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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 September 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 October 31, 1997
$.01 par value 10,062,095 shares
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<PAGE>
PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES
INDEX
Page
No.
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
September 30, 1997 and December 31, 1996 2
Condensed Consolidated Statements of Operations
Three Months and Nine Months Ended September 30, 1997 and 1996 3
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 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 2. Changes in Securities and Use of Proceeds 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
<PAGE>
PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 1997 December 31,
(Unaudited) 1996
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 17,098,313 $ 1,633,534
Accounts receivable, net 13,807,217 6,227,228
Management fees receivable 161,105 1,266,598
Due from affiliated physician groups 2,206,265 660,278
Prepaid expenses and other current assets 3,501,605 742,845
------------------ ------------------
Total current assets 36,774,505 10,530,483
------------------ ------------------
Property and equipment, net 6,337,628 3,930,191
Intangible assets, net 46,237,534 14,860,171
Other assets 16,332,234 1,238,929
------------------ ------------------
Total assets $ 105,681,901 $ 30,559,774
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,437,015 $ 1,505,762
Payable to affiliated physician groups 3,596,788 1,341,876
Accrued salaries, wages and benefits 1,628,373 1,153,558
Accrued expenses and other current liabilities 2,757,731 2,353,381
Current maturities of long-term debt 3,668,146 1,151,191
Current maturities of obligations under capital leases 137,180 589,438
Deferred purchase price 8,434,428 181,986
------------------ ------------------
Total current liabilities 21,659,661 8,277,192
------------------ ------------------
Long-term debt, net of current maturities 15,245,130 4,585,173
Obligations under capital leases, net of current maturities 746,414 1,030,171
Convertible subordinated notes payable 1,800,274 1,800,274
Other long term liabilities 1,716,481 393,575
------------------ ------------------
Total liabilities 41,167,960 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 100,621 31,871
Additional paid-in capital 53,400,407 11,987,480
Common stock to be issued 11,878,044 2,303,212
Stockholder notes receivable (369,665) (151,306)
Accumulated deficit (495,466) (3,659,547)
------------------- ------------------
Total stockholders' equity 64,513,941 10,523,972
------------------ ------------------
Total liabilities and stockholders' equity $ 105,681,901 $ 30,559,774
================== ==================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Physician groups revenue, net $ 29,302,573 $ 12,672,590 $ 75,760,198 $ 29,805,433
Less: amounts retained by physician groups 11,496,972 5,332,128 31,037,320 13,472,676
-------------- -------------- -------------- --------------
Management fee revenue 17,805,601 7,340,462 44,722,878 16,332,757
-------------- -------------- -------------- --------------
Operating expenses:
Clinic salaries and benefits 6,795,818 3,301,399 17,362,170 7,526,661
Clinic rent and lease expense 1,620,677 727,252 4,129,602 1,688,280
Clinic supplies 2,034,422 972,824 5,510,504 2,016,980
Other clinic costs 2,826,303 1,631,434 8,225,318 3,921,005
General corporate expenses 1,113,978 643,704 2,756,283 1,901,399
Depreciation and amortization 923,093 204,369 1,961,520 323,001
Interest expense 110,468 59,024 227,565 72,470
Merger costs - 139,501 - 139,501
------------- -------------- ------------- --------------
15,424,759 7,679,507 40,172,962 17,589,297
-------------- -------------- -------------- --------------
Income (loss) before provision for income taxes 2,380,842 (339,045) 4,549,916 (1,256,540)
Provision for income taxes 778,494 - 1,385,835 -
-------------- -------------- -------------- --------------
Net income (loss) $ 1,602,348 $ (339,045) $ 3,164,081 $ (1,256,540)
============== ============== ============== ==============
Earnings (loss) per share $ 0.11 $ (0.04) $ 0.23 $ (0.15)
============== ============== ============== ==============
Weighted average number of common shares outstanding 15,060,419 8,190,404 13,939,114 8,198,698
============== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 3,164,081 $ (1,256,540)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities (net of effects of
purchase transactions):
Depreciation and amortization 1,961,520 323,001
Provision for deferred income taxes 109,046 -
Net gain on disposal of fixed assets - (229,251)
Noncash compensation - 14,750
Changes in assets and liabilities:
Accounts receivable (2,105,236) (697,842)
Management fees receivable (726,767) (965,782)
Due from affiliated physician groups (1,570,472) (307,550)
Other assets (3,519,524) (218,007)
Accounts payable (231,608) 400,114
Payable to physician groups 2,254,912 -
Accrued expenses and other current liabilities 964,567 2,488,126
-------------- ---------------
Net cash provided by (used in) operating activities 300,519 (448,981)
-------------- ----------------
Cash flows from investing activities:
Purchases of property and equipment (1,451,354) (512,777)
Proceeds from sale of fixed assets - 242,175
Purchases of clinic assets, net of cash (14,010,972) (1,670,620)
--------------- ----------------
Net cash used in investing activities (15,462,326) (1,941,222)
--------------- ----------------
Cash flows from financing activities:
Borrowings under long-term debt 2,076,242 1,029,949
Payments on long-term debt (2,640,048) (265,908)
Payments on capital lease obligations (736,015) -
Payment of deferred financing costs - (565,137)
Payment of deferred offering costs - (36,393)
Proceeds from issuance of common stock, net 32,308,489 125,000
Purchase and retirement of treasury stock (382,082) -
Payment on stockholder notes receivable - (3,636)
-------------- ----------------
Net cash provided by financing activities 30,626,586 283,875
-------------- ---------------
Increase (decrease) in cash and cash equivalents 15,464,779 (2,106,328)
Cash and cash equivalents, beginning of period 1,633,534 3,047,366
-------------- ---------------
Cash and cash equivalents, end of period $ 17,098,313 $ 941,038
============== ===============
Supplemental disclosure of cash flow information
Cash paid during the period for -
Interest expense $ 528,436 $ 46,628
Income taxes $ 551,440 $ -
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
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:
<PAGE>
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net income per share $ 0.16 $ (0.07) $ 0.35 $ (0.26)
============== ========== ============ ===========
Weighted average number of common
shares outstanding 10,063,095 4,785,524 8,999,857 4,785,744
============== ========== ============ ===========
</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 clinic 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 group's revenue retained and
paid to the physician group primarily consists of the cost of the affiliated
services. The remaining amount of the clinic operating income (typically 15%)
and an amount equal to 100% of the clinic expenses are reflected as management
fee revenue earned by the Company. Other revenue represents management
consulting and other transitional services provided to physician groups and
other companies.
Management fee revenue is detailed as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Component based upon percentage of physician
groups operating income $ 2,028,877 $ 940,964 $ 5,477,174 $ 2,377,531
Other revenue 2,040,000 - 2,840,000 -
Reimbursement of clinic expenses 13,736,724 6,399,498 36,405,704 13,955,226
-------------- --------------- -------------- ---------------
Management fee revenue $ 17,805,601 $ 7,340,462 $ 44,722,878 $ 16,332,757
============== =============== ============== ===============
</TABLE>
<PAGE>
2. ACQUISITIONS:
Through September 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 (a) Abilene, TX
Intercoastal Medical Group, Inc. August 1, 1997 Sarasota, FL
Beacon Medical Group October 1, 1997 (b) Harrisburg, PA
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>
(a) Abilene Diagnostic Clinic, P.L.L.C. was operated by the Company
under an interim service agreement effective December 1, 1995. The
Company completed its acquisition of certain operating assets on
June 5, 1997, and entered into a long-term service agreement with
the physician group effective June 1, 1997.
(b) Beacon Medical Group was operated by the Company under an interim
service agreement effective April 1, 1997. The Company completed
its acquisition of certain operating assets on October 1, 1997,
and entered into a long-term service agreement effective on that
date.
Aggregate purchase price for the 1997 acquisitions amounted to $53.6 million,
consisting of cash and deferred cash payments, notes payable, common stock of
the Company and the assumption of certain liabilities. 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.
<PAGE>
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 Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Physician groups revenue, net $ 30,188,765 $ 23,832,788 $ 87,446,531 $ 73,996,459
Less: amounts retained by physician groups 11,769,184 9,165,385 35,407,284 30,232,627
-------------- --------------- -------------- ---------------
Management fee revenue $ 18,419,581 $ 14,667,403 $ 52,039,247 $ 43,763,832
============== =============== ============== ===============
Net income $ 1,502,025 $ 134,186 $ 3,092,445 $ 816,031
Net income per share $ 0.10 $ 0.01 $ 0.22 $ 0.08
============== =============== ============== ===============
</TABLE>
Pro forma net income and pro forma net income per share for the three months and
nine months ended September 30, 1997 are lower than historical net income and
net income per share for the same periods 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 Nine Months Ending
March 31, 1997 September 30,1996 September 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 $ 9,659,391 $ 3,013,199 $ 20,779,713 $ 9,025,720
Less: amounts retained
by physician groups 7,669,484 1,338,687 3,953,024 1,379,104 9,249,420 4,223,256
------------- ------------- ------------- ------------- -------------- -------------
Management fee revenue 9,674,181 2,043,225 5,706,367 1,634,095 11,530,293 4,802,464
------------- ------------- ------------- ------------- -------------- -------------
Operating expenses
Clinic expenses 8,025,524 1,671,579 4,883,539 1,749,370 9,762,036 5,390,890
General corporate
expenses 818,772 - 643,704 - 1,901,399 -
Depreciation and
amortization 391,507 44,368 180,328 24,041 262,528 60,473
Interest expense 112,666 3,283 51,505 7,519 50 22,115
Merger costs - - - 139,501 - 139,501
------------- ------------- ------------- ------------- -------------- -------------
9,348,469 1,719,230 5,759,076 1,920,431 11,976,318 5,612,979
------------- ------------- ------------- ------------- -------------- -------------
Income (loss) before
provision for income
taxes 325,712 323,995 (52,709) (286,336) (446,025) (810,515)
Provision for income taxes 97,714 97,198 - - - -
------------- ------------- ------------- ------------- -------------- -------------
Net income (loss) $ 227,998 $ 226,797 $ (52,709) $ (286,336) $ (446,025) $ (810,515)
============= ============= ============= ============= ============== =============
</TABLE>
<PAGE>
3. LONG-TERM DEBT:
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
<S> <C> <C>
Borrowings under bank credit facility $ 4,468,000 $ 4,157,027
Notes payable issued to physician groups 9,041,404 851,549
Other long-term debt 5,403,872 727,788
------------------ ------------------
18,913,276 5,736,364
Less current maturities 3,668,146 1,151,191
------------------ ------------------
Long-term debt, net of current maturities $ 15,245,130 $ 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.
Included in other long-term debt is $5 million of deferred cash payments
relating to the acquisition of Intercoastal Medical Group, Inc. Subsequent to
September 30, 1997, these deferred cash payments were funded through borrowings
under the bank credit facility.
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 $1.7 million of expenses relating to the
Offering, of which approximately $1.6 million had been paid by September 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. In connection with the Abilene acquisition, the
Company will issue, in January 1998, approximately 2,000,000 shares of common
stock. This amount is included in common stock to be issued in the accompanying
September 30, 1997 balance sheet.
<PAGE>
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 Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Supplemental income per share (primary and
fully diluted)
Net income (loss) per share $ 0.11 $ (0.03) $ 0.21 $ (0.10)
============== =============== ============= ============
Supplemental weighted average
shares outstanding 15,060,419 12,190,404 14,994,059 12,198,698
============== ============== ============= ============
</TABLE>
<PAGE>
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 ten physician groups in six states
representing 224 physicians and 56 physician extenders practicing at 48 service
sites. An affiliation with an eleventh physician group, consisting of 87
physicians, 39 physician extenders and 18 physicians in an affiliated IPA
network, was completed November 13, 1997. During the third quarter of 1997, the
Company provided certain management consulting and strategic planning services
to this group. The Company is also in the process of completing its acquisition
of a risk management company located in Portland, Maine, which will bring with
it 240 physicians in an affiliated IPA network and capitation contracts
covering 30,000 lives. This acquisition is expected to close in the fourth
quarter.
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 eight additional
groups during 1996 and the first nine months of 1997. The significance of
individual affiliations, the mix of physician specialties and ancillary
services, and the levels of management consulting and other transitional
services can have significant impacts on the percentage relationships of the
various income statement components. Changes in results of operations for the
three and nine months ended September 30, 1997 as compared to the three and nine
months ended September 30, 1996 were caused primarily by affiliations with these
additional physician groups.
<PAGE>
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 Nine Months
Ended September 30, Ended September 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 39.2 42.1 41.0 45.2
------ ------ ------ -------
Management fee revenue 60.8 57.9 59.0 54.8
Operating expenses:
Clinic salaries and benefits 23.2 26.0 22.8 25.2
Clinic rent and lease expense 5.5 5.7 5.5 5.7
Clinic supplies 6.9 7.7 7.3 6.8
Other clinic costs 9.6 12.9 10.9 13.1
General corporate expenses 3.8 5.1 3.6 6.4
Depreciation and amortization 3.2 1.6 2.6 1.1
Interest expense 0.4 0.5 0.3 0.2
Merger costs - 1.1 - 0.5
----- ------ ----- ------
Income (loss) before provision for income taxes 8.1% (2.7)% 6.0% (4.2)%
Provision for income taxes 2.6 - 1.8 -
----- ------ ----- ------
Net income (loss) 5.5% (2.7)% 4.2% (4.2)%
===== ====== ===== ======
</TABLE>
Physician groups revenue increased to $29.3 million for the three months ended
September 30, 1997 from $12.7 million for the three months ended September 30,
1996, an increase of 131%, and to $75.8 million from $29.8 million for the first
nine months of 1997 compared to 1996, an increase of 154%. 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 39.2% for the three months ended September 30, 1997, compared to
42.1% for the three months ended September 30, 1996, and to 41.0% for the first
nine months of 1997 compared to 45.2% for the first nine months of 1996. Overall
clinic costs as a percentage of physician groups revenue declined to 45.2% for
the three months ended September 30, 1997, compared to 52.3% for the three
months ended September 30, 1996, and to 46.5% for the first nine months of 1997
compared to 50.8% for the first nine 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 and the level of other revenue 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.
<PAGE>
General corporate expenses as a percentage of physician groups revenue declined
to 3.8% for the three months ended September 30, 1997, compared to 5.1% for the
three months ended September 30, 1996, and to 3.6% for the first nine months of
1997 compared to 6.4% for the first nine months of 1996. The amount of these
expenses continued to increase during the remainder of 1996 and through the nine
months ended September 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 physician groups revenue.
Depreciation and amortization as a percentage of physician groups revenue
increased to 3.2% for the three months ended September 30, 1997, compared to
1.6% for the three months ended September 30, 1996 and to 2.6% for the first
nine months of 1997 compared to 1.1% for the first nine months of 1996. This
increase is attributable to differences in the mix of assets acquired in the
various affiliations that have occurred over the past year.
Net interest expense as a percentage of physician groups revenue decreased to
0.4% for the three months ended September 30, 1997, compared to 0.5% for the
three months ended September 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 nine months of 1997, net interest expense as a percentage of physician
groups revenue increased to 0.3% for the first nine months of 1997 compared to
0.2% for the first nine months of 1996 as a result of higher debt levels
associated with the new affiliations.
Provision for income taxes reflects an effective rate of 30.5%, 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 September 30, 1997, the Company had working capital of $15.1 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 $13.3 million, resulting from the Naples Medical
Center and Intercoastal Medical Group affiliations.
Cash from operations for the nine months ended September 30, 1997 was $301,000.
Net income combined with depreciation and amortization, deferred taxes, and
increases in amounts payable to affiliated physician groups and accrued expenses
to provide $8.4 million in cash flows. This was offset by uses of cash of $8.1
million, resulting from increases in accounts receivable, management fees
receivable, amounts due from affiliated physicians and other assets and
decreases in accounts payable.
<PAGE>
The Company had expenditures for the acquisition of clinic assets of $14.0
million for the nine months ended September 30, 1997. Of this, approximately
$12.6 million related to the affiliations with Abilene and Naples and $535,000
related to the affiliation with Sarasota. The remaining amounts were for
additional physicians at existing clinics and deferred payments associated with
previously completed acquisitions. Capital expenditures amounted to $1.5 million
for the nine months ended September 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 amounts have 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.
In November 1997, the Company completed an expansion of its bank credit facility
from $25 million to $50 million. The facility provides for working capital and
acquisition financing, subject to certain restrictions. The interest rate under
this facility is, at the Company's option, either the adjusted 30 day commercial
paper rate or one month LIBOR plus 2.70% to 3.25%, or the bank's base rate plus
0.35% to 0.875%, depending on certain debt levels. The bank credit facility,
which expires January 2, 2004, contains certain restrictive covenants, including
prohibitions on paying dividends, limitations on capital expenditures and
maintenance of minimum net worth and certain financial ratios. Outstanding
borrowings against the bank credit facility were $4.5 million at September 30,
1997.
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 $17.1 million at September 30,
1997. In addition to this, the Company's principal sources of liquidity are
accounts receivable of $13.8 million at September 30, 1997 and availability
under the working capital portion of the bank line of credit of $7.3 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'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.
<PAGE>
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;
(iii) locating and negotiating additional financing at terms that are acceptable
to the Company; and (iv) 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.
<PAGE>
Item 2. Changes in Securities and Use of Proceeds
In March, 1997, ProMedCo Management Company completed the offering of 4,000,000
shares of its common stock at an aggregate price of $36,000,000. The effective
date of the registration statement (SEC file number 333-10557) was March 12,
1997. Managing underwriters for the offering were Piper Jaffray, Inc.;
Robertson, Stephens & Company and Cowen & Company. All securities offered were
sold in the offering. Expenses incurred through September 30, 1997, in
connection with the offering were:
(A) (B)
Underwriting discount $2,520,000
Other expenses $49,986 $1,685,014
(A) Direct or indirect payments to directors or officers of the issuer.
(B) Direct or indirect payments to others.
The use of net proceeds of $31,745,000 through September 30, 1997 is:
(A) (B)
Purchase and installation of
machinery and equipment $1,030,238
Acquisition of other businesses $11,626,134
Repayment of indebtedness $1,715,935
Working capital $4,269,508
Temporary investments $13,103,185
(A) Direct or indirect payments to directors or officers of the issuer.
(B) Direct or indirect payments to others.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
11 Computation of Per Share Earnings
27 Financial Data Schedule
(b) Reports on Form 8-K
On October 15, 1997, the Company filed a report on Form 8-K
reporting an acquisition of a physician group in Harrisburg,
Pennsylvania, pursuant to Item 2. of Form 8-K.
On October 23, 1997, the Company filed a report on Form 8-K
reporting an acquisition of a physician group in Sarasota,
Florida, pursuant to Item 2. of Form 8-K.
<PAGE>
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 November 14, 1997
Officer, and Director
(Chief Executive Officer)
/s/ ROBERT D. SMITH
Robert D. Smith Vice President - Finance November 14, 1997
(Chief Accounting Officer)
</TABLE>
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 10,063,095 4,785,524 8,999,857 4,785,744
Net common shares issuable
on exercise of certain
stock options (1) (2) 729,693 252,991 664,507 261,065
Net common shares issuable
on exercise of certain
stock warrants (1) (2) 2,287,957 66,667 2,295,076 66,667
Contingently issuable shares in
business combinations 1,979,674 3,085,222 1,979,674 3,085,222
Number of common shares
outstanding 15,060,419 8,190,404 13,939,114 8,198,698
Fully Diluted
Weighted average shares
outstanding 10,063,095 4,785,524 8,999,857 4,785,744
Net common shares issuable
on exercise of certain
stock options (1) (2) 729,693 252,991 664,507 261,065
Net common shares issuable
on exercise of certain
stock optionswarrants 2,287,957 66,667 2,295,076 66,667
Contingently issuable shares in
business combinations 1,979,674 3,085,222 1,979,674 3,085,222
Other dilutive securities 200,030 200,030 200,030 200,030
Number of common shares
outstanding 15,260,449 8,390,434 14,139,144 8,398,728
</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 publice 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
anit-dilutive effect.)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 17,098,313
<SECURITIES> 0
<RECEIVABLES> 13,807,217
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 36,774,505
<PP&E> 9,504,696
<DEPRECIATION> 3,167,068
<TOTAL-ASSETS> 105,681,901
<CURRENT-LIABILITIES> 21,659,661
<BONDS> 0
0
0
<COMMON> 100,621
<OTHER-SE> 64,413,320
<TOTAL-LIABILITY-AND-EQUITY> 105,681,901
<SALES> 0
<TOTAL-REVENUES> 75,760,198
<CGS> 0
<TOTAL-COSTS> 70,982,718
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 227,565
<INCOME-PRETAX> 4,549,916
<INCOME-TAX> 1,385,835
<INCOME-CONTINUING> 3,164,081
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,164,081
<EPS-PRIMARY> 0.23
<EPS-DILUTED> 0.22
</TABLE>
