<PAGE> 1
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
1934
For the transition period from to
Commission file number 0-21373
PROMEDCO MANAGEMENT COMPANY
(Exact name of Registrant as specified in its charter)
DELAWARE 75-2529809
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
801 CHERRY STREET, SUITE 1450
FORT WORTH, TEXAS 76102
(Address of principal executive offices) (Zip Code)
(817) 335-5035
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES ( X ) NO ( )
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock July 31, 1997
- --------------------- -----------------
$.01 par value 10,066,095 shares
===============================================================================
<PAGE> 2
PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
No.
----
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
June 30, 1997 and December 31, 1996 2
Condensed Consolidated Statements of Operations
Three Months and Six Months Ended June 30, 1997 and 1996 3
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 1997 and 1996 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 11
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
</TABLE>
1
<PAGE> 3
PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 1997 December 31,
(Unaudited) 1996
------------------ -------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 19,713,154 $ 1,633,534
Accounts receivable, net 9,502,714 6,227,228
Management fees receivable 800,826 1,266,598
Due from affiliated physician groups 3,382,547 660,278
Prepaid expenses and other current assets 941,954 742,845
------------------ ------------------
Total current assets 34,341,195 10,530,483
------------------ ------------------
Property and equipment, net 5,448,069 3,930,191
Intangible assets, net 33,911,368 14,860,171
Other assets 16,558,105 1,238,929
------------------ ------------------
Total assets $ 90,258,737 $ 30,559,774
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,300,406 $ 1,505,762
Payable to affiliated physician groups 3,256,439 1,341,876
Accrued salaries, wages and benefits 1,457,687 1,153,558
Accrued expenses and other current liabilities 1,941,327 2,353,381
Current maturities of long-term debt 3,395,289 1,151,191
Current maturities of obligations under capital leases 535,458 589,438
Deferred purchase price 1,577,505 181,986
------------------ ------------------
Total current liabilities 13,464,111 8,277,192
------------------ ------------------
Long-term debt, net of current maturities 10,265,237 4,585,173
Obligations under capital leases, net of current maturities 877,154 1,030,171
Convertible subordinated notes payable 1,800,274 1,800,274
Other long term liabilities 749,576 393,575
------------------ ------------------
Total liabilities 27,156,352 16,086,385
------------------ ------------------
Series A redeemable convertible preferred stock - 2,957,641
Redeemable common stock - 991,776
Stockholders' equity:
Class B Common Stock - 12,262
Common stock 100,510 31,871
Additional paid-in capital 53,555,315 11,987,480
Common stock to be issued 11,914,039 2,303,212
Stockholder notes receivable (369,665) (151,306)
Accumulated deficit (2,097,814) (3,659,547)
------------------ ------------------
Total stockholders' equity 63,102,385 10,523,972
------------------ ------------------
Total liabilities and stockholders' equity $ 90,258,737 $ 30,559,774
================== ==================
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 4
PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ ------------------------------
1997 1996 1997 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Physician groups revenue, net $ 25,732,048 $ 10,041,414 $ 46,457,625 $ 17,132,843
Less: amounts retained by physician groups 10,532,177 4,712,459 19,540,348 8,140,548
-------------- -------------- -------------- --------------
Management fee revenue 15,199,871 5,328,955 26,917,277 8,992,295
-------------- -------------- -------------- --------------
Operating expenses:
Clinic salaries and benefits 5,926,457 2,483,746 10,566,352 4,225,262
Clinic rent and lease expense 1,429,063 549,656 2,508,925 961,028
Clinic supplies 1,962,366 639,858 3,476,082 1,044,156
Other clinic costs 2,935,385 1,353,550 5,399,015 2,289,571
General corporate expenses 823,533 676,099 1,642,305 1,257,695
Depreciation and amortization 602,552 67,068 1,038,427 118,632
Interest expense 1,148 33,071 117,097 13,446
-------------- -------------- -------------- --------------
13,680,504 5,803,048 24,748,203 9,909,790
-------------- -------------- -------------- --------------
Income (loss) before provision for income taxes 1,519,367 (474,093) 2,169,074 (917,495)
Provision for income taxes 412,429 - 607,341 -
-------------- -------------- -------------- ---------------
Net income (loss) $ 1,106,938 $ (474,093) $ 1,561,733 $ (917,495)
============== ============== ============== ==============
Earnings (loss) per share $ 0.08 $ (0.06) $ 0.12 $ (0.11)
============== ============== ============== ==============
Weighted average number of common shares outstanding 14,704,421 8,191,446 13,133,900 8,202,845
============== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 5
PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------------------
1997 1996
----------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,561,733 $ (917,495)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities (net of effects of
purchase transactions):
Depreciation and amortization 1,014,788 118,632
Provision for deferred income taxes 390,058 -
Noncash compensation - 14,750
Changes in assets and liabilities:
Accounts receivable 615,343 40,775
Management fees receivable (1,087,407) (696,890)
Due from affiliated physician groups (2,358,986) (132,520)
Other assets (941,353) (148,651)
Accounts payable (205,356) 493,728
Payable to physician groups 1,914,563 -
Accrued expenses and other current liabilities (122,430) 1,070,079
-------------- ---------------
Net cash provided by (used in) operating activities 780,953 (157,592)
-------------- ---------------
Cash flows from investing activities:
Purchases of property and equipment (1,111,146) (201,289)
Purchases of clinic assets, net of cash (13,166,514) (1,546,805)
-------------- ---------------
Net cash used in investing activities (14,277,660) (1,748,094)
-------------- ---------------
Cash flows from financing activities:
Borrowings under long-term debt 2,076,242 218,705
Payments on long-term debt (2,857,590) (173,505)
Payments on capital lease obligations (206,997) -
Payment of deferred financing costs - (35,000)
Proceeds from issuance of common stock, net 32,913,035 -
Purchase and retirement of treasury stock (348,363) -
Payment on stockholder notes receivable - (3,636)
-------------- ---------------
Net cash provided by financing activities 31,576,327 6,564
-------------- ---------------
Increase in cash and cash equivalents 18,079,620 (1,899,122)
Cash and cash equivalents, beginning of period 1,633,534 3,047,366
-------------- ---------------
Cash and cash equivalents, end of period $ 19,713,154 $ 1,148,244
============== ===============
Supplemental disclosure of cash flow information
Cash paid (received) during the period for -
Interest expense $ 404,571 $ 23,690
Income taxes $ (60,434) $ -
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 6
PROMEDCO MANAGEMENT COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation/Principles of Consolidation
The condensed consolidated financial statements included herein 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 financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such SEC rules and regulations. Management believes that
the disclosures herein are adequate to prevent the information presented from
being misleading. The foregoing financial information, not audited by
independent public accountants, reflects, in the opinion of the Company, all
adjustments (which included only normal recurring adjustments) necessary for a
fair presentation of the financial position and the results of operations for
the interim periods presented. The results of operations for any interim period
are not necessarily indicative of the results of the operations for the entire
year. It is suggested that these condensed consolidated financial statements be
read in conjunction with the financial statements and notes thereto for the
year ended December 31, 1996, included in the Company's registration statement
on Form S-1.
Certain prior period amounts have been reclassified to conform with the 1997
presentation.
In November 1996, the Company entered into a definitive agreement with Western
Medical Management Corp., Inc. ("Reno"), a physician management company. Under
the terms of the agreement, Reno exchanged its common stock for common stock of
the Company upon consummation of the Company's initial public offering of
common stock in March 1997 (see Note 4). This transaction has been accounted
for as a pooling of interests, as defined by APB No. 16, "Business
Combinations." The accompanying financial statements are based on the
assumption that the companies were combined for the full periods presented and
prior financial statements have been restated to give effect to the
combination.
Earnings Per Share
Primary earnings per share ("EPS") of common stock have been computed using the
weighted average number of shares of common stock outstanding and dilutive
common stock equivalents. Fully diluted EPS is not materially different from
primary EPS.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share," which will require
the Company to change its method of calculating EPS. SFAS No. 128 simplifies
the computation of EPS by replacing the presentation of primary EPS with a
presentation of basic EPS. Basic EPS is calculated by dividing income available
to common stockholders by the weighted average number of common shares
outstanding during the period. Options, warrants, and other potentially
dilutive securities are excluded from the calculation of basic EPS. Diluted
EPS, which has not changed significantly from the current calculation of fully
diluted EPS, includes the options, warrants and other potentially dilutive
securities that are excluded from basic EPS. In accordance with the provisions
of SFAS No. 128, the Company will adopt this new standard beginning in 1998.
Had the Company adopted the new standard in 1997, (early adoption is
specifically prohibited) basic EPS would be as follows:
5
<PAGE> 7
PROMEDCO MANAGEMENT COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
------------------------------- ----------------------------
1997 1996 1997 1996
-------------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income per share $ 0.11 $ (0.10) $ 0.18 $ (0.19)
============== =============== =============== ============
Weighted average number of common shares outstanding $ 10,050,953 $ 4,785,524 $ 8,459,921 $ 4,785,854
============== =============== =============== ============
</TABLE>
Management Fee Revenue
Management fee revenue represents physician groups revenue less amounts
retained by physician groups. The amounts retained by physician groups
(typically 85% of the physician groups' operating income) represents amounts
paid to the physicians pursuant to the service agreements between the Company
and the physician groups. Under the service agreements, the Company provides
each physician group with the facilities and equipment used in its 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 Company's management fee revenues are dependent upon the operating income
of the physician groups. As discussed previously, the physician groups retain a
fixed percentage of physician group operating income. Physician group operating
income is defined in the service agreements as the physician group's net
medical revenue less certain contractually agreed-upon clinic expenses,
including non-physician clinic salaries and benefits, rent, insurance, interest
and other direct clinic expenses. The amount of the physician groups revenue
retained and paid to the physician group primarily consists of the cost of the
affiliated services. The remaining amount of the physician group operating
income (typically 15%) and an amount equal to 100% of the clinic expenses are
reflected as management fee revenue earned by the Company and is detailed as
follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
------------------------------- ------------------------------
1997 1996 1997 1996
-------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C>
Component based upon percentage of physician
groups operating income $ 1,858,619 $ 831,610 $ 3,448,297 $ 1,436,567
Reimbursement of clinic expenses 13,341,252 4,497,345 23,468,980 7,555,728
-------------- --------------- -------------- --------------
Management fee revenue $ 15,199,871 $ 5,328,955 $ 26,917,277 $ 8,992,295
============== =============== ============== ==============
</TABLE>
6
<PAGE> 8
PROMEDCO MANAGEMENT COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. ACQUISITIONS:
Through June 30, 1997 and during 1996, the Company, through its wholly-owned
subsidiaries, acquired certain operating assets of the following clinics:
<TABLE>
<CAPTION>
Clinic Effective Date Location
<S> <C> <C> <C>
1997:
Naples Medical Center, P.A. March 1, 1997 Naples, FL
Abilene Diagnostic Clinic, P.L.L.C. June 1, 1997 Abilene, TX
1996:
Cullman Primary Care, P.C. March 6, 1996 Cullman, AL
Morgan-Haugh, P.S.C. April 1, 1996 Mayfield, KY
HealthFirst Medical Group, P.A. June 1, 1996 Lake Worth, TX
King's Daughters Clinic, P.A. September 1, 1996 Temple, TX
</TABLE>
These acquisitions were accounted for as purchases, and the accompanying
condensed consolidated financial statements include the results of their
operations from the dates of their respective acquisitions. Purchase price
allocations to tangible assets acquired and liabilities assumed are based on
the estimated fair values at the dates of acquisitions and are subject to final
revisions. The impacts of these acquisitions have been eliminated from the
statement of cash flows. Simultaneous with each acquisition, the Company
entered into a long-term service agreement with the related clinic physician
group. The service agreements are 40 years in length.
The Naples acquisition was closed on April 23, 1997 and is effective as of
March 1, 1997. Total consideration amounted to $19.9 million, consisting of
cash of $11.1 million, notes payable of $8.7 million and the assumption of
certain liabilities of $130,000.
The Abilene acquisition was closed on June 5, 1997 and is effective as of June
1, 1997. Total consideration for the transaction amounted to $15.1 million,
consisting of cash of $2.5 million and approximately 2,000,000 shares of the
Company's common stock to be issued. The cash component consisted of $700,000
paid prior to closing and $1.8 million paid at closing. Prior to the closing of
the acquisition, the Abilene physician group was operated under an interim
service agreement since December 1995.
7
<PAGE> 9
PROMEDCO MANAGEMENT COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following unaudited pro forma information reflects the effect of
acquisitions on the consolidated results of operations of the Company,
including the operations for Reno, had the acquisitions occurred at January 1,
1996. Future results may differ substantially from pro forma results and may
not be indicative of future operations.
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
------------------------------- --------------------------------
1997 1996 1997 1996
-------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Physician groups revenue, net $ 25,732,048 $ 22,099,852 $ 51,127,469 $ 43,650,756
Less: amounts retained by physician groups 10,532,177 9,571,949 21,557,659 18,650,964
-------------- --------------- --------------- ---------------
Management fee revenue $ 15,199,871 $ 12,527,903 $ 29,569,810 $ 24,999,792
============== =============== =============== ===============
Net income $ 842,942 $ 264,674 $ 1,389,843 $ 541,303
============== =============== =============== ===============
Net income per share $ 0.06 $ 0.02 $ 0.11 $ 0.05
============== =============== =============== ===============
</TABLE>
Pro forma net income and pro forma net income per share for the three months
and six months ended June 30, 1997 are lower than historical net income and net
income per share for the same period primarily due to a higher pro forma tax
rate, which assumes that all net operating loss carryforwards would have been
recognized prior to 1997.
As discussed in Note 1, the Company completed its merger with Reno on March 17,
1997, the date of the closing of the Company's initial public offering. The
accompanying condensed consolidated financial statements are based on the
assumption that the companies were combined for the full periods presented and
prior financial statements have been restated to give effect to the
combination. The following unaudited information reflects the separate results
of the combined entities for periods prior to the combination:
<TABLE>
<CAPTION>
Three Months Ending Three Months Ending Six Months Ending
March 31, 1997 June 30, 1996 June 30, 1996
---------------------------- ------------------------------ ------------------------------
ProMedCo Reno ProMedCo Reno ProMedCo Reno
------------- ------------- ------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Physician groups
revenue, net $ 17,343,665 $ 3,381,912 $ 6,981,105 $ 3,060,309 $ 11,120,322 $ 6,012,521
Less: amounts retained
by physician groups 7,669,484 1,338,687 3,286,249 1,426,210 5,296,396 2,844,152
------------- ------------- ------------- ------------- -------------- -------------
Management fee revenue 9,674,181 2,043,225 3,694,856 1,634,099 5,823,926 3,168,369
------------- ------------- ------------- ------------- -------------- -------------
Operating expenses
Clinic expenses 8,025,524 1,671,579 3,103,894 1,922,916 4,878,496 3,641,520
General corporate
expenses 818,772 - 676,099 - 1,257,694 -
Depreciation and
amortization 391,507 44,368 50,611 16,457 82,202 36,432
Interest expense
(income) 112,666 3,283 27,618 5,453 (1,150) 14,596
------------- ------------- ------------- ------------- -------------- -------------
9,348,469 1,719,230 3,858,222 1,944,826 6,217,242 3,692,548
------------- ------------- ------------- ------------- ------------- --------------
Income (loss) before
provision for income
taxes 325,712 323,995 (163,366) (310,727) (393,316) (524,179)
Provision for income taxes 97,714 97,198 - - - -
------------- ------------- ------------- ------------- -------------- -------------
Net income (loss) $ 227,998 $ 226,797 $ (163,366) $ (310,727) $ (393,316) $ (524,179)
============= ============= ============= ============= ============== =============
</TABLE>
8
<PAGE> 10
PROMEDCO MANAGEMENT COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
3. LONG-TERM DEBT:
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
------------------ ------------------
<S> <C> <C>
Borrowings under bank credit facility $ 4,468,000 $ 4,157,027
Note payable issued to physician groups 9,121,286 851,549
Other long-term debt 71,240 727,788
------------------ ------------------
13,660,526 5,736,364
Less current maturities 3,395,289 1,151,191
------------------ ------------------
Long-term debt, net of current maturities $ 10,265,237 $ 4,585,173
================== ==================
</TABLE>
In connection with the Naples affiliation, the Company issued notes payable to
the group totaling $8.7 million. These notes payable are payable in three
annual installments in each of April 1998, 1999 and 2000. The notes bear
interest at 9%, with interest payable in options to purchase the Company's
common stock at a price of $9.00 per share, providing the market price for the
stock is above the exercise price at the time of payment. Interest may be paid
in cash at the option of either party if the market price for the stock is
$9.00 or less at the time of payment.
4. CAPITALIZATION:
During March 1997, the Company completed the initial public offering of its
common stock (the "Offering"). The Offering consisted of 4,000,000 shares of
common stock sold at a price of $9.00 per share. Gross and net proceeds from
the Offering were $36 million and $33.5 million, respectively. In addition, net
proceeds were reduced by approximately $1.6 million of expenses relating to the
Offering, of which approximately $1.1 million had been paid by June 30, 1997.
Upon the completion of the Offering, 500,000 shares of preferred stock were
converted into common stock. Similarly, 165,296 shares of redeemable common
stock and 613,075 shares of Class B Common Stock were converted into common
stock.
During May 1997, the Company issued an additional $3.6 million of the Company's
common stock to a physician group acquired in late 1996 relating to post-closing
consideration adjustments. As discussed in Note 2, the Company will issue, in
January 1998, approximately 2,000,000 shares of common stock in connection with
the Abilene acquisition. This amount is included in common stock to be issued
in the accompanying June 30, 1997 balance sheet.
9
<PAGE> 11
PROMEDCO MANAGEMENT COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
5. SUPPLEMENTAL EARNINGS PER SHARE DATA:
In March 1997, the Company sold 4,000,000 shares of common stock at a price of
$9.00 per share in the Offering. The unaudited supplemental earnings per share
data has been calculated assuming the Offering occurred as of the beginning of
each respective period.
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
------------------------------- -------------------------------
1997 1996 1997 1996
-------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Supplemental income per share (primary and
fully diluted)
Net income (loss) per share $ 0.08 $ (0.04) $ 0.11 $ (0.07)
============== ============== ============== ==============
Supplemental weighted average shares
outstanding 14,704,421 12,191,446 14,725,060 12,202,845
============== ============== ============== ==============
</TABLE>
10
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
ProMedCo Management Company, ("ProMedCo" or the "Company") a Delaware
corporation, is a physician practice management company that consolidates its
affiliated physician groups into primary-care-driven multi-specialty networks.
ProMedCo commenced operations in December 1994 and affiliated with its initial
physician group in June 1995. The Company's rapid growth in 1996 and 1997 has
resulted primarily from its affiliation with additional physician groups. The
Company is currently affiliated with eight physician groups in five states
representing 186 physicians and 52 physician extenders practicing at 33 service
sites. A ninth physician group, consisting of 18 physicians and 3 physician
extenders, is being operated under an interim service agreement until its
affiliation with the Company is consummated. 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 is
continually seeking additional physician groups with which to affiliate and is
currently engaged in negotiations with several such groups.
ProMedCo focuses on pre-managed care secondary markets located principally
outside of or adjacent to large metropolitan areas. The key elements of the
Company's strategy are to (i) affiliate with primary-care-oriented
multi-specialty groups, (ii) continue to penetrate pre-managed care markets,
(iii) expand its affiliated groups' market presence through addition of
physicians and ancillary services, (iv) preserve the local autonomy of the
Company's affiliated physician groups and maintain decentralized management and
(v) align the Company's economic interests with those of its physician
partners.
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 six additional
groups during 1996 and 1997. Changes in results of operations for the three and
six months ended June 30, 1997 as compared to the three and six months ended
June 30, 1996 were caused primarily by affiliations with these six physician
groups.
11
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
The following table sets forth the percentages of physician groups revenue
represented by certain items reflected in the Company's condensed consolidated
statements of operations.
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
---------------------------- ----------------------------
1997 1996 1997 1996
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
Physician groups revenue, net 100.0% 100.0% 100.0% 100.0%
Less: amounts retained by physician groups 40.9 46.9 42.1 47.5
---- ---- ---- -----
Management fee revenue 59.1 53.1 57.9 52.5
Operating expenses:
Clinic salaries and benefits 23.1 24.7 22.7 24.7
Clinic rent and lease expense 5.6 5.5 5.4 5.6
Clinic supplies 7.6 6.4 7.5 6.1
Other clinic costs 11.4 13.5 11.6 13.4
General corporate expenses 3.2 6.7 3.5 7.3
Depreciation and amortization 2.3 0.7 2.2 0.7
Interest expense - 0.3 0.3 0.1
---- ---- ---- -----
Income (loss) before provision for income taxes 5.9% (4.7)% 4.7% (5.4)%
Provision for income taxes 1.6 - 1.3 -
---- ------ ---- -----
Net income (loss) 4.3% (4.7)% 3.4% (5.4)%
==== ===== ==== =====
</TABLE>
Physician groups revenue increased to $25.7 million for the three months ended
June 30, 1997 from $10.0 million for the three months ended June 30, 1996, an
increase of 156%, and to $46.5 million from $17.1 million for the first six
months of 1997 compared to 1996, an increase of 171%. The increase in physician
groups revenue resulted primarily from the various affiliations with physician
groups in 1996 and 1997.
Amounts retained by physician groups as a percentage of physician groups
revenue declined to 40.9% for the three months ended June 30, 1997, compared to
46.9% for the three months ended June 30, 1996, and to 42.1% for the first six
months of 1997 compared to 47.5% for the first six months of 1996. Overall
clinic costs as a percentage of physician groups revenue declined to 47.7% for
the three months ended June 30, 1997, compared to 50.1% for the three months
ended June 30, 1996, and to 47.2% for the first six months of 1997 compared to
49.8% for the first six months of 1996. The mix of physician specialties and
ancillary services affects the cost of affiliated physician services, clinic
salaries and benefits and clinic supplies. Because of the significance of
individual group affiliations to the Company as a whole, these expense ratios
will vary with each new acquisition. Generally, primary care and office-based
physician practices require a higher number of support staff than specialty
care or hospital-based practices. Clinic rent and lease expense as percentage
of physician groups revenue will vary based on the size of each of the
affiliated group's 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 physician groups revenue based on regional cost differences
and the Company's ability to implement operational efficiencies and negotiate
more favorable purchasing arrangements.
12
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
General corporate expenses as a percentage of physician groups revenue declined
to 3.2% for the three months ended June 30, 1997, compared to 6.7% for the
three months ended June 30, 1996, and to 3.5% for the first six months of 1997
compared to 7.3% for the first six months of 1996. The amount of these expenses
continued to increase during the remainder of 1996 and through the six months
ended June 30, 1997, 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
management fee revenue.
Depreciation and amortization as a percentage of physician groups revenue
increased to 2.3% for the three months ended June 30, 1997, compared to 0.7%
for the three months ended June 30, 1996 and to 2.2% for the first six months
of 1997 compared to 0.7% for the first six months of 1996. This increase is
attributable to differences in the mix of assets amount the various
affiliations that have occurred over the past year.
Net interest expense as a percentage of physician groups revenue was nil for
the three months ended June 30, 1997, compared to 0.3% for the three months
ended June 30, 1996, primarily due to increased interest income from the
investment of unused proceeds from the Company's initial public offering of its
common stock (the "Offering"), completed on March 12, 1997. For the first six
months of 1997, net interest expense as a percentage of physician groups
revenue increased to 0.3% for the first six months of 1997 compared to 0.1% for
the first six months as a result of higher debt levels associated with the new
affiliations.
Provision for income taxes reflects an effective rate of 28%, the Company's
estimated effective rate for all of 1997. This effective rate is lower than the
Federal statutory rate due to the realization of net operating loss
carryforwards, which had been previously reserved for.
Liquidity and Capital Resources
At June 30, 1997, the Company had working capital of $20.9 million, compared to
$2.3 million at December 31, 1996. This increase was largely due to completion
of the Offering, which resulted in net proceeds of $33.5 million, before
expenses of the Offering. This was partially offset by an increase in deferred
purchase price of $1.4 million, resulting from the Naples Medical Center
affiliation. During the second quarter, the Company paid approximately $11.7
million in connection with the Naples and Abilene affiliations (see Note 2).
Cash from operations for the six months ended June 30, 1997 was $781,000. Net
income combined with depreciation and amortization, deferred taxes, a decrease
in accounts receivable and an increase in amounts payable to affiliated
physician groups to provide $5.5 million in cash flows. This was offset by uses
of cash of $4.7 million, resulting from increases in management fees
receivable, amounts due from affiliated physicians and other assets and
decreases in accounts payable, accrued expenses and other current liabilities.
13
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
The Company had expenditures for the acquisition of clinic assets of $13.2
million for the six months ended June 30, 1997. Of this, approximately $12.6
million related to the affiliations with Abilene and Naples. The remaining
amounts were for additional physicians at existing clinics and deferred
payments associated with previously completed acquisitions. Capital
expenditures amounted to $1.1 million for the six months ended June 30, 1997.
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 bank credit facility provides for a total of $25 million in
working capital and acquisition financing, subject to certain restrictions.
Outstanding borrowings against the bank credit facility were $4.5 million at
June 30, 1997. The interest rate under this facility is, at the Company's
option, (i) the "adjusted" 30-day commercial paper rate of issuers whose
corporate bonds are rated "AA" plus 3.25%, (ii) one month LIBOR plus 3.25% or
(iii) the bank's prime rate plus 0.5%, which was 8.5% as of June 30, 1997. The
bank credit facility, which expires in July 2001, contains certain restrictive
covenants, including prohibitions on paying dividends, limitations on capital
expenditures and maintenance of minimum net worth and certain financial ratios.
In connection with the Naples affiliation, the Company issued notes payable to
the group totaling $8.7 million. These notes are payable in three annual
installments in each of April 1998, 1999 and 2000. The notes bear interest at
9%, with interest payable in options to purchase the Company's common stock at
a price of $9.00 per share, providing the market price for the stock is above
the exercise price at the time of payment. Interest may be paid in cash at the
option of either party if the market price for the stock is $9.00 or less at
the time of payment.
The Company had cash and cash equivalents of $19.7 million at June 30, 1997. In
addition to this, the Company's principal sources of liquidity are accounts
receivable of $9.5 million at June 30, 1997 and availability under the working
capital portion of the bank line of credit of $2.3 million. The Company
believes that the combination of these sources will be sufficient to meet the
Company's working capital needs for the next twelve months. The Company has
finalized terms for an affiliation with a physician group and the acquisition of
a managed care company, both of which are expected to close in the third
quarter. Combined consideration for the two is estimated to be $13 million, in
the form of cash, stock and deferred purchase price. The Company's future
acquisition, expansion and capital expenditure programs will require substantial
amounts of capital resources. To meet the capital needs of these programs, the
Company will continue to evaluate alternative sources of financing, including
short- and long-term bank indebtedness, additional equity and other forms of
financing, the availability and terms of which will depend upon market and other
conditions. There can be no assurance that additional financing will be
available on terms acceptable to the Company.
14
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
Forward-Looking Statements
From time to time, the Company may publish forward-looking statements
about anticipated results. The Private Securities Litigation Reform Act of 1995
provides a safe harbor for forward-looking statements. In order to comply with
the terms of the safe harbor, the Company notes that such forward-looking
statements are based upon internal estimates which are subject to change
because they reflect preliminary information and management assumptions, and
that a variety of factors could cause the Company's actual results and
experience to differ materially from the anticipated results or other
expectations expressed in the Company's forward-looking statements. The factors
which could cause actual results or outcomes to differ from such expectations
include the extent of the Company's success in (i) negotiating the acquisition
of additional physician groups; (ii) integrating all operations within the
planned time frame; and (iii) negotiating favorable reimbursement rates, along
with the uncertainties and other factors described from time to time in the
Company's SEC filings and reports. This report includes "forward-looking
statements" including, without limitation, statements as to operating results,
liquidity and capital resources, and the negotiation and acquisition of
additional physician groups.
15
<PAGE> 17
<TABLE>
<CAPTION>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
<S> <C>
(a) Exhibits:
11 Computation of Per Share Earnings
27 Financial Data Schedule
(b) Reports on Form 8-K
On June 19, 1997, the Company filed a report on Form 8-K
reporting an acquisition of a physician group in Abilene,
Texas, pursuant to Item 2. of Form 8-K.
</TABLE>
16
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ H. Wayne Posey
- -------------------------
H. Wayne Posey President, Chief Executive August 14, 1997
Officer, and Director
(Chief Executive Officer)
/s/ Robert D. Smith
- -------------------------
Robert D. Smith Vice President - Finance August 14, 1997
(Chief Accounting Officer)
</TABLE>
17
<PAGE> 19
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- -------
<S> <C>
EX - 11 Computation of Per Share Earnings
EX - 27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 11
Computation of Per Share Earnings
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Primary
Weighted average shares
outstanding 10,050,953 4,785,524 8,459,921 4,785,854
Net common shares issuable
on exercise of certain
stock options (1) (2) 472,148 254,033 484,932 265,102
Net common shares issuable
on exercise of certain
stock warrants (1) (2) 2,200,547 66,667 2,208,817 66,667
Contingently issuable shares in
business combinations 1,980,773 3,085,222 1,980,230 3,085,222
Number of common shares
outstanding 14,704,421 8,191,446 13,133,900 8,202,845
Fully Diluted
Weighted average shares
outstanding 10,050,953 4,785,524 8,459,921 4,785,854
Net common shares issuable
on exercise of certain
stock options (1) (2) 472,148 254,033 484,932 265,102
Net common shares issuable
on exercise of certain
stock options warrants 2,200,547 66,667 2,208,817 66,667
Contingently issuable shares in
business combinations 1,980,773 3,085,222 1,980,230 3,085,222
Other dilutive securities 200,030 200,030 200,030 200,030
Number of common shares
outstanding 14,904,451 8,391,476 13,333,930 8,402,875
</TABLE>
(1) net common shares issuable on exercise of certain stock options and warrants
is calculated based on the treasury stock method using an estimated of the
initial public offering price.
(2) Common shares issuable on exercise of certain stock options and warrants
were not included during loss periods since the effect of the inclusion
would be anti-dilutive. (Pursuant to applicable rules of the SEC stock,
options, and warrants issued or contingently issuable within one year
prior to the initial filing of this registration statement are treated
as outstanding for all periods presented regardless of the anti-dilutive
effect.)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 19,713,154
<SECURITIES> 0
<RECEIVABLES> 9,502,714
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 34,341,195
<PP&E> 6,929,533
<DEPRECIATION> 1,481,464
<TOTAL-ASSETS> 90,258,737
<CURRENT-LIABILITIES> 13,464,111
<BONDS> 0
0
0
<COMMON> 100,510
<OTHER-SE> 63,001,875
<TOTAL-LIABILITY-AND-EQUITY> 90,258,737
<SALES> 0
<TOTAL-REVENUES> 46,457,625
<CGS> 0
<TOTAL-COSTS> 44,171,454
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 117,097
<INCOME-PRETAX> 2,169,074
<INCOME-TAX> 607,341
<INCOME-CONTINUING> 1,561,733
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,561,733
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
</TABLE>
