UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended June 30, 1997
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from to
---- ----
******************************
Commission File Number 0-26806
SHERIDAN HEALTHCARE, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3252967
(State or other jurisdiction of (IRS Employer ID Number)
incorporation or organization)
4651 Sheridan Street, Suite 400, Hollywood, Florida
33021 (Address of principal executive offices,
including zip code)
954/987-5822
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---- ----
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of outstanding shares of the issuer's classes of common
stock as of the latest practicable date.
As of August 1, 1997, there were 6,417,998 shares of the Registrant's voting
Common Stock, $.01 par value, outstanding and 296,638 shares of the Registrant's
non-voting Class A Common Stock, $.01 par value, outstanding.
Part I: Financial Information
Item 1: Financial Statements
SHERIDAN HEALTHCARE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
June 30, December 31,
1997 1996
------------- -------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents..................................................... $ --- $ ---
Accounts receivable, net of allowances........................................ 20,494 18,717
Income tax refunds receivable................................................. --- 570
Deferred income taxes......................................................... 1,568 1,154
Other current assets.......................................................... 2,057 1,845
------------- -------------
Total current assets........................................................ 24,119 22,286
Property and equipment, net of accumulated depreciation.......................... 3,342 3,730
Goodwill, net of accumulated amortization........................................ 49,922 46,111
Intangible assets, net of accumulated amortization............................... 1,671 1,281
------------- -------------
Total assets.............................................................. $ 79,054 $ 73,408
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................................. $ 363 $ 222
Amounts due for acquisitions.................................................. 553 558
Accrued salaries and benefits................................................. 2,698 2,798
Self-insurance accruals....................................................... 3,388 3,170
Refunds payable............................................................... 2,590 1,952
Accrued lease obligations..................................................... 704 971
Other accrued expenses........................................................ 4,019 3,090
Current portion of long-term debt............................................. 439 1,189
------------- -------------
Total current liabilities................................................... 14,754 13,950
Long-term debt................................................................... 24,057 21,367
Amounts due for acquisitions..................................................... 1,865 2,133
Stockholders' equity:
Preferred stock, par value $.01; 5,000 shares authorized, none issued......... --- ---
Common stock, par value $.01; 21,000 shares authorized:
Voting; 6,418 shares issued and outstanding................................. 64 64
Class A non-voting; 297 shares issued and outstanding...................... 3 3
Additional paid-in capital.................................................... 61,129 61,129
Excess purchase price distributed to management stockholders.................. (7,541) (7,541)
Retained earnings (deficit)................................................... (15,277) (17,697)
------------- -------------
Total stockholders' equity ................................................. 38,378 35,958
------------- -------------
Total liabilities and stockholders' equity................................ $ 79,054 $ 73,408
============= =============
See accompanying notes.
2
SHERIDAN HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three Months Ended
June 30,
----------------------------
1997 1996
------------- ------------
Net revenue of consolidated and unconsolidated physician practices............... $ 24,605 $ 23,475
Less - amounts retained by unconsolidated practices.............................. (876) (275)
------------- ------------
Net revenue of the Company....................................................... 23,729 23,200
Operating expenses:
Direct facility expenses...................................................... 16,486 16,636
Provision for bad debts....................................................... 950 915
Salaries and benefits......................................................... 1,893 1,684
General and administrative.................................................... 1,289 1,086
Amortization.................................................................. 475 638
Depreciation.................................................................. 153 274
------------- -------------
Total operating expenses.................................................... 21,246 21,233
------------- -------------
Operating income................................................................. 2,483 1,967
Interest expense................................................................. 583 651
------------- -------------
Income before income taxes....................................................... 1,900 1,316
Income tax expense............................................................... 668 200
------------- -------------
Net income....................................................................... $ 1,232 $ 1,116
============= =============
Net income per share............................................................. $ .18 $ .16
Weighted average shares of common stock and
common stock equivalents outstanding.......................................... 6,934 6,831
See accompanying notes.
3
SHERIDAN HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Six Months Ended
June 30,
----------------------------
1997 1996
------------- ------------
Net revenue of consolidated and unconsolidated physician practices............... $ 47,923 $ 43,569
Less - amounts retained by unconsolidated practices.............................. (1,289) (515)
------------- ------------
Net revenue of the Company....................................................... 46,634 43,054
Operating expenses:
Direct facility expenses...................................................... 32,485 31,082
Provision for bad debts....................................................... 1,875 1,590
Salaries and benefits......................................................... 3,723 3,234
General and administrative.................................................... 2,409 2,102
Amortization.................................................................. 912 1,189
Depreciation.................................................................. 296 484
------------- -------------
Total operating expenses.................................................... 41,700 39,681
------------- -------------
Operating income................................................................. 4,934 3,373
Interest expense................................................................. 1,184 1,204
------------- -------------
Income before income taxes....................................................... 3,750 2,169
Income tax expense............................................................... 1,330 200
------------- -------------
Net income....................................................................... $ 2,420 $ 1,969
============= =============
Net income per share............................................................. $ .35 $ .30
Weighted average shares of common stock and
common stock equivalents outstanding.......................................... 6,913 6,577
See accompanying notes.
4
SHERIDAN HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended
June 30,
-----------------------------
1997 1996
------------- -------------
Cash flows from operating activities:
Net income.................................................................... $ 2,420 $ 1,969
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization................................................................ 912 1,189
Depreciation................................................................ 296 484
Provision for bad debts..................................................... 1,875 1,590
Deferred income taxes....................................................... (414) ---
Changes in operating assets and liabilities:
Accounts receivable......................................................... (4,622) (3,753)
Other current assets........................................................ 258 (1,368)
Other assets................................................................ (524) ---
Accounts payable............................................................ 141 (156)
Other accrued expenses...................................................... 1,265 841
------------- -------------
Net cash provided by operating activities................................. 1,607 796
------------- -------------
Cash flows from investing activities:
Acquisitions of physician practices........................................... (273) (10,933)
Investment in management agreements........................................... (6,258) ---
Sale of physician practices................................................... 3,282 ---
Capital expenditures.......................................................... (382) (939)
------------- -------------
Net cash (used) in investing activities................................... (3,631) (11,872)
------------- -------------
Cash flows from financing activities:
Borrowings on long-term debt.................................................. 3,018 12,559
Payments on long-term debt.................................................... (994) (1,287)
------------- -------------
Net cash provided by financing activities................................. 2,024 11,272
------------- -------------
Increase in cash and cash equivalents............................................ --- 196
Cash and cash equivalents:
Beginning of period........................................................... --- ---
------------- -------------
End of period................................................................. $ --- $ 196
============= =============
See accompanying notes.
5
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
(unaudited)
(1) BASIS OF PRESENTATION
---------------------
The interim consolidated financial statements have been prepared without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission
(SEC). Certain information and footnote disclosures, normally included in
financial statements prepared in accordance with generally accepted accounting
principles, have been condensed or omitted pursuant to SEC rules and
regulations; nevertheless, management believes that the disclosures herein are
adequate to make the information presented not misleading. These consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1996. In the opinion of management,
all adjustments, consisting only of normal recurring adjustments, necessary to
fairly present the consolidated financial position of the Company at June 30,
1997, and the consolidated results of its operations and its consolidated cash
flows for the periods shown in the interim consolidated financial statements,
have been included herein. The results of operations for the interim periods are
not necessarily indicative of the results for the full years.
(2) GOODWILL
--------
Approximately $29.0 million of the total amount of goodwill, net of accumulated
amortization, at June 30, 1997 is related to the Company's acquisition of
Sheridan Healthcorp, Inc. (the "Predecessor") in November 1994. Such goodwill
represents the Company's market position and reputation, its relationships with
its customers and affiliated physicians, the relationships between its
affiliated physicians and their patients, and other similar intangible assets.
The remaining $20.9 million of the total amount of goodwill at June 30, 1997 is
related to several acquisitions of physician practices, and investments in
management agreements with physician practices, which were completed from
September 1994 to May 1997, some of which are included in the transactions
discussed in Note 6 below. Such goodwill represents the general reputation of
the practices in the communities they serve, the collective experience of the
management and other employees of certain practices in managing health care
services delivered under capitated arrangements, contracts with health
maintenance organizations, relationships between the physicians and their
patients, patient lists, and other similar intangible assets.
(3) INTANGIBLE ASSET
----------------
Intangible assets consist primarily of the physician employee workforce,
non-physician employee workforce, management team and computer software acquired
in the Company's acquisition of the Predecessor and deferred loan costs.
(4) AMOUNTS DUE FOR ACQUISITIONS
----------------------------
Amounts due for acquisitions includes obligations to the former stockholders of
certain office-based physician practices acquired by the Company, which are
being paid over the terms of the employment agreements between the Company and
the former stockholders, which range from three to five years. It also includes
termination benefits payable to the former stockholders of an acquired practice,
which are payable beginning in 2001 or upon termination of their employment by
the Company, whichever is later.
6
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(5) NET REVENUE
-----------
Since the beginning of 1996, the Company has entered into several long-term
management agreements with physician practices. Under the management agreements,
the Company recognizes net revenue equal to the management fees received from
the practices. Effective for the period ended June 30, 1997, the Company began
presenting the total net revenue of all of its owned and managed physician
practices and the net revenue of the company after deducting amounts retained by
the managed practices in its results of operations, as shown on the accompanying
consolidated statements of operations. The Company's management believes that
this data provides readers with additional useful information about its
operations.
(6) ACQUISITIONS AND DIVESTITURES
-----------------------------
During the period from January to October 1996, the Company made six
acquisitions of physician practices for an aggregate of $12.4 million in cash
and deferred payments and approximately 658,000 shares of the Company's common
stock. During the period from March 1997 to May 1997, the Company also entered
into long-term management agreements with three physician practices, in
connection with which it acquired certain assets from the practices, and options
to acquire the practices, for aggregate consideration of $6.2 million in cash.
These acquisitions and management agreements were accounted for as purchases,
and accordingly, the operations of each acquired practice, or the operations
under each management agreement, are included in the Company's consolidated
financial statements beginning on each respective date of acquisition, or the
effective date of the management agreement, as applicable. In each transaction,
the purchase price was allocated to the net assets acquired based on their
estimated fair market values.
The following table summarizes the pro forma consolidated results of operations
of the Company as though all of the transactions discussed above had occurred at
the beginning of the period presented. The pro forma consolidated results of
operations shown below do not necessarily represent what the consolidated
results of operations of the Company would have been if these transactions had
actually occurred at the beginning of the period presented, nor do they
represent a forecast of the consolidated results of operations of the Company
for any future period.
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
(in thousands, except per share data)
Pro Forma Results of Operations:
Net revenue of the Company................ $ 23,994 $ 24,690 $ 47,783 $ 48,932
Income before income taxes................ 1,910 1,371 3,757 2,484
Net income................................ 1,236 1,133 2,408 2,089
Net income per share...................... .18 .17 .35 .32
During the period from December 1996 to April 1997, the Company sold two primary
care practices and two rheumatology practices which had generated an aggregate
of $8.4 million of net revenue during the year ended December 31, 1996.
7
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(7) LONG-TERM DEBT
--------------
Long-term debt consists of the following (in thousands):
June 30, December 31,
1997 1996
----------- ------------
Revolving credit facility, maturing in March 2000,
secured by substantially all assets of the Company.................... $ 23,000 $ ---
Revolving credit facility, maturing in February 1997,
secured by substantially all assets of the Company.................... --- 19,982
Capital lease obligations payable in various monthly
installments, maturing at various dates through 2001.................. 1,496 1,809
Note payable, maturing in January 1997.................................. --- 765
----------- -----------
Total................................................................ 24,496 22,556
Less current portion.................................................... (439) (1,189)
----------- -----------
Long-term debt...................................................... $ 24,057 $ 21,367
=========== ===========
On March 12, 1997, the Company established a new $35 million revolving credit
facility, which was used to pay the outstanding balance under the previous
credit facility. There are no principal payments due under the new credit
facility until the maturity date of March 11, 2000. The new revolving credit
facility contains various restrictive covenants that include, among other
requirements, the maintenance of certain financial ratios, various restrictions
regarding acquisitions, sales of assets, liens and dividends, and limitations
regarding investments, additional indebtedness and guarantees. The Company was
in compliance with the loan covenants in the new credit facility as of June 30,
1997. The additional amount that could be borrowed under the credit facility is
potentially restricted by a leverage ratio defined in the credit agreement.
Based on the value of this leverage ratio at June 30, 1997, the Company had the
ability to borrow the entire unused portion of the credit facility, which was
$12.0 million at June 30, 1997.
(8) INCOME TAXES
------------
The Company's income tax expense was reduced by a loss carryforward from the
prior year for the three months and six months ended June 30, 1997 and the three
months and six months ended June 30, 1996. Without the loss carryforwards,
income tax expense for the three months ended June 30, 1997 and 1996 would have
been approximately $875,000 and $650,000, and income tax expense for the six
months ended June 30, 1997 and 1996 would have been approximately $1,750,000 and
$1,100,000. The Company had an unused loss carryforward of approximately $1.1
million for book purposes as of June 30, 1997. The tax effect of this loss
carryforward is being allocated evenly among all four quarters in the year
ending December 31, 1997. The Company had net deferred tax assets at June 30,
1997, which represent the tax effect of differences between the tax basis and
the financial reporting basis of assets and liabilities on the Company's balance
sheet.
(9) LITIGATION
----------
In October 1996, the Company and certain of its directors, officers and legal
advisors were named as defendants in a lawsuit filed in the Circuit Court of the
Seventeenth Judicial Circuit in and for Broward County, Florida by certain
former physician stockholders of the Predecessor, which was formerly named
Southeastern Anesthesia Management Associates, Inc. The claim alleges that the
defendants engaged in a conspiracy of fraud and deception for personal gain in
connection with inducing the plaintiffs to sell their stock in the Predecessor
to the Company, as well as legal malpractice and violations of Florida
securities laws. The claim seeks damages of at least $10 million and the
imposition of a constructive trust and disgorgement of stock and options held by
certain members of the Company's management. The Company believes the lawsuit is
without merit and intends to continue to vigorously defend against it.
8
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(10) NET INCOME PER SHARE
--------------------
Net income per share reflected in the accompanying consolidated statements of
operations represents both primary earnings per share and fully diluted earnings
per share, which are substantially the same for the Company. In February 1997,
the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings Per Share," ("SFAS 128"), which is
effective for fiscal years ending after December 15, 1997. SFAS 128 simplifies
the calculation of earnings per share and provides for the reporting of basic
earnings per share and diluted earnings per share. Application of SFAS 128 to
the accompanying consolidated financial statements would not have a material
impact on the Company's earnings per share.
(11) STOCKHOLDERS' EQUITY
--------------------
In May 1997, the Company decreased the amount of its authorized common stock
from 31,000,000 shares to 21,000,000 shares, which is retroactively reflected in
the accompanying consolidated balance sheets.
(12) STOCK OPTIONS
-------------
The Company adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," ("SFAS 123") in 1996. The Company has
elected to continue using Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," in accounting for employee stock
options. Each stock option has an exercise price equal to the market price on
the date of grant and, accordingly, no compensation expense has been recorded
for any stock option grants.
Stock option activity during the six months ended June 30, 1997 was as follows:
Weighted
Average
Number Exercise
of Shares Price
--------- ---------
Balance, December 31, 1996................................................. 553,911 $ 5.73
Granted during period...................................................... 471,500 9.27
Forfeited during period.................................................... (6,975) 5.83
-----------
Balance, June 30, 1997..................................................... 1,018,436 $ 7.37
===========
The following table summarizes the pro forma consolidated results of operations
of the Company as though the fair value based accounting method in SFAS 123 had
been used in accounting for stock options.
Six Months
Ended
June 30, 1997
-------------
(in thousands,
except per
share data)
Pro forma results of operations:
Net income.............................................................................. $ 1,693
Net income per share.................................................................... .24
9
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
This Form 10-Q contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
those set forth in the forward-looking statements. Certain factors that might
cause such a difference include the following: fluctuations in the volume of
services delivered by the Company's affiliated physicians, changes in the
reimbursement rates for those services, uncertainty about the ability to collect
the appropriate fees for those services, fluctuations in the cost and
utilization rates of referral services used by patients that are subject to
shared-risk capitation arrangements, the loss of significant hospital or
third-party payor relationships, and changes in the number of patients using the
Company's physician services.
GENERAL
The Company is a physician practice management company which provides specialist
physician services at hospitals and ambulatory surgical facilities in the areas
of anesthesia, neonatology, pediatrics, emergency services and obstetrics, and
which owns and operates, or manages, office-based primary care and obstetrical
practices. The Company derives substantially all of its revenue from the medical
services provided by the physicians who are employed by the Company or whose
practices are managed by the Company. The Company increased the number of
physicians affiliated with it from approximately 145 at December 31, 1995 to
approximately 210 at June 30, 1997 through several acquisitions of physician
practices, several long-term management agreements with physician practices, and
the addition of several new contracts for specialist physician services. The
Company made several acquisitions of physician practices and entered into
several long-term management agreements with physician practices, during the
period from January 1, 1996 to June 30, 1997, as described in Note 6 to the
accompanying consolidated financial statements. These transactions were
accounted for as purchases and accordingly, the operations of each acquired
practice, or the operations under each management agreement, are included in the
Company's consolidated financial statements beginning on each respective date of
acquisition, or the effective date of the management agreement, as applicable.
The Company also sold certain physician practices during the period from
December 1996 to April 1997, as described in Note 6 to the accompanying
consolidated financial statements.
RESULTS OF OPERATIONS
The following table shows certain statement of operations data expressed as
percentage of net revenue:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1997 1996 1997 1996
--------- --------- --------- --------
(in thousands, except per share data)
Net revenue of the Company........................... 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Direct facility expenses........................ 69.5 71.7 69.7 72.2
Provision for bad debts......................... 4.0 3.9 4.0 3.7
Salaries and benefits........................... 8.0 7.3 8.0 7.5
General and administrative...................... 5.4 4.7 5.2 4.9
Amortization.................................... 2.0 2.7 1.9 2.8
Depreciation.................................... 0.6 1.2 0.6 1.1
--------- --------- --------- --------
Total operating expenses................... 89.5 91.5 89.4 92.2
--------- --------- --------- --------
Operating income..................................... 10.5% 8.5% 10.6% 7.8%
========= ========= ========= ========
10
Three Months Ended June 30, 1997 Compared To Three Months Ended June 30, 1996
Net revenue increased $529,000, or 2.3%, from $23.2 million in 1996 to $23.7
million in 1997. Net revenue from hospital-based services increased by $1.3
million, from $16.1 million in 1996 to $17.4 million in 1997. This increase was
primarily due to the addition of several new contracts for hospital-based
services during the past year. Net revenue from office-based practices decreased
$800,000, from $7.1 million in 1996 to $6.3 million in 1997, primarily due to
the sale of two primary care practices and two rheumatology practices during the
period from December 1996 to April 1997.
Direct facility expenses decreased $150,000, or 0.9%, from $16.6 million in 1996
to $16.5 million in 1997. Direct facility expenses include all operating
expenses that are incurred at the location of the physician practice, including
salaries, employee benefits, referral claims (in the case of shared-risk
capitation business), office expenses, medical supplies, insurance and other
expenses. The decrease in direct facility expenses, in spite of a $529,000
increase in net revenue, was primarily due to an increase in the percentage of
the Company's total net revenue that is derived from hospital-based services,
from 69.3% in 1996 to 73.5% in 1997. The Company's hospital-based operations
have historically had a lower direct facility expense percentage than its
office-based operations. Direct facility expenses as a percentage of net revenue
("direct facility expense percentage") decreased from 71.7% in 1996 to 69.5% in
1997, primarily due to a favorable change in the mix of the Company's business,
as noted above.
The provision for bad debts increased $35,000, or 3.8%, from $915,000 in 1996 to
$950,000 in 1997. This increase was primarily due to a 2.3% increase in net
revenue, as discussed above. As a percentage of net revenue, the provision for
bad debts increased only slightly, from 3.9% in 1996 to 4.0% in 1997.
Salaries and benefits increased $209,000, or 12.4%, from $1.7 million in 1996 to
$1.9 million in 1997. Salaries and benefits includes salaries, payroll taxes and
employee benefits related to employees located at the Company's central office,
including employees related to hospital-based operations, office-based
operations and general corporate functions. The increase in salaries and
benefits was primarily due to employees added to various corporate functions to
support future growth of the Company, to employees added to support the new
contracts for hospital-based services noted above and to the accrual of
physician incentives. As a percentage of net revenue, salaries and benefits
increased from 7.3% in 1996 to 8.0% in 1997, primarily due to the increases
noted above.
General and administrative expense increased $203,000, or 18.7%, from $1.1
million in 1996 to $1.3 million in 1997. General and administrative expense
includes expenses incurred at the Company's central office, including office
expenses, accounting and legal fees, insurance, travel and other similar
expenses. The increase in general and administrative expense was primarily due
to an increase in legal fees due to the litigation discussed in Note 9 to the
accompanying consolidated financial statements, and increases in various
expenses to support the increase in the number of employees indicated in the
preceding paragraph. As a percentage of net revenue, general and administrative
expense increased from 4.7% in 1996 to 5.4% in 1997.
Amortization expense decreased $163,000, or 25.5%, from $638,000 in 1996 to
$475,000 in 1997. This decrease was primarily due to a decrease in amortization
expense related to goodwill and intangible assets that were written down to
their estimated realizable values during the fourth quarter of 1996, which was
partially offset by amortization of the goodwill related to several acquisitions
of physician practices, and management agreements with physician practices,
completed from July 1996 to May 1997, which are included in the transactions
discussed in Note 6 to the accompanying consolidated financial statements.
Operating income increased $516,000, or 26.2%, from $2.0 million in 1996 to $2.5
million in 1997. This increase was primarily due to a decrease in the direct
facility expense percentage from 71.7% in 1996 to 69.5% in 1997, which was
primarily due to a favorable shift in the Company's mix of hospital-based and
office-based operations, as discussed above.
11
Six Months Ended June 30, 1997 Compared To Six Months Ended June 30, 1996
Net revenue increased $3.5 million, or 8.3%, from $43.1 million in 1996 to $46.6
million in 1997. Net revenue from hospital-based services increased by $5.4
million, from $28.7 million in 1996 to $34.1 million in 1997. This increase was
primarily due to the acquisition of a 43-physician hospital-based neonatology
and pediatric practice in March 1996, and the addition of several new contracts
for hospital-based services during the past year. Net revenue from office-based
practices decreased $1.9 million, from $14.4 million in 1996 to $12.5 million in
1997, primarily due to the sale of two primary care practices and two
rheumatology practices during the period from December 1996 to April 1997.
Direct facility expenses increased $1.4 million, or 4.5%, from $31.1 million in
1996 to $32.5 million in 1997. The increase in direct facility expenses was
primarily due to an 8.3% increase in net revenue, as noted above. The direct
facility expense percentage decreased from 72.2% in 1996 to 69.7% in 1997,
primarily due to an increase in the percentage of the Company's total net
revenue that is derived from hospital-based services, from 66.7% in 1996 to
73.3% in 1997. The Company's hospital-based operations have historically had a
lower direct facility expense percentage than its office-based operations.
The provision for bad debts increased $285,000, or 17.9%, from $1.6 million in
1996 to $1.9 million in 1997. This increase was primarily due to an 8.3%
increase in net revenue, as discussed above. As a percentage of net revenue, the
provision for bad debts increased from 3.7% in 1996 to 4.0% in 1997. This
increase was primarily due to an increase in the percentage of the Company's
total net revenue that is derived from hospital-based services, which typically
have a higher bad debt expense as a percentage of net revenue than the Company's
office-based operations.
Salaries and benefits increased $489,000, or 15.1%, from $3.2 million in 1996 to
$3.7 million in 1997. The increase in salaries and benefits was primarily due to
employees added to various corporate functions to support future growth of the
Company, to additional employees to support the new contracts for hospital-based
services noted above and to the accrual of physician incentives. As a percentage
of net revenue, salaries and benefits increased from 7.5% in 1996 to 8.0% in
1997, primarily due to the increases noted above.
General and administrative expense increased $307,000, or 14.6%, from $2.1
million in 1996 to $2.4 million in 1997. The increase in general and
administrative expense was primarily due to an increase in legal fees due to the
litigation discussed in Note 9 to the accompanying consolidated financial
statements, and increases in various expenses to support the increase in the
number of employees indicated in the preceding paragraph. As a percentage of net
revenue, general and administrative expense increased from 4.9% in 1996 to 5.2%
in 1997.
Amortization expense decreased $277,000, or 23.3%, from $1.2 million in 1996 to
$912,000 in 1997. This decrease was primarily due to a decrease in amortization
expense related to goodwill and intangible assets that were written down to
their estimated realizable values during the fourth quarter of 1996, which was
partially offset by amortization of the goodwill related to several acquisitions
of physician practices, and management agreements with physician practices,
completed from July 1996 to May 1997, which are included in the transactions
discussed in Note 6 to the accompanying consolidated financial statements.
Operating income increased $1.5 million, or 46.3%, from $3.4 million in 1996 to
$4.9 million in 1997. This increase was primarily due to a decrease in the
direct facility expense percentage from 72.2% in 1996 to 69.7% in 1997, which
was primarily due to a favorable shift in the Company's mix of hospital-based
and office-based operations, as discussed above and the acquisition of a
hospital-based neonatology practice completed in March 1996.
12
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal uses of cash during the six months ended June 30, 1997
were to finance investments in management agreements with physician practices
($6.3 million) and to finance increases in accounts receivable ($2.7 million).
The Company met its cash needs during this period primarily through the sale of
certain physician practices ($3.3 million), its net income plus non-cash
expenses (amortization, depreciation and deferred income taxes) ($3.2 million),
and net borrowings on long-term debt ($2.0 million).
On March 12, 1997, the Company established a new $35 million revolving credit
facility with NationsBank, National Association (South) ("NationsBank"). The new
credit facility matures on March 11, 2000 and bears interest at the London
interbank offered rate plus an applicable margin which is subject to quarterly
adjustment based on a leverage ratio defined in the credit agreement. As of
August 1, 1997, the applicable margin was 1.63%. The Company was in compliance
with the loan covenants in the new credit facility as of June 30, 1997. There
are no principal payments due under the credit facility until the maturity date
of March 11, 2000.
The outstanding balance under the credit facility increased from $20.0 million
at December 31, 1996 to $23.0 million at June 30, 1997 primarily due to
investments in management agreements in 1997, as discussed above. The amount
that can be borrowed under the new credit facility is potentially restricted by
a leverage ratio defined in the credit agreement. Based on the value of this
leverage ratio at June 30, 1997, the Company had the ability to borrow the
entire unused portion of the credit facility, which was $12.0 million at June
30, 1997. Certain conditions must be met, including the maintenance of certain
financial ratios, and in certain circumstances, the approval of NationsBank must
be obtained, in order to use the credit facility to finance acquisitions of
physician practices or investments in management agreements. There can be no
assurance that the Company will be able to satisfy such conditions in order to
use its credit facility to finance any future acquisitions or investments in
management agreements.
In March 1996, the Company issued approximately 658,000 shares of its common
stock as partial consideration for an acquisition of a hospital-based
neonatology practice completed in March 1996, which is included in the
acquisitions discussed in Note 6 to the accompanying consolidated financial
statements.
In order to provide funds necessary for the Company's future expansion
strategies, it will be necessary for the Company to incur, from time to time,
additional long-term bank indebtedness and/or issue equity or debt securities,
depending on market and other conditions. There can be no assurance that such
additional financing will be available on terms acceptable to the Company.
Six Months Ended June 30, 1997 Compared To Six Months Ended June 30, 1996
Net cash provided by operating activities increased from $796,000 in 1996 to
$1.6 million in 1997. This increase of $811,000 was due to several factors, the
largest of which was an increase in deferred income tax assets of only $414,000
in 1997, compared to an increase of $1.4 million in 1996.
Net cash used by investing activities decreased from $11.9 million in 1996 to
$3.6 million in 1997. This decrease was primarily due to a decrease in cash used
for physician practice acquisitions and investments in management agreements
from $10.9 million in 1996 to $6.5 million in 1997, and proceeds of $3.3 million
from the sale of physician practices in 1997.
Net cash provided by financing activities decreased from $11.3 million in 1996
to $2.0 million in 1997. This decrease was primarily due to a decrease in net
borrowings under the Company's revolving credit facility from $12.6 million in
1996 to $3.0 million in 1997, which is related to the decrease in cash used for
physician practice acquisitions and investments in management agreements, and
proceeds from the sale of physician practices, as discussed above.
13
PART II. OTHER INFORMATION
-----------------
Item 1: Legal Proceedings
From time to time, the Company is party to various claims,
suits, and complaints. Currently, there are no such claims,
suits or complaints which, in the opinion of management, would
have a material adverse effect on the Company's financial
position, liquidity or results of operations.
Item 4: Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders on May 15,
1997. At the Annual Meeting, the Company's stockholders voted
(i) to re-elect Lewis D. Gold, M.D. and Henry E. Golembesky,
M.D. to serve as Class II Directors of the Company until the
2000 Annual Meeting of Stockholders and until their respective
successors are duly elected and qualified; (ii) to approve an
amendment to the Company's Third Amended and Restated
Certificate of Incorporation to decrease the number of
authorized shares of common stock of the Company from 31,000,000
to 21,000,000; and (iii) to approve an amendment to the
Company's Second Amended and Restated 1995 Stock Option Plan to
increase the total number of shares of common stock of the
Company that may be issued thereunder from 750,000 to 1,350,000,
each as described in the Company's Proxy Statement distributed
to stockholders in connection with the Annual Meeting. Set forth
below are the results of the stockholder votes at the Annual
Meeting on the foregoing matters.
Election of Class II Directors
Nominee Votes in Favor Votes Withheld Broker Non-Votes
- ------- -------------- -------------- ----------------
Lewis D. Gold, M.D. 5,632,304 7,750 N/A
Henry E. Golembesky, M.D. 5,631,304 8,750 N/A
Approval of Amendment to the Company's Third
Amended and Restated Certificate of Incorporation
Votes in Favor Votes Against Abstentions Broker Non-Votes
- -------------- ------------- ----------- ----------------
5,582,664 41,775 15,615 N/A
Approval of Amendment to the Company's Second
Amended and Restated 1995 Stock Option Plan
Votes in Favor Votes Against Abstentions Broker Non-Votes
- -------------- ------------- ----------- ----------------
4,080,641 499,246 30,702 1,029,465
Item 6: Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report:
14
Exhibit
Number Description
- ------- -----------
3.1 Third Amended and Restated Certificate of Incorporation of Sheridan
Healthcare, Inc., as amended effective May 27, 1997.
10.1 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.
11.1 Statement regarding computation of per share earnings.
27 Financial Data Schedule (for SEC use only).
(b) No reports on Form 8-K have been filed during the quarter for
which this report is filed.
15
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SHERIDAN HEALTHCARE, INC.
(Registrant)
Date: August 14, 1997 By: /s/ Michael F. Schundler
--------------------------- ------------------------
Michael F. Schundler
Chief Financial Officer
(principal financial officer)
16