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 March 31, 1998
[ ] 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 May 1, 1998, there were 7,910,712 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)
March 31, December 31,
1998 1997
------------- -------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents..................................................... $ 874 $ 427
Accounts receivable, net of allowances........................................ 23,212 21,588
Income tax refunds receivable................................................. 239 1,280
Deferred income taxes......................................................... 1,318 1,417
Other current assets.......................................................... 2,591 2,814
------------- -------------
Total current assets........................................................ 28,234 27,526
Property and equipment, net of accumulated depreciation.......................... 3,610 3,538
Goodwill, net of accumulated amortization........................................ 91,024 54,168
Intangible assets, net of accumulated amortization............................... 1,664 1,803
------------- -------------
Total assets.............................................................. $ 124,532 $ 87,035
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................................. $ 542 $ 591
Amounts due for acquisitions.................................................. 493 527
Accrued salaries and benefits................................................. 1,973 2,686
Self-insurance accruals....................................................... 3,964 3,973
Refunds payable............................................................... 2,890 2,674
Accrued physician incentives.................................................. 327 744
Other accrued expenses........................................................ 2,484 2,235
Current portion of long-term debt............................................. 447 446
------------- -------------
Total current liabilities................................................... 13,120 13,876
Long-term debt, net of current portion........................................... 46,621 29,833
Amounts due for acquisitions..................................................... 1,851 1,976
Stockholders' equity:
Preferred stock, par value $.01; 5,000 shares authorized, none issued......... --- ---
Common stock, par value $.01; 21,000 shares authorized:
Voting; 7,901 and 6,509 shares issued and outstanding....................... 79 66
Class A non-voting; 297 shares issued and outstanding...................... 3 3
Additional paid-in capital.................................................... 81,530 61,352
Excess purchase price distributed to management stockholders.................. (7,541) (7,541)
Accumulated deficit........................................................... (11,131) (12,530)
------------- -------------
Total stockholders' equity ................................................. 62,940 41,350
------------- -------------
Total liabilities and stockholders' equity................................ $ 124,532 $ 87,035
============= =============
See accompanying notes.
2
SHERIDAN HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three Months Ended
March 31,
1998 1997
------------- -------------
Net revenue...................................................................... $ 27,675 $ 22,979
Operating expenses:
Direct facility expenses...................................................... 19,131 16,073
Provision for bad debts....................................................... 1,309 925
Salaries and benefits......................................................... 1,893 1,830
General and administrative.................................................... 977 1,120
Amortization.................................................................. 716 437
Depreciation.................................................................. 201 143
------------- -------------
Total operating expenses.................................................... 24,227 20,528
------------- -------------
Operating income................................................................. 3,448 2,451
Interest expense................................................................. 881 601
------------- -------------
Income before income taxes....................................................... 2,567 1,850
Income tax expense............................................................... 1,168 662
------------- -------------
Net income....................................................................... $ 1,399 $ 1,188
============= =============
Net income per share
Basic......................................................................... $ .19 $ .18
Diluted....................................................................... .18 .17
Weighted average shares of common stock and
common stock equivalents outstanding
Basic......................................................................... 7,439 6,715
Diluted....................................................................... 7,859 6,897
See accompanying notes.
3
SHERIDAN HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended
March 31,
1998 1997
------------- -------------
Cash flows from operating activities:
Net income.................................................................... $ 1,399 $ 1,188
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization................................................................ 716 437
Depreciation................................................................ 201 143
Provision for bad debts..................................................... 1,309 925
Deferred income taxes....................................................... 99 (207)
Changes in operating assets and liabilities:
Accounts receivable......................................................... (2,933) (2,727)
Other current assets........................................................ 1,264 605
Other assets................................................................ 80 (519)
Accounts payable............................................................ (49) 84
Other accrued expenses...................................................... (674) (1,178)
------------- -------------
Net cash provided by (used in) operating activities....................... 1,412 (1,249)
------------- -------------
Cash flows from investing activities:
Acquisitions of physician practices........................................... (130) (135)
Investment in management agreements........................................... (17,377) (3,203)
Sale of physician practices................................................... --- ---
Capital expenditures.......................................................... (273) (162)
------------- -------------
Net cash (used) in investing activities................................... (17,780) (3,500)
------------- -------------
Cash flows from financing activities:
Borrowings on long-term debt.................................................. 16,936 5,618
Payments on long-term debt.................................................... (176) (869)
Exercise of employee stock options............................................ 55 ---
------------- -------------
Net cash provided by financing activities................................. 16,815 4,749
------------- -------------
Increase in cash and cash equivalents............................................ 447 ---
Cash and cash equivalents:
Beginning of period........................................................... 427 ---
------------- -------------
End of period................................................................. $ 874 $ ---
============= =============
See accompanying notes.
4
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
(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, 1997. 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 March 31,
1998, 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) 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".
The Company is following the controlling financial interest provisions of EITF
Issue 97-2 in its determination of whether the operations of an affiliated
physician practice qualify for consolidation.
(3) Goodwill
--------
Approximately $28.4 million of the total amount of goodwill, net of accumulated
amortization, at March 31, 1998 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 $62.6 million of the total amount of goodwill at March 31, 1998 is
related to several acquisitions of physician practices, and investments in
management agreements with physician practices accounted for as purchases, which
were completed from September 1994 to March 1998, some of which are included in
the transactions discussed in Note 6 below. Such goodwill represents the general
reputation of the practices in the communities they serve, the collective
experience of the management and other employees of certain practices in
managing health care services delivered under capitated arrangements, contracts
with third-party payors, relationships between the physicians and their
patients, patient lists, and other similar intangible assets. 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.
5
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(4) Intangible assets
-----------------
Intangible assets consist primarily of the physician employee workforce,
non-physician employee workforce, management team and computer software acquired
in the Company's acquisition of the Predecessor and deferred loan costs. These
intangible assets are being amortized over the lives of the underlying assets or
agreements, which range from three to seven years.
(5) Amounts due for acquisitions
----------------------------
Amounts due for acquisitions includes obligations to the former stockholders of
certain office-based physician practices acquired by the Company. These amounts
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) Acquisitions and divestitures
-----------------------------
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. 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. Concurrent with each acquisition of an option the Company entered
into a long-term management agreement with each practice. 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 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.
Three Months Ended
March 31,
1998 1997
----------- -----------
(in thousands, except
per share data)
Pro Forma Results of Operations:
Net revenue.......................................................... $ 28,849 $ 28,664
Income before income taxes........................................... 2,939 2,942
Net income .......................................................... 1,624 1,790
Net income per share - basic......................................... 0.20 0.22
Net income per share - diluted....................................... 0.19 0.22
During the period from February 1997 through April 1997 the Company sold a
primary care office location and two rheumatology practices which generated
approximately $875,000 in net revenue for the year ended December 31, 1997.
6
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Effective April 1, 1998 the Company completed the sale of a primary care
practice with two office locations. The practices generated approximately $8.2
million in net revenue for the year ended December 31, 1997 and approximately
$1.9 million for the quarter ended March 31, 1998.
(7) Long-term debt
--------------
Long-term debt consists of the following (in thousands):
March 31, December 31,
1998 1997
----------- --------
Revolving credit facility, maturing in December 2000,
secured by substantially all assets of the Company.................... $ 45,900 $ 29,000
Capital lease obligations payable in various monthly
installments, maturing at various dates through 2001.................. 1,168 1,279
----------- -----------
Total................................................................ 47,068 30,279
Less current portion.................................................... (447) (446)
----------- -----------
Long-term debt...................................................... $ 46,621 $ 29,833
=========== ===========
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. On December 17, 1997 the Company amended its existing revolving
credit facility which increased the amount available from $35 million to $50
million. There are no principal payments due under the new credit facility until
the maturity date of December 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 March 31,
1998. 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 March 31, 1998, the Company had the
ability to borrow the entire unused portion of the credit facility, which was
$4.1 million at March 31, 1998.
On April 30, 1998 the Company further amended its revolving credit facility
which increased the amount available from $50 million to $75 million. This
amendment included the syndication of the credit facility with a group of banks
led by NationsBank, N.A. There are no principal payments due under the new
credit facility until the maturity date of April 30, 2001.
(8) Income taxes
------------
The Company's income tax expense was reduced by a loss carryforward from the
prior year for the three months ended March 31, 1997. Without the loss
carryforward, income tax expense for the three months ended March 31, 1997 would
have been approximately $870,000. The Company had an unused loss carryforward of
approximately $1.6 million for book purposes as of March 31, 1997. The tax
effect of the loss carryforward from 1996 was allocated evenly among all four
quarters in the year ending December 31, 1997. The Company had net deferred tax
assets at March 31, 1998, 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.
7
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(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 and also
believes the lawsuit's ultimate resolution will not have a material adverse
impact on the financial position of the Company.
(10) Recent accounting pronouncements
--------------------------------
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.
(11) Earnings per share
------------------
Reconciliation of Basic EPS Factors to Diluted EPS Factors:
March 31,
------------------------
1998 1997
----------- -----------
Weighted average common shares outstanding
for basic earnings per share............................... 7,439 6,715
Impact of dilutive employee stock options.................... 420 182
----------- -----------
Weighted average of shares of
common stock equivalents for
diluted earnings per share................................. 7,859 6,897
=========== ===========
8
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(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 three months ended March 31, 1998 was as
follows:
Weighted
Average
Number Exercise
of Shares Price
----------- ---------
Balance, December 31, 1997................................................. 937,084 $ 7.91
Exercised.................................................................. (8,833) 6.37
Granted during period...................................................... 297,675 14.25
Forfeited during period.................................................... (12,600) 7.95
-----------
Balance, March 31, 1998.................................................... 1,213,326 $ 9.48
===========
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, 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 employs or manages
specialist physicians providing 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 or managing 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 April 30, 1998, the Company
employed, or managed the practices of, approximately 241 physicians practicing
under 52 specialty service contracts with 35 health care facilities and at 24
office locations.
The Company made several acquisitions of physician practices and entered into
several long-term management agreements with physician practices, during the
period from March 1997 to March 1998, 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
February 1997 to December 1997, as described in Note 6 to the accompanying
consolidated financial statements.
10
RESULTS OF OPERATIONS
The following table shows certain statement of operations data expressed as
percentage of net revenue:
Three Months Ended
March 31,
-------------------
1998 1997
-------- --------
(in thousands,
except per share data)
Net revenue.................................................................. 100.0% 100.0%
Operating expenses:
Direct facility expenses................................................ 69.1 69.9
Provision for bad debts................................................. 4.7 4.0
Salaries and benefits................................................... 6.8 8.0
General and administrative.............................................. 3.5 4.9
Amortization............................................................ 2.6 1.9
Depreciation............................................................ 0.7 0.6
--------- --------
Total operating expenses........................................... 87.4 89.3
--------- --------
Operating income............................................................. 12.6% 10.7%
========= ========
Three Months Ended March 31, 1998 Compared To Three Months Ended March 31, 1997
Net revenue was $27.7 million in 1998 compared to $23.0 million in 1997, an
increase of $4.7 million or 20.4%. Of this increase, $1.6 million was due to the
acquisition of two hospital-based physician practices during the first quarter
of 1998, $2.1 million was due to the acquisition of several office-based
practices during the past year and $1.0 million was due to the addition of
several new contracts for hospital-based services during the past year.
Direct facility expenses increased $3.0 million, or 19%, from $16.1 million in
1997 to $19.1 million in 1998. 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 corresponds to the increase
in net revenue as noted above. Direct facility expenses as a percentage of net
revenue decreased slightly from 69.9% in 1997 to 69.1% in 1998.
The provision for bad debts increased $384,000, or 41.5%, from $925,000 in 1997
to $1,309,000 in 1998. This increase was due to a 20.4% increase in net revenue,
as discussed above, and an increase in the Company's overall bad debt percentage
which increased from 4.5% in 1997 to 4.7% in 1998. The increase in the Company's
bad debt percentage is due to an increase in the Company's net revenue derived
from office-based practices with a concentration of fee-for-service revenue
rather than capitation revenue. Capitated practices do not incur bad debt
expense.
Salaries and benefits increased $63,000, or 3.4%, from $1.8 million in 1997 to
$1.9 million in 1998. 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 due to an increase in personnel used to support the growth in the
Company's hospital-based contracts. As a percentage of net revenue, salaries and
benefits decreased from 8.0% in 1997 to 6.8% in 1998.
General and administrative expense decreased $143,000, or 12.8%, from $1.1
million in 1997 to $1.0 million in 1998. 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 decrease in general and administrative expense was due to a
decrease in legal fees incurred in connection with malpractice cases which are
now reflected as a direct facility expense. As a percentage of net revenue,
general and administrative expense decreased from 4.9% in 1997 to 3.5% in 1998.
11
Amortization expense increased $279,000, or 63.8%, from $437,000 in 1997 to
$716,000 in 1998. This increase was related to several acquisitions of physician
practices and management agreements with physician practices, completed from
March 1997 to March 1998, which are included in the transactions discussed in
Note 6 to the accompanying consolidated financial statements.
Operating income increased $997,000, or 40.7%, from $2.5 million in 1997 to $3.4
million in 1998. This increase was due to growth from acquisitions and new
contracts. As a percentage of net revenue, operating income increased from 10.7%
in 1997 to 12.6% in 1998. This increase was due to the fact net revenue
increased at a greater rate than salaries and benefits or general and
administrative expense.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal uses of cash during the three months ended March 31,
1998 were to finance investments in management agreements with physician
practices ($17.5 million) and to finance increases in accounts receivable ($1.6
million). The Company met its cash needs during this period primarily from its
net income plus non-cash expenses (amortization, depreciation and deferred
income taxes) ($2.4 million), and net borrowings on long-term debt ($16.9
million).
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 which was further amended on April 30, 1998 to
increase the total revolving credit commitment from $50 million to $75 million.
This amendment included the syndication of the revolving credit facility with a
group of seven banks led by NationsBank. 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 May 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 amended credit facility
until the maturity date of April 30, 2001.
The outstanding balance under the credit facility increased from $29.0 million
at December 31, 1997 to $45.9 million at March 31, 1998 primarily due to
investments in management agreements in 1998, 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 March 31, 1998, the Company had the ability to borrow the
entire unused portion of the credit facility, which was $4.1 million at March
31, 1998. Certain conditions must be met, including the maintenance of certain
financial ratios, and in certain circumstances, the approval of the Company's
lenders 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 November 1997, the Company issued approximately 14,000 shares of its common
stock as partial consideration for an acquisition of an office-based general
surgical practice completed in November 1997. During the period from January
1998 to March 1998 the Company completed four transactions with physician
practices for consideration of approximately $17.2 million in cash and the
issuance of approximately 1,384,000 shares of the Company's common stock.
12
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.
On April 20, 1998 the Company filed a Form S-3 registration statement with the
Securities and Exchange Commission for a public offering of up to 1,000,000
newly issued shares of the Company's common stock. The registration statement
relating to these securities has not yet become effective. All the shares are
being offered by the Company and Pacific Growth Equities, Inc. is acting as the
Company's placement agent in connection with the offering.
Three Months Ended March 31, 1998 Compared To Three Months Ended March 31, 1997
Net cash provided by operating activities increased by $2.7 million from 1997 to
1998. This increase was due to several factors, the largest of which was an
increase of net income plus non-cash expenses (amortization, depreciation and
deferred income taxes) which increased from $1.6 million in 1997 to $2.4 million
in 1998.
Net cash used by investing activities increased from $3.5 million in 1997 to
$17.8 million in 1998. This increase was primarily due to an increase in cash
used for physician practice acquisitions and investments in management
agreements from $3.3 million in 1997 to $17.5 million in 1998.
Net cash provided by financing activities increased from $4.7 million in 1997 to
$16.8 million in 1998. This increase was primarily due to an increase in net
borrowings under the Company's revolving credit facility from $5.6 million in
1997 to $16.9 million in 1998, which is related to the increase in cash used for
physician practice acquisitions and investments in management agreements.
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 2. Changes in Securities and Use of Proceeds
SALES OF UNREGISTERED SECURITIES
--------------------------------
During the period from January 1, 1998 to March 31, 1998, the Company
issued unregistered securities to a limited number of persons, as described
below. No underwriters or underwriting discounts or commissions were involved.
There was no public offering in any such transaction, and the Company believes
that each transaction was exempt from the registration requirements of the
Securities Act of 1933, as amended (the "Securities Act"), by reason of Section
4(2) thereof, based on the private nature of the transactions and the financial
sophistication of the purchasers, all 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.
(1) On January 9, 1998, the Company issued an aggregate of
172,816 shares of common stock to the former stockholders of a
physician practice in consideration for the acquisition of such
practice by the Company.
(2) On January 28, 1998, the Company issued an aggregate of
287,304 shares of common stock to the former stockholders of a
physician practice in consideration for the acquisition of such
practice by the Company.
(3) On March 4, 1998, the Company issued an aggregate of
885,000 shares of common stock to the former stockholders of a
physician practice and a related party in consideration for the
acquisition of such practice by the Company.
(4) On March 6, 1998, the Company issued on aggregate of
38,593 shares of common stock to the former stockholder and an employee
of a physician practice in consideration for the acquisition of such
practice by the Company.
Item 6: Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report:
14
Exhibit
Number Description
- ------- -----------
10.1 Investment and Stockholders' Agreement, by and among the Company
and Rafael D. Arango, M.D., Stuart J. Leaderman, M.D., Eduardo H.
Marti, M.D., Charles Merson, M.D., Ramiro Rodriguez, M.D., Tirso
J. Rojas, M.D., Laurence Skolnik, M.D., and Joaquin C. Taranco,
M.D., dated as of January 9, 1998.
10.2 Investment and Stockholders' Agreement, by and among the Company
and Jeffrey L. Buchalter, M.D., Kurt A. Krueger, M.D., Davie E.
Fairleigh, M.D., and Ruben B. Timmons, M.D., dated as of January
28, 1998.
10.3 Investment and Stockholers' Agreement, by and among the Company
and Michael R. Cavenee, M.D., and Kenneth J. Trimmer, M.D., dated
as of March 4, 1998 (incorporated herein by reference to such
exhibit filed as an exhibit to the Company's Report on Form 8-K
filed as of March 19, 1998).
10.4 Investment and Stockholders' Agreement, by and between the Com
pany and Nord Capital Group, Inc., dated as of March 4, 1998.
10.5 Investment and Stockholders' Agreement, by and among the Company,
Staffan R. B. Nordqvist, M.D., and Laurel A. King, M.D., dated as
of March 6, 1998.
27 Financial Data Schedule (for SEC use only).
(b) (i) A report on Form 8-K was filed on March 19, 1998 to report
a material acquisition completed on March 4, 1998.
(ii) A report on Form 8-K/A was filed on April 16, 1998 to
amend a report on Form 8-K which was filed on March 19, 1998
to report a material acquisition completed on March 4, 1998.
The Form 8-K/A includes Item 7.(a), the financial statements
of businesses acquired, and Item 7.(b), the pro forma
financial information, both of which were not included in the
Form 8-K.
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: May 15, 1998 By: /s/ Michael F. Schundler
-----------------------------
Michael F. Schundler
Chief Financial Officer
(principal financial officer)