UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1997
[ ] 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)
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
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of outstanding shares of the issuer's classes of common
stock as of the latest practicable date.
As of November 1, 1997, there were 6,417,998 shares of the Registrant's voting
Common Stock, $.01 par value, outstanding and 296,638 shares of the Registrant's
non-voting Class A Common Stock, $.01 par value, outstanding.
<PAGE>
Part I: Financial Information
Item 1: Financial Statements
<TABLE>
SHERIDAN HEALTHCARE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents..................................................... $ 286 $ ---
Accounts receivable, net of allowances........................................ 21,530 18,717
Income tax refunds receivable................................................. --- 570
Deferred income taxes......................................................... 2,946 1,154
Other current assets.......................................................... 2,046 1,845
------------- -------------
Total current assets........................................................ 26,808 22,286
Property and equipment, net of accumulated depreciation.......................... 3,423 3,730
Goodwill, net of accumulated amortization........................................ 52,550 46,111
Intangible assets, net of accumulated amortization............................... 1,554 1,281
------------- -------------
Total assets.............................................................. $ 84,335 $ 73,408
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................................. $ 210 $ 222
Amounts due for acquisitions.................................................. 565 558
Accrued salaries and benefits................................................. 1,965 2,798
Self-insurance accruals....................................................... 3,926 3,170
Refunds payable............................................................... 2,603 1,952
Accrued lease obligations..................................................... 543 971
Other accrued expenses........................................................ 4,092 3,090
Current portion of long-term debt............................................. 443 1,189
------------- -------------
Total current liabilities................................................... 14,347 13,950
Long-term debt................................................................... 28,546 21,367
Amounts due for acquisitions..................................................... 1,730 2,133
Stockholders' equity:
Preferred stock, par value $.01; 5,000 shares authorized, none issued......... --- ---
Common stock, par value $.01; 21,000 shares authorized:
Voting; 6,418 shares issued and outstanding................................. 64 64
Class A non-voting; 297 shares issued and outstanding...................... 3 3
Additional paid-in capital.................................................... 61,129 61,129
Excess purchase price distributed to management stockholders.................. (7,541) (7,541)
Retained earnings (deficit)................................................... (13,943) (17,697)
------------- -------------
Total stockholders' equity ................................................. 39,712 35,958
------------- -------------
Total liabilities and stockholders' equity................................ $ 84,335 $ 73,408
============= =============
</TABLE>
See accompanying notes.
2
<PAGE>
<TABLE>
SHERIDAN HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<CAPTION>
Three Months Ended
September 30,
-----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Net revenue of consolidated and unconsolidated physician practices............... $ 25,308 $ 25,141
Less - amounts retained by unconsolidated practices.............................. 1,045 272
------------- -------------
Net revenue of the Company....................................................... 24,263 24,869
Operating expenses:
Direct facility expenses...................................................... 16,891 17,748
Provision for bad debts....................................................... 975 990
Salaries and benefits......................................................... 1,821 1,870
General and administrative.................................................... 1,246 1,097
Amortization.................................................................. 494 708
Depreciation.................................................................. 150 299
------------- -------------
Total operating expenses.................................................... 21,577 22,712
------------- -------------
Operating income................................................................. 2,686 2,157
Interest expense................................................................. 595 710
------------- -------------
Income before income taxes....................................................... 2,091 1,447
Income tax expense............................................................... 757 720
------------- -------------
Net income....................................................................... $ 1,334 $ 727
============= ============
Net income per share............................................................. $ .19 $ .11
Weighted average shares of common stock and
common stock equivalents outstanding.......................................... 7,111 6,808
</TABLE>
See accompanying notes.
3
<PAGE>
<TABLE>
SHERIDAN HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<CAPTION>
Nine Months Ended
September 30,
-----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Net revenue of consolidated and unconsolidated physician practices............... $ 73,231 $ 68,710
Less - amounts retained by unconsolidated practices.............................. 2,334 787
------------- -------------
Net revenue of the Company....................................................... 70,897 67,923
Operating expenses:
Direct facility expenses...................................................... 49,376 48,830
Provision for bad debts....................................................... 2,850 2,580
Salaries and benefits......................................................... 5,544 5,104
General and administrative.................................................... 3,655 3,199
Amortization.................................................................. 1,406 1,897
Depreciation.................................................................. 446 783
------------- -------------
Total operating expenses.................................................... 63,277 62,393
------------- -------------
Operating income................................................................. 7,620 5,530
Interest expense................................................................. 1,779 1,914
------------- -------------
Income before income taxes....................................................... 5,841 3,616
Income tax expense............................................................... 2,087 920
------------- -------------
Net income....................................................................... $ 3,754 2,696
============= =============
Net income per share............................................................. $ .54 $ .41
Weighted average shares of common stock and
common stock equivalents outstanding.......................................... 6,969 6,648
</TABLE>
See accompanying notes.
4
<PAGE>
<TABLE>
SHERIDAN HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<CAPTION>
Nine Months Ended
September 30,
-----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income.................................................................... $ 3,754 $ 2,696
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization................................................................ 1,406 1,897
Depreciation................................................................ 446 783
Provision for bad debts..................................................... 2,850 2,580
Deferred income taxes....................................................... (621) ---
Changes in operating assets and liabilities:
Accounts receivable......................................................... (6,654) (5,813)
Other current assets........................................................ (902) (1,430)
Other assets................................................................ (469) ---
Accounts payable............................................................ (12) (513)
Other accrued expenses...................................................... 267 326
------------- -------------
Net cash provided by operating activities................................. 65 526
------------- -------------
Cash flows from investing activities:
Acquisitions of physician practices........................................... (396) (12,361)
Investment in management agreements........................................... (8,596) ---
Sale of physician practices................................................... 3,282 ---
Capital expenditures.......................................................... (573) (1,086)
------------- -------------
Net cash (used) in investing activities................................... (6,283) (13,447)
------------- -------------
Cash flows from financing activities:
Borrowings on long-term debt.................................................. 7,605 15,036
Payments on long-term debt.................................................... (1,101) (1,385)
------------- -------------
Net cash provided by financing activities................................. 6,504 13,651
------------- -------------
Increase in cash and cash equivalents............................................ 286 730
Cash and cash equivalents:
Beginning of period........................................................... --- ---
------------- -------------
End of period................................................................. $ 286 $ 730
============= =============
</TABLE>
See accompanying notes.
5
<PAGE>
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(unaudited)
(1) BASIS OF PRESENTATION
---------------------
The interim consolidated financial statements have been prepared without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission
(SEC). Certain information and footnote disclosures, normally included in
financial statements prepared in accordance with generally accepted accounting
principles, have been condensed or omitted pursuant to SEC rules and
regulations; nevertheless, management believes that the disclosures herein are
adequate to make the information presented not misleading. These consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1996. In the opinion of management,
all adjustments, consisting only of normal recurring adjustments, necessary to
fairly present the consolidated financial position of the Company at September
30, 1997, and the consolidated results of its operations and its consolidated
cash flows for the periods shown in the interim consolidated financial
statements, have been included herein. The results of operations for the interim
periods are not necessarily indicative of the results for the full years.
(2) GOODWILL
--------
Approximately $28.8 million of the total amount of goodwill, net of accumulated
amortization, at September 30, 1997 is related to the Company's acquisition of
Sheridan Healthcorp, Inc. (the "Predecessor") in November 1994. 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.
The remaining $23.8 million of the total amount of goodwill at September 30,
1997 is related to several acquisitions of physician practices, and investments
in management agreements with physician practices, which were completed from
September 1994 to September 1997, some of which are included in the transactions
discussed in Note 6 below. Such goodwill represents the general reputation of
the practices in the communities they serve, the collective experience of the
management and other employees of certain practices in managing health care
services delivered under capitated arrangements, contracts with third-party
payors, relationships between the physicians and their patients, patient lists,
and other similar intangible assets.
(3) INTANGIBLE ASSETS
-----------------
Intangible assets consist primarily of the physician employee workforce,
non-physician employee workforce, management team and computer software acquired
in the Company's acquisition of the Predecessor and deferred loan costs.
(4) AMOUNTS DUE FOR ACQUISITIONS
----------------------------
Amounts due for acquisitions includes obligations to the former stockholders of
certain office-based physician practices acquired by the Company, which are
being paid 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.
6
<PAGE>
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(5) NET REVENUE
-----------
Since the beginning of 1996, the Company has entered into several long-term
management agreements with physician practices. Under the management agreements,
the Company recognizes net revenue equal to the management fees received from
the practices. Effective for the period ended June 30, 1997, the Company began
presenting the total net revenue of all of its owned and managed physician
practices and the net revenue of the Company after deducting amounts retained by
the managed practices in its results of operations, as shown on the accompanying
consolidated statements of operations. The Company's management believes that
this data provides readers with additional useful information about its
operations.
(6) ACQUISITIONS AND DIVESTITURES
-----------------------------
During the period from January to October 1996, the Company made six
acquisitions of physician practices for an aggregate of $12.4 million in cash
and deferred payments and approximately 658,000 shares of the Company's common
stock. During the period from March 1997 to September 1997, the Company also
entered into long-term management agreements with four physician practices, in
connection with which it acquired certain assets from the practices, and options
to acquire the practices, for aggregate consideration of $8.6 million in cash.
These acquisitions and management agreements were accounted for as purchases,
and accordingly, the operations of each acquired practice, or the operations
under each management agreement, are included in the Company's consolidated
financial statements beginning on each respective date of acquisition, or the
effective date of the management agreement, as applicable. In each transaction,
the purchase price was allocated to the net assets acquired based on their
estimated fair market values.
The following table summarizes the pro forma consolidated results of operations
of the Company as though all of the transactions 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 transactions 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>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
(in thousands, except per share data)
Pro Forma Results of Operations:
<S> <C> <C> <C> <C>
Net revenue of the Company................ $ 24,525 $ 26,295 $ 73,195 $ 75,940
Income before income taxes................ 2,122 1,588 6,062 4,318
Net income................................ 1,349 782 3,843 2,987
Net income per share...................... .19 .11 .55 .44
</TABLE>
During the period from December 1996 to April 1997, the Company sold two primary
care practices and two rheumatology practices which had generated an aggregate
of $8.4 million of net revenue during the year ended December 31, 1996.
7
<PAGE>
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(7) LONG-TERM DEBT
--------------
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
Revolving credit facility, maturing in March 2000,
secured by substantially all assets of the Company.................... $ 27,600 $ ---
Revolving credit facility, maturing in February 1997,
secured by substantially all assets of the Company.................... --- 19,982
Capital lease obligations payable in various monthly
installments, maturing at various dates through 2001.................. 1,389 1,809
Note payable, maturing in January 1997.................................. --- 765
------------- ------------
Total................................................................ 28,989 22,556
Less current portion.................................................... (443) (1,189)
------------- ------------
Long-term debt...................................................... $ 28,546 $ 21,367
============= ============
</TABLE>
On March 12, 1997, the Company established a new $35 million revolving credit
facility, which was used to pay the outstanding balance under the previous
credit facility. 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 was
in compliance with the loan covenants in the new credit facility as of September
30, 1997. The additional amount that could be borrowed under the credit facility
is potentially restricted by a leverage ratio defined in the credit agreement.
Based on the value of this leverage ratio at September 30, 1997, the Company had
the ability to borrow the entire unused portion of the credit facility, which
was $7.4 million at September 30, 1997.
(8) INCOME TAXES
------------
The Company's income tax expense was reduced by a loss carryforward from the
prior year for the three months and nine months ended September 30, 1997 and the
nine months ended September 30, 1996. Without the loss carryforwards, income tax
expense for the three months ended September 30, 1997 would have been
approximately $970,000, and income tax expense for the nine months ended
September 30, 1997 and 1996 would have been approximately $2.7 million and $1.8
million. The Company had an unused loss carryforward of approximately $550,000
for book purposes as of September 30, 1997. The tax effect of the loss
carryforward from 1996 is being allocated evenly among all four quarters in the
year ending December 31, 1997. The Company had net deferred tax assets at
September 30, 1997, which represent the tax effect of differences between the
tax basis and the financial reporting basis of assets and liabilities on the
Company's balance sheet.
(9) 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 continue to vigorously defend against it.
8
<PAGE>
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(10) NET INCOME PER SHARE
--------------------
Net income per share reflected in the accompanying consolidated statements of
operations represents both primary earnings per share and fully diluted earnings
per share, which are substantially the same for the Company. In February 1997,
the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings Per Share," ("SFAS 128"), which is
effective for fiscal years ending after December 15, 1997. SFAS 128 simplifies
the calculation of earnings per share and provides for the reporting of basic
earnings per share and diluted earnings per share. Application of SFAS 128 to
the accompanying consolidated financial statements would not have a material
impact on the Company's earnings per share.
(11) STOCKHOLDERS' EQUITY
--------------------
In May 1997, the Company decreased the amount of its authorized common stock
from 31,000,000 shares to 21,000,000 shares, which is retroactively reflected in
the accompanying consolidated balance sheets.
(12) 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.
Stock option activity during the nine months ended September 30, 1997 was as
follows:
<TABLE>
<CAPTION>
Weighted
Average
Number Exercise
of Shares Price
------------ ------------
<S> <C> <C>
Balance, December 31, 1996................................................. 553,911 $ 5.73
Granted during period...................................................... 471,500 9.27
Forfeited during period.................................................... (6,975) 5.83
----------- ------------
Balance, September 30, 1997................................................ 1,018,436 $ 7.37
=========== ============
</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>
Nine Months
Ended
September 30, 1997
------------------
(in thousands,
except per
share data)
<S> <C>
Pro forma results of operations:
Net income....................................................................... $ 2,675
Net income per share............................................................. .38
</TABLE>
9
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
This Form 10-Q 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, emergency services and obstetrics, and
which owns and operates, or manages, office-based primary care and obstetrical
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 increased the number of
physicians affiliated with it from approximately 145 at December 31, 1995 to
approximately 225 at September 30, 1997 through several acquisitions of
physician practices, several long-term management agreements with physician
practices, and the addition of several new contracts for specialist physician
services. The Company made several acquisitions of physician practices and
entered into several long-term management agreements with physician practices,
during the period from January 1, 1996 to September 30, 1997, as described in
Note 6 to the accompanying consolidated financial statements. These transactions
were accounted for as purchases and accordingly, the operations of each acquired
practice, or the operations under each management agreement, are included in the
Company's consolidated financial statements beginning on each respective date of
acquisition, or the effective date of the management agreement, as applicable.
The Company also sold certain physician practices during the period from
December 1996 to April 1997, as described in Note 6 to the accompanying
consolidated financial statements.
RESULTS OF OPERATIONS
The following table shows certain statement of operations data expressed as
percentage of net revenue:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1997 1996 1997 1996
------- ------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Net revenue of the Company........................... 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Direct facility expenses........................ 69.6 71.4 69.6 71.9
Provision for bad debts......................... 4.0 4.0 4.0 3.8
Salaries and benefits........................... 7.5 7.5 7.8 7.5
General and administrative...................... 5.1 4.4 5.2 4.7
Amortization.................................... 2.0 2.9 2.0 2.8
Depreciation.................................... 0.6 1.2 0.6 1.2
--------- --------- --------- --------
Total operating expenses................... 88.8 91.4 89.2 91.9
--------- --------- --------- --------
Operating income..................................... 11.2% 8.6% 10.8% 8.1%
========= ========= ========= ========
</TABLE>
10
<PAGE>
Three Months Ended September 30, 1997 Compared to Three Months Ended
September 30, 1996
Net revenue was $24.3 million in 1997 compared to $24.9 million in 1996, a
decrease of $600,000 or 2.4%. Net revenue from hospital-based services increased
by $300,000, from $17.6 million in 1996 to $17.9 million in 1997. This increase
was primarily due to the addition of several new contracts for hospital-based
services during the past year. Net revenue from office-based practices decreased
$900,000, from $7.3 million in 1996 to $6.4 million in 1997, primarily due to
the sale of two primary care practices and two rheumatology practices during the
period from December 1996 to April 1997.
Direct facility expenses decreased $857,000, or 4.8%, from $17.7 million in 1996
to $16.9 million in 1997. 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 decrease in direct facility expenses was partially due to the 2.4%
decrease in net revenue as noted above. Direct facility expenses as a percentage
of net revenue ("direct facility expense percentage") decreased from 71.4% in
1996 to 69.6% in 1997. The decrease in the direct facility expense percentage
reflects a favorable shift in the percentage of the Company's total net revenue
that is derived from hospital-based services, from 70.7% in 1996 to 73.8% in
1997. The Company's hospital-based operations have historically had a lower
direct facility expense percentage than its office-based operations.
The provision for bad debts decreased $15,000, or 1.5%, from $990,000 in 1996 to
$975,000 in 1997. This decrease was primarily due to a 2.4% decrease in net
revenue, as discussed above. As a percentage of net revenue, the provision for
bad debts was unchanged from 1996 to 1997.
Salaries and benefits decreased $49,000, or 2.6%, from $1.9 million in 1996 to
$1.8 million in 1997. Salaries and benefits includes salaries, payroll taxes and
employee benefits related to employees located at the Company's central office,
including employees related to hospital-based operations, office-based
operations and general corporate functions. The decrease in salaries and
benefits was primarily due to a non-recurring reduction in employee benefits. As
a percentage of net revenue, salaries and benefits were unchanged at 7.5% in
1996 and 1997.
General and administrative expense increased $149,000, or 13.6%, from $1.1
million in 1996 to $1.2 million in 1997. General and administrative expense
includes expenses incurred at the Company's central office, including office
expenses, accounting and legal fees, insurance, travel and other similar
expenses. The increase in general and administrative expense was primarily due
to an increase in legal fees due to the litigation discussed in Note 9 to the
accompanying consolidated financial statements. As a percentage of net revenue,
general and administrative expense increased from 4.4% in 1996 to 5.1% in 1997.
Amortization expense decreased $214,000, or 30.2%, from $708,000 in 1996 to
$494,000 in 1997. This decrease was primarily due to a decrease in amortization
expense related to goodwill and intangible assets that were written down to
their estimated realizable values during the fourth quarter of 1996, which was
partially offset by amortization of the goodwill related to several acquisitions
of physician practices, and management agreements with physician practices,
completed from July 1996 to September 1997, which are included in the
transactions discussed in Note 6 to the accompanying consolidated financial
statements.
Operating income increased $529,000, or 24.5%, from $2.2 million in 1996 to $2.7
million in 1997. This increase was primarily due to a decrease in the direct
facility expense percentage from 71.4% in 1996 to 69.6% in 1997, which was
primarily due to a favorable shift in the Company's mix of hospital-based and
office-based operations, as discussed above.
11
<PAGE>
Nine Months Ended September 30, 1997 Compared to Nine Months Ended
September 30, 1996
Net revenue increased $3.0 million, or 4.4%, from $67.9 million in 1996 to $70.9
million in 1997. Net revenue from hospital-based services increased by $5.8
million, from $46.3 million in 1996 to $52.1 million in 1997. This increase was
primarily due to the acquisition of a 43-physician hospital-based neonatology
and pediatric practice in March 1996, and the addition of several new contracts
for hospital-based services during the past year. Net revenue from office-based
practices decreased $2.8 million, from $21.6 million in 1996 to $18.8 million in
1997, primarily due to the sale of two primary care practices and two
rheumatology practices during the period from December 1996 to April 1997.
Direct facility expenses increased $546,000, or 1.1%, from $48.8 million in 1996
to $49.4 million in 1997. The increase in direct facility expenses was primarily
due to a 4.4% increase in net revenue, as noted above. The direct facility
expense percentage decreased from 71.9% in 1996 to 69.6% in 1997, primarily due
to an increase in the percentage of the Company's total net revenue that is
derived from hospital-based services, from 68.2% in 1996 to 73.5% in 1997. The
Company's hospital-based operations have historically had a lower direct
facility expense percentage than its office-based operations.
The provision for bad debts increased $270,000, or 10.5%, from $2.6 million in
1996 to $2.9 million in 1997. This increase was primarily due to a 4.4% increase
in net revenue, as discussed above. As a percentage of net revenue, the
provision for bad debts increased from 3.8% in 1996 to 4.0% in 1997. This
increase was primarily due to an increase in the percentage of the Company's
total net revenue that is derived from hospital-based services, which typically
have a higher bad debt expense as a percentage of net revenue than the Company's
office-based operations.
Salaries and benefits increased $440,000, or 8.6%, from $5.1 million in 1996 to
$5.5 million in 1997. The increase in salaries and benefits was primarily due to
employees added to various corporate functions to support future growth of the
Company, to additional employees to support the new contracts for hospital-based
services noted above and salaries and benefits related to a 43-physician
hospital-based neonatology and pediatric practice acquired in March 1996. As a
percentage of net revenue, salaries and benefits increased from 7.5% in 1996 to
7.8% in 1997, primarily due to the increases noted above.
General and administrative expense increased $456,000, or 14.3%, from $3.2
million in 1996 to $3.7 million in 1997. The increase in general and
administrative expense was primarily due to an increase in legal fees due to the
litigation discussed in Note 9 to the accompanying consolidated financial
statements, and increases in various 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 increased from 4.7% in 1996 to 5.2%
in 1997.
Amortization expense decreased $491,000, or 25.9%, from $1.9 million in 1996 to
$1.4 million in 1997. This decrease was primarily due to a decrease in
amortization expense related to goodwill and intangible assets that were written
down to their estimated realizable values during the fourth quarter of 1996,
which was partially offset by amortization of the goodwill related to several
acquisitions of physician practices, and management agreements with physician
practices, completed from July 1996 to September 1997, which are included in the
transactions discussed in Note 6 to the accompanying consolidated financial
statements.
Operating income increased $2.1 million, or 37.8%, from $5.5 million in 1996 to
$7.6 million in 1997. This increase was primarily due to a decrease in the
direct facility expense percentage from 71.9% in 1996 to 69.6% in 1997, which
was primarily due to a favorable shift in the Company's mix of hospital-based
and office-based operations, as discussed above and the acquisition of a
hospital-based neonatology practice completed in March 1996.
12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal uses of cash during the nine months ended September 30,
1997 were to finance investments in management agreements with physician
practices ($8.6 million) and to finance increases in accounts receivable ($3.8
million). The Company met its cash needs during this period primarily through
the sale of certain physician practices ($3.3 million), its net income plus
non-cash expenses (amortization, depreciation and deferred income taxes) ($5.0
million), and net borrowings on long-term debt ($6.5 million).
On March 12, 1997, the Company established a new $35 million revolving credit
facility with NationsBank, National Association (South) ("NationsBank"). The new
credit facility matures on March 11, 2000 and 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
November 1, 1997, the applicable margin was 1.63%. The Company was in compliance
with the loan covenants in the new credit facility as of September 30, 1997.
There are no principal payments due under the credit facility until the maturity
date of March 11, 2000.
The outstanding balance under the credit facility increased from $20.0 million
at December 31, 1996 to $27.6 million at September 30, 1997 primarily due to
investments in management agreements in 1997, as discussed above. The amount
that can be borrowed under the new credit facility is potentially restricted by
a leverage ratio defined in the credit agreement. Based on the value of this
leverage ratio at September 30, 1997, the Company had the ability to borrow the
entire unused portion of the credit facility, which was $7.4 million at
September 30, 1997. 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 or investments in management agreements.
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 or investments in management agreements.
In March 1996, the Company issued approximately 658,000 shares of its common
stock as partial consideration for an acquisition of a hospital-based
neonatology practice completed in March 1996, which is included in the
acquisitions discussed in Note 6 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 issue equity or debt securities,
depending on market and other conditions. As of November 14, 1997, the Company
is negotiating with NationsBank to increase the size of the existing $35 million
credit facility in order to finance investments in management agreements planned
by the Company. There can be no assurance that such additional financing will be
available on terms acceptable to the Company.
Nine Months Ended September 30, 1997 Compared to Nine Months Ended
September 30, 1996
Net cash provided by operating activities decreased from $526,000 in 1996 to
$65,000 in 1997. This decrease of $461,000 was due to several factors, the
largest of which was $621,000 of cash used for a deferred income tax benefit in
1997, compared to none used in 1996.
Net cash used by investing activities decreased from $13.4 million in 1996 to
$6.3 million in 1997. This decrease was primarily due to a decrease in cash used
for physician practice acquisitions and investments in management agreements
from $12.4 million in 1996 to $9.0 million in 1997, and proceeds of $3.3 million
from the sale of physician practices in 1997.
Net cash provided by financing activities decreased from $13.7 million in 1996
to $6.5 million in 1997. This decrease was primarily due to a decrease in net
borrowings under the Company's revolving credit facility from $15.0 million in
1996 to $7.6 million in 1997, which is related to the decrease in cash used for
physician practice acquisitions and investments in management agreements, and
proceeds from the sale of physician practices, as discussed above.
13
<PAGE>
PART II. OTHER INFORMATION
-----------------
Item 1: Legal Proceedings
From time to time, the Company is party to various claims,
suits, and complaints. Currently, there are no such claims,
suits or complaints which, in the opinion of management, would
have a material adverse effect on the Company's financial
position, liquidity or results of operations.
Item 6: Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report:
Exhibit
Number Description
- ------- -----------
11.1 Statement regarding computation of per share earnings.
27 Financial Data Schedule (for SEC use only).
(b) No reports on Form 8-K have been filed during the
quarter for which this report is filed.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Sheridan Healthcare, Inc.
(Registrant)
Date: November 14, 1997 By: /s/ Michael F. Schundler
------------------------------ ------------------------
Michael F. Schundler
Chief Financial Officer
(principal financial officer)
15
<PAGE>
<TABLE>
<CAPTION>
Exhibit 11.1
SHERIDAN HEALTHCARE, INC.
Computation of Earnings per Share of Common Stock
(in thousands, except per share amounts)
Three Months Ended
September 30,
--------------------------
1997 1996
----------- -----------
Primary Earnings Per Share:
- --------------------------
<S> <C> <C>
Weighted average shares outstanding............................................ 6,715 6,702
Dilutive effect of outstanding stock options................................... 396 106
----------- -----------
Primary weighted average shares of common stock and
common stock equivalents outstanding........................................ 7,111 6,808
=========== ===========
Net income..................................................................... $ 1,334 $ 727
Net income per share - primary................................................. $ .19 $ .11
Fully Diluted Earnings Per Share:
- --------------------------------
Weighted average shares outstanding............................................ 6,715 6,702
Dilutive effect of outstanding stock options................................... 448 106
----------- -----------
Fully diluted weighted average shares of common stock and
common stock equivalents outstanding........................................ 7,163 6,808
=========== ===========
Net income..................................................................... $ 1,334 $ 727
Net income per share - fully diluted........................................... $ .19 $ .11
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Exhibit 11.1
SHERIDAN HEALTHCARE, INC.
Computation of Earnings per Share of Common Stock
(in thousands, except per share amounts)
Nine Months Ended
September 30,
--------------------------
1997 1996
----------- -----------
Primary Earnings Per Share:
- --------------------------
<S> <C> <C>
Weighted average shares outstanding............................................ 6,715 6,540
Dilutive effect of outstanding stock options................................... 254 108
----------- -----------
Primary weighted average shares of common stock and
common stock equivalents outstanding........................................ 6,969 6,648
=========== ===========
Net income..................................................................... $ 3,754 $ 2,696
Net income per share - primary................................................. $ .54 $ .41
Fully Diluted Earnings Per Share:
- --------------------------------
Weighted average shares outstanding............................................ 6,715 6,540
Dilutive effect of outstanding stock options................................... 399 108
----------- -----------
Fully diluted weighted average shares of common stock and
common stock equivalents outstanding........................................ 7,114 6,648
=========== ===========
Net income..................................................................... $ 3,754 $ 2,696
Net income per share - fully diluted........................................... $ .53 $ .41
</TABLE>
17
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FIANNACIAL INFORMATIN EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SHERIDAN HEALTHCARE, INC. FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 56,332
<ALLOWANCES> 34,802
<INVENTORY> 0
<CURRENT-ASSETS> 26,808
<PP&E> 5,581
<DEPRECIATION> 2,158
<TOTAL-ASSETS> 84,335
<CURRENT-LIABILITIES> 14,347
<BONDS> 0
0
0
<COMMON> 67
<OTHER-SE> 39,645
<TOTAL-LIABILITY-AND-EQUITY> 84,335
<SALES> 0
<TOTAL-REVENUES> 70,897
<CGS> 0
<TOTAL-COSTS> 49,376
<OTHER-EXPENSES> 11,051
<LOSS-PROVISION> 2,850
<INTEREST-EXPENSE> 1,779
<INCOME-PRETAX> 5,841
<INCOME-TAX> 2,087
<INCOME-CONTINUING> 3,754
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,754
<EPS-PRIMARY> .54
<EPS-DILUTED> .53
</TABLE>
