agreement, the
prevailing party shall be entitled to recover from the non-prevailing
party all reasonable fees, costs, and expenses of counsel (at
pre-trial, trial and appellate levels) for the prevailing party.
16. JURISDICTION; VENUE; INCONVENIENT FORUM; JURY TRIAL. ANY SUIT, ACTION
OR PROCEEDING WITH RESPECT TO THIS AGREEMENT, OR ANY JUDGMENT ENTERED BY ANY
COURT IN RESPECT TO THIS AGREEMENT SHALL BE BROUGHT IN THE COURTS OF THE STATE
OF FLORIDA OR IN THE U.S. DISTRICT COURT FOR THE SOUTHERN DISTRICT OF FLORIDA IN
BROWARD COUNTY, AND THE PARTIES ACCEPT THE EXCLUSIVE PERSONAL JURISDICTION OF
THOSE COURTS FOR THE PURPOSE OF ANY SUIT, ACTION OR PROCEEDING. IN ADDITION, THE
PARTIES KNOWINGLY, INTENTIONALLY AND IRREVOCABLY WAIVE, TO THE FULLEST EXTENT
PERMITTED BY LAW, ANY OBJECTION WHICH THEY MAY NOW OR LATER HAVE TO THE LAYING
OF VENUE OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS
AGREEMENT, OR ANY JUDGMENT ENTERED BY ANY COURT BROUGHT IN THE STATE OF FLORIDA,
AND FURTHER, KNOWINGLY, INTENTIONALLY AND IRREVOCABLY WAIVE ANY CLAIM THAT ANY
SUIT, ACTION OR PROCEEDING BROUGHT IN THE STATE OF FLORIDA HAS BEEN BROUGHT IN
AN INCONVENIENT FORUM. EACH
11
<PAGE>
PARTY WAIVES ALL RIGHTS TO ANY TRIAL BY JURY IN ALL LITIGATION RELATING TO OR
ARISING OUT OF THIS AGREEMENT.
Each of the parties have duly executed this Agreement as of the Execution
Date.
COMPANY:
SHERIDAN HEALTHCORP, INC.,
a Florida corporation
Date: By:
------------------- ---------------------------
Mitchell Eisenberg,President
PARENT:
SHERIDAN HEALTHCARE, INC.,
a Delaware corporation
Date: By:
------------------- ---------------------------
Mitchell Eisenberg,President
EXECUTIVE:
MICHAEL F. SCHUNDLER
Date: By:
------------------- ---------------------------
Michael F. Schundler
<TABLE>
<CAPTION>
Exhibit 11.1
SHERIDAN HEALTHCARE, INC.
Computation of Earnings per Share of Common Stock
(in thousands, except per share amounts)
YEAR ENDED
DECEMBER 31,
-------------------
1996 1995
-------- --------
<S> <C> <C>
Primary Earnings Per Share:
Weighted average shares outstanding.......................................... 6,587 2,713
Dilutive effect of outstanding stock options (1)............................. --- ---
Dilutive effect of convertible securities (1)................................ --- ---
-------- --------
Primary weighted average shares of common stock and
common stock equivalents outstanding....................................... 6,587 2,713
======== ========
Net income (loss) attributable to common stockholders........................ $(12,126) $ (5,044)
Net income (loss) per share - primary........................................ $ (1.84) $ (1.86)
Fully Diluted Earnings Per Share:
Weighted average shares outstanding.......................................... 6,587 2,713
Dilutive effect of outstanding stock options (1)............................. --- ---
Dilutive effect of convertible securities (1)................................ --- ---
-------- --------
Fully diluted weighted average shares of common stock and
common stock equivalents outstanding....................................... 6,587 2,713
======== ========
Net income (loss) attributable to common stockholders........................ $(12,126) $ (5,044)
Net income (loss) per share - fully diluted.................................. $ (1.84) $ (1.86)
<FN>
(1) Stock options and convertible securities are excluded from the earnings per
share computation for both years because they would have the effect of
decreasing the net loss per share.
</FN>
</TABLE>
SHERIDAN HEALTHCARE, INC.
EXHIBIT 21.1
Schedule of Subsidiaries and Affiliates
(As of December 31, 1996)
I. SUBSIDIARIES:
A. SHERIDAN HEALTHCORP, INC., a Florida corporation
SUBSIDIARIES:
1. SHERIDAN HEALTHCARE OF WEST FLORIDA, INC., a Florida corporation
f/k/a AMSA, Inc.
2. PRIMEDICA HEALTHCARE, INC., a Florida corporation
3. AARDS, INC., a Florida corporation f/k/a Norman Gaylis, M.D.,
P.A.
4. ROSENBAUM, WEITZ AND RITTER, INC., a Florida corporation f/k/a
Rosenbaum, Weitz & Ritter, M.D., P.A.
B. MEDISERV,INC.,a Florida corporation f/k/a Group Practice Management,Inc.
C. SHERIDAN CHILDREN'S HEALTHCARE SERVICES, INC.,
a Florida corporation f/k/a Neonatology Certified, Inc.
SUBSIDIARY:
1. SHERIDAN CHILDREN'S HEALTHCARE SERVICES OF WEST VIRGINIA, INC., a
West Virginia corporation
D. CHILDREN'S HOSPITAL SERVICES, INC., a Florida corporation
E. SHERIDAN HEALTHCARE OB/GYN, INC.,
a Florida corporation f/k/a Sheridan Healthcare of Puerto Rico, Inc.
F. SHERIDAN FINANCE CORP., a Delaware corporation
II AFFILIATES:
A. SHERIDAN MEDICAL HEALTHCORP, P.C., a New York professional corporation
SUBSIDIARY:
1. SHERIDAN STC CORP., a Delaware corporation
B. SHERIDAN HEALTHCARE OF TEXAS, P.A., a Texas professional association
C. SHERIDAN HEALTHCARE OF CALIFORNIA MEDICAL GROUP, INC.,
a California professional corporation
D. ARTHRITIS AND RHEUMATIC DISEASE SPECIALTIES, P.A.,
a Florida professional association
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANICAL STATEMENTS OF SHERIDAN HEALTHCARE, INC. FOR THE YEAR ENDED
DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENT.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 19,994
<ALLOWANCES> 1,277
<INVENTORY> 0
<CURRENT-ASSETS> 22,286
<PP&E> 6,367
<DEPRECIATION> 2,637
<TOTAL-ASSETS> 73,408
<CURRENT-LIABILITIES> 13,950
<BONDS> 0
0
0
<COMMON> 67
<OTHER-SE> 35,891
<TOTAL-LIABILITY-AND-EQUITY> 73,408
<SALES> 0
<TOTAL-REVENUES> 92,767
<CGS> 0
<TOTAL-COSTS> 66,125
<OTHER-EXPENSES> 32,402
<LOSS-PROVISION> 3,605
<INTEREST-EXPENSE> 2,572
<INCOME-PRETAX> (11,937)
<INCOME-TAX> 189
<INCOME-CONTINUING> (12,126)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,126)
<EPS-PRIMARY> (1.84)
<EPS-DILUTED> (1.84)
</TABLE>
