SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark one)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
Commission file number 0-27260
COMPLETE MANAGEMENT, INC.
-------------------------
(Exact Name of Registrant as Specified in Its Charter)
New York 11-3149119
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
254 West 31st Street, New York, NY 10001-2813
---------------------------------- ----------
(Address of Principal Executive (Zip Code)
Offices)
Registrant's telephone number, including area code (212) 273-0600
--------------
Securities registered under Section 12(b) of the Act:
Title of Each Class Name of Exchange on Which Registered
------------------- ------------------------------------
Common Shares, par value New York Stock Exchange
$.001 per share
Securities registered under Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) 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 |_|
As of November 16, 1998, the registrant had a total of 15,019,981
outstanding shares of Common Stock.
<PAGE>
Forward Looking Statements
When used in this Quarterly Report on Form 10-Q, the words "may," "will,"
"should," "expect," "believe," "anticipate," "continue," "estimate," "project,"
"intend" and similar expressions are intended to identify forward-looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act regarding events, conditions and financial trends that
may affect the Company's future plans of operations, business strategy, results
of operations and financial condition. The Company wishes to ensure that such
statements are accompanied by meaningful cautionary statements pursuant to the
safe harbor established in the Private Securities Litigation Reform Act of 1995.
Prospective investors are cautioned that any forward-looking statements are not
guarantees of future performance and are subject to risks and uncertainties and
that actual results may differ materially from those included within the
forward-looking statements as a result of various factors. Such forward-looking
statements should, therefore, be considered in light of various important
factors, including those set forth herein and others set forth from time to time
in the Company's reports and registration statements filed with the Securities
and Exchange Commission. The Company disclaims any intent or obligation to
update such forward-looking statements.
In particular, in connection with certain past acquisitions and the entry
into long-term physician practice management agreements the Company has
disclosed expected additions to its revenues from such transactions. Such
revenue forecasts are forward-looking information and as such are inherently
subject to risk and uncertainty. Important factors, including those set forth
below, could cause the Company's actual results from these transactions to
differ materially and adversely from the projections, or the additional revenues
from these transactions could be offset by a diminution of other revenues.
Accordingly, there can be no assurance that the Company will achieve the
projected revenues, or, if attained, what effect such revenues will have on the
Company's net earnings or earnings per share. In addition, the healthcare
industry in general and the physician practice management business in particular
are undergoing significant changes, making the Company particularly susceptible
to various factors that may affect future results, such as the following: risks
relating to the Company's expense reductions, risks relating to the Company's
restructuring efforts; risks relating to the integration in connection with the
acquisitions; risks relating to capital requirements; identification of growth
opportunities; control of healthcare costs; risks relating to certain legal
matters; risks relating to exposure to professional liability; risks relating to
government regulations; risks relating to healthcare reform and proposed
legislation; and possible volatility of stock price.
2
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements.
COMPLETE MANAGEMENT, INC.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
---------------------------
(in thousands, except share data)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 3,689 $ 2,470
Marketable securities 6,894 18
Notes receivable - related party 12 --
Notes receivable - other 553 1,137
Accounts receivable, net of unamortized discount
of $1,087 and $1,626, respectively and allowance
for doubtful accounts of $1,438 and $2,968, respectively 68,312 44,748
Short-term investments 2,107 --
Prepaid expenses and other current assets 1,935 1,678
--------- ---------
Total Current Assets 83,502 50,051
--------- ---------
Long-term portion of accounts receivable, net of
unamortized discount of $1,579 and $3,140, respectively 32,678 18,277
Property and equipment, less accumulated depreciation and
amortization of $5,665 and $7,355, respectively 24,707 29,263
Intangible assets, less accumulated amortization of $2,183
and $3,888, respectively 52,951 43,919
Debt issuance cost 6,641 5,719
Advances to full service clients 19,258 17,926
Other assets 6,323 7,973
Deferred tax asset, net of valuation allowance of $0 and
$11,547, respectively -- 16,400
--------- ---------
Total Assets $ 226,060 $ 189,528
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 5,333 $ 7,947
Restructuring reserve -- 8,620
Income taxes payable 3,741 4,098
Deferred income taxes - current 3,946 --
Deferred purchase price 5,741 498
Notes payable 5,242 13,044
Current portion of capital lease obligations 1,894 2,258
Current portion of long-term debt 10,015 --
--------- ---------
Total Current Liabilities 35,912 36,465
--------- ---------
Deferred income taxes - noncurrent 7,907 --
Long term portion of capital lease obligations 4,164 6,063
Deferred rent 136 131
Convertible subordinated debentures 73,844 74,659
Minority interest 4,174 4,181
Line of credit -- 2,182
--------- ---------
Total Liabilities 126,137 123,681
--------- ---------
Stockholders' equity:
Preferred stock, $.001 par value; authorized, 2,000,000 shares,
issued and outstanding, none -- --
Common stock, $.001 par value; authorized, 40,000,000 shares,
issued and outstanding shares, 11 15
11,421,884 shares at December 31, 1997 and 15,019,981 shares at
September 30, 1998
Paid-in capital 79,987 107,005
Retained earnings 20,698 (41,131)
Unrealized loss on marketable securities - available for sale (773) (42)
--------- ---------
Total Stockholders' Equity 99,923 65,847
--------- ---------
Total Liabilities and Stockholders' Equity $ 226,060 $ 189,528
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
COMPLETE MANAGEMENT, INC.
Condensed Consolidated Statements of Income
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------------------- ---------------------------
1997 1998 1997 1998
--------------------------- ---------------------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenue:
From a related party $ 4,523 $ -- $ 17,019 $ 2,734
Other revenue 15,692 11,265 36,339 42,372
Interest discount (647) -- (2,196) (270)
--------- --------- --------- ---------
Net revenues 19,568 11,265 51,162 44,836
--------- --------- --------- ---------
Operating expenses:
Cost of revenues 11,691 10,472 26,893 32,903
General and administrative expenses 3,818 7,397 14,162 20,253
Non-Recurring charges -- 17,491 -- 74,173
--------- --------- --------- ---------
Total operating expenses 15,509 35,360 41,055 127,329
--------- --------- --------- ---------
Income (loss) from operations 4,059 (24,095) 10,107 (82,493)
Reversal of interest discount 542 375 1,671 1,277
Interest expense (1,683) (2,121) (4,876) (5,784)
Interest, dividend and other income (expense), net 584 (406) 2,820 (2,959)
Gain on partial equity disposition 850 -- 850 --
--------- --------- --------- ---------
Income (loss) before income taxes and extraordinary item 4,352 (26,247) 10,572 (89,959)
--------- --------- --------- ---------
Provision for income taxes 1,614 -- 4,030 (27,985)
--------- --------- --------- ---------
Income (loss) before extraordinary item 2,738 (26,247) 6,542 (61,974)
--------- --------- --------- ---------
Extraordinary item, extinguishment of debt,
net of income tax expense of $0 and $119, respectively -- 145 -- 145
--------- --------- --------- ---------
Net income (loss) $ 2,738 $ (26,102) $ 6,542 $ (61,829)
========= ========= ========= =========
Basic net income (loss) per share $ 0.25 $ (1.81) $ 0.64 $ (4.50)
========= ========= ========= =========
Basic weighted average number of shares outstanding 10,742 14,459 10,299 13,739
========= ========= ========= =========
Diluted net income (loss) per share $ 0.22 $ (1.81) $ 0.58 $ (4.50)
========= ========= ========= =========
Diluted weighted average number of shares outstanding 16,510 14,459 15,876 13,739
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
COMPLETE MANAGEMENT, INC.
Condensed Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months ended September 30
------------------------------
1997 1998
------------------------------
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 6,542 $(61,829)
Adjustments to reconcile net income (loss) to
net cash (used in) provided by operating activities: 0 0
Loss on impairment of goodwill -- 3,571
Loss on impairment of accounts receivable -- 42,723
Loss on impairment of advances to full-service clients -- 4,122
Gain on disposal of fixed assets -- (97)
Provision for uncollectible accounts -- 6,823
Extraordinary gain -- (145)
Restructuring reserve -- 8,620
Other nonrecurring charges adjustment -- 669
Depreciation and amortization 3,641 5,840
Discount of accounts receivable, net of amortization -- 2,100
Loss (gain) on sale of marketable securities
- available for sale (608) 3,590
Amortization of deferred note issuance cost -- 922
Gain on partial equity disposition (850) --
Income applicable to minority interest -- 7
Change in deferred taxes -- (39,800)
Deferred tax asset valuation allowance -- 11,547
Changes in operating assets and liabilities:
Notes receivable from a related party 63 253
Accounts receivable (32,748) (13,681)
Prepaid expenses and other current assets (1,276) 257
Accounts payable and accrued expenses 1,039 2,614
Income taxes payable 819 357
Other assets (2,648) (4,685)
-------- --------
Net cash used in operating activities (26,026) (26,222)
-------- --------
</TABLE>
Condensed Consolidated Statements of Cash Flows is continued on the next page.
5
<PAGE>
Condensed Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
Nine Months ended September 30
------------------------------
1997 1998
------------------------------
(in thousands)
<S> <C> <C>
Cash flows from investing activities:
Purchase of property and equipment (10,873) (7,757)
Businesses acquired (40,018) (308)
Increase in minority interest 5,198 --
Investment in subsidiary -- (600)
Loans advanced to acquire businesses -- (721)
Repayment of advances to full service clients -- --
Purchase of marketable securities (52,168) (5,884)
Proceeds from sales and maturities of marketable securities 74,415 13,491
Purchase of medical receivables -- 89
Purchase of shortterm investments (100) (370)
-------- --------
Net cash used in investing activities (23,546) (2,060)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock, net of
underwriters' commission & expenses -- 23,115
Proceeds from exercise of options and warrants 969 --
Proceeds from partial equity disposition 5,000 --
Payment to extinguish convertible debentures -- (435)
Deferred note issuance costs (275) --
Repayment of notes payable (7) (4,644)
Repayment of longterm debt -- (10,000)
Proceeds from capital lease obligations (660) 2,339
Cash acquired in merger 652 --
Proceeds from bank line of credit 10,000 16,688
-------- --------
Net cash provided by financing activities 15,679 27,063
-------- --------
Net increase (decrease) in cash and cash equivalents (33,893) (1,219)
Cash and cash equivalents at the beginning of the period 40,138 3,689
-------- --------
Cash and cash equivalents at the end of the period $ 6,245 $ 2,470
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 5,023 5,730
Taxes 4,364 223
Noncash investing and financing activities:
Capital stock and debt issued for acquisitions of businesses and assets 8,485 5,135
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
<PAGE>
COMPLETE MANAGEMENT, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 1998
BASIS OF PRESENTATION AND OPERATIONS
The accompanying condensed consolidated financial statements are unaudited
and in the opinion of management reflect all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation. Operating
results for the nine-month period ended September 30, 1998 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1998. For further information refer to the financial statements and footnotes
thereto included in the audited financial statements of Complete Management,
Inc. (the "Company") for the year ended December 31, 1997.
Overview
The Company provides physician practice management services to medical
practices and hospitals located in the New York metropolitan area, particularly
New York City, Long Island, the Hudson Valley region and portions of New Jersey.
The Company's services range from managing all non-medical aspects of its full
service clients' businesses to providing limited non-medical services, such as
billing and collection, transcription and temporary staffing, to its partial
service clients. Additionally, the Company owns and provides administrative
support for magnetic resonance imaging ("MRI") and other diagnostic imaging
equipment at seven hospitals. The Company also owns Consumer Health Network,
Inc., a preferred provider organization ("PPO") operating in New Jersey and, to
a more limited extent, New York and Connecticut. Consumer Health Network is the
largest PPO in New Jersey. CMI Capital Corporation, a 60% owned subsidiary of
the Company ("CMIC"), is an asset-backed lender.
Termination of Management Agreement
During the second quarter, the Company decided to terminate its management
agreement with its initial client, Greater Metropolitan Neurology Service, P.C.
(d/b/a Greater Metropolitan Medical Services) ("GMMS"), effective August 10,
1998. At such date, GMMS began to wind down the operations of its medical
practice. GMMS's primary focus had been the treatment of patients with
injury-related conditions who carry insurance with various insurance carriers
under the workers' compensation and automobile no-fault regulations. As a result
of the termination, the Company recorded a write-off of approximately $28.9
million of accounts receivable in the second quarter. During the third quarter,
the Company recorded an additional write-off of approximately $6.1 million,
which is included as a non-recurring charge in the accompanying condensed
consolidated statements of income as of September 30, 1998, related to the
termination of the management agreement. Included in this write-off, is $2.1
million relating to the Company's re-evaluation of its receivable based on an
incremental borrowing rate of 8% and an estimated collection period of 5 years.
See "Notes to the Condensed Consolidated Financial Statements - Non-Recurring
Charges."
Revenue Recognition
The Company earns its fees from full service clients for managing the
non-medical aspects of their medical practices, generally under 30 year
management agreements. The Company's fees are based on its direct costs plus
either a fixed fee or a percentage of such costs. The Company also receives
hourly consulting charges and per use fees when MRI and other diagnostic imaging
equipment is provided to clients. Fixed and percentage fees are subject to
periodic upward readjustment after one or two years based on specified formulae
or procedures. The Company earns its fees from partial service clients primarily
by providing billing and collection services for a fee based on a percentage of
collections. Consumer Health Network earns its fees from self-insured employer
groups, union groups, insurance companies and other third party payors based
primarily on a percentage of the savings generated through the use of its
network. The Company's fees for owning and providing administrative support for
MRI and other diagnostic imaging equipment are earned on the basis of a charge
for each use of the equipment. CMIC earns fees from upfront charges and interest
accrued on outstanding loan balances charged to its borrowers.
The Company determined, based on actual results and industry factors, that
its management fees from GMMS had a collection cycle averaging approximately
four years. Accordingly, an interest discount had been taken on the Company's
revenues generated by its management fees from GMMS utilizing the Company's then
current incremental borrowing rate of 7.25% per annum over this collection
cycle. The Company recaptured this interest discount in income over a four year
period to reflect the presumed collection of these revenues. Actual collection
results differed from the Company's estimate, however, because numerous factors
affected the timing and the manner in which the receivables were collected
(i.e., government regulations).
7
<PAGE>
To the extent permitted by applicable law, management fees due to the
Company from its full service clients are collateralized through the assignment,
on a full recourse basis, of such client's patient service receivables. The
clients' ability to pay these fees is dependent on the Company's ability to
collect, on behalf of its full service clients, these receivables.
Extraordinary Item
During the third quarter, the Company purchased $360,000 of its 8%
Convertible Subordinated Debentures due December 15, 2003 for $90,890 and
$75,000 of its 8% Convertible Subordinated Debentures due August 15, 2003 for
$19,340. The purchase of these securities resulted in an extraordinary gain of
approximately $145,000. In addition, as of November 16, 1998, the Company has
subsequently purchased $890,000 of its 8% Convertible Subordinated Debentures
due December 15, 2003 for $208,842 and $225,000 of its 8% Convertible
Subordinated Debentures due August 15, 2003 for $54,345.
Relationship to Full Service Clients
The Company earns fees from its full service clients by managing the
non-medical aspects of their medical practices, generally under 30 year
management agreements. Since the Company does not have an ownership interest in
such clients, the Company's consolidated financial statements do not include the
financial statements of its full service clients.
The activities of the Company's full service clients consist primarily of
rendering medical services to patients through physicians and other medical
personnel employed by them. Their income statements include (a) fees generated
from rendering medical services, (b) compensation to physicians and other
medical personnel, (c) other expenses related to rendering medical services and
(d) management fees due to the Company. Their principal asset is the accounts
receivable due from third party payors and/or patients for the provision of
medical services (minimal services are paid for by the patient at the time
service is rendered). Their principal liabilities are the amounts due to
physicians and other medical personnel for the performance of medical services
and the management fees due to the Company under its management agreements.
The Company's initial and former client, GMMS, is 95% owned by Lawrence
Shields, M.D., who owns approximately 7.2% of the outstanding common stock of
the Company as of November 16, 1998. Accordingly, GMMS had been classified as a
related party to the Company. In 1997, 1996, and 1995, 28%, 65% and 100% of the
Company's gross revenues were generated from agreements with GMMS, respectively.
During the third quarter of 1998, the Company did not recognize any revenues
generated from agreements with GMMS.
New Accounting Pronouncements
Effective March 31, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income," which
establishes standards for reporting and display of comprehensive income and its
components (revenue, expenses, gains and losses) in a full set of general
purpose financial statements. As of September 30, 1998, accumulated
comprehensive loss was approximately $41,737 consisting of unrealized gains and
losses on marketable securities available-for-sale.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No 131, "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS No. 131"), which is effective
for periods beginning after December 15, 1997. SFAS No. 131 establishes
standards for reporting financial and descriptive information regarding an
enterprise's operating segments. This standard increases disclosure only and
will have no impact on the Company's 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 recorded
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate and assess the effectiveness of
the transactions that receive hedge accounting. SFAS 133 is effective for fiscal
years beginning after June 15, 1999. A company may also implement SFAS 133 as of
the beginning of any fiscal quarter after such date. SFAS 133 cannot be applied
retroactively. SFAS 133 must be applied to (a) derivative instruments and (b)
certain derivative instruments embedded in hybrid contracts that were issued,
acquired, or substantively modified after December 31, 1997 (at the company's
election, before January 1, 1998). The adoption of SFAS 133 will not have a
material impact on the Company's financial statements.
8
<PAGE>
The Emerging Issues Task Force ("EITF") issued guidance during 1997, EITF
97-2, on the consolidation of physician practice revenues. Under EITF 97-2,
physician practice management companies ("PPMs") will be required to consolidate
financial information of a physician practice where the PPM acquires a
"controlling financial interest" in the practice through the execution of a
contractual management agreement even though the PPM does not own a controlling
equity interest in the physician practice. EITF 97-2 outlines six requirements
for establishing a controlling financial interest. The guidance contained in
EITF 97-2 is effective for the Company's financial statements for the year ended
December 31, 1998. The Company does not believe that the implementation of this
guidance will have a material impact on its results of operations or financial
position.
9
<PAGE>
Earnings Per Share
The Company has adopted the provisions of Statement of Financial
Accounting Standards No. 128 "Earnings per Share" ("SFAS No. 128"), under which
it is required to present basic and diluted earnings per share information.
Basic earnings per share is based upon the weighted average number of common
shares outstanding during each year. Diluted earnings per share is based on the
above, common share equivalents outstanding, and if dilutive, adjusted for the
assumed conversion of the Company's convertible subordinated debentures and
convertible notes, and the assumed increase in net income for the after tax
interest cost of the debentures and convertible notes. Earnings per share for
prior periods presented have been restated to conform with the provisions of
SFAS No. 128.
A reconciliation between the numerators and denominators of the basic
and diluted EPS computations for net earnings is as follows:
<TABLE>
<CAPTION>
Three Months Ended Sept. 30, 1998 Three Months Ended Sept. 30, 1997
------------------------------------- -------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amounts (Numerator) (Denominator) Amounts
----------- ------------- -------- ----------- ------------- ---------
(In Thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Net earnings
attributable to
common stock $ (26,102) 14,459 $ (1.81) $ 2,738 10,742 $ 0.25
Effect of Dilutive
Securities
Stock options -- 479
Stock warrants -- 62
Convertible debt 907 5,227
----------- ------------- ----------- -------------
Diluted EPS
Net earnings
attributable to
common stock and assumed
option and warrant
exercises,
and debt conversion $ (26,102) 14,459 $ (1.81) $ 3,645 16,510 $ 0.22
=========== ============= ======= =========== ============= =========
<CAPTION>
Nine Months Ended Sept. 30, 1998 Nine Months Ended Sept. 30, 1997
------------------------------------- -------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amounts (Numerator) (Denominator) Amounts
----------- ------------- -------- ----------- ------------- ---------
(In Thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Net earnings
attributable to
common stock $ (61,829) 13,739 $ (4.50) $ 6,542 10,299 $ 0.64
Effect of Dilutive
Securities
Stock options -- 311
Stock warrants -- 39
Convertible debt 2,694 5,227
----------- ------------- ----------- -------------
Diluted EPS
Net earnings
attributable to
common stock and assumed
option and warrant
exercises,
and debt conversion $ (61,829) 13,739 $ (4.50) $ 9,236 15,876 $ 0.58
=========== ============= ======= =========== ============= =========
</TABLE>
<TABLE>
<CAPTION>
Anti-Dilutive Securities
-----------------------------------------------------------------------------
Three Months Ended Sept. 30, 1998 Three Months Ended Sept. 30, 1997
------------------------------------ -------------------------------------
<S> <C> <C>
Stock options 1,422 1,402
Stock warrants 870 779
Convertible debt 5,329 0
============= =============
7,621 2,181
============= =============
<CAPTION>
Nine Months Ended Sept. 30, 1998 Nine Months Ended Sept. 30, 1997
------------------------------------ -------------------------------------
<S> <C> <C>
Stock options 1,422 1,570
Stock warrants 870 802
Convertible debt 5,252 0
------------- -------------
7,544 2,372
============= =============
</TABLE>
10
<PAGE>
The Basic Loss Per Share for the three months ended September 30, 1998
including extraordinary item as calculated on the income statement was a loss of
$1.81 compared to a loss of $1.82 without extraordinary item. The Basic Loss Per
Share for the nine months ended September 30, 1998 including extraordinary item
as calculated on the income statement was a loss of $4.50 compared to a loss of
$4.51 without extraordinary item. See "Notes to Condensed Consolidated Financial
Statements - Extraordinary Item."
The Diluted Loss Per Share for the three months ended September 30, 1998
including extraordinary item as calculated on the income statement was a loss of
$1.81 compared to a loss of $1.82 without extraordinary item. The Diluted Loss
Per Share for the nine months ended September 30, 1998 including extraordinary
item as calculated on the income statement was a loss of $4.50 compared to a
loss of $4.51 without extraordinary item. See "Notes to Condensed Consolidated
Financial Statements - Extraordinary Item."
Non-Recurring Charges
During 1995, the Company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed Of" ("SFAS 121"). Under SFAS 121, the Company
has evaluated its long-lived assets for financial impairment, and will continue
to evaluate them as events and changes in circumstances indicate that the
carrying amount of such assets may not be fully recoverable. The Company
considers continued operating losses, or significant and long-term changes in
industry conditions, to be its primary indicators of potential impairment. An
impairment is recognized when the future undiscounted cash flows of each asset
is estimated to be insufficient to recover its related carrying value.
Considerable management judgement is necessary to estimate undiscounted cash
flows, and accordingly, actual results could vary significantly from the
Company's estimates.
During the second quarter of 1998, the Company decided to terminate its
management agreement with GMMS effective August 10, 1998 due to the
long-collection cycle associated with, and difficulty in collecting, the
accounts receivable generated by this line of business. See "Part II, Item 5 -
Other Information." GMMS has been forced to wind down its medical practice due
to the delay and denial by insurance carriers of substantial amounts of claims
made by GMMS for payment of medical services. See "Part II, Item 1 - Legal
Proceedings." As a result, and after a thorough analysis of the Company's
efforts to improve the collection rate of GMMS' accounts receivable, $28.9
million in outstanding management fees owing from GMMS, which are secured by
such accounts receivable, have been deemed uncollectible and written down by the
Company in the second quarter. In addition, the curtailment of the Company's
injury related business has resulted in $4.0 million of non-recurring
incremental costs associated with collecting GMMS' receivables in the second
quarter. The Company also took a $6.1 million charge against earnings in the
third quarter related to GMMS for certain severance, lease termination and other
costs, and the write off of assets related to the medical offices that serviced
GMMS' medical practice. Included in this write-off, is $2.1 million relating to
the Company's re-evaluation of its receivable based on an incremental borrowing
rate of 8% and an estimated collection period of 5 years.
As a result of the Company's implementation of a plan to improve its cost
structure and disassociate from its full service clients' underperforming
medical practices, the Company and its clients decided to close certain medical
practices as well as reduce the carrying amount of impaired long-lived assets
(i.e. advances for acquisitions and goodwill) to their fair value. As a result
of the closing of these offices and, after a thorough analysis of the Company's
efforts to improve the collection rate of its full service clients, the Company
wrote off approximately $10.8 million during the second quarter in outstanding
management fees and approximately $12.1 million in goodwill and advances for
acquisitions, which have been deemed to be uncollectible. The Company also took
a charge against earnings of $0.9 million in the second quarter to write off
various costs related to cancelled financings and acquisitions. The Company also
took an $11.4 million charge against earnings during the third quarter of 1998
relating to, among other things, the closing of additional medical offices by
full service clients, and certain lease termination, severance and other costs
in connection with the Company's operations at these offices.
The Company has been advised by its independent public accountants that if
the improvement in operating cash flows, the sale of one or more of its
businesses, and the restructuring of the Company's capitalization described in
the preceding paragraphs have not been achieved or resolved prior to the
completion of their audit of the Company's financial statements for the year
ended December 31, 1998, their auditors' report on those financial statements
may be modified to reflect the uncertainty related to the Company's ability to
continue as a going concern.
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion of the results of operations and financial
condition of the Company should be read in conjunction with the Company's
unaudited condensed consolidated financial statements and notes thereto included
elsewhere in this Quarterly Report.
Overview
The Company provides physician practice management services to medical
practices and hospitals. These services range from managing all non-medical
aspects of its full service clients' businesses to providing limited,
non-medical services to its partial service clients, such as billing and
collection, transcription and temporary staffing. Additionally, the Company owns
and provides administrative support for MRI and other diagnostic imaging
equipment. The Company also owns Consumer Health Network, the largest preferred
provider organization in New Jersey. CMIC, a 60% owned subsidiary of the
Company, is an asset-backed lender.
Full Service Clients
The Company earns fees from its full service clients by managing the
non-medical aspects of their medical practices, generally under 30 year
management agreements. The Company's fees are based on its direct costs plus
either a fixed fee or a percentage of such costs. The Company also receives
hourly consulting charges and per use fees when MRI and other diagnostic imaging
equipment is provided to clients.
To the extent permitted by applicable law, management fees due to the
Company from its full service clients are collateralized through the assignment,
on a full-recourse basis, of such clients' patient service accounts receivable.
The clients' ability to pay these fees is dependent on the Company's ability to
collect, on behalf of its full service clients, these receivables.
The Company had negative cash flow from operations of approximately
$26,222,000 for the nine months ended September 30, 1998. As previously
disclosed, one of the Company's goals in 1998 is to achieve positive cash flow
from operations. Therefore, during the end of 1997 and throughout 1998, the
Company has embarked on an expense reduction plan and evaluation of all of its
client relationships to determine what actions are necessary to achieve this
goal. Such evaluation included, but is not limited to, an analysis of the
Company's relationships with its full service clients where the historical and
anticipated collection patterns of the accounts receivable generated by those
full service clients would be a barrier to achieving positive cash flow from
operations in 1998. Based on this evaluation, the Company decided to terminate
its relationships with, and significantly reduce its services provided to,
certain of its full service clients. Such actions have and will have a material
adverse effect on the recoverability of certain accounts receivable due from
these clients and the fixed assets utilized in serving these clients, and result
in related personnel and lease termination costs. See "Notes to the Condensed
Consolidated Financial Statements - Non-Recurring Charges." This activity has
and will have a material adverse effect on the Company's financial condition and
results of operation. See "Liquidity and Capital Resources." The Company is
continuing its analysis of expenses during the fourth quarter and may take
additional actions that may adversely effect the Company's financial condition
and results of operation in subsequent periods.
12
<PAGE>
The following unaudited table sets forth the operating results of the
Company's full-service clients for the three and nine month periods ended
September 30, 1998 and 1997. Since the Company does not have an ownership
interest in its full service clients, the amounts set forth below are not
included in the Company's financial results, except for the management fees
earned by the Company.
<TABLE>
<CAPTION>
Nine months ended Three months ended
(In thousands) September 30, September 30,
--------------------- ---------------------
1997 1998 1997 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Gross physician billings $ 78,834 $ 67,994 $ 33,829 $ 17,219
Contractual allowances $ (14,982) $ (22,812) $ (6,757) $ (7,125)
--------- --------- --------- ---------
Net physician billings 63,852 45,182 27,072 10,094
Management fees $ 37,084 $ 25,525 $ 12,219 $ 5,752
Medical personnel payroll $ 15,068 $ 19,983 $ 6,673 $ 5,869
Other expenses and reserves $ 11,161 $ 6,604 $ 7,242 $ 1,206
--------- --------- --------- ---------
Total expenses 63,313 52,112 26,134 12,827
--------- --------- --------- ---------
Net income $ 539 $ (6,930) $ 938 $ (2,733)
========= ========= ========= =========
Management fees:
GMMS $ 17,019 $ 2,300 $ 4,523 $ --
Other full service clients $ 20,065 23,225 $ 7,696 5,752
--------- --------- --------- ---------
Total $ 37,084 $ 25,525 $ 12,219 $ 5,752
========= ========= ========= =========
</TABLE>
The Company's initial and former client, GMMS, is 95% owned by Lawrence
Shields, M.D., who owns approximately 7.2% of the outstanding common stock of
the Company as of November 16, 1998. Accordingly, GMMS had been classified as a
related party to the Company. In 1997, 1996, and 1995, 28%, 65% and 100% of its
gross revenues were generated from agreements with GMMS, respectively. During
the third quarter of 1998, the Company did not recognize any revenues generated
from agreements with GMMS. See "Notes to Unaudited Financial Statements -
Non-Recurring Charges" and "Liquidity and Capital Resources."
Partial Service Clients
The Company earns its fees from partial service clients primarily by
providing billing and collection services for a fee based on a percentage of
collections.
Preferred Provider Organization
Consumer Health Network earns its fees from self-insured employer groups,
union groups, insurance companies and other third party payors based primarily
on a percentage of the savings generated through the use of its network.
Management of Diagnostic Imaging Services
The Company's fees for owning and providing administrative support for MRI
and other diagnostic imaging equipment are earned on the basis of a charge for
each use of the equipment.
13
<PAGE>
Accounts Receivable Lending
The Company's revenues from CMIC are generated from upfront charges and
interest accrued on outstanding loan balances charged to its borrowers.
Year 2000 Compliance
Many existing computer systems and software products accept only two digit
entries in the date code field. Beginning in the year 2000, and in certain
instances prior to the year 2000, these date code fields will need to accept
four digit entries to distinguish 21st century dates from 20th century dates. As
a result, date critical functions may be materially adversely affected unless
these computer systems and software products are, or become, able to accept four
digit entries ("year 2000 compliant").
During 1997 and the beginning of 1998, the Company had begun a
comprehensive upgrade of its enterprise-wide management information systems to
provide certain competitive benefits and result in the Company's information
systems being year 2000 compliant. Currently, however, the Company's information
systems needs are not as the Company had previously anticipated. Therefore, the
Company has determined to substantially reduce the scale of its implementation
and upgrade of its information systems. The Company is currently evaluating the
most economical manner of proceeding with this upgrade. The Company still
expects, however, to make any necessary upgrades to its information systems so
that year 2000 compliance issues will not pose significant operational problems.
There can be no assurance, however, that the Company's systems will be rendered
year 2000 compliant in a timely manner, or that the Company will not incur
significant unforeseen additional expenses to assure such compliance. Failure to
successfully complete and upgrade on a timely basis would have a material
adverse affect on the Company's operations.
The Company's financial systems are year 2000 compliant.
Results of Operations for the Nine Months Ended September 30, 1998 and 1997
The following tables set forth, in dollars and as a percentage of
revenues, respectively, certain items in the Company's statements of operations
for the three-month and nine-month periods ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1997 1998 1997 1998
-------------------------------------------------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 20,215 100.0% $ 11,265 100.0% $ 53,358 100.0% $ 45,106 100.0%
Interest discount(1) (647) (3.2) 0 0.0 (2,196) (4.1) (270) (0.6)
-------- ------ -------- ------ -------- ------ -------- ------
Net revenues 19,568 96.8 11,265 100.0 51,162 95.9 44,836 99.4
Cost of revenues 11,691 57.8 10,472 93.0 26,893 50.4 32,903 72.9
General & administrative expenses 3,818 18.9 7,397 65.7 14,162 26.5 20,253 44.9
-------- ------ -------- ------ -------- ------ -------- ------
Income (loss) from operations 4,059 20.1 (6,604) (58.6) 10,107 18.9 (8,320) (18.4)
Interest discount included in income(2) 542 2.7 375 3.3 1,671 3.1 1,277 2.8
Interest expense (1,683) (8.3) (2,121) (18.8) (4,876) (9.1) (5,784) (12.8)
Interest, dividend and other income 584 2.9 (406) (3.6) 2,820 5.3 (2,959) (6.6)
Gain on partial equity disposition 850 4.2 -- 0.0 850 1.6 -- 0.0
Non-Recurring charge -- 0.0 (17,491) (155.3) -- 0.0 (74,173) (164.4)
-------- ------ -------- ------ -------- ------ -------- ------
Income (loss) before income taxes and
extraordinary item 4,352 21.5 (26,247) (233.0) 10,572 19.8 (89,959) (199.4)
-------- ------ -------- ------ -------- ------ -------- ------
Provision for income taxes 1,614 8.0 -- 0.0 4,030 7.6 (27,985) (62.0)
Income (loss) before extraordinary item 2,738 13.5 (26,247) (233.0) 6,542 12.3 (61,974) (137.4)
-------- ------ -------- ------ -------- ------ -------- ------
Extraordinary item -- 0.0 145 1.3 -- 0.0 145 0.3
Net income (loss) $ 2,738 13.5 $(26,102) (231.7) $ 6,542 12.3 $(61,829) (137.1)
======== ====== ======== ====== ======== ====== ======== ======
Basic net income per share $ 0.25 $ (1.81) $ 0.64 $ (4.50)
Weighted average number of basic shares
outstanding 10,742 14,459 10,299 13,739
Diluted net income per share $ 0.22 $ (1.81) $ 0.58 $ (4.50)
Weighted average number of diluted shares
outstanding 16,510 14,459 15,876 13,739
</TABLE>
(1) Represents interest discount taken to reflect the presumed collection of
revenues over a period in excess of one year. See Note 2 to the
Consolidated Financial Statements of the Company included in the Annual
Report on Form 10-K for the year ended December 31, 1997.
(2) Represents recapture of interest discount taken to reflect the presumed
collection of revenues over a period in excess of one year. See Note 2 to
the Consolidated Financial Statements of the Company included in the
Annual Report on Form 10-K for the year ended December 31, 1997.
14
<PAGE>
Comparison of the Nine Months Ended September 30, 1998 and 1997
Revenues for the first nine months of 1998 were $45,106,000 as compared to
$53,358,000 for the same period in 1997, a decrease of $8,252,000. The net
decrease in revenues was due to the provision of services to the Company's full
service clients, which generated $5,801,000 less in revenues, the provision of
limited non-medical services, such as billing and collection, transcription and
temporary staffing, to partial service clients, which generated $2,713,000 less
in revenues, and the provision of administrative support for MRI and other
diagnostic imaging equipment, which generated $1,934,000 less in revenues,
partially offset by the Company's preferred provider network, which added
$1,088,000 of additional revenues, and the accounts receivable financing of
CMIC, which added $1,108,000 of additional revenues.
Cost of revenues for the first three quarters of 1998 increased to
$32,903,000 from $26,893,000 for the same period in 1997, an increase of
$6,010,000. Cost of revenues includes the non-medical costs of physician
practices and other costs directly related to the recognition of the Company's
revenues, including the costs incurred by the Company to collect patient service
receivables. The increase in cost of revenues was attributable to the Company's
preferred provider network, which added $1,407,000 of additional costs, the
accounts receivable financing of CMIC, which added $396,000 of additional costs,
the Company's management of full service clients, which added $1,169,000 of
additional costs, the provision of limited non-medical services, such as billing
and collection, transcription and temporary staffing, to partial service
clients, which added $1,127,000 of additional costs, and the provision of
administrative support for MRI and other diagnostic imaging equipment, which
added $1,911,000 of additional costs.
As a percentage of revenues, cost of revenues for the nine-month period
ended September 30, 1998 increased to 72.9% from 50.4% for the same period of
the prior year. This decrease in profit margin resulted from both an increase in
the Company's cost of revenues and a decrease in its revenues.
General and administrative expenses increased to $20,253,000 for the first
nine months of 1998 as compared to $14,162,000 for the same period in 1997, an
increase of $6,091,000. General and administrative expenses represent overhead
and administrative expenses excluding costs directly related to operations and
the recognition of revenues. The net increase in general and administrative
expenses was due to the Company's preferred provider network, which added
$730,000 of additional expenses, the accounts receivable financing of CMIC,
which added $279,000 of additional expenses, the Company's management of full
service clients, which added $4,971,000 of additional expenses, and the
provision of administrative support for MRI and other diagnostic imaging
equipment, which added $2,510,000 of additional expenses, partially offset by
the provision of limited non-medical services, such as billing and collection,
transcription and temporary staffing, to partial service clients, which required
$2,399,000 less in expenses.
Interest expense increased to $5,784,000 for the first nine months of 1998
from $4,876,000 in 1997 principally due to interest on (a) $10,000,000 principal
amount of borrowings incurred under a line of credit (the "Revolving Credit
Loan"), $5,000,000 in February 1997 and $5,000,000 in May 1997, (b) $5,000,000
principal amount of 8% Notes issued on October 17, 1997, and (c) the borrowings
from DVI Business Credit Corporation ("DVI") pursuant to the secured financing
transaction described below. In addition, on May 26, 1998, the Company repaid
the Revolving Credit Loan in full with the proceeds from DVI, which increased
the Company's rate of borrowing.
Interest, dividend and other income reported for the nine month period
ended September 30, 1998 decreased to a loss of $2,959,000 from a gain of
$2,820,000 for the same period of 1997. The primary reasons for the loss were
the write off of $1,499,000 in short term investments, which have been deemed
impaired by the Company, and $2,091,000 in net losses recognized upon the sale
of certain marketable securities.
Comparison of the Three Months Ended September 30, 1998 and 1997
Revenues for the three month period ended September 30, 1998 declined to
$11,265,000 from $20,215,000 for the same period in 1997, a decrease of
$8,950,000. The net decrease in revenues was due to the reduction in services
provided to the Company's full service clients, which generated $4,942,000 less
in revenues, the Company's preferred provider network, which generated $890,000
less in revenues, the provision of limited non-medical services, such as billing
and collection, transcription and temporary staffing, to partial service
clients, which generated $2,379,000 less in revenues, and the provision of
administrative support for MRI and other diagnostic imaging equipment, which
generated $1,056,000 less in revenues, which were partially offset by the
accounts receivable financing of CMIC, which added $317,000 of additional
revenues.
Cost of revenues for the third quarter of 1998 decreased to $10,472,000
from $11,691,000 for the same period in 1997, an decrease of $1,219,000. Cost of
revenues includes the non-medical costs of physician practices and other costs
directly related to the recognition of the Company's revenues, including the
costs incurred by the Company to collect patient service receivables. The net
decrease in cost of revenues was primarily attributable to the Company's
management of full service clients, which required $1,709,000 less in costs, the
Company's preferred provider network, which required $11,000 less in costs, the
accounts
15
<PAGE>
receivable financing of CMIC, which required $108,000 less in costs, partially
offset by the provision of limited non-medical services, such as billing and
collection, transcription and temporary staffing, to partial service clients,
which added $37,000 of additional costs, and the provision of administrative
support for MRI and other diagnostic imaging equipment, which added $572,000 of
additional costs.
As a percentage of revenues, cost of revenues for the third quarter of
1998 increased to 93.0% from 57.8% for the same period in the prior year. This
decrease in profit margin resulted from both an increase in the Company's cost
of revenues and a decrease in its revenues.
General and administrative expenses increased to $7,397,000 for the third
quarter of 1998 as compared to $3,818,000 for the same period in 1997, an
increase of $3,579,000. General and administrative expenses represent overhead
and administrative expenses excluding costs directly related to operations and
the recognition of revenues. The net increase in general and administrative
expenses was primarily due to the Company's management of full service clients,
which added $1,286,000 of additional expenses, the Company's preferred provider
network, which added $56,000 of additional expenses, the accounts receivable
financing of CMIC, which added $276,000 in additional expenses, and the
provision of administrative support for MRI and other diagnostic imaging
equipment, which added $2,247,000 of additional expenses, partially offset by
the provision of limited non-medical services, such as billing and collection,
transcription and temporary staffing, to partial service clients, which required
$286,000 less in expenses.
Interest expense increased to $2,121,000 for the third quarter of 1998
from $1,683,000 for the same period in 1997 principally due to interest on (a)
$10,000,000 principal amount of borrowings incurred under a line of credit (the
"Revolving Credit Loan"), $5,000,000 in February 1997 and $5,000,000 in May
1997, (b) $5,000,000 principal amount of 8% Notes issued on October 17, 1997,
and (c) the borrowings from DVI. In addition, on May 26, 1998, the Company
repaid the Revolving Credit Loan in full with the proceeds of the secured
financing transaction, described below, with DVI, which increased the Company's
rate of borrowing.
Interest, dividend and other income reported for the third quarter of 1998
decreased to a loss of $406,000 from a gain of $584,000 for the same period of
1997. The primary reasons for the loss were the write off of $510,000 in short
term investments, which have been deemed impaired by the Company, and $109,000
in net losses recognized upon the sale of certain marketable securities.
Liquidity and Capital Resources
To date, the Company has primarily used its cash to support operating
activities, including higher levels of receivables generated by increased
management fees, to fund acquisitions and for capital expenditures. The
Company's primary sources of cash have been the proceeds of its initial public
offering and its sales of an aggregate of $5,000,000 principal amount of 8%
Convertible Subordinated Notes, $40,250,000 principal amount of 8% Convertible
Subordinated Debentures due August 15, 2003, $28,750,000 principal amount of 8%
Convertible Subordinated Debentures due December 15, 2003, $5,000,000 principal
amount of 8% Notes due April 30, 1998 and 2,300,000 Common Shares in February
1998, and $10,000,000 principal amount of borrowings, which have been repaid,
under the Revolving Credit Loan. In addition, on May 26, 1998, the Company
entered into a secured financing transaction, described below, with DVI Business
Credit Corporation ("DVI") pursuant to which the Company owed approximately
$11,298,000 as of November 13, 1998. At September 30, 1998, the Company had
working capital of $47,236,000.
The Company's full service clients are liable to the Company for
management fees regardless of whether the client receives payment for the
medical services rendered. The Company, however, has historically deferred
collecting amounts owed to it when full service clients have experienced delays
in collecting payments for medical services. A substantial majority of the
accounts receivable generated by the Company's full service clients remain
outstanding for extended periods. The average days outstanding for the Company's
full service clients' receivables at September 30, 1998 was 162 days. The number
of outstanding days increased from 145 at June 30, 1998. To date, the Company's
efforts to accelerate collections of receivables owed to its full service
clients have not proven successful, therefore, the Company continues to seek to
more effectively utilize employees and other resources devoted to collection
efforts and to consolidate most billing and collection. See "Notes to Condensed
Consolidated Financial Statements - Non-Recurring Charges."
Net cash used for operating activities during the first nine months half
of 1998 was $26,222,000. During the third quarter of 1998, the Company also used
$185,000 of cash to pay the deferred purchase prices of certain previously
completed acquisitions. During that period, the Company also made capital
expenditures of $7,757,000 compared to $10,873,000 for 1997.
On July 8, 1998, as previously disclosed, the Board of Directors
authorized the Company to buy back up to $5,000,000 of its outstanding 8%
Convertible Subordinated Debentures. See "Notes to Condensed Consolidated
Financial Statements - Extraordinary Item."
16
<PAGE>
During the first nine months of 1998, the Company funded its operating
cash flow deficit, acquisitions and capital expenditures primarily through (i) a
reduction in the Company's cash and cash equivalents, (ii) a net reduction in
marketable securities, (iii) the sale of 2,300,000 Common Shares in February
1998, (iv) certain sale and leaseback transactions and (v) the secured financing
transaction, described below, with DVI.
Due to the Company's reduced needs, the Company has substantially
curtailed its previously announced $10 to $15 million investment in management
information systems, now projected to be less than $2 million. However, the
Company continues to re-evaluate its needs. The actual amount and timing of the
investment in new management information systems will depend upon technological
changes and the number of medical offices and doctors under full service
management, and the Company's cash resources. The Company has also reduced its
planned 1998 capital expenditures, which are expected to be used largely for the
renovation of the offices of certain of its full service clients and the
consolidation of the Company's billing and collection efforts, however, the
actual amount and timing of these expenditures will also depend upon the
Company's cash resources.
In February 1998, the Company completed a public offering of 2,300,000
Common Shares at $10.75 per share and received net proceeds of $22,415,000.
Costs incurred with respect to the registration of the Common Shares in addition
to the underwriter's commission and expenses, including repayment of $7,966,000
principal amount of the Revolving Credit Loan, were $8,666,000.
On May 26, 1998, a newly formed wholly owned subsidiary of the Company,
Medical Receivables Corp. ("MRC") and DVI entered into a Loan and Security
Agreement pursuant to which DVI agreed to lend to MRC up to $40,000,000
principal amount at an interest rate equal to the prime rate plus 1.5% to the
extent that such borrowings do not exceed 85% of the accounts receivable of MRC
that secure such obligation. The proceeds paid by MRC to the Company's full
service clients were used to pay down outstanding management fees owed to the
Company by its full service clients. As of September 30, 1998, the outstanding
loan balance owed by MRC to DVI was $11.8 million, and MRC could borrow
approximately an additional $1.0 million under the Loan and Security Agreement.
As of November 13, 1998, the outstanding loan balance owed by MRC to DVI was
$11,298,000 and MRC could borrow approximately an additional $166,000 under the
Loan and Security Agreement. The Company is currently seeking to obtain
additional secured financing, which would be secured by receivables not
currently securing MRC's obligation to DVI, or other available financing.
On each of June 1 and July 1, 1998, the Company repaid $625,000 of the 8%
Notes, leaving a remaining balance of $1,250,000 principal amount of 8% Notes
due September 30, 1998. The 8% Notes were issued in a private placement in
October 1997 in the original principal amount of $5 million. The 8% Notes bear
interest at 8.0% per annum and were originally due on April 30, 1998. As
additional consideration, holders of the 8% Notes received an aggregate of
15,000 Common Shares. On April 30, 1998, the Company and the holders of the 8%
Notes agreed to amend certain terms of the 8% Notes. Pursuant to the amendment,
the holder of an 8% Note in the principal amount of $625,000 agreed to waive any
right to convert its 8% Note into Common Shares and extended the maturity date
with respect to such note to June 1, 1998. The holders of the remaining 8% Notes
with a principal amount of $1,875,000 agreed to extend the maturity date of
their notes to the earlier of (i) September 30, 1998 or (ii) the closing of a
debt or equity financing by the Company in the amount of at least $10,000,000.
If the 8% Notes are due September 30, 1998, the holders of such notes also
waived their right to convert their notes into Common Shares at a conversion
price of $9.00 per share. If, however, the maturity date occurs before September
30, 1998, the holders of such 8% Notes shall have the right to convert their 8%
Notes into Common Shares at a conversion price of $9.00 per share. The Company
repaid $625,000 of the 8% Notes on July 3, 1998. As of November 16, 1998, the
remaining balance of the 8% Notes, $1,250,000, had not been repaid, and the
holders thereof have not demanded payment. The Company is in the process of
negotiating new terms of such obligations.
At September 30, 1998, $25,771,000, or 37%, of the Company's accounts
receivable were due from GMMS. These receivables are collateralized by patient
service receivables due to GMMS with a face amount of $67,776,000 at such date.
GMMS's ability to pay the Company is dependent upon the Company's ability to
collect the patient service receivables on behalf of GMMS. During the second
quarter of 1998, the Company decided to terminate its management agreement with
GMMS effective August 10, 1998 due to the long-collection cycle associated with,
and difficulty in collecting, the accounts receivable generated by this line of
business. See "Part II, Item 5 Other Information." GMMS has been forced to close
its medical practice due to the delay and denial by insurance carriers of
substantial amounts of claims made by GMMS for payment of medical services. See
"Part II, Item 1 - Legal Proceedings." As a result, and after a thorough
analysis of the Company's efforts to improve the collection rate of GMMS'
accounts receivable, $28.9 million in outstanding management fees owing from
GMMS, which are secured by such accounts receivable, have been deemed
uncollectible and written down during the second quarter by the Company. In
addition, the curtailment of the Company's injury related business has resulted
in $4.0 million of non-recurring incremental costs associated with collecting
GMMS' receivables. The Company also took a $6.1 million charge against earnings
in the third quarter related to GMMS for certain severance, lease termination
and other costs, and the write off of assets related to the medical offices that
serviced GMMS' medical practice.
17
<PAGE>
As a result of the Company's implementation of a plan to improve its cost
structure and disassociate from its full service clients' underperforming
medical practices, the Company and its clients decided to close certain medical
practices as well as reduce the carrying amount of impaired long-lived assets
(i.e. advances for acquisitions and good-will) to their fair value. The charges
associated with the write off of these long-lived assets are included in the
Company's results of operations for the three and nine month periods ended
September 30, 1998 under "Non-Recurring charges." As a result of the closing of
these offices and, after a thorough analysis of the Company's efforts to improve
the collection rate of its full service clients, the Company wrote off during
the second quarter approximately $10.8 million in outstanding management fees,
which have been deemed to be uncollectible. The Company also took an $11.4
million charge against earnings during the third quarter of 1998 relating to,
among other things, the closing of additional medical offices by full service
clients, and certain lease termination, severance and other costs in connection
with the Company's operations at these offices.
From July 1996 through the beginning of 1998, the Company had conducted an
active acquisition program using both cash and stock as consideration in its
transactions. More recently, however, because of the decline in the price of the
Company's common stock and its cash flow deficit from operations, the Company
has been forced to substantially curtail its acquisition program. Accordingly,
the Company has determined that its most likely vehicle for growth in the near
term will be from the internal expansion of its full service clients currently
under management and the expansion of its other businesses: Consumer Health
Network, the provision of MRI and other diagnostic imaging equipment to third
parties, billing and collection services, and the accounts receivable financing
of CMIC. The curtailment of the Company's acquisition program and shift to
internal expansion will likely have a material adverse effect on the Company's
growth of revenue.
Certain deferred acquisition payments are payable in the event certain
full service clients attain predetermined financial targets during established
periods of time following the acquisitions. In connection with such deferred
payments, the Company issued 780,000 shares of common stock and paid cash of
$200,000 during the third quarter, and expects to pay cash of $300,000 and issue
$400,000 in shares of common stock during the third quarter. The Company does
not expect, based on current analysis of financial targets, make additional
payments or issue shares of common stock, in an amount which will have a
material impact on the Company's financial condition or results of operations
prior to December 31, 1998.
The Company has recognized a full tax benefit for the net operating loss
incurred in the second quarter of 1998. However, the Company has recognized no
additional tax benefit for the net operating loss incurred in the third quarter
of 1998. The net operating loss expires in 2018. To the extent that there is an
ownership change pursuant to Section 382 of the Internal Revenue Code, or the
Company does not recognize sufficient taxable income to utilize the net
operating loss, annual limitations and/or an increase in valuation allowance may
be required in the future. To preserve cash for operations, the Company ceased
making estimated income tax payments for federal and state purposes in the
second quarter of 1997. The Company is currently delinquent with respect to its
1997 income tax liabilities and may incur penalties and interest, accumulated
through the second quarter of 1998, of as much as $1,000,000 when its
liabilities are ultimately paid.
The Company's cash flow deficit from operations was $26,222,000 for the
nine month period ended September 30, 1998. As previously announced, the Company
has completed its review of the expenses it incurs as well as the expenses of
its full service clients. The Company and its full service clients have made
significant reductions of those expenses. Further expense reductions are being
studied and, after additional consultation with its clients, may be implemented
in the fourth quarter of 1998 and the first quarter of 1999. Although the
Company has had significant success reducing its expenses, it does not currently
anticipate achieving its previously announced goal of positive cash flow from
operations during the fourth quarter of 1998. Although there can be no
assurance, the Company's objective is to achieve sustainable positive cash flows
from operations during the first quarter of 1999.
The Company believes that cash and marketable securities, including the
proceeds of its February 1998 offering, cash flow from operations reflecting the
expense reductions discussed above, and additional borrowings from DVI or
another lender will enable it to meet its working capital and capital
expenditure requirements through the third quarter of 1999. In addition, the
Company is exploring other options of raising capital, either through the sale
of one or more of its businesses, accounts receivable or the sale of equity or
debt securities. However, the Company's inability to successfully execute its
expense reduction plan and/or failure to collect amounts due from its clients
could adversely effect the Company's ability to meet its working capital and
capital expenditure requirements.
18
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
On May 19, 1998, Tenbroeck Management, Corp., a wholly owned subsidiary of
the Company ("TMC"), sent notice to Tenbroeck Medical Associates, P.C., a full
service client ("TMA"), that TMA was in default under its management agreement
for failing to pay fees and that TMC intended to terminate the agreement within
forty-five days if the fees were not paid in full. On June 23, 1998, TMC sent a
second notice of default to TMA identifying July 5, 1998 as the termination
date. As of April 30, 1998, the aggregate management fees owed to TMC were
approximately $1.15 million. On June 26, 1998, TMA brought an action against
TMC, the Company and certain officers of the Company in the Supreme Court of the
State of New York, New York County, seeking a preliminary injunction and
temporary restraining order to compel TMC to continue to provide physician
practice management services to TMA and at least $10.0 million dollars in
unspecified damages. On July 16, 1998, the defendants filed a motion to dismiss
the action for failure to state a claim. On July 23, 1998, the Court denied
TMA's motion to compel continued services and granted a preliminary injunction
restraining TMC from taking any action that would harm TMA. On August 12, 1998,
TMA filed an amended complaint adding various causes of action and deleting
certain officers as named defendants. On September 11, 1998, TMC filed a motion
to compel arbitration and seeking to recover its outstanding management fees as
well as $1.8 million in liquidated damages. On September 29, 1998, TMA filed a
cross-motion seeking to stay arbitration. The Company believes this action is
without merit and intends to defend itself vigorously. Although the Company
believes that the ultimate resolution of this matter is not likely to have a
material adverse effect on the Company, there can be no assurance that this
matter, if adversely determined, would not have a material adverse effect on the
Company.
On June 22, 1998, GMMS commenced suit against several insurance carriers
in the Supreme Court of the State of New York, Kings County, seeking a
declaratory judgement and preliminary injunction against such carriers. The
carriers have denied substantial amounts of claims made by GMMS for payment of
medical services rendered under New York's no-fault insurance laws arguing that
GMMS does not technically exist because the name on its invoice uses an assumed
name with a corporate identifier. On July 28, 1998, the court denied granting a
preliminary injunction as to certain claims that have already been filed in
arbitration by GMMS. The court, however, ruled that GMMS is entitled to seek a
declaratory judgement in its favor in connection with numerous denied claims
that were not submitted to arbitration. The Company believes that such denials
are not proper and, along with other similar actions taken by insurance
carriers, have resulted in delays of payment of substantial amounts of accounts
receivable of GMMS, and accordingly resulted in GMMS' inability to pay the
Company's management fees. In turn, GMMS' inability to pay the Company's
management fees has adversely effected the Company's financial condition. See
"Notes to Condensed Consolidated Financial Statements - Non-Recurring Charges."
The Company is subject to various legal proceedings and claims, either
asserted or unasserted, which arise in the ordinary course of business. While
the outcome of these claims cannot be predicted with certainty, management does
not believe that the outcome of any of these legal matters will have a material
adverse effect on the Company' consolidated results of operations or financial
condition.
Item 2. Changes in Securities
The following table indicates all unregistered sales of the Company's
Common Stock during the quarter ended September 30, 1998 pursuant to Section
4(2) of the Securities Act of 1933, as amended:
Shareholder Purpose Date No. of Shares
- ----------- ------- ---- -------------
Kenneth S. Schwartz, M.D. Acquisition August 18, 1998 4,288
Stanley Weber Acquisition August 18, 1998 11,601
425 Associates Acquisition August 18, 1998 48,154
Alexander Levin, M.D. Acquisition September 1, 1998 780,000
Item 5. Other Information.
On August 13, 1998, the Board of Directors approved the terms of an
agreement pursuant to which Arthur L. Goldberg, the Company's Vice Chairman and
former Chief Financial Officer would resign as an officer and a director from
the Company and its subsidiaries. In consideration for Mr. Goldberg's
resignation and conditional release of all claims against the Company, including
pursuant to his employment agreement, the Company paid Mr. Goldberg $100,000.
19
<PAGE>
On August 13, 1998, the Board of Directors approved the terms of an
agreement between the Company, GMMS and Lawrence Shields, M.D. pursuant to which
Dr. Shields shall cooperate with the Company in its efforts to collect GMMS'
accounts receivable that secure the Company's outstanding management fees owed
from GMMS. Subject to negotiation and execution of a definitive agreement, Dr.
Shields shall be entitled to receive an amount equal to 15% of the collected
receivables up to an aggregate of $950,000 and work as an independent contractor
for one year for another full service client of the Company for $150,000. As of
November 16, 1998, the Company and Dr. Shields were still negotiating the final
terms and conditions of such agreement.
On September 23, 1998, the Compensation Committee of the Board of
Directors approved a severance arrangement with David R. Jacaruso, the former
Vice Chairman and former President of the Company, entitling Mr. Jacaruso to
nine months severance from August 28, 1998 in exchange for his full release of
the Company from any liability.
On November 3, 1998, the New York Stock Exchange, Inc. ("NYSE") notified
the Company that the aggregate market value of the Company's publicly held
shares had fallen below the NYSE's continue listing criteria. In determining the
appropriateness of the continued listing of the Company's securities, the NYSE
has indicated that it will give consideration to any definitive action that the
Company would propose to take that would bring it in line with original listing
standards within thirty-six months, provided that the Company demonstrates
movement towards such standards within eighteen months. The Company has had
discussions with the NYSE and plans to take all steps necessary to satisfy the
continued listing criteria, however, there can be no assurance that the Company
will achieve this goal within the necessary time frames.
20
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit No. Description
- ----------- -----------
3.1 Certificate of Incorporation (incorporated by reference to Exhibit
3.1 of Registration Statement No. 33-97894)
3.2 Certificate of Amendment to the Certificate of Incorporation
(incorporated by reference to Exhibit 3.2 of Registration Statement
No. 33-97894)
3.3 Certificate of Amendment to the Certificate of Incorporation
11 Computation of Earnings per Share
27 Financial Data Schedule
(b) Reports on Form 8-K
None
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: COMPLETE MANAGEMENT, INC.
-----------------------------------------------
(Registrant)
November 23, 1998 /s/ STEVEN RABINOVICI
----------------- -----------------------------------------------
Steven Rabinovici
Chairman, Chief Executive Officer and President
November 23, 1998 /s/ RONALD F. MATTHEWS, JR
----------------- -----------------------------------------------
Ronald F. Matthews, Jr.
Chief Financial and Accounting Officer
22
Exhibit 11
<TABLE>
<CAPTION>
Number of Common Diluted
and Common Basic Weighted Weighted
Nine months ending September 30, 1998 Equivalent Shares Days Outstanding Average Shares Average Shares
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stock outstanding at January 1, 1998 11,421,884 272 11,421,884 11,421,884
Issuance of Common Shares 86,432 264 83,890 83,890
Issuance of Common Shares 197,328 252 182,819 182,819
Issuance of Common Shares 2,561 247 2,326 2,326
Issuance of Common Shares 3,500 247 3,178 3,178
Issuance of Common Shares 20,000 237 17,426 17,426
Issuance of Common Shares 837 225 692 692
Issuance of Common Shares 2,300,000 219 1,851,838 1,851,838
Issuance of Common Shares 3,000 190 2,096 2,096
Exercise of Options 10,000 190 6,985 6,985
Issuance of Common Shares 22,458 184 15,192 15,192
Issuance of Common Shares (10,000) 48 (1,765) (1,765)
Issuance of Common Shares 4,288 43 678 678
Issuance of Common Shares 11,601 43 1,834 1,834
Issuance of Common Shares 48,154 43 7,613 7,613
Issuance of Common Shares 780,000 29 83,162 83,162
Issuance of Common Shares (2,299) 117 (989) (989)
Issuance of Common Shares 155 138 79 79
Exercise of Options 88,967 140 45,792 45,792
Exercise of Options 30,400 126 14,082 14,082
Exercise of Options 715 112 294 294
----------------------------------------------------------------
---------- ------------------------------
Total Primary Shares 15,019,981 13,739,106 13,739,106
========== ==============================
------------
Assumed Conversion of Notes and Debentures -- 5,251,604
============
Assumed Conversion of Options and Warrants -- --
------------------------------
Basic Shares 13,739,106
------------
Diluted Shares 18,990,710
------------
Net Income for the nine months ended September 30, 1998 $(61,828,814) (61,828,814)
Addback Interest: -- 2,542,756
------------------------------
(61,828,814) (59,286,058)
Basic Earnings per Share $ (4.50)
============
Diluted Earnings per Share $ (4.50)
============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet of Income found on pages 3 and 4 of the company's
form 10-Q for the nine months ending September 30, 1998 and is qualified in its
entirety by reference to such consolidated financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,470
<SECURITIES> 18
<RECEIVABLES> 44,748
<ALLOWANCES> (2,968)
<INVENTORY> 0
<CURRENT-ASSETS> 50,051
<PP&E> 29,263
<DEPRECIATION> (7,355)
<TOTAL-ASSETS> 189,528
<CURRENT-LIABILITIES> 36,465
<BONDS> 74,659
0
0
<COMMON> 15
<OTHER-SE> 65,832
<TOTAL-LIABILITY-AND-EQUITY> 189,528
<SALES> 45,106
<TOTAL-REVENUES> 44,836
<CGS> 30,749
<TOTAL-COSTS> 127,053
<OTHER-EXPENSES> (1,682)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (5,784)
<INCOME-PRETAX> 89,815
<INCOME-TAX> (27,985)
<INCOME-CONTINUING> 82,217
<DISCONTINUED> 0
<EXTRAORDINARY> 145
<CHANGES> 0
<NET-INCOME> (61,830)
<EPS-PRIMARY> (4.50)
<EPS-DILUTED> (4.50)
</TABLE>
