SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark one)
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|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
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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
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COMPLETE MANAGEMENT, INC.
-------------------------
(Exact Name of Registrant as Specified in Its Charter)
New York 11-3149119
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
254 West 31st Street, New York, NY 10001-2813
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (212) 273-0600
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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 August 13, 1998, the registrant had a total of 14,965,938
outstanding shares of Common Stock.
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<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
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>
Part I.
Financial Information
Item 1. Condensed Consolidated Financial Statements
COMPLETE MANAGEMENT, INC.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
Assets December 31, June 30,
1997 1998
-----------------------
Current assets: (In thousands, except share data)
<S> <C> <C>
Cash and cash equivalents $ 3,689 $ 7,444
Marketable securities 6,894 89
Notes receivable from a related party 12 --
Notes receivable - other 553 1,119
Accounts receivable, net of unamortized discount of $1,087 and $796, respectively
and allowance for doubtful accounts of $1,438 and $1,930, respectively 68,312 41,136
Short-term investments 2,107 1,611
Prepaid expenses and other current assets 1,935 2,879
-----------------------
Total current assets 83,502 54,278
-----------------------
Long-term portion of accounts receivable, net of unamortized discount of 32,678 31,351
$1,579 and $1,238, respectively
Property and equipment, less accumulated depreciation and amortization of 24,707 32,039
$5,665 and $7,362, respectively
Intangible assets, less accumulated amortization of $2,183 and $3,364, respectively 52,951 42,697
Debt issuance cost 6,641 6,127
Advances to full service clients 19,258 17,695
Deferred Tax Asset -- 16,134
Other assets 6,323 7,488
-----------------------
Total assets $ 226,060 $ 207,809
=======================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 5,218 $ 11,438
Income taxes payable 3,741 3,677
Deferred income taxes - current 3,946 --
Deferred revenue 115 115
Deferred purchase price 5,741 504
Notes payable 5,242 12,059
Current portion of capital lease obligations 1,894 2,313
Current portion of long-term debt 10,015 2
-----------------------
Total current liabilities 35,912 30,108
-----------------------
Deferred income taxes - noncurrent 7,907 --
Capital lease - noncurrent 4,164 6,530
Deferred rent 136 136
Convertible subordinated debentures 73,844 75,094
Minority interest 4,174 4,198
Line of Credit -- 2,000
-----------------------
Total liabilities 126,137 118,066
-----------------------
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, 11 14
11,421,884 shares at December 31, 1997 and 14,188,082 shares at June 30,1998
Paid-in capital 79,987 104,849
Retained earnings 20,698 (15,027)
Unrealized loss on marketable securities - available for sale (773) (93)
-----------------------
Total stockholders' equity 99,923 89,743
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Total liabilities and stockholders' equity $ 226,060 $ 207,809
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</TABLE>
The accompanying notes are an integral part of these consolidated statements.
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<PAGE>
COMPLETE MANAGEMENT, INC.
Condensed Consolidated Statements of Income
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------ ------------------------
1997 1998 1997 1998
------------------------ ------------------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenue:
From a related party $ 5,622 $ 975 $ 12,496 $ 2,734
Other revenue 12,138 14,079 20,647 31,107
Interest discount (697) (37) (1,549) (270)
---------- ---------- ---------- ----------
Net revenues 17,063 15,017 31,594 33,571
---------- ---------- ---------- ----------
Operating expenses:
Cost of revenues 9,384 12,483 15,116 22,431
General and administrative expenses 4,615 7,723 10,430 12,856
Nonrecurring Charges -- 56,682 -- 56,682
---------- ---------- ---------- ----------
Total operating expenses 13,999 76,888 25,546 91,969
---------- ---------- ---------- ----------
Income (loss) from operations 3,064 (61,871) 6,048 (58,398)
Reversal of interest discount 556 420 1,129 902
Interest expense (1,659) (1,798) (3,193) (3,663)
Interest, dividend and other income (expense), net 1,116 (1,323) 1,874 (1,213)
Gain (loss) on sale of marketable securities 327 (2,070) 361 (1,340)
---------- ---------- ---------- ----------
Income (loss) before provision for income taxes 3,404 (66,642) 6,219 (63,712)
---------- ---------- ---------- ----------
Provision (benefit) for income taxes 1,313 (29,271) 2,416 (27,985)
---------- ---------- ---------- ----------
Net income (loss) $ 2,091 (37,370) $ 3,803 (35,727)
========== ========== ========== ==========
Basic net income (loss) per share $ 0.21 $ (2.64) $ 0.37 $ (2.67)
========== ========== ========== ==========
Basic weighted average number of shares outstanding 10,122 14,127 10,085 13,373
========== ========== ========== ==========
Diluted net income (loss) per share $ 0.19 $ (2.64) $ 0.35 $ (2.67)
========== ========== ========== ==========
Diluted weighted average number of shares outstanding 15,772 14,127 15,735 13,373
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
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<PAGE>
COMPLETE MANAGEMENT, INC.
Condensed Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Six months ended June 30,
------------------------
1997 1998
------------------------
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income (Loss) $ 3,803 $ (35,726)
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Loss on Impairment of Goodwill 9,689
Loss on Impairment of A/R 38,742
Loss on Impairment of Advances to full-service clients 2,284
Other Nonrecurring Charges Adjustment -- 5,867
Depreciation and amortization 2,185 3,416
Discount of accounts receivable, net of amortization 421 --
Loss (Gain) on sale of marketable securities - available for sale (361) 2,070
Loss on write down of short-term investments 989
Income applicable to minority interest -- 24
Changes in operating assets and liabilities:
Notes receivable from a related party 33 (357)
Accounts receivable (25,755) (10,642)
Prepaid expenses and other current assets (728) (943)
Accounts payable and accrued expenses 799 1,010
Income taxes payable (1,609) (28,047)
Other assets 232 (2,291)
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Net cash (used) provided by operating activities (20,980) (13,915)
---------- ----------
Cash flows from investing activities:
Purchase of property and equipment (6,080) (5,309)
Businesses acquired (9,815) (708)
Loans advanced to acquire businesses (12,873) (1,483)
Repayment of advances to full service clients -- 229
Purchase of marketable securities (50,648) (5,000)
Proceeds from sales and maturities of marketable securities 70,625 10,978
Proceeds from (Purchase of) short-term investments 400 (370)
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Net cash (used) provided by investing activities (8,391) (1,663)
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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 127 --
Payment of registration costs of common stock (279) (1,091)
Deferred note issuance costs (275) (45)
Repayment of notes payable -- (5,367)
Repayment of long-term debt (325) (10,000)
Repayment of capital lease obligations (306) (712)
Cash acquired in merger 500 --
Proceeds from bank line of credit 10,132 13,433
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Net cash (used) provided by financing activities 9,574 19,333
---------- ----------
Net (decrease) increase in cash and cash equivalents (19,797) 3,755
Cash and cash equivalents at the beginning of the period 40,138 3,689
---------- ----------
Cash and cash equivalents at the end of the period $ 20,341 $ 7,444
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 3,159 $ 3,477
Taxes 3,921 223
Noncash investing and financing activities:
Capital stock and debt issued for acquisitions of businesses and assets 4,765 5,135
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
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<PAGE>
COMPLETE MANAGEMENT, INC.
Notes to Condensed Consolidated Financial Statements
June 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 six-month period ended June 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, which is included as a non-recurring charge in
the accompanying consolidated statement of income as of June 30, 1998. See "-
Non-Recurring Charge."
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).
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<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.
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 August 13, 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 second quarter of 1998, 6.5% of the Company's revenues were generated
from 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. For the three and six month periods ended June 30,
1998, accumulated comprehensive loss was approximately $768,000 and $93,289,
respectively, consisting of unrealized gains and losses on marketable securities
available-for-sale.
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 beginnning 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.
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.
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<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 June 30, 1998 Three Months Ended June 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 $ (37,371) 14,127 $ (2.64) $ 2,091 10,122 $ 0.21
========== ==========
Effect of Dilutive Securities
Stock options -- -- 375
Stock warrants -- -- 48
Convertible Debt -- -- 853 5,227
---------- ---------- ---------- ----------
Diluted EPS
Net earnings attributable to common stock
and assumed option and warrant exercises,
and debt conversion ($ 37,371) 14,127 ($ 2.64) $ 2,943 15,772 $ 0.19
========== ========== ========== ========== ========== ==========
<CAPTION>
Six Months Ended June 30, 1998 Six Months Ended June 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 $ (35,726) 13,373 $ (2.64) $ 3,803 10,085 $ 0.38
========== ==========
Effect of Dilutive Securities
Stock options -- -- 375
Stock warrants -- -- 48
Convertible Debt -- -- 1,697 5,227
---------- ---------- ---------- ----------
Diluted EPS
Net earnings attributable to common stock
and assumed option and warrant exercises,
and debt conversion ($ 35,726) 19,407 ($ 2.64) $ 5,500 15,735 $ 0.35
========== ========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Anti-Dilutive Securities
-------------------------------- --------------------------------
Six Months Ended June 30, 1998 Six Months Ended June 30, 1997
-------------------------------- --------------------------------
<S> <C> <C>
Options 44,092 35,000
Warrants -- 606,250
Convertible Debentures 5,245,884 --
--------- -------
5,289,976 641,250
========= =======
<CAPTION>
Three Months Ended June 30, 1998 Three Months Ended June 30, 1997
-------------------------------- --------------------------------
<S> <C> <C>
Options -- 35,000
Warrants -- 606,250
Convertible Debentures 5,279,449 --
--------- -------
5,279,449 641,250
========= =======
</TABLE>
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<PAGE>
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 "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 "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 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 expects to take additional charges against
earnings in the third quarter related to GMMS of between $4.0 million to $5.0
million for certain severance, lease termination and other costs, and the write
off of assets related to the medical offices that serviced GMMS' medical
practice.
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 six month periods ended June
30, 1998 under "Non-recurring, non-cash 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
approximately $13.0 million in outstanding management fees, which have been
deemed to be uncollectible. The Company also expects to take additional charges
against earnings of between $3.0 million to $7.0 million 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.
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<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
$13,915,000 for the six months ended June 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 the beginning of 1998, the Company
embarked on an expense reduction plan and evaluation of all of its client
relationships to determine what actions would be necessary to achieve this goal.
Such evaluation included, but was 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 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 Unaudited Financial Statements
Non-Recurring Charges." This will have a material adverse effect on the
Company's financial condition and results of operation. See "- Liquidity and
Capital Resources." The Company plans to continue its analysis of expenses
during the third quarter and may take additional actions that may adversely
effect the Company's financial condition and results of operation in subsequent
periods.
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<PAGE>
The following unaudited table sets forth the operating results of the
Company's full-service clients for the three and six month periods ended June
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.
Six months ended
(In thousands) June 30,
--------------------
1997 1998
-------- --------
Gross physician billings $ 45,005 $ 50,775
Contractual allowances $ (8,225) $(15,687)
-------- --------
Net physician billings 36,780 35,088
Management fees $ 24,842 $ 19,773
Medical personnel payroll $ 8,395 $ 14,114
Other expenses and reserves $ 4,141 $ 5,398
-------- --------
Total expenses 37,378 39,285
-------- --------
Net income $ (598) $ (4,197)
======== ========
Management fees:
GMMS $ 12,495 $ 2,300
Other full service clients $ 12,347 17,473
-------- --------
Total $ 24,842 $ 19,773
======== ========
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 August 13, 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 second quarter of 1998, 6.5% of the Company's revenues were generated from
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.
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.
-11-
<PAGE>
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 Six Months Ended June 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 six-month period ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1997 1998 1997 1998
-----------------------------------------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 17,760 100.0% $ 15,054 100.0% $ 33,143 100.0% $ 33,841 100.0%
Interest discount (1) (697) (3.9) (37) (0.2) (1,549) (4.7) (270) (0.8)
-------- ------- -------- ------- -------- ------- -------- -------
Net revenues 17,063 96.1 15,017 99.8 31,594 95.3 33,571 99.2
Cost of revenues 9,384 52.8 12,483 82.9 15,116 45.6 22,431 66.3
General & administrative expenses 4,615 26.0 7,723 51.3 10,430 31.5 12,856 38.0
-------- ------- -------- ------- -------- ------- -------- -------
Income from operations 3,064 17.3 (5,189) (34.5) 6,048 18.2 (1,716) (5.1)
Interest discount included in income (2) 556 3.1 420 2.8 1,129 3.4 902 2.7
Interest expense (1,659) (9.3) (1,798) (11.9) (3,193) (9.6) (3,663) (10.8)
Interest, dividend and other income 1,443 8.1 (1,323) (8.8) 2,235 6.7 (1,213) (3.6)
Gain (Loss) on sale of marketable securities -- 0.0 (2,070) 0.0 -- 0.0 (1,340) 0.0
Non-recurring charge (56,682) (56,682)
-------- --------
Income before provision for taxes 3,404 19.2 (66,642) (442.7) 6,219 18.8 (63,712) (188.3)
Provision for income taxes 1,313 7.4 (29,271) (194.4) 2,416 7.3 (27,985) (82.7)
-------- ------- -------- ------- -------- ------- -------- -------
Net income $ 2,091 11.8 $(37,371) (248.2) $ 3,803 11.5 $(35,727) (105.6)
======== ======= ======== ======= ======== ======= ======== =======
Basic net income per share $ 0.20 $ (2.65) $ 0.37 $ (2.67)
Weighted average number of basic
shares outstanding 10,437 14,127 10,405 13,373
Diluted net income per share $ 0.19 $ (2.65) $ 0.35 $ (2.67)
Weighted average number of diluted 15,772 19,407 15,735 18,660
shares outstanding
</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.
-12-
<PAGE>
(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 Six Months Ended June 30, 1998 and 1997
Revenues for the first six months of 1998 were $33,841,000 as compared to
$33,143,000 for the same period in 1997, an increase of $698,000. The net
increase in revenues was due to the acquisition of Consumer Health Network in
June 1997, which added $1,978,000 of additional revenues, the accounts
receivable financing of CMIC, which added $791,000 of additional revenues and
the provision of limited non-medical services, such as billing and collection,
transcription and temporary staffing, to partial service clients, which added
$414,000 in additional revenues, which were partially offset by the provision of
services to the Company's full service clients, which generated $1,608,000 less
in revenues and the provision of administrative support for MRI and other
diagnostic imaging equipment, which generated $878,000 less in revenues.
Within the category of full service clients, the revenue from GMMS in the
first six months of 1998 declined to $2,734,000 (12.9% of total revenue
generated from full service clients) from $12,496,000 (or 55%) for the first six
months of 1997 while revenue from other full service clients, generally primary
care practices managed by the Company, were $18,396,000 for the first six months
of 1998 compared to $10,241,000 in the first six months of 1997, or a 44.3%
increase. This change in revenue mix reflects implementation of the Company's
program to de-emphasize its reliance on revenues and profits from GMMS's 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 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 primary care medical practices is lower
than that of GMMS the accounts receivable collection cycle is significantly
shorter. During the second quarter of 1998, the Company decided to terminate the
Company's management agreement with GMMS. See "Notes to Unaudited Financial
Statements - Non-Recurring Charges" and - "Revenue Recognition."
Cost of revenues for the first two quarters of 1998 increased to
$23,474,000 from $15,116,000 for the same period in 1997, an increase of
$8,358,000. 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
acquisition of Consumer Health Network in June 1997, which added $1,419,000 of
additional costs, the accounts receivable financing of CMIC, which added
$503,000 of additional costs, the Company's management of full service clients,
which added $4,507,000 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 $589,000 of additional costs, and the
provision of administrative support for MRI and other diagnostic imaging
equipment, which added $1,339,000 of additional costs.
As a percentage of revenues, cost of revenues for the six month period
ended June 30, 1998 increased to 69.4% from 45.6% for the same period of 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, to a lesser extent, the reclassification
of certain general and administrative expenses.
General and administrative expenses increased to $11,813,000 for the first
six months of 1998 as compared to $10,430,000 for the same period in 1997, an
increase of $1,383,000. 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 acquisition of Consumer Health Network in June
1997, which added $674,000 of additional expenses, the accounts receivable
financing of CMIC, which added $3,000 of additional expenses, the Company's
management of full service clients, which added $777,000 of additional expenses
and the provision of administrative support for MRI and other diagnostic imaging
equipment, which added $263,000 of additional expenses, which were 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 $335,000 less in expenses,.
Interest expense increased to $3,663,000 for the first six months of 1998
from $3,193,000 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.
-13-
<PAGE>
Interest, dividend and other income reported for the six month period
ended June 30, 1998 decreased to a loss of $2,553,000 from a gain of $2,235,000
for the same period of 1997. The primary reasons for the loss were the write off
of $989,000 in short term investments, which have been deemed impaired by the
Company, and $1,982,000 in net losses recognized upon the sale of certain
marketable securities.
Comparison of the Three Months Ended June 30, 1998 and 1997
Revenues for the three month period ended June 30, 1998 declined to
$15,054,000 from $17,760,000 for the same period in 1997, a decrease of
$2,706,000. The net decrease in revenues was due to the reduction in services
provided to the Company's full service clients, which generated $2,863,000 less
in revenues, which was partially offset by the acquisition of Consumer Health
Network in June 1997, which added $678,000 of additional revenues, the accounts
receivable financing of CMIC, which added $353,000 of additional revenues, the
provision of limited non-medical services, such as billing and collection,
transcription and temporary staffing, to partial service clients, which added
$251,000 of additional revenues, and the provision of administrative support for
MRI and other diagnostic imaging equipment, which generated $1,124,000 less in
revenues.
Within the category of full service clients, the revenue from GMMS in the
second quarter of 1998 declined to $975,000 (10.3% of total revenue generated
from full service clients) from $5,622,000 for the same period of 1997 while
revenue from other full service clients and businesses, generally primary care
practices managed by the Company, were $8,463,000 in the quarter compared to
$6,679,000 in 1997, or a 21.0% increase. This change in revenue mix reflects
implementation of the Company's program to de-emphasize its reliance on revenues
and profits from GMMS's 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 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 primary care
medical practices is lower than that of GMMS the accounts receivable collection
cycle is significantly shorter. During the second quarter of 1998, the Company
decided to terminate the Company's management agreement with GMMS. See "Notes to
Unaudited Financial Statements - Non-Recurring Charges" and "Revenue
Recognition."
Cost of revenues for the second quarter of 1998 increased to $13,024,000
from $9,384,000 for the same period in 1997, an increase of $3,640,000. 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 acquisition of
Consumer Health Network in June 1997, which added $746,000 of additional costs,
the accounts receivable financing of CMIC, which added $276,000 of additional
costs, the Company's management of full service clients, which added $1,491,000
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 $181,000 of additional costs, and the provision of
administrative support for MRI and other diagnostic imaging equipment, which
added $957,000 of additional costs.
As a percentage of revenues, cost of revenues for the second quarter of
1998 increased to 86.5% from 52.8% for the same period in 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, to a lesser extent, the reclassification of certain general
and administrative expenses.
General and administrative expenses increased to $7,182,000 for the second
quarter of 1998 as compared to $4,615,000 for the same period in 1997, an
increase of $2,567,000. 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 acquisition of Consumer Health Network in June
1997, which added $286,000 of additional expenses, the accounts receivable
financing of CMIC, which required $43,000 less in expenses, the Company's
management of full service clients, which added $2,045,000 of additional
expenses, the provision of limited non-medical services, such as billing and
collection, transcription and temporary staffing, to partial service clients,
which added $104,000 of additional expenses, and the provision of administrative
support for MRI and other diagnostic imaging equipment, which added $174,000 of
additional expenses.
-14-
<PAGE>
Interest expense increased to $1,798,000 for the second quarter of 1998
from $1,659,000 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 second quarter of
1998 decreased to a loss of $3,393,000 from a gain of $1,443,000 for the same
period of 1997. The primary reasons for the loss were the write off of $989,000
in short term investments, which have been deemed impaired by the Company, and
$2,712,000 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
$12,209,707 as of August 14, 1998. At June 30, 1998, the Company had working
capital of $48,207,000.
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 June 30, 1998 was 145 days. The number of
outstanding days decreased from329 at March 31, 1998 because the receivables of
GMMS, which were historically very long, were not included in such calculation
due to the Company having terminated its management agreement with GMMS. 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
efforts at a centralized facility. See "Notes to Unaudited Financial Statements
- - Non-Recurring Charges."
Net cash used for operating activities during the first half of 1998 was
$13,915,000, principally due to an increase in accounts receivable of
$10,642,000. During the second quarter of 1998, the Company used $648,000 of
cash and issued $230,000 of its common shares to complete acquisitions. During
that period, the Company also made capital expenditures of $1,028,000 (compared
to $4,169,000 for 1997), primarily for the acquisition of MRI and other
diagnostic imaging equipment and the refurbishment and expansion of the offices
provided to its full service clients.
During the first six 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, 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, 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.
-15-
<PAGE>
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 June 30, 1998, the outstanding loan
balance owed by MRC to DVI was $11,306,000, and MRC could borrow approximately
an additional $2,568,000 under the Loan and Security Agreement. As August 14,
1998, the outstanding loan balance owed by MRC to DVI was $12,210,000 and MRC
could borrow approximately an additional $494,000 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.
At June 30 1998, $26,439,000, or 36.0%, 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 $69,163,000 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 "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
"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 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 expects to take
additional charges against earnings in the third quarter related to GMMS of
between $4.0 million to $5.0 million for certain severance, lease termination
and other costs, and the write off of assets related to the medical offices that
serviced GMMS' medical practice.
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 six month periods ended June
30, 1998 under "Non-recurring, non-cash 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
approximately $13.0 million in outstanding management fees, which have been
deemed to be uncollectible. The Company also expects to take additional charges
against earnings of between $3.0 million to $7.0 million 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.
-16-
<PAGE>
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
party's 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 88,967 shares of common stock during the second
quarter, and expects to pay $500,000 and issue 780,000 shares of common stock
during the third quarter. The Company does not expect, based on current analysis
of financial targets, to have to 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. 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 a 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 up to approximately
$1,000,000 when its liabilities are ultimately paid. No accrual has been
recorded for this liability.
The Company's cash flow deficit from operations was $13,915,000 for the
six month period ended June 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. After consultation with, and obtaining
the agreement of, certain of its full service clients, the Company has
implemented, in the first half of 1998, expense reductions of approximately
$20,620,000 on an annualized basis. Further expense reductions are being studied
and, after additional consultation with its clients, may be implemented in the
second half of 1998. Although there can be no assurance, the Company's objective
is to achieve 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, 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 second quarter of 1999. In addition, the
Company is exploring other options of raising capital, including through the
sale of one or more of its businesses.
-17-
<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. 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 the
ultimate resolution of 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 Unaudited Financial Statements - Non-Recurring Charges."
Item 2. Changes in Securities
The following table indicates all unregistered sales of the Company's
Common Stock during the quarter ended June 30, 1998 pursuant to Section 4(2) of
the Securities Act of 1933, as amended:
Shareholder Purpose Date No. of Shares
- ----------- ------- ---- -------------
Benjamin Chouake Acquisition May 13, 1998 88,967
Peter Herman Settlement May 27, 1998 30,400
Frank Carr Compensation June 10, 1998 715
-18-
<PAGE>
Item 4. Submission of Matters to Vote of Security Holders
The Company held its 1998 Annual Meeting on May 27, 1998 at which
shareholders of the Company voted as follows:
Election of Directors
Steven M. Rabinovici For 12,388,417 Withheld 180,113
Arthur L. Goldberg For 12,401,226 Withheld 167,304
Kenneth S. Schwartz, M.D. For 12,400,537 Withheld 167,993
Steven Cohn For 12,398,417 Withheld 170,113
Steven A. Hirsh For 12,401,417 Withheld 167,113
Joseph S. Tocci For 12,401,092 Withheld 167,438
Confirmation of Arthur Andersen, LLP as independent auditors for the Company
For 12,473,491 Against 84,789 Abstained 10,250
Adoption of Employee Stock Purchase Plan
For 9,279,880 Against 781,688 Abstained 99,758
Amendment to the 1995 Stock Option Plan
For 9,146,803 Against 861,162 Abstained 153,361 Broker Non-Votes 2,407,204
Item 5. Other Information.
On June 16, 1998, Alan Goldstein, the Company's former
Vice-President-Finance and Chief Accounting Officer, resigned as an officer from
the Company.
On June 17, 1998, Ronald F. Matthews, Jr., the Company's former Vice
President-Business Development, was appointed Executive Vice President, Chief
Financial Officer and Chief Accounting Officer of the Company replacing Arthur
L. Goldberg, as Chief Financial Officer, and Alan Goldstein, as Chief Accounting
Officer.
On July 20, 1998, the Company and Dennis Simmons, the Company's Chief
Operating Officer, entered into an Agreement and General Release, pursuant to
which Mr. Simmons resigned as an officer from the Company and its subsidiaries.
In consideration for Mr. Simmons' resignation and his release of all claims
against the Company, including pursuant to his employment agreement, the Company
paid Mr. Simmons approximately $100,000.
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. Subject to negotiation and execution of a
definitive agreement, in consideration for Mr. Goldberg's resignation and
conditional release of all claims against the Company, including pursuant to his
employment agreement, the Company will pay Mr. Goldberg $100,000.
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.
-19-
<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
-20-
<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)
August 19, 1998 /s/ STEVEN RABINOVICI
--------------- -----------------------------------
Steven Rabinovici
Chairman, Chief Executive Officer
and President
August 19, 1998 /s/ RONALD F. MATTHEWS, JR
--------------- -----------------------------------
Ronald F. Matthews, Jr.
Chief Financial and Accounting Officer
-21-
Exhibit 11
<TABLE>
<CAPTION>
Number of Basic Diluted
Common and Weighted Weighted
Common Equivalent Days Average Average
Six months ending June 30, 1998 Shares Outstanding Shares Shares
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stock outstanding at January 1, 1998 11,421,884 180 11,421,884 11,421,884
Issuance of Common Shares 86,432 172 82,591 82,591
Issuance of Common Shares 197,328 160 175,403 175,403
Issuance of Common Shares 2,561 155 2,205 2,205
Issuance of Common Shares 3,500 155 3,014 3,014
Issuance of Common Shares 20,000 145 16,111 16,111
Issuance of Common Shares 837 133 618 618
Issuance of Common Shares 2,300,000 127 1,622,778 1,622,778
Issuance of Common Shares 3,000 98 1,633 1,633
Exercise of Options 10,000 98 5,444 5,444
Issuance of Common Shares 22,458 92 11,479 11,479
Exercise of Options 88,967 48 23,725 23,725
Exercise of Options 30,400 34 5,742 5,742
Exercise of Options 715 20 79 79
-------------------------------------------------------------
-------------- -----------------------------
Total Primary Shares 14,188,082 13,372,706 13,372,706
============== =============================
Assumed Conversion of Notes and Debentures -- 5,245,885
Assumed Conversion of Options and Warrants -- 44,092
------------------------------
Primary Shares 13,372,706
--------------
Fully Diluted Shares 18,662,683
--------------
Net Income for the six months ended June 30, 1998 $ (35,725,553) (35,725,553)
Interest Expense on Notes and Debentures -- 1,772,256
------------------------------
(35,725,553) (35,725,553)
Basic Earnings per Share $ (2.67)
==============
Fully Diluted Earnings per Share $ (2.67)
==============
</TABLE>
<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 six months ending June 30 1998 and is qualified in
its entirety by reference to such consolidated financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 7,443
<SECURITIES> 89
<RECEIVABLES> 75,610
<ALLOWANCES> (3,965)
<INVENTORY> 0
<CURRENT-ASSETS> 54,278
<PP&E> 39,402
<DEPRECIATION> (7,362)
<TOTAL-ASSETS> 207,809
<CURRENT-LIABILITIES> 30,108
<BONDS> 75,094
0
0
<COMMON> 14
<OTHER-SE> 89,727
<TOTAL-LIABILITY-AND-EQUITY> 207,809
<SALES> 33,841
<TOTAL-REVENUES> 33,571
<CGS> 22,431
<TOTAL-COSTS> 35,287
<OTHER-EXPENSES> (1,651)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (3,663)
<INCOME-PRETAX> (63,712)
<INCOME-TAX> (27,985)
<INCOME-CONTINUING> (35,727)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (35,727)
<EPS-PRIMARY> (2.67)
<EPS-DILUTED> (2.67)
</TABLE>
