SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities and Exchange Act of 1934
Date of Report (date of earliest event reported):
April 23, 1997
PROMEDCO MANAGEMENT COMPANY
(Exact name of Registrant as specified in its charter)
DELAWARE 0-21373 75-2529809
(State of (Commission File No.) (IRS Employer
Incorporation) Identification No.)
801 CHERRY STREET, SUITE 1450
FORT WORTH, TEXAS 76102
(Address of principal executive offices, including zip code)
(817)335-5035
(Registrant's telephone number, including area code)
<PAGE>
The undersigned Registrant hereby amends Item 7 of its current report on Form
8-K which was filed with the Securities and Exchange Commission on May 7, 1997,
as follows:
Item 7. Financial Statements and Exhibits
(a) Financial Statements of Business Acquired
(i) The audited combined financial statements of
Southwest Florida Clinic
Practices as of December 31, 1995 and 1996
(b) Pro Forma Financial Information
(i) Unaudited Pro Forma Consolidated Balance Sheet as of
December 31, 1996
(ii) Unaudited Pro Forma Consolidated Statement of
Operations for the year ended
December 31, 1996
(iii) Notes to Pro Forma Consolidated Financial Information
The unaudited pro forma consolidated financial statements should be
read in conjunction with the historical financial statements and notes
thereto, included in the Company's registration statement on Form S-1
and related prospectus dated March 12, 1997.
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<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Naples Medical Center, P.A. and Naples Obstetric and Gynecology, M.D., P.A.:
We have audited the accompanying combined balance sheets of the Southwest
Florida Clinic Practices (see Note 1) as of December 31, 1995 and 1996, and the
related combined statements of operations, owners' equity, and cash flows for
the years then ended. These financial statements are the responsibility of the
Companies' 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 the Southwest Florida Clinic
Practices as of December 31, 1995 and 1996, and the results of their operations
and their cash flows for the years then ended in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Fort Worth, Texas,
February 28, 1997
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<PAGE>
SOUTHWEST FLORIDA CLINIC PRACTICES (NOTE 1)
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
ASSETS 1995 1996
------ ------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 150,312 $ 129,582
Accounts receivable - net of contractual and other
allowances of $3,381,568 and $4,148,894, respectively 2,917,824 3,666,759
Inventories 17,708 30,989
-------------- -------------
Total current assets 3,085,844 3,827,330
PROPERTY AND EQUIPMENT, net of accumulated depreciation
of $1,786,873 and $1,966,873, respectively 673,064 616,234
OTHER ASSETS 12,250 81,867
--------- ---------
Total assets $ 3,771,158 $ 4,525,431
============== =============
LIABILITIES AND OWNERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ -- $ 234,900
Advances from affiliated company 697,488 700,174
Current maturities of notes payable 202,750 301,152
Accrued expenses and other current liabilities 828,819 838,664
-------------- -------------
Total current liabilities 1,729,057 2,074,890
NOTES PAYABLE, net of current maturities 283,695 177,702
-------------- -------------
Total liabilities 2,012,752 2,252,592
COMMITMENTS AND CONTINGENCIES
OWNERS' EQUITY 1,758,406 2,272,839
-------------- -------------
Total liabilities and owners' equity $ 3,771,158 $ 4,525,431
============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
SOUTHWEST FLORIDA CLINIC PRACTICES (NOTE 1)
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
1995 1996
<S> <C> <C>
NET REVENUES $ 19,875,731 $ 22,782,922
------------- -------------
COSTS AND EXPENSES:
Clinic salaries and benefits 15,231,612 17,184,326
Clinic rent and lease expense 614,462 728,747
Clinic pharmaceuticals and supplies 148,610 114,724
General and administrative 3,565,790 4,007,000
Depreciation 215,626 188,962
Interest expense 39,854 54,030
------------- -------------
Total costs and expenses 19,815,954 22,277,789
------------- -------------
NET INCOME $ 59,777 $ 505,133
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 5 -
<PAGE>
SOUTHWEST FLORIDA CLINIC PRACTICES (NOTE 1)
COMBINED STATEMENTS OF OWNERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
BALANCE, December 31, 1994 $ 1,701,729
Net income 59,777
Capital transactions (3,100)
-------------
BALANCE, December 31, 1995 1,758,406
Net income 505,133
Capital transactions 9,300
-------------
BALANCE, December 31, 1996 $ 2,272,839
=============
The accompanying notes are an integral part of these financial statements.
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<PAGE>
SOUTHWEST FLORIDA CLINIC PRACTICES (NOTE 1)
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 59,777 $ 505,133
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 215,626 188,962
Changes in assets and liabilities
Accounts receivable, net (247,066) (748,935)
Inventories 1,812 (13,281)
Other current assets 70,331 --
Other noncurrent assets (12,000) (69,617)
Accounts payable (61) 234,900
Accrued expenses and other current liabilities 16,395 9,845
------------- ------------
Net cash provided by operating activities 104,814 107,007
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (273,472) (132,132)
------------- ------------
Net cash used in investing activities (273,472) (132,132)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable 7,069 (7,591)
Proceeds from capital transactions (3,100) 9,300
Proceeds from affiliated company 162,663 2,686
------------- ------------
Net cash provided by financing activities 166,632 4,395
------------- ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,026) (20,730)
CASH AND CASH EQUIVALENTS, beginning of year 152,338 150,312
------------- ------------
CASH AND CASH EQUIVALENTS, end of year $ 150,312 $ 129,582
============= ============
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the year for interest $ 39,854 $ 54,030
============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
SOUTHWEST FLORIDA CLINIC PRACTICES (NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
1. DESCRIPTION OF BUSINESS:
The combined financial statements of Southwest Florida Clinic Practices
include the historical financial statements of Naples Medical Center,
P.A. (NMC) and Naples Obstetric & Gynecology, M.D., P.A.. These
entities have collectively agreed to enter into a service agreement
with a wholly-owned subsidiary of ProMedCo Management Company
(ProMedCo) to manage all day-to-day operations other than the provision
of medical services. The entities have also agreed to enter into asset
purchase agreements with ProMedCo for certain assets and certain
liabilities (excluding, among other things, requirements under benefit
plans) of the entities, with an anticipated closing date in April 1997.
The transaction will be accounted for by ProMedCo under the purchase
method of accounting for business combinations.
The accompanying combined financial statements of the Southwest Florida
Clinic Practices (the "Combined Entities") have been prepared for a
Securities and Exchange Commission filing requirement of ProMedCo. The
entities have been presented on a combined basis as the business
transaction will be accounted for as a single transaction by ProMedCo
and, therefore, it is more meaningful to present the combined financial
position and results of operations of the acquired entities.
2. SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The accompanying combined financial statements have been prepared on
the accrual basis of accounting. The Combined Entities maintain their
accounting records on a cash basis. Certain accrual-basis adjustments
have been made in the preparation of these combined financial
statements.
Revenue Recognition
Revenue is recorded at estimated net amounts to be received from third
party payors and others for services rendered.
Cash and Cash Equivalents
Cash and cash equivalents include 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.
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<PAGE>
Accounts Receivable
Accounts receivable primarily consists of receivables from patients,
insurers, government programs and other third-party payors for medical
services provided by physicians. Such amounts are reduced by an
allowance for contractual and other uncollectible amounts.
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 5-7
Equipment 3-15
Leasehold improvements Estimated Lease Life
Income Taxes
One of the Combined Entities is an S Corporation; accordingly, income
tax liabilities are the responsibility of the respective owners. The
remaining taxable corporation is a cash-basis tax payor and has 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.
New Accounting Pronouncement
The Financial Accounting Standards Board issued 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."
Adoption of this standard is required for financial statements for
fiscal years beginning after December 15, 1995. The new standard did
not have an impact on The Combined Entities' results of operations.
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.
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<PAGE>
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
1995 1996
<S> <C> <C>
Furniture and fixtures $ 176,048 $ 191,852
Leasehold improvements 170,222 170,222
Equipment 2,113,667 2,221,033
Less- Accumulated depreciation and amortization (1,786,873) (1,966,873)
-------------- -------------
Property and equipment, net $ 673,064 $ 616,234
============== =============
</TABLE>
4. ADVANCES FROM AFFILIATED COMPANY:
Advances from affiliated company represent amounts owed to Naples
Medical and Professional Center, Inc., a related party, for operating
assets transferred to NMC and cash advances to NMC for the purchase of
equipment.
5. NOTES PAYABLE:
Notes payable consists of the following:
<TABLE>
<CAPTION>
December 31,
1995 1996
<S> <C> <C>
Note payable to a bank, due in 1999, principal and interest payable in
monthly installments, bearing interest at 7.0%, secured by certain
property
and equipment $ 383,355 $ 283,854
Note payable to a bank, due in 1997, principal and interest payable in
monthly installments, bearing interest at a variable rate of prime
plus 1/2% (8.75% at
December 31, 1996) 103,090 195,000
------------- -------------
Total 486,445 478,854
Less Current maturities (202,750) (301,152)
------------- -------------
Notes payable, net of current maturities $ 283,695 $ 177,702
============= =============
</TABLE>
6. COMMITMENTS AND CONTINGENCIES:
The Combined Entities have operating leases for the buildings in which
they are located and equipment. The leases are negotiated annually.
Rent expense totaled $614,462 and $728,747 for the years ended December
31, 1995 and 1996, respectively.
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<PAGE>
7. BENEFIT PLANS:
The Combined Entities have several defined contribution plans.
Contributions were $698,548 and $836,142 for 1995 and 1996,
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 and 1996.
9. RELATED-PARTY TRANSACTIONS:
NMC leases the building in which they are located and various pieces of
equipment from Naples Medical and Professional Center, Inc., a related
party. The amounts paid to the related party approximated $376,219 and
$390,226 in 1995 and 1996, respectively.
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<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The pro forma as adjusted consolidated balance sheet gives effect to
the acquisition of substantially all of the operating assets of Naples Medical
Center, P.A. and Naples Obstetrics & Gynecology, M.D., P.A. (the "Naples
Acquisition") as if it had been completed on December 31, 1996 and also reflects
the initial public offering of ProMedCo Management Company's ("ProMedCo" or the
"Company") Common Stock in March 1997 (the "Offering") and the conversion of all
outstanding Series A 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 all outstanding Redeemable Common Stock, all
of which occurred simultaneously with the closing of the Offering, as if such
transactions had occurred on December 31, 1996.
The pro forma as adjusted consolidated statement of operations for the
year ended December 31, 1996, gives effect to the Naples Acquisition as if it
had been completed on January 1, 1996. The historical as adjusted statement of
operations gives effect to the Offering and to the 1996 affiliations with
Cullman Family Practice, P.C.; Family Medical Clinic, P.C.; Morgan-Haugh,
P.S.C.; HealthFirst Services, Inc.; Tarrant Family Practice, P.A. and King's
Daughters Clinic, P.A. (the "1996 Transactions"), all completed during 1996, as
if they had been completed on January 1, 1996. The pro forma as adjusted
consolidated statement of operations information is based on the combined
financial statements of the Company and the affiliated physician groups, giving
effect to the Naples Acquisition and the 1996 Transactions 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 had been prepared by
management based on the audited financial statements of the affiliated 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 Naples Acquisition or
the 1996 Transactions had been completed on January 1, 1996 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 Southwest Florida Clinic Practices included elsewhere in
this filing and for the Company, Cullman Family Practice, P.C., Family Medical
Clinic, P.C., Morgan-Haugh, P.S.C., HealthFirst Services, Inc., and Tarrant
Family Practice, P.A., included in the Company's registration statement on Form
S-1 and related prospectus dated March 12, 1997.
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<PAGE>
PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Equity Offering Historical Naples Naples Pro Forma
Historical(a) Conversions(b) Adjustments(c) As Adjusted Historical(d) Adjustments as Adjusted
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents $ 1,633,534 $ -- $ 31,764,065 $ 33,397,599 $ 129,582 $(11,107,755) (g) $22,419,426
Accounts receivable, net 6,227,228 -- -- 6,227,228 3,666,759 (1,071,296) (e) 8,822,691
Inventory 225,212 -- -- 225,212 30,989 -- 256,201
Management fees receivable 1,266,598 -- -- 1,266,598 -- -- 1,266,598
Due from affiliated
physician groups 660,278 -- -- 660,278 -- -- 660,278
Prepaid expenses and other
current assets 517,633 -- -- 517,633 -- -- 517,633
----------- ------------ ------------ ------------ ------------ ------------ -----------
Total current assets 10,530,483 -- 31,764,065 42,294,548 3,827,330 (12,179,051) 33,942,827
Property and equipment, net 3,930,191 -- -- 3,930,191 616,234 -- 4,546,425
Intangible assets, net 14,860,171 -- -- 14,860,171 -- 1,993,699 (d) 16,853,870
Other assets 1,238,929 -- (564,427) 674,502 81,867 14,493,255 (d) 15,249,624
----------- ------------ ------------ ------------ ------------ ------------ -----------
Total assets $30,559,774 $ -- $ 31,199,638 $ 61,759,412 $ 4,525,431 $ 4,307,903 $70,592,746
=========== ============ ============ ============ ============ ============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,505,762 $ -- $ -- $ 1,505,762 $ 234,900 $ (97,420) (e) $ 1,643,242
Payable to affiliated
physician groups 1,341,876 -- -- 1,341,876 -- -- 1,341,876
Accrued salaries, wages
and benefits 1,153,558 -- -- 1,153,558 -- -- 1,153,558
Accrued expenses and other
current liabilities 2,353,381 -- 1,035,573 3,388,954 838,664 (838,664) (e) 3,388,954
Advances from affiliated
company -- -- -- -- 700,174 (700,174) (e) --
Current maturities of
long-term debt 1,151,191 -- -- 1,151,191 301,152 (301,152) (e) 1,151,191
Current maturities of
capital leases 589,438 -- -- 589,438 -- -- 589,438
Deferred purchase price 181,986 -- -- 181,986 -- -- 181,986
----------- ------------ ------------ ------------ ------------ ------------ -----------
Total current
liabilities 8,277,192 -- 1,035,573 9,312,765 2,074,890 (1,937,410) 9,450,245
Notes payable, net 4,585,173 -- (1,715,935) 2,869,238 177,702 (177,702) (e) 11,565,092
8,695,854 (g)
Obligations under capital
leases 1,030,171 -- -- 1,030,171 -- -- 1,030,171
Convertible subordinated
notes payable 1,800,274 -- -- 1,800,274 -- -- 1,800,274
Other long term liabilities 393,575 -- -- 393,575 -- -- 393,575
----------- ------------ ------------ ------------ ------------ ------------ -----------
Total liabilities 16,086,385 -- (680,362) 15,406,023 2,252,592 6,580,742 24,239,357
----------- ------------ ------------ -------------- ------------ ------------ -----------
Series A Redeemable
convertible
preferred stock 2,957,641 (2,957,641) -- -- -- -- --
Redeemable common stock 991,776 (991,776) -- -- -- -- --
Stockholders' equity:
Preferred stock -- -- -- -- -- -- --
Class B common stock 12,262 (12,262) -- -- -- -- --
Common stock 31,871 18,915 40,000 90,786 2,272,839 (2,272,839) (f) 90,786
Additional paid in
capital 11,987,480 3,942,764 31,840,000 47,770,244 -- -- 47,770,244
Common stock to be
issued 2,303,212 -- -- 2,303,212 -- -- 2,303,212
Stockholder notes
receivable (151,306) -- -- (151,306) -- -- (151,306)
Accumulated deficit (3,659,547) -- -- (3,659,547) -- -- (3,659,547)
----------- ------------ ------------ ------------ ------------ ------------ -----------
Total stockholders'
equity 10,523,972 3,949,764 31,880,000 46,353,389 2,272,839 (2,272,839) 46,353,389
---------- ------------ ------------ ------------ ------------ ----------- -----------
Total liabilities and
stockholders' equity $30,559,774 $ $ 31,199,638 $ 61,759,412 $ 4,525,431 $ 4,307,903 $70,592,746
=========== ============ ============ ============ ============ ============ ===========
</TABLE>
See accompanying notes to pro forma consolidated financial information
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<PAGE>
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1996 Trans- Offering Historical Naples Naples Pro Forma
Historical(h) actions(i) Adjustments Adjustments(s) As Adjusted Acquisition(t) Adjustments As Adjusted
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Physician groups
revenue, net $46,996,262 $17,474,415 $ -- $ -- $64,470,677 $19,875,731 $ -- $84,346,408
Less: amounts
retained
by physician
groups 20,791,607 6,559,401 (12,028,788) (j) -- 26,453,704 10,819,621 (10,819,621)(u) 37,199,931
11,131,484 (k) 10,746,227 (u)
----------- ----------- ----------- --------- ---------- ---------- ----------- ----------
Management fee
revenue 26,204,655 10,915,014 897,304 -- 38,016,973 9,056,110 73,394 47,146,477
Operating expenses:
Clinic salaries
and benefits 11,778,563 4,545,936 (603,070) (l) -- 15,721,429 4,411,991 (1,712,046)(v) 18,421,374
Clinic rent and
lease expense 2,684,002 1,318,760 17,630 (m) -- 4,020,392 614,462 -- 4,634,854
Clinic supplies 2,860,454 1,221,014 -- -- 4,081,468 148,610 -- 4,230,078
Other clinic costs 6,202,760 6,202,760 (467,287) (n) -- 8,920,050 3,565,790 (11,322)(w) 12,474,518
General corporate
expenses 2,633,585 -- -- -- 2,633,585 -- -- 2,633,585
Depreciation and
amortization 723,641 288,052 (28,933) (o) -- 1,311,783 215,626 66,457 (x) 1,593,865
329,023 (p)
Merger costs 682,269 -- -- -- 682,269 -- -- 682,269
Interest expense 210,234 109,045 (25,442) (q) (51,098) 301,944 39,854 (39,854)(y) 1,084,944
59,204 (q) 783,000 (y)
----------- ----------- ----------- -------- ---------- ---------- ----------- ----------
27,775,508 10,667,384 (718,875) (51,098) 37,672,919 8,996,333 (913,765) 45,755,487
----------- ----------- ----------- -------- ---------- ---------- ----------- ----------
Income (loss) before
provision for
income taxes (1,570,853) 247,630 1,616,179 51,098 344,053 59,777 987,159 1,390,990
Provision
(benefit) for
income taxes -- (93,974) 205,297 (r) 19,417 130,740 -- 397,836 (z) 528,576
----------- ----------- ----------- --------- ---------- ---------- ----------- ----------
Net income (loss) $(1,570,853) $ 341,604 $ 1,410,881 $ 31,681 $ 213,313 $ 59,777 $ 589,323 $ 862,414
=========== =========== =========== ========= ========== ========== =========== ==========
Net income (loss)
per share $ (0.19) $ 0.01 $ 0.06
=========== ========== ==========
Weighted average number
of common shares
outstanding 8,395,186 14,873,522 14,873,522
=========== ========== ==========
</TABLE>
See accompanying notes to pro forma consolidated financial information.
- 14 -
<PAGE>
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
Through March 31, 1997 and during 1996 the Company, through its wholly
owned subsidiaries, acquired certain operating assets and assumed certain
operating liabilities of five physician groups located in Alabama, Florida,
Kentucky, and Texas.
PHYSICIAN GROUPS REVENUE, NET
Physician groups revenue represents the revenue of the affiliated
physician groups reported at the estimated realizable amounts from patients,
third-party payors, and others for services rendered, net of contractual and
other adjustments.
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 group operating income) represent amounts paid
to the physician groups 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 revenue is dependent upon the operating
income of the physician groups. 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 groups primarily consists of the cost of the affiliated physicians'
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.
PRO FORMA CONSOLIDATED BALANCE SHEET
The adjustments reflected in the pro forma consolidated balance sheet are as
follows:
(a) The historical consolidated balance sheet includes the
combined assets, liabilities and stockholders' equity of the
Company and Western Medical Management Corp. Inc. ("Reno")
at December 31, 1996. The Reno business combination was
completed on March 17, 1997, and has been accounted for as a
pooling of interests.
(b) To reflect the conversion of all Series A Redeemable
Convertible Preferred Stock and Class B Common Stock into
Common Stock and the termination of the Company's contingent
obligation to repurchase Redeemable Common Stock. The equity
conversions assume that all stock was converted using a
one-for-one conversion ratio, as provided in the Company's
Certificate of Incorporation.
(c) To reflect effects of the Offering.
- 15 -
<PAGE>
(d) To record the assets acquired and liabilities assumed by ProMedCo in the
Naples Acquisition. This acquisition has been accounted for by the purchase
method of accounting and, accordingly, the purchase price has been
preliminarily allocated to the assets acquired and liabilities assumed
based on the estimated fair values. Total consideration amounted to
approximately $19.9 million, consisting of cash of $11.1 million, notes
payable of $8.7 million, and the assumption of certain liabilities of
$100,000. The preliminary allocation of the purchase price includes
recognition of a long-term receivable for cash paid on behalf of the
sellers for premiums under certain split dollar life insurance arrangements
covering the physicians (see further discussion below under "Other
Assets").
The following methods and assumptions were used to estimate fair value:
Cash and cash equivalents--The historical carrying amount approximates fair
value.
Accounts receivable, net--The Company acquired only a specified portion of the
accounts receivable. The Company reviewed the specific receivable
balances and determined that their historical carrying amount
approximates their fair value.
Property and equipment, net--The Company performed an asset review and
determined that the historical carrying amount approximates fair value.
Liabilities assumed--Given the short term nature of the liabilities assumed, the
historical carrying amount approximates their fair value.
Intangible assets--In connection with the allocation of the purchase price to
identifiable intangible assets, the Company analyzes the nature of each
group, number of service sites and ability to recruit additional
physicians, the group's relative market position, the length of time
each group has been in existence, and the term and enforceability of
the service agreement. Because the Company does not practice medicine,
maintain patient relationships, hire physicians, enter into employment
and non-competition agreements with the physicians, or directly
contract with payors, the intangible asset created in the purchase
allocation process is associated solely with the service agreement with
the physician group. The service agreements are for a term of 40 years
and cannot be terminated by either party without cause, consisting
primarily of bankruptcy or material default.
The Company believes that there is no material value allocable to the
employment and non-competition agreements entered into between the
physician group and the individual physicians. The primary economic
beneficiary of these agreements is the physician group, an entity that
the Company does not legally control. In addition, any damages under
the agreements are paid solely to the physician group for purposes of
replacing departing physicians. Generally, due to low expected
physician turnover in the industry and the ability of the physician
group to replace departing physicians, the Company believes there would
be no significant economic loss to either the physician group or the
Company due to physician departure. The physician groups continually
recruit physicians and, as appropriate and necessary, subsequently add
qualified physicians to the group. This manner of operations allows the
physician group to perpetuate itself as individual physicians retire or
are otherwise replaced. The Company believes that the physician groups
with which it has service agreements thus are long-lived entities with
an
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<PAGE>
indeterminable life, and that the physicians, customer demographics,
and various contracts will be continuously replaced. The service
agreement intangible is being amortized on a straight-line method over
a composite average life of 30 years.
Other assets--The Company is entitled to receive, from the
physicians, amounts equal to premiums paid by the Company for
split-dollar life insurance arrangements covering the
physicians. The long-term receivables are collected upon the
individual physician's death or his early termination. The
full amounts of the receivables are guaranteed by the
physicians and are stated at fair value.
(e) To eliminate assets not acquired and liabilities not assumed
by ProMedCo in the Naples Acquisition as stated in the
purchase agreement.
(f) To eliminate the owner's equity of Naples in connection with
the purchase accounting for the acquisition.
(g) To record the cash paid and notes payable issued at closing in
exchange for assets acquired and liabilities assumed in
connection with the acquisition.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
The adjustments reflected in the pro forma consolidated statement of operations
for the year ended December 31, 1996 are as follows:
(h) The historical consolidated statement of operations includes
the combined results of operations of the Company and Reno for
the year ended December 31, 1996. The Reno business
combination was completed on March 17, 1996, and has been
accounted for as a pooling of interests.
(i) The 1996 Transactions column represents the historical
revenues and expenses of the physician groups for that portion
of the year preceding the groups' affiliation with the
Company. The 1996 Transactions include Cullman Family
Practice, P.C., Family Medical Clinic, P.C., Morgan-Haugh,
P.S.C., HealthFirst Services, Inc., Tarrant Family Practice,
P.A., and King's Daughters Clinic, P.A.
(j) To eliminate the historical amounts retained by physician
groups for each acquired physician group in the 1996
Transactions and Reno. The adjustment is for the periods that
the physician groups were not managed under the service
agreements.
(k) To record the amounts retained by physician groups to the
percentage specified in the service agreement (typically 85%
of each of the physician group's operating income) entered
into with each affiliated physician group in the 1996
Transactions and Reno. The adjustment is for the periods the
physician groups were not managed under the service
agreements.
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<PAGE>
(l) To eliminate the salaries of nurses and physician extenders at
historical levels in the 1996 Transactions for the periods not
covered by the service agreements. The service agreements
provide that these costs are for the account of the physician
groups. The adjustment is for the periods the physician groups
were not managed under the service agreements.
(m) To record additional rental expense related to the rental of
clinic space from the physician groups in the 1996
Transactions. The adjustment is for the periods the physician
groups were not managed under the service agreements.
(n) To eliminate physician benefits and other physician-related
costs in the 1996 Transactions and Reno, such as club dues and
subscriptions, that will not be paid by the Company. The
adjustment is for the periods the physician groups were not
managed under the service agreements.
(o) To eliminate the depreciation and amortization expense
recorded by the physician groups in the 1996 Transactions at
historical values. The adjustment is for the periods the
physician groups were not managed under the service
agreements.
(p) To adjust depreciation expense and amortization expense in the
1996 Transactions. The adjustment for depreciation expense
is computed by dividing total fixed assets acquired by the
weighted average life of the fixed assets acquired
(approximately seven years), less depreciation expense
recorded on an historical basis. The adjustment for
amortization expense is computed by dividing total service
agreement rights acquired by a composite average life of
30 years, less agreement amortization expense recorded on an
historical basis. The adjustments assume the acquired assets
were held for the entire period presented.
(q) To eliminate interest expense related to liabilities not
assumed in connection with the 1996 Transactions and record
interest on debt issued in connection with the acquisitions.
(r) To record an estimate of the overall provision for income
taxes for the consolidated operations of the historical
results of the Company plus the 1996 Transactions, as
adjusted, at an estimated effective rate of 38%.
(s) To reduce interest expense assuming repayment of the Company's
Credit Facility borrowings with a portion of the proceeds of
the Offering received by the Company as of January 1, 1996,
net of estimated federal and state income taxes at a combined
rate of 38%.
(t) The Naples Acquisition represents the historical combined
revenues and expenses of the Southwest Florida Clinic
Practices.
(u) To eliminate the historical amounts retained by the physician
group and record the amounts retained by the physician group
based on the percentage specified in the service agreement
entered into with the physician group.
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<PAGE>
(v) To eliminate the salaries of nurses and physician extenders at
historical levels for the periods not covered by the service
agreements. The service agreements provide that these costs
are for the account of the physician groups.
(w) To eliminate physician benefits and other physician-related
costs, such as club dues and subscriptions, that will not be
paid by the Company.
(x) To adjust depreciation expense and amortization expense. The adjustment for
depreciation expense is computed by dividing total fixed assets acquired by
the weighted average life of the fixed assets acquired (approximately seven
years), less depreciation expense recorded on an historical basis. The
adjustment for amortization expense is computed by dividing total service
agreement rights acquired by a composite average life of 30 years, less
agreement amortization expense recorded on an historical basis. The
adjustments assume the acquired assets were held for the entire period
presented.
(y) To eliminate interest expense related to liabilities not
assumed and record interest on debt issued in connection with
the acquisition.
(z) To record an estimate of the provision for income taxes for
the Naples Acquisition at an estimated rate of 38%.
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<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
PROMEDCO MANAGEMENT COMPANY
By: /s/ Robert D. Smith
Robert D. Smith
Chief Accounting Officer
Date: July 7, 1997
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