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 March 31, 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 Offices) (Zip Code)
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 April 27, 1998, the registrant had a total of 14,068,000 outstanding
shares of Common Stock.
<PAGE>
Forward Looking Statements
When used in this Quarterly Report on Form 10-Q, the words "may," "will,"
"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 "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 growth strategy; 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.
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<PAGE>
COMPLETE MANAGEMENT, INC.
Index to Form 10-Q
March 31, 1998
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (unaudited) Page
----
Condensed Consolidated Balance Sheets at March 31, 1998 and
at December 31, 1997............................................ 4
Condensed Consolidated Statements of Income for the three
months ended March 31, 1998 and 1997............................ 5
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 1998 and 1997............................ 6
Notes to Condensed Consolidated Financial Statements.......... 7-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................... 9-14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................... 15
SIGNATURES................................................................... 16
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<PAGE>
PART I : FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements.
COMPLETE MANAGEMENT, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
Assets March 31, December 31,
1998 1997
---------------------------------
Current assets: (In thousands, except share data)
<S> <C> <C>
Cash and cash equivalents $ 5,227 $ 3,689
Marketable securities 5,966 6,894
Notes receivable from a related party 12 12
Notes receivable - other 792 553
Accounts receivable, net of unamortized discount of $938
and $1,087, respectively and allowance for
doubtful accounts of $1,918 and $1,438 respectively 75,260 68,312
Short-term investments 2,107 2,107
Prepaid expenses and other current assets 2,834 1,935
--------- ---------
Total current assets 92,198 83,502
Long-term portion of accounts receivable, net of unamortized
discount of $1,479 and $1,579, respectively 33,296 32,678
Property and equipment, less accumulated depreciation and
amortization of $6,607 and $5,665, respectively 28,061 24,707
Intangible assets, less accumulated amortization of $2,771
and $2,183, respectively 52,788 52,951
Debt issuance cost 6,410 6,641
Advances to full service clients 19,958 19,258
Other assets 4,946 6,323
--------- ---------
Total assets $ 237,657 $ 226,060
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 5,524 $ 5,218
Income taxes payable 4,378 3,741
Deferred income taxes - current 3,946 3,946
Deferred revenue 115 115
Deferred purchase price 853 5,741
Notes payable 2,742 5,242
Current portion of capital lease obligations 1,806 1,894
Current portion of long-term debt 2,042 10,015
--------- ---------
Total current liabilities 21,406 35,912
--------- ---------
Deferred income taxes - noncurrent 7,907 7,907
Capital lease - noncurrent 3,912 4,164
Deferred rent 136 136
Convertible subordinated debentures 73,844 73,844
Minority interest 4,190 4,174
Commitments and contingencies -- --
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, 14,068,000 shares at
March 31, 1998 and 11,421,884 shares at December 31, 1997 14 11
Paid-in capital 104,782 79,987
Retained earnings 22,413 20,698
Unrealized loss on marketable securities - available for sale (947) (773)
--------- ---------
Total stockholders' equity 126,262 99,923
--------- ---------
Total liabilities and stockholders' equity $ 237,657 $ 226,060
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
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<PAGE>
COMPLETE MANAGEMENT, INC.
Consolidated Statements of Income
<TABLE>
<CAPTION>
Three months ended
March 31,
---------------------------------
1998 1997
--------------- ---------------
(in thousands, except share data)
<S> <C> <C>
Revenue:
From a related party $ 1,759 $ 6,875
Other revenue 17,028 8,478
Interest discount (233) (852)
------------ ------------
Net revenues 18,554 14,501
------------ ------------
Operating expenses:
Cost of revenues 10,474 5,721
General and administration expenses 4,606 5,815
------------ ------------
Total operating expenses 15,080 11,536
------------ ------------
Income from operations 3,474 2,965
Reversal of interest discount 482 573
Interest expense (1,864) (1,533)
Interest, dividends and other income, net 110 802
Gain on sale of marketable securities 730 9
------------ ------------
Income before provision for income taxes 2,932 2,816
Provision for income taxes 1,217 1,103
------------ ------------
Net income $ 1,715 $ 1,713
============ ============
Basic net income per share $ 0.14 $ 0.17
============ ============
Basic weighted average number of shares outstanding 12,618,320 10,373,260
============ ============
Diluted net income per share $ 0.14 $ 0.16
============ ============
Diluted weighted average number of shares outstanding 18,032,504 15,600,691
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
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<PAGE>
COMPLETE MANAGEMENT, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1998 1997
------------ -------------
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,715 $ 1,713
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Depreciation and amortization 1,804 1,048
Discount of accounts receivable, net of amortization -- (279)
Gain on sale of marketable securities - available for sale (730) (34)
Provision for deferred income taxes -- (251)
Income applicable to minority interest 16 --
Changes in operating assets and liabilities:
Notes receivable from a related party -- 204
Accounts receivable (7,805) (14,107)
Prepaid expenses and other current assets (897) 52
Accounts payable and accrued expenses 309 448
Income taxes payable 637 528
Other assets (800) (720)
-------- --------
Net cash used in operating activities (5,751) (11,398)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (4,281) (1,911)
Businesses acquired (60) (3,316)
Loans advanced to acquire businesses (950) (8,805)
Repayment of advances to fullservice clients 250 --
Purchase of marketable securities (5,000) (65,356)
Proceeds from sales and maturities of marketable securities 6,223 58,828
Proceeds from short-term investments -- 400
-------- --------
Net cash used in investing activities (3,818) (20,160)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock, net of underwriters' commission 23,115 --
Payment of registration costs of common stock (929) (167)
Deferred note issuance cost (45) --
Repayment of notes payable (2,721) --
Repayment of long-term debt (7,973) (397)
Repayment of capital lease obligations (340) (149)
Proceeds from bank line of credit -- 5,000
-------- --------
Net cash provided by financing activities 11,107 4,287
-------- --------
Net increase (decrease) in cash and cash equivalents 1,538 (27,271)
Cash and cash equivalents at the beginning of the period 3,689 40,138
-------- --------
Cash and cash equivalents at the end of the period $ 5,227 $ 12,867
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 2,121 $ 1,790
Taxes 433 660
Noncash investing and financing activities:
Capital stock and debt issued for acquisitions of businesses and assets $ 4,905 $ --
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
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<PAGE>
COMPLETE MANAGEMENT, INC.
Notes to Consolidated Financial Statements
March 31, 1998
BASIS OF PRESENTATION AND OPERATIONS
The accompanying 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 three-month period ended March 31, 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
and Connecticut. 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.
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, per use fees when MRI and other diagnostic imaging
equipment is provided and, in the case of the Company's initial client, Greater
Metropolitan Medical Services ("GMMS"), reimbursement of a portion of the
Company's corporate overhead expenses. 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.
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. Due to the
long-term collection cycle associated with assigned receivables from GMMS, these
revenues are discounted using the Company's incremental borrowing rate and
management's estimate of the collection cycle.
GMMS's primary focus is treating patients with injury-related conditions
who carry insurance with various insurance carriers under the workers'
compensation and automobile no-fault regulations. The Company has determined,
based on actual results and industry factors, that its management fees from GMMS
have a collection cycle averaging approximately four years. Accordingly, an
interest discount has been taken on the Company's revenues generated by its
management fees from GMMS utilizing the Company's current incremental borrowing
rate of 7.25% per annum over this collection cycle. The Company recaptures this
interest discount in income over a four year period to reflect the presumed
collection of these revenues. Actual collection results may differ from the
Company's estimate, however, because numerous factors affect the timing and the
manner in which receivables are collected (i.e., government regulations). It is
the Company's policy to periodically assess the collection of its receivables
from clients. As a result, the Company's estimate of its incremental borrowing
rate and collection cycle may change.
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<PAGE>
COMPLETE MANAGEMENT, INC.
Notes to Consolidated Financial Statements
March 31, 1998
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 client, GMMS, is 95% owned by Lawrence Shields, a
neurologist who is also a co-founder and a major shareholder of the Company.
Accordingly, GMMS has 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 first three months of 1998,
the percentage of revenues generated from such agreements was 9%.
Comprehensive Income
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 components
(revenue, expenses, gains, and losses) in a full set of general purpose
financial statements. For the quarter ended March 31, 1998, accumulated
comprehensive income was approximately $768,000, consisting of unrealized gains
and losses on marketable securities available-for-sale.
-8-
<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 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.
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, per use fees when MRI and other diagnostic imaging
equipment is provided and, in the case of GMMS, reimbursement of a portion of
the Company's corporate overhead expenses.
The Company had negative cash flow from operations of approximately $5.8
million for the three months ended March 31, 1998. One of the Company's goals,
in 1998, is to achieve positive cash flow from operations. The Company has
embarked on an expense reduction plan and is currently evaluating all of its
client relationships to determine what actions would be necessary to achieve
this goal. Such evaluation includes, but is not limited to, an analysis of the
relationships with its full service clients where the historical and anticipated
collection pattern 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 the results of this evaluation, the Company may seek to terminate
or significantly curtail its relationship with certain of its full service
clients. If a significant curtailment or termination of client contracts does
occur, such curtailment or termination could have a material impact on the
recoverability of certain accounts receivable due from the client, fixed assets
utilized in serving the client, and related personnel and lease termination
costs. This could have a material impact on the Company's financial position and
results of operation. Reference is made to Liquidity and Capital Resources for
further discussion of the Company's cash flow.
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 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.
-9-
<PAGE>
The following unaudited table sets forth the operating results of the
Company's full-service clients for the three-month periods ended March 31, 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.
Three Months Ended March 31,
----------------------------
1998 1997
---- ----
(in thousands)
Gross physician billings $ 27,195 $ 20,147
Contractual allowances (6,342) (3,587)
-------- --------
Net physician billings 20,853 16,560
Management fees 10,943 11,484
Medical personnel payroll 6,068 2,952
Other expenses 2,602 2,158
-------- --------
Total expenses 19,613 16,594
-------- --------
Net income $ 1,240 $ (34)
======== ========
Full service clients--management fees:
GMMS $ 1,325 $ 6,874
Other clients 9,618 4,610
-------- --------
Total management fees $ 10,943 $ 11,484
======== ========
The Company's initial client, GMMS, is 95% owned by Lawrence Shields, a
neurologist who is also a co-founder and a major shareholder of the Company.
Accordingly, GMMS has been classified as a related party to the Company. In
1997, 1996 and 1995, 28%, 65% and 100%, respectively, of the Company's gross
revenues were generated from management agreements with GMMS. During the first
three months of 1998, the percentage of revenues generated from such agreements
was 9%.
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.
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").
In 1997, the Company commenced a comprehensive upgrade of its
enterprise-wide management information systems. This upgrade involves
substantial changes to the Company's present hardware and software, and is
expected to provide certain competitive benefits and also result in the
Company's information systems being year 2000 compliant upon completion.
Management currently expects the full implementation of the project will involve
a commitment of $10 to $15 million over the next three years. The Company
expects that with the implementation of its information systems, the year 2000
issues would 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
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<PAGE>
complete and implement the upgrade project 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 Three Months Ended March 31, 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 period ended March 31, 1998 and 1997:
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1998 1997
---- ----
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues $ 18,787 100.0% $15,353 100.0%
Interest discount(1) (233) (1.2) (852) (5.5)
-------- ----- ------- -----
Net revenues 18,554 98.8 14,501 94.5
Cost of revenues 10,474 55.8 5,721 37.3
General & administrative expenses 4,606 24.5 5,815 37.9
-------- ----- ------- -----
Income from operations 3,474 18.5 2,965 19.3
Interest discount included in income (2) 482 2.6 573 3.7
Interest expense (1,864) (10.0) (1,533) (10.0)
Interest, dividend and other income 110 0.6 802 5.2
Gain on sale of marketable securities 730 3.9 9 0.1
-------- ----- ------- -----
Income before provision for taxes 2,932 15.6 2,816 18.3
Provision for income taxes 1,217 6.5 1,103 7.2
-------- ----- ------- -----
Net income $ 1,715 9.1% $ 1,713 11.1%
======== ===== ======= =====
Basic net income per share $ 0.14 $ 0.17
Weighted average number of basic shares outstanding 12,618 10,373
Diluted net income per share $ 0.14 $ 0.16
Weighted average number of diluted shares outstanding 18,033 15,601
</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.
Comparison of the Three Months Ended March 31, 1998 and 1997
Revenues for the first three months of 1998 were $18,787,000 as compared
to $15,353,000 for the same period in 1997, an increase of 22.4%. The components
of the net increase were services provided to the Company's full service
clients, which declined $26,000 the provision of limited non-medical services,
such as billing and collection, transcription and temporary staffing, to partial
service clients, which added $54,000 of additional revenues, the provision of
administrative support for MRI and other diagnostic imaging equipment, which
added $2,106,000 of additional revenues, and the acquisition of Consumer Health
Network in June 1997, which added $1,300,000 of additional revenues.
Within the category of full service clients the revenue from GMMS in the
first quarter of 1998 declined to $1,759,000 (9% of total revenue) from
$6,875,000 (45% of total revenue) in the first quarter of 1997 while revenue
from other full service and other clients and businesses, generally the primary
care practices managed by the Company, were $17,028,000 in the first quarter of
1998 compared to $8,478,000 in the first quarter of 1997, or a 101% increase.
This change in revenue mix reflects implementation of the Company's program to
de-emphasize its reliance on revenues and profits from GMMS' injury related
medical practice. Though these revenues generate higher profit margins, the very
long collection cycle of injury related accounts receivable leaves GMMS unable
to timely pay
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<PAGE>
the management fees charged by the Company and is a significant barrier to the
Company achieving its goal of positive cash flow from operations. While the
profitability of management of primary care medical practices is lower than that
of GMMS the accounts receivable collection cycle is significantly shorter.
Cost of revenues for the first quarter of 1998 increased to $10,474,000
from $5,721,000 for the same period in 1997, an increase of $4,753,000. 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 primarily attributable to the Company's
management of full service clients, which added $2,196,000 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
$770,000 of additional costs, the provision of administrative support for MRI
and other diagnostic imaging equipment, which added $1,114,000 of additional
costs, and the acquisition of Consumer Health Network in June 1997, which added
$673,000 of additional costs.
As a percentage of revenues, cost of revenues for the first quarter of
1998 increased to 55.8% from 37.3% for the prior year. This decrease in profit
margin resulted primarily from a decline in the percentage of the Company's
revenues generated by GMMS, a practice with historically high profit margins,
and the reclassification of certain general and administrative expenses.
General and administrative expenses decreased to $4,606,000 for the first
three months of 1998 as compared to $5,815,000 for the same period in 1997, a
decrease of $1,209,000. General and administrative expenses represent overhead
and administrative expenses excluding costs directly related to operations and
the recognition of revenues. The decrease in general and administrative expenses
was primarily due to the Company's management of full service clients, which
decreased $1,433,000, and the provision of limited non-medical services, such as
billing and collection, transcription and temporary staffing, to partial service
clients, which decreased $394,000, offset by the provision of administrative
support of MRI and other diagnostic imaging equipment, which added $231,000 of
additional expenses and the acquisition of Consumer Health Network in June 1997,
which added $387,000 of additional expenses.
Interest expense increased to $1,864,000 for the first quarter of 1998
from $1,533,000 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 and (b)
$5,000,000 principal amount of 8% Notes issued on October 17, 1997 as well as
capital leases entered into during 1997.
Interest, dividend and other income for the first quarter of 1998
increased to $840,000 from $811,000 for the same period of 1997. The primary
reason for the increase was due to the sale of 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 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, 2,000,000 Common
Shares in December 1996, $5,000,000 principal amount of 8% Notes, 2,300,000
Common Shares in February 1998 and, $10,000,000 principal amount of borrowings
under the Revolving Credit Loan. At March 31, 1998, the Company had working
capital of $70,792,000.
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. However, the Company 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,
particularly GMMS, remain outstanding for extended periods. The average days
outstanding for the Company's full service clients' receivables at March 31,
1998 was 310 days. For this reason, at the beginning of 1997, the Company
embarked on a program to accelerate collections of receivables owed to its full
service clients. This program includes increased manpower and other resources
devoted to collection efforts, consolidation of most billing and collection
efforts at a centralized facility, and the earlier use of legal counsel for
collection of workers' compensation and no-fault automobile receivables.
Net cash used for operating activities during the first quarter of 1998
was $5,751,000 principally due to an increase in accounts receivable of
$7,805,000. Accounts receivable increased primarily due to fourth quarter 1997
acquisitions of medical practices under management and to the increased accounts
receivable related to the Company's medical lending subsidiary, CMI Capital
Corporation. During the first three months of 1998, the Company used $950,000 of
cash and issued 316,116 of its Common Shares to fund acquisitions. During that
period, the Company
-12-
<PAGE>
also made capital expenditures of $4,281,000 (compared to $1,911,000 for 1997),
primarily for computer systems development and expansion of the offices provided
to its full service clients.
During the first three 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, and (iii) the sale of 2,300,000 Common Shares in February
1998.
At March 31, 1998, $56,679,000 or 52.2%, 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 $73,194,000 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. On a quarterly basis,
the Company reviews, based on estimated rates of collection for each class of
patient service and estimated allowances for uncollectible balances, the
adequacy of GMMS's collateral. From January 1, 1992 through March 31, 1998, GMMS
billed its patients and third-party payors an aggregate of $132,039,000, of
which $54,784,000 or 41.5%, had been collected by March 31, 1998. In order for
GMMS's patient receivables outstanding at March 31, 1998 to cover the Company's
management fees owed by GMMS at that date, 77.4% of such patient receivables
must be collected, representing an overall collection rate of 84.4% on GMMS's
billings through March 31, 1998.
More specifically, at March 31, 1998, approximately $25,900,000 or 35.4%,
of GMMS's total patient service receivables were generated through the
performance of medical services for which GMMS will be paid only upon the
successful resolution of negligence claims by the patients against third
parties, either through a judicial determination or settlement. From January 1,
1992 to March 31, 1998, GMMS billed approximately $31,183,000 of such
receivables, of which $4,392,000 or 14.1%, had been collected by March 31, 1998.
In measuring the adequacy of such receivables as collateral for the Company's
management fees to GMMS, the Company has estimated that it will collect, on
behalf of GMMS, approximately 55% of these outstanding receivable balances. The
Company estimates, based upon industry factors and GMMS's historical collection
experience prior to its association with the Company, that the entire collection
process for these contingent claims generally ranges from one to seven years.
Since 1994, however, the percentage of cases resolved within two years of
providing service has declined, which may result in an even longer collection
cycle or a lower rate of collection. The Company believes that this decline is
the result of payors more consistently deferring settlement of these matters
until just prior to trial.
In evaluating the adequacy of its collateral from GMMS, the Company
considers historical collection patterns important. The Company, however, also
believes that the ultimate collection of receivables is dependent on its ability
to improve its billing and collection process and its relations with third party
payors. Accordingly, the Company's estimate of future collections reflects not
only historical results, but also the impact of the improved collection
processes and the increased resources being applied to this effort. There can be
no assurance, however, that the Company will be able to achieve the collection
rate necessary to assure that the Company's management fees from GMMS are paid
in full. The inability of the Company to collect a significant portion of its
management fees owed by GMMS could have a material adverse effect on the
Company.
The proposed investment of $10 to $15 million in management information
systems is the largest planned capital expenditure over the next three years.
Approximately $5 million is scheduled to be spent in 1998. The actual amount and
timing of the investment in new management information systems will depend upon
technological changes, the pace at which the Company adds new clients through
its acquisition program and new offices or additional doctors through expansion
of its clients and the Company's cash resources. The balance of the Company's
1998 capital expenditures, estimated at up to approximately $2 million, are
expected to be used largely for the renovation and expansion of the offices of
certain of its full service clients.
In February 1998, the Company completed a secondary 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 February 24, 1998, the Company repaid $2.5 million principal amount of
the 8% Notes. The 8% Notes were issued in a private placement in October 1997 in
the original principal amount of $5 million. As additional consideration,
holders of the 8% Notes received an aggregate of 15,000 Common Shares. The 8%
Notes bear interest at 8.0% per annum and were originally due on April 30, 1998.
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 an
outstanding 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 prior to September 30, 1998, the holders of such notes
have the right to convert their 8%Notes into Common Shares at a conversion price
of $9.00 per share.
-13-
<PAGE>
The balance of the Revolving Credit Loan, $1,034,000 is due on May 22,
1998. In January 1998, in connection with extending the maturity date of the
Revolving Credit Loan, such loan became secured by receivables and other assets
of the Company. On February 9, 1998, pursuant to the terms of an amendment to
the Revolving Credit Loan, the Company agreed to a formula under which it was
required to use $7,966,000 of the net proceeds of its equity offering in
February 1998 to repay amounts due under the Revolving Credit Loan. In addition,
if the Company raises additional debt or equity capital, the Company will be
required to apply 50% or 40%, respectively, of the net proceeds thereof to repay
the remaining balance of the Revolving Credit Loan. The Company has also agreed
to a limit on its use of cash and short-term debt to complete future
acquisitions. After giving effect to the offering in February, this limit is
$8,208,000 plus 50% of the net proceeds of any additional sales of capital
stock. In April 1998, in connection with extending the maturity date of the
Revolving Credit Loan to May 22, 1998, the Company paid down $1,000,000 of the
then outstanding balance.
Since July 1996, the Company has conducted an active acquisition program.
The Company and its clients are presently evaluating, as they do on a regular
basis, physician practice management companies, medical practices, ancillary
service providers and other healthcare-related businesses for possible
acquisition, although they are not engaged in active negotiation for any
material acquisition. The Company or its full service clients completed the
acquisition of nine physician practices during the fourth quarter of 1997 for an
aggregate purchase price in cash and common shares of $10,159,000, of which cash
payments totaling $3,272,000 were deferred until the first quarter of 1998. To
date, the Company has paid $1,341,000 of such deferred amounts. Based on the
acquisitions the Company is currently considering it anticipates it could spend
for acquisitions all or substantially all of the $8,208,000 currently permitted
under the Revolving Credit Loan by the end of the second quarter of 1998. In
addition, if the Company is successful in replacing the Revolving Credit Loan
with a new senior secured credit facility as discussed below, and repays the
balance of the Revolving Credit Loan, it anticipates it could expend substantial
additional funds on acquisitions.
The Company's cash flow deficit from operations was $5,751,000 for the
three month period ended March 31, 1998. The Company expects that it will
generate a cash flow deficit from operations for at least the first six months
of 1998. In 1997, the Company accelerated efforts to improve collections of
third party receivables on behalf of its clients and retained a law firm to
conduct collection efforts on its behalf. It has also implemented a thorough
review of the expenses it incurs as well as the expenses of its full service
clients, with the object of making significant reductions of those expenses.
After consultation with, and obtaining the agreement of, certain of its full
service clients the Company has implemented, in the first quarter of 1998,
expense reductions at the clients and the Company of approximately $7,500,000 on
an annualized basis. Further expense reductions are being studied and, after
additional consultation with its clients, are expected to be implemented in the
second quarter of 1998. The Company believes that such process may result in
decisions and actions being taken necessary to achieve its objective of positive
cash flows from operations during the second half of 1998.
The Company believes that cash and marketable securities, including the
proceeds of its February 1998 offering, and cash flow from operations reflecting
the expense reductions discussed above, will enable it to meet its working
capital and capital expenditure requirements through the second quarter of 1999.
The Company currently is in discussions with various financial institutions to
replace the Revolving Credit Loan and to provide additional capital to support
the Company's business, including acquisitions. The Company has signed a
commitment letter for a two year accounts receivable financing facility of up to
$40 million. The amount that may be borrowed at any one time is limited by a
formula based on eligible receivables (as defined) with the initial borrowing
under this facility totaling about $20 million. The commitment letter is
conditioned on several factors, including legal documentation satisfactory to
the lender and no material adverse changes in the business. It is expected that
the transaction will close about the end of May 1998. If the Company is unable
to obtain additional financing from this or other sources, it would need to
defer substantially all of its capital expenditures for expansion of its
clients, and reduce the capital expenditures for management information systems.
In addition, the Company's ability to offer cash consideration in connection
with acquisitions would be limited and the Company would seek to offer a larger
component of debt or equity. The Company's inability to offer cash consideration
in its acquisition program could substantially curtail the pace of its
acquisitions. The Company expects that these actions, including its cost cutting
measures, would be sufficient to permit it to continue operations. However, any
significant curtailment of the Company's acquisition program or expenditures
needed to expand its full service client's practices would have a significant
adverse effect on the growth of the Company's revenues and earnings.
-14-
<PAGE>
PART II
OTHER INFORMATION
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
The Company filed the following reports on Form 8-K during the quarter
ended March 31, 1998.
Date Item Reported
---- -------------
February 20, 1998 Item 7. Financial Statements, Pro
Forma Financial Information and
Exhibits
-15-
<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)
May 15, 1998 /s/ STEVEN RABINOVICI
---------------------- -------------------------------------------
Steven Rabinovici
Chairman, Chief Executive Officer
and President
May 15, 1998 /s/ ARTHUR GOLDBERG
---------------------- -------------------------------------------
Arthur Goldberg
Vice Chairman and Chief Financial Officer
May 15, 1998 /s/ ALAN GOLDSTEIN
---------------------- -------------------------------------------
Alan Goldstein
Chief Accounting Officer and
Vice President - Finance
-16-
Exhibit 11
<TABLE>
<CAPTION>
Number of Basic Diluted
Common and Weighted Weighted
Common Equivalent Days Average Average
Three months ending March 31, 1998 Share Outstanding Shares Shares
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stock outstanding at January 1, 1998 11,421,884 90 11,421,884
Issuance of Common Shares 86,432 82 78,749 78,749
Issuance of Common Shares 197,328 70 153,477 153,477
Issuance of Common Shares 2,561 65 1,850 1,850
Issuance of Common Shares 3,500 65 2,528 2,528
Issuance of Common Shares 20,000 55 12,222 12,222
Issuance of Common Shares 837 43 400 400
Issuance of Common Shares 2,300,000 37 945,556 945,556
Issuance of common shares 3,000 8 267 267
Issuance of common shares 22,458 2 499 499
Exercise of Options 10,000 8 889 889
---------- ------------------------
Total Primary Shares 14,068,000 12,618,320 12,618,320
========== ==========
Assumed Conversion of Notes and Debentures -- 5,212,319
Assumed Conversion of Options and Warrants -- 201,865
------------------------
Primary Shares 12,618,320
----------
Fully Diluted Shares 18,032,504
-----------
Net Income for the three months ended March 31, 1998 $ 1,715,021 $ 1,715,321
Interest Expense on Notes and Debentures -- 888,000
------------------------
1,715,321 2,603,321
Basic Earnings per Share $ 0.14
===========
Fully Diluted Earnings per Share $ 0.14
===========
</TABLE>
-17-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet and Statement of Income found on pages 3 & 4 of the
company's Form 10-Q for the three months ending March 31, 1998 and is qualified
in its entirety by reference to such consolidated financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 5,227
<SECURITIES> 8,073
<RECEIVABLES> 111,968
<ALLOWANCES> (4335)
<INVENTORY> 0
<CURRENT-ASSETS> 92,199
<PP&E> 34,689
<DEPRECIATION> (6,607)
<TOTAL-ASSETS> 237,658
<CURRENT-LIABILITIES> 21,406
<BONDS> 73,844
0
0
<COMMON> 14
<OTHER-SE> 126,248
<TOTAL-LIABILITY-AND-EQUITY> 237,658
<SALES> 18,787
<TOTAL-REVENUES> 18,554
<CGS> 10,474
<TOTAL-COSTS> 15,081
<OTHER-EXPENSES> 1,323
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,864
<INCOME-PRETAX> 2,932
<INCOME-TAX> 1,217
<INCOME-CONTINUING> 1,715
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,715
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.14
</TABLE>
