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, 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)
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 $51.4 million as of March 16, 1998. 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 16,
1998, as reported on the NASDAQ National Market.
As of March 16, 1998, there were 6,508,752 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 to be held on May 14, 1998 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 and
manages practices which provide specialist physician services at hospitals and
ambulatory surgical facilities in the areas of anesthesia, neonatology,
pediatrics, obstetrics and emergency services and owns and operates, or manages,
office-based obstetrical, general surgical, gynecologic-oncology, pain
management, perinatology and primary care 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 networks providing women's
and children's healthcare services, consisting of both hospital-based and
office-based physicians in various complementary specialties that support the
Company's hospital customers. As of March 12, 1998, the Company employed, or
managed the practices of, approximately 246 physicians practicing under 52
specialty service contracts with 35 health care facilities and at 26 office
locations.
OPERATIONS
HOSPITAL-BASED PHYSICIAN SERVICES. The Company currently provides or
manages hospital-based physician services at 24 hospitals and 11 ambulatory
surgery facilities located in Florida, New York, Texas, Virginia, West Virginia,
Ohio and Pennsylvania. These services are provided by approximately 189
physicians who are employed by the Company or whose practices are managed by the
Company, of which 95 are anesthesiologists, 49 are neonatologists or
pediatricians, three are in-house obstetricians and 42 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.
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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.
Since its inception, and unlike many of its competitors, the Company and
its managed practices have directly employed most of its hospital-based
specialist physicians and other health care professionals. The Company and the
practices it manages currently have 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 and its managed
practices also employ 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. The Company further
expanded the scope of its hospital-based services to include neonatology and
pediatrics in 1996 and hospital obstetrics in 1997. The Company has expanded its
hospital-based services business by being awarded new contracts for its services
and through the acquisition of hospital-based practices. 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. In December 1997 the Company further expanded
its involvement with the provision of neonatology services through the execution
of a long-term management agreement with a two-physician neonatology practice
providing services at three hospitals in Ohio. In January and February 1998, the
Company executed long-term management agreements with two anesthesia practices
providing specialist physician services to two hospitals and five ambulatory
surgical facilities located in Florida. These two practices collectively
employed 19 physicians.
OFFICE-BASED PHYSICIAN SERVICES. The Company currently employs, or manages
the practices of, approximately 57 office-based physicians, of which 22 are
obstetricians, 31 are primary care physicians, two are perinatologists and two
are general surgeons. The practices of these physicians are conducted at 26
office locations, all of which are in Florida and Texas. 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.
The Company's primary focus in its office-based services division is the
development of its owned and managed obstetrical, surgical and perinatology
practices and acquisition or management of additional practices which provide
women's health services. Office-based practices, with a focus on women's health
services, complement the Company's hospital-based services division by providing
opportunities for the integration of neonatology and anesthesia services
utilized by patients served by these practices.
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 and entered into two long-term management agreements.
During the period from March 1997 to November 1997 the Company entered into five
long-term management agreements with four obstetrical practices and one surgical
practice that focused on women's health services. During February 1998 and March
1998 the Company executed three long-term management agreements with a pain
management practice, a gynecologic-oncology practice and a perinatology
practice. The pain management and gynecologic-oncology practices are located in
Florida, the perinatology practice is located in Texas. Substantially all of the
Company's office-based revenue has been derived from the acquired physician
practices and the ten management agreements.
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In November 1996, the Company announced its intent to sell non-strategic
office-based physician practices in connection with a change in its strategic
direction. The Company sold one primary care office location in December 1996
and one in February 1997, four rheumatology office locations in April 1997 and
one primary care location in December 1997. The remaining practices to be sold
have been consolidated from five office locations into three office locations,
which employ five primary care physicians. In addition, the Company terminated a
long-term management agreement with a primary care practice entered into during
1996 that included two office locations and one physician.
The Company and the practices it manages have 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.
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. Concurrent with the execution of a management agreement the
Company may purchase 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. In addition, the
Company may also purchase an option to acquire the outstanding stock of the
physician practice by paying the owner of the practice a multiple of expected
earnings under the management agreement. The practice will typically be required
to enter into long term employment agreements with the physicians of the
practice which typically range from five to seven years and typically provide
for base compensation and employee benefits and may contain incentive
compensation provisions based on increases in productivity and efficiency.
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 is in the process of selling certain of its office-based physician
practices. The remaining practices to be 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 1997,
approximately $21.8 million, or 22.1%, was derived from anesthesia, obstetrics
and neonatology services delivered at three hospitals owned and operated by the
South Broward Hospital District. In addition, approximately $21.8 million, or
22.2% of the Company's total net revenue in 1997, was derived from anesthesia,
neonatology, pediatric and emergency services delivered at 11 hospitals and two
ambulatory surgical facilities owned and operated by Columbia/HCA Healthcare
Corp. In addition, approximately $11.7 million, or 11.9% of the Company's total
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net revenue in 1997, was derived from anesthesia, neonatology, pediatric,
emergency and management services delivered at seven hospitals owned and
operated by Tenet Healthcare Corporation.
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 1997, the Company derived total net revenue of approximately $14.1
million from Humana and its affiliates, which accounted for 14.3% 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.
The Company is currently modifying its internal information systems to
comply with the change to the year 2000. The Company does not anticipate that
the future cost of modifying its information systems for compliance with the
year 2000 requirements will have a material adverse financial impact on the
Company.
The office-based practices owned and managed by the Company utilize
information systems for billing and collections which vary depending on the size
and medical specialty of the practice. These systems are primarily supported
through contractual arrangements with third party vendors.
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 that may be exercised 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 one 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 Sheridan
Children's Healthcare Services of Pennsylvania, P.C. ("Sheridan PA"). Each of
these affiliates is owned by Gilbert Drozdow, M.D., who is an executive officer
and a stockholder of the Company. The Company also has management agreements
with four obstetrical practices, a general surgery practice and a neonatology
practice entered into during 1997 and a pain management practice, anesthesia
practice, gynecologic-oncology practice and perinatology practice entered into
during 1998. Concurrent with the execution of these management agreements the
Company also purchased an option to acquire the outstanding stock of these
practices. These practices 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 net practice earnings, 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. The
Company typically requires managed practices to enter into employment agreements
with the physician owners of the practices it manages. These employment
agreements provide for compensation based on a guaranteed base salary, a
percentage of net practice revenue or a percentage of net practice earnings from
the physician's provision of professional services. These agreements are
typically for terms of five to seven years, contain non-competition provisions
and may provide for incentive compensation. Those practices whose management
agreements include terms that demonstrate a controlling financial interest by
the Company for accounting purposes are included in the Company's consolidated
financial statements, and the related management fees are eliminated. Factors
which demonstrate a controlling financial interest include the fluctuation of
the Company's management fee together with the performance of the practice and
the exercise of control by the Company over the administrative operations,
recruitment and physician compensation of the practice. See Note 1(b) to the
Company's consolidated financial statements for more information.
The Company and the practices it manages have 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
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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 15.8% of the Company's total net revenue in
1997 was derived from the assignment of Medicare and Medicaid benefits to the
Company by patients of the Company's affiliated physicians. In addition,
approximately 7.9% of the Company's total net revenue in 1997 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.
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 Sheridan PA, 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 Sheridan PA, 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.
The federal government has 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. 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. 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." While the Company believes it is in
compliance with the Stark legislation, there can be no assurance this is the
case. 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 does not believe
these regulations will have a material effect on the Company's current
operations, including its contractual arrangements with its physicians and
prepaid health plans.
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
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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.
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."
9
<PAGE>
EMPLOYEES
As of March 12, 1998, the Company had approximately 770 employees,
substantially all of whom were full-time. Of the total number of employees,
approximately 250 were physicians and approximately 520 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 $180,000. The Company currently leases approximately 34,000 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 $53,000 (adjusted for certain operating expenses). The Company
also leases office space for its physician practices under leases with remaining
terms which expire at various dates from 1998 to 2007, and monthly rental
payments ranging from $1,200 to $14,000. In addition, the Company owns a 3,000
square foot one-story building in Miami, Florida. The Company considers its
facilities to be adequate and suitable for its current needs.
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,
stockholders 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 Company's 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 continues 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>
1998(1) 1997 1996
-------------------- -------------------- -------------------
High Low High Low High Low
<S> <C> <C> <C> <C> <C> <C>
First Quarter.................. 15 1/2 12 3/4 10 1/16 5 5/8 13 8 1/4
Second Quarter................. --- --- 11 1/4 7 11 3/4 7 3/8
Third Quarter.................. --- --- 13 5/8 10 1/8 10 1/4 8
Fourth Quarter................. --- --- 16 1/2 12 1/4 8 3/4 4 5/8
<FN>
(1) Through March 16, 1998.
</FN>
</TABLE>
10
<PAGE>
On March 16, 1998, the closing sale price of the Company's common stock was
$15.31. As of March 6, 1998, there were approximately 964 holders of the common
stock of the Company, including 64 holders of record. As of March 16, 1998,
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.
During the fourth quarter of 1997, the Company issued approximately 14,000
shares of its Common Stock as partial consideration for the acquisition of an
office-based physician practice. No underwriters or underwriting discounts or
commissions were involved. There was no public offering in such transaction, and
the Company believes that this transaction was exempt from the registration
requirements of the Securities Act of 1933, as amended, by reason of Section
4(2) thereof, based on the private nature of the transaction and the financial
sophistication of the purchasers, each of whom had access to complete
information concerning the Company and acquired the securities for investment
and not with a view to the distribution thereof.
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 year
ended December 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, 1996 and
1997 and for the period from November 29, 1994 to December 31, 1994 and the
years ended December 31, 1995, 1996 and 1997 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
November 29, January 1, Year
Year Ended Year Ended 1994 to 1994 to Ended
December 31,
---------------------------- December 31, December 31, November 28, December 31,
Statement of Operations 1997 1996 1995 1994 1994 1994 1993
-------- --------- --------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Data (in thousands):
Net revenue........................ $ 98,616 $ 92,767 $ 64,665 $ 38,624 $ 5,129 $ 33,495 $ 29,891
Operating expenses:
Direct facility expenses........ 68,919 66,125 47,477 26,531 4,089 22,442 19,971
Provision for bad debts......... 4,066 3,605 2,324 1,909 159 1,750 1,742
Salaries and benefits........... 7,424 6,967 5,398 3,127 452 2,675 2,495
General and administrative...... 4,900 4,561 3,976 2,581 297 2,284 1,666
Write-down of office-based
net assets --- 17,360 --- --- --- --- ---
Physician stockholders' payroll in
excess of base salary (1)..... --- --- --- 1,949 --- 1,949 3,644
Loss on dissolution of subsidiary --- --- --- --- --- --- 886
Transaction costs............... --- --- --- 372 372 --- ---
Amortization.................... 2,096 2,491 2,630 270 173 97 ---
Depreciation.................... 689 1,023 559 177 65 112 44
-------- --------- --------- ----------- ----------- ----------- --------------
Operating income (loss)............ 10,522 (9,365) 2,301 1,708 (478) 2,186 (557)
Interest expense, net.............. 2,461 2,572 4,254 634 341 293 ---
Other expense...................... --- --- --- --- --- --- 227
-------- --------- --------- ----------- ----------- ----------- --------------
Income (loss) before income
taxes and extraordinary item.... 8,061 (11,937) (1,953) 1,074 (819) 1,893 (784)
Income tax expense (benefit)....... 2,894 189 (456) 460 (177) 637 (303)
-------- --------- -------- ----------- ---------- ----------- --------------
Income (loss) before
extraordinary item 5,167 (12,126) (1,497) 614 (642) 1,256 (481)
Extraordinary item................. --- --- (2,184) --- --- --- ---
-------- --------- -------- ----------- ---------- ----------- --------------
Net income (loss)............... $ 5,167 $ (12,126)$ (3,681) $ 614 $ (642) $ 1,256 $ (481)
======== ========= ======== =========== ========== =========== ==============
Income (loss) before extraordinary item
per share....................... $ 0.77 $ (1.84)$ (1.05) $ (.36)
Net income (loss) per share:
Basic........................... 0.77 (1.84) (1.86) (.36)
Diluted......................... 0.73 (1.84) (1.86) (.36)
Company Predecssor
----------------------------------------------------- --------------
December 31,
----------------------------------------------------- December 31,
1997 1996 1995 1994 1993
-------- --------- --------- ----------- --------------
Balance Sheet Data (in thousands):
Working capital ................... $ 13,650 $ 8,336 $ 4,299 $ 1,338 $ 1,659
Total assets....................... 87,035 73,408 64,373 54,127 8,356
Long-term debt, net................ 29,833 21,367 11,365 30,581 101
Stockholders' equity............... 41,350 35,958 42,669 13,261 130
<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, the loss of significant hospital or
third-party payor relationships, the ability to recruit and retain qualified
physicians, and changes in the number of patients using the Company's physician
services.
GENERAL
The Company is a physician practice management company which provides, and
manages practices which provide, specialist physician services at hospitals and
ambulatory surgical facilities in the areas of anesthesia, neonatology,
obstetrics, pediatrics and emergency services and owns and operates, or manages,
office-based obstetrical and primary care practices. The Company derives
substantially all of its revenue from the medical services provided by the
physicians who are employed by the Company or the practices 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 November 1997, the Predecessor and
the Company completed several transactions with practices specializing in
primary care, obstetrics and rheumatology at an aggregate cost of $37.3 million
in cash and stock. These office-based practices accounted for substantially all
of the Company's office-based revenue during the four years ended December 31,
1997. 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. In December 1997,
the Company entered into a twenty-year management agreement with a
hospital-based neonatology practice at a cost of $435,000. Transactions with
acquired physician practices were accounted for as purchases. Transactions with
managed physician practices whose agreements with the Company have terms that
demonstrate a controlling financial interest by the Company were also accounted
for as purchases. The operations of acquired and managed practices whose
transactions are accounted for as purchases are included in the Company's
financial statements beginning on each respective transaction date. During the
year ended December 31, 1997, 71.3% of the Company's net revenue was derived
from specialist physician services delivered at hospitals and ambulatory
surgical facilities, and the remaining 28.7% 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.
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
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
13
<PAGE>
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 cost of approximately $8.2 million
in cash and deferred payments. From January 1, 1997 to November 4, 1997 the
Company entered into long-term management agreements with, and purchased options
to acquire, four obstetrical practices and one general surgical practice at an
aggregate cost of approximately $11 million in cash and stock. The Company's
consolidated financial statements include the operations of these practices.
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(j) to the Company's consolidated financial
statements for more information.
As discussed above under "Operations -- Office-based Physician Services,"
the Company sold two office-based primary care practice locations in December
1996 and February 1997, respectively, and sold two rheumatology practices with
four locations in April 1997 and intends to sell three other practice locations.
The Company also terminated a management agreement with an office-based primary
care practice with two locations in December 1997 that was entered into in
November 1996. 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, a
three-facility primary care practice acquired in June 1995 and two rheumatology
practices acquired in 1996.
Under shared-risk capitation arrangements, which accounted for
approximately 7.8% of the Company's net revenue in 1997, 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.
In order to effectively manage the Company's growth generated by the
acquisition of physician practices the Company made significant investments in
personnel, computer equipment, computer software and other infrastructure costs.
These investments resulted in significant increases in salaries and benefits,
general and administrative expenses, and capital expenditures during 1996 and
1995, compared to prior years.
As a result of the 1994 Acquisition and several transactions with physician
practices completed 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, 1997,
the Company's total assets were approximately $87.0 million, of which
approximately $54.2 million, or 62.2%, was goodwill. Of the total goodwill at
December 31, 1997, $28.6 million is related to the 1994 Acquisition, and $25.6
million is related to several acquisitions of physician practices completed by
the Predecessor and the Company.
14
<PAGE>
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 goodwill related to the acquisition of options to acquire physician
practices and the simultaneous execution of management agreements with the
practices represents the going concern value of those management agreements.
This goodwill is being amortized over the terms of the management agreements
which range from 20 to 40 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 in 1996 discussed above, which resulted primarily from
the Company's change in strategic direction.
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,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Net revenue............................................. 100.0% 100.0% 100.0%
Operating expenses:
Direct facility expenses............................. 69.9 71.3 73.4
Provision for bad debts.............................. 4.1 3.9 3.6
Salaries and benefits................................ 7.5 7.5 8.3
General and administrative........................... 5.0 4.9 6.1
Write-down of office-based net assets................ --- 18.7 ---
Amortization......................................... 2.1 2.7 4.1
Depreciation......................................... .7 1.1 0.9
----------- ----------- -----------
Total operating expenses.......................... 89.3 110.1 96.4
----------- ----------- -----------
Operating income (loss)................................. 10.7% (10.1)% 3.6%
============ ============ ===========
</TABLE>
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net revenue increased $5.8 million, or 6.3%, from $92.8 million in 1996 to
$98.6 million in 1997. Net revenue from hospital-based services increased $6.6
million, from $63.9 million in 1996 to $70.5 million in 1997. Of this increase,
$3.9 million was due to growth from existing contracts and the addition of new
contracts for hospital-based services, and $2.7 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 decreased $800,000, from
$28.9 million in 1996 to $28.1 million in 1997. This decrease was due to the
sale of two primary care practices and two rheumatology practices during the
period from December 1996 to April 1997, offset by acquisitions which occurred
throughout 1997, as described in Note 2 to the accompanying consolidated
financial statements.
15
<PAGE>
Direct facility expenses increased $2.8 million, or 4.2%, from $66.1
million in 1996 to $68.9 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 increase in direct facility expenses was primarily due
to the acquisition of a hospital-based neonatology and pediatrics practice in
March 1996 and the growth in new and existing contracts for hospital-based
services, as discussed in the preceding paragraph offset by a decline in direct
facility expenses associated with the practices sold. As a percentage of net
revenue, direct facility expenses decreased from 71.3% in 1996 to 69.9% in 1997.
The decrease of the direct facility expense percentage is due to a shift in the
Company's revenue in its office-based services from shared risk capitation to
fee-for-service. The Company's practices that generate revenue on a
fee-for-service basis have had lower direct facility expenses associated with
their operation.
The provision for bad debts increased $461,000, or 12.8%, from $3.6 million
in 1996 to $4.1 million in 1997. This increase was due to a 6.3% increase in net
revenue, as discussed above, and an additional allowance for bad debts
associated with the office-based practices sold or held for sale. As a
percentage of net revenue, the provision for bad debts increased slightly from
3.9% in 1996 to 4.1% in 1997.
Salaries and benefits increased $457,000, or 6.6%, from $7.0 million in
1996 to $7.4 million in 1997. This increase was attributable to the Company's
hiring of personnel necessary to support the growth that occurred in the
Company's hospital-based services. As a percentage of net revenue, salaries and
benefits was constant from 1996 to 1997 at 7.5%.
General and administrative expense increased $339,000, or 7.4%, from $4.6
million in 1996 to $4.9 million in 1997. The increase in general and
administrative expenses was primarily due to an increase in legal fees due to
the litigation discussed in Note 7 to the accompanying consolidated financial
statements, 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 increased slightly from 4.9% in
1996 to 5.0% in 1997.
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(j) to the accompanying consolidated financial
statements for more information.
Amortization expense decreased $395,000, or 15.9%, from $2.5 million in
1996 to $2.1 million in 1997. This decrease was 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, and
the sale of four office-based practices during 1997, partially offset by several
acquisitions of physician practices during 1997.
Operating income increased from an operating loss of $9.4 million in 1996
to operating income of $10.5 million in 1997. The increase was primarily due to
the $17.4 million write-down discussed above. Excluding this write-down,
operating income increased from $8.0 million in 1996 to $10.5 million in 1997,
an increase of $2.5 million or 31.3%. This increase in operating income is due
to the acquisition of a hospital-based neonatology and pediatrics practice in
March 1996 as discussed above, improved operating performance in 1997 from the
Company's office-based practices and a decrease in amortization expense, as
discussed above.
Interest expense decreased from $2.6 million in 1996 to $2.5 million in
1997. This decrease was primarily due to a lower interest rate on the revolving
credit facility established in March 1997 as compared to the previous credit
facility.
16
<PAGE>
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.
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.
17
<PAGE>
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.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997 the Company had $13.7 million in working capital, up
from $8.3 million as of December 31, 1996. At December 31, 1997, net accounts
receivable of $21.6 million amounted to 80 days of net revenue compared to $18.7
million and 74 days at December 31, 1996. This increase is attributable to
growth in fee-for service revenue and a decline in revenue from shared-risk
capitation which has no associated accounts receivable.
On March 12, 1997, the Company established a new $35 million revolving
credit facility with NationsBank, National Association ("NationsBank"), which
was used to repay the outstanding balance under the previous facility, which was
$25.2 million. On December 17, 1997, the Company amended its existing revolving
credit facility with NationsBank, which increased the total revolving credit
commitment from $35 million to $50 million. The 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 12, 1998, the applicable margin was 1.88%. The Company is
also required to pay a commitment fee on a quarterly basis based on the unused
portion of the total commitment. The fee ranges from 0.25% to 0.50% and is
subject to quarterly adjustments based on a leverage ratio defined in the credit
agreement. There are no principal payments due under the new credit facility
until the maturity date of December 16, 2000.
The amount that can be borrowed under the credit facility is restricted by
a leverage ratio defined in the credit agreement. The outstanding balance under
the credit facilities increased from $20.0 million at December 31, 1996 to $29.0
million at December 31, 1997, primarily due to several acquisitions of physician
practices completed during 1997. The outstanding balance increased from $29.0
million at December 31, 1997 to $47.5 million at March 12, 1998, due to the
acquisition of four physician practices from January through March 1998. Based
on the value of the leverage ratio as of March 12, 1998, the Company had
additional borrowing availability of $2.4 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's principal uses of cash during the year ended December 31,
1997 were to finance acquisitions of physician practices ($11.0 million), to
make payments on long-term debt ($1.1 million), and to finance increases in
accounts receivable ($3.9 million). The $3.9 million increase in accounts
receivable was due to new contracts for hospital-based services added during the
year ended December 31, 1997 and an increase in accounts receivable associated
with the Company's shift from shared risk capitation revenue to fee-for-service
revenue in its office-based practices. The Company met its cash needs during
this period primarily through borrowings under its revolving credit facility
with NationsBank ($8.9 million) proceeds from the sale of two primary care
practices and two rheumatology practices ($3.4 million) and its net income,
excluding non-cash expenses (amortization and depreciation) ($7.9 million).
18
<PAGE>
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 November 1997, the Company issued
approximately 14,000 shares of common stock as partial consideration for an
acquisition of an office-based physician practice. During the period from
January 1998 through March 1998 the Company issued approximately 1,384,000
shares of common stock as partial consideration for the acquisition of four
practices.
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. The Company is currently
negotiating with a syndicate of banks lead by NationsBank to increase the total
revolving credit commitment from $50 million to $65 million. There can be no
assurance that such additional financing will be available on terms acceptable
to the Company.
Net cash provided by operating activities was $5.3 million in 1996 compared
to $1.1 million of cash provided by operating activities in 1997. The decrease
in cash provided by operating activities is due to an increase in amounts paid
for income taxes during 1997, an increase in accounts receivable related to an
increase in fee-for-service revenue and an increase in other current assets.
Net cash used by investing activities decreased from $14.8 million in 1996
to $8.5 million in 1997, primarily due to an decrease in cash used for physician
practice acquisitions from $13.7 million in 1996 to $11.0 million in 1997 and
the cash generated from the sale of two primary care practices and two
rheumatology practices. Cash used for capital expenditures decreased from $1.2
million to $934,000 primarily due to the termination in 1996 of the Company's
development of an integrated management information system for its office-based
operations.
Net cash provided by financing activities decreased from $9.6 million in
1996 to $7.8 million in 1997. Net borrowings on long-term debt decreased from
$14.0 million in 1996 to $8.9 million in 1997. The net borrowings were used
primarily to finance acquisitions in 1997.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 129, "Disclosures of Information about
Capital Structure", ("SFAS No. 129") which is effective for fiscal years ending
after December 15, 1997. SFAS No. 129 requires disclosing information about an
entity's capital structure. The impact of adopting SFAS No. 129 in 1997 was
immaterial.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income", ("SFAS
No. 130"), which is required to be adopted in fiscal 1998. This statement
established standards to reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. This statement
requires that an enterprise (a) classify items of other comprehensive income by
their nature in financial statements and (b) display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of statements of financial position.
Comprehensive income is defined as the change in equity during the financial
reporting period of a business enterprise resulting from non-owner sources. The
Company currently does not have other comprehensive income and therefore does
not believe the adoption of SFAS No. 130 will have a significant impact on its
financial statement presentation.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information", ("SFAS No. 131"), which is required to be
adopted in fiscal 1998. This statement requires that a public business
enterprise report financial and descriptive information about its reportable
operating segments including, among other things, a measure of segment profit or
loss, certain specific revenue and expense items, and segment assets. The
Company does not believe the adoption of SFAS No. 131 will have a significant
impact on its financial statement presentation.
19
<PAGE>
Item 8. Financial Statements and Supplementary Data
<TABLE>
Index to Financial Statements
<CAPTION>
Page
<S> <C>
Report of Independent Certified Public Accountants............................. 21
Consolidated Balance Sheets as of December 31, 1997 and 1996................... 22
Consolidated Statements of Operations for the Years ended December 31,
1997, 1996 and 1995.......................................................... 23
Consolidated Statements of Stockholders' Equity for the Years ended
December 31, 1997, 1996 and 1995............................................. 24
Consolidated Statements of Cash Flows for the Years ended December 31,
1997, 1996 and 1995.......................................................... 25
Notes to Consolidated Financial Statements..................................... 26-40
</TABLE>
20
<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,
1997 and 1996, and the related consolidated statements of operations,
stockholders' equity and cash flow for each of the three years ended
December 31, 1997. 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Miami, Florida,
February 23, 1998 (except the matter discussed in Note 10, as to which the
date is March 12, 1998).
21
<PAGE>
<TABLE>
SHERIDAN HEALTHCARE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<CAPTION>
December 31,
------------------------
1997 1996
---------- -----------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents.......................................................... $ 427 $ ---
Accounts receivable, less allowances of $1,828 and $1,277.......................... 21,588 18,717
Income tax refunds receivable...................................................... 1,280 570
Deferred income taxes.............................................................. 1,417 1,154
Other current assets............................................................... 2,814 1,845
---------- -----------
Total current assets............................................................. 27,526 22,286
Property and equipment, net of accumulated depreciation of $2,950 and $2,637.......... 3,538 3,730
Goodwill, net of accumulated amortization of $15,798 and $17,756...................... 54,168 46,111
Other intangible assets, net of accumulated amortization of $1,712 and $1,942......... 1,803 1,281
---------- -----------
Total assets..................................................................... $ 87,035 $ 73,408
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................... $ 591 $ 222
Amounts due for acquisitions....................................................... 527 558
Accrued salaries and benefits...................................................... 2,686 2,798
Self-insurance accruals............................................................ 3,973 3,170
Refunds payable.................................................................... 2,674 1,952
Accrued lease obligations.......................................................... 338 971
Accrued physician incentives....................................................... 744 659
Other accrued expenses............................................................. 1,897 2,431
Current portion of long-term debt.................................................. 446 1,189
---------- -----------
Total current liabilities........................................................ 13,876 13,950
Long-term debt, net of current portion................................................ 29,833 21,367
Amounts due for acquisitions.......................................................... 1,976 2,133
Commitments and contingencies (Note 7)
Stockholders' equity:
Preferred stock, par value $.01; 5,000 shares authorized; none issued.............. --- ---
Common stock, par value $.01; 21,000 shares authorized in 1997,
31,000 shares authorized in 1996:
Voting; 6,509 and 6,418 shares issued and outstanding............................ 66 64
Class A non-voting; 297 shares issued and outstanding............................ 3 3
Additional paid-in capital......................................................... 61,352 61,129
Excess purchase price distributed to management stockholders....................... (7,541) (7,541)
Accumulated deficit................................................................ (12,530) (17,697)
---------- -----------
Total stockholders' equity ...................................................... 41,350 35,958
---------- -----------
Total liabilities and stockholders' equity....................................... $ 87,035 $ 73,408
========== ===========
</TABLE>
See accompanying notes.
22
<PAGE>
<TABLE>
SHERIDAN HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<CAPTION>
Year Ended December 31,
--------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Net revenue.............................................................. $ 98,616 $ 92,767 $ 64,665
Operating expenses:
Direct facility expenses.............................................. 68,919 66,125 47,477
Provision for bad debts............................................... 4,066 3,605 2,324
Salaries and benefits................................................. 7,424 6,967 5,398
General and administrative............................................ 4,900 4,561 3,976
Write-down of office-based net assets................................. --- 17,360 ---
Amortization.......................................................... 2,096 2,491 2,630
Depreciation.......................................................... 689 1,023 559
----------- ----------- -----------
Total operating expenses............................................ 88,094 102,132 62,364
----------- ----------- -----------
Operating income (loss).................................................. 10,522 (9,365) 2,301
Interest expense, net.................................................... 2,461 2,572 4,254
----------- ----------- -----------
Income (loss) before income taxes and extraordinary item................. 8,061 (11,937) (1,953)
Income tax expense (benefit)............................................. 2,894 189 (456)
----------- ------------ -----------
Income (loss) before extraordinary item.................................. 5,167 (12,126) (1,497)
Extraordinary item (Note 1(k))........................................... --- --- (2,184)
----------- ----------- -----------
Net income (loss)........................................................ $ 5,167 $ (12,126) $ (3,681)
=========== =========== ===========
Dividends on convertible preferred stock................................. 1,363
-----------
Net loss attributable to common stockholders............................. $ (5,044)
===========
Income (loss) before extraordinary item per share........................
Basic............................................................... 0.77 (1.84) (1.05)
Diluted............................................................. 0.73 (1.84) (1.05)
Net income (loss) per share
Basic............................................................... 0.77 (1.84) (1.86)
Diluted............................................................. 0.73 (1.84) (1.86)
Weighted average shares of common stock
and common stock equivalents outstanding
Basic............................................................... 6,722 6,587 2,713
Diluted............................................................. 7,035 6,587 2,713
</TABLE>
See accompanying notes.
23
<PAGE>
<TABLE>
SHERIDAN HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<CAPTION>
Excess
Purchase
Convertible Preferred Stock Price
Voting Class A ------------------------------- Distributed
Common Stock Common Stock Class A Class B Additional to
------------- -------------- --------------- --------------- Paid-in Subscriptions ManagementAccumulated
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>
Balance,
January 1, 1995 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
Issuance of common
stock upon exercise
of employee stock
options .......... 77 1 --- --- --- --- --- --- 53 --- --- --- 54
Issuance of common
stock in
acquisition . 14 1 --- --- --- --- --- --- 170 --- --- --- 171
Net income.. ... --- --- --- --- --- --- --- --- --- --- --- 5,167 5,167
------- ------- ------- ------- ----- ------- ------- ------- ------- ------- ------- --------- --------
Balance,
December 31,
1997 6,509 $ 66 297 $ 3 --- $ --- --- $ --- $61,352 $ --- $ (7,541) $ (12,530) $ 41,350
====== ======= ======= ====== ======= ======= ======= ======== ======= ======= ======== ========= ========
</TABLE>
See accompanying notes.
24
<PAGE>
<TABLE>
SHERIDAN HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<CAPTION>
Year Ended December 31,
-------------------------------------
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)....................................................... $ 5,167 $ (12,126) $ (3,681)
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities:
Write-down of office-based net assets................................. --- 17,360 ---
Amortization.......................................................... 2,096 2,491 2,630
Depreciation.......................................................... 689 1,023 559
Provision for bad debts............................................... 4,066 3,605 2,324
Net interest amortization on subordinated debt........................ --- --- 425
Deferred income taxes................................................. (263) (1,154) (167)
Changes in operating assets and liabilities:
Accounts receivable................................................... (7,997) (7,076) (5,214)
Income tax refunds receivable......................................... (710) 190 (760)
Other current assets.................................................. (1,125) (486) 17
Other assets.......................................................... (655) 207 ---
Accounts payable and accrued expenses................................. (215) 1,229 349
----------- ----------- -----------
Net cash provided (used) by operating activities...................... 1,053 5,263 (3,518)
Cash flows from investing activities:
Acquisitions of physician practices..................................... (10,867) (12,517) (7,419)
Investments in management agreements.................................... (62) (1,245) ---
Sale of physician practices............................................. 3,388 193 ---
Capital expenditures.................................................... (934) (1,245) (471)
----------- ------------ ----------
Net cash used by investing activities................................. (8,475) (14,814) (7,890)
Cash flows from financing activities:
Borrowings on long-term debt............................................ 9,005 13,997 15,465
Issuance of convertible promissory note................................. --- --- 5,000
Payments on long-term debt.............................................. (1,210) (4,438) (39,282)
Issuance of common stock in public offering............................. --- --- 44,840
Redemption of redeemable preferred stock................................ --- --- (16,071)
Dividends on convertible preferred stock................................ --- --- (1,363)
Collection of subscriptions receivable.................................. --- --- 238
Exercise of employee stock options...................................... 54 --- ---
Treasury shares purchased and retired................................... --- (8) ---
----------- ----------- -----------
Net cash provided by financing activities............................. 7,849 9,551 8,827
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents........................... 427 --- (2,581)
Cash and cash equivalents, beginning of period............................. --- --- 2,581
----------- ----------- -----------
Cash and cash equivalents, end of period................................... $ 427 $ --- $ ---
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid for interest..................................................... $ 2,338 $ 2,588 $ 3,779
Cash paid for income taxes................................................. 3,867 2,110 1,971
Capital leases entered into................................................ --- --- 1,887
</TABLE>
See accompanying notes.
25
<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 the accompanying balance sheets and
was not allocated to the net assets acquired. As a result of the allocation,
$31.2 million of the purchase price was allocated to goodwill.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its majority owned subsidiaries and other entities in which the Company has
more than 50% ownership interest or a controlling financial interest.
In November 1997, the Emerging Issues Task Force ("EITF") reached a
consensus on when a physician practice management company ("PPM") has
established a controlling financial interest in a physician practice through a
contractual management service agreement ("MSA"). A controlling financial
interest must exist in order for a PPM to consolidate the operations of an
affiliated physician practice. The consensus is addressed in EITF Issue 97-2,
"Application of Physician Practice Entities".
A controlling financial interest exists between a PPM and an affiliated
physician practice if all of the following six requirements are met; (i) the MSA
has a term that is either the entire remaining legal life of the physician
practice entity or a period of 10 years or more; (ii) the MSA is not terminable
by the physician practice except in the case of gross negligence, fraud or other
illegal acts by the PPM or bankruptcy of the PPM; (iii) the PPM has exclusive
authority over all decision making relating to ongoing major or central
operations of the physician practice, except for the dispensing of medical
services; (iv) the PPM has exclusive authority over all decision making related
to total practice compensation of the licensed medical professionals as well as
the ability to establish and implement guidelines for the selection, hiring and
firing of them; (v) the PPM must have a significant financial interest that is
unilaterally salable or transferable by the PPM; and (vi) the PPM must have a
significant financial interest that provides it with the right to receive
income, both as on-going fees and as proceeds from the sale of its interest in
the physician practice, in an amount that fluctuates based on the performance of
the operations (a net profit interest) of the physician practice and the change
in the fair value thereof.
The Company is following the above controlling financial interest
provisions of EITF Issue 97-2 in its determination of whether the operations of
an affiliated physician practice qualify for consolidation.
26
<PAGE>
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(c) 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.
(d) Accounts Receivable and Net Revenue
The Company derives 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 its revenues
net of 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 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.
(e) Charity Care
The Company has 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 in the accompanying
financial statements.
(f) Goodwill
Approximately $28.6 million of the total amount of goodwill, net of
accumulated amortization, at December 31, 1997, 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.
27
<PAGE>
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Approximately $14.7 million of the total amount of goodwill, net of
accumulated amortization, at December 31, 1997, is related to several
acquisitions of physician practices by the Company and its Predecessor.
Approximately $10.9 million of the total amount of goodwill, net of accumulated
amortization at December 31, 1997 is related to several management agreements
entered into by the Company which have been accounted for as purchases. 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 including the term of the management services
agreement 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 40 years.
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 (j) 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 (g) below.
(g) 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 (j) below
for a description of an adjustment to reduce the carrying values of certain
intangible assets to their net realizable values during 1996.
(h) 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.
(i) 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
accompanying financial statements at cost which approximates fair value.
28
<PAGE>
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(j) 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>
<CAPTION>
<S> <C>
Goodwill............................................................................ $ 13,878
Property and equipment.............................................................. 1,045
Intangible assets................................................................... 430
Accrued expenses.................................................................... 2,007
-----------
Total write-down................................................................. $ 17,360
===========
</TABLE>
(k) 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 8. 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).
(l) Cash and Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be a cash equivalent.
(m) Net Income (Loss) Per Share
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share", ("SFAS No.
128"). SFAS No. 128 simplifies the current standards for computing earnings per
share ("EPS") under Accounting Principles Board Opinion No. 15, "Earnings per
Share" by replacing the existing calculation of primary EPS with a basic EPS
calculation. It requires a dual presentation for complex capital structures of
basic and diluted EPS on the face of the income statement and requires a
reconciliation of basic EPS factors to diluted EPS factors. The impact of
adopting SFAS No. 128 in 1997 was immaterial. Common stock equivalents, which
consist of stock options issued to employees and directors, are not included in
the determination of the net loss per fully diluted share in 1996 and 1995 since
they would have the effect of reducing the net loss per share.
29
<PAGE>
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
<TABLE>
<CAPTION>
RECONCILIATION OF BASIC EPS FACTORS TO DILUTED EPS FACTORS:
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Weighted average common shares outstanding
for basic earnings per share...................... 6,722 6,587 2,713
Impact of dilutive employee stock options........... 313 --- ---
----------- ----------- -----------
Weighted average of shares of
common stock equivalents for
diluted earnings per share........................ 7,035 6,587 2,713
=========== =========== ===========
</TABLE>
(n) New Accounting Standards
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 129, "Disclosures of Information about
Capital Structure", ("SFAS No. 129") which is effective for fiscal years ending
after December 15, 1997. SFAS No. 129 requires disclosing information about an
entity's capital structure. The impact of adopting SFAS No. 129 in 1997 was
immaterial.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income", ("SFAS
No. 130"), which is required to be adopted in fiscal 1998. This statement
established standards to reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. This statement
requires that an enterprise (a) classify items of other comprehensive income by
their nature in financial statements and (b) display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of statements of financial position.
Comprehensive income is defined as the change in equity during the financial
reporting period of a business enterprise resulting from non-owner sources. The
Company currently does not have other comprehensive income and therefore does
not believe the adoption of SFAS No. 130 will have a significant impact on its
financial statement presentation.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information", ("SFAS No. 131"), which is required to be
adopted in fiscal 1998. This statement requires that a public business
enterprise report financial and descriptive information about its reportable
operating segments including, among other things, a measure of segment profit or
loss, certain specific revenue and expense items, and segment assets. The
Company does not believe the adoption of SFAS No. 131 will have a significant
impact on its financial statement presentation.
(2) ACQUISITIONS
------------
In September 1994, the Predecessor acquired a four-facility primary care
practice for cash and notes and the assumption of certain contingent
obligations. The aggregate purchase price was $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.
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.
30
<PAGE>
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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.
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.
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.
In connection with the change in the Company's strategic direction, as
discussed in Note 1(j), the Company has sold a facility acquired in September
1994, three facilities which constituted the practice acquired in June 1995 and
two rheumatology practices acquired during 1996. The Company intends to sell the
remaining three facilities acquired in September 1994 and two primary care
practices acquired in February 1995.
During the period from March 1997 to December 1997, the Company purchased
options to acquire five office-based physician practices and one hospital-based
physician practice for an aggregate of $10.8 million in cash and approximately
14,000 shares of the Company's common stock. Concurrent with each acquisition of
an option the Company entered into a long-term management agreement with each
practice. These transactions were accounted for as purchases, and accordingly,
the purchase price of each option was allocated to the net assets acquired based
on their estimated fair market values. As a result of these allocations, $11.0
million of the aggregate purchase price was allocated to goodwill.
<TABLE>
<CAPTION>
<S> <C>
Aggregate purchase price........................................................... $ 11,012
Net assets acquired:
Working capital.................................................................. (357)
Property and equipment........................................................... 218
Intangible assets................................................................ 111
-----------
Net assets acquired........................................................... 28
-----------
Goodwill related to the acquisitions............................................... $ 11,040
===========
</TABLE>
All of the above transactions 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.
31
<PAGE>
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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,
--------------------------
1997 1996
------------ ------------
(in thousands, except
per share data)
<S> <C> <C>
Pro Forma Results of Operations:
Net revenue.......................................................... $ 103,024 $ 106,654
Income (loss) before income taxes.................................... 8,553 (10,770)
Net income (loss).................................................... 5,413 (11,594)
Net income (loss) per share - basic.................................. 0.81 (1.76)
Net income (loss) per share - diluted................................ 0.77 (1.76)
</TABLE>
(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>
December 31,
------------------------
1997 1996
----------- -----------
<S> <C> <C>
Equipment............................................................ $ 2,643 $ 2,355
Furniture and fixtures............................................... 1,919 2,259
Computer software.................................................... 843 806
Building and improvements............................................ 1,083 947
----------- -----------
Total.............................................................. 6,488 6,367
Accumulated depreciation and amortization............................ (2,950) (2,637)
----------- -----------
Property and equipment, net........................................ $ 3,538 $ 3,730
=========== ===========
</TABLE>
At December 31, 1997, the net book value of property and equipment related
to capital lease obligations was $922,900. See Note l(j) 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.
32
<PAGE>
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(4) LONG-TERM DEBT
--------------
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1996
----------- -----------
<S> <C> <C>
Revolving credit facility, maturing in December 2000, at Libor plus an
applicable margin (7.79% at December 31, 1997),
secured by substantially all assets of the Company ............... $ 29,000 $ ---
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
Capital lease obligations, payable in aggregate monthly installments
of $45 as of December 31, 1997, including interest ranging from 4%
to 10%, maturing at various dates through 2001, secured by
property and equipment............................................ 1,279 1,809
Note payable, interest at 8%, maturing in January 1997............... --- 765
----------- -----------
Total debt........................................................ 30,279 22,556
Less - Current portion............................................... (446) (1,189)
---------- -----------
Total long-term debt.............................................. $ 29,833 $ 21,367
=========== ===========
</TABLE>
Annual maturities of long-term debt as of December 31, 1997 are as follows
(in thousands):
<TABLE>
<CAPTION>
<S> <C>
1998............................................................................... $ 446
1999............................................................................... 482
2000............................................................................... 29,351
-----------
Total............................................................................ $ 30,279
===========
</TABLE>
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 were no principal payments due in 1997 under the new
facility, the balance is classified as long-term at December 31, 1996 on the
accompanying consolidated balance sheet. On December 17, 1997 the Company
amended its existing revolving credit facility which increased the amount
available from $35 million to $50 million. No payments are due under the amended
credit facility until December 2000.
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(j). However, as discussed
above, 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.
33
<PAGE>
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(5) 401(K) PROFIT SHARING PLANS
---------------------------
The Company maintains 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, 1997, the
Company 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 years ended December 31, 1997 and 1996.
Aggregate expense related to the Plans was $501,000 for the year ended December
31, 1995.
(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>
Year Ended December 31,
------------------------------------
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Current................................................ $ 3,157 $ 1,343 $ (289)
Deferred............................................... (263) (1,154) (167)
----------- ---------- -----------
Total............................................... $ 2,894 $ 189 $ (456)
=========== =========== ===========
Federal................................................ $ 2,454 $ (27) $ (349)
State.................................................. 440 216 (107)
----------- ----------- -----------
Total................................................ $ 2,894 $ 189 $ (456)
=========== =========== ===========
</TABLE>
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>
Year Ended December 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Tax provision (benefit) at the
federal statutory rate.............................. $ 2,741 $ (3,721) $ (664)
State income taxes..................................... 319 (433) (71)
Increase (decrease) in valuation allowance for
deferred tax assets................................. (828) 2,122 ---
Non-deductible portion of write-down
of office-based net assets.......................... --- 1,279 ---
Non-deductible goodwill amortization................... 621 516 ---
Income of affiliates that cannot be
offset against net operating
losses of the Company............................... --- 296 279
Other, net............................................. 41 130 ---
----------- ----------- -----------
Total............................................... $ 2,894 $ 189 $ (456)
=========== =========== ============
</TABLE>
34
<PAGE>
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Deferred income taxes were related to the following timing differences at
December 31, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1996
----------- -----------
<S> <C> <C>
Goodwill and intangible assets...................................... $ 2,378 $ 4,211
Accrual basis income of cash basis affiliates....................... (327) (1,272)
Self-insurance accruals............................................. 1,420 933
Conversion from cash to accrual basis............................... (388) (398)
Bad debt reserve.................................................... (300) ---
Amounts due for acquisitions........................................ --- (342)
Other, net.......................................................... (72) 144
---------- -----------
Total............................................................ 2,711 3,276
Valuation allowance................................................. (1,294) (2,122)
---------- -----------
Net deferred income taxes........................................ $ 1,417 $ 1,154
=========== ===========
</TABLE>
The Company records a valuation allowance to reflect net deferred income
taxes at their estimated realizable value.
(7) COMMITMENTS AND CONTINGENCIES
-----------------------------
(a) Major Customers
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 1997,
approximately $21.8 million, or 22.1%, was derived from anesthesia, obstetrics
and neonatology services delivered at three hospitals owned and operated by the
South Broward Hospital District. In addition, approximately $21.8 million, or
22.2% of the Company's total net revenue in 1997, was derived from anesthesia,
neonatology, pediatric and emergency services delivered at 11 hospitals and two
ambulatory surgical facilities owned and operated by Columbia/HCA Healthcare
Corp. In addition, approximately $11.7 million, or 11.9% of the Company's total
net revenue in 1997, was derived from anesthesia, neonatology, pediatric,
emergency and management services delivered at seven hospitals owned and
operated by Tenet Healthcare Corporation.
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 15.8% of the Company's total net revenue in
1997 was derived from the assignment of Medicare and Medicaid benefits to the
Company by patients of the Company's affiliated physicians. In addition,
approximately 7.9% of the Company's total net revenue in 1997 was derived from
capitation payments from health maintenance organizations for patients who had
assigned their Medicare or Medicaid benefits to the health maintenance
organizations.
In addition, the Company derived 14.3%, 20.8% and 29.5% of its total net
revenue in 1997, 1996 and 1995, respectively, from a single third-party payor.
No other third-party payor or other customer accounted for 10% or more of the
Company's net revenue.
35
<PAGE>
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(b) Employment Agreements
The Company and its affiliates have employment contracts with certain
executives, physicians and other clinical and administrative employees. Future
annual minimum payments under such employment agreements as of December 31, 1997
are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1998............................................................................... $ 10,610
1999............................................................................... 8,460
2000............................................................................... 7,501
2001............................................................................... 4,839
2002............................................................................... 3,442
Thereafter......................................................................... 5,575
-----------
Total .......................................................................... $ 40,427
===========
</TABLE>
(c) Self-insurance
Due to the nature of its business, the Company 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.
The liability for self-insurance accruals in the accompanying balance
sheets 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 $2,522,000 and $2,095,000 at December 31, 1997 and 1996,
respectively. An analysis of the self-insurance accrual is as follows (in
thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Balance, beginning of year.............................. $ 3,170 $ 1,615 $ 1,188
Provision for self-insurance............................ 378 1,252 634
Self-insurance accruals related to
acquired physician practices......................... 626 439 317
Payments made for claims................................ (201) (136) (124)
Transfer, to and paid as, professional fee accruals..... $ --- $ --- $ (400)
----------- ----------- -----------
Balance, end of year............................... $ 3,973 $ 3,170 $ 1,615
=========== =========== ===========
</TABLE>
36
<PAGE>
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(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 Company's Predecessor. 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 continues to vigorously defend against it and also believes
the lawsuit's ultimate resolution will not have a material adverse impact on the
financial position of the Company.
(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
$2,475,000, $2,399,000 and $1,716,000 in 1997, 1996 and 1995, respectively.
Future annual minimum payments under non-cancellable operating leases as of
December 31, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1998.............................................................................. $ 2,408
1999.............................................................................. 2,126
2000.............................................................................. 1,814
2001.............................................................................. 1,279
2002.............................................................................. 1,135
Thereafter........................................................................ 2,545
-----------
Total.......................................................................... $ 11,307
===========
</TABLE>
(f) Government Regulation
The healthcare industry is highly regulated and there can be no assurance
that the regulatory environment in which the Company operates will not change
significantly and adversely in the future. In general, regulation of healthcare
providers and companies is increasing.
Federal and state laws regulate the healthcare industry, the relationship
between practice management companies such as the Company and physicians, and
the relationship among physicians and other providers of healthcare services.
Several laws, including fee-splitting, anti-kickback laws and prohibition
of the corporate practice of medicine, have civil and criminal penalties and
have been subject to limited judicial and regulatory interpretation. They are
enforced by regulatory agencies vested with broad discretion interpreting them.
The Company's agreements and proposed activities have not been examined by
federal or state authorities under these laws and regulations. Although the
Company believes that its operations are conducted so as to comply with all of
the applicable laws, there can be no assurance such operations will not be
challenged as in violation of one or more of such laws. In addition, these laws
and their interpretation vary from state to state. The regulatory framework at
certain jurisdictions may limit the Company's expansion into or ability to
continue operations within such jurisdictions, if the Company's is unable to
modify its operational structure to conform to such regulatory framework. Any
limitation on the Company's ability to expand could have an adverse effect on
the Company.
37
<PAGE>
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
There have been numerous initiatives at the federal and state levels for
comprehensive reforms affecting the availability of, and payment for,
healthcare. The Company believes that such initiatives will continue during the
foreseeable future. Certain reforms previously proposed could, if adopted, have
a material effect on the Company.
On August 5, 1997, the President signed into law a number of Medicare
provisions as part of the Balanced Budget Act of 1997. When compared with
projected Medicare levels under current law, the legislation could reduce
Medicare spending by $115 billion over 5 years. The vast majority of these
savings would come from reductions in payments for services of healthcare
facilities, practitioners and other providers. The legislation will eliminate
disparities in payment rates for similar services by physicians in different
specialties effective January 1, 1998. Payment rates for physician services will
no longer be necessarily updated for inflation. Beginning in 1998, inflation
increases will be adjusted based on a "sustainable growth rate" defined with
reference to the change in (i) the number of Medicare beneficiaries, (ii) the
gross domestic product per capita, and (iii) the level of expenditures for
physician services. The legislation will also revise Medicare payments for
practice expense costs and change payments to managed care plans from the
current rate of 95% of fee-for-service rates in the area, to a nationwide
average per capita fee for service spending, with an adjustment factor for local
area wage rates. Any reductions in payment for the services offered by the
Company could have an adverse effect on the Company's results of operations and
financial condition.
(8) STOCKHOLDERS' EQUITY
--------------------
At January 1, 1995 the issued and outstanding stock of the Company
consisted of 409,900 shares of the Company's Class A voting common stock held by
management of the Company and 350,000 and 78,572 shares of Class A and Class B
Convertible Preferred Stock, respectively. 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.
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 and second
installments, which consisted of 15,146 shares each, expired unexercised in
December 1996 and 1997, respectively. The remaining installment of 15,132 shares
will either become exercisable or will expire unexercised in 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.
38
<PAGE>
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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.
In May 1997, the Company reduced the amount of authorized common stock
from 31,000,000 shares to 21,000,000 shares. In November 1997, the Company
issued approximately 14,000 shares of its common stock as partial consideration
for an acquisition of an office-based physician practice. Employees of the
Company exercised options to acquire 77,190 shares of the Company's common stock
during 1997.
(9) STOCK OPTIONS
-------------
The Company adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," ("SFAS No. 123") in 1996. As
permitted under SFAS No. 123 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 employee 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 to employees.
In 1995 the Company adopted the 1995 Stock Option Plan, under which
750,000 shares of common stock were reserved for issuance. An amendment to the
plan in 1997 increased the shares of common stock reserved for issuance to
1,350,000. 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>
1997 1996 1995
-------------------- ------------------------ ---------------------
Weighted Weighted Weighted
Average Average Average
Number Exercise Number Exercise Number Exercise
of Shares Price of Shares Price of Shares Price
---------- -------- ----------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance, beginning of year..... 553,911 $ 5.73 321,461 $ 8.82 --- $ ---
Granted during year............ 471,500 9.27 608,071 7.17 382,382 10.01
Terminated during year......... --- --- (335,071) 10.51 (53,421) 16.84
Exercised...................... (77,190) 0.58 --- --- --- ---
Forfeited during year.......... (11,137) 6.65 (40,550) 12.32 (7,500) 12.50
--------- --------- ---------
Balance, end of year........ 937,084 $ 7.91 553,911 $ 5.73 321,461 $ 8.82
========= ========= =========
Exercisable at end of year..... 151,716 $ 6.25 131,283 $ 3.38 64,604 $ 2.63
</TABLE>
39
<PAGE>
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The weighted average fair value per share as of the grant date was $6.11
for stock options granted in 1997, $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 1997, 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 from 75% to 78%, and (iv) no expected dividends on the underlying
common stock. Stock options outstanding at December 31, 1997 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 32,350 $ .58 7.9 years 21,565 $ .58
$5.75 to $8.13 353,051 6.39 8.1 years 90,046 5.79
$8.75 to $13.00 551,683 9.31 9.2 years 40,105 10.31
----------- -----------
Total 937,084 $ 7.91 8.7 years 151,716 $ 6.25
=========== ===========
</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 No. 123 had been used in accounting for stock options.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1997 1996
------------ ------------
(in thousands, except
per share data)
<S> <C> <C>
As reported results of operations:
Net income (loss).................................................... $ 5,167 $ (12,126)
Net income (loss) per share - basic.................................. $ 0.77 $ (1.84)
Net income (loss) per share - diluted................................ $ 0.73 $ (1.84)
Pro forma results of operations:
Net income (loss).................................................... $ 3,495 $ (13,047)
Net income (loss) per share - basic.................................. $ 0.52 $ (1.98)
Net income (loss) per share - diluted................................ $ 0.50 $ (1.98)
</TABLE>
(10) SUBSEQUENT EVENT
----------------
During the period from January 1998 to March 1998 the Company completed
four transactions with physician practices for aggregate consideration of
approximately $37.3 million of which approximately $17.2 million was paid in
cash and approximately $20.1 million was paid through the issuance of
approximately 1,384,000 shares of the Company's common stock. As a result of
these transactions, the outstanding balance under the Company's revolving credit
facility has increased from $29.0 million at December 31, 1997 to $47.5 million
at March 12, 1998.
40
<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 each of
the three years in the period ended December 31, 1997, included in this Form
10-K, and have issued our report thereon dated February 23, 1998. 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 taken as a
whole.
ARTHUR ANDERSEN LLP
Miami, Florida,
February 23, 1998. (except for the matter discussed in
Note 10, as to which the date is March 12, 1998).
41
<PAGE>
<TABLE>
<CAPTION>
SHERIDAN HEALTHCARE, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1997, 1996 and 1995
(in thousands)
Balance at Charged to Balance at
Beginning of Costs and End of
Period Expenses Deductions Period
Accounts receivable allowances:
<S> <C> <C> <C> <C>
Year ended December 31, 1997.................... $ 1,277 $ 4,066 $ 3,515 $ 1,828
=========== =========== =========== ===========
Year ended December 31, 1996.................... $ 737 $ 3,605 3,065 $ 1,277
=========== =========== =========== ===========
Year ended December 31, 1995.................... $ 463 $ 2,324 $ 2,050 $ 737
=========== =========== =========== ===========
</TABLE>
42
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The Proxy Statement for the Company's Annual Meeting of Stockholders to be
held on May 14, 1998, 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 "Compliance with Section 16(a) of the
Exchange Act" information required by Item 10 of Form 10-K as to directors and
certain 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 to be
held on May 14, 1998, 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 to be
held on May 14, 1998, 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 to be
held on May 14, 1998, 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.
43
<PAGE>
3. Exhibits:
Exhibit
Number Description
------- -----------
3.1 Third Amended and Restated Certificate of Incorporation, as
amended effective May 27, 1997 (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 June 30,
1997) .
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 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).
10.2 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).
10.3 Stockholder's 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).
10.4 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).
10.5 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).
44
<PAGE>
3. Exhibits (cont'd):
Exhibit
Number Description
------- -----------
10.6 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).
10.7 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).
10.8 Executive Employment Agreement of Gilbert Drozdow 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).
10.9 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).
10.10 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).
10.11 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).
10.12 Participation Agreement by and between Health Options, Inc.
and Southeastern Anesthesia Management Associates, 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).
10.13 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).
10.14 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).
10.15 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 and exhibit to
the Registration Statement).
10.16 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).
45
<PAGE>
3. Exhibits (cont'd):
Exhibit
Number Description
------- -----------
10.17 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).
10.18 Physician Agreement dated April 1, 1990 by and between
Pavilack, Karch, Lipton Barran & Ast, P.A. d/b/a Anesthesia
Associates of Hollywood and Humana Medical Plan, Inc. and
Humana Plan of Florida, Inc. and Humana Health Insurance
Company of Florida, Inc. (incorporated herein by reference
to such exhibit filed as and exhibit to the Registration
Statement).
10.19 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).
10.20 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).
10.21 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 and exhibit to the Registration Statement).
10.22 Form of Letter of Agreement for Specialty Service 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).
10.23 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 and exhibit to the Registration Statement).
10.24 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).
10.25 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).
10.26 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).
46
<PAGE>
3. Exhibits (cont'd):
Exhibit
Number Description
------- -----------
10.27 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).
10.28 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).
10.29 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).
10.30 First Addendum to Management Services Agreement, dated as of
September 1, 1995, by and among between AMSA, Inc., Sheridan
Medical Healthcorp, P.C., and Sheridan Healthcorp, Inc.
(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, 1996).
10.31 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).
10.32 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).
10.33 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).
10.34 Executive Employment Agreement, dated as of August 9, 1996,
by and between Sheridan Healthcorp, Inc., Sheridan Healthcare,
Inc. and Michael F. Schundler (incorporated herein by
reference to such exhibit filed as an exhibit to theCompany's
Annual Report on Form 10-K for the year ended
December 31, 1996).
10.35 Anesthesiology Agreement by and between South Broward Hospital
District, a special taxing district doing business as Memorial
Healthcare System and Sheridan Healthcorp, Inc., a Florida
corporation, dated as of January 1, 1997 (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
March 31, 1997).
47
<PAGE>
3. Exhibits (cont'd):
Exhibit
Number Description
------- -----------
10.36 Real Property Lease Agreement, by and among ACP Venture I
Limited Partnership, a Delaware limited partnership, and
Sheridan Healthcorp, Inc., a Florida corporation, dated as
of January 11, 1997 (incorporated herein by reference to
such exhibit filed as an exhibit to the Company's Quarterly
Report on Form 10-Q for the first quarter ended
March 31,1997).
10.37 Amended and Restated Credit Agreement by and between
NationsBank, N.A. (South) as Agent and Lender and the Company,
as Borrower, dated as of March 12, 1997 (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
March 31, 1997).
10.38 Sheridan Healthcare, Inc. Second Amended and Restated 1995
Stock Option Plan, effective as of April 27, 1995, amended and
restated as of July 27, 1995 and further amended as of
February 26, 1997 and as of May 15, 1997 (incorporated herein
by referenced to such exhibits filed as exhibits to the
Company's Quarterly Reports on Form 10-Q for the quarters
ended March 31, 1997 and June 30, 1997).
10.39 Investment and Stockholders' Agreement, by and between the
Company and Frederick N. Herman, M.D., dated as of
November 3, 1997.
10.40 First Amendment to Amended and Restated Credit Agreement,
by and among NationsBank, N.A., (as successor by merger
to NationsBank, N.A. (South)) as Agent and Lender, and
the Company, as Borrower, dated as of December 17, 1997.
21.1 Schedule of Subsidiaries.
27 Financial Data Schedule.
48
<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 30, 1998 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 30, 1998
- ---------------------------- President, Chief Executive
Mitchell Eisenberg, M.D. Officer (Principal Executive
Officer)
/s/ Lewis D. Gold, M.D. Executive Vice President, March 30, 1998
- ---------------------------- Director
Lewis D. Gold, M.D.
/s/ Henry E. Golembesky, M.D. Director March 30, 1998
- -----------------------------
Henry E. Golembesky, M.D.
/s/ Jamie Hopping Director March 30, 1998
- -----------------------------
Jamie Hopping
/s/ Neil A. Natkow, D.O. Director March 30, 1998
- -----------------------------
Neil A. Natkow, D.O.
/s/ Michael F. Schundler Chief Financial Officer March 30, 1998
- ------------------------- (Principal Financial and
Michael F. Schundler Accounting Officer)
49
<PAGE>
INVESTMENT AND STOCKHOLDERS' AGREEMENT
THIS INVESTMENT AND STOCKHOLDERS' AGREEMENT (the "Agreement") is made as of
November 3, 1997, by and among Sheridan Healthcare, Inc., a Delaware corporation
("Sheridan"), and the individuals who are identified as Stockholders on Schedule
A attached to this Agreement (the "Stockholders").
PRELIMINARY STATEMENTS
----------------------
Reference is made to the: (i) Asset Purchase Agreement (the "APA"), dated
as of November 3, 1997, by and among Sheridan Healthcorp, Inc., Frederick N.
Herman, M.D., Inc. (the "Company"), and the Stockholders; (ii) the Management
Services Agreement, dated as of November 3, 1997 by and among the Company, the
Stockholders, and Sheridan Healthcorp, Inc.; (iii) each of the Restrictive
Covenant Agreements, dated as of November 3, 1997 by and between Sheridan
Healthcorp, Inc. and each of the Stockholders; (iv) the Purchase Option
Agreement, dated as of November 3, 1997 by and among Sheridan, the Company and
the Stockholders; and (v) each of the Physician Employment Agreements, dated as
of November 3, 1997 by and between Sheridan Healthcorp, Inc. and each of the
Stockholders (collectively, the "Acquisition Agreements"). Capitalized terms not
defined in this Agreement shall have the meanings given them in the Acquisition
Agreements.
The parties to this Agreement desire to set forth the terms of their
interest in the securities of Sheridan.
In consideration of the foregoing and the mutual covenants and agreements
contained in this Agreement, the parties to this Agreement agree as follows:
ARTICLE I ACQUISITION OF SECURITIES
- --------- -------------------------
Section 1. Acquisition of Sheridan Common Stock by Stockholders. Pursuant
to the Purchase Option Agreement, each Stockholder has been issued by Sheridan
the respective number of shares of Sheridan Common Stock (as defined in the
Purchase Option Agreement), set forth opposite the name of that Stockholder on
Schedule A to this Agreement.
ARTICLE II THE CLOSING
- ---------- -----------
Section 1. Closing. The delivery and acceptance of the shares of Sheridan
Common Stock being acquired by the Stockholders pursuant to the Acquisition
Agreements (the "Closing Shares"), shall take place at the offices of Sheridan
concurrently with the Closing of the transactions contemplated by the
Acquisition Agreements or at a later date as agreed to in writing by the
parties, subject to satisfaction or waiver of all of the conditions set forth in
the Acquisition Agreements and in this Agreement. For the purposes of this
Agreement, the term "Closing Shares" shall mean: (a) any shares of Sheridan
Common Stock issued at Closing or at a later date as agreed to in writing by the
parties, pursuant to the Acquisition Agreements; and, (b) any securities of
<PAGE>
Sheridan issued or issuable with respect to any of the shares described in
clause (a) above by way of a stock dividend or stock split or in connection with
a combination of shares, recapitalization, merger, consolidation or other
reorganization (it being understood that for purposes of this Agreement, a
person will be deemed to be a holder of Closing Shares whenever that person has
the right to then acquire or obtain from Sheridan any Closing Shares, whether or
not that acquisition has actually been effected).
ARTICLE III RESTRICTIONS ON TRANSFER
- ----------- ------------------------
Section 1. Restrictions on Transfer of Closing Shares.
---------- -------------------------------------------
(a) Each Stockholder agrees not to offer, transfer, donate, sell,
assign, pledge, hypothecate or otherwise dispose of (collectively "Transfer" and
the result of any of these actions is a "Transfer") any Closing Shares or other
rights in respect to those Closing Shares or rights pursuant to this Agreement,
whether occurring voluntarily or involuntarily, directly or indirectly, or by
operation of law or otherwise, except that a Stockholder may Transfer Closing
Shares in accordance with the provisions of Article III, Section 1(b).
(b) Notwithstanding anything in this Agreement, the following
transactions shall be exempt from the prohibition on Transfers in Section 1 of
this Article III:
(i) Transfers between a Stockholder and the trustees of a trust
revocable by that Stockholder alone and the sole beneficiary of which is that
Stockholder;
(ii) Transfers by gift by a Stockholder to that Stockholder's spouse
or issue or to the trustees or a trust for the benefit of that spouse and/or
issue;
(iii) Transfers between a Stockholder and that Stockholder's
guardian or conservator;
(iv) Transfers upon the death of a Stockholder by will, intestacy laws
or the laws of survivorship to that Stockholder's personal representatives,
heirs or legatees;
(v) Transfers by a Stockholder pursuant to an effective registration
statement filed under the Securities Act; and
(vi) Transfers by a Stockholder pursuant to Rule 144 under the
Securities Act.
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provided, however, that, except in the case of Transfers pursuant to
Article III, Section 1(b)(v) and 1(b)(vi), the transferee agrees in writing for
the benefit of the other Stockholders and Sheridan, as a condition to that
Transfer, to be bound by all of the provisions of this Agreement to the same
extent as was the transferor prior to that Transfer; and provided, further, that
any of these transferees shall take all Closing Shares and rights so transferred
subject to all the provisions of this Agreement as if those Closing Shares or
rights were still held by the Stockholder who made the Transfer. If any Transfer
is effected in accordance with the provisions of this Article III, Section
1(b)(i), (ii), (iii) or (iv), then the transferee shall be referred to as a
"Permitted Transferee," and for all purposes of this Agreement unless expressly
indicated to the contrary, the Permitted Transferee shall be deemed to be a
"Stockholder," but only to the extent that the transferor was included within
that definition prior to the transfer.
(c) If any Transfer by a Stockholder is made or attempted contrary to
the provisions of this Agreement, that purported Transfer shall be void ab
initio; Sheridan and the other Stockholders (and their transferees) shall have,
in addition to any other legal or equitable remedies which they may have, the
right to enforce the provisions of this Agreement by actions for specific
performance (to the extent permitted by law); and Sheridan shall have the right
to refuse to recognize any Transferee of a Stockholder pursuant to any Transfer
that is made or attempted contrary to the provisions of this Agreement as one of
its stockholders for any purpose.
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS
- ---------- --------------------------------------------------
By execution of a counterpart of this Agreement, any Stockholder at the
time of that execution makes the following representations and warranties to
Sheridan, these representations and warranties being made in connection with the
issuance of the Closing Shares:
1. This Agreement is made in reliance on each Stockholder's representations to
Sheridan that all Closing Shares acquired by that Stockholder will be acquired
for investment for that Stockholder's own account, not as a nominee or agent,
and not with a view toward distribution of any part thereof, and that
Stockholder has, except as otherwise contemplated in the Acquisition Agreements,
no present intention of selling, granting participation in, or otherwise
distributing those Closing Shares.
2. Each Stockholder understands that the Closing Shares will not be
registered under the Securities Act, on the ground that the sale and issuance of
the same are exempt from registration under Section 4(2) of the Securities Act,
and that Sheridan's reliance on that exemption is predicated on the
representations of each Stockholder set forth in this Agreement.
3. Each Stockholder understands that the Closing Shares may not be sold,
transferred or otherwise disposed of without registration under the Securities
Act or an exemption therefrom, and that in the absence of an effective
registration statement covering the Closing Shares or an available exemption
from registration under the Securities Act, the Closing Shares must be held
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indefinitely. Each Stockholder agrees that, in addition to any other applicable
limitations on the transfer of the Closing Shares, in no event will it make a
transfer, pledge or other disposition of any of the Closing Shares other than
pursuant to an effective registration statement under the Securities Act, unless
and until: (i) that Stockholder shall have notified Sheridan of the proposed
disposition and shall have furnished to Sheridan a statement of the
circumstances surrounding the disposition; and, (ii) at the expense of the
Stockholder or its transferee, it shall have furnished to Sheridan an opinion of
counsel reasonably satisfactory to Sheridan and its counsel to the effect that
the proposed transfer, pledge or other disposition may be made without
registration under the Securities Act.
4. Each Stockholder: (i) by reason of his or her business and financial
experience, has that knowledge, sophistication and experience in business and
financial matters as to be capable of evaluating the merits and risks of his or
her investment in the Closing Shares; and, (ii) believes his or her financial
condition and investments enable him or her to bear the economic risk of a
complete loss of the Closing Shares. Each Stockholder has consulted with its own
advisers with respect to their proposed investment in Sheridan. Each Stockholder
has had the opportunity to ask questions and to receive answers concerning the
financial condition, operations and prospects of Sheridan and the terms and
conditions of the Stockholder's investment, as well as the opportunity to obtain
any additional information necessary to verify the accuracy of information
furnished in connection therewith that Sheridan possesses or can acquire without
unreasonable effort or expense. In addition, the Stockholder acknowledges that
he or she has received prior to the execution of this Agreement the following
documentation: (i) a prospectus for Sheridan, dated as of October 31, 1995 (ii)
annual reports for 1995 and 1996; (iii) 10Ks for 1995 and 1996; and, (iv)
Sheridan's Form 10-Q for the time period ended June 30, 1997. Each Stockholder
has carefully reviewed that documentation and has had the opportunity to review
that documentation with his or her own advisers and Sheridan.
5. Each Stockholder is an individual who either (i) has an individual net worth,
or joint net worth with that Stockholder's spouse as of the date hereof which
exceeds One Million Dollars ($1,000,000.00); or (ii) has had income in excess of
Two Hundred Thousand Dollars ($200,000.00) in each of the two (2) most recent
years or joint income with that Stockholder's spouse in excess of Three Hundred
Thousand Dollars ($300,000.00) in each of those years and has a reasonable
expectation of reaching the same income level in the current year.
6. Each Stockholder's legal domicile for purposes of the applicable
securities laws is as set forth on Schedule A attached to this Agreement
executed by that Stockholder.
7. This Agreement and each agreement, instrument and document to be
executed and delivered by each Stockholder pursuant to or as contemplated by
this Agreement constitute, or when executed and delivered by that Stockholder
will constitute, valid and binding obligations of that Stockholder enforceable
in accordance with their respective terms.
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8. The execution, delivery and performance by each Stockholder of this
Agreement and each agreement, document and instrument:
(a) do not and will not violate any laws, rules or regulations of the United
States or any state or other jurisdiction applicable to that Stockholder, or
require that Stockholder to obtain any approval, consent or waiver of, or to
make any filing with, any person that has not been obtained or made; and
(b) do not and will not result in a breach of, constitute a default under,
accelerate any obligation under or give rise to a right of termination of any
indenture or loan agreement or any other agreement, contract, instrument,
mortgage, lien, lease, permit, authorization, order, writ, judgment, injunction,
decree, determination or arbitration award to which that Stockholder is a party
or by which the property of that Stockholder is bound or affected, or result in
the creation or imposition of any mortgage, pledge, lien, security interest or
other charge or encumbrance on any of the assets or properties of that
Stockholder.
ARTICLE V OBLIGATIONS OF SHERIDAN
- --------- -----------------------
Section 1. Rule 144 Requirements. Sheridan, which is subject to the
reporting requirements of Section 13 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), will use its best efforts to file with the
Commission all information as is specified under that Section for so long as
there are holders of Closing Shares; and Sheridan shall use its best efforts to
take all action as may be required by an issuer as a condition to the
availability of Rule 144 under the Securities Act (or any comparable successor
rules). Sheridan shall furnish to any holder of Closing Shares upon request a
written statement executed by Sheridan as to the steps it has taken to comply
with the current public information requirement of Rule 144 (or any comparable
successor rules). Sheridan, subject to the limitations on transfers imposed by
this Agreement, shall use its best efforts to facilitate and expedite transfers
of Closing Shares pursuant to Rule 144 under the Securities Act, which efforts
shall include timely notice to its transfer agent to expedite any transfers of
Closing Shares. The provisions of this Section 1, as they relate to certain
Closing Shares, subject to Rule 144, shall terminate and be of no further force
and effect as of November 3, 1999.
ARTICLE VI MISCELLANEOUS PROVISIONS
- ---------- ------------------------
Section 1. Survival of Representations and Warranties. The Stockholders
agree that each representation, warranty, covenant and agreement made by them in
this Agreement or in any certificate, instrument or other document delivered
pursuant to this Agreement is material, shall be deemed to have been relied upon
by Sheridan, shall remain operative and in full force and effect after the date
of this Agreement regardless of any investigation or the acceptance of
securities hereunder and payment therefor.
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This Agreement shall not be construed so as to confer any right or benefit
upon any Person other than the parties to this Agreement and their respective
successors and permitted assigns.
Section 2. Legend on Securities. Sheridan and the Stockholders acknowledge
and agree that substantially the following legend shall be typed on each
certificate evidencing any of the securities issued under the Acquisition
Agreements or held at any time by the Stockholders (and their transferees):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE OFFERED, SOLD,
TRANSFERRED, HYPOTHECATED OR OTHERWISE ASSIGNED EXCEPT PURSUANT TO: (1) A
REGISTRATION STATEMENT WITH RESPECT TO THESE SECURITIES WHICH IS EFFECTIVE UNDER
THAT ACT; OR, (2) AN AVAILABLE EXEMPTION FROM REGISTRATION UNDER THAT ACT
RELATING TO THE DISPOSITION OF SECURITIES. THESE SECURITIES ARE ALSO SUBJECT TO
THE PROVISIONS OF A CERTAIN INVESTMENT AND STOCKHOLDERS' AGREEMENT, DATED AS OF
NOVEMBER 3, 1997, INCLUDING CERTAIN RESTRICTIONS ON TRANSFER SET FORTH IN THAT
AGREEMENT. A COMPLETE AND CORRECT COPY OF THAT AGREEMENT IS AVAILABLE FOR
INSPECTION AT THE PRINCIPAL OFFICE OF SHERIDAN AND WILL BE FURNISHED UPON
WRITTEN REQUEST AND WITHOUT CHARGE.
SHERIDAN IS AUTHORIZED TO ISSUE MORE THAN ONE CLASS OF STOCK. SHERIDAN WILL
FURNISH TO EACH STOCKHOLDER WHO SO REQUESTS A COPY OF THE POWERS, DESIGNATIONS,
PREFERENCES AND RELATIVE RIGHTS AND LIMITATIONS OF EACH OUTSTANDING CLASS OF
STOCK OF SHERIDAN.
Section 3. Amendment and Waiver. Any party may waive any provision of this
Agreement intended for its benefit in writing. Except as specifically set forth
in this Agreement to the contrary, no failure or delay on the part of any party
to this Agreement in exercising any right, power or remedy under this Agreement
shall operate as a waiver. The remedies in this Agreement are cumulative and are
not exclusive of any remedies that may be available to any party to this
Agreement at law or in equity or otherwise. This Agreement may be amended with
the prior written consent of all parties.
Section 4. Notices. Whenever any notice, request, information or other
document is required or permitted to be given under this Agreement, that notice,
demand or request shall be in writing and shall be either hand delivered, sent
by United States certified mail, postage prepaid or delivered via overnight
courier to the addresses below or to any other address that any party may
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specify by notice to the other parties. No party shall be obligated to send more
than one notice to each of the other parties and no notice of a change of
address shall be effective until received by the other parties. A notice shall
be deemed received upon hand delivery, two days after posting in the United
States mail or one day after dispatch by overnight courier.
Sheridan: Sheridan Healthcare, Inc.
4651 Sheridan Street, Suite 400
Hollywood, Florida 33021
Attn: Mitchell Eisenberg, M.D., President
with a copy to: Sheridan Healthcare, Inc.
4651 Sheridan Street, Suite 400
Hollywood, Florida 33021
Attn: Jay A. Martus, Esq., Vice President
To Stockholders: At the Addresses listed on Schedule A attached to this
Agreement
with a copy to: Berger Davis & Singerman
100 N.E. Third Avenue, Suite 400
Fort Lauderdale, Florida 33301
Attn: James B. Davis, Esq.
Facsimile: (954) 523-2872
or to any other address of which any party may notify the other parties as
provided above.
Section 5. Headings. The Article and Section headings used or
contained in this Agreement are for convenience of the reference only and
shall not affect the construction of this Agreement.
Section 6. Counterparts. This Agreement may be executed in one or more
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which together
shall be deemed to constitute one and the same agreement.
Section 7. Remedies; Severability. It is specifically understood and agreed
that any breach of the provisions of this Agreement by any person subject to
this Agreement will result in irreparable injury to the other parties to this
Agreement, that the remedy at law alone will be an inadequate remedy for that
breach, and that, in addition to any other legal or equitable remedies which
they may have, those other parties may enforce their respective rights by
actions for specific performance (to the extent permitted by law) and Sheridan
may refuse to recognize any unauthorized transferee as one of its stockholders
for any purpose, including, without limitation, for purposes of dividend and
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voting rights, until the relevant party or parties have complied with all
applicable provisions of this Agreement. In the event that any one or more of
the provisions contained in this Agreement, or the application thereof in any
circumstances, is held invalid, illegal or unenforceable in any respect for any
reason, the validity, legality and enforceability of that provision in every
other respect and of the remaining provisions contained in this Agreement shall
not be in any way impaired thereby, it being intended that all of the rights and
privileges of the parties to this Agreement shall be enforceable to the fullest
extent permitted by law.
Section 8. Entire Agreement. This Agreement is intended by the parties as a
final expression of their agreement and intended to be complete and exclusive
statement of the agreement and understanding of the parties to this Agreement in
respect of the subject matter contained in this Agreement and their agreement
and understanding. This Agreement supersedes all prior agreements and
understandings between the parties with respect to that subject matter.
Section 9. Adjustments. All references to share prices and amounts
herein shall be equitably adjusted to reflect stock splits, stock dividends,
recapitalizations and similar changes affecting the capital stock of Sheridan.
Section 10. Law Governing. This Agreement shall be construed and
enforced in accordance with and governed by the laws of the state of Delaware
(without giving effect to principles of conflicts of law).
Section 11. 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.
Section 12. Word Usage. Words used in the masculine shall apply to
the feminine where applicable, and wherever the context of this Agreement
directs, the plural shall be read as the singular and the singular as the
plural.
Section 13. 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.
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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 PARTY WAIVES ALL RIGHTS TO ANY
TRIAL BY JURY IN ALL LITIGATION RELATING TO OR ARISING OUT OF THIS AGREEMENT.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
SHERIDAN:
SHERIDAN HEALTHCARE, INC.
By: ------------------------------
Jay A. Martus
Vice President
STOCKHOLDERS:
------------------------------
Frederick N. Herman, M.D.
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SCHEDULE A
Name and Address Consideration Paid
of Stockholder in Sheridan Stock
---------------- ------------------
Frederick N. Herman, M.D. $200,000.00
918 West Tropical Way
Plantation, Florida 33317
FIRST AMENDMENT
TO THE AMENDED AND RESTATED CREDIT AGREEMENT
This FIRST AMENDMENT TO THE AMENDED AND RESTATED CREDIT AGREEMENT (the
"Amendment Agreement"), dated as of December 17, 1997 is made by and among
SHERIDAN HEALTHCARE, INC., a Delaware corporation having its principal place of
business in Hollywood, Florida (the "Borrower"), NATIONSBANK, NATIONAL
ASSOCIATION (as successor by merger to NationsBank, National Association
(South)), a national banking association organized and existing under the laws
of the United States, as Lender, and NATIONSBANK, NATIONAL ASSOCIATION (as
successor by merger to NationsBank, National Association (South)), in its
capacity as agent for the Lenders (in such capacity, the "Agent"). Capitalized
terms used but not otherwise defined herein shall have the meanings ascribed to
such terms in the Credit Agreement (as defined below).
W I T N E S S E T H:
--------------------
WHEREAS, the Borrower, the Agent and the Lenders have entered into that
certain Amended and Restated Credit Agreement dated as of March 12, 1997 ( the
"Credit Agreement"); and
WHEREAS, the Agent and certain of its Subsidiaries and certain professional
corporations or associations whose financial results are included in the
consolidated financial statements of the Borrower have entered into an Amended
and Restated Guaranty and Suretyship Agreement dated as of March 12, 1997,
pursuant to which such Subsidiaries, Partnerships and professional corporations
or associations whose financial results are included in the consolidated
financial statements of the Borrower have guaranteed the Borrower's Liabilities
under the Credit Agreement; and
WHEREAS, certain Subsidiaries and certain professional corporations or
associations whose financial results were included in the consolidated financial
statements of the Borrower were released from their obligations thereunder
pursuant to that certain Consent Letter dated as of April 10, 1997 from the
Agent to the Borrower; and
WHEREAS, Becerra & Augustino, M.D., Inc., a professional corporation whose
financial results are included in the consolidated financial statements of the
Borrower ("B&A"), and the Agent have entered into a Guaranty and Suretyship
Agreement dated as of April 29, 1997 pursuant to which B&A has guaranteed the
Borrower's Liabilities under the Credit Agreement; and
WHEREAS, Castillo-Plaza & Associates, M.D., Inc., a professional
corporation whose financial results are included in the consolidated financial
statements of the Borrower ("CPA"), and the Agent have entered into a Guaranty
and Suretyship Agreement dated as of May 13, 1997 pursuant to which CPA has
guaranteed the Borrower's Liabilities under the Credit Agreement; and
WHEREAS, Drs. Grabois, Firestone, Halfon & Lebow, P.A. a professional
association whose financial results are included in the consolidated financial
<PAGE>
statements of the Borrower ("GFH&L"), and the Agent have entered into a Guaranty
and Suretyship Agreement dated as of September 4, 1997 pursuant to which GFH&L
has guaranteed the Borrower's Liabilities under the Credit Agreement; and
WHEREAS, Woman to Woman Obstetrics & Gynecology, P.A., a professional
association whose financial results are included in the consolidated financial
statements of the Borrower ("WWO&G"), and the Agent have entered into a Guaranty
and Suretyship Agreement dated as of September 4, 1997 pursuant to which WWO&G
has guaranteed the Borrower's Liabilities under the Credit Agreement; and
WHEREAS, Frederick N. Herman, M.D., P.A., a Florida corporation whose
financial results are included in the consolidated financial statements of the
Borrower ("Herman"), and the Agent have entered into a Guaranty and Suretyship
Agreement dated as of November 3, 1997 pursuant to which Herman has guaranteed
the Borrower's Liabilities under the Credit Agreement; and
WHEREAS, Sheridan Children's Healthcare Services of Pennsylvania, P.A., a
Pennsylvania corporation whose financial results are included in the
consolidated financial statements of the Borrower ("SCHSP"), and the Agent have
entered into a Guaranty and Suretyship Agreement dated as of November 30, 1997
pursuant to which SCHSP has guaranteed the Borrower's Liabilities under the
Credit Agreement; and
WHEREAS, the Borrower has requested that the Agent and the Lenders amend
the Credit Agreement; and
WHEREAS, upon the terms and conditions contained herein, the Agent and the
Lenders are willing to amend the Credit Agreement;
NOW, THEREFORE, in consideration of the premises and conditions herein set
forth, it is hereby agreed as follows:
1. Credit Agreement Amendment. Subject to the conditions hereof, the
Credit Agreement is hereby amended, effective as of the date hereof as
follows:
(a) The following new definitions are added to Section 1.1:
"'First Amendment" means that certain First Amendment to the
Amended and Restated Credit Agreement dated as of December 17, 1997, by and
among the Borrower, the Lenders, and the Agent.
'Asset Disposition' means any voluntary disposition, whether by
sale, lease or transfer of (a) any or all of the assets, excluding cash and cash
equivalents, of the Borrower or any Subsidiary or any professional corporation
or association whose financial results are included in the consolidated
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financial statements of the Borrower, and (b) any of the capital stock, or
securities and investments interchangeable, exercisable or convertible for or
into, or otherwise entitling the holder to receive, any of the capital stock of
any Subsidiary or any professional corporation or association whose financial
results are included in the consolidated financial statements of the Borrower
(other than a disposition to the Borrower or a Guarantor).
'Debt Offering' means the incurrence of any Indebtedness for
Money Borrowed permitted hereunder in connection with a public offering or
private placement of debt securities of the Borrower or any Subsidiary or any
professional corporation or association whose financial results are included in
the consolidated financial statements of the Borrower.
'Equity Offering' means a public or private offering of equity
securities (including, without limitation, any security or investment
exchangeable, exercisable or convertible for or into, or otherwise entitling the
holder to receive, equity securities) of the Borrower or any Subsidiary or any
professional corporation or association whose financial results are included in
the consolidated financial statements of the Borrower (other than securities
issued to the Borrower or a Subsidiary); provided however, the term "Equity
Offering" shall not include any issuance of equity securities in connection with
the exercise of stock options granted, or purchase of restricted stock, pursuant
to Schedule 9.9.
'Net Proceeds' means (a) from any Equity Offering or Debt
Offering cash payments received by the Borrower or any Subsidiary or any
professional corporation or association whose financial results are included in
the consolidated financial statements of the Borrower therefrom as and when
received, net of all legal, accounting, banking and underwriting fees and
expenses, commissions, discounts and other issuance expenses incurred in
connection therewith and all taxes required to be paid or accrued as a
consequence of such issuance; (b) from any Asset Disposition cash payments
received by the Borrower or any Subsidiary or any professional corporation or
association whose financial results are included in the consolidated financial
statements of the Borrower therefrom (including cash payments received pursuant
to any note or other debt security received in connection with any Asset
Disposition) as and when received, net of (i) all legal fees and expenses and
other fees and expenses paid to third parties and incurred in connection
therewith, (ii) all taxes required to be paid or accrued as a consequence of
such sale, (iii) amounts applied to repayment of Indebtedness (other than the
Obligations) secured by a Lien on the asset or property disposed, and (iv) any
other necessary costs incurred in connection with the sale."
(b) The definition of "Applicable Margin" in Section 1.1 is hereby amended
in its entirety so that as amended it shall read as follows:
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"'Applicable Margin' and 'Applicable Unused Fee' means for each
Eurodollar Rate Loan that percent per annum set forth below, which shall be
based upon the Consolidated Leverage Ratio for the Four-Quarter Period most
recently ended as specified below:
Tier Consolidated Leverage Ratio Eurodollar Applicable
Applicable Margin Unused Fee
I Less than 1.50 to 1.00 1.000% 0.250%
II Equal to or greater
than 1.50 to 1.00 1.125% 0.375%
and less than 2.00 to 1.00
III Equal to or greater
than 2.00 to 1.00 1.375% 0.375%
and less than 2.50 to 1.00
IV Equal to or greater
than 2.50 to 1.00 1.875% 0.500%
and equal to or less
than 3.00 to 1.00
From the effective date of the First Amendment to the first Business Day next
following the six month anniversary of the effective date of The First
Amendment, the Applicable Margin and Applicable Unused Fee shall be Tier IV.
Thereafter, the Applicable Margin and Applicable Unused Fee shall be established
at the end of each fiscal quarter of the Borrower (each, a "Determination
Date"). Any change in the Applicable Margin or Applicable Unused Fee following
each Determination Date shall be determined based upon the computations set
forth in the certificate furnished to the Agent pursuant to Section 8.1(a)(ii)
and Section 8.1(b)(ii), subject to review and confirmation of such computations
by the Agent, and shall be effective commencing on the first Business Day next
following the date such certificate is received (or, if earlier, the date such
certificate was required to be delivered) until the first Business Day following
the date on which a new certificate is delivered or is required to be delivered,
whichever shall first occur; provided however, if the Borrower shall fail to
deliver any such certificate within the time period required by Section 8.1,
then the Applicable Margin and Applicable Unused Fee shall be Tier IV until the
appropriate certificate is so delivered."
(c) Subclause (ii) in the definition of "Change of Control" in Section 1.1
is hereby amended so that as amended it shall read as follows:
"(ii) if TA Associates shall at anytime cease to own, directly or
indirectly, at least fifteen percent (15%) of the combined voting power of all
Voting Stock of the Borrower; provided, however, that to the extent the Borrower
completes any Acquisition permitted hereunder which is accounted for as a
"pooling of interests" such that the consolidated stockholder's equity of the
Borrower is diluted, the percentage threshold required under this subclause (ii)
shall decrease pro rata based on the amount of such dilution."
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(d) The definition of "Total Revolving Credit Commitment" in Section 1.1 is
hereby amended in its entirety so that as amended it shall read as follows:
"'Total Revolving Credit Commitment' means a principal amount equal to
$50,000,000, as reduced from time to time in accordance with Section 2.7."
(e) The definition of "Stated Termination Date" in Section 1.1 is hereby
amended in its entirety so that as amended it shall read as follows:
"'Stated Termination Date' means December 16, 2000."
(f) Section 2.3 is hereby amended in its entirety so that as amended it
shall read as follows:
"2.3 Payment of Principal. (a) Manner of Payment. The principal amount
of each Revolving Loan shall be due and payable to the Agent for the benefit of
each Lender in full on the Revolving Credit Termination Date, or earlier as
specifically provided herein. The principal amount of any Base Rate Loan may be
prepaid in whole or in part at any time. The principal amount of any Eurodollar
Rate Loan may be prepaid only at the end of the applicable Interest Period
unless the Borrower shall pay to the Agent for the account of the Lenders the
additional amount, if any, required under Section 5.4. All prepayments of
Revolving Loans made by the Borrower shall be in the amount of (i) $500,000 or
such greater amount which is an integral multiple of $100,000 in the case of
Eurodollar Rate Loans, (ii) $100,000 or such greater amount which is an integral
multiple of $100,000 in the case of Base Rate Loans, or (iii) the amount equal
to all Revolving Credit Outstandings or such other amount as necessary to comply
with Section 2.1(b) or Section 2.8.
(b) Mandatory Prepayments. The Borrower shall make the following
required prepayments, each such payment to be made to the Agent for the benefit
of the Lenders within the time period specified below:
(i) Equity Offerings. The Borrower shall make, or shall cause
each applicable Subsidiary or any professional corporation or association whose
financial results are included in the consolidated financial statements of the
Borrower to make, a prepayment from the Net Proceeds of any Equity Offering in
an amount equal to one hundred percent (100%) of such Net Proceeds. Each such
prepayment shall be made within fifteen (15) Business Days of receipt of such
Net Proceeds and upon not less than three (3) Business Days' written notice to
the Agent, and shall include within one (1) Business Day of repayment a
certificate of an Authorized Representative setting forth in reasonable detail
the calculations utilized in computing the amount of the Net Proceeds.
Notwithstanding the foregoing, however, any prepayment required under this
5
<PAGE>
Section 2.3(b) shall not be required for fifty percent (50%) of up to
$16,000,000 in Net Proceeds from the first equity issuance occurring after the
effective date of The First Amendment.
(ii) Debt Offerings. The Borrower shall make, or shall cause each
applicable Subsidiary or any professional corporation or association whose
financial results are included in the consolidated financial statements of the
Borrower to make, a prepayment from the Net Proceeds of any Debt Offering in an
amount equal to one hundred percent (100%) of such Net Proceeds. Each such
prepayment shall be made within fifteen (15) Business Days of receipt of such
Net Proceeds and upon not less than three (3) Business Days' written notice to
the Agent, and shall include within one (1) Business Day of repayment a
certificate of an Authorized Representative setting forth in reasonable detail
the calculations utilized in computing the amount of the Net Proceeds.
(iii) Asset Dispositions. The Borrower shall make, or shall cause
each applicable Subsidiary or any professional corporation or association whose
financial results are included in the consolidated financial statements of the
Borrower to make, a prepayment from the Net Proceeds of any Asset Disposition in
an amount equal to one hundred percent (100%) of such Net Proceeds. Each such
prepayment shall be made within fifteen (15) Business Days of receipt of such
Net Proceeds and upon not less than three (3) Business Days' written notice to
the Agent, and shall include within one (1) Business Day of repayment a
certificate of an Authorized Representative setting forth in reasonable detail
the calculations utilized in computing the amount of the Net Proceeds.
All mandatory prepayments made pursuant to this Section 2.3 shall
permanently reduce the Total Revolving Credit Commitment. Any prepayment of a
Eurodollar Rate Loan pursuant to this Section 2.3 other than on the last day of
an Interest Period shall be accompanied by the additional payment, if any,
required under Section 5.4 hereof.
(g) Section 2.10 is hereby amended so that the phrase "0.375% per annum" in
the third line is deleted and replaced with "the Applicable Unused Fee".
(h) Section 9.1(a) is hereby amended as follows:
(1) The amount "$32,500,000" in subclause (i) is hereby
deleted and replaced with the amount "$33,755,000".
(2) The amount "75%" in subclause (ii)(A) is hereby deleted and
replaced with the amount "50%".
(3) Subclause (ii)(c) is hereby deleted and replaced with the
phrase "100% of the Net Proceeds of any Equity Offering".
6
<PAGE>
(i) Section 9.1(c) is hereby amended in its entirety so that as amended it
shall read as follows:
"(c) Consolidated Fixed Charge Ratio. Permit at any time during
the respective periods set forth below the Consolidated Fixed Charge Ratio
to be less than that set forth opposite each such period:
FOUR-QUARTER PERIOD ENDING CONSOLIDATED FIXED CHARGE RATIO
-------------------------- -------------------------------
Closing - September 30, 1998 2.00 to 1.00
October 1, 1998 - September 30, 1999 2.25 to 1.00
Thereafter 2.75 to 1.00
(j) Section 9.2(d) is hereby amended in its entirety so that as amended it
shall read as follows:
"(d) if the Cost of Acquisition shall (A) exceed $5,000,000 in cash,
or (B) exceed $8,000,000 in the aggregate, or (C) cause the aggregate Cost of
Acquisitions incurred in fiscal year 1997 to exceed $25,000,000 or in any Fiscal
Year thereafter to exceed $20,000,000, the Required Lenders shall consent to
such Acquisition in their discretion;"
(k) Section 9.7(b) is hereby amended in its entirety so that as amended it
shall read as follows:
"(b) Eligible Securities;"
(l) Section 12.5 is hereby amended in its entirety so that as amended it
shall read as follows:
"12.5 Expenses. The Borrower agrees (a) to pay or reimburse the Agent
for all its reasonable out-of-pocket costs and expenses incurred in connection
with the preparation, negotiation, syndication, execution and delivery of the
Loan Documents (including due diligence expenses and travel expenses), and the
consummation of the transactions contemplated thereby, including the reasonable
fees and disbursements of counsel to the Agent, (b) to pay or reimburse the
Agent for all of its reasonable out-of-pocket costs and expenses incurred in
connection with any amendment, supplement or modification to, any of the Loan
Documents (including due diligence expenses and travel expenses), and the
consummation of the transactions contemplated thereby, including the reasonable
fees and disbursements of counsel to the Agent, (c) to pay or reimburse the
Agent and the Lenders for all their costs and expenses incurred in connection
with the enforcement or preservation of any rights under the Loan Documents,
including the reasonable fees and disbursements of their counsel and any
7
<PAGE>
payments in indemnification or otherwise payable by the Lenders to the Agent
pursuant to the Loan Documents, and (d) to pay, indemnify and hold the Agent and
the Lenders harmless from any and all recording and filing fees and any and all
liabilities with respect to, or resulting from any failure to pay or delay in
paying, documentary, stamp, excise and other similar taxes, if any, which may be
payable or determined to be payable in connection with the execution and
delivery of any of the Loan Documents, or consummation of any amendment,
supplement or modification of, or any waiver or consent under or in respect of,
any Loan Document.
2. REPRESENTATIONS AND WARRANTIES. In order to induce the Agent and the
Lenders to enter into this Amendment Agreement, the Borrower hereby represents
and warrants that the Credit Agreement has been re-examined by the Borrower and
that except as disclosed by the Borrower in writing to the Lenders as of the
date hereof except:
(a) The representations and warranties made by the Borrower in Article VII
thereof are true on and as of the date hereof except that the financial
statements referred to in Section 7.6 shall be those most recently furnished to
the Agent pursuant to Section 8.1;
(b) There has been no material adverse change in the condition, financial
or otherwise, of the Borrower and its Subsidiaries since the date of the most
recent financial reports of the Borrower delivered to the Agent under Section
8.1 thereof, other than changes in the ordinary course of business, none of
which has been a material adverse change;
(c) The business and properties of the Borrower and its Subsidiaries are
not, and since the date of the most recent financial reports of the Borrower
delivered to the Agent under Section 8.1 thereof, have not been, adversely
affected in any substantial way as the result of any fire, explosion,
earthquake, accident, strike, lockout, combination of workers, flood, embargo,
riot, activities of armed forces, war or acts of God or the public enemy, or
cancellation or loss of any major contracts; and
(d) After giving effect to this Amendment Agreement, no condition exists
which, upon the effectiveness of the amendment contemplated hereby, would
constitute a Default or an Event of Default on the part of the Borrower under
the Credit Agreement or the Notes, either immediately or with the lapse of time
or the giving of notice, or both.
3. CONDITIONS PRECEDENT. The effectiveness of this Amendment Agreement is
subject to the receipt by the Agent of the following:
(a) six counterparts of this Amendment Agreement duly executed by all
signatories hereto; and
8
<PAGE>
(b) copies of all additional agreements, instruments and documents which
the Agent may reasonably request, such documents, when appropriate, to be
certified by appropriate governmental authorities; and
(c) receipt of payment by the Agent for all its reasonable costs and
expenses incurred in connection with the preparation, negotiation and execution
of this Amendment Agreement, including without limitation the reasonable fees
and disbursements of counsel to the Agent; and
(d) execution of the Underwriting Fee Letter dated December 4, 1997
(the "Fee Letter") and payment of all fees described therein that are payable on
or before the effective date of this Amendment Agreement.
All proceedings of the Borrower relating to the matters provided for herein
shall be satisfactory to the Lenders, the Agent and their counsel.
4. ENTIRE AGREEMENT. This Amendment Agreement sets forth the entire
understanding and agreement of the parties hereto in relation to the subject
matter hereof and supersedes any prior negotiations and agreements among the
parties relative to such subject matter. No promise, condition, representation
or warranty, express or implied, not herein set forth shall bind any party
hereto, and no one of them has relied on any such promise, condit ion,
representation or warranty. Each of the parties hereto acknowledges that, except
as in this Amendment Agreement otherwise expressly stated, no representations,
warranties or commitments, express or implied, have been made by any party to
the other. None of the terms or conditions of this Amendment Agreement may be
changed, modified, waived or canceled orally or otherwise, except by writing,
signed by all the parties hereto, specifying such change, modification, waiver
or cancellation of such terms or conditions, or of any proceeding or succeeding
breach thereof.
5. CONSENT OF GUARANTORS. The Guarantors have joined in the execution of
this Amendment Agreement for the purposes of consenting hereto, including the
increase of the Total Revolving Credit Commitment from $35,000,000 to
$50,000,000, and for the further purpose of confirming their guaranty of the
Obligations of the Borrower as provided in the Facility Guaranty.
6. FULL FORCE AND EFFECT OF AGREEMENT. Except as hereby specifically
amended, modified or supplemented, the Credit Agreement and all other Loan
Documents are hereby confirmed and ratified in all respects and shall remain in
full force and effect according to their respective terms.
7. COUNTERPARTS. This Amendment Agreement may be executed in any number of
counterparts, each of which shall be deemed an original as against any party
whose signature appears thereon, and all of which shall together constitute one
and the same instrument.
9
<PAGE>
8. GOVERNING LAW. THIS AMENDMENT AGREEMENT SHALL IN ALL RESPECTS BE
GOVERNED BY THE LAW OF THE STATE OF FLORIDA, WITHOUT REGARD TO ANY OTHERWISE
APPLICABLE PRINCIPLES OF CONFLICT OF LAWS. THE BORROWER HEREBY (i) SUBMITS TO
THE JURISDICTION AND VENUE OF THE STATE AND FEDERAL COURTS OF FLORIDA FOR THE
PURPOSES OF RESOLVING DISPUTES HEREUNDER OR UNDER ANY OF THE OTHER LOAN
DOCUMENTS TO WHICH IT IS A PARTY OR FOR PURPOSES OF COLLECTION AND (ii) WAIVES
TRIAL BY JURY IN CONNECTION WITH ANY SUCH LITIGATION.
9. Enforceability. Should any one or more of the provisions of this
Amendment Agreement be determined to be illegal or unenforceable as to one or
more of the parties hereto, all other provisions nevertheless shall remain
effective and binding on the parties hereto.
10. Credit Agreement. All references in any of the Loan Documents to
the Credit Agreement shall mean and include the Credit Agreement as amended
hereby.
11. Successors and Assigns. This Amendment Agreement shall be binding upon
and inure to the benefit of each of the Borrower, the Lenders, the Agent and
their respective successors, assigns and legal representatives; provided,
however, that the Borrower, without the prior consent of the Lenders, may not
assign any rights, powers, duties or obligations hereunder.
[Remainder of page intentionally left blank.]
10
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
Agreement to be duly executed by their duly authorized officers, all as of the
day and year first above written.
SHERIDAN HEALTHCARE, INC.
By:
------------------------------------
Name: Jay A. Martus
Title: Vice President
GUARANTORS:
-----------
SHERIDAN HEALTHCORP, INC.
SHERIDAN HEALTHCARE OF WEST FLORIDA, INC.
PRIMEDICA HEALTHCARE, INC.
MEDISERV, INC.
SHERIDAN CHILDREN'S HEALTHCARE SERVICES, INC.
SHERIDAN CHILDREN'S HEALTHCARE
SERVICES OF WEST VIRGINIA, INC.
CHILDREN'S HOSPITAL SERVICES, INC.
SHERIDAN HEALTHCARE OB/GYN, INC.
BECERRA & AUGUSTINO, M.D., INC.
CASTILLO-PLAZA & ASSOCIATES, M.D., INC.
DRS. GRABOIS, FIRESTONE, HALFON & LEBOW, P.A.
WOMAN TO WOMAN OBSTETRICS
& GYNECOLOGY, P.A.
FREDERICK N. HERMAN, M.D., INC.
By:
-----------------------------------
Name: Jay A. Martus
Title: Vice President
SHERIDAN FINANCE CORP.
SHERIDAN STC CORP.
By:
-----------------------------------
Name: Michael Schundler
Title: Vice President
Signature Page 1 of 2
<PAGE>
SHERIDAN MEDICAL HEALTHCORP, P.C.
SHERIDAN HEALTHCARE OF TEXAS, P.A.
SHERIDAN HEALTHCARE OF CALIFORNIA
MEDICAL GROUP, INC.
SHERIDAN CHILDREN'S HEALTHCARE
SERVICES OF PENNSYLVANIA, P.C.
By:
-----------------------------------
Name: Gilbert Drozdow
Title: President
NATIONSBANK, NATIONAL ASSOCIATION,
as Agent and Lender
By:
-----------------------------------
Name: Michael A. Crabb, III
Title: Vice President
Signature Page 2 of 2
<PAGE>
TOTAL REVOLVING CREDIT COMMITMENT
---------------------------------
PROMISSORY NOTE
(Revolving Loan)
$50,000,000 Charlotte, North Carolina
December 17, 1997
FOR VALUE RECEIVED, SHERIDAN HEALTHCARE, INC., a Delaware corporation
having its principal place of business located in Hollywood, Florida (the
"Borrower"), hereby promises to pay to the order of NATIONSBANK, NATIONAL
ASSOCIATION (the "Lender"), in its individual capacity, in care of NATIONSBANK,
NATIONAL ASSOCIATION , as agent for the Lenders (the "Agent"), at One
Independence Center, 101 North Tryon Street, NC1-001-15-04, Charlotte, North
Carolina 28255 (or at such other place or places as the Agent may designate in
writing) at the times set forth in the Amended and Restated Credit Agreement
dated as of March 12, 1997, as amended pursuant to that certain Amendment
Agreement No. 1 to the Amended and Restated Credit Agreement dated as of
December 17, 1997, among the Borrower, the financial institutions party thereto
(collectively, the "Lenders") and the Agent (the "Agreement" --all capitalized
terms not otherwise defined herein shall have the respective meanings set forth
in the Agreement), in lawful money of the United States of America, in
immediately available funds, the principal amount of FIFTY MILLION DOLLARS
($50,000,000) or, if less than such principal amount, the aggregate unpaid
principal amount of all Revolving Loans made by the Lender to the Borrower
pursuant to the Agreement on the Revolving Credit Termination Date or such
earlier date as may be required pursuant to the terms of the Agreement, and to
pay interest from the date hereof on the unpaid principal amount hereof, in like
money, at said office, on the dates and at the rates provided in Article II of
the Agreement. All or any portion of the principal amount of Loans may be
prepaid or required to be prepaid as provided in the Agreement.
If payment of all sums due hereunder is accelerated under the terms of the
Agreement, the then remaining principal amount and accrued but unpaid interest
shall bear interest which shall be payable on demand at the rates per annum set
forth in the proviso to Section 2.2 (a) of the Agreement. Further, in the event
of such acceleration, this Note shall become immediately due and payable,
without presentation, demand, protest or notice of any kind, all of which are
hereby waived by the Borrower.
In the event this Note is not paid when due at any stated or accelerated
maturity, the Borrower agrees to pay, in addition to the principal and interest,
all costs of collection, including reasonable attorneys' fees, and interest due
hereunder thereon at the rates set forth above.
Interest hereunder shall be computed as provided in the Agreement.
This Note is one of the Notes referred to in the Agreement and is issued
pursuant to and entitled to the benefits and security of the Agreement to which
reference is hereby made for a more complete statement of the terms and
<PAGE>
conditions upon which the Revolving Loans evidenced hereby were or are made and
are to be repaid. This Note is subject to certain restrictions on transfer or
assignment as provided in the Agreement.
All Persons bound on this obligation, whether primarily or secondarily
liable as principals, sureties, Guarantors, endorsers or otherwise, hereby waive
to the full extent permitted by law the benefits of all provisions of law for
stay or delay of execution or sale of property or other satisfaction of judgment
against any of them on account of liability hereon until judgment be obtained
and execution issues against any other of them and returned satisfied or until
it can be shown that the maker or any other party hereto had no property
available for the satisfaction of the debt evidenced by this instrument, or
until any other proceedings can be had against any of them, also their right, if
any, to require the holder hereof to hold as security for this Note any
collateral deposited by any of said Persons as security. Protest, notice of
protest, notice of dishonor, diligence or any other formality are hereby waived
by all parties bound hereon.
IN WITNESS WHEREOF, the Borrower has caused this Note to be made, executed
and delivered by its duly authorized representative as of the date and year
first above written, all pursuant to authority duly granted.
SHERIDAN HEALTHCARE, INC.
WITNESS:
- ------------------------------ By:
--------------------------------
Name: Jay A. Martus
- ------------------------------ Title: Vice President
ACKNOWLEDGMENT OF EXECUTION ON BEHALF OF
SHERIDAN HEALTHCARE, INC.
STATE OF NORTH CAROLINA
COUNTY OF MECKLENBURG
Before me, the undersigned, Notary Public in and for said County and State
on this 17th day of December, 1997 A.D., personally appeared Jay A. Martus,
known to be the Vice President of the above-named corporation (the "Borrower"),
who, being by me duly sworn, said he works at 4651 Sheridan Street, Hollywood,
Florida and that by authority duly given by, and as the act of, the Borrower,
the foregoing and annexed Note dated December 17, 1997, was signed by him as
said Vice President on behalf of the Borrower.
Witness my hand and official seal this 17th day of December, 1997.
(SEAL) --------------------------------------------
Kimberly B. Saltrick, Notary Public
My commission expires: August 11, 2001
<PAGE>
AFFIDAVIT OF MICHAEL A. CRABB, III
The undersigned, being first duly sworn, deposes and says:
1. He is a Vice President of NationsBank, National Association, and works
at NationsBank Corporate Center, 8th Floor, Charlotte, North Carolina.
2. The Note of Sheridan Healthcare, Inc. to the NationsBank, National
Association (the "Agent") dated December 17, 1997 was executed before her/him
and delivered to her/him on behalf of the Agent in Charlotte, North Carolina on
December 17, 1997.
This the 17th day of December, 1997.
------------------------------------
Michael A. Crabb, III
ACKNOWLEDGMENT OF EXECUTION
STATE OF NORTH CAROLINA
COUNTY OF MECKLENBURG
Before me, the undersigned, a Notary Public in and for said County and
State on this 17th day of December, 1997 A.D., personally appeared Michael A.
Crabb, III who before me affixed her/his signature to the above Affidavit.
Witness my hand and official seal this 17th day of December, 1997.
------------------------------------
Kimberly B. Saltrick, Notary Public
(SEAL)
My commission expires: August 11, 2001
SHERIDAN HEALTHCARE, INC.
EXHIBIT 21.1
Schedule of Subsidiaries and Affiliates
(As of December 31, 1997)
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
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. SHERIDAN CHILDREN'S HEALTHCARE SERVICES OF PENNSYLVANIA, P.C.,
a Pennsylvania professional corporation
<PAGE>
III. OTHER MANAGED AFFILIATES:
A. WEST BROWARD OB/GYN, P.A., a Florida professional association
B. BECERRA & AUGUSTINO, M.D., INC., a Florida corporation
C. CASTILLO-PLAZA & ASSOCIATES, M.D., INC., a Florida corporation
D. DRS. GRABIOS, FIRESTONE, HALFON & LEBOW, P.A., a Florida
professional association
E. WOMAN TO WOMAN OBSTETRICS & GYNECOLOGY, P.A., a Florida
professional association
F. FREDERICK N. HERMAN, M.D., INC., a Florida corporation
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SHERIDAN HEALTHCARE, INC. FOR THE YEAR ENDED
DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 23,416
<ALLOWANCES> 1,828
<INVENTORY> 0
<CURRENT-ASSETS> 27,526
<PP&E> 6,488
<DEPRECIATION> 2,950
<TOTAL-ASSETS> 87,035
<CURRENT-LIABILITIES> 13,876
<BONDS> 0
0
0
<COMMON> 69
<OTHER-SE> 41,281
<TOTAL-LIABILITY-AND-EQUITY> 87,035
<SALES> 0
<TOTAL-REVENUES> 98,616
<CGS> 0
<TOTAL-COSTS> 68,919
<OTHER-EXPENSES> 15,109
<LOSS-PROVISION> 4,066
<INTEREST-EXPENSE> 2,461
<INCOME-PRETAX> 8,061
<INCOME-TAX> 2,894
<INCOME-CONTINUING> 5,167
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,167
<EPS-PRIMARY> 0.77
<EPS-DILUTED> 0.73
</TABLE>
