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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 June 30, 1998
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, 1998
$.01 par value 20,837,949 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
June 30, 1998 and December 31, 1997 2
Condensed Consolidated Statements of Operations
Three Months and Six Months Ended June 30, 1998 and 1997 3
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 1998 and 1997 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds 16
Item 4. Submission of Matters to a Vote of Security Holders 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>
June 30, 1998 December 31,
(Unaudited) 1997
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 18,472,624 $ 15,760,920
Accounts receivable, net 37,273,636 22,463,689
Management fees receivable 8,511,624 1,938,464
Due from affiliated physician groups 1,521,289 2,870,607
Deferred income tax asset 370,200 -
Prepaid expenses and other current assets 9,214,029 6,917,675
------------------ ------------------
Total current assets 75,363,402 49,951,355
------------------ ------------------
Property and equipment, net 13,775,155 10,590,561
Intangible assets, net 112,010,237 77,195,351
Long-term receivables 23,546,548 23,915,884
Other assets 2,517,765 1,312,999
------------------ ------------------
Total assets $ 227,213,107 $ 162,966,150
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,916,218 $ 3,185,208
Payable to affiliated physician groups 6,332,253 6,562,903
Accrued salaries, wages and benefits 4,724,176 2,895,023
Accrued expenses and other current liabilities 10,387,514 6,014,729
Deferred income tax liability - 174,101
Current maturities of notes payable 3,252,154 3,676,365
Current portion of obligations under capital leases 574,416 609,591
Current portion of deferred purchase price 3,872,544 5,265,713
Income taxes payable 732,108 1,051,050
------------------ ------------------
Total current liabilities 36,791,383 29,434,683
------------------ ------------------
Notes payable, net of current maturities 8,835,242 39,688,325
Obligations under capital leases, net of current portion 923,560 1,073,886
Deferred purchase price, net of current portion 5,073,924 7,318,526
Convertible subordinated notes payable 8,801,741 1,765,058
Deferred income tax liability 229,373 1,103,876
Other long-term liabilities 1,433,412 1,963,059
------------------ ------------------
Total liabilities 62,088,635 82,347,413
------------------ ------------------
Stockholders' equity:
Common stock 206,339 106,868
Additional paid-in capital 150,891,996 58,946,838
Common stock to be issued 7,108,060 20,121,059
Stockholder notes receivable (369,665) (369,665)
Retained earnings 7,287,742 1,813,637
------------------ ------------------
Total stockholders' equity 165,124,472 80,618,737
------------------ ------------------
Total liabilities and stockholders' equity $ 227,213,107 $ 162,966,150
================== ==================
</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 Six Months Ended
June 30, June 30,
------------------------------- --------------------------------
1998 1997 1998 1997
-------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Physician groups revenue, net $ 73,061,817 $ 25,732,048 $ 134,241,608 $ 46,457,625
Less: amounts retained by physician groups 21,068,005 10,532,177 41,635,343 19,540,348
-------------- --------------- --------------- ---------------
Management fee revenue 51,993,812 15,199,871 92,606,265 26,917,277
-------------- --------------- --------------- ---------------
Operating expenses:
Clinic salaries and benefits 17,715,045 5,926,457 31,055,270 10,566,352
Clinic rent and lease expense 3,861,977 1,429,063 7,061,013 2,508,925
Clinic supplies 6,337,031 1,962,366 11,194,576 3,476,082
Purchased medical services 10,656,091 780,510 18,788,001 1,465,668
Other clinic costs 5,636,433 2,154,875 9,958,391 3,933,347
General corporate expenses 1,291,480 823,533 2,374,638 1,642,305
Depreciation and amortization 1,749,005 602,552 3,043,265 1,038,427
Interest (income) expense (170,309) 1,148 301,910 117,097
--------------- --------------- --------------- ---------------
47,076,753 13,680,504 83,777,064 24,748,203
-------------- --------------- --------------- ---------------
Income before provision for income taxes 4,917,059 1,519,367 8,829,201 2,169,074
Provision for income taxes 1,868,482 412,429 3,355,096 607,341
-------------- --------------- --------------- ---------------
Net income $ 3,048,577 $ 1,106,938 $ 5,474,105 $ 1,561,733
============== =============== =============== ===============
Net earnings per share:
Basic $ 0.17 $ 0.09 $ 0.35 $ 0.15
============== =============== =============== ===============
Diluted $ 0.15 $ 0.08 $ 0.30 $ 0.12
============== =============== =============== ===============
Weighted average number of common shares outstanding:
Basic 17,841,121 12,031,726 15,783,673 10,440,151
============== =============== =============== ===============
Diluted 20,554,789 14,704,421 18,510,677 13,133,900
============== =============== =============== ===============
</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>
Six Months Ended
June 30,
----------------------------------------
1998 1997
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,474,105 $ 1,561,733
Adjustments to reconcile net income to net cash provided by
(used in) operating activities (net of effects of
purchase transactions):
Depreciation and amortization 3,043,265 1,014,788
Provision for deferred income taxes 582,196 390,058
Changes in assets and liabilities:
Accounts receivable (9,923,001) 615,343
Management fees receivable (5,283,073) (1,087,407)
Due from affiliated physician groups 1,349,318 (2,358,986)
Other assets (1,883,265) (941,353)
Accounts payable (1,209,762) (205,356)
Payable to physician groups (230,650) 1,914,563
Accrued expenses and other liabilities 1,251,487 (122,430)
------------------ -------------------
Net cash provided by (used in) operating activities (6,829,380) 780,953
------------------- ------------------
Cash flows from investing activities:
Purchases of property and equipment (2,136,100) (1,111,146)
Purchases of clinic assets, net of cash (29,648,066) (13,166,514)
------------------- -------------------
Net cash used in investing activities (31,784,166) (14,277,660)
------------------- -------------------
Cash flows from financing activities:
Borrowings under long-term debt 32,020,236 2,076,242
Payments on long-term debt (63,235,838) (2,857,590)
Payments on capital lease obligations (247,329) (206,997)
Proceeds from issuance of common stock, net 72,788,181 32,913,035
Purchase and retirement of treasury stock - (348,363)
------------------ -------------------
Net cash provided by financing activities 41,325,250 31,576,327
------------------ ------------------
Increase in cash and cash equivalents 2,711,704 18,079,620
Cash and cash equivalents, beginning of period 15,760,920 1,633,534
------------------ ------------------
Cash and cash equivalents, end of period $ 18,472,624 $ 19,713,154
================== ==================
Supplemental disclosure of cash flow information
Cash paid (received) during the period for -
Interest expense $ 1,780,970 $ 404,571
Income taxes $ 2,639,742 $ (60,434)
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES
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 included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
Certain prior period amounts have been reclassified to conform with the 1998
presentation.
In March 1997, the Company completed its merger with Western Medical Management
Corp., Inc. ("Reno"), a physician management company. 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
Basic earnings per share ("EPS") is calculated by dividing income available to
common stockholders by the weighted average number of common shares outstanding
during the period. Common stock to be issued is assumed to be common stock
outstanding and is included in the weighted average number of common shares
outstanding for the basic EPS calculation. Diluted EPS includes the options,
warrants, and other potentially dilutive securities that are excluded from basic
EPS using the treasury method to the extent that these securities are not
anti-dilutive.
Management Fee Revenue
Management fee revenue represents physician groups revenue less amounts retained
by physician groups. The amounts retained by physician groups (80-85% 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.
<PAGE>
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 (typically 80-85%) 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 groups operating income (typically 15-20%) and an amount equal to 100%
of the clinic expenses are reflected as management fee revenue earned by the
Company. Other revenue represents fees from management consulting, supplemental
implementation services and other miscellaneous revenues:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- -------------------------------
1998 1997 1998 1997
-------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C>
Component based upon physician groups
operating income $ 5,668,581 $ 1,858,620 $ 10,654,746 $ 3,448,297
Reimbursement of clinic expenses 44,800,231 12,741,251 78,926,519 22,668,980
Other revenue 1,525,000 600,000 3,025,000 800,000
-------------- --------------- -------------- ---------------
Management fee revenue $ 51,993,812 $ 15,199,871 $ 92,606,265 $ 26,917,277
</TABLE>
2. ACQUISITIONS:
Through June 30, 1998 and during 1997, the Company, through its wholly owned
subsidiaries, acquired certain operating assets of the following medical
clinics:
<TABLE>
<CAPTION>
Physician Group Effective Date Location
<S> <C> <C> <C>
1998: Berkshire Physicians & Surgeons April 1, 1998 (a) Pittsfield, MA
Primary Medical Physicians May 1, 1998 Midland, TX
Shah Associates May 1, 1998 (b) Hollywood, MD
Medical Associates of Pinellas May 1, 1998 (b) Clearwater, FL
Prime Medical Associates (c) June 1, 1998 Hudson, NY
1997: Naples Medical Center March 1, 1997 Naples, FL
Abilene Diagnostic Clinic June 1, 1997 (d) Abilene, TX
Intercoastal Medical Group August 1, 1997 Sarasota, FL
Beacon Medical Group October 1, 1997 (e) Harrisburg, PA
Cowley Medical Associates (f) November 1, 1997 Harrisburg, PA
Thomas-Spann Clinic December 1, 1997 Corpus Christi, TX
HealthStar, Inc. December 1, 1997 Knoxville, TN
</TABLE>
(a) Berkshire Physicians and Surgeons was operated by the Company under an
interim service agreement effective February 1, 1998. The Company
completed its acquisition in April 1998, and entered into a long-term
service agreement with the physician group effective April 1, 1998.
(b) Shah Associates and Medical Associates of Pinellas are currently operated
under interim service agreements. The Company expects to complete the
acquisitions and enter into a long-term service agreement with each
physician group in the third quarter of 1998.
<PAGE>
(c) Prime Medical Associates merged with Berkshire Physicians & Surgeons in
July 1998.
(d) Abilene Diagnostic Clinic 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.
(e) 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 with the physician group effective on that date.
(f) Cowley Medical Associates merged with Beacon Medical Group in December
1997.
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. Simultaneous with each acquisition, the Company entered into a
long-term service agreement with the related physician group. The service
agreements are 40 years in length.
In addition to the medical clinics acquired, the Company completed its
acquisition of Health Plans, Inc. in December 1997 and renamed the company PMC
Medical Management, Inc. ("PMC"). PMC provides a full range of managed care
services to capitated providers, including clinical quality assessment,
credentialing, claims processing and payment, referral and utilization
management, and case management.
<PAGE>
The following unaudited pro forma information reflects the effect of
acquisitions of medical clinics and PMC on the consolidated results of
operations of the Company assuming that the acquisitions occurred at January 1,
1997. Future results may differ substantially from pro forma results and cannot
be considered indicative of future results.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------------
1998 1997 1998 1997
-------------- --------------- --------------- -----------------
<S> <C> <C> <C> <C>
Physician groups revenue, net $ 74,547,741 $ 48,504,703 $ 139,171,572 $ 96,572,542
Less: amounts retained by physician
groups 21,648,972 16,360,089 42,905,207 32,119,830
-------------- --------------- --------------- -----------------
Management fee revenue $ 52,898,769 $ 32,144,614 $ 96,266,365 $ 64,452,712
============== =============== =============== =================
Net income $ 3,139,138 $ 1,461,765 $ 5,476,225 $ 2,336,368
============== =============== =============== =================
Net earnings per share
Basic $ 0.18 $ 0.12 $ 0.34 $ 0.22
============== =============== =============== =================
Diluted $ 0.15 $ 0.10 $ 0.29 $ 0.17
============== =============== =============== =================
Weighted average number of common
shares outstanding
Basic 17,841,121 12,426,163 15,980,892 10,834,588
============== =============== =============== =================
Diluted 20,554,789 15,098,858 18,707,896 13,528,337
============== =============== =============== =================
</TABLE>
3. LONG-TERM DEBT:
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
<S> <C> <C>
Borrowings under bank credit facility $ 4,988,236 $ 32,968,000
Notes payable issued to physician groups 6,910,964 10,220,775
Other long-term debt 188,196 175,915
------------------ ------------------
12,087,396 43,364,690
Less current maturities (3,252,154) (3,676,365)
------------------- -------------------
Long-term debt, net of current maturities $ 8,835,242 $ 39,688,325
================== ==================
</TABLE>
In connection with the affiliation with Berkshire Physicians & Surgeons in
Pittsfield, MA, the Company issued convertible subordinated notes totaling $7.6
million. The notes accrue interest at the rate of 4 3/4% paid annually on March
31 and can be converted into shares of the Company's common stock any time after
April 17, 1999 and prior to March 31, 2005 at a conversion price of $15.35,
subject to adjustment under the note agreements.
<PAGE>
4. SUPPLEMENTAL CASH FLOW INFORMATION:
In March 1998, an officer of the Company surrendered 43,693 warrants in full
payment of the $600,000 outstanding note balance and $30,875 of accrued interest
receivable.
In March and April 1998, the Company converted $359,991 and $324,774 of
convertible subordinated notes payable to a physician group into 39,999 and
36,094 shares of the Company's common stock, respectively.
5. SUPPLEMENTAL NET EARNINGS PER SHARE DATA:
In May 1998, the Company completed a public offering of 6,900,000 shares of
common stock at a price of $11.00 per share, and in March 1997 the Company sold
4,000,000 shares of common stock at a price of $9.00 in a public offering
(collectively the "Offerings"). The unaudited supplemental earnings per share
data has been calculated assuming the Offerings occurred as of the beginning of
each respective period.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ----------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Supplemental net earnings per share
Basic $ 0.14 $ 0.06 $ 0.26 $ 0.08
============= ============= ============= =============
Diluted $ 0.13 $ 0.05 $ 0.23 $ 0.07
============= ============= ============= =============
Supplemental weighted average number of
common shares outstanding
Basic 21,048,814 18,931,726 20,827,319 18,931,311
============= ============= ============= =============
Diluted 23,762,482 21,604,421 23,554,323 21,625,060
============= ============= ============= =============
</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 since June 1995 has
resulted primarily from its affiliation with additional physician groups. The
Company currently is affiliated with multi-specialty physician groups in 13
states, comprised of 590 physicians and 130 mid-level providers (primarily
physician assistants and nurse practitioners), and is associated with 580
physicians in independent practice association ("IPA") networks. The Company
also provides a full range of managed care services to capitated providers,
including clinical quality assessment, credentialing, claims processing and
payment, referral and utilization management, and case management. The Company
is currently providing such services to the Company's associated IPAs and to
those of its affiliated groups that have entered into capitation arrangements,
together covering approximately 100,000 managed care capitated lives.
When affiliating with a physician group, the Company generally 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. Under the service agreement, the Company receives a fixed
percentage (typically 15-20%) of the physician groups' operating income (as
defined) and shares between 25% and 50% of the group's surplus or deficit under
risk-sharing arrangements pursuant to capitated managed care contracts. Although
the group's physicians retain full control over the practice of medicine,
ProMedCo manages all day-to-day operations other than the provision of medical
services. 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) continue to penetrate pre-managed-care markets;
(ii) affiliate with primary-care-oriented multi-specialty groups; (iii) expand
its affiliated groups' market presence through the addition of physicians and
selected ancillary services; (iv) optimize managed care opportunities for its
groups; and (v) align the Company's economic interests with those of its
physician partners.
Results of Operations
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 five additional groups in 1996, seven additional
groups during 1997, and five additional groups in the first six months of 1998.
Changes in results of operations 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 Ended Six Months Ended
June 30, June 30,
----------------------------- -------------------------------
1998 1997 1998 1997
------------- ------------- --------------- --------------
<S> <C> <C> <C> <C>
Physician groups revenue, net 100.0% 100.0% 100.0% 100.0%
Less: amounts retained by physician groups 28.8 40.9 31.0 42.1
------- ------ ------ ------
Management fee revenue 71.2 59.1 69.0 57.9
------- ------ ------ ------
Operating expenses:
Clinic salaries and benefits 24.2 23.1 23.1 22.7
Clinic rent and lease expense 5.3 5.6 5.3 5.4
Clinic supplies 8.7 7.6 8.3 7.5
Purchased medical services 14.6 3.0 14.0 3.1
Other clinic costs 7.7 8.4 7.4 8.5
General corporate expenses 1.8 3.2 1.8 3.5
Depreciation and amortization 2.4 2.3 2.3 2.2
Interest expense (income) (0.2) 0.0 0.2 0.3
------- ------ ------ ------
64.5 53.2 62.4 53.2
------- ------ ------ ------
Income before provision for income taxes 6.7 5.9 6.6 4.7
Provision for income taxes 2.5 1.6 2.5 1.3
------- ------ ------ ------
Net income 4.2% 4.3% 4.1% 3.4%
======= ====== ====== ======
</TABLE>
Physician groups revenue increased by 184% to $73.1 million for the quarter
ended June 30, 1998, from $25.7 million for the quarter ended June 30, 1997. For
the six months ended June 30, 1998, physician groups revenue increase by 189% to
$134.2 million from $46.5 million for the six months ended June 30, 1997.
Approximately 82% of the growth in physician groups revenue is attributable to
new affiliations since June 30, 1997, with the balance coming from increases in
revenues from affiliated physician groups in place prior to June 30, 1997.
One of the more significant impacts to the Company's business has been an
increase in revenues from capitation contracts with HMOs. While virtually
non-existent in early 1997, these revenues account for nearly 20% of the
Company's physician groups revenue. This increase in capitation affects certain
other income statement items quite significantly. Purchased medical services has
increased to 14.6% of physician groups revenue for the quarter ended June 30,
1998 from 3.0% for the same period a year ago. This is directly attributable to
the increase in capitation, which requires the procurement of medical services
not provided by the local affiliated physician group. Offsetting this increase
is a related decrease in amount retained by physicians. Since capitation
generates more aggregate dollars to affiliated physician groups, but less as a
percentage of physician groups revenue, the amount retained by physicians will
be lower as a percentage of physician groups revenue than under the ordinary
fee-for-service model.
<PAGE>
General corporate expenses as a percentage of physician groups revenue declined
to 1.8% for the quarter ended June 30, 1998, compared to 3.2% for the quarter
ended June 30, 1997. For the six months ended June 30, 1998, general corporate
expenses as a percentage of physician groups revenue declined to 1.8% compared
to 3.5% for the six months ended June 30, 1997. While these costs declined as a
percentage of physician groups revenue, the amount of general corporate expenses
increased to $1.3 million for the quarter ended June 30, 1998 from $.8 million
for the quarter ended June 30, 1997, and increased to $2.4 million for the six
months ended June 30, 1998 from $1.6 million for the six months ended June 30,
1997. This increase in expenses was expected as the Company continues to add
management and technology infrastructure.
Depreciation and amortization, as a percentage of physician groups revenue,
increased to 2.4% for the quarter ended June 30, 1998, compared to 2.3% for the
quarter ended June 30, 1997. For the six months ended June 30, 1998,
depreciation and amortization as a percentage of physician groups revenue
increased to 2.3% compared to 2.2% for the six months ended June 30, 1997. This
slight 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 (income) as a percentage of physician groups revenue
decreased to (0.2)% for the quarter ended June 30, 1998, compared to nil for the
quarter ended June 30, 1997. For the six months ended June 30, 1998, net
interest expense as a percentage of physician groups revenue decreased to 0.2%
from 0.3% for the six months ended June 30, 1997. This decrease is related to
increased interest income from the investment of unused proceeds from the
Company's public offering of its common stock (the "Offering"), effective May 8,
1998 which was offset by an increase in long-term debt relating to the
affiliation with additional physician groups.
Provision for income taxes reflects an effective rate of 38%, the Company's
estimated effective rate for all of 1998.
<PAGE>
Year 2000
The Company is aware of issues associated with the programming code associated
with the programming code in existing computer systems as the year 2000
approaches. The "Year 2000" problem is pervasive and complex, as virtually every
computer operation will be affected in the same way by the rollover of the two
digit year value to 00. The issue is whether computer systems will properly
recognize date sensitive information when the year changes to 2000. Systems that
do not properly recognize such information could generate enormous data or cause
a system to fall.
The Company continues to assess the impact of the Year 2000 issue on its
information systems and operations using both internal and external resources.
The Company divides the software into three broad categories: financial
(including general ledger, accounts payable, fixed assets, purchasing and
inventory control), practice management (including billing and accounts
receivable) and managed care. The Company is in the process of installing a new,
common financial software package at all locations that is certified Year 2000
compliant. Since the implementation of the financial software is part of the
Company's ongoing development of its technology infrastructure, there are no
incremental costs resulting from the Year 2000 issue. The Company's philosophy
with respect to practice management systems is to utilize the legacy system in
place as long as it can capably serve the physicians' needs. With disparate
practice management systems in place at the Company's various affiliated groups,
the Year 2000 assessment process continues with each new affiliation.
Noncompliant practice management systems could be acquired in a new affiliation,
which would require system remediation or replacement. Given these issues, the
Company is currently unable to estimate the costs of the remediation or
replacements that may be required. With its current strategy of replacing
inadequate practice management systems, however, the Company does not believe
that Year 2000 issues will cause a conversion of one or more of its practice
management systems to be more or less difficult than a typical system
conversion. If the issues prove more significant than anticipated, or if
noncompliant third-party systems "reinfect" the Company's Year 2000 compliant
systems, there could be a material adverse impact on the Company's financial
position, results of operations or cash flows. The Company's primary managed
care technology resides at its risk management subsidiary, PMC Medical
Management ("PMC"). PMC is currently upgrading its systems to be Year 2000
compliant. This process is expected to be completed in the first quarter of 1999
and the costs are not currently estimated to be material.
<PAGE>
Liquidity and Capital Resources
At June 30, 1998, the Company had working capital of $38.6 million, compared to
$20.5 million at December 31, 1997. Cash used in operations for the six months
ended June 30, 1998 was $6.8 million. This is primarily attributable to an
overall increase in accounts receivable resulting, in part, from the Company's
growth in revenues, but more significantly from an increase in accounts
receivable at the Company's largest affiliate. The structure of this
transaction, which was completed in November 1997, did not include acquisition
of the group's accounts receivable, thus resulting in a "ramp up" in accounts
receivable of approximately $6.3 million. Net accounts receivable of $37.3
million at June 30, 1998 amounted to 47 days of net physician groups revenue
(excluding other revenues) for the second quarter of 1998, compared to 42 days
for the first quarter of 1998. Net income combined with depreciation and
amortization, deferred taxes, a decrease in due from affiliated physician groups
and an increase in accrued expenses and other liabilities to provide $11.7
million in cash flows. This was offset by uses of cash of $18.5 million
resulting from increases in accounts receivable, management fees receivable,
other assets and decreases in accounts payable and payable to physician groups.
The Company had aggregate cash expenditures for purchases of clinic assets of
$29.6 million for the six months ended June 30, 1998. Of this, approximately
$18.4 million relates to the Berkshire affiliation in Pittsfield, MA, and the
remaining amounts relate primarily to deferred payments associated with
previously completed acquisitions. The Company has commitments to spend
approximately $36.8 million in total consideration for new affiliations that are
currently under letters of intent. Capital expenditures amounted to $2.1 million
for the six months ended June 30, 1998. 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.
In April 1998, the Company completed an expansion of its Credit Facility from
$50 million to $70 million. The Credit Facility provides for working capital and
acquisition financing, subject to certain restrictions. The interest rate is, at
the Company's option, either the adjusted 30-day commercial paper rate, one
month LIBOR plus 2.31% to 3.25%, or the bank's prime rate plus 0.25% to 1.13%,
depending on certain debt levels. The 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. At June 30, 1998, outstanding borrowings
against the Credit Facility were $5.0 million and the current effective interest
rate was 8.31%.
In connection with the affiliation with Berkshire Physicians & Surgeons in
Pittsfield, MA, the Company issued convertible subordinated notes totaling $7.6
million. The notes accrue interest at the rate of 4 3/4% paid annually on March
31 and can be converted into shares of the Company's common stock any time after
April 17, 1999 and prior to March 31, 2005 at a conversion price of $15.35,
subject to adjustment under the note agreements.
<PAGE>
In May 1998, the Company completed a public offering of 6,900,000 shares of its
common stock at a price of $11.00 per share. Proceeds of $71.9 million, net of
underwriters' discount and expenses of the offering were used primarily to pay
down outstanding borrowings under the Credit Facility.
The Company had cash and cash equivalents of $18.5 million at June 30, 1998. In
addition to this, the Company's principal sources of liquidity are accounts
receivable of $37.3 million at June 30, 1998 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.
Forward-Looking Statements
This report includes certain forward-looking statements about anticipated
results, including statements as to operating results, liquidity and capital
resources, and negotiations with and acquisitions of additional physician
groups. Such forward-looking statements are based upon internal estimates which
are subject to change because they reflect preliminary information and
management assumptions, and 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 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) consummating affiliations
with additional physician groups; (ii) negotiating managed care contracts and
managing the medical risk assumed thereunder, (iii) obtaining additional
financing upon terms acceptable to the Company, and (iv) negotiating favorable
reimbursement rates with third-party payors, along with the uncertainties and
other factors described herein and in the Company's public filings and reports.
<PAGE>
Item 2. Changes in Securities and Use of Proceeds
In May 1998, the Company issued 144,536 shares of Common Stock to the
stockholders of a provider of capitation management services as post-closing
adjustments to the consideration payable by the Company in connection with its
acquisition by the Company in December 1997. In June 1998, the Company issued
27,583 shares of Common Stock to two physicians in connection with their
affiliations with the Company. As of June 30, 1998, the Company had commitments
to issue an aggregate of 531,979 shares of Common Stock to physician groups and
their stockholders in connection with its affiliations with three physician
groups between November 1997 and April 1998. Each of such issuances was or will
be exempt from registration under the Securities Act, pursuant to section 4(2)
of the Act as they did not involve any public offering.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of stockholders on May 20, 1998. At the
meeting, the stockholders elected James F. Herd, M.D. and Charles J. Buysse,
M.D. as Class I members of the Board of Directors with terms expiring in 2001.
Other members of the Board of Directors whose terms continue after the meeting
include David T. Bailey, M.D. and Jack W. McCaslin, who are Class II directors
with terms expiring in 1999, and Richard E. Ragsdale, E. Thomas Chaney, and H.
Wayne Posey, who are Class III directors with terms expiring in 2000.
The voting results of the election of directors are as follows:
Votes Withheld
Nominee: For Authority
James F. Herd, M.D. 10,382,639 82,922
Charles J. Buysse, M.D. 10,382,639 82,922
No other matters were voted upon at the meeting.
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 May 1, 1998, the Company filed a report on Form 8-K
reporting an affiliation with a physician group in Berkshire,
Massachusetts, 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.
Signature Title Date
/s/ H. WAYNE POSEY
H. Wayne Posey President, Chief Executive August 14, 1998
Officer, and Director
(Chief Executive Officer)
/s/ ROBERT D. SMITH
Robert D. Smith Vice President - Finance August 14, 1998
(Chief Accounting Officer)
PROMEDCO MANAGEMENT COMPANY
EXHIBIT 11
Computation of Per Share Earnings
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -------------------------------
1998 1997 1998 1997
------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C>
BASIC
Weighted average shares outstanding 17,322,667 10,050,953 15,068,166 8,459,921
Contingently issuable shares in business
combinations 518,454 1,980,773 715,507 1,980,230
------------- ------------- ------------- ----------------
Number of common shares outstanding 17,841,121 12,031,726 15,783,673 10,440,151
============= ============= ============= ================
DILUTED
Weighted average shares outstanding 17,322,667 10,050,953 15,068,166 8,459,921
Contingently issuable shares in business
combinations 518,454 1,980,773 715,507 1,980,230
Net common shares issuable on exercise of
certain stock options and warrants (1) 2,713,668 2,672,695 2,727,004 2,693,749
Other dilutive securities - - - -
------------- ------------- ------------- ----------------
Number of common shares outstanding 20,554,789 14,704,421 18,510,677 13,133,900
============= ============= ============= ================
</TABLE>
(1) Net common shares issuable on exercise of certain stock options and
warrants is calculated based on the treasury stock method
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 18,472,624
<SECURITIES> 0
<RECEIVABLES> 37,273,636
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 75,363,402
<PP&E> 20,089,186
<DEPRECIATION> 6,314,031
<TOTAL-ASSETS> 227,213,107
<CURRENT-LIABILITIES> 36,791,383
<BONDS> 0
0
0
<COMMON> 206,339
<OTHER-SE> 164,918,133
<TOTAL-LIABILITY-AND-EQUITY> 227,213,107
<SALES> 0
<TOTAL-REVENUES> 134,241,608
<CGS> 0
<TOTAL-COSTS> 125,110,497
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 301,910
<INCOME-PRETAX> 8,829,201
<INCOME-TAX> 3,355,096
<INCOME-CONTINUING> 5,474,105
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,474,105
<EPS-PRIMARY> 0.35
<EPS-DILUTED> 0.30
</TABLE>
