AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 21, 1996
REGISTRATION NO. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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PROFESSIONAL MEDICAL MANAGEMENT COMPANY
(Exact name of Registrant as specified in its charter)
DELAWARE 8011 75 252 9809
(State or other jurisdiction of (Primary Standard Industry (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
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801 CHERRY STREET, SUITE 1450
FORT WORTH, TEXAS 76102
(817) 335-5035
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
------------------
H. WAYNE POSEY
PRESIDENT AND CHIEF EXECUTIVE OFFICER
PROFESSIONAL MEDICAL MANAGEMENT COMPANY
801 CHERRY STREET, SUITE 1450
FORT WORTH, TEXAS 76102
(817) 335-5035
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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COPIES TO:
MICHAEL JOSEPH, ESQ. JEFFREY A. CHAPMAN, ESQ.
DYER ELLIS & JOSEPH, P.C. VINSON & ELKINS L.L.P.
600 NEW HAMPSHIRE AVE., N.W. 3700 TRAMMELL CROW CENTER
SUITE 1000 2001 ROSS AVENUE
WASHINGTON, D.C. 20037 DALLAS, TEXAS 75201
(202) 944-3000 (214) 220-7700
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this Registration Statement becomes effective. If any of
the securities being registered on this form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box.|_|
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. |X|
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<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
<S> <C> <C>
Proposed Maximum
Title of Each Class of Aggregate Amount of
Securities To Be Registered Offering Price (1) Registration Fee
Common Stock (no par value)................ $50,000,000 $17,241.38
=========================================== ====================================== ====================================
<FN>
(1) ESTIMATED SOLELY FOR THE PURPOSE OF CALCULATING THE REGISTRATION FEE IN
ACCORDANCE WITH RULE 457(O).
</FN>
</TABLE>
------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE>
Subject to Completion, Dated August 21, 1996
PROSPECTUS
Dated , 1996
SHARES
[ProMedCo logo]
PROFESSIONAL MEDICAL MANAGEMENT COMPANY
COMMON STOCK
All of the shares of Common Stock offered hereby are being issued and sold by
Professional Medical Management Company ("ProMedCo" or the "Company").
Prior to this offering (the "Offering"), there has been no public market for the
Common Stock of the Company. It is currently estimated that the initial public
offering price will be between $ and $ per share. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price. Application has been made to list the Common Stock on the Nasdaq
National Market under the proposed symbol "PMCO."
SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
<S> <C> <C> <C>
Per Share..................... $ $ $
- ------------------------------ ----------------------------- ----------------------------- -----------------------------
Total (3)..................... $ $ $
- ------------------------------ ----------------------------- ----------------------------- -----------------------------
<FN>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company and the Selling Stockholder (as defined herein) have granted
the Underwriters a 30-day option to purchase up to an additional shares
of Common Stock from the Company and shares of Common Stock from the
Selling Stockholder solely to cover over-allotments, if any, at the Price
to Public less the Underwriting Discount. If all such shares are
purchased, the total Price to Public, Underwriting Discount, Proceeds to
Company, and Proceeds to Selling Stockholder will be $ , $ , $ , and $ ,
respectively. See "Underwriting."
</FN>
</TABLE>
The shares of Common Stock are offered by the Underwriters subject to prior sale
when, as, and if delivered to and accepted by the Underwriters and subject to
their right to reject orders in whole or in part. It is expected that
certificates for such shares will be available for delivery at the offices of
Piper Jaffray Inc. in Minneapolis, Minnesota on or about , 1996.
PIPER JAFFRAY INC.
ROBERTSON, STEPHENS & COMPANY
COWEN & COMPANY
<PAGE>
[ Map of United States showing location of affiliated
physician groups]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON
STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. As used herein, the terms "ProMedCo" and "the
Company" refer to Professional Medical Management Company and its consolidated
subsidiaries. Except as otherwise indicated, all information in this Prospectus
assumes (i) the conversion of all outstanding shares of Redeemable Convertible
Preferred Stock and Class B Common Stock of the Company into Common Stock and
the termination of the Company's contingent obligation to repurchase Redeemable
Common Stock, (ii) the reincorporation of the Company as a Delaware corporation
and increase of its authorized Common Stock to 50,000,000 shares, and (iii) no
exercise of the Underwriters' over-allotment option.
THE COMPANY
ProMedCo is a physician practice management company that consolidates
its affiliated physician groups into primary-care-driven multi-specialty
networks. The Company focuses on pre-managed-care secondary markets located
principally outside of or adjacent to large metropolitan areas. The Company
believes that primary care physicians increasingly will be the principal point
of access to the healthcare delivery system and will control, directly or
indirectly, a growing percentage of healthcare expenditures, and it therefore
affiliates with physician groups having a primary care orientation. ProMedCo
assists in expanding and integrating the affiliated groups into comprehensive
multi-specialty networks to increase their market presence. The groups expand
through affiliations with additional primary care physicians and specialists and
selective additions of ancillary services. The groups are thus well positioned
to become the physician component of locally developing managed care delivery
systems. In addition to providing operating and expansion capital, the Company
provides its affiliated groups with a broad range of strategic and management
expertise and services.
ProMedCo commenced operations in December 1994 and is currently
affiliated with 76 physicians and 14 physician extenders (primarily physician
assistants and nurse practitioners) at 16 sites in Texas, Alabama, and Kentucky.
Currently, approximately 80% of the Company's affiliated physicians are primary
care providers, although the Company expects the proportion of specialists to
increase as the Company affiliates with additional physician groups and its
groups expand. Following the Offering, approximately % of ProMedCo's outstanding
Common Stock will be owned by the Company's management and affiliated
physicians.
When affiliating with a physician group, the Company typically
purchases the group's non-real estate operating assets and enters into a
long-term service agreement with the group in exchange for a combination of
Common Stock, cash, other securities of the Company, and/or assumption of
liabilities. Under the service agreement, the physician group receives a fixed
percentage of its operating income plus a percentage of any surpluses in the
group's revenues under risk-sharing arrangements pursuant to capitated managed
care contracts. Although the group's physicians retain full control over the
practice of medicine, ProMedCo manages all day-to-day operations other than the
provision of medical services. Through a policy council, the physicians set
broad management and operational policy jointly with Company representatives.
The key elements of the Company's strategy are (i) to affiliate with
primary-care-oriented multi-specialty groups; (ii) to continue to penetrate
pre-managed-care markets; (iii) to increase its affiliated groups' market
presence through addition of physicians and selected ancillary services; (iv) to
preserve local autonomy of the Company's affiliated physician groups and to
maintain decentralized management; and (v) to align the Company's economic
interests with those of its physician partners.
3
<PAGE>
The Company was incorporated in Texas in 1993 and will be
reincorporated in Delaware prior to the Offering. Its executive offices are
located at 801 Cherry Street, Suite 1450, Fort Worth, Texas 76102, and its
telephone number is (817) 335-5035.
THE OFFERING
Common Stock offered by the Company.................. shares
Common Stock to be outstanding after the Offering.... shares(1)
Use of proceeds...................................... Acquisitions and
working capital
Proposed Nasdaq National Market symbol............... PMCO
(1) Based upon the number of shares outstanding as of June 30, 1996. Does not
include (i) 2,191,287 shares to be issued in February 1997 in connection
with the acquisition of Abilene Diagnostic Clinic, P.L.L.C. ("Abilene"),
(ii) 4,033,123 shares reserved for issuance upon exercise of outstanding
options and warrants with a weighted average exercise price of $2.92 per
share, and (iii) 200,030 shares reserved for conversion of outstanding
convertible subordinated notes. See "Business--Affiliation Structure" and
"Management--Director Stock Option Plan," "--Employee Stock Incentive
Plan," "--Employee Stock Purchase Plan," and "--Physician Stock Option
Plan."
<TABLE>
<CAPTION>
SUMMARY FINANCIAL DATA
JULY 1, 1994 YEAR ENDED SIX MONTHS ENDED
(INCEPTION) TO DECEMBER 31, JUNE 30,
DECEMBER 31, PRO FORMA(1) PRO FORMA(1)
1994 1995 1995 1995 1996 1996
----------- ----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenue ................. $ -- $ 1,918,029 $ 32,890,349 $ 172,744 $ 11,120,322 $ 18,209,594
Net income (loss) ........... (169,890) (697,342) (135,451) (349,015) (393,316) 128,217
Net income (loss) per share . $ 0.00 $ (0.10) $ (0.02) $ (0.05) $ (0.06) $ 0.02
Weighted average number of
common shares outstanding 5,221,652 6,939,236 6,939,236 6,901,357 7,040,565 9,621,437
OTHER DATA (AT END OF PERIOD):
Affiliated physicians.......... 32 8 72
Affiliated physician groups.... 2 1 5
Number of service sites........ 4 1 15
States. . . . ................. 1 1 3
</TABLE>
JUNE 30, 1996
PRO PRO FORMA
ACTUAL FORMA(2) AS ADJUSTED(3)
BALANCE SHEET DATA:
Cash and cash equivalents........... $ 1,148,243 $ 1,616,629
Working capital..................... 1,577,751 3,539,759
Total assets........................ 11,746,647 26,608,655
Long-term debt, less current
maturities....................... 2,973,443 2,973,443
Redeemable equity securities........ 3,945,134 -
Total stockholders' equity.......... 2,464,932 21,272,074
(1) Gives effect to the acquisitions of North Texas Medical Surgical, P.A.,
Cullman Primary Care, P.C., Morgan-Haugh, P.S.C., and HealthFirst Medical
Group, P.A. completed by the Company during 1995 and 1996 and the
acquisition of Abilene, to be completed in February 1997, which has been
operated under an interim service agreement since December 1995
(collectively, the "Acquisitions") as if they had been completed on January
1, 1995.
(2) Gives effect to the acquisition of Abilene as if it had been completed on
June 30, 1996, the conversion into Common Stock of all outstanding shares
of Redeemable Convertible Preferred Stock, and the termination of the
Company's contingent obligation to repurchase Redeemable Common Stock.
(3) Adjusted to give effect to the sale of shares of Common Stock
offered by the Company hereby at an assumed public offering price
of $ per share and the application of the estimated net proceeds
therefrom. See "Use of Proceeds."
4
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following should be considered carefully in evaluating an investment in the
Common Stock offered hereby.
RISKS ASSOCIATED WITH GROWTH STRATEGY
The Company's strategy involves growth through affiliation with
physician groups and the expansion of their practices. The Company is subject to
various risks associated with this strategy, including the risks that the
Company will be unable to identify and recruit suitable affiliation candidates,
successfully expand and manage the practices of the groups with which it
affiliates, or successfully integrate such groups into its existing operations.
The Company's growth is dependent on its ability to affiliate with physicians,
to manage and control costs, and to realize economies of scale. There can be no
assurance that the Company will be able to achieve and manage its planned growth
or that suitable physician groups will continue to be available for affiliation
upon terms satisfactory to the Company, if at all. In addition, there can be no
assurance that the Company will be able to continue to attract and retain a
sufficient number of qualified physicians and other healthcare professionals to
continue to expand its operations or otherwise to maintain an adequate
infrastructure to support continued growth. See "Business."
LIMITED CAPITAL; NEED FOR ADDITIONAL FINANCING
Implementation of the Company's growth strategy requires substantial
capital resources. Such resources will be needed to acquire the assets of
additional physician groups and for the effective integration, operation, and
expansion of affiliated groups. The Company expects that its capital
requirements over the next several years will substantially exceed capital
generated from operations, the net proceeds of the Offering, and borrowings
available under its current credit facility. To finance its capital
requirements, the Company intends from time to time to issue additional equity
securities and incur additional debt. A greater amount of debt or additional
equity financing could be required to the extent that the Company's Common Stock
fails to maintain a market value sufficient to warrant its use in future
affiliations or to the extent that physician groups are unwilling to accept
Common Stock in exchange for their operating assets. There can be no assurance
that the Company will be able to obtain additional required capital on
satisfactory terms. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
LIMITED OPERATING HISTORY; LOSSES
The Company has operated only since December 1994. It has grown
principally through acquisitions and is pursuing a strategy of growth. For the
year ended December 31, 1995, the Company incurred a net loss of $697,342, and
for the six months ended June 30, 1996, it incurred a net loss of $393,316.
There can be no assurance that the Company will become profitable. In addition,
the Company may experience significant quarter-to-quarter variations in
operating results. See "Selected Consolidated Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
5
<PAGE>
CONCENTRATION OF REVENUE
The Company's net revenue is currently derived from only five physician
groups, of which Abilene accounted for approximately 52% and 53% of the
Company's net revenue on a pro forma basis for the year ended December 31, 1995
and the six months ended June 30, 1996, respectively. While the Company's
service agreements are for terms of 40 years and may be terminated only for
cause, any termination or significant deterioration of the Company's
relationship with any of its affiliated physician groups could have a material
adverse effect upon the Company. In addition, each of the Company's affiliated
physician groups operates within a limited geographic area, and a deterioration
of economic or other conditions within such area could have a material adverse
impact upon the group. Such a result, as well as any other deterioration in the
financial condition of any of the affiliated physician groups, could also have a
material adverse effect on the Company. See "Business."
GOVERNMENT REGULATION
Federal and state laws regulate the healthcare industry and the
relationships among physicians and other providers of healthcare services. These
laws include the fraud and abuse provisions of the Medicare and Medicaid
statutes, which prohibit the payment or receipt of any remuneration for the
referral of Medicare or Medicaid patients or for recommendations, leasing,
arranging, ordering, or purchasing of Medicare- or Medicaid-covered services, as
well as laws that impose significant penalties for false or improper billings
for physician services. These laws also impose restrictions on physicians'
referrals for certain designated health services to entities with which they
have financial relationships. Violations of these laws may result in substantial
civil or criminal penalties for individuals or entities, including exclusion
from participation in the Medicare and Medicaid programs. Such exclusion or
penalties, if applied to the Company's affiliated physicians, could have a
material adverse effect upon the Company.
Moreover, the laws of many states, including Texas, from which a
significant portion of the Company's revenue is derived, prohibit non-physician
entities from practicing medicine and limit the ability of non-physicians to
receive physician practice revenues. These laws and their interpretations vary
from state to state and are enforced by the courts and by regulatory authorities
with broad discretion. Although the Company believes its operations as currently
conducted are in material compliance with existing applicable laws, there can be
no assurance that the Company's contractual arrangements with affiliated
physicians will not be successfully challenged as constituting fee splitting or
the unlicensed practice of medicine or that the enforceability of such
arrangements will not be limited. There can be no assurance that review of the
business of the Company and its affiliates by courts or regulatory authorities
will not result in a determination that could adversely affect their operations
or that the healthcare regulatory environment will not change so as to restrict
the Company's existing operations or expansion. In the event that any
legislature, regulatory authority, or court limits or prohibits the Company from
carrying on its business or from expanding the operations of the Company to
certain jurisdictions, structural and organizational modifications of the
Company's organization and arrangements may be required, which could have a
material adverse effect on the Company.
There have been numerous initiatives at the federal and state levels
for comprehensive reforms affecting the availability of and payment for
healthcare. The Company believes that such initiatives will continue during the
foreseeable future. Certain reforms previously proposed could, if adopted, have
a material adverse effect on the Company. See "Business -- Government
Regulation."
6
<PAGE>
RELIANCE ON MEDICAL SERVICE PROVIDERS
Each of the Company's affiliated physician groups enters into
employment agreements with its physicians. Such agreements generally are for an
initial term of five years. Although the Company, in conjunction with the
affiliated physician groups, will endeavor to extend such contracts, in the
event a significant number of physicians terminate their relationships with the
Company's affiliated physician groups at the expiration of their employment
agreements or otherwise, the Company could be adversely affected. See "Business
- -- Affiliation Structure."
CHANGES IN BASIS OF PAYMENT FOR HEALTHCARE SERVICES
The Company derives all of its revenue from its affiliated physician
groups. Substantially all of the revenue of the affiliated groups is derived
from third-party payors. The Company estimates that approximately 40% of the net
revenue of the physician groups is currently derived from government- sponsored
healthcare programs (principally, the Medicare and Medicaid programs). The
healthcare industry is experiencing a trend toward cost containment, as
government and other third-party payors seek to impose lower reimbursement and
utilization rates upon providers and negotiate reduced payment schedules with
them. The Company believes that this trend will continue to result in a
reduction in per- patient revenue from historical levels. Further reductions in
payments to physicians or other changes in reimbursement for healthcare services
could have a material adverse effect on the Company. See "Business -- Government
Regulation."
RISKS ASSOCIATED WITH MANAGED CARE CONTRACTS
A significant part of the Company's growth strategy involves assisting
its affiliated physician groups in obtaining capitated managed care contracts
and managing the medical risk associated with such contracts. Such contracts
shift much of the risk of providing care from the payor to the provider.
Although its management has substantial experience in managed care contracting,
the Company itself has had limited experience with such contracts. There can be
no assurance that the Company will be able to negotiate satisfactory
risk-sharing or capitated arrangements on behalf of its affiliated physician
groups. To the extent that patients or enrollees covered by such contracts
require more frequent or extensive care than anticipated, operating margins may
be reduced, or the revenues derived from such contracts may be insufficient to
cover the costs of the services provided. Any such reduction of earnings or
losses from such arrangements could have a material adverse effect on the
Company. In addition, some jurisdictions are taking the position that capitated
risk-sharing arrangements should be regulated by state insurance laws. As a
result, in some states the Company's affiliated physician groups may be limited
in their ability to enter into such arrangements. See "Business."
POSSIBLE EXPOSURE TO PROFESSIONAL LIABILITY
In recent years, physicians, hospitals, and other participants in the
healthcare industry have become subject to an increasing number of lawsuits
alleging medical malpractice and related legal theories. Many of these lawsuits
involve large claims and substantial defense costs. Such suits, if successful,
could result in substantial damage awards that may exceed the limits of
insurance coverage. The Company does not engage in the practice of medicine or
provide medical services, nor does it control the practice of medicine by its
affiliated physician groups or the compliance with regulatory requirements
directly applicable to such groups. Nevertheless, there can be no assurance that
the Company will not become subject to such litigation in the future. In
addition, through its employment of non-physician
7
<PAGE>
healthcare personnel, the Company could be named in actions involving care
provided by the affiliated physician groups assisted by such personnel. The
Company maintains professional malpractice and general liability insurance. In
addition, the Company's service agreements require affiliated physicians to
maintain professional liability insurance coverage of the practice and of each
employee and agent of the practice. The Company generally is a named insured
under such policies and is indemnified under each of the service agreements by
the physician groups for liabilities resulting from the performance of medical
services. Certain types of risks and liabilities are not covered by insurance,
however, and there can be no assurance that coverage will continue to be
available upon terms satisfactory to the Company or that the coverage will be
adequate to cover losses. Malpractice insurance, moreover, can be expensive and
varies from state to state. Successful malpractice claims asserted against the
physician groups or the Company could have a material adverse effect on the
Company. See "Business -- Insurance."
COMPETITION
The physician practice management industry is highly competitive. The
Company is subject to significant competition both in affiliating with physician
groups and in seeking managed care contracts on behalf of its affiliated groups.
Its competitors include hospitals, managed care organizations, and other
physician practice management companies. Many of the Company's competitors are
larger and have substantially greater resources, provide a wider variety of
services, and have longer established relationships with purchasers of such
services than the Company. There can be no assurance that the Company will be
able to compete effectively, that additional competitors will not enter the
market, or that such competition will not make it more difficult to enter into
affiliations with physician groups on terms beneficial to the Company.
The Company also experiences competition in the recruitment and
retention of qualified physicians and other healthcare professionals on behalf
of its affiliated physician groups. There can be no assurance that the Company
will be able to recruit or retain a sufficient number of qualified physicians
and other healthcare professionals to continue to expand its operations.
BROAD DISCRETION OF MANAGEMENT IN APPLYING PROCEEDS OF OFFERING
The Company intends to utilize the net proceeds of the Offering to
finance the purchase of operating assets in connection with future affiliations
with physician groups and expansions of such groups, for working capital, and
for other general corporate purposes. Accordingly, the Company's management will
have broad discretion in applying the net proceeds of the Offering. See "Use of
Proceeds."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF PRICE
Prior to the Offering there has been no public market for the Common
Stock. Accordingly, there can be no assurance that an active trading market will
develop or be sustained upon completion of the Offering or that the market price
of the Common Stock will not decline below the initial public offering price.
The initial public offering price of the Common Stock will be determined by
negotiations between the Company and the Representatives of the Underwriters and
may not be indicative of the prices that will prevail in the public market. The
trading prices of the Company's Common Stock could be subject to wide
fluctuations in response to quarter-to-quarter variations in the Company's
operating results, material announcements by the Company, governmental
regulatory action, general conditions in the healthcare industry, or other
events or factors, many of which are beyond the Company's control. In
8
<PAGE>
addition, the stock market has experienced extreme price and volume
fluctuations, which have particularly affected the market prices of many
healthcare services companies and which have often been unrelated to the
operating performance of such companies. The Company's operating results in
future quarters may be below the expectations of securities analysts and
investors. In such event, the price of the Common Stock would likely decline,
perhaps substantially. See "Underwriting."
CONTROL BY MANAGEMENT
Upon completion of the Offering, the executive officers and Directors
of the Company will collectively own approximately % of the outstanding shares
of Common Stock. Accordingly, these persons may have the ability to control the
Company's Board of Directors and, therefore, the business, policies, and affairs
of the Company. Such control could preclude unsolicited acquisitions of the
Company and, consequently, adversely affect the market price of the Common
Stock. See "Principal Stockholders" and "Description of Capital Stock."
ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Certificate of Incorporation and
certain provisions of the Delaware General Corporation Law may make it difficult
to change control of the Company and replace incumbent management. For example,
the Certificate of Incorporation provides for a staggered Board of Directors and
permits the Board of Directors, without stockholder approval, to issue
additional shares of Common Stock or establish one or more classes or series of
Preferred Stock having such number of shares, designations, relative voting
rights, dividend rates, liquidation and other rights, preferences and
limitations as the Board of Directors may determine. In addition, the Company's
Board of Directors has adopted a stockholder rights plan that could further
discourage attempts to acquire control of the Company. See "Description of
Capital Stock" and "Management."
SHARES ELIGIBLE FOR FUTURE SALE; DILUTION; DIVIDENDS
Sales of substantial amounts of Common Stock in the public market
following the Offering, or the perception that such sales could occur, could
adversely affect prevailing market prices of the Common Stock and could impair
the future ability of the Company to raise capital through the sale of its
equity securities. The Company is unable to make any prediction as to the
effect, if any, that future sales of Common Stock or the availability of Common
Stock for sale may have on the market price of the Common Stock prevailing from
time to time. Certain existing stockholders have the right to require the
Company to register their Common Stock from time to time. See "Description of
Capital Stock -- Registration Rights" and "Shares Eligible for Future Sale."
Purchasers of the Common Stock offered hereby will incur an immediate
and substantial dilution of approximately $ per share in pro forma net tangible
book value from the initial public offering price. See "Dilution."
The Company has never paid cash dividends on its Common Stock and does
not currently intend to pay cash dividends. It is not likely that any cash
dividends will be paid in the foreseeable future. See "Dividend Policy."
9
<PAGE>
USE OF PROCEEDS
The net proceeds of the Offering, after deducting expenses payable by
the Company and assuming an initial offering price of $ per share, will be
approximately $ million ($ million if the Underwriters' over-allotment option is
exercised). The Company intends to use such proceeds to finance affiliations
with physician groups, for working capital, including reduction of $ million
outstanding under its revolving credit agreement (the "Credit Facility"), and
for other general corporate purposes. Pending application of the net proceeds as
described above, the Company intends to invest the net proceeds in short-term,
interest-bearing securities. For information concerning the terms of the Credit
Facility, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
While the Company is continually seeking additional physician groups
with which to affiliate, there can be no assurance that any such affiliation
will occur.
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock. The
Company currently intends to retain any earnings to finance the growth and
development of its business and does not anticipate paying cash dividends in the
foreseeable future. Any payment of cash dividends in the future will depend upon
the financial condition, capital requirements, and earnings of the Company, as
well as other factors the Board of Directors may deem relevant. In addition, the
Company is currently restricted under the terms of its Credit Facility from
paying any dividends to stockholders without the prior written consent of the
lenders. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
10
<PAGE>
DILUTION
The Company's pro forma net tangible book value at June 30, 1996 was
$2.7 million or approximately $0.28 per share. Pro forma net tangible book value
per share represents total assets, less intangible assets and total liabilities,
divided by the number of shares outstanding as of June 30, 1996 (assuming the
conversion into Common Stock of all outstanding Redeemable Convertible Preferred
Stock and the exchange of all outstanding Redeemable Common Stock and Class B
Common Stock for Common Stock). After giving effect to the sale of the shares of
Common Stock offered hereby at an assumed initial offering price of $ per share
and the application by the Company of the estimated net proceeds therefrom as
described in "Use of Proceeds," the pro forma net tangible book value of the
Company as of June 30, 1996 would have been $ , or $ per share of Common Stock.
This represents an immediate increase in net tangible book value of $ per share
to existing stockholders and an immediate dilution in net tangible book value of
$ per share of Common Stock to purchasers of Common Stock in the Offering. The
following table illustrates this per share dilution:
Assumed initial public offering price per share......................... $
Pro forma net tangible book value per share before the Offering......
Increase in net tangible book value attributable to new investors.... $
Pro forma net tangible book value per share after the Offering.......... $
Dilution per share to new investors..................................... $
The following table summarizes, on a pro forma basis as of June 30,
1996, the total shares purchased and the total consideration and average price
per share paid by existing stockholders, and paid by the new investors
purchasing the shares offered hereby, assuming an initial public offering price
of $ per share.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average Price
Number Percent Amount Percent Per Share
<S> <C> <C> <C> <C> <C>
Existing stockholders............ % $ % $
New investors....................
Total .................... % $ % $
============ ============ ================ ==========
</TABLE>
The above calculations do not give effect to the exercise of (i)
outstanding options and warrants to purchase 4,033,123 shares of Common Stock at
a weighted average exercise price of $2.92 per share outstanding at June 30,
1996, (ii) options to purchase an additional 161,300 shares of Common Stock
available for issuance under the Company's 1994 stock option plan, and (iii)
200,030 shares of Common Stock issuable upon conversion of outstanding
convertible subordinated notes.
11
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
June 30, 1996 (i) on a pro forma basis to give effect to the conversion of all
outstanding Redeemable Convertible Preferred Stock into Common Stock, the
exchange of all outstanding Redeemable Common Stock and Class B Common Stock for
Common Stock, and the issuance in February 1997 of 2,191,287 shares of Common
Stock in connection with the Abilene acquisition, and (ii) as adjusted to
reflect the sale by the Company of the Common Stock offered hereby, assuming an
initial public offering price of $ per share and after deducting the applicable
underwriting discount and estimated expenses payable by the Company, and the
application of the estimated net proceeds therefrom as described under "Use of
Proceeds." See "Pro Forma Consolidated Financial Information."
<TABLE>
<CAPTION>
JUNE 30, 1996
PRO PRO FORMA
ACTUAL FORMA AS ADJUSTED
<S> <C> <C> <C>
Current maturities of long-term debt (1).......... $ 684,540 $ 684,540 $
============== =============== ===============
Long-term debt, net of current
maturities (1)............................... $ 2,973,443 $ 2,973,443 $
-------------- --------------- ---------------
Redeemable Convertible Preferred Stock, no par value; 700,000 shares authorized,
500,000 shares issued and outstanding; no shares issued and outstanding pro
forma and pro forma as adjusted.............. 2,953,358
Redeemable Common Stock, no par value;
165,296 shares issued and outstanding;
no shares issued and outstanding pro
forma and pro forma as adjusted.............. 991,776
Stockholders' equity:
Class B Common Stock, no par value;
2,600,000 shares authorized;
1,226,150 shares issued and
outstanding; no shares issued
and outstanding pro forma and pro
forma as adjusted........................ 601,893 - -
Common Stock, no par value; 50,000,000
shares authorized; 2,122,827 shares
issued and outstanding; 5,548,174 shares
issued and outstanding pro forma and
shares issued and outstanding
pro forma as adjusted (2)................ 1,238,077 16,188,510
Common Stock to be issued, 167,630, 825,016,
and 825,016 shares, respectively......... 2,011,760 6,470,362
Stockholder notes receivable................. (126,250) (126,250)
Accumulated deficit.......................... (1,260,548) (1,260,548)
-------------- --------------- --------------
Total stockholders' equity............... 2,464,932 21,272,074
Total capitalization..................... $ 9,383,509 $ 24,245,517 $
============== =============== --------------
<FN>
(1) See Note 6 to Consolidated Financial Statements of the Company for
information concerning long-term debt.
(2) Excludes 4,033,123 shares reserved for issuance upon exercise of
outstanding options and warrants, at a weighted average exercise price
of $2.92 per share, and 200,030 shares reserved for issuance upon
conversion of outstanding convertible subordinated notes. See
"Description of Capital Stock."
</FN>
</TABLE>
12
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following pro forma consolidated statements of operation for the
six months ended June 30, 1996 and the year ended December 31, 1995, give effect
to the Acquisitions as if they had been completed on January 1, 1995. The pro
forma consolidated balance sheet gives effect to the Abilene acquisition as if
it had been completed on June 30, 1996 and also reflects the conversion of all
outstanding Redeemable Convertible Preferred Stock and Class B Common Stock of
the Company into Common Stock and the termination of the Company's contingent
obligation to repurchase Redeemable Common Stock, all of which will occur
simultaneously with the Offering, as if such transactions had occurred on June
30, 1996. The pro forma consolidated financial information is based on the
historical consolidated financial statements of the Company and the acquired
physician groups, giving effect to the Acquisitions under the purchase method of
accounting, and the assumptions and adjustments in the accompanying notes to pro
forma consolidated financial information.
The pro forma consolidated financial information has been prepared by
management based on the audited and unaudited financial statements of the
acquired physician groups adjusted where necessary, to reflect the acquisitions
and related operations as if the service agreements between the Company and such
groups had been in effect during the entire periods presented. This pro forma
consolidated financial information is presented for illustrative purposes only
and is not indicative of the results that would have occurred if the
Acquisitions had been completed on the dates indicated or that may be obtained
in the future. The pro forma consolidated financial information should be read
in conjunction with the audited consolidated financial statements and notes
thereto of the Company and the audited financial statements and notes thereto of
North Texas Medical Surgical, P.A., Cullman Family Practice, P.C., Family
Medical Clinic, P.C., Morgan-Haugh, P.S.C., HealthFirst Services, Inc. and
Tarrant Family Practice, P.A., and Abilene Diagnostic Clinic Practices included
elsewhere in this Prospectus.
13
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
(UNAUDITED)
ABILENE
TRANSACTION
AND EQUITY
HISTORICAL CONVERSIONS PRO FORMA
ASSETS
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents................................ $ 1,148,243 $ 468,386 (a) $ 1,616,629
Accounts receivable, net................................. 1,415,350 2,300,000 (a) 3,715,350
Management fees receivable............................... 806,378 (806,378) (b) -
Due from affiliated physician groups..................... 371,448 - 371,448
Prepaid expenses and other current assets................ 199,470 - 199,470
---------------- --------------- ---------------
Total current assets................................... 3,940,889 1,962,008 5,902,897
Property and equipment, net................................... 887,902 1,200,000 (a) 2,087,902
Intangible assets, net........................................ 6,833,794 11,700,000 (c) 18,533,794
Other assets, net............................................. 84,062 - 84,062
---------------- --------------- ---------------
Total assets........................................... $ 11,746,647 $ 14,862,008 $ 26,608,655
================ =============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable......................................... $ 470,186 $ - $ 470,186
Payable to affiliated physician groups................... 276,747 - 276,747
Accrued expenses and other current liabilities........... 931,665 - 931,665
Current maturities of notes payable...................... 420,132 - 420,132
Deferred purchase price.................................. 264,408 - 264,408
---------------- --------------- ---------------
Total current liabilities.............................. 2,363,138 - 2,363,138
Notes payable, net............................................ 455,169 - 455,169
Deferred purchase price....................................... 718,000 - 718,000
Convertible subordinated notes payable........................ 1,800,274 - 1,800,274
---------------- --------------- ---------------
Total liabilities...................................... 5,336,581 - 5,336,581
Redeemable Convertible Preferred Stock........................ 2,953,358 (2,953,358) (d) -
Redeemable Common Stock....................................... 991,776 (991,776) (d) -
Stockholders' equity:
Class B Common Stock..................................... 601,893 (601,893) (d) -
Common Stock............................................. 1,238,077 14,950,433 (c)(d) 16,188,510
Common Sock to be issued................................. 2,011,760 4,458,602 (c)(d) 6,470,362
Stockholder notes receivable............................. (126,250) - (126,250)
Accumulated deficit...................................... (1,260,548) - (1,260,548)
---------------- --------------- ---------------
Total stockholders' equity............................. 2,464,932 18,807,142 21,272,074
---------------- --------------- ---------------
Total liabilities and stockholders' equity............. $ 11,746,647 $ 14,862,008 $ 26,608,655
================ =============== ===============
</TABLE>
See accompanying notes to pro forma consolidated financial information.
14
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996
(UNAUDITED)
1996
HISTORICAL TRANSACTIONS ADJUSTMENTS PRO FORMA
<S> <C> <C> <C> <C>
Net revenue........................................ $ 11,120,322 $ 7,089,272 $ - $ 18,209,594
Operating expenses:
Cost of affiliated physician services........... 5,296,397 1,983,203 (1,983,203) (e) 8,655,717
3,359,320 (e)
Clinic salaries and benefits.................... 2,213,140 1,018,549 (95,934) (f) 3,135,755
Clinic rent and lease expense................... 658,093 213,824 17,630 (g) 889,547
Clinic supplies................................. 659,264 382,387 - 1,041,651
Other clinic costs.............................. 1,347,998 1,690,147 (223,847) (f) 2,814,298
General corporate expenses...................... 1,257,694 - (207,517) (h) 1,050,177
Depreciation and amortization................... 82,202 107,197 255,489 (i) 444,888
Interest expense (income)....................... (1,150) 25,442 25,052 (j) 49,344
------------- ------------- -------------- --------------
11,513,638 5,420,749 1,146,990 18,081,377
------------- ------------- -------------- --------------
Income (loss) before provision for
income taxes.................................... (393,316) 1,668,523 (1,146,990) 128,217
Provision (benefit) for
income taxes.................................... - 634,039 (k) (634,039) (k) -
------------- ------------- -------------- --------------
Net income (loss).................................. $ (393,316) $ 1,034,484 $ (512,951) $ 128,217
============= ============= ============= ==============
Net income (loss) per share........................ $ (0.06) $ 0.02
============= ==============
Weighted average number of common shares
outstanding..................................... 7,040,565 9,621,437
============= ==============
</TABLE>
See accompanying notes to pro forma consolidated financial information.
15
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
PRO FORMA
1995 FOR 1995 1996
HISTORICAL TRANSACTIONS ADJUSTMENTS TRANSACTIONS TRANSACTIONS ADJUSTMENTS PRO FORMA
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenue..... $ 1,918,029 $ 7,907,397 $ - $9,825,426 $ 23,064,923 - $32,890,349
Operating expenses:
Cost of affiliated
physician
services...... 759,513 4,509,289 (4,509,289) (e) 4,664,770 8,967,068 (8,967,068)(e) 15,025,524
3,905,257 (e) 10,360,754 (e)
Clinic salaries and
benefits...... 554,384 1,012,871 (85,389) (f) 1,481,866 5,992,096 (1,069,589)(f) 6,404,373
Clinic rent and lease
expense....... 115,028 467,305 - 582,333 814,367 49,487 (g) 1,446,187
Clinic supplies 111,703 347,178 - 458,881 1,495,050 - 1,953,931
Other clinic costs 242,491 1,872,125 (340,294) (f) 1,774,322 3,904,734 (652,394) (f) 5,026,662
General corporate
expenses...... 802,980 - - 802,980 - 1,293,395 (l) 2,096,375
Depreciation and
amortization.. 34,302 14,870 56,320 (i) 105,492 385,469 398,815 (i) 889,776
Interest expense
(income)...... (5,030) 23,620 (23,620) (m) (5,030) 153,687 34,315 (j) 182,972
----------- ----------- ----------- ---------- ------------ ----------- -----------
2,615,371 8,247,258 (997,015) 9,865,614 21,712,471 1,447,715 33,025,800
----------- ----------- ----------- ---------- ------------ ----------- -----------
Income (loss)
before
provision
for income
taxes........... (697,342) (339,861) 997,015 (40,188) 1,352,452 (1,447,715) (135,451)
Provision
(benefit)
for income
taxes........... - - - - 513,932(k) (513,932) (k) -
----------- ----------- ----------- ---------- ------------ ----------- -----------
Net income
(loss).......... $ (697,342) $ (339,861) $ 997,015 $ (40,188) $ 838,520 $ (933,783) $ (135,451)
=========== ========================== ========== =============== =========== ===========
Net income
(loss) per
share........... $ (0.10) $ (0.02)
----------- -----------
Weighted average
number of
common shares
outstanding..... 6,939,236 6,939,236
=========== ===========
</TABLE>
See accompanying notes to pro forma consolidated financial information.
16
<PAGE>
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
During the year ended December 31, 1995, the Company acquired, through
its wholly owned subsidiary, certain operating assets and assumed certain
operating liabilities of a physician group located in Texas. During the six
months ended June 30, 1996, the Company, through its wholly owned subsidiaries,
acquired certain operating assets and assumed certain operating liabilities of
four additional physician groups located in Alabama, Kentucky, and Texas. In
addition, the Company has entered into an agreement to acquire Abilene, which is
currently operated under an interim service agreement with the closing to occur
on February 16, 1997.
Pro Forma Consolidated Balance Sheet
The adjustments reflected in the pro forma consolidated balance sheet
are as follows:
(a) To reflect estimated fair values of tangible assets to be
acquired upon completion of the Abilene acquisition.
(b) To reflect elimination of the management fee receivable due
from Abilene upon completion of its acquisition.
(c) To reflect the issuance of Common Stock in connection with the
Abilene acquisition and to record the intangible assets
acquired thereunder.
(d) To reflect the conversion of all outstanding Redeemable
Convertible Preferred Stock into Common Stock and the exchange
of all outstanding Redeemable Common Stock and Class B Common
Stock for Common Stock upon the completion of the Offering.
Pro Forma Consolidated Statements of Operations
The adjustments reflected in the pro forma consolidated statements of
operations for the six months ended June 30, 1996 and the year ended December
31, 1995 are as follows:
(e) To adjust the cost of affiliated physician services to the
percentage specified in the service agreements entered into
with each affiliated physician group.
(f) To eliminate physician benefits and other physician related
costs, which will be paid by the physician groups under the
terms of the service agreements.
(g) To record additional rental expense related to the rental of
clinic space from affiliated physician groups.
(h) To eliminate non-recurring expenses related to executive
recruitment.
(i) To adjust depreciation expense by $26,311 and $(104,368) and
amortization expense by $229,178 and $559,503 for the six
months ended June 30, 1996 and the year ended December 31,
1995, respectively, based on the allocation of the purchase
price of the Acquisitions among property and equipment,
assembled workforce, and goodwill resulting from excess of
cost over fair value of assets acquired. The assembled
17
<PAGE>
workforce is being amortized using the straight-line method
over seven years, the workforce's estimated working career,
and goodwill is being amortized using the straight-line method
over 40 years, the non-cancelable term of the service
agreements not including options for extensions.
(j) To record interest expense on debt issued in connection with
acquisitions.
(k) To record and eliminate estimated Federal and state income
taxes at a combined rate of 38%. The pro forma tax provision
is eliminated for the six months ended June 30, 1996 due to
available net operating loss carryforwards. There is no pro
forma tax provision for the year ended December 31, 1995 due
to the pro forma loss.
(l) To record a full year of general corporate expenses at the
level necessary to manage all of the Acquisitions for the
entire period presented.
(m) To eliminate interest expense related to liabilities not
assumed in connection with an acquisition.
18
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data presented below should be read in
conjunction with the consolidated financial statements and the notes thereto of
the Company, the financial statements and the notes thereto of North Texas
Medical Surgical, P.A., Cullman Family Practice, P.C., Family Medical Clinic,
P.C., Morgan-Haugh, P.S.C., HealthFirst Services, Inc. and Tarrant Family
Practice, P.A., and Abilene Diagnostic Clinic Practices, "Pro Forma Consolidated
Financial Information," and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Prospectus. The
selected unaudited pro forma consolidated statement of operations data for the
year ended December 31, 1995 and the six months ended June 30, 1996 give effect
to the Acquisitions as if they had been completed on January 1, 1995. The
selected unaudited pro forma consolidated balance sheet data as of June 30, 1996
gives effect to the Abilene acquisition as if it had been completed on June 30,
1996. Such pro forma data are presented for illustrative purposes only and do
not purport to represent what the Company's results would have been if such
events had occurred at the dates indicated, nor do such data purport to project
the financial position or results of operations for any future period or as of
any future date. The results for the six months ended June 30, 1996 are not
necessarily indicative of the results to be expected for the full year.
<TABLE>
<CAPTION>
JULY 1, 1994 YEAR ENDED SIX MONTHS ENDED
(INCEPTION) TO DECEMBER 31, JUNE 30,
DECEMBER 31, PRO FORMA PRO FORMA
1994 1995 1995 1995 1996 1996
----------- --------- ----------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenue.................... $ - $1,918,029 $32,890,349 $ 172,744 $11,120,322 $18,209,594
----------- ---------- ----------- ----------- ----------- -----------
Operating expenses:
Cost of affiliated physician
services..................... - 759,513 15,025,524 54,713 5,296,397 8,655,717
Clinic salaries and benefits. - 554,384 6,404,373 56,871 2,213,140 3,135,755
Clinic rent and lease expense - 115,028 1,446,187 8,956 658,093 889,547
Clinic supplies. . .......... - 111,703 1,953,931 8,428 659,264 1,041,651
Other clinic costs........... - 242,491 5,026,662 33,010 1,347,998 2,814,298
General corporate expenses... 172,462 802,980 2,096,375 360,581 1,257,694 1,050,177
Depreciation and amortization 1,182 34,302 889,776 8,279 82,202 444,888
Interest expense (income).... (3,754) (5,030) 182,972 (9,079) (1,150) 49,344
----------- --------- ----------- ----------- ----------- -----------
169,890 2,615,371 35,025,800 521,759 11,513,638 18,081,377
----------- --------- ----------- ----------- ----------- -----------
Income (loss) before provision
for income taxes............. (169,890) (697,342) (135,451) (349,015) (393,316) 128,217
Income tax..................... - - - - - -
--- ---- ----- --- --- ---
Net income (loss).......... $ (169,890) $(697,342) $ (135,451) $ (349,015) $ (393,316) $ 128,217
=========== ========= =========== =========== =========== ===========
Net income (loss) per share.... $ 0.00 $ (0.10) $ (0.02) $ (0.05) $ (0.06) $ 0.02
=========== ========= =========== =========== =========== ===========
Weighted average number of
common shares outstanding.... 5,221,652 6,939,236 6,939,236 6,901,357 7,040,565 9,621,437
=========== ========= =========== =========== =========== ===========
JUNE 30, 1996
PRO
ACTUAL FORMA
BALANCE SHEET DATA:
Cash and cash equivalents........................................................... $ 1,148,243 $ 1,616,629
Working capital..................................................................... 1,577,751 3,539,759
Total assets........................................................................ 11,746,647 26,608,655
Long-term debt, less current maturities............................................. 2,973,443 2,973,443
Redeemable equity securities........................................................ 3,945,134 -
Total stockholders' equity.......................................................... 2,464,932 21,272,074
</TABLE>
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
ProMedCo is a physician practice management company that consolidates
its affiliated physician groups into primary-care-driven multi-specialty
networks. The Company was incorporated in Texas in 1993 and will be
reincorporated in Delaware prior to the Offering. ProMedCo commenced operations
in December 1994 and affiliated with its initial physician group in June 1995.
The Company's rapid growth in 1995 and 1996 has resulted primarily from its
affiliation with additional physician groups. Through June 30, 1996, the Company
affiliated with five physician groups in three states representing 72 physicians
and 12 physician extenders practicing at 15 service sites. When affiliating with
a physician group, the Company typically acquires at fair market value the
group's non-real estate operating assets and enters into a 40-year service
agreement with the group in exchange for a combination of Common Stock, cash,
other securities of the Company, and/or the assumption of certain liabilities.
The Company's net revenue is derived from medical services, including
revenue from ancillary services, provided by its affiliated physician groups.
This net revenue consists of the estimated realizable amounts from patients,
third-party payors, and others for services rendered. For providing medical
services, the physician group receives a fixed percentage of the group's
operating income which is defined as net clinic revenue less certain
contractually agreed-upon expenses not including physician salaries and other
physician-related expenses. The expenses incurred by the Company in fulfilling
its obligations under the service agreements are the same as the operating costs
and expenses that would have been incurred by the affiliated groups, including
non-physician salaries, employee benefits, medical supplies, building rent,
equipment leases, malpractice insurance premiums, management information systems
and other expenses related to clinic operations. The distribution to the group
for providing medical services is increased or decreased by a percentage of the
group's surplus or deficit, respectively, in net revenue under risk sharing
arrangements pursuant to capitated managed care contracts.
In addition to the clinic expenses discussed above, the Company also
incurs personnel and administrative expenses in connection with maintaining a
corporate office function that provides management, administrative, marketing
and acquisition services to the affiliated groups. The Company's profitability
depends on, among other things, increasing market share, expanding healthcare
services, enhancing operating efficiencies and developing favorable contractual
relationships with payors.
Management believes that industry trends toward cost containment and
lower reimbursement rates will continue to result in a reduction from historical
levels in per patient revenue. Further reductions in reimbursement rates could
have an adverse effect on the Company's operations unless the Company is
otherwise able to offset such payment reductions.
For the six months ended June 30, 1996, four of the Company's
affiliated physician groups each contributed 10% or more of the Company's pro
forma net revenue. Abilene represented approximately 53% of the pro forma net
revenue, and the three other groups represented approximately 17%, 12% and 10%.
20
<PAGE>
RESULTS OF OPERATIONS
As a result of the Company's rapid growth and limited period of
affiliation with its affiliated physician groups, the Company does not believe
that the period-to-period comparisons and percentage relationships within
periods set forth below are meaningful. The Company commenced operations in
December 1994 and affiliated with its first physician group in June 1995 and its
second group in December 1995. The Company entered into affiliations with three
additional groups during the six months ended June 30, 1996. Changes in results
of operations for the six months ended June 30, 1996 as compared to the six
months ended June 30, 1995 and for the year ended December 31, 1995 were caused
primarily by affiliations with these five physician groups.
The following table sets forth the percentages of net revenue
represented by certain items reflected in the Company's consolidated statements
of operations.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED JUNE 30,
DECEMBER 31, PRO FORMA
1995 1995 1996 1996
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Net revenue........................... 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Cost of affiliated physician
services......................... 39.6 31.7 47.6 47.5
Clinic salaries and benefits....... 28.9 32.9 19.9 17.2
Clinic rent and lease expenses..... 6.0 5.2 5.9 4.9
Clinic supplies.................... 5.8 4.9 5.9 5.7
Other clinic costs................. 12.6 19.1 12.1 15.5
General corporate expenses......... 41.9 208.7 11.3 5.8
Depreciation and amortization...... 1.8 4.8 0.7 2.4
Interest expense (income).......... (0.3) (5.3) 0.0 0.3
------------- ------------- -------------- -------------
Net income (loss)............... (36.3)% (202.0)% (3.5)% 0.7%
============= ============= ============== =============
</TABLE>
For the six months ended June 30, 1996, net revenue was $11,120,322,
compared with $172,744 for the six months ended June 30, 1995, an increase of
$10,947,578. For the year ended December 31, 1995, net revenue was $1,918,029,
compared with zero for the period from July 1, 1994 (inception) to December 31,
1994. The increase in net revenue resulted from the affiliation with five
physician groups since December 1995.
For the period from July 1, 1994 (inception) to December 31, 1994 and
the six months ended June 30, 1995, general corporate expenses exceeded net
revenue due to the start-up nature of the Company. While declining as a
percentage of net revenue, the level of these expenses continued to increase
during the remainder of 1995 and through the six months ended June 30, 1996, as
the Company continued to add to its management infrastructure. While the Company
expects that these expenses will continue to increase as the Company increases
the number of affiliated physician groups, it believes that these expenses will
continue to decline as a percentage of net revenue.
The mix of physician specialities and ancillary services affects the
cost of affiliated physician services, clinic salaries and benefits, clinic
supplies, and deprecation and amortization. Generally, primary care and
office-based physician practices are less capital intensive, but require a
higher number of support staff, than specialty care or hospital-based practices.
While the percentage of primary care
21
<PAGE>
physicians to total physicians affiliated with the Company was 80% and 84% at
June 30, 1996 and December 31, 1995, respectively, the Company expects the
percentage of specialists to increase over time.
Clinic rent and lease expense as a percentage of net revenue will vary
based on the size of each of the affiliated group offices and the current market
rental rate for medical office space in the particular geographic markets. Other
clinic costs will vary as a percentage of net revenue based on regional cost
differences and the Company's ability to implement operational efficiencies and
negotiate more favorable purchasing arrangements.
SUMMARY OF OPERATIONS BY QUARTER (UNAUDITED)
The following table presents unaudited quarterly operating results for
the preceding five quarters. The Company believes that all necessary
adjustments, consisting only of normal, recurring adjustments, have been
included in the amounts stated below to present fairly the quarterly results
when read in conjunction with the Company's consolidated financial statements
and notes thereto included elsewhere in this Prospectus. Future quarterly
results may fluctuate depending on, among other things, the timing and number of
affiliations with physician groups. Results of operations for any particular
quarter are not necessarily indicative of results of operations for a full year
or predictive to future periods.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1995 1995 1995 1996 1996
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenue............... $ 172,744 $ 517,366 $ 1,227,919 $ 4,139,217 $ 6,981,105
Operating expenses:
Cost of affiliated
physician services... 54,713 192,390 512,410 2,010,147 3,286,250
Clinic salaries and
benefits............. 56,871 175,139 322,374 778,356 1,434,784
Clinic rent and lease
expense.............. 8,956 29,002 77,070 262,838 395,255
Clinic supplies........ 8,428 33,705 69,570 241,329 417,935
Other clinic costs..... 33,010 54,362 155,119 492,078 855,920
General corporate
expenses............. 197,852 177,452 264,947 581,596 676,098
Depreciation and
amortization......... 5,603 12,961 13,062 31,591 50,611
Interest expense
(income)............. (3,476) (3,858) 7,907 (28,768) 27,618
---------- -------------- ------------ ------------ ------------
Net income (loss).... $ (189,213) $ (153,787) $ (194,540) $ (229,950) $ (163,36)
========== ============== ============ ============ ============
OTHER DATA (AT END OF PERIOD):
Affiliated physicians..... 8 8 32 51 72
Affiliated physician
groups................... 1 1 2 3 5
Number of service sites... 1 1 4 6 15
States.................... 1 1 1 2 3
</TABLE>
22
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, the Company had $1.6 million in working capital, a
decrease of $1.4 million from December 31, 1995. The decrease was primarily
related to cash paid and short-term obligations incurred relative to the 1996
Acquisitions. The Company's principal sources of liquidity as of June 30, 1996
consisted of cash and cash equivalents of $1.1 million and accounts receivable
of $1.4 million. In addition, subsequent to June 30, 1996 the Company entered
into the Credit Facility, providing a $25 million revolving working capital
loan.
The Company has financed its acquisitions, capital expenditures and
working capital needs since inception through a combination of (i) private
placements of capital stock and (ii) issuances of Common Stock, debt and
convertible subordinated notes and assumption of equipment financing and other
debt in the Acquisitions. Through June 30, 1996, the Company paid or committed
to pay consideration in an aggregate amount of approximately $24.1 million in
connection with the Acquisitions.
For the year ended December 31, 1995 and the six months ended June 30,
1996, the cash used by operations was approximately $600,000 and $500,000,
respectively. During 1995 and the six months ended June 30, 1996 the Company
incurred losses of $700,000 and $400,000, respectively, and increases in
non-cash current assets were offset by increases in current liabilities.
Cash used in investing activities was $2.1 million in 1995 and $500,000
for the six months ended June 30, 1996. In 1995, the Company purchased
government-sponsored agency debt securities with maturities of less than six
months. During the 1996 period, the cash used in investing activities was
primarily for the acquisition of physician groups.
Cash provided by financing activities (primarily related to the
issuance of the Company's Redeemable Convertible Preferred Stock) for the year
ended December 31, 1995 totaled $3.3 million.
Under the terms of the Credit Facility, the Company in July 1996 paid
a commitment fee of $500,000, which will be capitalized and amortized as an
adjustment to interest expense using the effective interest method. The interest
rate under the Credit Facility is, at the Company's option (i) the 30-day
commercial paper rate of issuers whose corporate bonds are rated "AA" plus
3.25%, (ii) reserve adjusted LIBOR plus 3.25%, or (iii) prime rate plus 0.5%.
The Credit Facility includes certain restrictive covenants including
prohibitions on the payment of dividends as well as the maintenance of certain
financial ratios.
Although each of the Company's service agreements with its affiliated
physician groups requires the Company to provide capital for equipment,
expansion, additional physicians, and other major expenditures, no specific
amount has been committed in advance. Capital expenditures are made based
partially upon the availability of funds, the sources of funds, alternative
projects, and an acceptable repayment period.
The Company's acquisition and expansion programs will require
substantial capital resources. In addition, the operation and expansion of
physician groups will require ongoing capital expenditures. The financing of
future acquisitions and business expansion is anticipated to be provided by a
combination of the proceeds of this Offering, the Credit Facility, and cash
flows from operations. The Company believes that the combination of these
sources will be sufficient to meet the Company's currently anticipated
acquisition, expansion, and working capital needs through 1997. In addition, in
order to meet
23
<PAGE>
its long-term liquidity needs, ProMedCo expects to incur, from time to time,
additional short- and long-term bank indebtedness and to issue additional equity
and debt securities, the availability and terms of which will depend upon market
and other conditions. There can be no assurance that such additional financing
will be available on terms acceptable to the Company. The failure to raise the
funds necessary to finance its future cash requirements could adversely affect
the Company's ability to pursue its strategy and could adversely affect its
results of operations for future periods.
24
<PAGE>
BUSINESS
GENERAL
ProMedCo is a physician practice management company that consolidates
its affiliated physician groups into primary-care-driven multi-specialty
networks. The Company focuses on pre-managed-care secondary markets located
principally outside of or adjacent to large metropolitan areas. The Company
believes that primary care physicians increasingly will be the principal point
of access to the healthcare delivery system and will control, directly or
indirectly, a growing percentage of healthcare expenditures, and it therefore
affiliates with physician groups having a primary care orientation. ProMedCo
assists in expanding and integrating the affiliated groups into comprehensive
multi-specialty networks to increase their market presence. The groups expand
through affiliations with additional primary care physicians and specialists and
selective additions of ancillary services. The groups are thus well positioned
to become the physician component of locally developing managed care delivery
systems. In addition to providing operating and expansion capital, the Company
provides its affiliated groups with a broad range of strategic and management
expertise and services.
ProMedCo commenced operations in December 1994 and is currently
affiliated with 76 physicians and 14 physician extenders (primarily physician
assistants and nurse practitioners) at 16 sites in Texas, Alabama, and Kentucky.
Currently, approximately 80% of the Company's affiliated physicians are primary
care providers, although the Company expects the proportion of specialists to
increase as the Company affiliates with additional physician groups and its
groups expand. Following the Offering, approximately % of ProMedCo's outstanding
Common Stock will be owned by the Company's management and affiliated
physicians.
INDUSTRY OVERVIEW
The healthcare delivery system in the United States has been undergoing
substantial change, largely in response to concerns over the quality and
escalating cost of healthcare. National expenditures for healthcare grew from
$250 billion in 1980 to an estimated $1 trillion in 1995. Of the total estimated
1995 expenditures, physicians received approximately $200 billion for their own
services and controlled an additional $600 billion through the referral of
patients for additional care and services provided by others.
The substantial increase in healthcare expenditures has led to the
widespread establishment and growth of managed care organizations ("MCOs"),
consisting primarily of health maintenance organizations ("HMOs") and preferred
provider organizations ("PPOs"). As MCO enrollment has grown, so has MCO
influence over physicians and other healthcare providers. MCOs have increased
their efforts to reduce costs and bring about greater accountability with
respect to the quality and appropriateness of care.
As a result of increased enrollment in managed care health plans,
physicians and other healthcare providers, in order to retain broad access to
patients, are seeking to become components of vertically integrated healthcare
delivery systems that provide a full range of services for the MCOs that operate
those plans. Typically, the physician and hospital components of these
integrated systems contract with MCOs to provide medical and hospital services
to MCO enrollees pursuant to risk-sharing and other arrangements. Such
risk-sharing arrangements commonly consist of "capitated" risk contracts, under
which providers undertake to provide a specified range of services for a
predetermined fixed fee per enrollee. Many physician groups are concluding that,
in order to compete effectively in the managed
25
<PAGE>
care environment, they need to have greater control over the delivery of a wider
range of healthcare services and expenditures. Accordingly, an increasing number
of physician groups are entering into capitation arrangements under which they
assume contractual risk and responsibility for healthcare provided by others.
The private practice of medicine, remains a largely fragmented market.
The American Medical Association reports that, of the approximately 613,000
physicians actively involved in patient care in the United States, only 34% are
currently practicing in groups. Many of these are small to mid-sized physician
groups, which are at a competitive disadvantage in the managed care environment.
They generally do not have the market presence, expertise, or sophisticated cost
accounting and quality management systems required for capitated risk-sharing
arrangements. In addition, they often lack the capital required to purchase new
medical equipment and information systems to enhance the efficiency and quality
of their practices.
Physician groups are increasingly turning to physician-driven
organizations such as ProMedCo to provide the professional management expertise
and capital required to compete in the managed care environment and otherwise to
assist them with the increasingly complex management of physician practices.
ProMedCo believes that this has resulted in a need for management organizations
committed to preserving the professional autonomy of physician groups and whose
economic incentives are fully aligned with those of physicians. Because of the
unique position of primary care physicians in managing the delivery of
healthcare by both providing primary care and controlling patient referrals,
ProMedCo further believes that multi-specialty groups with a substantial primary
care orientation are likely to be best positioned to succeed in the emerging
managed care environment.
STRATEGY
The Company's strategy is to affiliate with leading physician groups in
pre-managed-care markets and expand and integrate them into comprehensive
multi-specialty networks to increase their market presence and position them to
become the physician component of managed care delivery systems as they develop
in their local markets. The key elements of the Company's strategy are as
follows:
Affiliate with Primary-Care-Oriented Multi-Speciality Groups. ProMedCo
believes that the primary care physician increasingly will manage the delivery
of healthcare services to patients by providing primary care and controlling
patient referrals for specialist, hospital, and other healthcare services.
Because of this central role, the Company believes that multi-specialty
physician groups with a primary care orientation can more effectively manage
capitated risk than other participants in the healthcare delivery system. The
Company also believes that primary care physicians and specialists organized
within a single multi-specialty network provide a comprehensive range of
services that is attractive to MCOs.
Continue to Penetrate Pre-Managed-Care Markets. Notwithstanding the
increasing presence of MCOs, managed care is just beginning to reach many
communities, principally outside of or adjacent to large metropolitan areas.
ProMedCo seeks to affiliate in such markets with high quality physician groups
that recognize the need for outside managerial, financial, and business
expertise, that are committed to expanding their practices, and that are, or
have the potential to be, the leading multi-specialty groups within their
markets.
Expand Existing Groups. ProMedCo seeks to increase the market presence
of each of its affiliated groups within the group's local market. The Company
facilitates expansion of the groups
26
<PAGE>
through affiliations with and recruitment of other primary care physicians and
selected specialists, recruitment of physician extenders, and expansion of
selected ancillary services.
Preserve Local Autonomy. While the Company provides management
expertise to a newly affiliated group, it believes that each physician group
presents unique management issues and therefore is best served by decentralized
management. The Company generally retains the group's existing administrative
staff, adding additional management personnel as the group expands. Each group's
physicians continue to maintain full professional control of the practice of
medicine. The Company establishes for each group a policy council, comprised
equally of physicians and ProMedCo representatives, to determine the broad
strategic and operational policies of the group.
Align Economic Interests. ProMedCo believes that affiliations with
practice management organizations whose incentives are fully aligned with the
interests of physicians are more attractive to physicians than affiliations with
hospitals or MCOs. Accordingly, ProMedCo employs an affiliation structure under
which the income of both the Company and the physicians within each group depend
upon the operating income of the group, providing a common incentive to expand
the group and increase its efficiency. In conjunction with the group's
affiliation with the Company, the affiliated physicians generally receive
ProMedCo Common Stock, which further aligns their interests with those of the
Company.
DEVELOPMENT AND OPERATIONS
Market Development
ProMedCo's development objective is to affiliate with leading primary
care groups or primary- care-oriented multi-specialty groups within
pre-managed-care secondary markets. The Company performs research and market
analyses to identify priority markets, which generally are communities that have
populations of at least 30,000, have less than 20% HMO penetration, and meet
other market criteria. Such criteria relate to, among other things, the number
of primary care physicians relative to demand, Medicare payment rates, physician
group competition, the number of hospitals, demographics, population growth, and
the likelihood of significant future HMO growth. The Company estimates that
there are approximately 490 markets in 33 states, with an average population of
69,000, that currently satisfy its priority market criteria. The Company ranks
these markets based upon the degree to which they satisfy its criteria, enabling
the Company further to prioritize its development efforts. While the Company
identifies its priority markets in this manner, it expects to pursue development
opportunities in other markets as well.
Within its priority markets, ProMedCo seeks to affiliate either with
primary care groups or with multi-specialty groups that are committed to the
importance of primary care physicians. The Company seeks to affiliate with
groups that have a reputation for providing high quality care and have a
substantial share of their local markets or the potential to acquire such share.
These groups are frequently the largest groups in their markets.
Once ProMedCo has identified a group meeting its criteria, the Company
conducts preliminary discussions to ascertain the group's interest in an
affiliation. If such interest is established, the Company conducts site visits,
analyzes financial and other data, and conducts an extensive due diligence
investigation into the group's operations, leadership, and commitment to
long-term growth. Assuming a favorable outcome of the investigation, the Company
proposes to purchase the group's operating assets and enter into a long-term
service agreement with the group. See "--Affiliation Structure."
27
<PAGE>
Upon affiliation with a group, the Company immediately begins to
facilitate expansion of the group within its local market. Group expansion may
be accomplished through affiliation with additional primary-care and specialty
physicians in the community, recruitment of physicians from outside the
community, and addition of physician extenders to the group. One of the
Company's affiliated groups, for example, consisted of 24 physicians when it
entered into an agreement in principle with the Company and, during the ensuing
nine months, has been expanded to 38 physicians, including five new
specialities.
Current Operations
Since commencing operations in December 1994, ProMedCo has affiliated
with five groups currently aggregating 76 physicians and 14 physician extenders
at 16 sites in Texas, Alabama, and Kentucky. Approximately 80% of ProMedCo's
affiliated physicians are primary care providers, although the Company expects
the proportion of specialists to increase as the Company affiliates with
additional groups and the affiliated groups expand. The primary care physicians
generally consist of family practitioners, general internists, pediatricians,
obstetrician/gynecologists, and urgent-care physicians. Increasingly, these
physicians are augmented by physician extenders, primarily consisting of
physician assistants and nurse practitioners, whom the Company believes
significantly increase the efficiency of delivery of a group's primary care
services. Each of the physician groups also provides, to varying degrees,
medical specialty services and ancillary services. Medical specialities
currently include anesthesiology, endocrinology, gastroenterology, general
surgery, infectious diseases, nephrology, neurology, occupational medicine,
ophthalmology, orthopedic surgery, otolaryngology, pulmonology, rheumatology,
and urology. Each of the physician groups is continually seeking to expand its
practice through the addition of primary care physicians and specialists.
The physician groups offer, to varying degrees, a range of ancillary
services such as audiology, clinical laboratories, diagnostic imaging (which may
include CAT scanning, gastrointestinal laboratories, mammography, nuclear
medicine, ultrasound, and x-ray), stress testing, and outpatient surgical
facilities. The Company and each of its affiliated groups continually evaluate
the addition of ancillary services to enhance the growth and profitability of
such group.
The following table sets forth information concerning the Company's
affiliated physician groups.
<TABLE>
<CAPTION>
BEGINNING OF
MEDICAL PROMEDCO PHYSICIAN MEDICAL SITES OF
GROUP LOCATION AFFILIATION PHYSICIANS EXTENDERS SPECIALITIES SERVICE
<S> <C> <C> <C> <C> <C> <C>
North Texas
Medical Surgical, P.A. Denton, TX June 1995 8 1 1 1
Abilene
Diagnostic
Clinic, P.L.L.C. (1) Abilene, TX December 1995 38 7 9 4
Cullman Primary
Care, P.C. Cullman, AL March 1996 10 1 1 3
Morgan-Haugh,
P.S.C. Mayfield, KY April 1996 10 1 5 2
HealthFirst Medical
Group, P.A. Lake Worth, TX June 1996 10 4 2 6
---- -- ---
TOTAL 76 14 16
<FN>
(1) Operated under an interim service agreement since December 1995 with the
acquisition to be concluded in February 1997.
</FN>
</TABLE>
28
<PAGE>
Management Services
Upon affiliating with a physician group, ProMedCo immediately assumes
the management of all aspects of the group's operations other than the provision
of medical services. The operating assets acquired by the Company are provided
for the exclusive use of the group, and substantially all non-physician
personnel utilized in the group's practice become employees of the Company.
ProMedCo provides the full range of administrative services required for the
group's operations, including facilities management and the purchase of medical
malpractice insurance, supplies, and equipment, and a broad spectrum of
financial and accounting services, including budgeting, billing and third-party
reimbursement services. For each of the groups, the Company also provides
operating capital and expansion capital for affiliations with other physicians,
additions of ancillary services, and improvements of existing facilities and
equipment. As MCOs expand their presence into the local market, the Company
provides expertise in the negotiation of managed care contracts and the
management of risk-sharing arrangements. Currently, only one of the Company's
affiliated groups derives a significant portion of its revenues from managed
care contracts.
While the Company provides a centralized source of expertise in all
aspects of management, it believes that each physician group presents different
operational issues and challenges and therefore employs a system of
decentralized local management of each group. The Company generally retains the
group's existing administrative staff as ProMedCo employees, adding additional
management personnel as the group expands. The physicians in the group continue
to maintain full professional control of the practice of medicine, including the
hiring and termination of physicians and the setting of practice guidelines and
standards. The Company establishes for each group a policy council comprised
equally of physicians and ProMedCo representatives to determine the broad
strategic and operational policies of the group. See "--Affiliation Structure."
The Company believes that sophisticated information systems are
essential to reducing the cost and improving the quality of healthcare. Basic
practice management systems have long been necessary for efficient patient
scheduling and registration, billing, and collections. In the future, the
integration of financial, practice management, managed care, and clinical
systems is expected to be imperative for physician groups to remain competitive.
Clinical systems will provide information in the physician's workplace--such as
case management, practice guidelines, and clinical pathways--that will
facilitate the improvement of patient care. Electronic medical records will
automate the clinical workflow and allow access to patient records from multiple
sites, thus providing more effective clinical decision support and increasing
the quality of care. Systems that effectively measure clinical outcomes and
patient satisfaction are likely to become increasingly important as quality
becomes a more significant factor in maintaining and growing market share.
Rather than attempting to develop its own proprietary information
systems, ProMedCo believes it is more cost-effective, in light of the rapidly
changing healthcare and information technology environments, to utilize systems
developed and proven by independent companies. Although there are many systems
currently under development, none are yet available that, in the Company's
opinion, effectively address all of the evolving needs of physicians. The
Company initially works with its affiliated physician groups to maximize the
performance of the groups' existing systems. As MCOs increase their penetration
of each group's market, new or enhanced information systems will be implemented
as required. Ultimately, the Company expects to interface all of its affiliated
clinics with a central data repository for consolidation and evaluation of
operating, clinical, and financial data.
29
<PAGE>
AFFILIATION STRUCTURE
ProMedCo utilizes an affiliation structure that fully aligns the
interests of the Company with those of its physician partners. Moreover, each
physician group retains professional autonomy and control over its medical
practices through continued ownership and governance of its professional
corporation or similar organization.
When a physician group has agreed to affiliate with ProMedCo, the
Company purchases the group's operating assets, excluding real estate, and the
group enters into a long-term service agreement with the Company in exchange for
a combination of Common Stock, cash, other securities of the Company, and/or
assumption of certain liabilities. The Company has utilized, and intends to
continue to utilize, Common Stock in payment of a significant portion of its
consideration for affiliated physician groups. The Company also grants stock
options to certain affiliated physicians and physician extenders, including
those subsequently recruited by the group. See "Management--Physician Stock
Option Plan."
The service agreement between the Company and the physician group
typically becomes effective at the beginning of the month of the acquisition of
the group's operating assets. Under the service agreement, the Company provides
the physician group with the facilities and equipment used in the group's
medical practice, assumes responsibility for the management of the operations of
the practice, and employs substantially all of the non-physician personnel
utilized by the group.
The income of both the Company and the physicians within each group is
dependent upon the operating income of the group. Under its service agreement,
the physician group receives a fixed percentage of group operating income, which
is defined as the group's net revenue less certain contractually agreed-upon
clinic expenses before physician salaries and other physician-related expenses.
In addition, the distribution to the group is increased or decreased by a
percentage of the group's surplus or deficit, respectively, in revenues under
risk-sharing arrangements pursuant to capitated managed care contracts. Although
the risk-sharing provisions currently do not have a material effect upon any
affiliated group's operating income, the Company expects such provisions to
become significant as managed care emerges in their local markets and its groups
enter into managed care contracts. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
The Company's service agreements are for a term of 40 years and
generally cannot be terminated by either party without cause, consisting
primarily of bankruptcy or material default. Upon expiration of the term of a
service agreement or in the event of termination, the physician group is
required to purchase the assets related to the practice, including intangible
assets, then owned by the Company at their current book value. Concurrently with
the execution of a service agreement, the physician group is required to enter
into an employment contract with each of its physicians, typically for an
initial term of five years. The employment contract provides for the repayment
to ProMedCo of all or a portion of the physician's share of the consideration
paid by ProMedCo for the group's operating assets and service agreement in the
event of the physician's breach of the contract. Each physician group also
enters into an agreement not to compete with the Company, and each physician
within the group enters into an agreement not to compete with the physician
group during the period of his employment and for a period of time thereafter,
typically two years.
The policy council established for each group is comprised equally of
physicians and ProMedCo representatives. The council meets periodically to
consider and determine broad policies regarding strategic and operational
planning, marketing, arrangements with MCOs and other major issues involved
30
<PAGE>
in the group's operations. This ensures that the physicians within each group
retain a significant voice in the expansion and operation of their group, while
benefitting from ProMedCo's management experience and expertise.
COMPETITION
The physician practice management industry is highly competitive. The
Company is subject to significant competition both in affiliating with physician
groups and in seeking managed care contracts on behalf of its affiliated groups.
Its competitors include hospitals, managed care organizations, other physician
groups, and other physician practice management companies. Many of the Company's
competitors are larger, have substantially greater resources, and have longer
established relationships with purchasers of healthcare services than the
Company. There can be no assurance that the Company will be able to compete
effectively, that additional competitors will not enter the market, or that such
competition will not make it more difficult to enter into affiliations with
physician groups on terms beneficial to the Company.
The Company also experiences competition in the recruitment and
retention of qualified physicians and other healthcare professionals on behalf
of its affiliated physician groups. There can be no assurance that the Company
will be able to recruit or retain a sufficient number of qualified physicians
and other healthcare professionals to continue to expand its operations.
GOVERNMENT REGULATION
As a participant in the healthcare industry, the Company's operations
and relationships are subject to extensive and increasing regulation by a number
of governmental entities at the federal, state, and local levels. The Company
believes its operations are in material compliance with applicable laws. Because
the structure of its relationship with physician groups is relatively new,
however, many aspects of the Company's business operations have not been the
subject of state or federal regulatory interpretation. There can therefore be no
assurance that a review of the Company's or the affiliated physicians' business
by courts or regulatory authorities will not result in a determination that
could adversely affect the operations of the Company or that the healthcare
regulatory environment will not change so as to restrict the Company's or its
affiliated physician groups' existing operations or expansion.
The Company estimates that approximately 40% of the revenues of the
Company's affiliated physician groups is derived from payments made by
government-sponsored healthcare programs (principally Medicare and Medicaid). As
a result, any change in government reimbursement regulations, policies,
practices, interpretations, or statutes could adversely affect the operations of
the Company. There are also state and federal civil and criminal statutes
imposing substantial penalties, including civil and criminal fines and
imprisonment, on healthcare providers that fraudulently or wrongfully bill
governmental or other third-party payers for healthcare services. Although, the
Company believes it is in material compliance with such laws, there can be no
assurance that its activities will not be challenged or scrutinized by
governmental authorities.
The laws of many states prohibit business corporations such as the
Company from practicing medicine and employing physicians to practice medicine.
The Company performs only non-medical administrative services, does not hold
itself out as a provider of medical services, and does not exercise influence or
control over the practice of medicine by the physicians with whom it is
affiliated. In addition to prohibiting the practice of medicine, numerous states
limit the ability of entities such as the Company
31
<PAGE>
to control physician revenues or to receive portions of such revenues in excess
of the value of services provided. The Company believes that it is not in
violation of applicable state laws relating to the corporate practice of
medicine or sharing of physician revenues.
Certain provisions of the Social Security Act, commonly referred to as
the fraud and abuse provisions, prohibit the payment or receipt of any form of
remuneration in return for the referral of Medicare or Medicaid patients or
patient care opportunities, or in return for the recommendation, arrangement,
purchase, lease or order of items or services that are covered by Medicare or
Medicaid programs. Many states have adopted similar prohibitions against
payments that are intended to induce referrals of Medicaid and other third-party
payor patients. Although the Company believes that neither it nor any of its
affiliated physician groups is in violation of the any such prohibitions, its
operations do not fit within any of the existing or proposed federal safe
harbors and may therefore be subject to challenge.
Significant prohibitions against physician referrals were enacted by
Congress in the Omnibus Budget Reconciliation Act of 1993. Subject to certain
exemptions, a physician or a member of his or her immediate family is prohibited
by this legislation from referring Medicare or Medicaid patients to an entity
providing "designated health services" in which the physician has an ownership
or investment interest or with which the physician has entered into a
compensation arrangement. While the Company believes it and its affiliated
physician groups are in compliance with such legislation, future regulations
could require the Company to modify the form of its relationships with physician
groups. Some states have also enacted similar so-called "physician
self-referral" laws, and additional states may follow. The Company believes that
its practices fit within exemptions contained in such statutes. Nevertheless,
expansion of the operations of the Company to certain jurisdictions may require
structural and organizational modifications of the Company's relationships with
physician groups to comply with new or revised state statutes.
Because the Company's affiliated physician groups remain separate legal
entities, they may be deemed competitors subject to a range of antitrust laws
that prohibit anti-competitive conduct, including price fixing, concerted
refusals to deal, and division of market. The Company intends to comply with
such state and federal laws in its development of integrated healthcare delivery
networks, but there can be no assurance that a review of the Company's business
by courts or regulatory authorities will not result in a determination that
could adversely affect the operation of the Company and its affiliated physician
groups.
As a result of the continued escalation of healthcare costs and the
inability of many individuals to obtain health insurance, numerous proposals
have been or may be introduced in the U.S. Congress and state legislatures
relating to healthcare reform. There can be no assurance as to the ultimate
content, timing, or effect of any healthcare reform legislation, nor is it
possible at this time to estimate the impact of potential legislation, which
could be material, on the Company.
32
<PAGE>
INSURANCE
The Company's affiliated physician groups maintain medical malpractice
liability insurance in the amount of $1 million per occurrence and $3 million in
the aggregate. The Company is named as the additional insured on the policies
maintained by each of its affiliated groups. The Company also maintains general
liability and umbrella coverage, including excess malpractice coverage of $5
million per occurrence and $5 million in the aggregate. The cost and
availability of such coverage has varied widely in recent years. While the
Company believes its insurance policies are adequate in amount and coverage for
its current operations, there can be no assurance that the coverage maintained
by the Company will be sufficient to cover all future claims or will continue to
be available in adequate amounts or at a reasonable cost.
EMPLOYEES
As of June 30, 1996, the Company employed approximately 290 people,
including those employed in its corporate office. The Company is not party to
any collective bargaining agreement with a labor union and considers its
relations with its employees to be good. The Company does not employ any of the
physicians practicing in its affiliated groups.
PROPERTIES
The Company currently leases approximately 5,000 square feet of space
at 801 Cherry Street in Forth Worth, Texas, where its headquarters are located,
under a lease terminable upon 60 days' notice by either party. The Company
believes these facilities are adequate for its current uses and that additional
space is available to accommodate its anticipated growth.
The Company leases, subleases, or occupies pursuant to its service
agreements the clinic facilities at which its affiliated physician groups
conduct their practices. The leases have varying terms ranging from
month-to-month to ten years. The Company anticipates that as the affiliated
practices continue to grow and add new services, expanded facilities will be
required.
33
<PAGE>
MANAGEMENT
The following table sets forth certain information regarding the
directors and executive officers of the Company:
NAME AGE POSITION
Richard E. Ragsdale (1)(2)(3).......... 52 Chairman and Director
H. Wayne Posey(1)(2)................... 58 President, Chief Executive
Officer, and Director
Richard R. D'Antoni.................... 48 Executive Vice President,
Chief Operating
Officer, and Director
Dale K. Edwards........................ 34 Vice President - Development
R. Alan Gleghorn....................... 35 Vice President - Operations
Steve W. Ratton, Jr.................... 34 Vice President - Finance
Rick E. Weymier........................ 40 Vice President - Managed Care
David T. Bailey, M.D.(4)............... 51 Director
E. Thomas Chaney(1)(2)(3).............. 54 Director
James F. Herd, M.D..................... 60 Director
Jack W. McCaslin(4).................... 57 Director
(1) Member of Executive Committee
(2) Member of Compensation Committee
(3) Member of Option Committee
(4) Member of Audit Committee
RICHARD E. RAGSDALE, a co-founder of the Company, has served as the
Chairman of its Board of Directors since its inception. He also has served as
the Chairman of the Board of Directors of Community Health Systems, Inc.
("CHS"), a non-urban hospital management company that he co-founded, since its
inception in 1985, and a director of The RehabCare Group, Inc., a publicly owned
rehabilitation services management company, since 1993. Prior to 1985, Mr.
Ragsdale was Senior Executive Vice President, Chief Financial Officer, and a
director of Republic Health Corporation, a hospital management company that he
co-founded in 1981. During 1980 and 1981, he was Vice President and Chief
Financial Officer of INA Healthcare Group, a wholly owned subsidiary of INA
Corporation, and from 1973 to 1980 he was a Vice President of Hospital
Affiliates International, Inc. ("HAI"), a publicly owned hospital management
company.
H. WAYNE POSEY, one of the Company's co-founders, has been the
President, Chief Executive Officer, and a Director of the Company since its
inception. Mr. Posey was a healthcare consultant from 1975 until 1994, most
recently as the principal in charge of the healthcare services division of
McCaslin & Company, P.C., a public accounting and consulting company in Fort
Worth, Texas. Mr. Posey was employed by HAI from 1970 until 1975, holding the
positions of Controller, Vice President and Controller, and Senior Vice
President of Operations. He also served on HAI's Board of Directors and
Executive Committee.
34
<PAGE>
RICHARD R. D'ANTONI has served as Executive Vice President, Chief
Operating Officer, and a Director of the Company since February 1996. From 1990
to 1995, Mr. D'Antoni served as President and Chief Executive Officer of
Cellcor, Inc., a publicly owned biotechnology company. Previously, he served as
Executive Vice President of Medical Care International, Inc., predecessor of
Medical Care America, Inc., a publicly owned operator of outpatient surgical
centers, and also was employed by Medical Networks, Inc., a physician practice
management company, where he was responsible for development and operations.
DALE K. EDWARDS has served as a Vice President of the Company with
primary responsibility for developing affiliations with physician groups since
November 1994. From November 1993 to November 1994, Mr. Edwards was Vice
President of Physician Network Development with Columbia/HCA Healthcare Company,
a publicly owned hospital management company, and with Medical Care America,
Inc., prior to its acquisition by Columbia/HCA. From 1991 to 1993, Mr. Edwards
was Vice President of Managed Care and Regional Vice President of Sales of
Medical Care America. Previously, he was employed by HealthPlus, a regional HMO
in the State of Washington, as an Account Executive.
R. ALAN GLEGHORN has served as a Vice President of the Company with
primary responsibility for operations since January 1995. From 1993 to January
1995, Mr. Gleghorn was Administrator and Chief Operating Officer of Family
Healthcare Associates, a 52-member physician medical group practice with nine
locations in the Dallas Fort Worth Metroplex. From September 1984 to August
1993, Mr. Gleghorn served as Associate Administrator of a 56-member physician
medical group in Wichita Falls, Texas. During 1995, he was the President of the
Texas Medical Group Management Association. He is certified as a Medical
Practice Executive by the American College of Medical Practice Executives.
STEVE W. RATTON, JR. has served as Vice President of Finance of the
Company since September 1995. From September 1994 to September 1995, he was
Chief Financial Officer of Ameristat Mobile Medical Services, Inc., a patient
transportation company. From September 1988 to June 1994, he was Assistant
Treasurer of Epic Healthcare Group, Inc., a publicly owned hospital management
company. He previously served as Accounting Supervisor for American Medical
International, Inc., a hospital management company, and as an Audit Senior with
Arthur Andersen & Company.
RICK E. WEYMIER has served as Vice President of Managed Care of the
Company since March 1996. From April 1994 to March 1996, he was Chief Operating
Officer of Morgan Health Group, Inc., a 270-member primary care physician
network. From July 1993 until he joined Morgan, Mr. Weymier was Chief Operating
Officer of Southwest Orthopedic Institute, a 24-member physician orthopedic
group. From May 1991 to July 1993, he served as Vice President-Finance of MH
Healthcare, Inc., a hospital- owned 60,000-member prepaid health plan. Mr.
Weymier is certified as a Medical Practice Executive by the American College of
Medical Practice Executives.
DAVID T. BAILEY, M.D. has served as a Director of the Company since January
1996. Dr. Bailey also serves as President of Abilene Diagnostic Clinic,
P.L.L.C., a ProMedCo affiliated physician group. Dr. Bailey is Board Certified
with the American Board of Family Practice and has been a full-time practicing
family physician since 1973. He has served as Chairman of the Department of
Family Practice both at Hendrick Medical Center and Abilene Regional Hospital in
Abilene. He also served as Chairman of the Board of Trustees at Abilene
Christian Schools from 1983 to 1994.
E. THOMAS CHANEY has served as President, Chief Executive Officer, and a
director of CHS, which he co-founded in 1985, since its inception. From 1981 to
1985, Mr. Chaney was Vice President
35
<PAGE>
of Finance of ARA Living Centers, an operator of nursing homes. From 1978 to
1981, he was national director of the U.S. healthcare practice of the accounting
and consulting firm of KMG Main Hurdman, and from 1971 to 1978, he held the
positions of Controller and Chief Accounting Officer with HAI. A co-founder of
the Company, he has served as a Director of the Company since its inception.
JAMES F. HERD, M.D. has been in private practice in obstetrics and
gynecology in Fort Worth, Texas since 1968. During 1994, he was the President of
the Tarrant County Medical Society. From 1986 to 1990, he served as Chief and
Vice Chief of Staff at Harris Methodist Hospital in Fort Worth.
He has been a Director of the Company since its inception.
JACK W. MCCASLIN has been the managing principal of McCaslin & Company,
P.C. and its predecessor, McCaslin, Wright & Greenwood, P.C. since 1983. From
1980 to 1982, he was Secretary and Treasurer of Burnett Oil Company, Inc. Prior
to joining Burnett Oil, he was a partner of the public accounting firm of
Deloitte Haskins & Sells in its Fort Worth office. Mr. McCaslin was the
President of the Fort Worth Chapter of Certified Public Accountants in 1993. He
has served as a Director of the Company since its inception.
The Company's Certificate of Incorporation and By-Laws provide that the
Board of Directors is divided into three classes of directors serving staggered
terms. The three classes of the Board of Directors are as follows: Class I,
comprised of Messrs. D'Antoni and Herd, who will serve until 1998; Class II,
comprised of Messrs. Bailey and McCaslin, who will serve until 1999; and Class
III, comprised of Messrs. Chaney, Posey, and Ragsdale, who will serve until
2000.
The Board of Directors has established an Executive Committee, a
Compensation Committee, an Option Committee, and an Audit Committee. The
Executive Committee exercises the powers of the Board of Directors in the
management of the business and affairs of the Company between Board meetings to
the extent permitted by applicable law. The Compensation Committee reviews on
behalf of, and makes recommendations to, the Board of Directors with respect to
the compensation of executive officers. The Option Committee administers the
Company's option plans and makes recommendations to the Board of Directors with
respect to the plans and the grant of options to persons eligible under the
plans. The Audit Committee's functions include recommending to the Board of
Directors the engagement of the Company's independent public accountants,
reviewing with such accountants the plans for and the results and scope of their
auditing engagement, and certain other matters relating to their services
provided to the Company, including the independence of such accountants.
36
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the compensation earned in the year
ended December 31, 1995 by the Chief Executive Officer and each of the most
highly compensated executive officers whose individual remuneration exceeded
$100,000 for the fiscal year (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
Other Securities
Name and Principal Annual Underlying All Other
Position Salary ($) Bonuses ($) Compensation ($) Options Compensation
------------------ ----------- ------------ ---------------- -------- --------------
<S> <C> <C> <C> <C> <C>
H. Wayne Posey.......................... $ 144,667 $ 12,600 $ - - $ -
President and CEO
Dale K. Edwards......................... 111,250 9,625 - 80,000 -
Vice President-Development
R. Alan Gleghorn........................ 104,199 4,167 - 104,000 -
Vice President-Operations
</TABLE>
OPTION GRANTS IN FISCAL YEAR 1995
<TABLE>
<CAPTION>
Individual Grants Potential Realizable
Percent of Value at Assumed
Number of Total Options Annual Rates of
Shares Granted to Stock Price
Underlying Employees Exercise Appreciation for
Options in Fiscal Year Price Expiration Option Term (2)
Name Granted(1) 1995 Per Share Date 5% 10%
---- ------------ ---------- ----------- --------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
H. Wayne Posey - - - -
Dale K. Edwards 80,000 14.6% $6.00 7/1/04 $ 252,818 $ 626,092
R. Alan Gleghorn 24,000 4.4% $0.50 7/1/04 $ 7,081 $ 17,710
80,000 14.6% $6.00 7/1/04 $ 252,818 $ 626,092
- -----------------
<FN>
(1) Represents options to purchase Common Stock granted pursuant to the Stock
Option Plan. Options generally are exercisable in 20%
increments, commencing one year after the date of grant.
(2) Based upon the per share estimated fair market value on the date of grant
and on annual appreciation of such value through the expiration date of
such options at the stated rates. These amounts represent assumed rates of
appreciation only and may not necessarily be achieved. Actual gains, if
any, depend on the future performance of the Common Stock, as well as the
continued employment of the Named Executives for the full term of the
options.
</FN>
</TABLE>
37
<PAGE>
AGGREGATED OPTION EXERCISES IN 1995
AND OPTION VALUES AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
Number of Number of Value of Unexercised
Shares Underlying Unexercised In-the-Money
Acquired Warrants/Options at Warrants/Options at
on Value December 31, 1995 December 31, 1995(1)
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C> <C> <C>
H. Wayne Posey - - 277,109(2) 40,000 $1,432,518 $ 140,000
Dale K. Edwards - - 8,000 112,000 $ 44,000 $ 176,000
R. Alan Gleghorn - - - 104,000 - $ 132,000
<FN>
(1) Represents an amount equal to the difference between the estimated fair
market value of the Company's Common Stock on December 31, 1995 minus the
option exercise price, multiplied by the number of unexercised options at
December 31, 1995.
(2) Represents an option to purchase 155,000 Units, each consisting of one
share of Common Stock and a warrant to purchase .7878 of a share
of Common Stock.
</FN>
</TABLE>
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Messrs. Posey,
D'Antoni, Edwards, Gleghorn, and Ratton to serve in their respective current
positions. The agreement with Mr. Posey, which expires June 30, 2001, provides
for an initial annual base salary of $325,000 plus an annual bonus not to exceed
120% of base salary, depending upon the achievement of certain operating goals.
In the event Mr. Posey's employment is terminated without cause or there is a
"change in control" of the Company (as defined in his employment agreement), Mr.
Posey is entitled to receive severance benefits equal to the present value of 36
months of his salary, bonus, and certain other benefits.
Mr. D'Antoni's agreement, which expires February 9, 1998, currently
provides for a base salary of $260,000, subject to a minimum of 80% of the base
salary of the Chief Executive Officer of the Company. The agreement also
provides that Mr. D'Antoni may receive an annual bonus based upon the
achievement of certain operating goals. The Company has agreed to lend Mr.
D'Antoni up to $500,000 to finance the exercise of options held by him and, in
the event the Company's taxes are reduced because the options do not qualify as
incentive stock options, the amount of such reduction will be applied to the
repayment of any such loan and any excess will be paid to Mr. D'Antoni. In the
event Mr. D'Antoni's employment is terminated without cause or there is a change
in control of the Company, Mr. D'Antoni is entitled to receive his salary and
bonus through the later of February 1998 or one year following such termination
or change in control.
The employment agreements with Mr. Edwards and Mr. Gleghorn expire on
November 14, 1996 and provide for annual salaries of $160,000 and $130,000,
respectively. Messrs. Edwards' and Gleghorn's agreements provide for the payment
of the purchase price of their stock over a two-year period under promissory
notes that bear interest at the annual rates of 5.71% and 6.2%, respectively.
The Company is entitled to repurchase all or a portion of Mr. Edwards' and Mr.
Gleghorn's stock for its purchase price less any amounts paid to the Company in
the event their employment is terminated prior to certain specified dates. Mr.
Ratton's agreement expires September 16, 1997 and provides for an annual salary
of $130,000.
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<PAGE>
In addition to the provisions described above, the agreements with
Messrs. Edwards, Gleghorn, and Ratton provide for an annual bonus based upon the
achievement of certain operating goals. In addition, such agreements provide for
an annual increase in salary at least equal to the increase in the Consumer
Price Index.
CERTAIN TRANSACTIONS
The Company has entered into consulting agreements with Messrs.
Ragsdale and Chaney, providing for annual compensation of $60,000 and $36,000,
respectively, for a period of five years.
DIRECTOR STOCK OPTION PLAN
The Company has reserved 100,000 shares of Common Stock for issuance to
Directors. Beginning in January 1997, each Director not employed by the Company
will annually be granted options to purchase 2,000 shares of the Company's
Common Stock at an exercise price equal to the fair market value of such stock
on the date of grant, exercisable in annual increments of 20%. Each such
Director who is newly appointed or newly elected to the Board of Directors will
in addition be granted options to purchase 5,000 shares of Common Stock upon the
same terms.
EMPLOYEE STOCK OPTION PLANS
The Company has reserved 1,500,000 shares of Common Stock for issuance
under its 1994 Stock Option Plan and 1,000,000 shares of Common Stock for
issuance under its 1996 Employee Stock Option Plan. Under the plans, which are
administered by the Option Committee of the Board of Directors, key employees,
including executive officers, may be granted incentive or non-qualified stock
options. Options granted under the plans may not be exercised until vested. The
Option Committee is empowered under the plans to determine all terms and
provisions under which options are granted, including (i) the number of shares
subject to each option, (ii) when the option becomes exercisable, (iii) the
exercise price, and (iv) the duration of the option which cannot exceed 10
years. As of June 30, 1996, options to purchase 1,338,700 shares of Common Stock
had been granted under the 1994 plan and none had been granted under the 1996
plan.
EMPLOYEE STOCK PURCHASE PLAN
The Company has reserved 500,000 shares of Common Stock for purchase
over the next five years under its 1996 Employee Stock Purchase Plan. This plan
permits employees to purchase shares of Common Stock at a discount to market
value and be eligible to receive favorable income tax treatment of the discount
under section 423 of the Internal Revenue Code of 1986, as amended. Under this
plan, all employees working more than 20 hours weekly are eligible to purchase
reserved shares at a discount equal to 15% of market price. The market cost of
shares purchased by an employee under this plan may not exceed $25,000 annually.
PHYSICIAN STOCK OPTION PLAN
The Company has reserved 1,000,000 shares of Common Stock for issuance
under its 1996 Physician Stock Option Plan. Under the plan, physicians and
physician extenders employed by the Company's affiliated physician groups may be
granted non-qualified options to purchase shares of Common Stock. Options
granted under the plan may not be exercised until vested. The Option
39
<PAGE>
Committee is empowered under the plan to determine all terms and provisions
under which options are granted, including (i) the number of shares subject to
each option, (ii) when the option becomes exercisable, (iii) the exercise price,
and (iv) the duration of the option. As of June 30, 1996, no options had been
granted under the Physician Stock Option Plan.
40
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Common Stock as of June 30, 1996, and as adjusted to reflect
the sale of the shares offered hereby, by (i) each person who is known by the
Company to be the beneficial owner of more than 5% of the outstanding Common
Stock, (ii) each Director, (iii) each Named Executive Officer, and (iv) all
Directors and executive officers as a group. The Company believes that the
individuals listed below each have sole voting and investment power with respect
to such shares, except as otherwise indicated in the footnotes to the table.
Unless otherwise indicated below, the business address of each person listed is:
c/o ProMedCo, Inc. 801 Cherry Street, Suite 1450, Fort Worth, Texas 76102.
Shares Beneficially Owned Shares Beneficially
Name and Address Prior to Offering(1) Owned After Offering(1)
of Beneficial Owner Number Percent Number Percent
Richard E. Ragsdale 2,026,540 28.4 2,026,540
H. Wayne Posey (2) 1,510,665 21.1 1,510,665
E. Thomas Chaney 1,114,780 15.6 1,114,780
Jack W. McCaslin 518,572 7.3 518,572
Richard R. D'Antoni 120,000 1.7 120,000
David T. Bailey, M.D. - - - -
James F. Herd, M.D. 143,020 2.0 143,020
Bessemer Venture
Partners(3) 644,007 9.0 644,007
All Directors and
executive officers
as a group(11 persons) 5,578,377 78.1 5,578,377
(1) Includes shares issuable upon the exercise of options that are exercisable
within 60 days of the date of this Prospectus. The shares underlying such
options are deemed to be outstanding for the purpose of computing the
percentage of outstanding stock owned by such persons individually and by
each group of which they are a member, but are not deemed to be outstanding
for the purpose of computing the percentage ownership of any other person.
(2) The Company and Mr. Posey (the "Selling Stockholder") have granted to the
Underwriters an over-allotment option to purchase up to an additional
shares of Common Stock. To the extent that the Underwriters exercise this
option, the first 150,000 shares of Common Stock will be sold by the
Selling Stockholder and the balance will be sold by the Company.
(3) This number includes (1) 18,837 shares held by a limited partnership of
which Deer III & Co., the general partner of Bessemer, is the general
partner and (2) 17,381 shares held by
six individuals and two subchapter S corporations employed by or
related to Bessemer Securities Corporation, whose wholly-owned
subsidiary is the limited partner of Bessemer. Each of these individuals
and S corporations is obligated to vote his or its shares as directed
by Bessemer. This number does not include 50,162 shares owned or
controlled by partners of Deer III & Co., nor does it include 3,500
shares owned by associates of Deer III & Co. Included in the foregoing
numbers are shares issuable upon conversion of preferred shares which are
issuable upon the exercise of warrants that are presently exercisable
at $6.00 per share in the following amounts: Bessemer - 173,654, the
limited partnership - 5,382, the eight individuals - 4,966, the partners
of Deer III & Co. - 14,332, and associates of Deer III & Co. - 1,000.
The preferred shares, when issued, are convertible into equal numbers
of common shares. The address of Bessemer Venture Partners is 1025 Old
Country Road, Suite 205, Westbury, New York 11590.
41
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following summary description is qualified in its entirety by
reference to the Company's Certificate of Incorporation, which is filed as an
exhibit to the registration statement of which this Prospectus is a part. Upon
consummation of the Offering, the authorized capital stock of the Company will
consist of 50,000,000 shares of Common Stock, no par value per share, of which
shares will be issued and outstanding, and 20,000,000 shares of Preferred Stock,
no par value per share, none of which will be issued and outstanding.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held of
record on all matters to be voted on by the stockholders. There is no cumulative
voting with respect to the election of Directors, with the result that the
holders of a majority of the shares of Common Stock voting for the election of
Directors can elect all of the Directors then up for election. The holders of
Common Stock are entitled to receive dividends when, as, and if declared by the
Board of Directors out of funds legally available therefor. In the event of
liquidation, dissolution, or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets remaining which are available
for distribution to them after payment of liabilities and after provision has
been made for each class of stock having preference over the Common Stock.
Holders of shares of Common Stock, as such, have no conversion, preemptive, or
other subscription rights, and there are no redemption provisions applicable to
the Common Stock. All of the outstanding shares of Common Stock are fully paid
and nonassessable.
PREFERRED STOCK
The Board of Directors is authorized, without further approval or
action by the stockholders, to issue shares of Preferred Stock in one or more
series and to determine the rights, preferences, privileges, and restrictions
thereof, including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences, sinking fund terms, and number of shares
constituting any series of Preferred Stock or the designation of such series.
The rights of the holders of Common Stock will generally be subject to
the prior rights of the holders of any outstanding shares of Preferred Stock
with respect to dividends, liquidation preferences, and other matters. Among
other things, the Preferred Stock could be issued by the Company to raise
capital or finance acquisitions. The Preferred Stock could have certain
anti-takeover effects under certain circumstances. The issuance of shares of
Preferred Stock could enable the Board of Directors to render more difficult or
discourage an attempt to obtain control of the Company by means of a merger,
tender offer, or other business combination transaction directed at the Company
by, among other things, placing shares of Preferred Stock with investors who
might align themselves with the Board of Directors, issuing new shares to dilute
stock ownership of a person or entity seeking control of the Company, or
creating a class or series of Preferred Stock with class voting rights.
The Company has no current plans to issue any shares of its Preferred
Stock.
42
<PAGE>
DELAWARE ANTI-TAKEOVER LAW
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law. Section 203 provides, with certain exceptions, that a
Delaware corporation may not engage in certain business combinations with a
person or affiliate or associate of such person who is an "interested
stockholder" for a period of three years from the date such person became an
interested stockholder unless: (i) the transaction resulting in the acquiring
person's becoming an interested stockholder, or the business combination, is
approved by the board of directors of the corporation before the person becomes
an interested stockholder; (ii) the interested stockholder acquires 85% or more
of the outstanding voting stock of the corporation in the same transaction that
makes it an interested stockholder (excluding shares owned by directors who are
also officers, and excluding certain employee stock option plans); and (iii) on
or after the date the person becomes an interested stockholder, the business
combination is approved by the corporation's board of directors and by the
holders of at least two-thirds of the corporation's outstanding voting stock at
an annual or special meeting, excluding shares owned by the interested
stockholder. Except as otherwise specified in Section 203, an "interested
stockholder" is defined as (a) any person that is the owner of 15% or more of
the outstanding voting stock of the corporation, (b) any person that is an
affiliate or associate of the corporation and was the owner of 15% or more of
the outstanding voting stock of the corporation at any time within the
three-year period immediately prior to the date on which it is sought to be
determined whether such person is an interested stockholder, or (c) the
affiliates and associates of any such person. By restricting the ability of the
Company to engage in business combinations with an interested person, the
application of Section 203 to the Company may provide a barrier to hostile or
unwanted takeovers. Under Delaware law, the Company could have opted out of
Section 203 but elected to be subject to its provisions.
CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BY-LAWS
Classified Board of Directors. The Company's Certificate of
Incorporation and By-Laws provide that the Board is to be divided into three
classes of directors serving staggered terms. One class of directors will be
elected at each annual meeting of stockholders for a three-year term. See
"Management-- Directors and Executive Officers." Thus, at least two annual
meetings of stockholders, instead of one, generally will be required to change
the majority of the Board of Directors. Directors can be removed from office
only for cause and only by the affirmative vote of at least two-thirds of the
then outstanding shares of capital stock entitled to vote generally in the
election of Directors, voting as a single class. Vacancies on the Board of
Directors may be filled only by the remaining Directors and not the
stockholders. The foregoing provisions may have the effect of making it more
difficult to acquire control of the Company by means of a hostile tender offer,
open market purchases, a proxy contest, or otherwise.
See "Management."
Requirements for Advance Notification of Stockholder Nomination and
Proposals. The Company's By-Laws require 60 to 90 days' notice to the Company
with regard to stockholder proposals and the nomination, other than by or at the
direction of the Board of Directors or a committee thereof, of candidates for
election as directors. Such notice must provide specified information, including
information regarding the ownership of Common Stock by the person giving the
notice, information regarding the proposal or the nominees, and information
regarding the interest of the proponent in the proposal or the nominations.
Special Meetings of Stockholders; Actions by Written Consent. The Company's
Certificate of Incorporation and By-Laws provide that special meetings of
stockholders of the Company may only be
43
<PAGE>
called by the Chairman of the Board, the President, or a majority of the then
authorized number of Directors. This provision precludes stockholders from
calling a special meeting and taking actions opposed by the Board of Directors.
The Certificate of Incorporation also provides that stockholder action cannot be
taken by written consent in lieu of a meeting.
Limitation of Director Liability. The Company's Certificate of
Incorporation limits the liability of Directors to the Company and its
stockholders to the fullest extent permitted by Delaware law. Specifically,
under current Delaware law, a director will not be personally liable for
monetary damages for breach of the director's fiduciary duty as a director,
except liability (i) for a breach of the director's duty of loyalty to the
Company or its stockholders, (ii) for acts or omissions by a director not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) for liability arising under Section 174 of the Delaware General
Corporation Law (relating to the declaration of dividends and purchase or
redemption of shares in violation of the Delaware General Corporation Law) or
(iv) for any transaction from which the director derived an improper personal
benefit. The inclusion of this provision in the Company's Certificate of
Incorporation may have the effect of reducing the likelihood of derivative
litigation against directors and may discourage or deter stockholders or
management from bringing a lawsuit against directors for breach of their duty of
care.
Supermajority Provisions. The Company's Certificate of Incorporation
provides that the vote of the Board of Directors or the affirmative vote of at
least two-thirds of the then outstanding shares of capital stock entitled to
vote generally in the election of Directors, voting as a single class, is
required to amend, repeal, or alter any of the Company's By-Laws or the
foregoing provisions contained in the Company's Certificate of Incorporation.
RIGHTS PLAN
Prior to the consummation of the Offering, there will be a dividend
distribution of one right (a "Right") for each outstanding share of Common Stock
of the Company to stockholders of record at the close of business on the date
the shares of Common Stock are first offered to the public (the "Record Date")
and will further authorize the issuance of one right for each share of Common
Stock that shall become outstanding between the Record Date and the earlier of
the Final Expiration Date (as defined herein) and the date the Rights are
redeemed. Except as described below, each Right, when exercisable, entitles the
registered holder thereof to purchase from the Company one one-hundredth of a
share of Series A Junior Participating Preferred Stock, par value $1.00 per
share (the "Junior Preferred Shares"), at a price of $ per one one-hundredth of
a share (the "Purchase Price"), subject to adjustment. The description and terms
of the Rights are set forth in the Rights Agreement (the "Rights Agreement")
between the Company and , as Rights Agent. A copy of the Rights Agreement has
been filed with the Commission as an exhibit to the registration statement of
which this Prospectus is a part. This summary of certain provisions of the
Rights Agreement and the Rights does not purport to be complete and is qualified
in its entirety by reference to the Rights Agreement.
Initially, the Rights will be evidenced by Common Stock certificates
representing shares then outstanding, and no separate certificates evidencing
the Rights will be distributed. Until the earlier to occur of (i) 10 days
following a public announcement that a person or group of affiliated or
associated persons, with certain limited exceptions (an "Acquiring Person"), has
acquired, or obtained the right to acquire, beneficial ownership of capital
stock of the Company representing 15% or more of the voting power of the Company
(the "Shares Acquisition Date") or (ii) 15 business days (or such later date as
may be determined by action of the Board of Directors prior to the time that any
person becomes an Acquiring
44
<PAGE>
Person) following the commencement of (or a public announcement of an intention
to make) a tender or exchange offer if, upon consummation thereof, such person
or group would be the beneficial owner of capital stock of the Company
representing 15% or more of the voting power of the Company (such date being
called the "Distribution Date"), the Rights will be evidenced by the Common
Stock certificates and not by separate certificates.
The Rights Agreement provides that, until the Distribution Date, the
Rights will be transferred with, and only with, the Common Stock. Until the
Distribution Date (or earlier redemption, expiration or termination of the
Rights), the transfer of any Common Stock certificates will also constitute the
transfer of the Rights associated with the Common Stock represented by such
certificates. As soon as practicable following the Distribution Date, separate
certificates evidencing the Rights ("Right Certificates") will be mailed to
holders of record of the Common Stock as of the close of business on the
Distribution Date and, thereafter, such separate Right Certificates alone will
evidence the Rights.
The Rights are not exercisable until the Distribution Date, and will
expire upon the earliest of (i) the close of business on the tenth anniversary
of the date of the Rights Agreement (the "Final Expiration Date"), (ii) the
redemption of the Rights by the Company as described below or (iii) the exchange
of all Rights for Common Stock as described below.
A person will not become an Acquiring Person under the Rights Agreement
if such person is the Company or an affiliate of the Company or obtained 15% or
more of the voting power of the Company through (i) an issuance of Common Stock
by the Company directly to such person (for example, in a private placement or
an acquisition by the Company in which Common Stock is used as consideration) or
(ii) a repurchase by the Company of Common Stock.
In the event that any person or group becomes an Acquiring Person, each
holder of a Right will thereafter have the right to receive, upon exercise at
the then current exercise price of the Right, Junior Preferred Stock (or, in
certain circumstances, cash, property, or other securities of the Company)
having a value equal to two times the exercise price of the Right.
In the event that, at any time following a Shares Acquisition Date, the
Company is acquired by the Acquiring Person in a merger or other business
combination transaction or 50% or more of the Company's assets or earning power
are sold to the Acquiring Person, proper provision will be made so that each
holder of a Right will thereafter have the right to receive, upon exercise at
the then current exercise price of the Right, common stock of the acquiring or
surviving company having a value equal to two times the exercise price of the
Right.
Notwithstanding the foregoing, following the occurrence of any of the
events set forth in the preceding two paragraphs (the "Triggering Events"), any
Rights that are, or (under certain circumstances specified in the Rights
Agreement) were, beneficially owned by any Acquiring Person will immediately
become null and void.
The Purchase Price payable, the number of Junior Preferred Shares,
shares of Common Stock or other securities or property issuable upon exercise of
the Rights, and the number of Rights outstanding, are subject to adjustment from
time to time to prevent dilution, among other circumstances, in the event of a
stock dividend on, or a subdivision, split, combination, consolidation, or
reclassification of, the Junior Preferred Shares or the Common Stock, or a
reverse split of the outstanding Junior Preferred Shares or shares of Common
Stock.
45
<PAGE>
With certain exceptions, no adjustment to the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% to
the Purchase Price. Upon the exercise of a Right, the Company will not be
required to issue fractional Junior Preferred Shares or fractional shares of
Common Stock (other than fractions in multiples of one one-hundredth of a Junior
Preferred Share) and, in lieu thereof, an adjustment in cash may be made based
on the market price of the Junior Preferred Shares or Common Stock on the last
trading date prior to the date of exercise.
At any time after a person or group becomes an Acquiring Person and
prior to the acquisition by such person or group of capital stock of the Company
representing 50% or more of the voting power of the Company, the Board of
Directors may exchange the Rights (other than Rights owned by such person or
group, which have become void), in whole or in part, at an exchange ratio of one
share of Common Stock per Right (subject to adjustment).
At any time after the date of the Rights Agreement until the earlier of
the time that a person becomes an Acquiring Person or the Final Expiration Date,
the Board of Directors may redeem the Rights in whole, but not in part, at a
price of $.01 per Right (the "Redemption Price"), which may (at the option of
the Company) be paid in cash, shares of Common Stock or other consideration
deemed appropriate by the Board of Directors. Upon the effectiveness of any
action of the Board of Directors ordering redemption of the Rights, the Rights
will terminate and the only right of the holders of Rights will be to receive
the Redemption Price.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of the Company, including, without limitation, the right
to vote or to receive dividends.
The provisions of the Rights Agreement may be amended by the Company,
except that any amendment adopted after the time that a person becomes an
Acquiring Person may not adversely affect the interests of holders of Rights.
Upon consummation of the Offering, there will be shares of Common Stock
outstanding and shares of Common Stock reserved for issuance under employee
benefit plans. Each outstanding share of Common Stock will receive one Right.
shares of Junior Preferred Shares will be reserved for issuance in the event of
the exercise of the Rights.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the Company
without conditioning the offer on the Rights being redeemed or a substantial
number of Rights being acquired by the Acquiring Person. Under certain
circumstances the Rights beneficially owned by such a person or group may become
void. The Rights should not interfere with any merger or other business
combination approved by the Board of Directors because, if the Rights would
become exercisable as a result of such merger or business combination, the Board
of Directors may, at its option, at any time prior to the time that any person
or entity becomes an Acquiring Person, redeem all (but not less than all) of the
then outstanding Rights at the Redemption Price.
46
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this Offering, there has been no public market for the Common
Stock. Sales of substantial amounts of shares of Common Stock in the public
market could adversely affect market prices of the shares and make it more
difficult for the Company to sell equity securities in the future at a time and
price that it deems appropriate.
The shares sold in this Offering ( shares if the Underwriters'
over-allotment option is exercised in full) will be freely tradeable without
restriction or further registration under the Securities Act of 1933, as amended
(the "Securities Act"), except for shares purchased by "affiliates" of the
Company, which will be subject to the resale limitations of Rule 144 under the
Securities Act. As defined in Rule 144, an affiliate of an issuer is a person
who, directly or indirectly, through one or more intermediaries, controls, is
controlled by, or is under common control with, such issuer, and generally
includes members of the Board of Directors and senior management. The remaining
shares of Common Stock that will be outstanding immediately following this
Offering include 2,788,123 shares issued in private transactions (the
"Restricted Shares").
The Restricted Shares, together with 4,033,123 shares of Common Stock
that may be acquired upon exercise of presently outstanding options and warrants
and 200,030 shares of Common Stock that may be issued upon conversion of
presently outstanding convertible subordinated notes, may not be sold except in
compliance with the registration requirements of the Securities Act or pursuant
to an exemption from registration, such as the exemption provided by Rule 144.
The Restricted Shares held by current stockholders will become eligible for
sale, subject to the restrictions of Rule 144, commencing in
. In general, Rule 144 allows a stockholder who has beneficially owned
Restricted Shares for at least two years (including person who may be deemed
"affiliates" of the Company under Rule 144) to sell a number of shares within
any three-month period that does not exceed the greater of (i) 1% of the then
outstanding shares of Common Stock (approximately shares after giving effect to
this Offering); or (ii) the average weekly trading volume in the Common Stock
during the four calendar weeks immediately preceding such sale. Sales under Rule
144 are also subject to certain requirements as to the manner and notice of sale
and the availability of public information concerning the Company. A stockholder
who is not an "affiliate" of the Company at any time during the 90 days
immediately preceding a sale, and who has beneficially owned his or her shares
for at least three years (as computed under Rule 144), is entitled to sell such
shares under Rule 144 without regard to the volume and manner of sale
limitations described above.
The Company and its Directors, officers, and certain stockholders have
agreed not to offer, sell, or otherwise dispose of any of their Restricted
Shares for a period of 180 days after the date of this Prospectus without prior
written consent of Piper Jaffray, Inc. See "Underwriting."
Certain holders have demand and "piggyback" registration rights with
respect to 1,281,000 shares of Common Stock held by them or issuable to them,
which rights allow them to require the Company, subject to certain conditions,
to file a registration statement covering the sale of such shares after the
expiration of the 180-day lock up period. In addition, the Company intends to
file a registration statement covering approximately 3,600,000 shares of Common
Stock reserved for issuance under the Company's stock option plans.
47
<PAGE>
UNDERWRITING
The Company has entered into a Purchase Agreement (the "Purchase
Agreement") with the underwriters listed in the table below (the
"Underwriters"), for whom Piper Jaffray Inc., Robertson, Stephens & Company LLC,
and Cowen & Company are acting as representatives (the
"Representatives"). Subject to the terms and conditions set forth in the
Purchase Agreement, the Company has agreed to sell to the Underwriters, and each
of the Underwriters has severally agreed to purchase, the number of shares of
Common Stock set forth opposite each Underwriter's name in the table below:
NUMBER OF
NAME SHARES
Piper Jaffray Inc........................................
Robertson, Stephens & Company LLC........................
Cowen & Company..........................................
Total...........................................
Subject to the terms and conditions of the Purchase Agreement, the
Underwriters have agreed to purchase all of the Common Stock being sold pursuant
to the Purchase Agreement, if any is purchased (excluding shares covered by the
over-allotment option granted therein). In the event of a default by any
Underwriter, the Purchase Agreement provides that in certain circumstances
purchase commitments of the nondefaulting Underwriters may be increased or the
Purchase Agreement may be terminated.
The Representatives have advised the Company that the Underwriters
propose to offer Common Stock directly to the public at the initial public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession of not more than $ per share.
Additionally, the Underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share to certain other dealers. After the
Offering, the initial public offering price and other selling terms may be
changed by the Underwriters.
The Company and the Selling Stockholder have granted to the
Underwriters an option, exercisable by the Representatives within 30 days after
the date of the Purchase Agreement, to purchase up to an additional shares of
Common Stock at the same price per share to be paid by the Underwriters for the
other shares offered hereby. If the Underwriters purchase any of such additional
shares pursuant to this option, each Underwriter will be committed to purchase
such additional shares in approximately the same proportion as set forth in the
table above. The Underwriters may exercise the option only for the
48
<PAGE>
purpose of covering over-allotments, if any, made in connection with the
distribution of the Common Stock offered hereby. To the extent that the
Underwriters exercise this option, the first 150,000 shares of Common Stock will
be sold by the Selling Stockholder and the balance will be sold by the Company.
The Representatives have informed the Company that neither they, nor
any other member of the National Association of Securities Dealers, Inc. (the
"NASD") participating in the Offering, will make sales of shares of Common Stock
offered hereby to accounts over which they exercise discretionary authority
without the prior specific written approval of the customer.
The Offering of the shares of Common Stock is made for delivery when,
as, and if accepted by the Underwriters and subject to prior sale and to
withdrawal, cancellation, or modification of the Offering without notice. The
Underwriters reserve the right to reject an order for the purchase of shares in
whole or in part.
The officers and Directors of the Company and certain other
stockholders designated by the Representatives, who will beneficially own in the
aggregate shares of Common Stock upon completion of the Offering, have agreed
that they will not sell, offer to sell, distribute, or otherwise dispose of any
shares of Common Stock owned by them for a period of 180 days after the date of
this Prospectus, without the prior written consent of Piper Jaffray Inc. See
"Shares Eligible For Future Sale." The Company has agreed that it will not,
without the prior written consent of Piper Jaffray Inc., offer, sell, issue, or
otherwise dispose of any shares of Common Stock, options, or warrants to acquire
shares of Common Stock or securities exchangeable for or convertible into shares
of Common Stock during the 180-day period following the date of this Prospectus,
except that the Company may issue shares upon the exercise of options and
warrants granted prior to the date hereof, may grant additional options under
, and may issue Common Stock in connection with affiliation with new physician
groups.
Prior to the Offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock has been
determined by negotiation among the Company and the Representatives. Among the
factors considered in determining the initial public offering price were
prevailing market and economic conditions, estimates of the business potential
and prospects of the Company, the present state of the Company's business
operations, an assessment of the Company's management and the consideration of
the above factors in relation to the market valuation of companies in related
businesses. See "Risk Factors--No Prior Public Market; Possible Volatility of
Price."
The Company has agreed to indemnify the Underwriters and their
controlling persons against certain liabilities, including liabilities under the
Securities Act, and to contribute to payments the Underwriters may be required
to make in respect thereof.
49
<PAGE>
LEGAL MATTERS
Certain legal matters in connection with the Offering are being passed
upon by Dyer Ellis & Joseph PC, Washington, D.C., special counsel to the
Company, and for the Underwriters by Vinson & Elkins L.L.P.
EXPERTS
The consolidated financial statements and schedule of the Company as of
December 31, 1994 and 1995 and June 30, 1996, and for the period from inception
(July 1, 1994) to December 31, 1994, the year ended December 31, 1995, and the
six months ended June 30, 1996, included in this Prospectus and elsewhere in the
Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.
The financial statements of North Texas Medical Surgical, P.A., Cullman
Family Practice, P.C., Family Medical Clinic, P.C., Morgan-Haugh, P.S.C., and
the combined financial statements of HealthFirst Services, Inc. and Tarrant
Family Practice, P.A. and Abilene Diagnostic Clinic Practices included in this
Prospectus have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.
ADDITIONAL INFORMATION
A Registration Statement on Form S-1 including amendments thereto
relating to the Common Stock offered hereby has been filed by the Company with
the Securities and Exchange Commission, Washington, D.C. This Prospectus does
not contain all of the information set forth in the Registration Statement and
the exhibits and schedules thereto. Statements contained in this Prospectus as
to the contents of any contract or other document referred to are not
necessarily complete and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference. For
further information with respect to the Company and the Common Stock offered
hereby, reference is made to the Registration Statement, exhibits, and
schedules. A copy of the Registration Statement may be inspected without charge
at the Securities and Exchange Commission's principal office located at 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549, the New York Regional
Office located at 7 World Trade Center, Suite 1300, New York, New York 10048,
and the Chicago Regional Office located at Northwestern Atrium Center, 500 West
Madison Street, Chicago, Illinois 60661-2511 and copies of all or any part
thereof may be obtained from the Public Reference Section of the Securities and
Exchange Commission upon the payment of certain fees prescribed by the
Securities and Exchange Commission. The Registration Statement may also be
obtained from the Web site that the Commission maintains at http:\www.sec.gov.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements certified by an independent public
accounting firm and quarterly reports for each of the first three quarters of
each fiscal year containing unaudited financial information.
50
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
PROFESSIONAL MEDICAL MANAGEMENT COMPANY AND SUBSIDIARIES
Report of Independent Public Accountants............................ F-3
Consolidated Balance Sheets as of December 31, 1994
and 1995, and June 30, 1996..................................... F-4
Consolidated Statements of Operations for the
period from inception (July 1, 1994)
to December 31, 1994, the year ended
December 31, 1995, and the six months
ended June 30, 1995 (unaudited) and 1996........................ F-6
Consolidated Statements of Stockholders'
Equity for the period from inception
(July 1, 1994) to December 31, 1994,
the year ended December 31, 1995,
and the six months ended June 30, 1996.......................... F-7
Consolidated Statements of Cash Flows
for the period from inception (July 1, 1994)
to December 31, 1994, the year ended
December 31, 1995, and the six months
ended June 30, 1995 (unaudited) and 1996........................ F-8
Notes to Consolidated Financial Statements.......................... F-9
NORTH TEXAS MEDICAL SURGICAL, P.A.
Report of Independent Public Accountants............................ F-26
Balance Sheets as of December 31, 1994, and June 30, 1995........... F-27
Statements of Operations for the years
ended December 31, 1993 and 1994, and
the six month ended June 30, 1995............................... F-28
Statements of Stockholders' Equity for
the years ended December 31, 1993
and 1994, and the six months ended June 30, 1995................ F-29
Statements of Cash Flows for the years
ended December 31, 1993 and 1994,
and the six months ended June 30, 1995.......................... F-30
Notes to Financial Statements....................................... F-31
CULLMAN FAMILY PRACTICE, P.C.
Report of Independent Public Accountants............................ F-34
Balance Sheets as of December 31, 1994 and 1995..................... F-35
Statements of Operations for the years ended
December 31, 1994 and 1995, the
period from January 1, 1995 to February 28,
1995 (unaudited), and the period
from January 1, 1996 to March 6, 1996 (unaudited)............... F-36
Statements of Stockholders' Equity for the
years ended December 31, 1994 and 1995.......................... F-37
Statements of Cash Flows for the years
ended December 31, 1994 and 1995................................ F-38
Notes to Financial Statements....................................... F-39
FAMILY MEDICAL CLINIC, P.C.
Report of Independent Public Accountants............................ F-42
Balance Sheets as of December 31, 1994 and 1995..................... F-43
Statements of Operations for the years
ended December 31, 1994 and 1995, the
period from January 1, 1995, to February 28,
1995 (unaudited), and the period from
January 1, 1996 to March 6, 1996 (unaudited).................... F-44
Statements of Stockholders' Equity for the
years ended December 31, 1994 and 1995.......................... F-45
Statements of Cash Flows for the years
ended December 31, 1994 and 1995................................ F-46
Notes to Financial Statements....................................... F-47
F-1
<PAGE>
MORGAN-HAUGH, P.S.C.
Report of Independent Public Accountants............................ F-51
Balance Sheets as of December 31, 1994 and 1995..................... F-52
Statement of Operations for the years ended
December 31, 1993, 1994, and 1995, the
period from January 1, 1995 to March 31,
1995 (unaudited), and the period from
January 1, 1996 to March 31, 1996 (unaudited)................... F-53
Statements of Stockholders' Equity for the years ended
December 31, 1993, 1994, and 1995 .............................. F-54
Statements of Cash Flows for the years
ended December 31, 1993, 1994, and 1995........................ F-55
Notes to Financial Statements....................................... F-56
HEALTHFIRST SERVICES, INC. AND TARRANT FAMILY PRACTICE, P.A.
Report of Independent Public Accountants............................ F-62
Combined Balance Sheets as of December 31, 1994 and 1995............ F-63
Combined Statements of Operations for the
years ended December 31, 1993,
1994, and 1995, the period from January 1, 1995 to May 31, 1995
(unaudited), and the period from January 1, 1996 to
May 31, 1996 (unaudited)........................................ F-64
Combined Statements of Owners' Equity for the years ended
December 31, 1993, 1994, and 1995............................... F-65
Combined Statements of Cash Flows for the years ended
December 31, 1993, 1994, and 1995............................... F-66
Notes to Combined Financial Statements.............................. F-67
ABILENE DIAGNOSTIC CLINIC PRACTICES
Report of Independent Public Accountants............................ F-71
Combined Balance Sheets as of December 31,
1994 and 1995 and June 30, 1996 (unaudited)..................... F-72
Combined Statements of Operations for the years ended
December 31, 1993, 1994, and 1995, the
period from January 1, 1995 to
June 30, 1995 (unaudited), and the
period from January 1, 1996 to
June 30, 1996 (unaudited)....................................... F-73
Combined Statements of Owners' Equity for the years ended
December 31, 1993, 1994, and 1995............................... F-74
Combined Statements of Cash Flows for the years ended
December 31, 1993, 1994, and 1995............................... F-75
Notes to Combined Financial Statements.............................. F-76
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Professional Medical Management Company:
We have audited the accompanying consolidated balance sheets of Professional
Medical Management Company (a Delaware corporation - see Note 11 to Consolidated
Financial Statements) and subsidiaries as of December 31, 1994 and 1995, and
June 30, 1996, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the period from inception (July 1,
1994) to December 31, 1994, the year ended December 31, 1995, and the six months
ended June 30, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Professional Medical Management
Company and subsidiaries as of December 31, 1994 and 1995, and June 30, 1996,
and the results of their operations and their cash flows for the period from
inception (July 1, 1994) to December 31, 1994, the year ended December 31, 1995,
and the six months ended June 30, 1996, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Fort Worth, Texas,
August 20, 1996
F-3
<PAGE>
PROFESSIONAL MEDICAL MANAGEMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Pro Forma
June 30, 1996 (Note 2)
Pro Forma Pro Forma
December 31, June 30, For Equity Acquisition Including
ASSETS 1994 1995 1996 Conversions Adjustments Acquisition
----------- ----------- ----------- -------------------------------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............ $ 490,391 $ 1,076,836 $ 1,148,243 $ 1,148,243 $ 468,386 $ 1,616,629
Short-term investments............... - 1,970,530 - - - -
Accounts receivable - net of
allowances of $0, $135,334,
and $1,289,008, respectively....... 200 168,177 1,415,350 1,415,350 2,300,000 3,715,350
Management fees receivable........... - 116,968 806,378 806,378 (806,378) -
Due from affiliated physician groups. - - 371,448 371,448 - 371,448
Prepaid expenses and other
current assets..................... 62 30,594 199,470 199,470 - 199,470
----------- ----------- ----------- ----------- ----------- -----------
Total current assets............. 490,653 3,363,105 3,940,889 3,940,889 1,962,008 5,902,897
PROPERTY AND EQUIPMENT, net
of accumulated depreciation and
amortization of $1,049, $22,907,
and $48,124, respectively............ 31,555 96,035 887,902 887,902 1,200,000 2,087,902
INTANGIBLE ASSETS, net of
accumulated amortization of $0,
$11,515, and $67,846, respectively... - 976,025 6,833,794 6,833,794 11,700,000 18,533,794
OTHER ASSETS , net of accumulated
amortization of $133, $1,062, and
$1,716, respectively................. 2,233 16,182 84,062 84,062 - 84,062
----------- ----------- ----------- ----------- ----------- -----------
Total assets..................... $ 524,441 $ 4,451,347 $11,746,647 $11,746,647 $14,862,008 $26,608,655
=========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
PROFESSIONAL MEDICAL MANAGEMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -- cont.
<TABLE>
<CAPTION>
Pro Forma
June 30, 1996 (Note 2)
Pro Forma Pro Forma
December 31, June 30, For Equity Acquisition Including
1994 1995 1996 Conversions Adjustments Acquisition
----------- ----------- ----------- -------------------------------------
(Unaudited) (Unaudited)(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable..................... $ 19,794 $ 94,174 $ 470,186 $ 470,186 $ - $ 470,186
Payable to affiliated physician
groups............................. - - 276,747 276,747 - 276,747
Accrued expenses and other current
liabilities........................ 359 209,425 931,665 931,665 - 931,665
Current maturities of notes payable.. 1,025 66,898 420,132 420,132 - 420,132
Deferred purchase price.............. - - 264,408 264,408 - 264,408
------------- ----------- ----------- ----------- ----------- -----------
Total current liabilities...... 21,178 370,497 2,363,138 2,363,138 - 2,363,138
NOTES PAYABLE, net of current
maturities........................... 2,050 1,429 455,169 455,169 - 455,169
NOTES PAYABLE TO
STOCKHOLDERS......................... - 261,604 - - - -
DEFERRED PURCHASE PRICE................. - - 718,000 718,000 - 718,000
CONVERTIBLE SUBORDINATED
NOTES PAYABLE........................ - - 1,800,274 1,800,274 - 1,800,274
----------- ----------- ----------- ----------- ----------- -----------
Total liabilities.............. 23,228 633,530 5,336,581 5,336,581 - 5,336,581
----------- ----------- ----------- ----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE CONVERTIBLE
PREFERRED STOCK 700,000 shares
authorized; 500,000 shares issued and
outstanding (liquidation preference
of $6,000,000) ........................ - 2,953,358 2,953,358 - - -
REDEEMABLE COMMON STOCK,
165,296 shares issued
and outstanding...................... - 991,776 991,776 - - -
STOCKHOLDERS' EQUITY:
Class B Common Stock, no par
value; 2,600,000 shares
authorized; 1,226,150
shares issued and outstanding
(liquidation preference
of $1,226,150)..................... 601,893 601,893 601,893 - - -
Common stock, no par value;
50,000,000 shares authorized;
1,878,000, 1,899,000, and 2,122,827
shares issued and outstanding
at December 31, 1994 and 1995,
and June 30, 1996,
respectively....................... 102,710 165,856 1,238,077 5,785,104 10,403,406 16,188,510
Common stock to be issued, 0, 667,
and 167,630 shares, respectively... - 4,000 2,011,760 2,011,760 4,458,602 6,470,362
Stockholder notes receivable......... (33,500) (31,834) (126,250) (126,250) - (126,250)
Accumulated deficit.................. (169,890) (867,232) (1,260,548) (1,260,548) - (1,260,548)
----------- ----------- ----------- ----------- ----------- -----------
Total stockholders' equity..... 501,213 (127,317) 2,464,932 6,410,066 14,862,008 21,272,074
----------- ----------- ----------- ----------- ----------- -----------
Total liabilities and
stockholders' equity........... $ 524,441 $ 4,451,347 $11,746,647 $11,746,647 $14,862,008 $26,608,655
=========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
PROFESSIONAL MEDICAL MANAGEMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from
Inception
(July 1, 1994)
to Year Ended Six Months
December 31, December 31, Ended June 30,
1994 1995 1995 1996
--------------- --------------- ---------------- ---------------
(Unaudited)
<S> <C> <C> <C> <C>
NET REVENUE........................... $ - $ 1,918,029 $ 172,744 $ 11,120,322
--------------- --------------- ---------------- ---------------
OPERATING EXPENSES:
Cost of affiliated physician
services......................... - 759,513 54,713 5,296,397
Clinic salaries and benefits....... - 554,384 56,871 2,213,140
Clinic rent and lease expense...... - 115,028 8,956 658,093
Clinic supplies.................... - 111,703 8,428 659,264
Other clinic costs................. - 242,491 33,010 1,347,998
General corporate expenses......... 172,462 802,980 360,581 1,257,694
Depreciation and amortization...... 1,182 34,302 8,279 82,202
Interest expense (income).......... (3,754) (5,030) (9,079) (1,150)
--------------- --------------- ---------------- ---------------
169,890 2,615,371 521,759 11,513,638
--------------- --------------- ---------------- ---------------
LOSS BEFORE PROVISION FOR
INCOME TAXES....................... (169,890) (697,342) (349,015) (393,316)
PROVISION FOR INCOME TAXES............ - - - -
--------------- --------------- ---------------- ---------------
NET LOSS.............................. $ (169,890) $ (697,342) $ (349,015) $ (393,316)
=============== =============== ================ ===============
NET LOSS PER SHARE.................... $ 0.00 $ (0.10) $ (0.05) $ (0.06)
=============== =============== ================ ===============
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING........................ 5,221,652 6,939,236 6,901,357 7,040,565
=============== =============== ================ ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
PROFESSIONAL MEDICAL MANAGEMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Class B Common Stockholder
Common Stock Common Stock Stock Notes Accumulated
Shares Amount Shares Amount To Be Issued Receivable Deficit Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, July 1,
1994, (inception).. - $ - - $ - $ - $ - $ - $ -
Issuance of common
stock............ - - 1,878,000 102,710 - (34,750) - 67,960
Issuance of Class
B common stock... 1,226,150 601,893 - - - - - 601,893
Payments on
stockholder
notes............ - - - - - 1,250 - 1,250
Net loss........... - - - - - - (169,890) (169,890)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE, December 31,
1994............... 1,226,150 601,893 1,878,000 102,710 - (33,500) (169,890) 501,213
Common stock
subscribed....... - - - - 4,000 (4,000) - -
Issuance of
common stock
and warrants..... - - 21,000 63,146 - (10,000) - 53,146
Payments on
stockholder
notes............ - - - - - 15,666 - 15,666
Net loss........... - - - - - - (697,342) (697,342)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE, December 31,
1995.................. 1,226,150 601,893 1,899,000 165,856 4,000 (31,834) (867,232) (127,317)
Issuance of common
stock............ - - 223,827 1,072,221 - - - 1,072,221
Stock subscription
canceled......... - - - - (4,000) 4,000 - -
Common stock
to be issued in
connection with
acquisition........ - - - - 2,011,760 - - 2,011,760
Issuance of
stockholder
note............. - - - - - (120,000) - (120,000)
Payments on
stockholder
notes............ - - - - - 21,584 - 21,584
Net loss........... - - - - - - (393,316) (393,316)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE, June 30,
1996.................. 1,226,150 $ 601,893 2,122,827 $ 1,238,077 $ 2,011,760 $ (126,250) $(1,260,548) $ 2,464,932
=========== =========== =========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
PROFESSIONAL MEDICAL MANAGEMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
Inception
(July 1, 1994)
to Year Ended Six Months
December 31, December 31, Ended June 30,
1994 1995 1995 1996
----------- ----------- ----------- --------
(Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss....................................................... $ (169,890) $ (697,342) $ (349,015) $ (393,316)
Adjustments to reconcile net loss to net
cash used in operating activities (net of effects of
purchase transactions):
Depreciation and amortization.............................. 1,182 34,302 8,279 82,202
Noncash compensation....................................... - - - 14,750
Changes in assets and liabilities:
Accounts receivable...................................... (200) (45,791) (10,600) (9,398)
Management fees receivable............................... - (116,968) - (689,410)
Due from affiliated physician groups..................... - - - (104,509)
Prepaid expenses and other current assets................ (62) (1,121) (6,147) (54,078)
Other assets............................................. (2,366) (13,949) (8,943) (135,833)
Accounts payable......................................... 19,794 55,048 25,897 275,594
Accrued expenses and other current liabilities........... 359 143,625 (132) 527,125
------------ ------------ ------------- ------------
Net cash used in operating activities.................. (151,183) (642,196) (340,661) (486,873)
------------ ------------ ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............................ (32,604) (30,395) (15,112) (143,658)
Purchases of clinic assets, net of cash........................ - (90,424) (90,424) (1,292,480)
Purchases of short-term investments............................ - (1,970,530) - -
Proceeds from short-term investments........................... - - - 1,970,530
------------ ------------ ------------- ------------
Net cash provided by (used in) investing activities.... (32,604) (2,091,349) (105,536) 534,392
------------ ------------ ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under notes payable................................. 3,075 297,820 475,620 15,398
Proceeds from issuance of redeemable
convertible preferred stock.................................. - 2,953,358 - -
Proceeds from issuance of common stock......................... 704,603 63,146 15,000 1,656
Payments of stockholder notes receivable, net.................. (33,500) 5,666 2,466 6,834
------------ ------------ ------------- ------------
Net cash provided by financing activities.............. 674,178 3,319,990 493,086 23,888
------------ ------------ ------------- ------------
INCREASE IN CASH.................................................. 490,391 586,445 46,889 71,407
CASH AND CASH EQUIVALENTS, beginning of period.................... - 490,391 490,391 1,076,836
------------ ------------ ------------- ------------
CASH AND CASH EQUIVALENTS, end of period.......................... $ 490,391 $ 1,076,836 $ 537,280 $ 1,148,243
============ ============ ============= ============
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION (See also Notes 3 and 6):
Cash paid during the year-
Interest expense............................................. $ - $ 14,391 $ - $ 53,217
Income taxes................................................. $ - $ - $ - $ -
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
PROFESSIONAL MEDICAL MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995, AND JUNE 30, 1996
1. DESCRIPTION OF BUSINESS
Professional Medical Management Company and subsidiaries ("ProMedCo" or the
"Company"), a Delaware corporation, formerly ProMedCo, Inc. and subsidiaries, a
Texas corporation, is engaged in operating and managing physician groups (See
Note 11). The Company, through its wholly owned subsidiaries, acquires certain
net assets of and operates physician groups under long-term service agreements
with affiliated physician groups. The Company was incorporated in Texas in
December 1993 and commenced operations in December 1994 and completed its first
acquisition in June 1995. Therefore, the Company has a limited operating
history.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation/Principles of Consolidation
The consolidated financial statements have been prepared on the accrual basis of
accounting and include the accounts of the Company and its wholly owned
subsidiaries. Through service agreements between the Company's wholly owned
subsidiaries and the various affiliated physician groups, the Company has
assumed full responsibility for the operating expenses in return for the
assignment of the revenue of the physician groups. The Company, as opposed to
the physician groups affiliated with the Company, has perpetual, unilateral
control over the assets and non-medical operations of the affiliated physician
groups, and notwithstanding the lack of technical majority ownership of the
stock of such entities, consolidation of the various physician practices is
necessary to present fairly the financial position and results of operations of
the Company because of control by means other than ownership of stock. Control
by the Company is perpetual rather than temporary because of (i) the length of
the original terms of the service agreements, (ii) the successive extension
periods provided by the service agreements, (iii) the terms of the service
agreements, which, among other things, require the physician groups to enter
into employment agreements with individual physicians; (iv) the continuing
investment of capital by the Company, (v) the employment of the majority of the
non-physician personnel, and (vi) the nature of the services provided to the
physician groups by the Company that evidence operating control. All
intercompany accounts and transactions have been eliminated in the
consolidation.
The Company's consolidated financial statements have been prepared in
anticipation of an initial public offering (the "Offering").
Net Revenue
Net revenue is reported at the estimated realizable amounts from patients,
third-party payors and others for services rendered. Revenue under certain
third-party payor agreements is subject to audit and
F-9
<PAGE>
PROFESSIONAL MEDICAL MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
retroactive adjustments. Provisions for estimated third-party payor settlements
and adjustments are estimated in the period the related services are rendered
and adjusted in future periods as final settlements are determined. During 1995
and 1996, the Company estimates that approximately 60% and 40%, respectively, of
net revenue was received under government-sponsored healthcare programs
(principally, the Medicare and Medicaid programs). The Company has numerous
agreements with managed care organizations to provide physician services based
on negotiated fee schedules. No individual managed care organization is material
to the Company.
Net Loss Per Share
In September 1995, the Company's Board of Directors declared a two-for-one split
of the Company's Common Stock including the Class B Common Stock. All share and
per share amounts have been restated to reflect the stock split. Net loss per
share is computed by dividing net loss by the number of common and common
equivalent shares outstanding during the periods in accordance with the
applicable rules of the Securities and Exchange Commission ("SEC"). All Common
Stock and Common Stock options and warrants issued or contingently issuable in
the year prior to the Offering have been considered as outstanding Common Stock
equivalents for all periods presented under the treasury stock method, based on
an estimate of the initial public offering price, subject to the 20% buy back
limitation. Shares of Common Stock issuable upon conversion of the Redeemable
Convertible Preferred Stock and Redeemable Common Stock are assumed to be Common
Stock equivalent shares for all periods presented. Fully diluted net loss per
share is not materially different than primary net loss per share and is
therefore not presented.
Upon completion of the Offering, all outstanding Redeemable Convertible
Preferred Stock and Class B Common Stock will be exchanged for Common Stock and
the Company's contingent obligation to repurchase certain shares of Common Stock
will terminate (see Note 7). The unaudited pro forma balance sheet information
is presented as if such conversions had occurred as of June 30, 1996.
In addition, the Company has entered into an agreement to acquire a physician
group which is currently operated under an interim service agreement. The
closing of this acquisition will occur on February 16, 1997. The Company will
issue approximately 2,191,000 common shares as consideration related to the
acquisition, adjustable as defined by the purchase agreement. The unaudited pro
forma consolidated balance sheet is presented as if the acquisition and related
Common Stock issuance had occurred as of June 30, 1996.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of
three months or less when purchased to be cash equivalents.
F-10
<PAGE>
PROFESSIONAL MEDICAL MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Short-Term Investments
The Company has government-sponsored agency debt securities which are classified
as "held-to- maturity." These securities matured in February and May 1996.
Accounts Receivable
Accounts receivable principally represent receivables from patients for medical
services provided by physician groups. Such amounts are recorded net of
contractual allowances and estimated bad debts.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated using the straight-line method over the estimated useful
lives of the assets which range from three to ten years. Leasehold improvements
are amortized on a straight-line basis over the shorter of the lease term or
estimated useful life of the assets. Routine maintenance and repairs are charged
to expense as incurred, while major renewals or improvements are capitalized.
Intangible Assets
Intangible assets include (i) excess of cost over fair value of assets acquired
(goodwill), and (ii) assembled workforce. Goodwill is being amortized using the
straight-line method over 40 years, the non-cancelable term of the service
agreements not including options for future extensions. The service agreements
are cancelable only for cause. In the event a physician group breaches the
service agreement, or if the Company terminates with cause, the physician group
is required to purchase all related assets, including the unamortized portion of
any intangible assets, at their then net book value. The assembled workforce is
being amortized using the straight-line method over seven years, the workforce's
estimated working career.
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of." Under SFAS No. 121, goodwill is
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of the goodwill may not be recoverable. If this review
indicates that the carrying amount of the goodwill may not be recoverable, as
determined based on the undiscounted cash flows of the entity acquired over the
remaining amortization period, the carrying value of the goodwill is reduced to
fair value.
Payable to Affiliated Physician Groups
Amounts payable to affiliated physician groups primarily represent monthly
compensation to physicians which, based on the service agreements, are generally
payable to physicians by the 15th day following the end of each month.
F-11
<PAGE>
PROFESSIONAL MEDICAL MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred Purchase Price
Deferred purchase price represents cash consideration due to affiliated
physician groups payable in July 1996 through January 1997. Deferred purchase
price totaling $718,000 has been classified as long-term at June 30, 1996 as the
amount will be refinanced with borrowings under the Company's revolving credit
agreement.
Income Taxes
The Company and its subsidiaries file a consolidated tax return. The Company's
year-end for tax reporting purposes is June 30. The Company accounts for income
taxes under the liability method which states that deferred taxes are to be
determined based on the estimated future tax effects of differences between the
financial statement and tax bases of assets and liabilities given the provisions
of enacted tax laws. Deferred income tax provisions and benefits are based on
the changes to the asset or liability from period to period.
F-12
<PAGE>
PROFESSIONAL MEDICAL MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
New Accounting Pronouncement
In October 1995, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123, "Accounting for Stock-Based Compensation," which requires entities to
measure compensation costs related to awards of stock-based compensation using
either the fair value method or the intrinsic value method. Under the fair value
method, compensation expense is measured at the grant date based on the fair
value of the award. Under the intrinsic value method, compensation expense is
equal to the excess, if any, of the quoted market price of the stock at the
grant date over the amount the employee must pay to acquire the stock. Entities
electing to measure compensation costs using the intrinsic value method must
make pro forma disclosures for fiscal years beginning after January 1, 1996, of
net income and earnings per share as if the fair value method had been applied.
The Company has elected to account for stock-based compensation programs using
the intrinsic value method consistent with existing accounting policies and,
therefore, the standard will have no effect on the consolidated financial
statements.
Basis of Presentation--Interim Financial Statements
The interim financial statements for the six months ended June 30, 1995 have
been prepared by the Company, without audit, pursuant to the rules and
regulations of the SEC. Certain information and footnote disclosures normally
included in the financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to SEC
rules and regulations; nevertheless, management of the Company believes that the
disclosures herein as adequate to prevent the information presented from being
misleading. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the results of their
operations for the interim period from January 1, 1995 to June 30, 1995, have
been included herein.
3. ACQUISITIONS:
During the year ended December 31, 1995, the Company acquired, through its
wholly owned subsidiary, certain operating assets and assumed certain operating
liabilities of a physician group located in Texas. During the six months ended
June 30, 1996, the Company, through its wholly owned subsidiaries, acquired
certain operating assets and assumed certain operating liabilities of four
additional physician groups located in Alabama, Kentucky, and Texas. In
addition, the Company has entered into an agreement to acquire a group that is
currently operated under an interim service agreement. The closing of this
acquisition will occur on February 16, 1997. The Company's statements
F-13
<PAGE>
PROFESSIONAL MEDICAL MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of operations for the year ended December 31, 1995 and for the six months ended
June 30, 1996 reflect the revenues and expenses associated with this interim
service agreement.
Pursuant to the service agreements, the Company manages all aspects of the
affiliated groups other than the provision of medical services, which is
controlled by the physician groups. For providing services under the service
agreements, the physicians receive a fixed percentage of the operating income of
the group. Generally, the service agreements cannot be terminated by the
physician group or the Company without cause, which includes material default or
bankruptcy. Upon termination for cause or expiration of the service agreements,
the physician group is required to purchase all of the related clinic assets
owned by the Company (including intangible assets), at current book values.
The acquisitions have been accounted for by the purchase method of accounting
and, accordingly, the purchase price has been allocated to the assets acquired
and liabilities assumed based on the estimated fair values at the dates of
acquisition. The accounts receivable was valued at net collectible values based
upon analyses by the Company. The estimated fair values of assets acquired and
liabilities assumed during 1995 and 1996 are summarized as follows:
December 31, June 30,
1995 1996
Cash and cash equivalents...................... $ 2,360 $ 172,677
Accounts receivable, net....................... 90,222 1,073,477
Prepaid expenses and other current assets...... 15,649 320,102
Property and equipment......................... 66,529 673,425
Liabilities assumed............................ (74,097) (384,516)
Intangible assets.............................. 987,540 5,914,100
------------- -------------
1,088,203 7,769,265
Less- fair value of common stock issued
and to be issued.......................... 991,776 2,631,284
Less- notes and convertible subordinated
notes issued.............................. - 2,613,882
Less- deferred purchase price
(payable in cash)......................... - 982,408
------------- -------------
Cash purchase price........................... $ 96,427 $ 1,541,691
============= =============
The cash purchase price includes direct acquisition costs capitalized as part of
the acquisitions of $3,643 and $76,534 for 1995 and 1996, respectively.
For certain acquisitions occurring close to or at the end of the period, the
estimated fair values are preliminary, and therefore are subject to change.
Under the purchase agreements, the purchase price is adjustable by the Company
for a period between 60 to 120 days after the closing of the transaction in
order to finalize the fair values of the assets acquired and liabilities
assumed.
F-14
<PAGE>
PROFESSIONAL MEDICAL MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In connection with the acquisition of a physician group, the Company is
contingently obligated to pay additional consideration, depending on the
achievement of certain financial results, as defined by the purchase agreement.
The Company is contingently obligated until the earlier of the Offering or June
1997. Such liability, if any, will be recorded in the period in which the
outcome of the contingency becomes known. Any payment made will be accounted for
as additional purchase price and will not be immediately charged to expense.
Based on the operations of the physician group to date, the Company does not
believe any obligation arising from the arrangement will have a material effect
on the Company's financial position or results of operations.
The following unaudited pro forma information reflects the effect of
acquisitions on the consolidated results of operations of the Company had the
acquisitions occurred at January 1, 1995. Future results may differ
substantially from pro forma results and cannot be considered indicative of
future results.
Year Ended Six Months
December 31, Ended
1995 June 30, 1996
---------------- ---------------
(Unaudited) (Unaudited)
Net revenue................................ $ 32,890,349 $ 18,209,594
================ ===============
Net income (loss).......................... (135,451) 128,217
================ ===============
Net income (loss) per share................ $ (0.02) $ 0.02
================ ===============
4. PROPERTY AND EQUIPMENT:
Property and equipment at December 31, 1994 and 1995, and June 30, 1996, is
summarized as follows:
December 31, June 30,
1994 1995 1996
Furniture, fixtures, and
equipment................. $ 32,604 $ 108,942 $ 723,696
Leasehold improvements........ - 10,000 212,330
Less- accumulated
depreciation and
amortization.............. (1,049) (22,907) (48,124)
-------------- ------------- -------------
Property and equipment, net... $ 31,555 $ 96,035 $ 887,902
============== ============= =============
5. INTANGIBLE ASSETS:
Identifiable and unidentifiable intangible assets at December 31, 1995, and June
30, 1996, are summarized as follows:
F-15
<PAGE>
PROFESSIONAL MEDICAL MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, June 30,
1995 1996
Excess of cost over fair value of net
assets acquired............................ $ 918,540 $ 6,337,640
Assembled workforce........................... 69,000 564,000
Less- accumulated amortization................ (11,515) (67,846)
------------- -------------
Intangible assets, net........................ $ 976,025 $ 6,833,794
============= =============
F-16
<PAGE>
PROFESSIONAL MEDICAL MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. NOTES PAYABLE AND OTHER LONG-TERM DEBT:
Notes Payable
<TABLE>
<CAPTION>
December 31, June 30,
1994 1995 1996
<S> <C> <C> <C>
Notes payable issued to stockholders......................... $ - $ 261,604 $ -
============== ============= =============
Note payable issued to physician groups...................... $ - $ - $ 823,093
Other notes payable.......................................... 3,075 68,327 52,208
-------------- ------------- -------------
3,075 68,327 875,301
Less- current portion........................................ (1,025) (66,898) (420,132)
-------------- ------------- -------------
Notes payable, net........................................... $ 2,050 $ 1,429 $ 455,169
============== ============= =============
</TABLE>
The maturities of notes payable at June 30, 1996, are as follows:
Remaining in 1996............................................ $ 4,720
1997 ....................................................... 428,990
1998 ....................................................... 413,985
1999 ....................................................... 10,370
2000 ....................................................... 11,260
2001 ....................................................... 5,976
Thereafter................................................... -
--------------
$ 875,301
In connection with the issuance of notes payable to stockholders and one other
party in 1995, the Company issued 150,000 warrants to purchase common stock at
$2.50 per share. On June 30, 1996, the warrants were exercised in exchange for
forgiveness of the notes payable.
The interest rates on the notes payable ranges from 7.0% to 8.25% and mature
from 1998 to 2001.
F-17
<PAGE>
PROFESSIONAL MEDICAL MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Convertible Subordinated Notes Payable
On March 29, 1996, in connection with the purchase of two physician groups, the
Company issued $1,800,274 in convertible subordinated notes. The notes bear
interest at 7.0% and mature in March 2003. The notes may, at the election of the
noteholders, be converted into shares of Common Stock at a conversion price of
$9.00 per share, subject to certain limitations as defined in the note
agreement. In addition, upon the effective date of the Offering, 20% of the
notes will, at the option of the holder, convert into shares of Common Stock.
F-18
<PAGE>
PROFESSIONAL MEDICAL MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revolving Credit Agreement
Effective July 15, 1996, the Company entered into a revolving credit agreement
(the " Credit Facility"). The Credit Facility provides for a three-year
commitment to fund revolving credit borrowings of up to $25.0 million for
acquisitions and general working capital purposes. Under the terms of the Credit
Facility, the Company paid a commitment fee of approximately $500,000 which will
be capitalized and amortized as an adjustment to interest expense using the
effective interest method. In addition, the Company granted options exercisable
for 62,500 shares of Common Stock at exercise prices ranging from $8.00 to
$10.00 per share. The interest rate under the Credit Facility will be set at the
Company's option as follows: (i) 30-day commercial paper rate of an issuer whose
corporate bonds are rated "AA," plus 3.25%; (ii) reserve adjusted LIBOR, as
defined, plus 3.25%; or (iii) prime rate plus .5%. The Credit Facility includes
certain restrictive covenants including limitations on the payment of dividends
as well as the maintenance of certain financial ratios. The Credit Facility is
secured by substantially all the assets of the Company.
7. REDEEMABLE CONVERTIBLE PREFERRED STOCK,
COMMON STOCK, AND STOCKHOLDERS' EQUITY:
The Company has authorized the issuance of 23,300,000 shares of no par value
stock, of which 700,000 shares are designated Redeemable Convertible Preferred
Stock ("Preferred Stock"), 2,600,000 shares are designated Class B Common Stock,
and 20,000,000 shares are designated Common Stock. The Preferred Stock, Class B
Common Stock, and Common Stock have voting rights equal to one vote per share.
Redeemable Convertible Preferred Stock
The Company has issued and outstanding 500,000 shares, and warrants to purchase
an additional 200,000 shares, of Preferred Stock as of June 30, 1996. The
warrants are exercisable at an amount per share equal to the lesser of $6.00 or
one-half the price per share issued in the Offering. The warrants expire on the
earlier of December 6, 2000, or the Offering. Shares of Preferred Stock may, at
the option of the holder, be converted at any time into Common Stock, on a
one-for-one basis as adjusted for certain events. All outstanding shares of
Preferred Stock will be automatically converted into Common Stock upon an
offering of Common Stock equal to or exceeding $12 per share. In absence of an
Offering, the Preferred Stock is subject to mandatory redemption by the Company
at $6.00 per share in equal amounts on December 6, 2000, and December 6, 2001.
Redeemable Common Stock
In connection with an acquisition in 1995, the Company issued 165,296 shares of
Common Stock for $991,776. The stockholders have the right to require the
Company to repurchase the shares for cash, if the Company does not complete a
public offering by June 30, 2000.
F-19
<PAGE>
PROFESSIONAL MEDICAL MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Class B Common Stock
During 1994, the Company issued 613,075 Class B units, each consisting of two
shares of Class B Common Stock and a warrant to purchase 1.5756 shares of Class
B Common Stock at an exercise price of $1.25 per share. The warrants are
exercisable on or before June 30, 2004. The Company also granted an option to
purchase 77,500 Class B units at an exercise price of $0.50 per unit. The
options are fully vested and may be exercised until September 30, 2004. As of
June 30, 1996, no warrants or options have been exercised. The Class B Common
Stock has a liquidation preference, subordinate to the Preferred Stock, at an
amount equal to $1.00 per share. Each share of Class B Common Stock may, at the
option of the holder, be converted at any time into Common Stock on a
one-for-one basis and will automatically convert to Common Stock at the
Offering.
Common Stock
During 1994, the Company issued 907,000 Common Stock units, each consisting of
two shares of Common Stock and a warrant to purchase 1.5756 shares of Common
Stock at an exercise price of $1.25 per share. The warrants are exercisable on
or before June 30, 2003. As of June 30, 1996, no warrants have been exercised.
Common Stock To Be Issued
In connection with an acquisition in May 1996, common shares valued at
$2,011,760 will be issued in early 1997.
1994 Stock Option Plan
On July 1, 1994, the Company's Board of Directors approved a Stock Option Plan
(the "Plan") under which options to purchase 1,500,000 shares of the Company's
Common Stock may be granted to key employees and other non-employees, as defined
by the Plan. Options granted under the Plan may be either incentive stock
options ("ISO") or non-qualified stock options ("NQSO"). The option price per
share shall not be less than the fair market value of the Company's Common Stock
at the date of grant. Generally, options vest over a five-year period. As of
June 30, 1996, options to purchase 161,300 shares remain available for grant
under the Plan.
The following table summarizes the activity in the plan:
Outstanding Price Per Share
July 1, 1994 (inception)............... - -
Granted.............................. 80,000 $0.50 - $2.50
Exercised............................ - -
Canceled............................. - -
-------------
F-20
<PAGE>
PROFESSIONAL MEDICAL MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1994...................... 80,000 $0.50 - $2.50
Granted.............................. 546,200 $0.50 - $6.00
Exercised............................ - -
Canceled............................. (121,000) $3.00 - $6.00
-------------
December 31, 1995...................... 505,200 $0.50 - $6.00
Granted.............................. 712,500 $6.00 - $14.00
Exercised............................ (23,200) $0.50 - $6.00
Canceled............................. (33,400) $0.50 - $6.00
-------------
June 30, 1996.......................... 1,161,100 $0.50 - $14.00
=============
Stock options available for exercise under the Plan as of December 31, 1994 and
1995, and June 30, 1996, totaled 0, 8,000, and 134,033, respectively. Upon
completion of the Offering, the vesting period accelerates for options to
purchase approximately 31,000 shares.
8. INCOME TAXES:
At June 30, 1996, the Company had a cumulative net operating loss carryforward
for income tax purposes of approximately $1.2 million available to reduce future
amounts of taxable income. If not utilized to offset future taxable income, the
net operating loss carryforwards will begin to expire in 2010.
The net deferred tax assets generated during 1994, 1995, and 1996, respectively,
have been offset by provisions of equal amounts to establish a valuation
allowance. The valuation allowance will be maintained until it is more likely
than not that some portion or all of the deferred tax assets will be realized.
F-21
<PAGE>
PROFESSIONAL MEDICAL MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred income taxes reflect the net operating loss carry forward of the
Company and the net tax effects of temporary differences between the amounts of
assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes. Significant components of the Company's net deferred tax
assets are as follows:
December 31, June 30,
1994 1995 1996
Deferred tax assets:
Net operating losses........ $ 61,160 $ 295,472 $ 414,875
Other...................... - 1,429 -
-------------- ------------- -------------
Net deferred tax assets....... 61,160 296,901 414,875
Valuation allowance........... (61,160) (296,901) (414,875)
-------------- ------------- -------------
$ - $ - $ -
============== ============= =============
The differences between the provision (benefit) for income taxes and the amount
computed by applying the statutory Federal income tax rate to loss before income
taxes were as follows:
<TABLE>
<CAPTION>
Period Ended Year Ended Six Months Ended
December 31, December 31, June 30,
1994 1995 1995 1996
------------- -------------- ------------- -------------
(unaudited)
<S> <C> <C> <C> <C>
Federal tax at statutory rate.................... $ (57,763) $ (237,096) $ (118,665) $ (133,727)
State income tax, net of federal tax
effect...................................... (3,397) (13,947) (6,980) (7,866)
Increase in valuation allowance.................. 61,160 235,741 117,980 117,974
Other ........................................ - 15,302 7,665 23,619
------------- -------------- ------------- -------------
$ - $ - $ - $ -
============= ============== ============= =============
</TABLE>
9. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS:
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," requires
disclosure about the fair value of financial instruments for which it is
practicable to estimate fair value. The carrying amounts of financial
instruments included in current assets and current liabilities approximate fair
values because of the short maturity of those instruments. The fair values of
the Company's notes payable and convertible subordinated notes payable are based
on similar issues or on the current rates available to the Company for debt with
similar terms. The carrying values and estimated fair values of the Company's
outstanding debt were estimated to be the same as of December 31, 1995 and June
30, 1996.
F-22
<PAGE>
PROFESSIONAL MEDICAL MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. COMMITMENTS AND CONTINGENCIES:
Leases
Operating leases generally consist of short-term leases for the office space
where the physician groups are located. Lease expense of $1,588, $122,594, and
$679,981 for the period and year ended December 31, 1994 and 1995, and for the
six months ended June 30, 1996, respectively, reflect lease commitments for
medical practice office space, medical practice equipment, corporate office
space, and corporate equipment.
The following is a schedule of future minimum lease payments under noncancelable
operating leases as of December 31, 1995.
1996 ........................................ $ 514,173
1997 ........................................ 615,292
1998 ........................................ 559,205
1999 ........................................ 511,971
2000 ........................................ 497,231
Thereafter.................................... 754,090
--------------
$ 3,451,962
Litigation
The Company is subject to various claims and legal actions which arise in the
ordinary course of business. In the opinion of management, the ultimate
resolution of such matters will not have a material adverse effect on the
Company's financial position or results of operations.
Insurance
The Company and its affiliated physician groups are insured with respect to
medical malpractice risks on a claims made basis. Management is not aware of any
claims against it or its affiliated physician groups which might have a material
impact on the Company's financial position or results of operations.
11. SUBSEQUENT EVENTS:
In August 1996, the Board of Directors authorized the reincorporation of the
Company in the State of Delaware, including an increase in the authorized shares
of Common Stock to 50,000,000 shares, and the change of the Company's name from
ProMedCo, Inc. to Professional Medical Management Company.
All presentations have been adjusted to reflect these changes.
Also subsequent to June 30, 1996, the Board of Directors authorized the Company
to reserve an aggregate 2,600,000 shares of Common Stock under the Company's
Director Stock Option Plan, 1996
F-23
<PAGE>
Employee Stock Option Plan, 1996 Employee Stock Purchase Plan and 1996 Physician
Stock Option Plan.
F-24
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
North Texas Medical Surgical, P.A.:
We have audited the accompanying balance sheets of North Texas Medical Surgical,
P.A. (a Texas professional association) as of December 31, 1994, and June 30,
1995, and the related statements of operations, stockholders' equity, and cash
flows for the years ended December 31, 1993 and 1994, and for the six months
ended June 30, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of North Texas Medical Surgical,
P.A. as of December 31, 1994, and June 30, 1995, and the results of its
operations and its cash flows for the years ended December 31, 1993 and 1994,
and for the six months ended June 30, 1995, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Fort Worth, Texas,
July 22, 1996
F-25
<PAGE>
NORTH TEXAS MEDICAL SURGICAL, P.A.
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS December 31, June 30,
1994 1995
<S> <C> <C>
CURRENT ASSETS:
Cash ....................................................................... $ 17,096 $ 2,563
Accounts receivable, net of allowances of $55,000 in
1994 and 1995.............................................................. 192,664 185,891
Prepaid expenses and other current assets.................................... - 6,000
------------- -------------
Total current assets................................................... 209,760 194,454
PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization of $118,043 and
$125,211, respectively....................................................... 79,826 72,658
------------- -------------
Total assets........................................................... $ 289,586 $ 267,112
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................................. $ 23,693 $ 6,218
Accrued salaries and benefits................................................ 22,400 22,400
Note payable................................................................. 54,652 29,782
------------- -------------
Total current liabilities.............................................. 100,745 58,400
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $100 par value; 500 shares authorized, 8 shares
issued and outstanding..................................................... 800 800
Retained income.............................................................. 188,041 207,912
------------- -------------
Total stockholders' equity............................................. 188,841 208,712
------------- -------------
Total liabilities and stockholders' equity............................. $ 289,586 $ 267,112
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE>
NORTH TEXAS MEDICAL SURGICAL, P.A.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended Six Months Ended
December 31, June 30,
1993 1994 1995
------------- ------------- -------------
<S> <C> <C> <C>
NET REVENUE..................................................... $ 2,417,428 $ 2,275,585 $ 1,091,147
COSTS AND EXPENSES:
Cost of affiliated physician services........................ 1,042,575 1,062,748 434,244
Clinic salaries and benefits................................. 592,336 612,736 315,211
Clinic rent and lease expenses............................... 109,921 109,637 56,587
Clinic pharmaceuticals and supplies.......................... 108,003 83,269 38,921
Other clinic costs........................................... 557,406 422,184 219,145
Depreciation and amortization................................ 21,441 33,868 7,168
Interest expense............................................. 1,961 64 -
-------------- ------------- -------------
Total costs and expenses................................. 2,433,643 2,324,506 1,071,276
-------------- ------------- -------------
NET INCOME (LOSS)............................................... $ (16,215) $ (48,921) $ 19,871
============== ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE>
NORTH TEXAS MEDICAL SURGICAL, P.A.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Retained
Shares Amount Earnings Total
<S> <C> <C> <C> <C>
BALANCE, December 31, 1992....................... 8 $ 800 $ 253,177 $ 253,977
Net loss...................................... - - (16,215) (16,215)
------------- -------------- ------------- -------------
BALANCE, December 31, 1993....................... 8 800 236,962 237,762
Net loss...................................... - - (48,921) (48,921)
------------- -------------- ------------- -------------
BALANCE, December 31, 1994....................... 8 800 188,041 188,841
Net income.................................... - - 19,871 19,871
------------- -------------- ------------- -------------
BALANCE, June 30, 1995........................... 8 $ 800 $ 207,912 $ 208,712
============= ============== ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE>
NORTH TEXAS MEDICAL SURGICAL, P.A.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended Six Months
December 31, Ended June 30
1993 1994 1995
----------- ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................... $ (16,215) $ (48,921) $ 19,871
Adjustments to reconcile net income (loss) to net cash
provided by operating activities-
Depreciation and amortization................................... 21,441 33,868 7,168
Changes in assets and liabilities-
Accounts receivable........................................... 24,439 92,545 6,773
Other current assets.......................................... 4,938 - (6,000)
Accounts payable.............................................. 6,069 (4,515) (17,475)
----------- ----------- -----------
Net cash provided by operating activities................... 40,672 72,977 10,337
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment................................. - (21,174) -
Proceeds from sale of property and equipment........................ 1,522 - -
----------- ----------- -----------
Net cash provided by (used in) investing
activities.............................................. 1,522 (21,174) -
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable.......................................... 21,969 - -
Payments on note payable............................................ (59,564) (64,118) (24,870)
----------- ----------- -----------
Net cash used in financing activities....................... (37,595) (64,118) (24,870)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH........................................ 4,599 (12,315) (14,533)
CASH, beginning of the year............................................ 24,812 29,411 17,096
----------- ----------- -----------
CASH, end of the year.................................................. $ 29,411 $ 17,096 $ 2,563
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the year-
Interest.......................................................... $ 1,961 $ 64 $ -
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE>
NORTH TEXAS MEDICAL SURGICAL, P.A.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND JUNE 30, 1995
1. DESCRIPTION OF BUSINESS:
North Texas Medical Surgical, P.A. (the "Company") is a Texas professional
association owned by eight physicians which practice in the Denton, Texas area.
The Company was purchased by ProMedCo of Denton, Inc. effective June 30, 1995
(see Note 8).
2. SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The accompanying financial statements have been prepared on the accrual basis of
accounting.
Revenue Recognition
Revenue is recorded at estimated net amounts to be received from third-party
payers and others for services rendered.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation and
amortization. Property and equipment is depreciated using the straight-line
method over the following useful lives:
Years
Furniture and fixtures........................... 7
Equipment........................................ 5
Leasehold improvements........................... Estimated life of lease
Income Taxes
The Company has historically not incurred significant tax liabilities for
federal or state income taxes. Compensation to physician owners has
traditionally reduced taxable income to nominal levels. This relationship would
be expected to continue in the future. Because of this practice, provisions for
income taxes and deferred tax assets and liabilities are not material and have
not been reflected in the financial statements.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the
F-30
<PAGE>
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
December 31, June 30,
1994 1995
Furniture, fixtures, and equipment.............. $ 134,310 $ 134,310
Leasehold improvements.......................... 63,559 63,559
Less- Accumulated depreciation
and amortization............................. (118,043) (125,211)
----------- -----------
Property and equipment, net..................... $ 79,826 $ 72,658
=========== ===========
4. NOTE PAYABLE:
At December 31, 1994 and June 30, 1995, the Company had a note payable for
$54,652 and $29,782, respectively. This note is payable in monthly installments
of $4,964 and was paid in its entirety in December 1995.
5. COMMITMENTS AND CONTINGENCIES:
The Company has operating leases for administrative equipment and facilities
expiring at various dates through April 1997. Rent expense totaled $109,921, and
$109,637 for the years ended December 31, 1993 and 1994, respectively, and
$56,587 for the six months ended June 30, 1995.
Future lease commitments under the operating leases are as follows:
1996....................................................... $ 29,855
1997....................................................... 1,509
6. RELATED-PARTY TRANSACTIONS:
The Company currently leases its facilities from First Texas Medical, Inc., an
affiliated company which shares certain common ownership with the Company.
7. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS:
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," requires
disclosure about the fair value of financial instruments. Carrying amounts for
all financial instruments approximate fair value as of June 30, 1995.
F-31
<PAGE>
8. SUBSEQUENT EVENT:
Effective June 30, 1995, the Company was acquired by ProMedCo of Denton, Inc., a
wholly owned subsidiary of Professional Medical Management Company, in an asset
purchase transaction whereby ProMedCo of Denton, Inc. agreed to acquire
substantially all the operations and certain assets and certain liabilities of
the Company.
F-32
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Cullman Family Practice, P.C.:
We have audited the accompanying balance sheets of Cullman Family Practice, P.C.
(an Alabama professional corporation) as of December 31, 1994 and 1995, and the
related statements of operations, stockholders' equity, and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cullman Family Practice, P.C.
as of December 31, 1994 and 1995, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Fort Worth, Texas,
July 20, 1996
F-33
<PAGE>
CULLMAN FAMILY PRACTICE, P.C.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
ASSETS 1994 1995
------ ----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash ......................................................................... $ 3,832 $ 5,585
Accounts receivable, net of allowances of $113,970 and $72,521,
respectively................................................................... 157,392 100,165
Prepaid expenses and other current assets........................................ 16,790 30,464
----------- -----------
Total current assets....................................................... 178,014 136,214
PROPERTY AND EQUIPMENT, net of accumulated depreciation
and amortization of $58,243 and $66,197, respectively............................ 6,053 4,145
----------- -----------
Total assets............................................................... $ 184,067 $ 140,359
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................. $ 8,003 $ 11,951
Accrued expenses and other current liabilities................................... 20,274 20,497
----------- -----------
Total current liabilities.................................................. 28,277 32,448
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $1 par value; 10,000 shares authorized, 2,500 shares
issued and outstanding......................................................... 2,500 2,500
Additional paid-in capital....................................................... 5,692 5,692
Retained income.................................................................. 147,598 99,719
----------- -----------
Total stockholders' equity................................................. 155,790 107,911
----------- -----------
Total liabilities and stockholders' equity................................. $ 184,067 $ 140,359
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE>
CULLMAN FAMILY PRACTICE, P.C.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period From Period From
January 1, January 1,
1995 1996
Years Ended to to
December 31, February 28, March 6,
1994 1995 1995 1996
------------- -------------- ------------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
NET REVENUE...................................... $ 1,872,444 $ 2,199,025 $ 372,019 $ 364,266
COSTS AND EXPENSES:
Cost of affiliated physician services......... 709,496 966,557 110,210 117,860
Clinic salaries and benefits.................. 565,416 642,975 79,586 83,698
Clinic rent and lease expenses................ 195,912 249,385 43,344 32,407
Clinic pharmaceuticals and supplies........... 132,102 132,812 15,079 19,093
Other clinic costs............................ 277,697 251,575 46,308 53,652
Depreciation and amortization................. 4,200 3,600 600 643
Interest expense.............................. 259 - - -
------------- -------------- ------------- -------------
Total costs and expenses.................. 1,885,082 2,246,904 295,127 307,353
------------- -------------- ------------- -------------
NET INCOME (LOSS)................................ $ (12,638) $ (47,879) $ 76,892 $ 56,913
============= ============== ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE>
CULLMAN FAMILY PRACTICE, P.C.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional
Common Stock Paid-In Retained
Shares Amount Capital Earnings Total
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993.................. 2,500 $ 2,500 $ 5,692 $ 160,236 $ 168,428
Net loss................................. - - - (12,638) (12,638)
----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1994.................. 2,500 2,500 5,692 147,598 155,790
Net loss................................. - - - (47,879) (47,879)
----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1995.................. 2,500 $ 2,500 $ 5,692 $ 99,719 $ 107,911
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE>
CULLMAN FAMILY PRACTICE, P.C.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended
December 31,
1994 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss..................................................................... $ (12,638) $ (47,879)
Adjustments to reconcile net loss to net cash
provided by operating activities-
Depreciation and amortization............................................ 4,200 3,600
Changes in assets and liabilities-
Accounts receivable.................................................... 32,977 57,227
Other current assets................................................... (543) (13,674)
Accounts payable....................................................... 8,003 3,948
Accrued expenses and other current liabilities......................... 5,690 223
------------- -------------
Net cash provided by operating activities............................ 37,689 3,445
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.......................................... (383) (1,692)
------------- -------------
Net cash used in investing activities................................ (383) (1,692)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt................................................... (40,000) -
------------- -------------
Net cash used in financing activities................................ (40,000) -
------------- -------------
NET INCREASE (DECREASE) IN CASH................................................. (2,694) 1,753
CASH, beginning of year......................................................... 6,526 3,832
------------- -------------
CASH, end of year............................................................... $ 3,832 $ 5,585
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE>
CULLMAN FAMILY PRACTICE, P.C.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995
1. DESCRIPTION OF BUSINESS:
Cullman Family Practice, P.C. (the "Company") is an Alabama professional
corporation owned by five physicians which practice in the Cullman, Alabama
area. The Company was purchased by ProMedCo of Cullman, Inc. effective March 12,
1996 (see Note 8).
2. SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation - Audited Financial Statements
The accompanying financial statements have been prepared on the accrual basis of
accounting.
Basis of Presentation - Interim Financial Statements
The interim financial statements have been prepared by the Company without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC). Certain information and footnote disclosures normally included
in the financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to SEC rules and
regulations; nevertheless, management of the Company believes that the
disclosures herein are adequate to prevent the information presented from being
misleading. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the financial position
of the Company with respect to the results of its operations for the interim
periods from January 1, 1995 to February 28, 1995, and from January 1, 1996 to
March 6, 1996, have been included herein. The results of operations for the
interim periods are not necessarily indicative of the results for the full year.
Revenue Recognition
Revenue is recorded at estimated net amounts to be received from third-party
payers and others for services rendered.
F-38
<PAGE>
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation and
amortization. Property and equipment is depreciated using the straight-line
method over the following useful lives:
Years
Furniture and fixtures..................... 7
Equipment.................................. 5
Leasehold improvements..................... Estimated life of lease
Income Taxes
The Company has historically not incurred significant tax liabilities for
federal or state income taxes. Compensation to physician owners has
traditionally reduced taxable income to nominal levels. This relationship would
be expected to continue in the future. Because of this practice, provisions for
income taxes and deferred tax assets and liabilities are not material and have
not been reflected in the financial statements.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
December 31,
1994 1995
Furniture and fixtures...................... $ 26,961 $ 28,652
Equipment................................... 30,695 35,050
Leasehold improvements...................... 6,640 6,640
Less accumulated depreciation
and amortization..................... (58,243) (66,197)
------------- -------------
Property and equipment, net................. $ 6,053 $ 4,145
============= =============
4. COMMITMENTS AND CONTINGENCIES:
The Company leases a building and equipment under operating leases which expire
in 1999. Rent expense totaled $195,912 and $249,385 for the years ended December
31, 1994 and 1995, respectively.
F-39
<PAGE>
Future minimum lease commitments under operating leases are as follows:
1996.................................... $ 140,400
1997.................................... 140,400
1998.................................... 140,400
1999.................................... 105,300
5. RELATED-PARTY TRANSACTIONS:
The Company currently leases its building and equipment from MMB Partnership, an
entity owned by the Company's stockholders. The building lease expires in 1999
and the equipment lease is cancelable on the yearly anniversary of the lease by
either party given 60 days notice. Amounts paid under the building lease were
approximately $103,000 and $138,000 in 1994 and 1995, respectively. Amounts paid
under the equipment lease were approximately $91,000 and $111,000 in 1994 and
1995, respectively.
6. BENEFIT PLAN:
The Company maintains a defined contribution plan for those employees who meet
the minimum length of service and age requirements. The Company contributed
$17,563 and $22,368 in 1994 and 1995, respectively.
7. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS:
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," requires
disclosure about the fair value of financial instruments. Carrying amounts for
all financial instruments approximate fair value as of December 31, 1995.
8. SUBSEQUENT EVENT:
Effective March 12, 1996, the Company was acquired by ProMedCo of Cullman, Inc.,
a wholly owned subsidiary of Professional Medical Management Company, in a stock
purchase transaction whereby ProMedCo of Cullman, Inc. agreed to acquire
substantially all the operations and certain assets and certain liabilities of
the Company, excluding, among other things, requirements under the Company's
benefit plan.
F-40
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Family Medical Clinic, P.C.:
We have audited the accompanying balance sheets of Family Medical Clinic, P.C.
(an Alabama professional corporation) as of December 31, 1994 and 1995, and the
related statements of operations, stockholders' equity, and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Family Medical Clinic, P.C. as
of December 31, 1994 and 1995, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Fort Worth, Texas,
July 20, 1996
F-41
<PAGE>
FAMILY MEDICAL CLINIC, P.C.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
ASSETS 1994 1995
------ ------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash ....................................................................... $ 37,220 $ 72,873
Accounts receivable, net of allowances of $127,409 and $150,904,
respectively............................................................... 130,302 145,397
------------- -------------
Total current assets..................................................... 167,522 218,270
PROPERTY AND EQUIPMENT, net of accumulated depreciation
of $87,731 and $114,582, respectively........................................ 63,538 94,576
------------- -------------
Total assets............................................................. $ 231,060 $ 312,846
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................................. $ 2,630 $ 2,942
Current maturities of notes payable.......................................... 40,751 39,886
Accrued expenses and other current liabilities............................... 41,646 44,793
------------- -------------
Total current liabilities................................................ 85,027 87,621
NOTES PAYABLE, net of current maturities........................................ 29,017 99,974
------------- -------------
Total liabilities........................................................ 114,044 187,595
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $10 par value; 200 shares authorized, 150 shares
issued and outstanding..................................................... 1,500 1,500
Additional paid-in capital................................................... 5,300 5,300
Retained income.............................................................. 110,216 118,451
------------- -------------
Total stockholders' equity............................................... 117,016 125,251
------------- -------------
Total liabilities and stockholders' equity............................... $ 231,060 $ 312,846
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-42
<PAGE>
FAMILY MEDICAL CLINIC, P.C.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period From Period From
January 1, January 1,
1995 1996
Years Ended to to
December 31, February 28, March 6,
1994 1995 1995 1996
------------- -------------- ------------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
NET REVENUE...................................... $ 1,951,683 $ 2,113,442 $ 330,603 $ 394,259
------------- -------------- ------------- -------------
COSTS AND EXPENSES:
Cost of affiliated physician services......... 1,211,088 1,218,585 137,414 169,808
Clinic salaries and benefits.................. 315,974 369,304 51,797 64,657
Clinic rent and lease expenses................ 18,704 87,356 2,372 8,403
Clinic pharmaceuticals and supplies........... 101,930 108,380 15,014 15,772
Other clinic costs............................ 283,050 264,646 46,886 65,845
Depreciation.................................. 18,306 41,295 4,614 4,734
Interest expense.............................. 1,544 14,891 - 385
------------- -------------- ------------- -------------
Total costs and expenses.................... 1,950,596 2,104,457 258,097 329,604
------------- -------------- ------------- -------------
NET INCOME....................................... $ 1,087 $ 8,985 $ 72,506 $ 64,655
============= ============== ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-43
<PAGE>
FAMILY MEDICAL CLINIC, P.C.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994
AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
Common Stock Additional Retained
Shares Amount Paid-In Capital Earnings Total
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993 150 $1,500 $5,300 $109,879 $116,679
Net income - - - 1,087 1,087
Dividends - - - (750) (750)
------ --------- --------- ------------ ------------
BALANCE, December 31, 1994 150 1,500 5,300 110,216 117,016
Net income - - - 8,985 8,985
Dividends - - - (750) (750)
------ --------- --------- ------------ ------------
BALANCE, December 31, 1995 150 $1,500 $5,300 $118,451 $125,251
=== ====== ====== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-44
<PAGE>
FAMILY MEDICAL CLINIC, P.C.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended
December 31,
1994 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................... $ 1,087 $ 8,985
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation............................................................. 18,306 41,295
Changes in assets and liabilities-
Accounts receivable...................................................... (9,740) (15,095)
Other current assets..................................................... 1,333 -
Accounts payable......................................................... (1,966) 312
Accrued expenses and other current liabilities........................... 4,870 3,147
------------- -------------
Net cash provided by operating activities............................ 13,890 38,644
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.......................................... (7,690) (72,333)
------------- -------------
Net cash used in investing activities................................ (7,690) (72,333)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable.................................................. 34,511 107,324
Payments on notes payable.................................................... (40,769) (37,232)
Payment of dividends......................................................... (750) (750)
------------- -------------
Net cash provided by (used in) financing activities...................... (7,008) 69,342
------------- -------------
NET INCREASE (DECREASE) IN CASH................................................. (808) 35,653
CASH, beginning of year......................................................... 38,028 37,220
------------- -------------
CASH, end of year............................................................... $ 37,220 $ 72,873
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the year-
Interest .................................................................. $ 1,544 $ 14,891
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-45
<PAGE>
FAMILY MEDICAL CLINIC, P.C.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995
1. DESCRIPTION OF BUSINESS:
Family Medical Clinic, P.C. (the "Company") is an Alabama professional
corporation owned by three physicians which practice in Cullman, Alabama. The
Company was purchased by ProMedCo of Cullman, Inc. effective March 12, 1996 (see
Note 9).
2. SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation - Audited Financial Statements
The accompanying financial statements have been prepared on the accrual basis of
accounting.
Basis of Presentation - Interim Financial Statements
The interim financial statements have been prepared by the Company without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC). Certain information and footnote disclosures normally included
in the financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to SEC rules and
regulations; nevertheless, management of the Company believes that the
disclosures herein are adequate to prevent the information presented from being
misleading. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the financial position
of the Company with respect to the results of its operations for the interim
periods from January 1, 1995 to February 28, 1995, and from January 1, 1996 to
March 6, 1996, have been included herein. The results of operations for the
interim periods are not necessarily indicative of the results for the full year.
Revenue Recognition
Revenue is recorded at estimated net amounts to be received from third-party
payers and others for services rendered.
F-46
<PAGE>
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation.
Property and equipment is depreciated using the straight-line method over the
following useful lives:
Years
Furniture and fixtures............................................ 7
Equipment......................................................... 5
Income Taxes
The Company has historically not incurred significant tax liabilities for
federal or state income taxes. Compensation to physician owners has
traditionally reduced taxable income to nominal levels. This relationship would
be expected to continue in the future. Because of this practice, provisions for
income taxes and deferred tax assets and liabilities are not material and have
not been reflected in the financial statements.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
December 31,
1994 1995
Furniture and fixtures................. $ 92,816 $ 147,483
Equipment.............................. 58,453 61,675
Less- Accumulated depreciation......... (87,731) (114,582)
------------- -------------
Property and equipment, net............ $ 63,538 $ 94,576
============= =============
F-47
<PAGE>
4. NOTES PAYABLE:
Notes payable consisted of the following:
<TABLE>
<CAPTION>
December 31,
1994 1995
<S> <C> <C>
Line of credit with a bank, due August 2000, principal and interest payable
monthly, annual interest rate equal to the Bank's commercial base rate ranging
between 7.75%-9.75% and 5.9% for the years 1994 and 1995, respectively, secured
by all assets of the Company and guaranteed by its
stockholders.................................................................... $ 42,279 $ 113,609
Other notes payable due April 1997, principal and interest payable monthly,
annual interest rates of 7.75%
and 9.5%, secured by automobiles................................................ 27,489 26,251
------------- -------------
Total .................................................................. 69,768 139,860
Less current maturities.................................................. (40,751) (39,886)
------------- -------------
Notes payable, net....................................................... $ 29,017 $ 99,974
============= =============
</TABLE>
The maturities of notes payable at December 31, 1995, are as follows:
1996 .......................................... $ 39,886
1997 .......................................... 28,974
1998 .......................................... 24,347
1999 .......................................... 26,631
2000 .......................................... 20,022
-------------
$ 139,860
5. COMMITMENTS AND CONTINGENCIES:
The Company has entered into an operating lease for a building which expires in
2005. The future minimum lease commitments under the operating leases are as
follows:
1996...................................... $ 90,248
1997...................................... 92,954
1998...................................... 95,743
1999...................................... 98,616
2000...................................... 101,573
Thereafter................................ 565,297
Rent expense totaled $18,704 and $87,536 for the years ended December 31, 1994
and 1995, respectively.
F-48
<PAGE>
6. RELATED-PARTY TRANSACTIONS:
During 1994, the Company paid approximately $4,500 to Family Medical Clinic
Association, an entity owned by two of the Company's stockholders, for building
rental. In addition, the Company paid this same entity approximately $14,000 and
$4,000 for equipment in 1994 and 1995, respectively.
7. BENEFIT PLAN:
The Company maintains a defined contribution plan for employees who meet the
minimum length of service and age requirements. Under the plan, the Company
makes contributions of 11% of all plan participants' compensation, plus 5.7% of
each of the participant's excess compensation, as defined. The Company is
responsible for the administration of the plan as the plan administrator and
trustee. The Company's contributions totaled $113,648 and $113,700 in 1994 and
1995, respectively, including $90,000 contributed for a stockholder in 1994 and
1995.
8. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS:
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," requires
disclosure about the fair value of financial instruments. Carrying amounts for
all financial instruments approximate fair value as of December 31, 1995.
9. SUBSEQUENT EVENT:
Effective March 12, 1996, the Company was acquired by ProMedCo of Cullman, Inc.,
a wholly owned subsidiary of Professional Medical Management Company, in a stock
purchase transaction whereby ProMedCo of Cullman, Inc. agreed to acquire
substantially all the operations and certain assets and certain liabilities of
the Company, excluding, among other things, requirements under the Company's
benefit plan.
F-49
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Morgan-Haugh, P.S.C.:
We have audited the accompanying balance sheets of Morgan-Haugh, P.S.C. (a
Kentucky professional services corporation) as of December 31, 1994 and 1995,
and the related statements of operations, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Morgan-Haugh, P.S.C. as of
December 31, 1994 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Fort Worth, Texas,
July 16, 1996
F-50
<PAGE>
MORGAN-HAUGH, P.S.C.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
ASSETS 1994 1995
------ ------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................................ $ 113,132 $ 188,346
Accounts receivable, net of allowances of $407,000 and
$432,000, respectively.............................................. 582,597 584,636
Stockholder notes receivable............................................. 23,935 -
Prepaid expenses and other current assets................................ 29,002 8,423
------------- -------------
Total current assets................................................ 748,666 781,405
PROPERTY AND EQUIPMENT, net of accumulated depreciation
of $836,689 and $929,949, respectively................................... 1,158,393 1,072,726
OTHER ASSETS ........................................................... 50,261 42,529
------------- -------------
Total assets........................................................ $ 1,957,320 $ 1,896,660
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable......................................................... $ 70,041 $ 55,988
Notes payable............................................................ 203,032 130,049
Accrued expenses and other current liabilities........................... 290,018 345,555
Deferred income taxes.................................................... 83,891 116,909
------------- -------------
Total current liabilities........................................... 646,982 648,501
NOTES PAYABLE, net of current maturities..................................... 983,017 864,811
------------- -------------
Total liabilities................................................... 1,629,999 1,513,312
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, no par value, 4,000 shares authorized;
3,000 shares issued and 2,200 shares outstanding.................... 505,069 446,566
Treasury stock........................................................... (340,097) (271,186)
Stockholders notes receivable............................................ (174,472) (191,277)
Retained income.......................................................... 336,821 399,245
------------- -------------
Total stockholders' equity.......................................... 327,321 383,348
------------- -------------
Total liabilities and stockholders' equity.......................... $ 1,957,320 $ 1,896,660
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-51
<PAGE>
MORGAN-HAUGH, P.S.C.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period From Period From
January 1, January 1,
1995 1996
Years to to
Ended December 31, March 31, March 31,
1993 1994 1995 1995 1996
------------- ------------- ------------- ------------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
NET REVENUE:
Patient service revenue..... $ 4,879,771 $ 4,519,251 $ 4,403,055 $ 1,301,949 $ 1,091,091
Other revenue............... 167,541 146,713 48,373 36,822 36,049
------------- ------------- ------------- ------------- -------------
Total net revenue....... 5,047,312 4,665,964 4,451,428 1,338,771 1,127,140
------------- ------------- ------------- ------------- -------------
COSTS AND EXPENSES:
Cost of affiliated physician
services.................. 1,749,511 1,767,328 1,636,120 495,297 404,988
Clinic salaries and benefits 1,827,385 1,547,205 1,412,101 222,664 197,644
Rent expense................ 25,633 24,575 33,547 7,685 7,911
Clinic pharmaceuticals and
supplies.................. 385,466 376,986 304,183 47,298 45,777
Other clinic costs.......... 1,021,745 894,142 761,402 355,236 322,369
Depreciation................ 123,406 115,350 111,266 27,189 23,556
Interest expense............ 100,471 88,775 87,465 23,673 19,887
------------- ------------- ------------- ------------- -------------
Total costs and expenses 5,233,617 4,814,361 4,346,084 1,179,042 1,022,132
------------- ------------- ------------- ------------- -------------
INCOME (LOSS) BEFORE
PROVISION FOR
INCOME TAXES................ (186,305) (148,397) 105,344 159,729 105,008
PROVISION (CREDIT) FOR
INCOME TAXES................ (73,317) (59,617) 42,920 60,696 39,903
------------- ------------- ------------- ------------- -------------
NET INCOME (LOSS).............. $ (112,988) $ (88,780) $ 62,424 $ 99,033 $ 65,105
============= ============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-52
<PAGE>
MORGAN-HAUGH, P.S.C.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Stockholder
Common Stock Treasury Notes Retained
Shares Amount Stock Receivable Earnings Total
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31,
1992 ...................... 2,200 $ 570,465 $ (286,635) $ (277,017) $ 538,589 $ 545,402
Stock purchased............. (200) - (96,713) - - (96,713)
Payments on stockholders
notes, net................ - - - 144,025 - 144,025
Net loss.................... - - - - (112,988) (112,988)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, December 31,
1993 ...................... 2,000 570,465 (383,348) (132,992) 425,601 479,726
Stock purchased............. (200) - (87,558) - - (87,558)
Stock issued................ 400 (65,396) 130,809 - - 65,413
Payments on stockholders
notes, net................ - - - (41,480) - (41,480)
Net loss.................... - - - - (88,780) (88,780)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, December 31,
1994 ...................... 2,200 505,069 (340,097) (174,472) 336,821 327,321
Stock purchased............. (200) - (18,889) - - (18,889)
Stock issued................ 200 (58,503) 87,800 - - 29,297
Payments on stockholders
notes, net................ - - - (16,805) - (16,805)
Net income.................. - - - - 62,424 62,424
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, December 31,
1995 ...................... 2,200 $ 446,566 $ (271,186) $ (191,277) $ 399,245 $ 383,348
=========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-53
<PAGE>
MORGAN-HAUGH, P.S.C.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
1993 1994 1995
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................ $ (112,988) $ (88,780) $ 62,424
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities-
Depreciation............................................. 123,406 115,350 111,266
(Gain) loss on sale of property.......................... (585) (2,904) 183
Changes in assets and liabilities-
Accounts receivable.................................... (17,637) (24,392) (2,039)
Prepaid expenses and other current assets.............. 77,658 5,218 20,579
Accounts payable....................................... 22,361 (2,691) (14,053)
Accrued expenses and other current liabilities......... (18,499) 35,323 55,537
Deferred income taxes.................................. (62,492) (59,617) 33,018
-------------- ------------- -------------
Net cash provided by (used in)
operating activities............................... 11,224 (22,493) 266,915
-------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.......................... (60,542) (53,841) (25,787)
Proceeds from sales of property and equipment................ 5,710 19,622 5
Other assets................................................. (2,510) (2,855) 7,732
-------------- ------------- -------------
Net cash used in investing activities................ (57,342) (37,074) (18,050)
-------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on stockholders notes receivable.................... 99,120 44,043 23,935
Proceeds from notes payable.................................. - 283,289 76,889
Payments on notes payable.................................... (122,928) (214,840) (255,586)
Purchase of treasury stock................................... (96,713) (87,558) (18,889)
-------------- ------------- -------------
Net cash provided by (used in)
financing activities................................ (120,521) 24,934 (173,651)
-------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH................................. (166,639) (34,633) 75,214
CASH AND CASH EQUIVALENTS, beginning
of year...................................................... 314,404 147,765 113,132
-------------- ------------- -------------
CASH AND CASH EQUIVALENTS, end of year.......................... $ 147,765 $ 113,132 $ 188,346
============== ============= =============
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the year-
Interest................................................... $ 100,471 $ 88,775 $ 87,465
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-54
<PAGE>
MORGAN-HAUGH, P.S.C.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995
1. DESCRIPTION OF BUSINESS:
Morgan-Haugh, P.S.C. (the "Company") is a Kentucky professional corporation that
provides medical services. The principal stockholders of the Company are the
physicians who provide healthcare services. The Company was purchased by
ProMedCo of Mayfield, Inc. effective April 25, 1996 (see Note 10).
2. SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation - Audited Financial Statements
The accompanying financial statements have been prepared on the accrual basis of
accounting.
Basis of Presentation - Interim Financial Statements
The interim financial statements have been prepared by the Company without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). Certain information and footnote disclosures normally
included in the financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to SEC
rules and regulations; nevertheless, management of the Company believes that the
disclosures herein are adequate to prevent the information presented from being
misleading. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the financial position
of the Company with respect to the results of its operations for the interim
periods from January 1, 1995 to March 31, 1995, and from January 1, 1996 to
March 31, 1996, have been included herein. The results of operations for the
interim periods are not necessarily indicative of the results for the full year.
Revenue Recognition
Revenue is recorded at estimated net amounts to be received from third-party
payers and others for services rendered.
Cash and Cash Equivalents
The Company includes all cash accounts, which are not subject to withdrawal
restrictions or penalties, and all highly liquid debt instruments, with original
maturities of three months or less, as cash and cash equivalents.
F-55
<PAGE>
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation.
Depreciation is computed on a straight-line method over the following useful
lives:
Years
Furniture, fixtures, and equipment......................... 5-10
Building and improvements.................................. 15-30
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
December 31,
1994 1995
Land........................................ $ 161,852 $ 161,852
Furniture, fixtures, and equipment.......... 679,851 684,844
Building and improvements................... 1,153,379 1,155,979
Less- Accumulated depreciation.............. (836,689) (929,949)
------------- -------------
Property and equipment, net................. $ 1,158,393 $ 1,072,726
============= =============
4. NOTES PAYABLE:
Notes payable consists of the following:
<TABLE>
<CAPTION>
December 31,
1994 1995
<S> <C> <C>
7.5% note payable to a bank, due in monthly
installments of $1,439, including interest, through
April 2005, secured by property and equipment................................... $ 123,677 $ 115,432
7.5% note payable to a bank, due in monthly
installments of $7,279, including interest, through
May 2003, secured by property and equipment..................................... 540,002 491,565
9.0% note payable to a bank, due in monthly
installments of $2,283, including interest, through
January 2011, secured by property and equipment................................. 233,109 225,058
</TABLE>
F-56
<PAGE>
<TABLE>
<CAPTION>
December 31,
1994 1995
<S> <C> <C>
6.56% note payable to a related party, due in monthly
installments of $215, including interest, through
July 2005, unsecured............................................................ $ - $ 18,324
8.75% note payable to a bank, due in monthly
installments of $407, including interest, through
May 2003, unsecured............................................................. - 26,558
5.9% note payable to a related party, due in monthly
installments of $249, including interest, through
December 2003, unsecured........................................................ 20,943 19,145
9.0% note payable to a bank, due in monthly
installments of $747, including interest, through
September 1999, unsecured....................................................... - 28,362
9.0% note payable to a bank, due in monthly
installments of $4,428, including interest, through
May 1997, secured by equipment.................................................. 115,279 70,416
8.26% note payable to a related party, due in monthly
installments of $863, including interest, through
January 1999, unsecured......................................................... 35,808 -
5.9% note payable to a related party, due in monthly
installments of $442, including interest, through
December 2003, unsecured........................................................ 37,231 -
8.5% note payable to a bank, due August
1995, unsecured................................................................. 80,000 -
------------- -------------
Total...................................................................... 1,186,049 994,860
Less current maturities.................................................... (203,032) (130,049)
------------- -------------
Notes payable, net......................................................... $ 983,017 $ 864,811
============= =============
</TABLE>
The maturities of notes payable as of December 31, 1995, are as follows:
1996............................................ $ 130,049
1997............................................ 109,436
1998............................................ 94,853
1999............................................ 100,130
2000............................................ 101,166
Thereafter...................................... 459,226
-------------
$ 994,860
F-57
<PAGE>
5. STOCKHOLDER NOTES RECEIVABLE:
At December 31, 1994 and 1995, the Company had the following non-interest
bearing notes due from stockholders. Each of the notes was received in exchange
for shares of the Company's common stock. As these notes are
noninterest-bearing, interest has been imputed and is recognized as interest
income in the statements of operations. As these notes relate to equity
contributions, the outstanding receivables as of December 31, 1994, have been
shown as a reduction of stockholders' equity.
The maturities of stockholder notes receivable at December 31, 1995, are as
follows:
Note receivable, $601 per month, through March 1998..... $ 16,219
Note receivable, $677 per month, through May 1999....... 29,798
Note receivable, $403 per month, through May 2010....... 69,714
Note receivable, $411 per month, through August 2004.... 30,021
Note receivable, $411 per month, through July 2004...... 29,425
Note receivable, $215 per month, through April 2005..... 16,100
-------------
$ 191,277
6. COMMITMENTS AND CONTINGENCIES:
The Company leases various equipment on a month-to-month basis; total rent
expense charged to operations aggregated $25,633, $24,575, and $33,547 in 1993,
1994, and 1995, respectively.
The Company leases office space and examination rooms to several physicians
under one-year renewable lease agreements. The Company is responsible for
repairs, maintenance, and utilities; the lessee is responsible for insurance
coverage during the term of the lease. Rental income under these operating
leases aggregated $20,070, $29,760, and $37,550 in 1993, 1994, and 1995,
respectively, and is included in other revenues in the accompanying statements
of operations.
7. INCOME TAXES:
Deferred income taxes are attributable primarily to timing differences between
income tax reporting and financial reporting related to revenues and expenses.
F-58
<PAGE>
The following table summarizes the composition of the deferred tax assets and
liabilities.
<TABLE>
<CAPTION>
December 31,
1994 1995
------------- -------------
<S> <C> <C>
Deferred tax assets-
Accounts payable............................................................. $ 29,093 $ 18,834
Accrued expenses and other current liabilities............................... 104,048 100,912
Operating loss carryforwards................................................. 23,601 -
------------- -------------
Total deferred tax assets................................................ 156,742 119,746
------------- -------------
Deferred tax liabilities-
Accounts receivable.......................................................... 233,039 233,855
Other ....................................................................... 7,594 2,800
------------- -------------
Total deferred tax liabilities........................................... 240,633 236,655
------------- -------------
Net current deferred taxes...................................................... $ 83,891 $ 116,909
============= =============
</TABLE>
The following table summarizes the significant components of income tax expense
(benefit):
<TABLE>
<CAPTION>
1993 1994 1995
------------- ------------- -------------
<S> <C> <C> <C>
Current tax provision (benefit)................................. $ (10,825) $ - $ 9,902
Deferred tax provision (benefit)................................ (62,492) (59,617) 33,018
------------- ------------- -------------
Provision (credit) for income taxes............................. $ (73,317) $ (59,617) $ 42,920
============= ============= =============
</TABLE>
A reconciliation of the statutory federal income tax rate to the Company's
effective income tax rate follows:
<TABLE>
<CAPTION>
1993 1994 1995
------------- ------------- -------------
<S> <C> <C> <C>
Statutory federal income tax rate............................... 34% 34% 34%
State income taxes, net of federal income taxes................. 4 4 4
Other ....................................................... 1 2 3
------------- ------------- -------------
39% 40% 41%
============= ============= =============
</TABLE>
8. PROFIT SHARING PLAN:
The Company has a qualified profit sharing plan (the "Plan") that includes a
401(k) provision. The profit sharing component covers substantially all
full-time employees and provides for contributions in such amounts as the Board
of Directors may annually determine. The 401(k) component permits eligible
employees, at their discretion, to invest up to 15% of their salary in the Plan.
Under the Plan agreement, the Company must match the employees' discretionary
investment in the Plan up to 3% of employees' compensation. Total expenses for
the Plan for the years ended December 31, 1993, 1994, and 1995, aggregated
$258,596, $130,199, and $153,752, respectively.
F-59
<PAGE>
9. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS:
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," requires
disclosure about the fair value of financial instruments. Carrying amounts for
all financial instruments approximate fair value as of December 31, 1995.
10. SUBSEQUENT EVENT:
Effective April 25, 1996, the Company was acquired by ProMedCo of Mayfield,
Inc., a wholly owned subsidiary of Professional Medical Management Company, in
an asset purchase transaction whereby ProMedCo of Mayfield, Inc. agreed to
acquire substantially all the operations and certain assets and liabilities of
the Company, excluding, among other things, requirements under the Company's
profit sharing plan.
F-60
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
HealthFirst Services, Inc. and
Tarrant Family Practice, P.A.:
We have audited the accompanying combined balance sheets of HealthFirst
Services, Inc. and Tarrant Family Practice, P.A. (a Texas corporation and a
Texas association, respectively - see Note 1) as of December 31, 1994 and 1995,
and the related combined statements of operations, owners' equity, and cash
flows for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of HealthFirst Services, Inc. and
Tarrant Family Practice, P.A. as of December 31, 1994 and 1995, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Fort Worth, Texas,
July 18, 1996
F-61
<PAGE>
HEALTHFIRST SERVICES, INC. AND TARRANT FAMILY PRACTICE, P.A.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
ASSETS 1994 1995
------ ------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash................................................................ $ 164,675 $ 121,538
Accounts receivable - net of allowances of $200,000 and
$360,000, respectively......................................... 493,000 836,270
------------- -------------
Total current assets.............................. 657,675 957,808
PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization of $200,895 and $260,479,
respectively........................................................ 423,384 544,646
OTHER ASSETS............................................................. 41,954 31,543
------------- -------------
Total assets....................................... $ 1,123,013 $ 1,533,997
============= =============
LIABILITIES AND OWNERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................................... $ 109,412 $ 180,120
Notes payable....................................................... 83,757 144,303
Accrued expenses and other current liabilities...................... 308,905 131,530
------------- -------------
Total current liabilities......................... 502,074 455,953
NOTES PAYABLE, net of current maturities................................. 221,909 117,867
OTHER LIABILITIES........................................................ - 101,180
------------- -------------
Total liabilities................................. 723,983 675,000
COMMITMENTS AND CONTINGENCIES (Note 6)
OWNERS' EQUITY ................................................. . 399,030 858,997
------------- ------------
Total liabilities and owners' equity.............. $ 1,123,013 $ 1,533,997
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-62
<PAGE>
HEALTHFIRST SERVICES, INC. AND TARRANT FAMILY PRACTICE, P.A.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period From Period From
January 1, January 1,
1995 1996
to to
Years Ended December 31, May 31, May 31,
1993 1994 1995 1995 1996
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
NET REVENUE................................... $2,155,948 $ 3,024,119 $ 4,828,924 $ 1,658,933 $2,590,608
---------- ----------- ----------- ----------- ----------
COSTS AND EXPENSES:
Cost of affiliated physician services.... 591,966 878,875 1,287,409 405,035 876,457
Clinic salaries and benefits............. 627,205 821,329 1,093,392 441,476 162,484
Clinic rent and lease expense............ 61,802 98,851 169,737 38,152 94,070
Clinic pharmaceuticals and supplies...... 172,851 200,978 304,644 115,659 101,764
Other clinic costs....................... 662,255 872,805 1,428,685 466,999 918,210
Depreciation and amortization............ 32,705 62,113 70,116 11,300 -
Interest expense......................... 36,922 25,257 22,532 4,103 5,170
---------- ----------- ----------- ----------- ----------
Total costs and expenses.......... 2,185,706 2,960,208 4,376,515 1,482,724 2,158,155
---------- ----------- ----------- ----------- ----------
NET INCOME (LOSS)............................. $ (29,758) $ 63,911 $ 452,409 $ 176,209 $ 432,453
========== =========== =========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-63
<PAGE>
HEALTHFIRST SERVICES, INC. AND TARRANT FAMILY PRACTICE, P.A.
COMBINED STATEMENTS OF OWNERS' EQUITY
BALANCE, December 31, 1992..................................... $ 342,473
Net loss.................................................. (29,758)
-----------
BALANCE, December 31, 1993..................................... 312,715
Net income................................................ 63,911
Capital contributions..................................... 22,404
-----------
BALANCE, December 31, 1994..................................... 399,030
Net income................................................ 452,409
Capital contributions..................................... 7,558
-----------
BALANCE, December 31, 1995..................................... $ 858,997
===========
The accompanying notes are an integral part of these financial statements.
F-64
<PAGE>
HEALTHFIRST SERVICES, INC. AND TARRANT FAMILY PRACTICE, P.A.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended
December 31,
1993 1994 1995
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................................... $ (29,758) $ 63,911 $ 452,409
Adjustments to reconcile net income (loss)
to net cash provided by operating activities-
Depreciation and amortization................................... 32,705 62,113 70,116
Changes in assets and liabilities-
Accounts receivable, net...................................... (40,300) (126,766) (343,270)
Other current assets.......................................... 40,315 - -
Other noncurrent assets....................................... (24,006) (8,159) -
Accounts payable.............................................. 25,163 79,592 70,708
Accrued expenses and other current liabilities................ 49,321 220,292 (177,375)
----------- ----------- -----------
Net cash provided by operating activities.................. 53,440 290,983 72,588
----------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment................................... (126,931) (72,041) (173,409)
----------- ----------- -----------
Net cash used in investing activities...................... (126,931) (72,041) (173,409)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable.......................................... 167,197 14,785 46,121
Payments on notes payable............................................ (50,186) (125,072) (89,617)
Proceeds from managed care contract.................................. - - 101,180
Proceeds from capital contributions.................................. - 12,500 -
----------- ----------- ----------
Net cash provided by (used in)
financing activities................................... 117,011 (97,787) 57,684
----------- ----------- ----------
NET INCREASE (DECREASE) IN CASH......................................... 43,520 121,155 (43,137)
CASH, beginning of year................................................. - 43,520 164,675
----------- ----------- ----------
CASH, end of year....................................................... $ 43,520 $ 164,675 $ 121,538
=========== =========== ==========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid during the year for interest............................. $ 36,922 $ 25,257 $ 22,532
Noncash capital contributions...................................... $ - $ 9,904 $ 7,558
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-65
<PAGE>
HEALTHFIRST SERVICES, INC. AND TARRANT FAMILY PRACTICE, P.A.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995
1. DESCRIPTION OF BUSINESS:
HealthFirst Services, Inc. and Tarrant Family Practice, P.A. (collectively, the
"Company") operate five medical clinics in Fort Worth, Texas and surrounding
areas. HealthFirst Services, Inc. and Tarrant Family Practice. P.A. were formed
under the applicable laws of Texas on June 23, 1994 and January 28, 1987,
respectively. The Companies are affiliated entities and share common ownership.
Accordingly, their financial position and results of operation have been
combined for financial reporting purposes.
2. SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation - Audited Financial Statements
The accompanying combined financial statements have been prepared on the accrual
basis of accounting.
Basis of Presentation - Interim Financial Statements
The interim financial statements have been prepared by the Company without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC). Certain information and footnote disclosures normally included
in the financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to SEC rules and
regulations; nevertheless, management of the Company believes that the
disclosures herein are adequate to prevent the information presented from being
misleading. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the financial position
of the Company with respect to the results of its operations for the interim
periods from January 1, 1995 to May 31, 1995, and from January 1, 1996 to May
31, 1996, have been included herein. The results of operations for the interim
periods are not necessarily indicative of the results for the full year.
Revenue Recognition
Revenue is recorded at estimated net amounts to be received from third-party
payers and others for services rendered.
F-66
<PAGE>
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation and
amortization. Property and equipment are depreciated using the straight-line
method over the following useful lives:
Years
Furniture and fixtures.................. 10
Equipment............................... 5-10
Leasehold improvements.................. Remaining life of lease
Income Taxes
HealthFirst Services, Inc. and Tarrant Family Practice, P.A. are both S
Corporations. Accordingly, income tax liabilities are the responsibility of the
respective owners.
Owners' Equity
Owners' equity includes the respective capital stock, additional paid-in capital
and retained earnings of the legal entities described in Note 1.
The practices were purchased by ProMedCo of Lake Worth, Inc. subsequent to
year-end 1995 (see Note 9).
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
December 31,
1994 1995
Furniture, fixtures, and equipment...... $ 370,059 $ 527,317
Leasehold improvements.................. 254,220 277,808
Less- Accumulated depreciation and
amortization........................ (200,895) (260,479)
------------- --------------
Property and equipment, net............. $ 423,384 $ 544,646
============= =============
F-67
<PAGE>
4. NOTES PAYABLE:
Notes payable consists of the following:
<TABLE>
<CAPTION>
December 31,
1994 1995
<S> <C> <C>
Note payable to bank, due in 1997, payable in monthly
installments, bearing interest at 8.75%, secured by
property and equipment......................................................... $ 120,399 $ 77,981
Note payable to a health maintenance organization, due
in 1998, payable in monthly installments beginning in
1995, bearing interest at prime, secured by operating assets................... 142,000 131,679
Other notes payable, due from 1996 to 1998, bearing
interest at rates from 5.85% to 9.75%......................................... 43,267 52,510
----------- -----------
Total...................................................................... 305,666 262,170
Less current maturities.................................................... (83,757) (144,303)
----------- ------------
Notes payable, net......................................................... $ 221,909 $ 117,867
=========== ===========
</TABLE>
The maturities of notes payable at December 31, 1995 are as follows:
1996.......................................... $ 144,303
1997.......................................... 76,938
1998.......................................... 40,929
-----------
Total...................................... $ 262,170
===========
5. OTHER LIABILITIES:
During 1995, the Company received cash from a health maintenance organization in
return for agreeing to provide clinic services to its members in a certain area,
for a three-year period. The amount will be earned over the three year term,
beginning in 1996. However, upon the Company's termination of clinic services in
the area, the unearned balance becomes due.
6. COMMITMENTS AND CONTINGENCIES:
The Company has operating leases for all of its facilities including the clinics
and the business office, extending through 2011. Rent expense totaled $60,778,
$97,714, and $169,411 for the years ended December 31, 1993, 1994, and 1995,
respectively (see Note 7).
F-68
<PAGE>
Future lease commitments under the operating leases are as follows:
1996..................................... $ 264,342
1997..................................... 307,854
1998..................................... 271,285
1999..................................... 221,088
2000..................................... 198,848
Thereafter............................... 1,260,000
Subsequent to December 31, 1995, the Company entered into a lease agreement with
an affiliated company for a new facility. The commitments related to this
agreement have been included in the above future lease commitments.
7. RELATED-PARTY TRANSACTIONS:
The Company leases several of its facilities from affiliated companies with
common owners. Total rent expense to related parties for the years ended
December 31, 1993, 1994, and 1995 was $45,779, $60,102, and $112,021,
respectively.
8. BENEFIT PLAN:
The Company maintains a defined contribution plan for employees who meet the
minimum length of service and age requirements. Under the plan, the Company
makes contributions of 5.7% of all plan participants' compensation. The
Company's contributions totaled $51,887, $65,984, and $90,261 in 1993, 1994, and
1995, respectively.
9. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS:
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," requires
disclosure about the fair value of financial instruments. Carrying amounts for
all financial instruments approximate fair value as of December 31, 1995.
10. SUBSEQUENT EVENT:
Effective May 29, 1996, the Company was acquired by ProMedCo of Lake Worth,
Inc., a wholly owned subsidiary of Professional Medical Management Company, in
an asset purchase transaction whereby ProMedCo of Lake Worth, Inc. agreed to
acquire substantially all the operations and certain assets and certain
liabilities of the Company, excluding, among other things, requirements under
the Company's benefit plan.
F-69
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Abilene Diagnostic Clinic, P.L.L.C.:
We have audited the accompanying combined balance sheets of the Abilene
Diagnostic Clinic Practices (see Note 1) as of December 31, 1994 and 1995, and
the related combined statements of operations, owners' equity, and cash flows
for each of the three years in the period ended December 31, 1995. We did not
audit the financial statements of Eye Medical Associates of Abilene (dba Abilene
Eye Institute) and Cameron Properties, Inc. (dba Abilene Cataract and Refractive
Surgery Center), which statements reflect total assets and total revenues of 32%
and 42% in 1993, 41% and 41% in 1994, and 40% and 33% in 1995, respectively, of
the combined totals. Those statements were audited by other auditors whose
report has been furnished to us and our opinion, insofar as it relates to the
amounts included for those entities, is based solely on the report of the other
auditors. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of the Abilene Diagnostic Clinic Practices as of December
31, 1994 and 1995, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Fort Worth, Texas,
July 25, 1996
F-70
<PAGE>
ABILENE DIAGNOSTIC CLINIC PRACTICES (NOTE 1)
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
ASSETS 1994 1995 1996
------ -------------- ------------- -------------
(unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents....................................... $ 748,590 $ 402,866 $ 393,844
Accounts receivable - net of
allowances of $835,887, $783,991, and
$2,138,406, respectively................................... 1,901,257 2,015,307 2,333,315
Prepaid expenses and other current assets....................... 188,869 211,525 243,879
-------------- ------------- -------------
Total current assets....................................... 2,838,716 2,629,698 2,971,038
PROPERTY AND EQUIPMENT,
net of accumulated depreciation and
amortization of $1,292,445, $1,443,819,
and $1,530,895, respectively................................. 704,530 839,131 757,461
OTHER ASSETS.................................................... - 50,000 61,733
-------------- ------------- -------------
Total assets............................................... $ 3,543,246 $ 3,518,829 $ 3,790,232
============== ============= =============
LIABILITIES AND OWNERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................. $ 199,958 $ 599,356 $ 241,264
Notes payable................................................ 72,547 198,163 42,000
Accrued expenses and other current liabilities............... 855,929 110,404 37,833
Short term notes............................................. 100,000 - -
-------------- ------------- -------------
Total current liabilities.................................. 1,228,434 907,923 321,097
NOTES PAYABLE, net of current maturities........................ 198,163 - 132,258
-------------- ------------- -------------
Total liabilities.......................................... 1,426,597 907,923 453,355
COMMITMENTS AND CONTINGENCIES
OWNERS' EQUITY.................................................. 2,116,649 2,610,906 3,336,877
-------------- ------------- -------------
Total liabilities and owners' equity..................... $ 3,543,246 $ 3,518,829 $ 3,790,232
============== ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-71
<PAGE>
ABILENE DIAGNOSTIC CLINIC PRACTICES (NOTE 1)
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Six Months
Years Ended Ended Ended
December 31, June 30, June 30
1993 1994 1995 1995 1996
----------- ----------- ----------- ---------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
NET REVENUE........................... $11,233,872 $11,993,675 $14,190,081 $ 7,207,435 $10,279,229
----------- ----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Cost of affiliated physician services 6,529,433 5,740,033 6,790,605 2,817,973 4,131,961
Clinic salaries and benefits....... 2,224,025 2,298,914 2,359,198 1,131,666 958,620
Clinic rent and lease expense...... 444,520 498,372 617,303 220,813 476,168
Clinic pharmaceuticals and supplies 803,371 857,545 832,715 434,416 552,430
Other clinic costs................. 1,903,338 1,954,122 2,344,731 753,694 2,480,507
Depreciation and amortization...... 160,168 145,108 166,894 64,872 88,652
Interest expense................... 28,382 35,622 25,198 16,093 6,164
Other (income) expense............. (205,375) 5,658 27,221 - -
----------- ----------- ----------- ----------- -----------
Total costs and expenses......... 11,887,862 11,535,374 13,163,865 5,439,527 8,694,502
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS)..................... $ (653,990) $ 458,301 $ 1,026,216 $ 1,767,908 $ 1,584,727
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-72
<PAGE>
ABILENE DIAGNOSTIC CLINIC PRACTICES (NOTE 1)
COMBINED STATEMENTS OF OWNERS' EQUITY
BALANCE, December 31, 1992..................................... $ 2,499,250
Net loss ............................................. (653,990)
Capital contributions...................................... 167
Capital distributions...................................... (148,054)
-------------
BALANCE, December 31, 1993..................................... 1,697,373
Net income ............................................. 458,301
Capital distributions...................................... (39,025)
-------------
BALANCE, December 31, 1994..................................... 2,116,649
Net income ............................................. 1,026,216
Capital distributions...................................... (531,959)
-------------
BALANCE, December 31, 1995..................................... $ 2,610,906
=============
The accompanying notes are an integral part of these financial statements.
F-73
<PAGE>
ABILENE DIAGNOSTIC CLINIC PRACTICES (NOTE 1)
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended Six Months
December 31, Ended June 30,
------------------------------------- ------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................ $ (653,990) $ 458,301 $ 1,026,216 $ 1,767,908 $ 1,584,727
Adjustments to reconcile net income (loss)
to net cash provided by operating activities-
Depreciation and amortization.......... 160,168 145,108 166,894 64,872 88,652
(Gain) loss on sale of equipment....... (216,872) 1,097 596 - 0
Changes in assets and liabilities-
Accounts receivable, net............. 247,694 (242,620) (114,050) (49,803) (318,008)
Other current assets................. (36,299) (18,593) (22,656) (76,922) (32,354)
Other assets......................... 7,337 - (50,000) (1,600) (11,733)
Accounts payable..................... 33,255 (4,151) 402,826 87 (362,433)
Accrued expenses and other
current liabilities................ 301,999 449,087 (748,953) (401,199) (68,230)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
operating activities................. (156,708) 788,229 660,873 1,303,343 880,621
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment...... (95,946) (544,534) (302,391) (169,729) (6,983)
Proceeds from sale of property and
equipment.............................. 566,798 137,778 300 - 0
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
investing activities .............. 470,852 (406,756) (302,091) (169,729) (6,983)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt....................... - 100,000 - - 0
Payments on debt......................... (15,535) (81,518) (172,547) (141,413) (23,905)
Proceeds from capital contributions...... 167 - - - 227,307
Capital owner distributions.............. (148,054) (39,025) (531,959) (26,053) (1,086,062)
----------- ----------- ----------- ----------- -----------
Net cash used in financing activities (163,422) (20,543) (704,506) (167,466) (882,660)
----------- ----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS......................... 150,722 360,930 (345,724) 966,148 (9,022)
CASH AND CASH EQUIVALENTS,
beginning of year........................ 236,938 387,660 748,590 748,590 402,866
----------- ----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS,
end of year.............................. $ 387,660 $ 748,590 $ 402,866 $ 1,714,738 $ 393,844
=========== =========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the year for interest... $ 28,382 $ 35,622 $ 25,198 $ 16,093 $ 6,164
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-74
<PAGE>
ABILENE DIAGNOSTIC CLINIC PRACTICES (NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995
1. DESCRIPTION OF BUSINESS:
Abilene Diagnostic Clinic, P.L.L.C. ("ADC"), a Texas professional limited
liability company, operates a group medical practice in Taylor County, Texas.
ADC has entered into an interim service agreement with ProMedCo of Abilene,
Inc., a wholly owned subsidiary of Professional Medical Management Company, to
manage all day-to-day operations other than the provision of medical services.
ADC has also entered into an asset purchase agreement with Professional Medical
Management Company for certain assets and certain liabilities (excluding, among
other things, requirements under benefit plans) of ADC in exchange for common
stock of Professional Medical Management Company effective the later of February
1, 1997 or the first day of the month following the date of the initial public
offering.
The combined financial statements of Abilene Diagnostic Clinic Practices include
ADC and the historical financial statements of Abilene Association of
Anesthesiology, P.A., Eye Medical Associates of Abilene (dba Abilene Eye
Institute), and Cameron Properties, Inc. (dba Abilene Cataract and Refractive
Surgery Center). These practices were purchased by ADC subsequent to December
31, 1995, and are included as part of the Professional Medical Management
Company purchase of ADC. The accompanying financial statements of the Abilene
Diagnostic Clinic Practices ("Combined Entities") have been prepared on a
combined basis due to common ownership.
2. SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation - Audited Financial Statements
The accompanying combined financial statements have been prepared on the accrual
basis of accounting.
Basis of Presentation - Interim Financial Statements
The interim financial statements have been prepared by the Company without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC). Certain information and footnote disclosures normally included
in the financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to SEC rules and
regulations; nevertheless, management of the Company believes that the
disclosures herein are adequate to prevent the information presented from being
misleading. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the financial position
of the Company with respect to the results of its operations for the interim
periods from January 1, 1995 to June 30, 1995, and from January 1, 1996 to June
30, 1996, have been included herein. The results of operations for the interim
periods are not necessarily indicative of the results for the full year.
Revenue Recognition
Revenue is recorded at estimated net amounts to be received from third party
payers and others for services rendered.
F-75
<PAGE>
Cash and Cash Equivalents
The Combined Entities includes all cash accounts, and all highly liquid debt
instruments, with original maturities of three months or less, as cash and cash
equivalents.
Accounts Receivable
Accounts receivable primarily consists of receivables from patients, insurers,
government programs and other third-party payers for medical services provided
by physicians. Such amounts are reduced by an allowance for uncollectible
amounts in certain entities.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation and
amortization. Property and equipment are depreciated using the straight-line
method over the following useful lives:
Years
Furniture and fixtures................ 10
Equipment............................. 5-10
Leasehold improvements................ Remaining life of lease
Income Taxes
Certain of the Combined Entities are S Corporations; accordingly, income tax
liabilities are the responsibility of the respective owners. The remaining
taxable corporations have not incurred significant tax liabilities for federal
or state income taxes. Compensation to physician owners has traditionally
reduced taxable income to nominal levels. This relationship would be expected to
continue in the future. Because of this practice, provisions for income taxes
and deferred tax assets and liabilities of the taxable entities have not been
reflected in the combined financial statements.
Owners' Equity
Owners' equity includes the combined respective capital stock, additional
paid-in capital, and retained earnings of the various legal entities reflected
herein as the Combined Entities.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-76
<PAGE>
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
December 31,
1994 1995
Land ................................... $ 52,880 $ 52,880
Equipment................................. 1,915,943 2,201,918
Leasehold improvements.................... 28,152 28,152
Less accumulated depreciation
and amortization...................... (1,292,445) (1,443,819)
------------- -------------
Property and equipment, net............... $ 704,530 $ 839,131
============= =============
4. NOTES PAYABLE:
Notes payable consists of the following:
<TABLE>
<CAPTION>
December 31,
1994 1995
<S> <C> <C>
Note payable to a bank, due in 1996, payable in monthly installments with
the balance due at maturity, bearing interest at the bank base rate
plus 0.5%, unsecured....................................................... $ 261,840 $ 198,163
Note payable to a bank, due in 1995, payable in
monthly installments, bearing interest at 8.5%,
unsecured................................................................. 8,870 -
------------- -------------
Total ................................................................ 270,710 198,163
Less current maturities.................................................. (72,547) (198,163)
--------------- -------------
Notes payable, net....................................................... $ 198,163 $ -
============= =============
</TABLE>
5. COMMITMENTS AND CONTINGENCIES:
The Combined Entities have operating leases for all of its facilities. Rent
expense totaled $444,520, $498,372, and $617,303 for the years ended December
31, 1993, 1994, and 1995, respectively.
Future lease commitments under the operating leases are as follows:
1996......................................... $ 355,742
1997......................................... 347,742
1998......................................... 315,795
1999......................................... 103,600
6. RELATED-PARTY TRANSACTIONS:
Rent expense of $137,400, $142,667, and $137,400 was paid to the owners in 1993,
1994, and 1995, respectively.
The owners loaned a total of $340,000 to the Combined Entities at interest rates
from 4% to 6% during 1994.
F-77
<PAGE>
7. BENEFIT PLANS:
The Combined Entities have several defined contribution plans. Contributions
were $479,793, $462,285, and $104,912 for 1993, 1994, and 1995, respectively.
8. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS:
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," requires
disclosure about the fair value of financial instruments. Carrying amounts for
all financial instruments approximate fair value as of December 31, 1995.
9. SALE OF THE COMBINED ENTITIES:
In December, 1995, the Combined Entities entered into an interim management
services agreement with ProMedCo of Abilene, Inc., a wholly owned subsidiary of
Professional Medical Management Company. As part of this transaction, the
Combined Entities agreed to be acquired by ProMedCo of Abilene, Inc., on the
later of February 16, 1997 or the first day of the month following the date of
the initial public offering of Professional Medical Management Company's common
stock, excluding, among other things, requirements under the Combined Entities'
benefit plan.
F-78
<PAGE>
NO DEALER, SALESPERSON, OR OTHER PERSON
IS AUTHORIZED TO GIVE ANY INFORMATION OR
MAKE ANY REPRESENTATIONS NOT CONTAINED SHARES
IN THIS PROSPECTUS IN CONNECTION WITH THE
OFFER MADE BY THIS PROSPECTUS, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON [ProMedCo logo]
AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A Professional Medical
SOLICITATION OF AN OFFER TO BUY ANY OF Management Company
THE SECURITIES OFFERED HEREBY BY ANYONE
IN ANY JURISDICTION IN WHICH SUCH OFFER
OR SOLICITATION IS NOT AUTHORIZED OR IN
WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR
TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE
SUCH AN OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THE AFFAIRS OF THE COMPANY SINCE THE
DATE HEREOF OR THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
TABLE OF CONTENTS
Page
Prospectus Summary....... COMMON STOCK
Risk Factors.............
Use of Proceeds..........
Dividend Policy..........
Dilution.................
Capitalization...........
Pro Forma Consolidated
Financial Information...
Selected Financial
Data................... -------------
Management's Discussion PROSPECTUS
and Analysis of -------------
Financial Condition
and Results of
Operations.............
Business.................
Management...............
Principal
Stockholders...........
Description of
Capital Stock..........
Shares Eligible
for Future Sale........
Underwriting............. PIPER JAFFRAY INC.
Legal Matters............
Experts.................. ROBERTSON, STEPHENS &
Additional Information... COMPANY
Index to Financial
Statements............ COWEN & COMPANY
UNTIL , 1996 (25 DAYS
AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS
IN THE COMMON STOCK
OFFERED HEREBY, WHETHER
OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY
BE REQUIRED TO DELIVER
A PROSPECTUS. THIS IS
IN ADDITION TO THE
OBLIGATION OF DEALERS
TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS. , 1996
<PAGE>
PART II.
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses payable in connection with
the registration of the Common Stock that is the subject of this Registration
Statement, all of which shall be borne by the Company. All the amounts shown are
estimates except for the registration fee, the New York Stock Exchange listing
fee, and the NASD filing fee.
To Be Paid By
Registrant
Securities and Exchange Commission registration fee...... $17,241.38
Nasdaq listing fee....................................... *
National Association of Securities Dealers filing fee.... 5,500
Printing and engraving expenses.......................... *
Legal fees and expenses.................................. *
Accounting fees and expenses............................. *
Blue sky filing fees..................................... *
Miscellaneous............................................ *
---------
Total................................................ $ *
* To be supplied by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Certificate of Incorporation and By-laws provide for
indemnification of directors, officers, agents, and employees of the Company to
the fullest extent permitted by law. Under Delaware law, a corporation may
indemnify any person who was or is a party or is threatened to be made a party
to an action (other than an action by or in the right of the corporation) by
reason of his service as a director or officer of the corporation, or his
service, at the corporation's request, as a director, officer, employee or agent
of another corporation or other enterprise, against expenses (including
attorneys' fees) that are actually and reasonably incurred by him ("Expenses"),
and judgments, fines and amounts paid in settlement that are actually and
reasonably incurred by him, in connection with the defense or settlement of such
action, provided that he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the corporation's best interests and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
that his conduct was unlawful. Although Delaware law permits a corporation to
indemnify any person referred to above against Expenses in connection with the
defense or settlement of an action by or in the right of the corporation,
provided that he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the corporation's best interests, if such person has
been judged liable to the corporation, indemnification is only permitted to the
extent that the Court of Chancery (or the court in which the action was brought)
determines that, despite the adjudication of liability, such person is entitled
to indemnity for such Expenses as the court deems proper. The determination as
to whether a person seeking indemnification has met the required standard of
conduct is to be made (1) by a majority vote of a quorum of disinterested
members of the board of directors, or (2) by independent legal counsel in a
written opinion, if such a quorum does not exist or if the disinterested
directors so direct, or (3) by the stockholders. The General Corporation Law of
the State of Delaware also provides for mandatory indemnification of any
director, officer, employee or agent against Expenses to the extent such person
has been successful in any proceeding covered by the statute. In addition, the
General Corporation Law of the State of Delaware provides the general
authorization of
II-1
<PAGE>
advancement of a director's or officer's litigation expenses in lieu of
requiring the authorization of such advancement by the board of directors in
specific cases, and that indemnification and advancement of expenses provided by
the statute shall not be deemed exclusive of any other rights to which those
seeking indemnification or advancement of expenses may be entitled under any
bylaw, agreement or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since its inception, the Registrant has sold or issued the following
unregistered securities:
(1) In July and August 1994, the Registrant issued an aggregate of
1,148,000 shares of Common Stock at a purchase price of $0.045 per share and
warrants to purchase an aggregate of 885,442 shares of Common Stock at an
exercise price of $1.25 per share to certain of its officers, directors,
employees, its counsel, and certain private investors.
(2) In October and November 1994 the Registrant issued an aggregate of
1,226,150 shares of Class B Common Stock at a purchase price of $0.50 and
warrants to purchase an aggregate of 966,456 shares of Class B Common Stock at
an exercise price of $1.25 per share to certain directors of the Registrant, its
counsel, and a private investor.
(3) In October 1994 the Registrant issued 690,000 shares of Common
Stock at a purchase price of $0.045 per share and warrants to purchase 543,556
shares of Common Stock at an exercise price of $1.25 per share to an individual
who is an officer and director of the Registrant.
(4) In November 1994 the Registrant issued 40,000 shares of Common
Stock at a purchase price of $0.50 per share to an officer of the Registrant.
(5) In January 1995 the Registrant issued an aggregate of 20,000 shares
of Common Stock at a purchase price of $0.50 per share to an officer of the
Registrant.
(6) On June 15, 1995 the Registrant issued warrants to purchase an
aggregate of 150,000 shares of Common Stock at an exercise price of $2.50 per
share at a purchase price of $2.50 per warrant to two directors of the
Registrant and a private investor.
(7) On June 30, 1995 the Registrant issued, in connection with the
acquisition of a physician group, an aggregate of 138,672 shares of redeemable
Common Stock to the physicians in the practice group in a transaction valued at
$6.00 per share.
(8) In August 1995 the Registrant issued, in connection with the
acquisition of a physician group, an aggregate of 26,624 shares of redeemable
Common Stock to the physicians in the practice group in a transaction valued at
$6.00 per share.
(9) In December 1995 the Registrant issued an aggregate of 500,000
shares of Redeemable Convertible Preferred Stock and warrants to purchase
200,000 shares of Redeemable Convertible Preferred Stock at an exercise price of
$6.00 per share for aggregate net consideration of $2,953,358 to venture capital
investors.
(10) In February 1996 the Registrant issued to a former employee 3,200
shares of Common Stock upon the exercise of options at an exercise price of
$0.50 per share.
II-2
<PAGE>
(11) In February 1996 the Registrant issued 20,000 shares of Common
Stock upon the exercise of options at an exercise price of $6.00 per share by an
individual who is an officer and director of the Registrant.
(12) In March 1996 the Registrant issued, in connection with the
acquisition of two physician groups,$1,800,274 in convertible subordinated notes
to the physicians of the groups.
(13) In June 1996, in connection with the acquisition of a physician
group, the Registrant issued 38,027 shares of Common Stock to the physicians in
the group in a transaction valued at $12.00 per share.
The issuances of securities in the above transactions were deemed to be
exempt from registration under the Act in reliance on Section 4(2) thereof as
transactions not involving a public offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following is a list of exhibits furnished:
1* Form of Purchase Agreement
2* Asset Purchase Agreement dated as of January 19, 1996 by and
among ProMedCo, Inc., ProMedCo Of Abilene, Inc. and Abilene
Diagnostic Clinic, P.L.L.C.
3.1* Restated Certificate of Incorporation of Professional Medical
Management Company.
3.2* By-laws of Professional Medical Management Company.
4* Rights Agreement
5* Opinion of Counsel
10.1* Interim Service Agreement dated as of January 19, 1996 by and
between ProMedCo of Abilene, Inc. and Abilene Diagnostic Clinic,
P.L.L.C.
10.2* Service Agreement dated as of January 19, 1996 by and between
ProMedCo of Abilene, Inc. and Abilene Diagnostic Clinic, P.L.L.C.
10.3* Service Agreement dated as of March 12, 1996 by and between
ProMedCo, Inc. of Cullman, Inc. and Cullman Primary Care, P.C.
10.4* Service Agreement dated as of April 1, 1996 by and between
ProMedCo of Mayfield, Inc. and Morgan-Haugh, P.S.C.
10.5* Amended and Restated Service Agreement dated as of June 24, 1996
by and between ProMedCo of Lake Worth, Inc. and Tarrant Family
Practice, P.A.
10.6* Service Agreement dated as of June 30, 1995 by and between
ProMedCo of Denton, Inc. and North Texas Medical Surgical
Clinic, P.A.
II-3
<PAGE>
10.7* Credit Agreement dated as of June 12, 1996 among ProMedCo, Inc.,
the Lenders referred to therein, and Nationscredit Commercial
Corporation, as Agent
10.8* Director Stock Option Plan
10.9* Employee Stock Option Plan
10.10* Employee Stock Purchase Plan
10.11* Physician Stock Option Plan
10.12* Employment Agreement with H. Wayne Posey
10.13* Employment Agreement with Richard R. D'Antoni
10.14* Employment Agreement with Dale K. Edwards
10.15* Employment Agreement with R. Alan Gleghorn
10.16* Employment Agreement with Steve W. Ratton, Jr.
11* Computation of Net Income Per Share
22* List of Subsidiaries
23.1 Consent of Independent Accountants
23.2* Consent of Counsel (included as part of Exhibit 5)
24 Powers of Attorney
27 Financial Data Schedule
* To be filed by amendment
(b) The following is a list of financial statement schedules
furnished:
Schedule II Valuation and qualifying accounts for the period from inception
(July 1, 1994) to December 31, 1994, the year ended December 31,
1995 and the six months ended June 30, 1996
Schedules not listed above have been omitted because they are not
applicable or because required information is included in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
II-4
<PAGE>
(1) To provide to the Underwriters at the closing specified in the
Purchase Agreement certificates in such denominations and registered in such
names as required by the Underwriters to permit prompt delivery to each
purchaser.
(2) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(3) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of the registration
statement as of the time it was declared effective.
(4) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Fort Worth
and State of Texas on the 20th day of August, 1996.
PROFESSIONAL MEDICAL MANAGEMENT
COMPANY
By: *
H. Wayne Posey
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
*
H. Wayne Posey President, Chief Executive August 20, 1996
Officer, and Director
(Principal Executive Officer)
*
Steve W. Ratton, Jr. Vice President - Finance August 20, 1996
(Principal Financial and
Accounting Officer)
*
Richard E. Ragsdale Chairman August 20, 1996
*
E. Thomas Chaney Director August 20, 1996
*
David T. Bailey, M.D. Director August 20, 1996
*
Richard R. D'Antoni Director August 20, 1996
James F. Herd, M.D. Director August , 1996
*
Jack W. McCaslin Director August 20, 1996
By: /s/ MICHAEL JOSEPH
Michael Joseph
Attorney-in-Fact
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Professional Medical Management Company:
We have audited, in accordance with generally accepted auditing standards, the
consolidated financial statements of Professional Medical Management Company, a
Delaware corporation, and subsidiaries included in this registration statement
and have issued our report thereon dated August 20, 1996. Our audit was made for
the purpose of forming an opinion on the basic financial statements taken as a
whole. Schedule II, Valuation and Qualifying Accounts, is the responsibility of
the Company's management and is presented for purposes of complying with the
Securities and Exchange Commission rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Fort Worth, Texas
August 20, 1996
S-1
<PAGE>
SCHEDULE II
PROFESSIONAL MEDICAL MANAGEMENT COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE PERIOD FROM INCEPTION (JULY 1, 1994) TO
DECEMBER 31, 1994, THE YEAR ENDED DECEMBER 31, 1995
AND THE SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
Additions Additions
Balance at Charged to Charged to Balance at
Beginning Income/ Other End of
of Period Expense Accounts Write-Offs Period
<S> <C> <C> <C> <C> <C>
December 31, 1994:
Accounts receivable allowances.................... $ - $ - $ - $ - $ -
=========== ===========
December 31, 1995:
Accounts receivable allowances.................... $ - $ 365,580(a) $ 48,756(b) $ (279,002)(a) $ 135,334
=========== ===========
June 30, 1996:
Accounts receivable allowances.................... $ 135,334 $ 1,235,859(a) $ 837,864(b) $ (920,049)(a) $ 1,289,008
=========== ===========
<FN>
(a) Includes provisions for and write-offs of bad debts and contractual allowances against accounts receivable.
(b) Allowances against accounts receivable acquired in acquisitions and established in purchase accounting.
</FN>
</TABLE>
S-2
Exhibit 11
<TABLE>
<CAPTION>
July 1, 1994 Year Ended Six Months Ended
(Inception) to December 31, June 30,
December 31, Pro Forma Pro Forma
1994 1995 1995 1995 1996 1996
------------- ------------- ------------- ------------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Primary
Weighted average shares
outstanding.................... 1,985,294 3,913,944 3,913,944 3,876,065 4,015,273 4,015,273
Net common shares issuable
on exercise of certain stock
options (1)(2)................. 763,155 552,089 552,089 552,089 552,089 951,830
Net common shares issuable
on exercise of certain
warrants (1)(2)................ 114,286 114,286 114,286 114,286 114,286 2,295,417
Contingently issuable shares in
business combinations.......... 2,358,917 2,358,917 2,358,917 2,358,917 2,358,917 2,358,917
------------- ------------- ------------- ------------- ------------- -------------
Number of common shares
outstanding.................... 5,221,652 6,939,236 6,939,236 6,901,357 7,040,565 9,621,437
============= ============= ============= ============= ============= =============
Fully Diluted
Weighted average shares
outstanding.................... 1,985,294 3,913,944 3,913,944 3,876,065 4,015,273 4,015,273
Net common shares issuable
on exercise of certain stock
options (1)(2)................. 763,155 552,089 552,089 552,089 552,089 951,830
Net common shares issuable
on exercise of certain
warrants (1)(2)................ 114,286 114,286 114,286 114,286 114,286 2,295,417
Contingently issuable shares in
business combinations.......... 2,358,917 2,358,917 2,358,917 2,358,917 2,358,917 2,358,917
Other dilutive securities........... 200,030 200,030 200,030 200,030 200,030 200,030
------------- ------------- ------------- ------------- ------------- -------------
Number of common shares
outstanding.................... 5,421,682 7,139,266 7,139,266 7,101,387 7,240,595 9,821,467
============= ============= ============= ============= ============= =============
Net income (loss)
Actual net income (loss)............ (169,890) (697,342) (135,451) (349,015) (393,316) 128,217
Reduction of interest
expense on debt (3)............ - - - - - 37,243
Interest income on
investments (3)................ 147,593 - - - - -
------------- ------------- ------------- ------------- ------------- -------------
Adjusted net income................. (22,297) (697,342) (135,451) (349,015) (393,316) 165,460
============= ============= ============= ============= ============= =============
</TABLE>
(1) Net common shares issuable on exercise of certain stock options and warrants
is calculated based on the treasury stock method using an estimate of the
initial public offering price
(2) Common shares issuable on exercise of certain stock options and warrants
were not included since the effect of inclusion would be anti-dilutive.
(3) Adjustments to net income are the result of the 20% buy back limitation of
the treasury stock method.
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our firm) included in or made a part of this
registration statement.
Fort Worth, Texas
August 20, 1996
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that Professional Medical Management
Company, a corporation organized under the laws of the State of Delaware (the
"Corporation"), and the undersigned officers and directors of the Corporation,
individually and in their respective capacities indicated below, hereby make,
constitute, and appoint Michael Joseph and John F. Kearney its and their true
and lawful attorneys, their separate or joint signatures sufficient to bind,
with power of substitution, to execute, deliver, and file in its or their
behalf, and in each person's respective capacity or capacities as shown below, a
registration statement on Form S-1 under the Securities Act of 1933, any and all
documents in support of or supplemental to said registration statement and any
and all amendments thereto with respect to the initial public offering of shares
of Class A Common Stock by the Corporation; and the Corporation and each said
person hereby grant to said attorneys full power and authority to do and perform
each and every act and thing whatsoever as any one of said attorneys may deem
necessary or advisable to carry out the full intent of this Power of Attorney to
the same extent and with the same effect as the Corporation or the undersigned
officers and directors of the Corporation might or could do personally in its or
their capacity or capacities as aforesaid; and the Corporation and each of said
persons hereby ratify, confirm, and approve all acts and things that any one of
said attorneys may do or cause to be done by virtue of this Power of Attorney
and its signature or their signatures as the same may be signed by any one of
said attorneys to said registration statement and any and all documents in
support of or supplemental to said registration statement and any and all
amendments thereto.
Dated as of August 9, 1996.
Professional Medical Management Company
Attest: /s/ JACK W. MCCASLIN By: /s/ H. WAYNE POSEY
Jack W. McCaslin H. Wayne Posey
Secretary President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ H. WAYNE POSEY /s/ STEVE W. RATTON, JR.
H. Wayne Posey Steve W. Ratton, Jr.
President, Chief Executive Officer and Director Vice President - Finance
(Principal Executive Officer) (Principal Financial
Accounting Officer)
/s/ RICHARD E. RAGSDALE /s/ E. THOMAS CHANEY
Richard E. Ragsdale E. Thomas Chaney
Chairman Director
/s/ DAVID T. BAILEY, M.D. /s/ RICHARD R. D'ANTONI
David T. Bailey, M.D. Richard R. D'Antoni
Director Director
<PAGE>
/s/ JACK W. MCCASLIN
James F. Herd, M.D. Jack W. McCaslin
Director Director
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<CIK> 0001011630
<NAME> ProMedCo
<S> <C> <C>
<PERIOD-TYPE> year 6-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 JUN-30-1996
<EXCHANGE-RATE> 1 1
<CASH> 1,076,836 1,148,243
<SECURITIES> 1,970,530 0
<RECEIVABLES> 303,511 2,704,358
<ALLOWANCES> 135,334 1,289,008
<INVENTORY> 0 0
<CURRENT-ASSETS> 3,363,105 3,940,889
<PP&E> 118,942 936,026
<DEPRECIATION> 22,907 48,124
<TOTAL-ASSETS> 4,451,347 11,746,647
<CURRENT-LIABILITIES> 370,497 2,363,138
<BONDS> 0 0
2,953,358 2,953,358
0 0
<COMMON> 767,749 1,839,970
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> (895,066) 624,962
<SALES> 1,918,029 11,120,322
<TOTAL-REVENUES> 1,918,029 11,120,322
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 2,615,371 11,513,638
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 0 0
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (697,342) (393,316)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (697,342) (393,316)
<EPS-PRIMARY> (0.10) (0.06)
<EPS-DILUTED> (0.10) (0.05)
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