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, 1998
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from to
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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 $22.9 million as of March 16, 1999. 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,
1999, as reported on the NASDAQ National Market.
As of March 16, 1999, there were 6,290,178 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 1999
Annual Meeting of Stockholders are incorporated by reference into Part III of
this Form 10-K.
Index to Financial Statements
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Page
Item 1. Business............................................................ 3
Item 2. Properties.......................................................... 15
Item 3. Legal and Administrative Proceedings................................ 16
Item 4. Submission of Matters to a Vote of Security Holders................. 16
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters............................................... 16-17
Item 6. Selected Financial Data............................................. 18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 19-29
Item 8. Financial Statements and Supplementary Data......................... 30-59
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.......................................... 60
Item 10. Directors and Executive Officers of the Registrant.................. 60
Item 11. Executive Compensation.............................................. 60
Item 12. Security Ownership of Certain Beneficial
Owners and Management............................................. 60
Item 13. Certain Relationships and Related Transactions...................... 60
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..... 60-65
2
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 "Risk Factors"
under Item 1 of this Form 10-K and "Certain Factors Affecting Future Operating
Results" under Item 7 of this Form 10-K.
ITEM 1. BUSINESS
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GENERAL
The Company provides physician services to hospitals, ambulatory surgical
facilities and in office-based settings in a variety of medical specialties
including anesthesia, emergency medicine, general surgery, gynecology,
gynecology-oncology, infertility, neonatology, obstetrics, pediatrics,
perinatology and primary care. The Company also provides management services to
physician practices that employ physicians practicing in generally the same
medical specialties as the Company's physicians. The Company derives its revenue
from the medical services provided by the physicians who are employed by the
Company and from management fees earned from the managed practices. For the year
ended December 31, 1998, approximately 97% of the Company's net revenue was
derived from physician services and approximately 3% of the Company's net
revenue was generated under management services agreements. References to
physician services provided by the Company include services performed by
physicians employed by the Company and services provided by physicians in whose
practices the Company has a controlling financial interest (the "Consolidated
Practices"). The financial results of the Consolidated Practices are presented
on a consolidated basis with those of the Company because the Company has a
controlling financial interest in these practices based on the provisions of its
purchase agreements, voting trust agreements or management agreements with these
entities.
Four of the Consolidated Practices, Sheridan Medical Healthcorp, P.C. ("Sheridan
NY"), Sheridan Healthcare of Texas, P.A. ("Sheridan TX"), Sheridan Healthcare of
California Medical Group, Inc. ("Sheridan CA") and Sheridan Children's
Healthcare Services of Pennsylvania, P.C. ("Sheridan PA") have entered into
long-term management agreements with the Company and are owned by Gilbert
Drozdow, M.D. who is an executive officer and a stockholder of the Company. In
addition, the Consolidated Practices include twelve practices with which the
Company executed long-term management agreements and purchase option agreements
from March 1997 through September 1998. One of these practices is located in
Texas, the remainder are located in Florida.
The Company generates revenue from its physician services by directly billing
third-party payors or patients on a fee-for-service or discounted
fee-for-service basis, through subsidies paid by hospitals to supplement billing
from third party payors and pursuant to capitation arrangements, which included
shared-risk capitation arrangements with managed care organizations until April
1, 1998. The Company generates management services revenue from managed
practices through a variety of reimbursement arrangements. Reimbursement terms
under management agreements in place with unconsolidated practices during 1998
required the practice to pay the Company a management fee that was either based
on a percentage of net revenues or based on expenses incurred by the Company
plus a flat fee that does not fluctuate based on performance. Management fees
that are based on a percentage of net revenue range from 35% to 65% and are not
subject to adjustment.
The Company's objective is to expand its business by increasing the number of
hospitals and other health care facilities at which it provides physician
services, providing physician services in additional specialties to existing
hospital customers, acquiring additional physician practices, adding physicians
to existing practices and entering into additional management agreements. One of
the Company's key strategies is to create integrated multi-specialty group
physician practices 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, 1999, the Company employed, or managed the practices of, approximately
237 full-time equivalent physicians practicing under 55 specialty service
contracts with 38 health care facilities and at 28 office locations.
3
OPERATIONS
The Company and its predecessors have been providing hospital-based physician
services for more than 40 years. All of the Company's physician services were in
the area of anesthesia until 1994, when the Company began to deliver emergency
physician services (see "Hospital Outsourcing"). In March 1996 the Company
further expanded its hospital-based services through the acquisition of a
43-physician neonatology practice that delivered physician services at 11
hospitals in Florida and Virginia. The Company also commenced its office-based
services business in 1994 by acquiring a four-location primary care practice and
completed an additional eleven acquisitions of office-based primary care,
obstetrical and rheumatology practices during the period from December 1994 to
October 1996. All of these practices were located in South Florida. In November
1996, the Company announced a change in its strategic direction and its intent
to sell non-strategic office-based primary care and rheumatology physician
practices. At that time the Company believed obstetrical, and other practices
with a focus on women's health services, provided the greatest opportunity for
integration of patients served by these practices with the Company's
hospital-based physician services which in turn supports our hospital-based
customers.
As a result of its change in strategic direction and the desire to further focus
on women's health the Company entered into long-term management agreements with
and purchased options to acquire, four obstetrical practices and one general
surgical practice from January 1997 through November 1997. In addition, from
January 1998 through September 1998 the Company completed four acquisitions of
obstetrical practices and entered into long-term management agreements with and
purchased options to acquire, two obstetrical practices, a gynecology-oncology
practice, an infertility practice and a general surgical practice all providing
office-based services. In January and June 1998 the Company entered into
long-term management agreements with and purchased options to acquire, a
hospital-based anesthesia practice and a neonatology practice. Each of these
practices is located in South Florida. In March 1998 the Company also entered
into a long term management agreement with, and purchased an option to acquire a
perinatology practice located in Dallas, Texas which is intended to be the
Company's next area of development of a multi-specialty group of practices. In
addition to acquisitions, the Company also expands internally by being awarded
new contracts for its services and the addition of new physicians to existing
office-based practices. Substantially all of the Company's office-based revenue
has been derived from the acquired physician practices.
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. 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, because the
Company provides the contracted services on a 24-hour a day, 365-day a year
basis. Office-based physicians seek affiliation with the Company to access the
Company's management expertise, capital resources and managed care contracting
assistance. The Company provides a comprehensive range of support services to
its hospital-based physicians and office-based practices that include
contracting with third-party payors, billing and collections, malpractice risk
management, quality assurance, and physician recruiting and credentialling.
For each hospital, ambulatory surgical facility, or office-based practice 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 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 has
directly employed most of its physicians and other health care professionals.
The Company currently has employment agreements with most of its hospital-based
physicians, which generally provide for terms of between one and seven years and
include non-competition provisions. The Company also employs advanced registered
nurse practitioners, certified nurse midwives and physician assistants. The
compensation structure for physicians and other health care professionals is
intended to be competitive within the geographic market in which they are
employed.
4
As a result of its 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 had been consolidated from
five office locations into three office locations, which employ five primary
care physicians. Two of these primary care office locations were sold in April
1998.
MULTI-SPECIALTY INTEGRATED GROUP PRACTICES. The Company's principal business
strategy is to develop multi-specialty group physician practices around key
hospitals to meet women and children's health care needs in select geographic
areas. The Company's multi-specialty group physician practices currently provide
a range of services including hospital-based anesthesia, neonatology,
pediatrics, and obstetrics, and office-based obstetrics, general surgery,
gynecology, gynecology oncology, perinatology and infertility. The Company's
multi-specialty group physician practices in South Florida provide services to
15 hospitals and 5 ambulatory surgical facilities and operate 25 office
locations. These services are provided by approximately 151 physicians. Of these
physicians 67 are anesthesiologists, 38 are neonatologists or pediatricians, 3
are in-house obstetricians, 31 are obstetricians, 3 are perinatologists, 4 are
general surgeons, 4 are gynecologists-oncologists and 1 is an infertility
specialist. The Company has also begun the development of a multi-specialty
group physician practice in the Dallas area through its affiliation with a
perinatology practice in March 1998 which presently employs 3 perinatologists
providing services at 3 office locations.
Hospital Outsourcing. The Company provides hospital-based physician services in
the areas of anesthesia, neonatology, pediatrics, emergency medicine and
obstetrics to hospitals and ambulatory surgical facilities in markets where the
Company has not established multi-specialty group practices. Many markets are
not suitable for the development of multi-specialty group physician practices
due to the significant amount of capital and management expertise that is
required to construct and manage these practices. In addition, the Company also
provides emergency services within markets that the Company has established
multi-specialty group practices. Emergency services in these markets are
excluded from the Company's multi-specialty group practice because they are not
focused on the area of women's health. The Company provides hospital-based
physician services to 10 hospitals located in Florida, New York, Texas,
Virginia, West Virginia and Pennsylvania. These services are provided by
approximately 70 physicians employed by the Company. Of these physicians, 22 are
anesthesiologists, 13 are neonatologists or pediatricians and 35 are emergency
room physicians. The Company also provides management services to a practice
with one neonatologist providing physician services to three hospitals in Ohio
and a practice with eight physicians providing anesthesia and pain management
services to five ambulatory surgical facilities in Florida. 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.
The Company began providing hospital-based services outside the South Florida
market in 1993 and has expanded those services by being awarded new contracts
for its services, through the acquisition in March 1996 of a neonatology and
pediatric practice which delivered physician services in Virginia and through
the execution of long term management agreements in December 1997 with a
hospital-based neonatology practice and in January 1998 through the execution of
a long-term management agreement with, and an option to acquire, a pain
management practice providing physician services to 5 surgical facilities in
Florida.
The Company provides the same support services to hospital-based physicians
providing services under its hospital outsourcing contracts as those that are a
part of its multi-specialty group practices. 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
practice. 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
that is either based on a percentage of net revenues or based on expenses
incurred by the Company plus a flat fee that does not fluctuate based on
performance. Management fees that are based on a percentage of net revenue range
from 35% to 65% and are not subject to adjustment.
Acquisitions And Management Agreements. The Company typically acquires a
physician practice by paying the owners of the practice a multiple of the
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, contain non-competition provisions and may contain
incentive compensation provisions based on increases in productivity and
efficiency.
5
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, contain non-competition provisions and may contain incentive
compensation provisions based on increases in productivity and efficiency.
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. These practices are referred to as Consolidated
Practices and the transactions with these practices are treated as business
combinations and the financial results of the Consolidated Practices are
presented on a consolidated basis with those of the Company. Those practices
whose management agreements do not demonstrate a controlling financial interest
by the Company are included in the Company's consolidated financial statements
only to the extent of management fees received and expenses incurred by the
Company under the respective agreement.
Divestitures. Pursuant to the Company's announced intention to divest of its
non-strategic office-based physician practices 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 Company consolidated the remaining practices to be sold from five office
locations into three office locations. Two of these primary care office
locations were sold in April 1998. In addition, as noted above, the Company has
terminated two long-term management agreements with primary care practices
entered into during 1996 that included five office locations and four
physicians. The office-based practices which have been sold, and which the
Company currently intends to sell, include a four-facility primary care 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. The office-based practices sold during
1997 and 1998 generated approximately $1.9 million and $9.9 million in net
revenue for the year ended December 31, 1998 and 1997, respectively. The
practices sold did not generate significant operating income for those periods.
MANAGED CARE
Approximately 55.1% of the Company's patient service revenue is derived from
third-party payors under various managed care arrangements. Such arrangements
include negotiated discounted fee-for-service arrangements which are based on a
percentage of the Company's billed charges or a percentage of Medicare and
Medicaid allowables, as well as capitation arrangements which are based on a
flat fee or a fixed fee per managed care member. The composition of net revenue
of practices managed by the Company is substantially similar to that of the
Company.
As a result of its change in strategic direction the Company has experienced a
shift in the composition of its patient service revenue away from capitation
arrangements. The primary care practices sold generated a substantial majority
of the Company's capitation revenue during 1997 and the year ended December 31,
1998.
Revenue under shared-risk capitation arrangements accounted for approximately
1.6% and 7.8% for year ended December 31, 1998 and 1997, respectively, of the
Company's net revenue. Under shared-risk capitation 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 each of the above fiscal periods
amounts received from managed care organizations under shared-risk capitation
arrangements exceeded the cost of services provided to patients under such
arrangements. However, the profitability of the Company's shared-risk capitation
arrangements had declined each year as a result of a decline in patients
enrolled with the managed care organization and assigned to the Company's
practices. The Company completed the sale of a two facility primary care
practice on April 1, 1998 which eliminated all of the Company's shared-risk
capitation revenue.
6
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 office-based practices owned and managed by the Company presently utilize a
variety of 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. The Company
has selected a single third-party product for implementation in its office-based
practices which began in September 1998.
The Company's Year 2000 preparedness plan for its systems is scheduled to be
completed by the fourth quarter of 1999.
See "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Year 2000" for a complete discussion of the Company's
preparedness for the Year 2000.
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 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.
7
The Company has management services agreements with four practices considered
Consolidated Practices, Sheridan NY, Sheridan TX, Sheridan CA and Sheridan PA
that are owned by Gilbert Drozdow, M.D., who is an executive officer and a
stockholder of the Company. The Company also has management services agreements
with four obstetrical practices, and a general surgery practice entered into
during 1997 and an anesthesia practice, gynecologic-oncology practice, general
surgery practice, infertility practice, two obstetrical practices and
perinatology practice entered into during 1998 that are also considered
Consolidated Practices. Concurrent with the execution of these management
agreements the Company also purchased an option to acquire the outstanding stock
of these practices. The terms of the management services agreements with each of
these Consolidated Practices demonstrate a controlling financial interest by the
Company for accounting purposes and these Consolidated Practices 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 typically requires Consolidated Practices to enter
into employment agreements with the physicians providing medical services. These
employment agreements provide for compensation based on a guaranteed base
salary. These agreements are typically for terms of five to seven years, contain
non-competition provisions and may provide for incentive compensation.
The Company also entered into long-term management agreements with a neonatology
practice in December 1997 and a pain management practice in February 1998. The
terms of these agreements, as well as two management agreements entered into in
1996 and terminated in December 1997 and April 1998, respectively, do not
demonstrate a controlling financial interest by the Company either because the
Company's management fee does not fluctuate together with the performance of the
practice or because the Company's interest is not unilaterally saleable or
transferable. Therefore, the Company's consolidated financial statements reflect
only the management fees earned and expenses incurred by the Company under the
management agreement. 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 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 exercised its
option to acquire the pain management practice to which it had been providing
management services on December 31, 1998. Therefore, the Company's consolidated
balance sheet as of December 31, 1998 includes the balance sheet of this
practice.
The responsibility for the provision of physician services by physician
practices with which the Company has long-term management agreements remains
with the physician practice regardless of whether the Company has a controlling
financial interest.
The Company has contractual arrangements with hospitals and ambulatory surgery
centers which govern its delivery of hospital-based physician services. The
agreements governing such operations are generally for terms of between one and
five years and provide for termination upon 60 to 180 days notice, although the
Company has some 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 consulting and management services relating to the
operation of anesthesia departments at six hospitals located in California. The
Company is paid a fixed monthly fee for these services.
The Company is paid for its 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.
8
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. 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 $250,000 of losses for each individual claim up to a maximum
aggregate self-insured retention amount of $1,000,000 for all claims in one
calendar year. Defense costs in excess of these self-insured retention amounts
are paid by the Company's insurer. The Company also maintains directors' and
officers' liability insurance and general liability insurance on a claims-made
basis.
TRADEMARKS
The Company has rights to a trademark and a service mark for "Sheridan
Healthcare, Inc." and "Sheridan Healthcorp, Inc." registered with the U.S.
Patent and Trademark Office. The Company also has a pending application for a
trademark and a service mark for "Sheridan Children's Healthcare Services, Inc."
EMPLOYEES
As of March 16, 1999, the Company had approximately 920 employees, of which 760
were full-time. Of the total number of employees, approximately 310 were
physicians and approximately 610 were non-physician clinical and administrative
support personnel. Of the total physicians employed by the Company, 64 were
physicians employed by the Consolidated Practices. The Company believes its
relationship with its employees is favorable.
RECENT DEVELOPMENTS
On March 25, 1999 the Company announced the signing of a definitive merger
agreement between the Company and an investor group led by Vestar Capital
Partners and the Company's senior management.
Under the terms of the agreement, the investor group will offer Sheridan
Healthcare, Inc. shareholders $9.25 per share in cash for all outstanding common
shares in a tender offer. Including debt and other obligations of the Company,
and costs expected to be incurred in connection with the acquisition, the total
value of the transaction is approximately $155 million. NationsBank, N.A. and
its affiliates, the Company's existing lender, have committed to provide $75
million in bank financing to fund the acquisition. Through Vestar Capital
Partners III, L.P., Vestar has committed to provide the remaining funds
necessary to complete the transaction. NationsBank has also committed to provide
a $50 million credit facility to fund the Company's long-term future growth and
expansion.
The Company entered into the merger agreement following a unanimous
recommendation by the Company's Board of Directors. The Board received fairness
opinions from Bowles Hollowell Conner, a division of First Union Capital Markets
Corp., and Salomon Smith Barney Inc., which, as previously announced, had been
retained to assist the Company in exploring strategic alternatives. Following
completion of the tender offer, Vestar will be entitled to designate a majority
of the Board of Directors of Sheridan Healthcare, Inc. The parties will complete
a second-step cash merger at $9.25 per share as promptly as practicable
following completion of the tender offer. The transaction is subject to a
variety of conditions, including receipt of at least a majority of the voting
stock in the tender offer, shareholder approval of the second-step cash merger,
financing and regulatory approvals.
9
RISK FACTORS
Risks Associated With the Company's Growth Strategy
A key element of the Company's strategy involves growth through acquisition of
physician practices. The Company is subject to various risks associated with
this strategy, including the risk that the Company will be unable to identify
and recruit suitable acquisition candidates in the future. The growth and
profitability of the Company is also largely dependent on the Company's ability
to effectively integrate the acquired practices to maintain or increase
reimbursement levels, to manage and control costs, and to realize economies of
scale. Any failure of the Company to consummate economically feasible
acquisitions, effectively integrate acquired practices or price its services
appropriately could have a material adverse effect on the Company's financial
condition or results of operations.
Risks From Concentration of Revenue
A significant portion of the Company's revenue is derived from delivering or
managing hospital-based physician services from hospitals that are under common
ownership by a limited number of entities. Of the Company's total net revenue in
1998, approximately $22.9 million, or 20.3%, was derived from anesthesia,
obstetrics and neonatology services delivered at three hospitals owned and
operated by the South Broward Hospital District. In addition, approximately
$28.9 million, or 25.6% of the Company's total net revenue in 1998, was derived
from anesthesia, neonatology, pediatric and emergency services delivered at 13
hospitals and two ambulatory surgical facilities owned and operated by
Columbia/HCA Healthcare Corp. The loss of either of these arrangements or
relationships would have a material adverse effect on the Company's financial
condition or results of operations.
Risks Related to Limitations On Reimbursement
Substantially all of the Company's revenues are derived from third party payors,
such as governmental programs (primarily Medicare and Medicaid), private
insurance plans and managed care organizations. Reflecting current trends in the
health care industry, these third party payors increasingly are negotiating with
health care providers such as the Company concerning the prices charged for
medical services by its owned and managed practices, with the goal of lowering
reimbursement and utilization rates. The profitability of the Company may be
adversely affected by changes in Medicare and Medicaid reimbursement, cost
containment decisions of third party payors and other payment factors over which
the Company has no control.
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 10.4% of the Company's total net revenue in
1998 was derived from the assignment of Medicare and Medicaid benefits to the
Company by patients of the Company's affiliated physicians. In addition,
approximately 4.4% of the Company's total net revenue in 1998 was derived from
capitation payments from health maintenance organizations for patients who had
assigned their Medicare or Medicaid benefits to the health maintenance
organizations. Medicare and Medicaid reimbursement policies are subject to
sweeping change and those programs are under significant pressure to reduce the
costs of providing health care services.
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,
for the services it provides, will increase at or above the overall rate of
inflation throughout the U.S. economy, though there can be no assurance that
these increases will occur.
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 eliminated disparities in
payment rates for similar services by physicians in different specialties
effective January 1, 1998. 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 Company has experienced a reduction in reimbursement for certain medical
services provided by its physicians with a specialty in surgery due to this
legislation. This reduction has not been significant. The legislation will also
revise Medicare payments for practice expense costs and change payments to
10
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 further reductions in payment
for the services offered by the Company could have an adverse effect on the
Company's financial condition or results of operations.
Some private insurance plans and managed care organizations with which the
company has contracts or to whose members it provides medical services have
limited operating histories. A default of a third-party payor and non-payment
for the Company's medical services could have an adverse effect on the Company's
financial condition or results of operations.
Risks From Exposure to Professional Liability
Due to the nature of its business, the Company from time to time 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 most significant source of potential liability in this regard is the
negligence of physicians employed or contracted by the Company or the practices
it manages. To the extent such physicians are employees of the Company or were
regarded as agents of the Company in the practice of medicine, the Company could
be held liable for their negligence. In addition, the Company could be found in
certain instances to have been negligent in performing its management services
under contractual arrangements even if no agency relationship with the physician
were found to exist. The Company's contracts with hospitals and third party
payors generally require the Company to indemnify such other parties for losses
resulting from the negligence of physicians who were employed or managed by or
affiliated with the Company. 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 risk 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
or available with sufficient limits and at reasonable cost to adequately and
economically insure the Company's operations in the future. A judgement against
the Company in excess of such coverage could have a material adverse effect on
the Company's financial condition or results of operations.
Risks Associated With Government Regulation
Because the Company is a participant in the health care industry, its operations
and relationships are subject to extensive and increasing regulation by a number
of governmental entities at the federal, state and local levels. The Company is
also subject to laws and regulations relating to business corporations in
general. The Company believes its operations are in material compliance with
applicable laws. Nevertheless, because the Company is involved in many aspects
of the health care industry, much of the Company's business operations have not
been the subject of state or federal regulatory interpretation and there can be
no assurance that a review of the Company's business by courts or regulatory
authorities will not result in a determination that could adversely affect the
operations of the Company or that the health care regulatory environment will
not change so as to restrict the Company's existing operations or their
expansion.
A significant portion of the Company's revenue is derived from delivering
medical services to patients who are covered under various Medicare and Medicaid
health care programs. Approximately 10.4% of the Company's total net revenue in
1998 was derived from the assignment of Medicare and Medicaid benefits to the
Company by patients of the Company's affiliated physicians. In addition,
approximately 4.4% of the Company's total net revenue in 1998 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 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.
11
Sheridan NY, Sheridan TX, Sheridan CA 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, Sheridan CA 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.
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.
12
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
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.
13
Risks Relating to the Year 2000
The Company uses computer software and related technologies throughout its
business that are likely to be affected by the date change in the Year 2000. The
Company's personnel may not discover and remediate all potential problems with
our systems in a timely manner. Presently, the Company's Year 2000 preparedness
plan for its systems is scheduled to be completed by the fourth quarters of
1999. In addition, computer software and related technologies used by
third-party payors and vendors are also likely to be affected by the Year 2000
date change. Failure of any of these parties to properly process dates for the
Year 2000 and thereafter could result in unanticipated expenses and delays to
the Company, including delays in the payment for services provided and delays in
our ability to conduct normal banking operations. See "ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Year
2000."
Risks Associated With Growth From New Contracts and Physician Services
The Company's growth strategy is also based on obtaining new contracts for the
provision of hospital-based physician services and adding physicians to its
existing office-based practices. There is substantial competition for
hospital-based contracts and the Company is increasingly involved in a
competitive bidding process that requires the Company to accurately project
revenues and expenses on a forward basis with limited information. The
integration of new contracts, as well as the maintenance of existing contracts,
is made more difficult by increasing pressures from health care payors to reduce
reimbursement rates at a time when the cost of providing medical services
continues to increase. Significant competition for new patients and managed care
contracts also exists among office-based practices within the Company's market.
Any failure of the Company to identify opportunities for new contracts and
services, effectively integrate new contracts, price its services appropriately
and increase patient volume for new physicians could have a material adverse
effect on the Company's financial condition or results of operations.
Risks Relating to Capital Requirements
The Company's acquisition of physician practices requires substantial capital
investment. Capital is typically needed not only for the acquisition of the
physician practices, but also for the effective integration, operation and
expansion of the practices as well as the start-up of new contracts for
hospital-based physician services and start-up of new physicians in its
office-based practices. The practices may require capital for renovation and
expansion and for the addition of medical equipment and technology. Therefore,
the Company may need to raise capital through the issuance of long-term or
short-term indebtedness or the issuance of its equity securities in private or
public transactions in order to complete further acquisitions and expansion.
This could result in dilution of existing equity positions and increased
interest expense. There can be no assurance that acceptable financing for future
acquisitions or for the integration and expansion of existing physician
practices can be obtained on suitable terms, if at all.
Risks From Dependence On Key Management
The Company is highly dependent on its senior and middle management. The Company
has entered into employment agreements with senior management that includes Dr.
Mitchell Eisenberg, President and Chief Executive Officer, Dr. Lewis Gold,
Executive Vice President of Business Development, Dr. Gilbert Drozdow, Vice
President of Hospital Based Services, Jay Martus, Vice President, Secretary and
General Counsel and Michael Schundler, Chief Operating Officer and Chief
Financial Officer. The employment agreements with Dr. Eisenberg, Dr. Gold, Mr.
Martus and Mr. Schundler end on July 31, 2003 and the employment agreement with
Dr. Drozdow ends on December 31, 1999. The loss of key management personnel or
inability to attract, retain and motivate sufficient number of qualified
management personnel could adversely affect the Company's business. In addition,
the Company may enter into employment agreements with key physicians and
administrative personnel of acquired practices. The loss of these key personnel
could adversely affect the performance of the acquired practice and the Company.
14
Risks Associated With Expansion Into New Geographic Markets
In pursuing its growth strategy, the Company intends to expand its presence into
new geographic markets. Expansion of the operations of the Company to 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. The Company may also face competitors
with greater knowledge of such markets than the Company. There can be no
assurance that the Company will be able to effectively establish a presence in
these new markets.
Risks From Competition
The provision of health care services and physician practice management services
are both competitive businesses in which the Company competes for contracts and
patients 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, and the provision of management services to, additional hospital-based and
office-based physician practices. Several companies, both publicly and privately
held, that have 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.
Risks Related to Volatility of Stock Price
Historically there has been and there may continue to be volatility in the
market price for the Company's common stock. Quarterly operating results of the
Company and their relationship to analysts' projections, changes in general
conditions in the economy, the financial markets or the healthcare industry, or
other developments affecting the Company or its competitors, could cause the
market price of the common stock to fluctuate substantially. In addition, in
recent years, the stock market and, in particular, the healthcare industry
segment, has experienced significant price and volume fluctuations. This
volatility has affected the market prices of securities issued by many companies
for reasons unrelated to their operating performance.
Risks Related to Anti-takeover Effect of Delaware Law and Charter and By-law
Provisions
Certain provisions of the Company's certificate of incorporation, by-laws and
Delaware law could, together or separately, discourage potential acquisition
proposals, delay or prevent a change in control of the Company and limit the
price that certain investors might be willing to pay in the future for shares of
the common stock. These provisions include a classified Board of Directors and
the ability of the Board of Directors to authorize the issuance, without further
stockholder approval, of preferred stock with rights and privileges which could
be senior to the common stock. The Company also is subject Section 203 of the
Delaware General Corporation Laws which, subject to certain exceptions,
prohibits a Delaware corporation from engaging in any of a broad range of
business combinations with any "interested stockholder" for a period of three
years following the date that stockholder became an interested stockholder.
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 $186,000. The Company currently leases approximately 31,000 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 $56,000 (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 $12,000. 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.
15
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 litigants are presently
engaged in the course of discovery. The Company continues to vigorously defend
against the lawsuit, believes the lawsuit is without merit and also believes the
lawsuit's ultimate resolution will not have a material adverse impact on the
financial position, operations and cash flow of the Company.
In December 1998, the buyer of two medical practices previously owned by the
Company, filed suit against the Company in the Circuit Court of the Seventeenth
Judicial Circuit in and for Broward County, Florida. The complaint seeks to
recover money damages and rescind the sale of the medical practices, based upon
alleged misrepresentations and concealment by the Company with respect to its
relationship with a third party payor in regards to these practices. The
practices were sold by the Company to the buyer in April 1998 in exchange for
the execution of a promissory note in the amount of $3,550,000 which is
presently in default. The Company believes the lawsuit is without merit and
intends to vigorously defend against it while vigorously pursuing its counter
claim which has been filed for recovery on its unsecured purchase money note.
The Company also believes the lawsuit's ultimate resolution will not have a
material adverse impact on the financial position, operations and cash flows of
the Company.
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:
1999 1998 1997
-------------------- -------------------- --------------------
High Low High Low High Low
--------- ------- --------- ------- --------- -------
First Quarter (1).............. 91/2 65/8 171/2 123/4 101/16 55/8
Second Quarter................. --- --- 17 11 111/4 7
Third Quarter.................. --- --- 121/2 81/2 135/8 101/8
Fourth Quarter................. --- --- 91/4 61/2 161/2 121/4
<FN>
(1) Through March 16, 1999.
</FN>
On March 16, 1999, the closing sale price of the Company's common stock was
$7.625. As of March 16, 1999, there were 46 holders of record of the Company's
voting common stock and one holder of record of non-voting Class A common stock.
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. From January 1998 through June 1998, the
16
Company issued approximately 1,428,000 shares of its common stock as partial
consideration in the acquisition of several physicians practices. No
underwriters or underwriting discounts or commissions were involved. Such
transactions were 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.
From July 1998 through December 1998 the Company repurchased approximately
425,000 shares of its common stock on the open market pursuant to the Stock
Repurchase Plan approved by its Board of Directors in July 1998. The shares of
common stock repurchased have been retired and cancelled.
From January 1999 through March 16, 1999 the Company repurchased approximately
1,275,000 shares issued to physicians in connection with the acquisition of
their physician practices by the Company from January 1998 through March 1998.
Shares were repurchased in accordance with the terms of each respective
acquisition agreement, retired and cancelled.
17
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 for the period from
January 1, 1994 to November 28, 1994 and of the Company as of December 31, 1994,
1995, 1996, 1997 and 1998 and for the period from November 29, 1994 to December
31, 1994 and the years ended December 31, 1995, 1996, 1997 and 1998 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 notes thereto included elsewhere in
this report.
Company Combined Company Predecessor
---------------------------------------- ----------- ----------- -----------
Period from Period from
November 29 January 1,
Year Ended Year Ended 1994 to 1994 to
December 31, December 31,December 31, November 28,
Statement of Operations 1998 1997 1996 1995 1994 1994 1994
-------- --------- --------- ----------- ----------- ----------- -----------
Data (in thousands):
Revenue:
Patient service revenue......... $109,580 $ 95,418 $ 89,753 $ 64,665 $ 38,624 $ 5,129 $ 33,495
Management fee revenue.......... 3,410 3,198 3,014 --- --- --- ---
-------- --------- --------- ----------- ----------- ----------- -----------
Net revenue........................ 112,990 98,616 92,767 64,665 38,624 5,129 33,495
Operating expenses:
Direct facility expenses........ 76,350 68,919 66,125 47,477 26,531 4,089 22,442
Provision for bad debts......... 5,592 4,066 3,605 2,324 1,909 159 1,750
Salaries and benefits........... 7,722 7,424 6,967 5,398 3,127 452 2,675
General and administrative...... 4,177 4,900 4,561 3,976 2,581 297 2,284
Write-down of office-based net
assets........................ --- --- 17,30 --- --- --- ---
Physician stockholders' payroll in
excess of base salary (1)..... --- --- --- --- 1,949 --- 1,949
Transaction costs............... --- --- --- --- 372 372 ---
Amortization.................... 3,572 2,096 2,491 2,630 270 173 97
Depreciation.................... 807 689 1,023 559 177 65 112
-------- --------- --------- ----------- ----------- --------- -----------
Operating income (loss)............ 14,770 10,522 (9,365) 2,301 1,708 (478) 2,186
Interest expense, net.............. 3,955 2,461 2,572 4,254 634 341 293
Other (income) expense............. (628) --- --- --- --- --- ---
-------- --------- --------- ----------- ----------- ---------- -----------
Income (loss) before income
taxes and extraordinary item.... 11,443 8,061 (11,937) (1,953) 1,074 (819) 1,893
Income tax expense (benefit)....... 5,070 2,894 189 (456) 460 (177) 637
-------- --------- --------- ----------- ----------- ---------- -----------
Income (loss) before
extraordinary item............... 6,373 5,167 (12,126) (1,497) 614 (642) 1,256
Extraordinary item................. --- --- --- (2,184) --- --- ---
-------- --------- --------- ----------- ----------- ---------- -----------
Net income (loss)............... $ 6,373 $ 5,167 $ (12,126) $ (3,681) $ 614 $ (642) $ 1,256
======== ========= ========= =========== =========== ========== ===========
Income (loss) before extraordinary
item per share.................. $ 0.80 $ 0.77 $ (1.84) $ (1.05) $ (.36)
Net income (loss) per share:
Basic........................... 0.80 0.77 (1.84) (1.86) (.36)
Diluted......................... 0.78 0.73 (1.84) (1.86) (.36)
Company
December 31,
1998 1997 1996 1995 1994
-------- --------- --------- ----------- -----------
Balance Sheet Data (in thousands):
Working capital ................... $ 21,079 13,650 $ 8,336 $ 4,299 $ 1,338
Total assets....................... 139,810 87,035 73,408 64,373 54,127
Long-term debt, net................ 56,994 29,833 21,367 11,365 30,581
Stockholders' equity............... 67,547 41,350 35,958 42,669 13,261
<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>
18
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. All forward-looking statements included in this document are based on
information available to the Company on the date hereof, and the Company assumes
no obligation to update any such forward-looking statements. 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: fluctuation in the volume of services delivered by the
Company's affiliated physicians, changes in reimbursement rates for those
services from third party payors including government sponsored healthcare
programs, uncertainty about the ability to collect the appropriate fees for
those services, the loss of significant hospital or third-party payer
relationships, the ability to recruit and retain qualified physicians, changes
in the number of patients using the Company's physician services and legislated
changes to the Company's structural relationships with its physicians and
practices.
GENERAL
The Company provides physician services to hospitals, ambulatory surgical
facilities and in office-based settings in a variety of medical specialties
including anesthesia, emergency medicine, general surgery, gynecology,
gynecology-oncology, infertility, neonatology, obstetrics, pediatrics,
perinatology and primary care. The Company also provides management services to
physician practices that employ physicians practicing in generally the same
medical specialties as the Company's physicians. The Company derives its revenue
from the medical services provided by the physicians who are employed by the
Company and from management fees earned from the managed practices. For the year
ended December 31, 1998, approximately 97% of the Company's net revenue was
derived from physician services and approximately 3% of the Company's net
revenue was generated under management services agreements. References to
physician services provided by the Company include services performed by
physicians employed by the Company and services provided by physicians in whose
practices the Company has a controlling financial interest (the "Consolidated
Practices"). The financial results of the Consolidated Practices are presented
on a consolidated basis with those of the Company because the Company has a
controlling financial interest in these practices based on the provisions of its
purchase agreements, voting trust agreements or management agreements with these
entities.
Four of the Consolidated Practices, Sheridan NY, Sheridan TX, Sheridan CA, and
Sheridan PA. have entered into long-term management agreements with the Company
and are owned by Gilbert Drozdow, M.D. who is an executive officer and a
stockholder of the Company. In addition, the Consolidated Practices include
twelve practices with which the Company executed long-term management agreements
and purchase option agreements from March 1997 through September 1998. One of
these practices is located in Texas, the remainder are located in Florida.
The Company provides management services to a neonatology practice and a pain
management practice which entered into long-term management agreements with the
Company's in December 1997 and February 1998. The Company also provided
management services during 1997 to two primary care practices whose agreements
have been terminated.
The Company generates revenue from its physician services by directly billing
third-party payors or patients on a fee-for-service or discounted
fee-for-service basis, through subsidies paid by hospitals to supplement billing
from third party payors and pursuant to capitation arrangements, which included
shared-risk capitation arrangements with managed care organizations until April
1, 1998. The Company generates management services revenue from managed
practices through a variety of reimbursement arrangements. Reimbursement terms
under management agreements in place with unconsolidated practices during 1998
required the practice to pay the Company a management fee that was either based
on a percentage of net revenues or based on expenses incurred by the Company
plus a flat fee that does not fluctuate based on performance. Management fees
that are based on a percentage of net revenue range from 35% to 65% and are not
subject to adjustment.
19
BUSINESS COMBINATIONS AND OTHER TRANSACTIONS
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.
The Company provided management services during 1998 to three practices whose
management agreements did not meet the criteria for demonstrating a controlling
financial interest. One of these practices had been managed by the Company since
1996 until the Company terminated its management services agreement in April
1998, and was obligated to pay the Company a management fee based on a
percentage of net revenues. The Company was unable to establish a controlling
financial interest in this practice because its interest in the practice was not
unilaterally salable or transferable and the agreements were terminable by the
practice in instances other than due to gross negligence, fraud, bankruptcy or
illegal acts committed by the Company. The other two practices were obligated to
pay the Company a management fee based on expenses incurred by the Company plus
a flat fee which does not fluctuate based on performance. This violates the
financial interest criteria for establishing a controlling financial interest.
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 $7.5 million in cash and $1.2 million in 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 $3.7 million in cash and $800,000 in 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 approximately $300,000 in deferred
payments and approximately 35,000 shares of common stock of the Company. In
another transaction related to the June 1995 acquisition, the Company agreed to
make a deferred payment of $700,000 to a physician employed by the acquired
practice, which was paid during the fourth quarter of 1995. This payment was
treated as a bonus for accounting purposes, and accordingly, was charged to
expense in its entirety during 1995. From January 1, 1996 to October 4, 1996,
the Company completed five acquisitions of primary care, obstetrical and
rheumatology practices for an aggregate cost of approximately $8.2 million in
cash and $765,000 in deferred payments. Deferred payments incurred in connection
with practice acquisitions represent the difference between the Company's
contractual obligation for compensation pursuant to the physician's employment
agreement with the Company and an estimate of the replacement cost for the
physician services provided or amounts due under promissory notes between the
Company and certain physicians. These payments are included in "Amounts due for
acquisitions" in the Company's consolidated balance sheets.
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 14,000 shares of the Company's common
stock which had a value of approximately $170,000 on the date of closing.
In January 1998 and June 1998 the Company entered into a long-term management
agreement with, and purchased an option to acquire, a hospital-based anesthesia
practice and acquired the outstanding shares of a neonatology practice,
respectively, for approximately $6.9 million in cash and approximately 204,000
shares of the Company's common stock which had a value on the date of closing of
approximately $2.9 million. During the period from January 6, 1998 through
September 9, 1998 the Company completed four acquisitions of obstetrical
20
practices and entered into long-term management agreements with and purchased
options to acquire two obstetrical practices, a perinatology practice, a
gynecology-oncology practice, an infertility practice and a general surgical
practice at an aggregate cost of $12.5 million in cash and 937,000 shares of the
Company's common stock which had a value of approximately $13.9 million on the
date of closing. The Company's consolidated financial statements include the
operations of these practices from the date of their respective transaction.
In December 1997, the Company entered into a twenty-year management agreement
with a hospital-based neonatology practice at a cost of $435,000. In addition,
in February 1998 the Company executed a forty-year management agreement with a
pain management practice at a cost of $5.9 million in cash and approximately
287,000 shares of the Company's common stock which had a value on the date of
closing of approximately $3.9 million. The operations under management
agreements entered into with the practices in which the Company does not have a
controlling financial interest are included in the Company's consolidated
financial statements beginning on the date of each agreement. The Company
exercised its option to acquire the pain management practice to which it had
been providing management services on December 31, 1998. Therefore, the
Company's consolidated balance sheet as of December 31, 1998 includes the
balance sheet of this practice.
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 a result of its change in strategic direction the Company has experienced a
shift in the composition of its patient service revenue. The primary care
practices held for sale generated a substantial majority of the Company's
capitation revenue during 1998 and preceding years.
As a result of its change in 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 had been consolidated from
five office locations into three office locations, which employ five primary
care physicians. Two of these primary care office locations were sold in April
1998. In addition, the Company terminated two long-term management agreements
with primary care practices entered into during 1996 that included five office
locations and four physicians. 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. The office-based practices sold
during 1997 and the remaining practices held for sale generated approximately
$1.9 in net revenue for the year ended December 31, 1998. The practices held for
sale did not generate significant operating income in 1998. Therefore, the
Company has experienced a slight increase in operating income as a percentage of
net revenue.
Under shared-risk capitation arrangements, which accounted for approximately
1.6%, 7.8% and 14.8% of the Company's net revenue in 1998, 1997 and 1996,
respectively, 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 each of the years 1996, 1997 and 1998 amounts
received from managed care organizations under shared-risk capitation
arrangements exceeded the cost of services provided to patients under such
arrangements. However, the profitability of the Company's shared-risk capitation
arrangements has declined each year as a result of a decline in patients
enrolled with the managed care organization and assigned to the Company's
practices. The Company completed the sale of a two facility primary care
practice on April 1, 1998 which eliminated all of the Company's shared-risk
capitation revenue.
21
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, intangible assets
constitute a substantial percentage of the total assets of the Company, and the
Company's results of operations include substantial expenses for the
amortization of intangible assets. Intangible assets are excess of the purchase
price of acquired businesses or cost of management services agreements 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, 1998,
the Company's total assets were approximately $139.8 million, of which
approximately $96.8 million, or 69.2%, were intangible assets. Of the total
goodwill at December 31, 1998, $27.8 million is related to the 1994 Acquisition,
$25.8 million is related to several acquisitions of physician practices
completed by the Predecessor and the Company and $43.2 million is related to the
cost of obtaining several management agreements with physician practices.
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. Management believes its role as a long-term service
provider to its hospital customers and the fact its relationships with hospitals
are not tied to a single physician or group of physicians contribute to the
indefinite length of this goodwill, and since 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 other 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 included in intangible assets that is 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 practice, 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 20 to 25 years.
The cost of long-term management services agreements included in intangible
assets that is 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. The
going concern value of these long-term management services agreements is related
to the general reputation of the practices in the communities they serve,
contracts with third-party payors, relationships between the physicians and
their patients, patient lists, the Company's ability to integrate the practice
into its existing network of hospital-based and office-based practices and the
term and enforceability of the management services agreement. The cost of
management services agreements is being amortized over the shorter of the term
of the management agreement or 25 years.
The Company continuously evaluates all components of intangible assets and other
intangible assets to determine whether there has been any impairment of the
carrying value of intangible assets 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.
The Securities and Exchange Commission (the "SEC"), has recently provided
guidance in regards to the appropriate amortization periods to be used in
connection with the amortization of intangible assets within the physician
practice management industry. The guidance provided has caused several companies
within the industry that were amortizing intangible assets over periods in
excess of 25 years to prospectively change the amortization period of their
22
intangible assets to 25 years. This change in estimate has resulted in an
increase in the amortization expense reported by those companies. Effective July
1998, the Company reduced the maximum amortization period of its intangible
assets related to physician practice acquisitions and affiliations to 25 years
on a prospective basis. This resulted in an increase in amortization expense for
the year ended December 31, 1998 of approximately $60,000 compared to the
amortization that would have been recorded. A significant change in the
estimated useful lives of certain intangible assets of the Company could have an
adverse impact on its future net income and reported earnings per share. Such an
accounting change, if made, would have no impact on the Company's cash flow or
operations nor would it reflect a change in management's estimate of the value
and expected duration of such intangible assets.
Results of Operations
The following table shows certain statement of operations data expressed as a
percentage of net revenue:
Year Ended December 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
Revenue:
Patient services revenue............................. 97.0% 96.8% 96.8%
Management fees...................................... 3.0 3.2 3.2
----------- ----------- -----------
Net revenue........................................ 100.0 100.0 100.0
Operating expenses:
Direct facility expenses............................. 67.6 69.9 71.3
Provision for bad debts.............................. 4.9 4.1 3.9
Salaries and benefits................................ 6.8 7.5 7.5
General and administrative........................... 3.7 5.0 4.9
Write-down of office-based net assets................ --- --- 18.7
Amortization......................................... 3.2 2.1 2.7
Depreciation......................................... 0.7 0.7 1.1
----------- ----------- -----------
Total operating expenses.......................... 86.9 89.3 110.1
----------- ----------- -----------
Operating income (loss)................................. 13.1% 10.7% (10.1)%
=========== =========== ===========
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Patient service revenue increased $14.2 million, or 14.9%, from $95.4 million in
1997 to $109.6 million in 1998. Patient service revenue within the Company's
multi-specialty group practices increased approximately $15.8 million, while
patient service revenue in the Company's hospital out-sourcing business
decreased approximately $1.6 million. Of the increase in the Company's
multi-specialty group practices, approximately $14.9 million was due to the
acquisitions of hospital-based and office-based physician practices from January
1998 through September 1998, approximately $5.4 million was due to office-based
acquisitions completed during 1997 and approximately $4.2 million was due to
growth in the Company's existing hospital-based contracts and office-based
contracts as a result of volume and reimbursement rate increases. These
increases were offset by a decrease in net revenue from primary care and
rheumatology practices that were sold during 1997 and 1998 which caused a
decrease in net revenue of approximately $8.7 million. Net revenue in the
Company's hospital out-sourcing business declined due to the termination of
existing hospital-based contracts. Net revenue from management services
increased approximately $200,000, or 6.6%, from $3.2 million in 1997 to $3.4
million in 1998. An increase in management fees generated from management
agreements with two hospital-based practices entered into in December 1997 and
February 1998, respectively, were mostly offset by a decrease in management fees
earned from two primary care practices whose agreements were terminated in
December 1997 and April 1998.
Direct facility expenses increased $7.4 million, or 10.7%, from $68.9 million in
1997 to $76.4 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 was primarily a result of the
23
acquisitions discussed in the preceding paragraph and increases in direct
facility expenses of the Company's existing hospital-based and office-based
practices offset by a decline in direct facility expenses associated with the
practices sold. As a percentage of net revenue, direct facility expenses
decreased from 69.9% in 1997 to 67.6% in 1998. 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 approximately $1.5 million, or 36.6%, from
$4.1 million in 1997 to $5.6 million in 1998. This increase was due to a 14.9%
increase in net revenue, as discussed above, and an increase in the Company's
overall bad debt percentage which increased from 4.1% in 1997 to 4.9% in 1998.
The increase in the Company's bad debt percentage is due to an increase in the
Company's net revenue derived from fee-for-service revenue rather than
capitation revenue, which was substantially eliminated with the divestiture of
two primary care locations in April 1998. Capitated practices incur minimal bad
debt expense.
Salaries and benefits increased $298,000, or 4.0%, from $7.4 million in 1997 to
$7.7 million in 1998. This increase was attributable to the Company's hiring of
personnel necessary to support the growth that occurred in the Company's
multi-specialty group practices. As a percentage of net revenue, salaries and
benefits decreased from 7.5% in 1997 to 6.8% in 1998.
General and administrative expense decreased $723,000, or 14.7%, from $4.9
million in 1997 to $4.2 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 of $500,000 in legal fees incurred in connection with malpractice cases
which are now reflected as a direct facility expense, a decrease in rent expense
of $180,000 at the corporate office and a decrease in advertising expense of
$40,000. As a percentage of net revenue, general and administrative expense
decreased from 5.0% in 1997 to 3.7% in 1998.
Amortization expense increased $1.5 million, or 71.4%, from $2.1 million in 1997
to $3.6 million in 1998. This increase was related to several acquisitions of
physician practices and management agreements with physician practices,
completed from March 1997 to September 1998, which are included in the
transactions discussed in Note 2 to the accompanying consolidated financial
statements.
Operating income increased approximately $4.2 million, or 39.6%, from $10.6
million in 1997 to $14.8 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 13.1% in 1998. This increase was primarily due
to the fact that net revenue increased at a greater rate than salaries and
benefits or general and administrative expense and the reduction in the direct
facility expense percentage from 69.9% in 1997 to 67.6% in 1998 as noted above.
Other income recognized was $628,000 for 1998. Other income primarily represents
an amount recognized by the Company pursuant to a favorable judgement received
by the Company in connection with certain litigation.
Interest expense increased from $2.5 million in 1997 to $4.0 million in 1998.
This increase was primarily related to borrowings under the Company's revolving
credit facility to fund the acquisitions discussed above.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Patient service revenue increased $5.7 million, or 6.3%, from $89.8 million in
1996 to $95.4 million in 1997. Patient service revenue from hospital-based
services increased $6.6 million, from $63.9 million in 1996 to $70.5 million in
1997. Of this increase, $800,000 was due to growth from existing contracts, $3.1
million was due to 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. Patient service revenue from office-based
services decreased $1.1 million, from $27.2 million in 1996 to $26.1 million in
1997 Of this decrease, $7.2 million, was due to the sale of two primary care
practices and two rheumatology practices during the period from December 1996 to
April 1997, which was offset by an increase in net revenue of $6.1 million from
acquisitions which occurred throughout 1997, as described in Note 2 to the
accompanying consolidated financial statements. Management fees increased
$184,000, or 6.1% from $3.0 million in 1996 to $3.2 million in 1997 due to
management agreements added with office-based practices during 1996.
24
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. In some cases
the Company has retained, and anticipates retaining, the right to collect
accounts receivable on practices sold or held for sale. Collection efforts are
impaired subsequent to the sale of a practice due to reduced accessability to
the practices' books and records. The additional allowances is based on the
Company's estimate of uncollectable accounts that will result from an impaired
collection ability on accounts receivable in existence at the time of sale and
retained by the Company. 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 15.8%, 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.
25
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998 the Company had $21.1 million in working capital, up from
$13.7 million as of December 31, 1997. At December 31, 1998, net accounts
receivable of $28.3 million amounted to 91 days of net revenue compared to $21.6
million and 80 days at December 31, 1997. This increase is primarily
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. 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. 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. The revolving credit facility was further amended on March
10, 1999 to increase the Company's maximum borrowing availability under the
credit facility by increasing the maximum allowable leverage ratio. Based on the
increased leverage ratio the Company's applicable margin as of March 10, 1999
was 2.5%. 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 April 30, 2001.
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 $29.0 million at December 31, 1997 to $56.6
million at December 31, 1998, primarily due to several acquisitions of physician
practices completed during 1998. The outstanding balance increased from $56.6
million at December 31, 1998 to $72.9 million at March 25, 1999, due to the
acquisition of a physician practice in January 1999 and the repurchase of
approximately 1,275,000 shares held by physicians whose practices were acquired
by the Company from January 1998 through March 1998. Based on these
transactions, the Company has maximized its borrowing availability under the
credit facility. 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, 1998
were to finance acquisitions of physician practices ($26.4 million), to
repurchase shares of the Company's common stock ($3.7 million), and to finance
increases in accounts receivable ($5.5 million). The $5.5 million increase in
accounts receivable, net of the provision for bad debts, was due to growth in
existing contracts for hospital-based services and the acquisition of physician
practices during 1998 which had a concentration of fee-for-service revenue and
replaced the Company's practices which had a concentration of shared risk
capitation revenue. The Company met its cash needs during this period primarily
through borrowings under its revolving credit facility with NationsBank ($27.6
million) and its net income, excluding non-cash expenses (amortization and
depreciation) ($10.8 million).
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 June 1998 the Company issued approximately 1,428,000 shares
of common stock as partial consideration for the acquisition of five practices.
Pursuant to a stock repurchase program approved by the Company's Board of
Directors, the Company repurchased approximately 425,000 shares of its common
stock from July 1998 through December 1998 for approximately $3.7 million.
26
In order to provide funds necessary for the Company's future expansion
strategies, it will be necessary for the Company to incur, from time to time,
additional long-term bank indebtedness and/or to issue equity or debt
securities, depending on market and other conditions. There can be no assurance
that such additional financing will be available on terms acceptable to the
Company.
The Company, as directed by its Board of Directors, had engaged investment
advisors to assist the Company in evaluating its strategic alternatives
including the procurement of additional capital. Possible strategic alternatives
included an expansion of the company's existing credit facility, merger, sale or
an equity investment by a private capital firm or other similar party. On March
25, 1999 the Company announced the signing of a definitive merger agreement
between the Company and an investor group led by Vestar Capital Partners and the
Company's senior management. See "ITEM 1. BUSINESS - Recent Developments".
Net cash provided by operating activities was $4.8 million in 1998 compared to
$1.1 million of cash provided by operating activities in 1997. The increase in
cash provided by operating activities is due to an increase in the Company's net
income, excluding non-cash expenses and a decrease in amounts paid for income
taxes during 1998.
Net cash used by investing activities increased from $8.5 million in 1997 to
$27.6 million in 1998, primarily due to an increase in cash used for physician
practice acquisitions from $10.9 million in 1997 to $26.4 million in 1998. Cash
used for capital expenditures increased from $934,000 to $1.2 million primarily
due to the Company's expenditures associated with preparing for the Year 2000.
Net cash provided by financing activities increased from $7.8 million in 1997 to
$23.4 million in 1998. Net borrowings on long-term debt increased from $9.0
million in 1997 to $27.6 million in 1998. The net borrowings were used primarily
to finance acquisitions in 1998.
The Company's professional liability insurance requires the Company to pay a
self-insured retention amount equal to the first $250,000 and $150,000 in 1998
and 1997, respectively, of losses for each individual claim up to a maximum
aggregate self-insured retention amount of $1,000,000 and $900,000 for all
claims in 1998 and 1997, respectively. On an ongoing basis the Company reviews
reported claims by calendar year, amounts incurred for the defense and
settlement of reported claims and estimated additional amounts to be incurred on
reported claims. The Company records, as part of direct facility expenses
amounts estimated to be incurred on reported claims under the self-insurance
provisions of its professional liability policy. The Company paid approximately
$1.7 million in 1998 under the self-insurance provisions of its professional
liability insurance policy. As of December 31, 1998 the Company's reserve for
self-insurance on reported claims is approximately $1.2 million.
YEAR 2000 ISSUES
The Company has conducted a review of its computer systems, telecommunications
equipment, medical equipment and other devices to identify those systems that
may be affected by the Year 2000 issue and has developed a plan to address the
issue. The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Computer
programs that have time sensitive software may recognize a date using "00" as
the year 1900 rather than the Year 2000. This could result in system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar business activities.
The Company's information systems have been internally developed and maintained
for its hospital-based operations and developed and maintained by third-party
vendors for its office-based operations and administrative support departments.
Beginning in 1997 the Company's personnel began reprogramming the Company's
internal systems for Year 2000 compliance. These modifications were completed by
December 31, 1998 and testing of those modifications is expected to be completed
by June 1999. The Company has begun the process of standardizing the information
27
systems used by its office-based practices. A single third-party product that is
Year 2000 compliant has been selected for implementation in the Company's
office-based practices throughout 1998 and 1999. The Company anticipates
implementation in its existing office-based practices to be completed by
September 1999. Additional practices acquired by the Company during 1999 will be
evaluated for Year 2000 readiness and an action plan determined based upon that
evaluation. Information systems used by the Company's administrative support
departments are being upgraded during 1998 and 1999 to be Year 2000 compliant
and are expected to be completed by the fourth quarter of 1999. The Company is
presently upgrading other equipment affected by the Year 2000 issue or obtaining
certification of its Year 2000 readiness from the appropriate third-party
vendors. The Company expects to complete this process by September 1999. The
Company does not presently have a contingency plan to respond to the Year 2000
issue if future events prevent it from completing its Year 2000 project on a
timely basis.
Computer software and related technologies used by third-party payors and
vendors are also likely to be affected by the Year 2000 date change. Failure of
any of these parties to properly process dates for the Year 2000 and thereafter
could result in unanticipated expenses and delays to the Company, including
delays in the payment for services provided and delays in our ability to conduct
normal banking operations. The Company will begin surveying significant
third-party payors and vendors in regards to their Year 2000 preparedness
beginning in the second quarter of 1999 and expects this assessment to be
completed during the fourth quarter of 1999. The Company presently does not have
a contingency plan to respond to problems that may arise with third-party payors
who are not prepared for the Year 2000.
The Company has employed additional personnel to support the Year 2000 project
and incurred additional expense for software and hardware. The Company estimates
that it will incur approximately $100,000 to $150,000 for the next year in
operating expenses and total capital expenditures of between $500,000 and
$700,000 for the Year 2000 project. These expenditures will be funded through
the Company's operating cash flow and its credit facility and are not expected
to have a material adverse effect on the Company's results of operations or cash
flow. The Company estimates that to date it has incurred approximately $100,000
in operating expenses and $300,000 in capital expenditures for the project.
The costs of this effort and the date on which the Company believes it will
complete its Year 2000 project are based on management's best estimate, which
was derived utilizing numerous assumptions of future events, including the
continued availability of certain resources, third party modification plans and
other factors. There can be no assurance that those estimates will be achieved
and actual results could differ materially from those anticipated. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained and resources utilized in
this area, the ability to locate and correct all relevant computer codes,
reliance on third party payors to modify their systems to be Year 2000
compliant, reliance on the accuracy of third-party vendor Year 2000
certifications and similar uncertainties. The Company's inability to complete
its Year 2000 project on a timely basis or the lack of compliance of third party
payor systems could have an adverse impact on the Company's operating cash flow,
the impact of which cannot be estimated.
NEW 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 was adopted in the first quarter of fiscal 1998. This statement
established standards for the 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 the adoption of SFAS No. 130 did not have a significant impact on its
financial statement presentation as comprehensive income is equal to net income.
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. Generally,
financial information is required to be reported on the basis that it is used
internally for evaluating segment performance and deciding how to allocate
resources to segments. SFAS No. 131 requires that a public company report a
28
measure of segment profit or loss, certain specific revenue and expense items
and segment assets. The Company adopted SFAS No. 131 effective December 31,
1998. Management does not conduct its business in a manner that indicates the
existence of segments or allocate its management services by distinguishable
business segments. As a result, no additional disclosure was required.
In February 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No.132, "Employers' Disclosures about Pensions
and Other Postretirement Benefits", ("SFAS No. 132") which is effective for
fiscal years ending after December 15, 1997. SFAS No. 132 revises employers'
disclosures about pension and other postretirement obligations of those plans.
The Company adopted SFAS No. 132 effective December 31, 1998 which did not have
a significant impact on its financial statement disclosures.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use", ("SOP 98-1"). SOP 98-1
requires computer software costs associated with internal use software to be
expensed as incurred until certain capitalization criteria are met. The Company
will adopt SOP 98-1 beginning January 1, 1999. Adoption of this statement will
not have a material impact on the Company's consolidated financial position or
results of operations.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on the
Costs of Start-Up Activities", ("SOP 98-5"). SOP 98-5 requires all costs
associated with pre-opening, pre-operating and organization activities to be
expensed as incurred. The Company's accounting policies conform with the
requirements of SOP 98-5, therefore adoption of this statement will not impact
the Company's consolidated financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities", ("SFAS No. 133"). SFAS No. 133 establishes accounting
and reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either and asset or liability measured at its fair value. SFAS
No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. SFAS
No. 133 cannot be applied retroactively. The Company will adopt SFAS No. 133
beginning January 1, 2000. The Company does not believe that the adoption of
this statement will have a material impact on the Company's consolidated
financial position or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- - --------------------------------------------------------------------
The Company's revolving credit facility with NationsBank 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.
Accordingly, the Company's interest expense related to the outstanding
indebtedness under the credit facility is subject to fluctuations based on
changes in the interest rate environment.
To mitigate this risk, the Company entered into an interest rate swap agreement
in August 1998 with NationsBank N.A., the notional amount of which is $40
million at December 31, 1998. The Company entered into the agreement to fix the
interest expense paid on a portion of the amount outstanding under its credit
facility with NationsBank N.A. Under the terms of the agreement, which matures
in August 2001, the Company's borrowing rate is fixed at 5.54% plus the
applicable margin due under the terms of the revolving credit facility. The net
effect of this agreement on the Company's interest expense in 1998 was nominal.
29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- - ----------------------------------------------------
INDEX TO FINANCIAL STATEMENTS
-----------------------------
Page
------
Report of Independent Certified Public Accountants............................. 30
Consolidated Balance Sheets as of December 31, 1998 and 1997................... 31
Consolidated Statements of Operations for the Years ended December 31,
1998, 1997 and 1996.......................................................... 32
Consolidated Statements of Stockholders' Equity for the Years ended
December 31, 1998, 1997 and 1996............................................. 33
Consolidated Statements of Cash Flows for the Years ended December 31,
1998, 1997 and 1996.......................................................... 34
Notes to Consolidated Financial Statements..................................... 35-57
30
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
To Sheridan Healthcare, Inc.:
We have audited the accompanying consolidated balance sheets of Sheridan
Healthcare, Inc. (a Delaware corporation) and subsidiaries as of December 31,
1998 and 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years ended December
31, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Miami, Florida,
February 18, 1999 (except for the matter discussed in Note 11, as to which the
date is March 25, 1999).
31
SHERIDAN HEALTHCARE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
December 31,
------------------------
1998 1997
---------- -----------
ASSETS
Current assets:
Cash and cash equivalents.......................................................... $ 1,102 $ 427
Accounts receivable, less allowances of $2,346 and $1,828.......................... 28,300 21,588
Income tax refunds receivable...................................................... 1,097 1,280
Deferred income taxes.............................................................. --- 1,417
Other current assets............................................................... 3,316 2,814
---------- -----------
Total current assets............................................................. 33,815 27,526
Property and equipment, net........................................................... 4,041 3,538
Intangible assets, net of accumulated amortization of $6,113 and $15,798.............. 96,802 54,168
Other intangible assets, net of accumulated amortization of $1,958 and $1,712......... 1,501 1,803
Other assets.......................................................................... 3,651 ---
---------- -----------
Total assets..................................................................... $ 139,810 $ 87,035
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................... $ 1,440 $ 591
Amounts due for acquisitions....................................................... 288 527
Accrued salaries and benefits...................................................... 1,016 2,686
Self-insurance accruals............................................................ 4,319 3,973
Refunds payable.................................................................... 2,555 2,674
Accrued physician incentives....................................................... 934 744
Other accrued expenses............................................................. 1,735 2,235
Current portion of long-term debt.................................................. 449 446
---------- -----------
Total current liabilities........................................................ 12,736 13,876
Long-term debt, net of current portion................................................ 56,994 29,833
Amounts due for acquisitions.......................................................... 1,364 1,976
Other long-term liabilities........................................................... 1,169 ---
Commitments and contingencies (Note 8)
Stockholders' equity:
Preferred stock, par value $.01; 5,000 shares authorized; none issued.............. --- ---
Common stock, par value $.01; 21,000 shares authorized
Voting; 7,535 and 6,509 shares issued and outstanding............................ 75 66
Class A non-voting; 297 shares issued and outstanding............................ 3 3
Additional paid-in capital......................................................... 73,626 53,811
Accumulated deficit................................................................ (6,157) (12,530)
---------- ----------
Total stockholders' equity ...................................................... 67,547 41,350
---------- -----------
Total liabilities and stockholders' equity....................................... $ 139,810 $ 87,035
========== ===========
See accompanying notes.
32
SHERIDAN HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year Ended December 31,
--------------------------------------
1998 1997 1996
----------- ----------- -----------
Revenue:
Patient service revenue............................................... $ 109,580 $ 95,418 $ 89,753
Management fees....................................................... 3,410 3,198 3,014
----------- ----------- -----------
Net revenue......................................................... 112,990 98,616 92,767
----------- ----------- -----------
Operating expenses:
Direct facility expenses.............................................. 76,350 68,919 66,125
Provision for bad debts............................................... 5,592 4,066 3,605
Salaries and benefits................................................. 7,722 7,424 6,967
General and administrative............................................ 4,177 4,900 4,561
Write-down of office-based net assets................................. --- --- 17,360
Amortization.......................................................... 3,572 2,096 2,491
Depreciation.......................................................... 807 689 1,023
----------- ----------- -----------
Total operating expenses............................................ 98,220 88,094 102,132
----------- ----------- -----------
Operating income (loss).................................................. 14,770 10,522 (9,365)
----------- ----------- -----------
Other (income) expense:
Interest expense, net................................................. 3,955 2,461 2,572
Other income.......................................................... (628) --- ---
----------- ----------- -----------
Total other expense................................................. 3,327 2,461 2,572
----------- ----------- -----------
Income (loss) before income taxes................................... 11,443 8,061 (11,937)
Income tax expense ...................................................... 5,070 2,894 189
----------- ----------- -----------
Net income (loss)................................................... $ 6,373 $ 5,167 $ (12,126)
=========== =========== ===========
Net income (loss) per share
Basic............................................................... $ 0.80 $ 0.77 $ (1.84)
Diluted............................................................. 0.78 0.73 (1.84)
Weighted average shares of common stock
and common stock equivalents outstanding
Basic............................................................... 7,947 6,722 6,587
Diluted............................................................. 8,219 7,035 6,587
See accompanying notes.
33
SHERIDAN HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Convertible Preferred Stock
Voting Class A ------------------------------
Common Stock Common Stock Class A Class B Additional
--------------- --------------- -------------- -------------- Paid-in Accumulated
Shares Amount Shares Amount Shares Amount Shares Amount Capital Deficit Total
------- ------- ------- ------- ----- ------ ------ ------ --------- ----------- ---------
Balance,
January 1, 1996 5,773 $ 58 297 $ 3 --- $ --- --- $ --- $ 48,179 $ (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 --- --- --- --- 53,588 (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 --- --- --- --- 53,811 (12,530) 41,350
Issuance of common
stock upon exercise
of employee stock
options........... 23 --- --- --- --- --- --- --- 92 --- 92
Issuance of common
stock in
acquisitions...... 1,428 14 --- --- --- --- --- --- 23,410 --- 23,424
Treasury shares
purchased and
retired........... (425) (5) --- --- --- --- --- --- (3,687) --- (3,692)
Net Income.......... --- --- --- --- --- --- --- --- --- 6,373 6,373
------- ------- ------- ------- ------- ------ ------ ------- -------- ----------- ---------
Balance,
December 31, 1998 7,535 $ 75 297 $ 3 --- $ --- --- $ --- $ 73,626 $ (6,157) $ 67,547
======= ======= ======= ======= ======= ====== ====== ======= ======== =========== =========
See accompanying notes.
34
SHERIDAN HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
--------------------------------------
1998 1997 1996
----------- ----------- -----------
Cash flows from operating activities:
Net income (loss)....................................................... $ 6,373 $ 5,167 $ (12,126)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Write-down of office-based net assets................................. --- --- 17,360
Amortization.......................................................... 3,572 2,096 2,491
Depreciation.......................................................... 807 689 1,023
Provision for bad debts............................................... 5,592 4,066 3,605
Deferred income taxes................................................. 1,417 (263) (1,154)
Changes in operating assets and liabilities:
Accounts receivable, net.............................................. (11,140) (7,997) (7,076)
Income tax refunds receivable......................................... (101) (710) 190
Other current assets.................................................. (736) (1,125) (486)
Other assets.......................................................... 238 (655) 207
Accounts payable and accrued expenses................................. (1,221) (215) 1,229
----------- ----------- -----------
Net cash provided by operating activities............................. 4,801 1,053 5,263
----------- ----------- -----------
Cash flows from investing activities:
Investments in management agreements and
acquisitions of physicians practices.................................. (26,428) (10,929) (13,762)
Sale of physician practices............................................. 49 3,388 193
Capital expenditures.................................................... (1,192) (934) (1,245)
----------- ----------- -----------
Net cash used by investing activities................................. (27,571) (8,475) (14,814)
----------- ----------- -----------
Cash flows from financing activities:
Borrowings on long-term debt............................................ 27,600 9,005 13,997
Payments on long-term debt.............................................. (555) (1,210) (4,438)
Treasury shares purchased and retired................................... (3,692) --- (8)
Exercise of employee stock options...................................... 92 54 ---
----------- ----------- -----------
Net cash provided by financing activities............................. 23,445 7,849 9,551
----------- ----------- -----------
Increase in cash and cash equivalents...................................... 675 427 ---
Cash and cash equivalents, beginning of year............................... 427 --- ---
----------- ----------- -----------
Cash and cash equivalents, end of year..................................... $ 1,102 $ 427 $ ---
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid for interest..................................................... $ 3,898 $ 2,338 $ 2,588
Cash paid for income taxes................................................. 2,350 3,867 2,110
Capital leases entered into................................................ --- --- ---
See accompanying notes.
35
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 was recorded as excess purchase price
distributed to management stockholders and included as a reduction to additional
paid in capital 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.
Purchase price...................................................................... $ 43,275
Excess purchase price distributed to management stockholders....................... (7,541)
-----------
Purchase price to be allocated.................................................... 35,734
-----------
Net assets acquired:
Working capital................................................................... 4,365
Property and equipment............................................................ 1,236
Other intangible assets (see Note (g))............................................ 1,880
Unamortized goodwill related to previous acquisition ............................. 7,316
Other assets...................................................................... 609
Long-term debt.................................................................... (9,580)
Deferred income taxes............................................................. (1,247)
-----------
Total net assets acquired...................................................... 4,579
-----------
Goodwill related to the 1994 Acquisition............................................ $ 31,155
===========
(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 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 FASB Statement No. 94 and APB Opinion No. 16 to Physician Practice Management
Entities".
36
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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. The Company's controlling
financial interest is demonstrated by means other than direct record ownership
of voting stock based on the provisions of its purchase agreements, voting trust
agreements or management agreements with these entities.
In accordance with EITF Issue 97-2 the Company's consolidated financial
statements include four practices that are affiliates of the Company, Sheridan
Medical Healthcorp, P.C., Sheridan Healthcare of Texas, P.A., Sheridan
Children's Healthcare Services of Pennsylvania, P.C. and Sheridan Healthcare of
California Medical Group, Inc. Each of these affiliates is owned by Gilbert
Drozdow, as a nominee shareholder, who is an executive officer and stockholder
of the Company. These entities have long-term management agreements with the
Company whose terms demonstrate a controlling financial interest by the Company.
The practices provide hospital-based physician services to four hospitals and
have been included in the Company's consolidated financial statements since the
date of their inception. In addition, the Company's consolidated financial
statements also include eleven office-based practices and one hospital-based
practice with which the Company has long-term management services agreements and
purchase option agreements whose terms also demonstrate a controlling financial
interest, (the "Consolidated Practices"). These agreements entered into during
1997 and 1998, have been accounted for in the Company's consolidated financial
statements in accordance with EITF 97-2 and have been included in the Company's
financial statements since the date of their inception.
The Company provides management services to a neonatology practice and a pain
management practice which entered into long-term management services agreements
with the Company in December 1997 and February 1998, respectively. The Company
also provided management services to a primary care practice whose agreement was
terminated in December 1997 and to a primary care practice whose agreement was
terminated in April 1998. The Company did not have a controlling financial
interest in these practices. These management services agreements are included
in the Company's consolidated financial statements only to the extent of
management fees earned and expenses incurred by the Company.
The Company exercised its purchase option on December 31, 1998 to acquire the
pain management practice to which it had been providing management services
during 1998. The practice has been included in the Company's consolidated
balance sheet as of December 31, 1998 and will be included in the Company's
consolidated financial statements beginning January 1, 1999.
37
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The table below sets forth the components of the Company's net revenue:
Year Ended
December 31,
1998 1997 1996
------------------ ---------------- -----------------
Total % Total % Total %
--------- -------- -------- -------- --------- -------
The Company.................................... $ 72,070 63.8% $ 76,850 77.9% $ 77,833 83.9%
Affiliates..................................... 13,309 11.8 12,511 12.7 11,920 12.8
Consolidated Practices......................... 24,201 21.4 6,057 6.2 --- ---
--------- -------- -------- -------- --------- -------
Patient service revenue..................... 109,580 97.0 95,418 96.8 89,753 96.7
--------- -------- -------- -------- --------- -------
Management fees................................ 3,410 3.0 3,198 3.2 3,014 3.3
--------- -------- -------- -------- --------- -------
Total..................................... $ 112,990 100.0% $ 98,616 100.0% $ 92,767 100.0%
========= ======== ======== ========= ========= ========
(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 generates revenue from the provision of physician and services which
is referred to as patient service revenue and the provision of management
services which are referred to as management fees.
The Company derives substantially all of its patient service revenue 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 received a portion of its patient service revenue pursuant to
shared-risk capitation arrangements with certain health maintenance
organizations until April 1998, at which time it sold its only remaining primary
care practice providing services under such arrangements. Under these
arrangements, the Company generally agreed 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 provided primary care
services to the enrollees and subcontracted directly, or through a third-party
payor, with specialist physicians, hospitals and other health care providers to
provide the remainder of the health care services to the enrollees. The
Company's profitability under such arrangements was dependent upon its ability
to effectively manage the use of specialist physician, hospital and other health
care services by its patients. In each of the fiscal periods presented in the
Company's statements of operations, amounts received from managed care
organizations under shared-risk capitation arrangements exceeded the cost of
services provided to patients under such arrangements.
38
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The Company derives its management fees pursuant to long-term management
services agreements with physician practices which require the practice to pay
the Company a management fee that is based on expenses incurred by the Company
plus either a percentage fee based on net revenues or a flat fee. The Company's
management fee may be increased under a flat fee arrangement if the net revenue
of the practice exceeds established thresholds, but may not be reduced.
(e) Charity Care
The Company has agreed with certain hospitals to provide charity care to
patients who are unable to pay or is required by law, in some cases, to provide
such care in emergency situations. 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, the amounts which are immaterial.
(f) Intangible Assets
The Company acquires or affiliates with physician practices through the
acquisition of their net assets, the acquisition of their stock or the
acquisition of an option to acquire their stock concurrent with the execution of
a long-term management services agreement. In each of these transactions the
Company allocates the purchase price to the tangible assets acquired and
liabilities assumed. The excess of the purchase price over the fair value of
assets acquired and liabilities assumed is allocated to intangible assets as
goodwill when the Company acquires the net assets or outstanding stock of a
physician practice and to intangible assets as the cost of obtaining the
management services agreement when the Company enters into a long-term
management services agreement and purchases the option to acquire the
outstanding stock of a physician practice.
Approximately $27.8 million of the total amount of intangible assets is
goodwill, net of accumulated amortization, at December 31, 1998, that is related
to the 1994 Acquisition. Such goodwill represents the Company's market position
and reputation, its relationships with its hospital customers and affiliated
physicians, the relationships between its affiliated physicians and their
patients, and other similar intangible assets. Management believes its role as a
long-term service provider to its hospital customers and the fact its
relationships with hospitals are not tied to a single physician or group of
physicians contribute to the indefinite length of this goodwill, and
accordingly, such goodwill is being amortized on a straight-line basis over 40
years.
Approximately $25.8 million of the total amount of intangible assets is
goodwill, net of accumulated amortization, at December 31, 1998, related to
several acquisitions of physician practices by the Company and its Predecessor.
Such goodwill represents the general reputation of the practices in the
communities they serve, the collective experience of the management and other
employees of the practices, contracts with health maintenance organizations,
relationships between the physicians and their patients, patient lists, and
other similar intangible assets. The Company evaluates the underlying facts and
circumstances related to each acquisition and establishes an appropriate
amortization period for the related goodwill. The goodwill related to these
physician practice acquisitions is being amortized on a straight-line basis over
periods ranging from 20 to 25 years.
39
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Approximately $43.2 million of the total amount of intangible assets represents
the cost of obtaining management services agreements, net of accumulated
amortization at December 31, 1998. The cost of obtaining management services
agreements with practices is related to the general reputation of the practices
in the communities they serve, contracts with third-party payors, relationships
between the physicians and their patients, patient lists, the Company's ability
to integrate the practice into its existing group of hospital-based and
office-based specialists and the term and enforceability of the management
services agreement. The Company evaluates the underlying facts and circumstances
related to each agreement and establishes an appropriate amortization period
related to the cost of obtaining the management services agreement. The cost of
obtaining these management services agreements is being amortized over the
shorter of the term of the agreement or 25 years.
The components of the Company's intangible assets segregated by amortization
period are as follows:
Physician Practice Acquisitions and Affiliations:
Amortization Original Balance
Period Amount December 31, 1998
------------------- -------------------- --------------------
20 years 3,121 2,185
25 years 68,834 66,818
---------------- ----------------
Sub-Total 71,955 69,003
1994 Acquisition:
40 years 30,960 27,799
---------------- ----------------
Total $ 102,915 $ 96,802
================ ================
The SEC has recently provided guidance in regards to the appropriate
amortization periods to be used in connection with the amortization of
intangible assets within the physician practice management industry. The
guidance provided has caused several companies within the industry that were
amortizing intangible assets over periods in excess of 25 years to prospectively
change the amortization period of their intangible assets to 25 years. This
change in estimate has resulted in an increase in the amortization expense
reported by those companies. Effective July 1998, the Company reduced the
maximum amortization period of its intangible assets related to physician
practice acquisitions and affiliations to 25 years on a prospective basis. This
resulted in an increase in amortization expense for the year ended December 31,
1998 of approximately $60,000 compared to the amortization that would have been
recorded. A significant change in the estimated useful lives of certain
intangible assets of the Company could have an adverse impact on its future net
income and reported earnings per share. Such an accounting change, if made,
would have no impact on the Company's cash flow or operations nor would it
reflect a change in management's estimate of the value and expected duration of
such intangible assets.
The Company continuously evaluates whether events have occurred or circumstances
exist which impact the recoverability of the carrying value of intangible
assets, 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, ("SFAS No. 121")." Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to future net
cash flows expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeded the fair value of the assets.
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.
40
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Separately identifiable intangible assets related to the 1994 Acquisition and
the physician practice acquisitions are included in other intangible assets,
separate from intangible assets, and are discussed in Note (g) below.
(g) Other Intangible Assets
Other 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
other 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. The obligations to former
stockholders arose at the time of acquisition as a result of negotiation between
the Company and the former stockholders of the practices acquired by the Company
who desired ongoing compensation in excess of a reasonable market rate for their
physician services. These payments are being made to former stockholders who are
employed by the Company over the terms of their employment agreements with the
Company which range from three to five years. These payments cease upon
termination of the physicians' employment with the Company. 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. These termination benefits were an obligation
of the practice prior to acquisition by the Company and were included as part of
the purchase price allocation at the time of acquisition. Also included in
amounts due for acquisitions is a promissory note payable to the owner of a
physician practice with which the Company has a management services agreement.
The note bears interest at 7.5%, is payable in monthly installments and matures
in December 2000.
(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, other
assets, accounts payable, accrued expenses and long-term debt are reflected in
the accompanying consolidated financial statements at cost which approximates
fair value.
(j) Write-down of Office-based Net Assets
In October 1996, the Company's Board of Directors approved a change in the
Company's 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 in
accordance with SFAS No. 121 and accrued certain liabilities for commitments
that no longer have value to the Company's future operations. The impairment of
intangible assets was calculated based on a comparison of the carrying amount of
those assets compared to the undiscounted cash flows of the operations over the
remaining amortization period. The write-down pertained to two rheumatology
practices acquired in January and February of 1996, a four-facility primary care
practice acquired in September 1994, two primary care practices acquired in
February 1995, and a primary care practice acquired in June 1995 which included
the assignment of a panel services agreement. 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):
41
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Goodwill............................................................................ $ 13,878
Property and equipment.............................................................. 1,045
Intangible assets................................................................... 430
Accrued expenses.................................................................... 2,007
-----------
Total write-down................................................................. $ 17,360
===========
(k) Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.
(L) 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 diluted share in 1996 since they would
have the effect of reducing the net loss per share.
RECONCILIATION OF BASIC EPS FACTORS TO DILUTED EPS FACTORS:
1998 1997 1996
----------- ----------- -----------
Weighted average shares of common stock and
common stock equivalents for basic earnings
per share......................................... 7,947 6,722 6,587
Impact of dilutive employee stock options........... 272 313 ---
----------- ----------- -----------
Weighted average of shares of
common stock equivalents for
diluted earnings per share........................ 8,219 7,035 6,587
=========== =========== ===========
Options outstanding which are not
included in the calculation of
diluted earnings per share because
their impact is anti-dilutive..................... 518 73 223
=========== =========== ===========
(n) New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income", ("SFAS
No. 130"), which was adopted in the first quarter of fiscal 1998. This statement
established standards for the 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 the adoption of SFAS No. 130 did not have a significant impact on its
financial statement presentation as comprehensive income is equal to net income.
42
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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. Generally,
financial information is required to be reported on the basis that it is used
internally for evaluating segment performance and deciding how to allocate
resources to segments. SFAS No. 131 requires that a public company report a
measure of segment profit or loss, certain specific revenue and expense items
and segment assets. The Company adopted SFAS No. 131 effective December 31,
1998. Management does not conduct its business in a manner that indicates the
existence of segments or allocate its management services by distinguishable
business segments. As a result, no additional disclosure was required.
In February 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No.132, "Employers' Disclosures about Pensions
and Other Postretirement Benefits", ("SFAS No. 132") which is effective for
fiscal years ending after December 15, 1997. SFAS No. 132 revises employers'
disclosures about pension and other postretirement obligations of those plans.
The Company adopted SFAS No. 132 effective December 31, 1998 which did not have
a significant impact on its financial statement disclosures.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use", ("SOP 98-1"). SOP 98-1
requires computer software costs associated with internal use software to be
expensed as incurred until certain capitalization criteria are met. The Company
will adopt SOP 98-1 beginning January 1, 1999. Adoption of this statement will
not have a material impact on the Company's consolidated financial position or
results of operations.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on the
Costs of Start-Up Activities", ("SOP 98-5"). SOP 98-5 requires all costs
associated with pre-opening, pre-operating and organization activities to be
expensed as incurred. The Company's accounting policies conform with the
requirements of SOP 98-5, therefore adoption of this statement will not impact
the Company's consolidated financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities", ("SFAS No. 133"). SFAS No. 133 establishes accounting
and reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. SFAS
No. 133 cannot be applied retroactively. The Company will adopt SFAS No. 133
beginning January 1, 2000. The Company does not believe that the adoption of
this statement will have a material impact on the Company's consolidated
financial position or results of operations.
43
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(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, which was amortized
over 20 years until the sale of the practice by the Company and is shown below,
(in thousands):
Purchase price..................................................................... $ 8,723
----------
Net assets acquired:
Working capital (deficit)........................................................ (355)
Property and equipment........................................................... 868
-----------
Net assets acquired........................................................... 513
-----------
Goodwill related to the acquisition................................................ $ 8,210
===========
In connection with the write-down of office-based net assets in 1996, as
discussed in Note 1(j), the carrying value of the goodwill associated with this
acquisition was reduced by approximately $5.3 million to approximately $2.1
million.
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 which, net of the
reduction in carrying value, is being amortized over 20 years and in shown
below, (in thousands):
Purchase price..................................................................... $ 1,437
----------
Net assets acquired:
Working capital.................................................................. 118
Property and equipment........................................................... 78
Intangible assets................................................................ 400
-----------
Net assets acquired........................................................... 596
-----------
Goodwill related to the acquisition................................................ $ 841
===========
In connection with the write-down of office-based net assets in 1996, as
discussed in Note 1(j), the carrying value of the goodwill associated with this
acquisition was reduced by approximately $170,000 to approximately $583,000.
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 which had a value of approximately
$450,000 on the date of acquisition. 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 which, net of the
reduction in carrying value, is being amortized over 20 years on a straight line
basis and is shown below, (in thousands):
44
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Aggregate purchase price........................................................... $ 7,880
----------
Net assets acquired:
Working capital.................................................................. 144
Property and equipment........................................................... 358
Intangible assets................................................................ 30
-----------
Net assets acquired........................................................... 532
-----------
Goodwill related to the acquisitions............................................... $ 7,348
===========
In connection with the write-down of office-based net assets in 1996, as
discussed in Note 1(j), the carrying value of the goodwill associated with these
acquisitions was reduced by approximately $5.0 million to approximately $1.0
million.
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
which had a value of approximately $5.4 million on the date of acquisition. 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 which is being amortized over 25 years on a straight line basis and is
shown below (in thousands):
Aggregate purchase price........................................................... $ 9,644
----------
Net assets acquired:
Working capital.................................................................. 1,407
Property and equipment........................................................... 78
Accrued termination benefits..................................................... (1,100)
Long-term debt................................................................... (500)
-----------
Net assets acquired........................................................... (115)
-----------
Goodwill related to the acquisition................................................ $ 9,759
===========
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 which, net of the reduction in carrying value, is being
amortized over 20 years on a straight line basis and is shown below (in
thousands):
Aggregate purchase price........................................................... $ 8,210
----------
Net assets acquired:
Working capital.................................................................. 830
Property and equipment........................................................... 670
Intangible assets................................................................ 60
Long-term debt................................................................... (130)
-----------
Net assets acquired........................................................... 1,430
-----------
Goodwill related to the acquisitions............................................... $ 6,780
===========
45
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
In connection with the write-down of office-based net assets in 1996, as
discussed in Note 1(j), the carrying value of the goodwill associated with these
acquisitions was reduced by approximately $3.4 million to approximately $1.2
million.
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 which had a value of approximately
$200,000 on the date of acquisition. Concurrent with each acquisition of an
option the Company entered into a long-term management services 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, $11.1 million of the aggregate purchase price was allocated to the
cost of the management services agreements which is being amortized over the
shorter of the term of the agreement or 25 years and is shown below (in
thousands):
Aggregate purchase price........................................................... $ 11,012
----------
Net assets acquired:
Working capital.................................................................. (390)
Property and equipment........................................................... 218
Intangible assets................................................................ 111
-----------
Net assets acquired........................................................... (61)
-----------
Net cost of management services agreements......................................... $ 11,073
===========
During the period from January 1998 to September 1998 the Company completed
thirteen transactions with physician practices for aggregate consideration of
approximately $49.1 million of which approximately $25.5 million was paid in
cash and approximately $23.6 million was paid through the issuance of
approximately 1,428,000 shares of the Company's common stock. Approximately $5.2
million was paid for the acquisition of practices' net assets or practices'
stock and approximately $43.9 million was paid for the purchase of options to
acquire the practices' stock for a nominal amount concurrent with the execution
of long-term management services agreements. In each transaction, the
consideration was allocated to the net assets acquired based on their estimated
fair market values. As a result of these allocations, $43.1 million of the
aggregate consideration was allocated to the cost of management services
agreements which are being amortized over 25 years and $5.3 million was
allocated to goodwill which is also being amortized over 25 years as shown below
(in thousands):
Aggregate purchase price........................................................... $ 49,050
----------
Net assets acquired:
Working capital.................................................................. 159
Property and equipment........................................................... 452
Intangible assets................................................................ 80
-----------
Net assets acquired........................................................... 691
-----------
Goodwill and net cost of management services agreements............................ $ 48,359
===========
The value of the Company's common stock issued in connection with each
transaction is based on the higher of the closing market price for the Company's
common stock on the date each transaction is completed or the price guaranteed
by the Company on some future date. In connection with the issuance of the
Company's common stock as consideration for the acquisition of certain physician
practices, the Company is obligated to make additional payments to the sellers
of the practices which are contingent on the market price of the Company's
common stock upon a specified date following the date of the transaction. In
most cases, the Company has the option to satisfy the contingent obligation
either by making an additional cash payment or by the issuance of additional
shares of the Company's common stock. Such shares have been excluded from the
calculation of diluted earnings per share
46
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
because of management's ability to fund the additional purchase price, if any,
through cash payments rather than through the issuance of additional shares.
Based on the closing market price of the Company's common stock on December 31,
1998 the total value of the contingencies was approximately $12.0 million.
The following table summarizes the pro forma consolidated results of operations
of the Company as though the transactions with 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.
Year Ended December 31,
-----------------------
1998 1997
---------- -----------
(in thousands, except
per share data)
Pro Forma Results of Operations:
Net revenue.......................................................... $ 119,224 $ 123,924
Income before income taxes........................................... 12,163 11,816
Net income........................................................... 6,756 7,103
Net income per share - basic......................................... 0.83 0.90
Net income per share - diluted....................................... 0.80 0.87
In connection with the change in the Company's strategic direction, as discussed
in Note 1(j), 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 Company consolidated the
remaining practices to be sold from five office locations into three office
locations, which employ five primary care physicians. Two of these primary care
office locations were sold in April 1998. 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.
The sale of the rheumatology offices in 1997 generated a gain of approximately
$75,000 based on the adjusted carrying value of the practices' net assets. The
sale of the primary care practices in April 1998 generated a gain of
approximately $240,000 based on the adjusted carrying value of the practice's
net assets, offset by a similar loss on the sale of net assets in connection
with the Company's termination of a management services agreement in April 1998.
The sale of primary care practices in December 1996, February 1997 and December
1997 did not generate significant gains or losses as these practices were sold
for the approximate book value of their net assets.
(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.
47
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Property and equipment consists of the following (in thousands):
December 31,
------------------------
1998 1997
----------- -----------
Equipment, computer hardware and software............................ $ 3,704 $ 3,486
Furniture............................................................ 2,341 1,919
Building and improvements............................................ 1,138 1,083
----------- -----------
Total.............................................................. 7,183 6,488
Accumulated depreciation and amortization............................ (3,142) (2,950)
----------- -----------
Property and equipment, net........................................ $ 4,041 $ 3,538
=========== ===========
At December 31, 1998 the net book value of property and equipment related to
capital lease obligations was $867,000.
(4) OTHER ASSETS
------------
Other assets consist primarily of notes receivable entered into in connection
with the sale of certain physician practices during 1998. The components of
other assets are as follows (in thousands):
December 31,
------------
1998
------------
Promissory note including accrued interest of $86, payable in monthly
installments of $28 including interest at 7.5%
with a final payment due in April 2003...................................... $ 3,555
Promissory note, payable in monthly installments of $3, ........................
including interest at 10.73%, maturing in December 2001...................... 90
Promissory note including accrued interest of $12, payable
in monthly installments of $12 including interest at 9.0%,
maturing in April 2001....................................................... 308
-----------
Total notes receivable....................................................... 3,953
Security deposits............................................................... 90
-----------
Total other assets........................................................... 4,043
Less-Current portion............................................................ (392)
-----------
Total non-current other assets............................................... $ 3,651
===========
Annual maturities of notes receivable as of December 31, 1998 are as follows (in
thousands):
1999............................................................................... 392
2000............................................................................... 244
2001............................................................................... 138
2002............................................................................... 103
2003............................................................................... 3,076
-----------
Total............................................................................ $ 3,953
===========
The borrower under the promissory note which matures in April 2003, of which
approximately $3.6 million is outstanding including accrued interest, is
presently in default under the terms of the promissory note and the terms of the
asset purchase agreement entered into in April 1998, pursuant to which the note
was issued. See Note 8(d) for further disclosure of ongoing litigation regarding
the promissory note.
48
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(5) LONG-TERM DEBT
--------------
Long-term debt consists of the following (in thousands):
December 31,
------------------------
1998 1997
----------- -----------
Revolving credit facility, maturing in April 2001, at Libor plus an
applicable margin (6.9% at December 31, 1998),
secured by substantially all assets of the Company ............... $ 56,600 $ 29,000
Capital lease obligations, payable in aggregate monthly installments
of $45 as of December 31, 1998, including interest ranging from 4%
to 10%, maturing at various dates through 2001, secured by
property and equipment............................................ 843 1,279
----------- -----------
Total debt........................................................ 57,443 30,279
Less - Current portion............................................... (449) (446)
----------- -----------
Total long-term debt.............................................. $ 56,994 $ 29,833
=========== ===========
Annual maturities of long-term debt as of December 31, 1998 are as follows (in
thousands):
1999............................................................................... 449
2000............................................................................... 388
2001............................................................................... 56,606
-----------
Total............................................................................ $ 57,443
===========
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. 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. 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 December
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 December 31, 1998, the Company had
the ability to borrow an additional amount of approximately $8.0 million as of
December 31, 1998.
The Company entered into an interest rate swap agreement in August 1998 with
NationsBank N.A., the notional amount of which is $40 million at December 31,
1998. The Company entered into the agreement to fix the interest expense paid on
a portion of the amount outstanding under its credit facility with NationsBank
N.A. Under the terms of the agreement, which matures in August 2001, the
Company's borrowing rate is fixed at 5.54% plus the applicable margin due under
the terms of the revolving credit facility. Hedge accounting treatment is
applied to the interest rate swap agreement with interest differentials
currently payable or receivable under the agreement recognized each period as an
adjustment to interest expense. The net effect of this agreement on the
Company's interest expense in 1998 was nominal.
49
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(6) 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, 1998, the
Company made discretionary profit sharing contributions to the Plans equal to a
percentage of the eligible employees' salaries, and made other employer
contributions to the Plans. There was no expense related to the Plans for the
years ended December 31, 1998, 1997 and 1996 as contributions were covered in
each year by the Plans' forfeitures.
(7) INCOME TAXES
------------
Current income tax expense represents the income tax payable 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 enacted tax rates expected to be applicable
to the future periods in which such tax consequences will occur.
The provision for income taxes consists of the following (in thousands):
Year Ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
Current................................................ $ 3,653 $ 3,157 $ 1,343
Deferred............................................... 1,417 (263) (1,154)
----------- ----------- -----------
Total............................................... $ 5,070 $ 2,894 $ 189
=========== =========== ===========
Federal................................................ $ 4,245 $ 2,454 $ (27)
State.................................................. 825 440 216
----------- ----------- -----------
Total................................................ $ 5,070 $ 2,894 $ 189
=========== =========== ===========
A reconciliation of the tax provision at the statutory federal rate of 34% to
the actual income tax expense (benefit) is as follows (in thousands):
Year Ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
Tax provision (benefit) at the
federal statutory rate.............................. $ 3,891 $ 2,741 $ (3,721)
State income taxes..................................... 453 319 (433)
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................... 830 621 516
Capital gain to be offset against unrecognized
capital loss carryover.............................. (190) --- ---
Income of affiliates that cannot be
offset against net operating
losses of the Company............................... --- --- 296
Other, net............................................. 86 41 130
----------- ----------- -----------
Total............................................... $ 5,070 $ 2,894 $ 189
=========== =========== ===========
50
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Deferred income taxes were related to the following timing differences at
December 31, 1998 and 1997 (in thousands):
December 31,
-------------------------
1998 1997
----------- ------------
Goodwill and other intangible assets................................ $ 924 $ 2,378
Accrual basis income of cash basis affiliates....................... (487) (327)
Self-insurance accruals............................................. 1,290 1,420
Conversion to accrual basis by cash basis taxpayers................. (374) (388)
Bad debt reserve.................................................... --- (300)
Property and equipment.............................................. (378) ---
Original issue discount interest.................................... 321 ---
Other, net.......................................................... (2) (72)
----------- -----------
Total............................................................ 1,294 2,711
Valuation allowance................................................. (1,294) (1,294)
----------- -----------
Net deferred income taxes........................................ $ 0 $ 1,417
=========== ===========
The Company records a valuation allowance to reflect net deferred income taxes
at their estimated realizable value.
(8) 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 1998, approximately
$22.9 million, or 20.3%, was derived from anesthesia, obstetrics and neonatology
services delivered at three hospitals owned and operated by the South Broward
Hospital District. In addition, approximately $28.9 million, or 25.6% of the
Company's total net revenue in 1998, was derived from anesthesia, neonatology,
pediatric and emergency services delivered at 13 hospitals and two ambulatory
surgical facilities owned and operated by Columbia/HCA Healthcare Corp. In
addition, approximately $9.3 million, or 8.3% of the Company's total net revenue
in 1998, was derived from anesthesia, neonatology, pediatric, emergency and
management services delivered at three 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 10.4% of the Company's total net revenue in
1998 was derived from the assignment of Medicare and Medicaid benefits to the
Company by patients of the Company's affiliated physicians. In addition,
approximately 4.4% of the Company's total net revenue in 1998 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 each year the amounts received from managed care organization
under the Company's capitation arrangements exceeded the cost of services
provided to patients under those arrangements.
In addition, the Company derived 8.2%, 14.3% and 20.8% of its total net revenue
in 1998, 1997 and 1996, 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 in 1998.
51
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, 1998
are as follows (in thousands):
1999............................................................................... $ 16,117
2000............................................................................... 13,722
2001............................................................................... 11,283
2002............................................................................... 9,898
2003............................................................................... 7,533
Thereafter......................................................................... 4,324
-----------
Total .......................................................................... $ 62,877
===========
(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.
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. 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 $250,000 and $150,000 in 1998
and 1997, respectively, of losses for each individual claim up to a maximum
aggregate self-insured retention amount of $1,000,000 and $900,000 for all
claims in 1998 and 1997, respectively. Defense costs in excess of these
self-insured retention amounts are paid by the Company's insurer. There can be
no assurance, 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 $3,165,000, $2,522,000 and $2,095,000 at December 31, 1998, 1997
and 1996, respectively, which represents an estimate of the aggregate cost to be
incurred by the Company on unreported claims. An analysis of the self-insurance
accrual is as follows (in thousands):
Year Ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
Balance, beginning of year.............................. $ 3,973 $ 3,170 $ 1,615
Provision for self-insurance............................ 1,159 378 1,252
Self-insurance accruals related to
acquired physician practices......................... 892 626 439
Payments made for claims................................ (1,705) (201) (136)
----------- ----------- -----------
Balance, end of year............................... $ 4,319 $ 3,973 $ 3,170
=========== =========== ===========
52
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Payments made for claims increased in 1998 as a result of an increase in
reported claims during 1997, many of which are incurring ongoing legal defense
costs or were settled during 1998. The increase in reported claims was
anticipated due to the growth in the Company's overall business and addition of
medical specialties that historically have demonstrated a higher frequency of
malpractice claims. Historically, the malpractice claims asserted against the
Company have not exceeded the limits of its professional liability insurance and
the Company's cost of self-insurance has been limited to the maximum annual
aggregate retention amount.
(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 and ongoing professional fees incurred as
defense costs will not have a material adverse impact on the financial position,
operations and cash flows of the Company.
In December 1998, the buyer of two medical practices previously owned by the
Company, filed suit against the Company in the Circuit Court of the Seventeenth
Judicial Circuit in and for Broward County, Florida. The complaint seeks to
recover money damages and rescind the sale of the medical practices, based upon
alleged misrepresentations and concealment by the Company with respect to its
relationship with a third party payor in regards to these practices. The
practices were sold by the Company to the buyer in April 1998 in exchange for
the execution of a promissory note in the amount of $3,550,000 which is
presently in default. The Company believes the lawsuit is without merit and
intends to vigorously defend against it while vigorously pursuing a counter
claim for recovery on its unsecured purchase money note. The Company also
believes the lawsuit's ultimate resolution and ongoing professional fees
incurred as defense costs will not have a material adverse impact on the
financial position, operations and cash flows of the Company. See Note (2) for
further disclosure regarding the sale of the primary care practices referred to
in this paragraph.
(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 $2,230,733, $2,475,000
and $2,399,000 in 1998, 1997 and 1996, respectively. Future annual minimum
payments under non-cancellable operating leases as of December 31, 1998 are as
follows (in thousands):
1999.............................................................................. $ 2,231
2000.............................................................................. 2,044
2001.............................................................................. 1,857
2002.............................................................................. 1,593
2003.............................................................................. 1,264
Thereafter........................................................................ 2,282
-----------
Total.......................................................................... $ 11,271
===========
53
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(f) Government Regulation
The healthcare industry in general, and the services that the Company provides
are subject to extensive federal and state laws and regulations. Additionally, a
significant portion of the Company's net revenue is from payment by
government-sponsored health care programs, principally Medicare and Medicaid,
and is subject to audit and adjustments by applicable regulatory agencies.
Failure to comply with any of these laws or regulations, the results of
regulatory audits and adjustments, or changes in the amounts payable for the
Company's services under these programs could have a material adverse effect on
the Company's financial position and results of operations
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 in 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.
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.
(9) 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
expired unexercised in June 1998.
54
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The Company completed an initial public offering of its common stock on November
3, 1995, in which it issued 3,825,000 shares of common stock at a price of
$13.00 per share. In connection with the public offering (i) the Company
increased the amount of authorized preferred stock to 5,000,000 shares and
increased the amount of authorized common stock to 31,000,000 shares, (ii) all
of the outstanding Class A and Class B Convertible Preferred Stock was converted
into 1,321,377 shares of Class A common stock, 296,638 shares of Class B common
stock, and 321,429 shares of Redeemable Preferred Stock, (iii) all of the
Redeemable Preferred Stock was redeemed by the Company for an aggregate amount
of $16.1 million, (iv) the Class A voting common stock was redesignated as
"common stock" and the Class B non-voting common stock was redesignated as
"Class A common stock," and (v) a 15.10-to-one stock split was effected as a
stock dividend. The 15.10 to one stock split has been retroactively reflected in
the accompanying consolidated financial statements.
The initial public offering generated net proceeds to the Company of $44.8
million. Of the total proceeds, $16.1 million was used to redeem the Company's
redeemable preferred stock, $26.1 million was used to repay long-term debt, $1.5
million was used to pay accrued dividends on convertible preferred stock, and
$1.1 million was used to pay certain deferred payments in connection with the
acquisition of a physician practice in June 1995.
In March 1996, the Company issued approximately 658,000 shares of its common
stock as partial consideration for an acquisition of a hospital-based physician
practice, as discussed in Note 2.
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.
During the period from January 1998 through June 1998 the Company issued
approximately 1,428,000 shares of its common stock as partial consideration in
the acquisition of seven physician practices. Pursuant to a stock repurchase
program approved by the Company's Board of Directors, the Company repurchased
approximately 425,000 shares of its common stock from July 1998 through December
1998 for approximately $3.7 million. The shares repurchased have been retired
and cancelled. Employees of the Company exercised options to acquire
approximately 23,000 and 77,000 shares of the Company's common stock during 1998
and 1997, respectively.
(10) 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 and second amendment in 1998 increased the shares of common stock reserved
for issuance to 1,350,000 which was subsequently amended in 1998 to increase the
shares of common stock reserved for issuance to 1,750,000. 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:
55
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
1998 1997 1996
-------------------- -------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Number Exercise Number Exercise Number Exercise
of Shares Price of Shares Price of Shares Price
---------- -------- --------- --------- --------- ---------
Balance, beginning of year..... 937,084 $ 7.91 553,911 $ 5.73 321,461 $ 8.82
Granted during year............ 522,675 13.18 471,500 9.27 608,071 7.17
Terminated during year......... --- --- --- (335,071) 10.51
Exercised...................... (23,475) 3.92 (77,190) 0.58 --- ---
Forfeited during year.......... (34,105) 8.97 (11,137) 6.65 (40,550) 12.32
---------- --------- ---------
Balance, end of year...... 1,402,179 $ 9.92 937,084 $ 7.91 553,911 $ 5.73
========== ========= =========
Exercisable at end of year..... 397,223 $ 8.13 151,716 $ 6.25 131,283 $ 3.38
The weighted average fair value per share as of the grant date was $6.78 for
stock options granted in 1998, $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 1998, 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 50% to 78%,
and (iv) no expected dividends on the underlying common stock. Stock options
outstanding at December 31, 1998 consisted of the following:
Total Outstanding Exercisable
------------------------------------ ------------------------
Weighted Average Weighted
Range of Number ----------------------- Number Average
Exercise of Exercise Remaining of Exercise
Prices Shares Price Life Shares Price
---------------- ---------- ----------- --------- ----------- -----------
$.58 22,508 $ .58 6.2 years 22,508 $ .58
$5.75 to $8.13 326,746 6.48 7.1 years 245,382 6.64
$8.75 to $9.50 520,250 9.22 8.3 years 39,334 8.70
$10.00 to $14.25 532,675 13.12 9.3 years 89,999 13.85
----------- -----------
Total 1,402,179 $ 9.92 8.3 years 397,223 $ 8.13
=========== ===========
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.
Year Ended December 31,
---------------------------
1998 1997
------------ ------------
(in thousands, except
per share data)
As reported results of operations:
Net income........................................................... $ 6,373 $ 5,167
Net income per share - basic......................................... $ 0.80 $ 0.77
Net income per share - diluted....................................... $ 0.78 $ 0.73
Pro forma results of operations:
Net income........................................................... $ 4,113 $ 3,495
Net income per share - basic......................................... $ 0.52 $ 0.52
Net income per share - diluted....................................... $ 0.50 $ 0.50
56
SHERIDAN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(11) SUBSEQUENT EVENT
----------------
In January 1999 the Company completed the acquisition of a physician practice
for approximately $1.9 million which was paid in cash. From January 1999 through
March 16, 1999 the Company repurchased approximately 1,275,000 shares of its
common stock for approximately $10.6 million from certain physicians who
received the Company's common stock as partial consideration for the acquisition
of their practices by the Company from January 1998 through March 1998, see Note
(2). Concurrent with such repurchases, the Company made payments of
approximately $5.6 million in connection with the stock price guarantees
associated with the stock issued and repurchased in those acquisitions.
On March 25, 1999 the Company announced the signing of a definitive merger
agreement between the Company and an investor group led by Vestar Capital
Partners and Sheridan Healthcare, Inc. senior management. Under the terms of the
agreement, the investor group will offer Sheridan Healthcare, Inc. shareholders
$9.25 per share in cash for all outstanding common shares in a tender offer.
Including debt and other obligations of the Company, and costs expected to be
incurred in connection with the acquisition, the total value of the transaction
is approximately $155 million. The transaction was unanimously recommended by
the Company's Board of Directors and is subject to a variety of conditions,
including receipt of at least a majority of the voting stock in the tender
offer, shareholder approval, financing and regulatory approvals.
57
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE
--------------------------------------------------------------
To 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, 1998, included in this Form
10-K, and have issued our report thereon dated February 18, 1999 (except for the
matter discussed in Note 11, as to which the date is March 25, 1999). 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 18, 1999. (except for the matter discussed in
Note 11, as to which the date is March 25, 1999).
58
SHERIDAN HEALTHCARE, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1998, 1997 and 1996
(in thousands)
Balance at Charged to Balance at
Beginning of Costs and End of
Period Expenses Deductions Period
----------- ----------- ---------- -----------
Accounts receivable allowances:
Year ended December 31, 1998.................... $ 1,828 $ 5,592 $ 5,074 $ 2,346
=========== =========== =========== ===========
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
=========== =========== =========== ===========
59
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- - ------------------------------------------------------------------------
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- - ------------------------------------------------------------
The Proxy Statement for the Company's 1999 Annual Meeting of Stockholders,
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 1999 Annual Meeting of Stockholders,
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 1999 Annual Meeting of Stockholders,
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 1999 Annual Meeting of Stockholders,
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.
(b) No reports on Form 8-K have been filed during the last quarter for which
this report is filed.
60
3. Exhibits (cont'd):
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 Third Amended and Restated Certificate of Incorporation, as
amended effective May 27, 1997 (incorporated herein by
reference to such exhibits filed as exhibits to the Company's
Quarterly Report on Form 10-Q for the quarter ended September
30, 1995 and 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
A Registration Statements).
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 exhibits filed
as exhibits to the Registration Statement and to the Company's
Quarterly Report on Form 10-Q for the quarter ended September
30, 1995).
10.1 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, as amended July 28, 1995 (incorporated herein by
reference to such exhibits filed as exhibits to the
Registration Statement).
10.2 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, as amended July 28, 1995 (incorporated
herein by reference to such exhibits filed as exhibits to the
Registration Statement).
10.3 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, as
amended August 1, 1995 (incorporated herein by reference to
such exhibits filed as exhibits to the Registration
Statement).
10.4 Executive Employment Agreement of Gilbert Drozdow dated
January 1, 1995 by and among SAMA Holdings, Inc., Southeastern
Anesthesia Management Associates, Inc. and Gilbert Drozdow, as
amended August 1, 1995 (incorporated herein by reference to
such exhibits filed as exhibits to the Registration
Statement).
61
3. Exhibits (cont'd):
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.5 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).
10.6 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).
10.7 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).
10.8 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).
10.9 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).
10.10 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).
10.11 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).
10.12 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, as amended September 1, 1995
(incorporated herein by reference to such exhibits filed as
exhibits to the Registration Statement and to the Company's
Annual Report on Form 10-K for the year ended December 31,
1996).
10.13 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).
62
3. Exhibits (cont'd):
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.14 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).
10.15 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).
10.16 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).
10.17 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 the Company's
Annual Report on Form 10-K for the year ended December 31,
1996).
10.18 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).
10.19 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).
10.21 Investment and Stockholders= Agreement, by and between the
Company and Frederick N. Herman, M.D., dated as of November 3,
1997 (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, 1997).
10.22 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
(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, 1998).
10.23 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 (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, 1998).
63
3. Exhibits (cont'd):
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.24 Investment and Stockholders= 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).
10.25 Investment and Stockholders= Agreement, by and between the
Company and Nord Capital Group, Inc., dated as of March 4,
1998 (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, 1998).
10.26 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 (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,
1998).
10.27 Second Amended and Restated Credit Agreement by and between
NationsBank, N.A. as Agent and Lender and the Company, as
Borrower, dated as of April 30, 1998.
10.28 Sheridan Healthcare, Inc. Third 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, as of May 15, 1997, and as of June 24, 1998
(incorporated herein by reference 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).
10.29 Investment and Stockholders= Agreement, by and among the
Company and Odalis Sijin Engel, M.D., dated as of June 16,
1998 (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, 1998).
10.30 Investment and Stockholders= Agreement, by and among the
Company and Santiago H. Triana, M.D., dated as of June 23,
1998 (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, 1998).
10.31 Investment and Stockholders= Agreement, by and among the
Company and Felix Estrada, M.D., Ian Jeffries, M.B., and
Andrew Kairalla, M.D., dated as of June 26, 1998 (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, 1998).
10.32 Amendment No. 3, dated and effective as of August 15, 1998, to
the Employment Agreement by and among SAMA Holdings, Inc.
n/k/a Sheridan Healthcare, Inc. , Southeastern Anesthesia
Management Associates, Inc. n/k/a Sheridan Healthcorp,Inc. and
Mitchell Eisenberg.
10.33 Amendment No. 3, dated and effective as of August 15, 1998, to
the Executive Employment Agreement by and among SAMA Holdings,
Inc. n/k/a Sheridan Healthcare, Inc., Southeastern Anesthesia
Management Associates, Inc. n/k/a Sheridan Healthcorp, Inc.
and Lewis Gold.
10.34 Amendment No. 2, dated and effective as of August 15, 1998, to
the Executive Employment Agreement by and among SAMA Holdings,
Inc. n/k/a Sheridan Healthcare, Inc., Southeastern Anesthesia
Management Associates, Inc. n/k/a Sheridan Healthcorp, Inc.
and Jay A. Martus.
64
3. Exhibits (cont'd):
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.35 Amendment No. 1, dated and effective as of August 15, 1998, to
the Executive Employment Agreement by and among Sheridan
Healthcare, Inc., Sheridan Healthcorp, Inc. and Michael
Schundler.
10.36 Amendment No. 3, dated and effective as of October 12, 1998,
to the Executive Employment Agreement by and among SAMA
Holdings, Inc. n/k/a Sheridan Healthcare, Inc., Southeastern
Anesthesia Management Associates, Inc. n/k/a Sheridan
Healthcorp, Inc. and Jay A. Martus.
10.37 Amendment No. 1, to the Second Amended and Restated Credit
Agreement, by and among NationsBank, N.A., as Agent and
Lender, and the Company, as Borrower, dated as of September
23, 1998.
21.1 Schedule of Subsidiaries.
23.1 Consent of Independent Certified Public Accountants
27 Financial Data Schedule.
65
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, 1999 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, 1999
- - ---------------------------- President, Chief Executive
Mitchell Eisenberg, M.D. Officer (Principal Executive
Officer)
/s/ Lewis D. Gold, M.D. Executive Vice President, March 30, 1999
- - ---------------------------- Director
Lewis D. Gold, M.D.
/s/ Henry E. Golembesky, M.D. Director March 30, 1999
- - -----------------------------
Henry E. Golembesky, M.D.
/s/ Jamie Hopping Director March 30, 1999
- - -----------------------------
Jamie Hopping
/s/ Neil A. Natkow, D.O. Director March 30, 1999
- - -----------------------------
Neil A. Natkow, D.O.
/s/ Michael F. Schundler Chief Financial Officer March 30, 1999
- - ------------------------- (Principal Financial and
Michael F. Schundler Accounting Officer)
66