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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 March 31, 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 April 30, 1998
$.01 par value 13,519,565 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
March 31, 1998 and December 31, 1997 2
Condensed Consolidated Statements of Operations
Three Months Ended March 31, 1998 and 1997 3
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 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 9
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
<PAGE>
PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, 1998 December 31,
(Unaudited) 1997
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 12,140,802 $ 15,760,920
Accounts receivable, net 27,980,501 22,463,689
Management fees receivable 4,414,354 1,938,464
Due from affiliated physician groups 1,189,837 2,870,607
Prepaid expenses and other current assets 8,062,422 6,917,675
------------------ ------------------
Total current assets 53,787,916 49,951,355
------------------ ------------------
Property and equipment, net 11,031,861 10,590,561
Intangible assets, net 80,358,935 77,195,351
Long term receivables 23,466,293 23,915,884
Other assets 1,548,016 1,312,999
------------------ ------------------
Total assets $ 170,193,021 $ 162,966,150
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,996,814 $ 3,185,208
Payable to affiliated physician groups 7,922,342 6,562,903
Accrued salaries, wages and benefits 3,656,958 2,895,023
Accrued expenses and other current liabilities 9,413,032 6,014,729
Deferred income tax liability 118,000 174,101
Current maturities of notes payable 3,610,438 3,676,365
Current portion of obligations under capital leases 596,353 609,591
Current portion of deferred purchase price 5,345,500 5,265,713
Income taxes payable 1,032,958 1,051,050
------------------ ------------------
Total current liabilities 33,692,395 29,434,683
------------------ ------------------
Notes payable, net of current maturities 42,343,313 39,688,325
Obligations under capital leases, net of current portion 963,451 1,073,886
Deferred purchase price, net of current portion 5,777,423 7,318,526
Convertible subordinated notes payable 1,404,931 1,765,058
Deferred income tax liability 1,700,788 1,103,876
Other long term liabilities 741,918 1,963,059
------------------ ------------------
Total liabilities 86,624,219 82,347,413
------------------ ------------------
Stockholders' equity:
Common stock 135,028 106,868
Additional paid-in capital 77,041,283 58,946,838
Common stock to be issued 2,522,991 20,121,059
Stockholder notes receivable (369,665) (369,665)
Retained earnings 4,239,165 1,813,637
------------------ ------------------
Total stockholders' equity 83,568,802 80,618,737
------------------ ------------------
Total liabilities and stockholders' equity $ 170,193,021 $ 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
March 31,
1998 1997
<S> <C> <C>
Physician groups revenue, net $ 61,179,791 $ 20,725,577
Less: amounts retained by physician groups 20,567,338 9,008,171
------------------ ------------------
Management fee revenue 40,612,453 11,717,406
------------------ ------------------
Operating expenses:
Clinic salaries and benefits 13,340,225 4,639,895
Clinic rent and lease expense 3,199,036 1,079,862
Clinic supplies 4,857,545 1,513,716
Purchased medical services 8,131,910 685,158
Other clinic costs 4,321,958 1,778,472
General corporate expenses 1,083,158 818,772
Depreciation and amortization 1,294,260 435,875
Interest expense 472,219 115,949
------------------ ------------------
36,700,311 11,067,699
------------------ ------------------
Income before provision for income taxes 3,912,142 649,707
Provision for income taxes 1,486,614 194,912
------------------ ------------------
Net income $ 2,425,528 $ 454,795
================== ==================
Net earnings per share:
Basic $ 0.18 $ 0.05
================== ==================
Diluted $ 0.15 $ 0.04
================== ==================
Weighted average number of common shares outstanding:
Basic 13,615,887 8,669,343
================== ==================
Diluted 16,490,851 11,617,229
================== ==================
</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>
Three Months Ended
March 31,
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,425,528 $ 454,795
Adjustments to reconcile net income to net cash provided by
(used in) operating activities (net of effects of
purchase transactions):
Depreciation and amortization 1,294,260 435,875
Provision for deferred income taxes 340,811 121,820
Changes in assets and liabilities:
Accounts receivable (6,266,812) (148,679)
Management fees receivable (2,475,890) (392,335)
Due from affiliated physician groups 1,680,770 (414,258)
Other assets (1,410,323) (153,971)
Accounts payable (1,188,394) (199,447)
Payable to physician groups 1,359,439 670,241
Accrued expenses and other liabilities 2,221,005 (53,807)
------------------ -------------------
Net cash provided by (used in) operating activities (2,019,606) 320,234
------------------- ------------------
Cash flows from investing activities:
Purchases of property and equipment (1,212,692) (477,907)
Purchases of clinic assets, net of cash (3,648,493) (1,189,144)
------------------- -------------------
Net cash used in investing activities (4,861,185) (1,667,051)
------------------- -------------------
Cash flows from financing activities:
Borrowings under long-term debt 2,625,000 2,076,242
Payments on long-term debt (36,075) (2,299,382)
Payments on capital lease obligations (123,673) (132,346)
Proceeds from issuance of common stock, net 795,421 33,363,110
------------------ ------------------
Net cash provided by financing activities 3,260,673 33,007,624
------------------ ------------------
Increase (decrease) in cash and cash equivalents (3,620,118) 31,660,807
Cash and cash equivalents, beginning of period 15,760,920 1,633,534
------------------ ------------------
Cash and cash equivalents, end of period $ 12,140,802 $ 33,294,341
================== ==================
Supplemental disclosure of cash flow information
Cash paid during the period for -
Interest expense $ 917,723 $ 221,743
Income taxes $ 951,700 $ 71,518
</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 March 31,
1998 1997
<S> <C> <C>
Component based upon percentage of physician groups
operating income $ 4,830,520 $ 1,589,677
Reimbursement of clinic expenses 31,904,683 9,927,729
Revenue from non-affiliated physician groups 2,377,250 -
Other revenue 1,500,000 200,000
------------------ ------------------
Management fee revenue $ 40,612,453 $ 11,717,406
================== ==================
</TABLE>
2. ACQUISITIONS:
Through March 31, 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>
1997: Naples Medical Center March 1, 1997 Naples, FL
Abilene Diagnostic Clinic June 1, 1997 (a) Abilene, TX
Intercoastal Medical Group August 1, 1997 Sarasota, FL
Beacon Medical Group October 1, 1997 (b) Harrisburg, PA
Cowley Medical Associates (c) November 1, 1997 Harrisburg, PA
Thomas-Spann Clinic December 1, 1997 Corpus Christi, TX
HealthStar, Inc. December 1, 1997 Knoxville, TN
</TABLE>
(a) 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.
(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.
(c) 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.
<PAGE>
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.
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 had 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 March 31,
1998 1997
<S> <C> <C>
Physician groups revenue, net $ 61,179,791 $ 37,025,274
Less: amounts retained by physician groups 20,567,338 14,128,813
------------------ ------------------
Management fee revenue $ 40,612,453 $ 22,896,461
================== ==================
Net income $ 2,425,528 $ 807,787
================== ==================
Net earnings per share
Basic $ 0.18 $ 0.08
================== ==================
Diluted $ 0.15 $ 0.06
================== ==================
Weighted average number of common shares outstanding
Basic 13,615,887 10,307,089
================== ==================
Diluted 16,490,851 13,254,975
================== ==================
</TABLE>
3. LONG-TERM DEBT:
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
<S> <C> <C>
Borrowings under bank credit facility $ 35,593,000 $ 32,968,000
Note payable issued to physician groups 10,220,775 10,220,775
Other long-term debt 139,976 175,915
------------------ ------------------
45,953,751 43,364,690
Less current maturities (3,610,438) (3,676,365)
------------------- -------------------
Long-term debt, net of current maturities $ 42,343,313 $ 39,688,325
================== ==================
</TABLE>
<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 1998, the Company converted $359,991 of convertible subordinated notes
payable to a physician group into 39,999 shares of the Company's common stock.
5. SUPPLEMENTAL NET EARNINGS PER SHARE DATA:
In May 1998, the Company completed a public offer of 6,000,000 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 registration statement
(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.
Three Months Ended March 31,
1998 1997
Supplemental net earnings per share
Basic $ 0.12 $ 0.03
Diluted $ 0.11 $ 0.02
Supplemental weighted average number
of common shares outstanding
Basic 19,615,887 17,869,343
========== ==========
Diluted 22,490,851 20,817,229
========== ==========
6. SUBSEQUENT EVENT:
On April 17, 1998, the Company, through a wholly owned subsidiary, acquired all
of the outstanding stock of Berkshire Physicians & Surgeons, P.C., a
Massachusetts professional corporation ("Berkshire"). The Company had previously
entered into an interim service agreement with Berkshire effective February 1,
1998. Concurrent with the acquisition, the Company entered into a long-term
service agreement (the "Service Agreement") with Berkshire. Berkshire is a
multi-specialty physician group based in Pittsfield, Massachusetts, comprised of
79 physicians, 15 mid-level providers and 15 physicians in an independent
practice association network. The total consideration for the transaction was
approximately $29.5 million, which consisted of a $16.1 million of cash, $7.6 of
convertible subordinated notes and $5.8 million of the Company's common stock
(to be issued in 1999). The cash portion of the purchase price was funded with
borrowings from the Company's revolving credit facility. The acquisition will be
accounted for using the purchase method of accounting.
<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 11
states, comprised of 440 physicians and 115 mid-level providers (primarily
physician assistants and nurse practitioners), and is associated with 540
physicians in independent practice associations ("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 over 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 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 one additional group in the first quarter 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.
Three Months Ended March 31,
1998 1997
Physician groups revenue, net 100.0% 100.0%
Less: amounts retained by physician groups 33.6 43.5
-------- -------
Management fee revenue 66.4 56.5
Operating expenses:
Clinic salaries and benefits 21.8 22.4
Clinic rent and lease expense 5.2 5.2
Clinic supplies 7.9 7.3
Purchased medical services 13.3 3.3
Other clinic costs 7.1 8.6
General corporate expenses 1.8 4.0
Depreciation and amortization 2.1 2.1
Interest expense 0.8 0.5
-------- -------
Income before provision for income taxes 6.4% 3.1%
Provision for income taxes 2.4 0.9
-------- -------
Net income 4.0% 2.2%
======== =======
Physician groups revenue increased by 195% to $61.2 million for the quarter
ended March 31, 1998, from $20.7 million for the quarter ended March 31, 1997.
Approximately 80% of this growth in physician groups revenue is attributable to
new affiliations since March 31, 1997, with the balance coming from increases in
revenues from affiliated physician groups in place prior to March 31, 1997 and
from an increase in other revenues.
Amounts retained by physician groups as a percentage of physician groups revenue
increased by 128% to $20.6 million for the quarter ended March 31, 1998, from
$9.0 million for the quarter ended March 31, 1997. This increase resulted
primarily from new affiliations. As a percentage of physician groups revenue,
amounts retained by physician groups declined to 33.6% for the quarter ended
March 31, 1998, compared to 43.5% for the quarter ended March 31, 1997. This
decline resulted primarily from an increase in revenues from capitation
contracts, which generate more aggregate dollars to affiliated physician groups,
but less as a percentage of physician groups revenue (primarily due to the
purchase of medical services not provided by the physician group), and from the
increase in other revenues noted above.
Overall clinic costs, including purchased medical services, as a percentage of
physician groups revenue increased to 55.3% for the quarter ended March 31,
1998, compared to 46.8% for the quarter ended March 31, 1997. Purchased medical
services created the largest increase as a percentage of physician groups
revenue, increasing to 13.3% in the quarter ended March 31, 1998 compared to
3.3% in the quarter ended March 31, 1997. This increase is directly related to
the increase in full professional and global capitation revenues.
<PAGE>
General corporate expenses as a percentage of physician groups revenue declined
to 1.8% for the quarter ended March 31, 1998, compared to 4.0% for the quarter
ended March 31, 1997. While theses costs declined as a percentage of physician
groups revenue, the amount of general corporate expenses increased 32.3% to $1.1
million for the quarter ended March 31, 1998 from $0.8 million for the quarter
ended March 31, 1997. This increase in expenses was expected as the Company
continued to add management and technology infrastructure.
Depreciation and amortization as a percentage of physician groups revenue
remained consistent at 2.1% for both the quarters ended March 31, 1998, and
1997.
Net interest expense as a percentage of physician groups revenue increased to
0.8% for the quarter ended March 31, 1998, compared to 0.5% for the quarter
ended March 31, 1997. This increase is directly related to the 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.
Liquidity and Capital Resources
At March 31, 1998, the Company had working capital of $20.1 million, compared to
$20.5 million at December 31, 1997. Cash used in operations for the quarter
ended March 31, 1998 was $2.0 million. This is primarily attributable to an
overall increase in accounts receivable resulting from the Company's growth in
revenues. Net accounts receivable of $28.0 million at March 31, 1998 amounted to
42 days of net physician groups revenue (excluding other revenues) for the first
quarter of 1998, compared to 41 days for the fourth quarter of 1997. Net income
combined with depreciation and amortization, deferred taxes, and in due from
affiliated physician groups and an increase in amounts payable to affiliated
physician groups and accrued expenses and other liabilities provide $9.3 million
in cash flows. This was offset by uses of cash of $11.3 million resulting from
increases in accounts receivable, management fees receivable, and other assets
and decreases in accounts payable.
The Company had aggregate cash expenditures for purchases of clinic assets of
$3.6 million for the quarter ended March 31, 1998. This amount relates primarily
to deferred payments associated with previously completed acquisitions. Capital
expenditures amounted to $1.2 million for the quarter ended March 31, 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.
<PAGE>
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 March 31, 1998, outstanding borrowings
against the Credit Facility were $35.6 million and the current effective
interest rate was 8.46%.
On April 17, 1998, the Company, through a wholly owned subsidiary, acquired all
of the outstanding stock of Berkshire Physicians & Surgeons, P.C., a
Massachusetts professional corporation ("Berkshire"). Concurrent with the
acquisition, the Company entered into a long-term service agreement (the
"Service Agreement") with Berkshire. Berkshire is a multi-specialty physician
group based in Pittsfield, Massachusetts, comprised of 79 physicians, 15
mid-level providers and 15 physicians in an independent practice association
network. The total consideration for the transaction was approximately $29.5
million, which consisted of a $16.1 million of cash, $7.6 of convertible
subordinated notes and $5.8 million of the Company's common stock (to be issued
in 1999). The cash portion of the purchase price was funded with borrowings from
the Company's revolving credit facility. The acquisition will be accounted for
using the purchase method of accounting.
In May 1998, the Company completed a public offering of 6,000,000 shares of its
common stock at a price of $11.00 per share. Proceeds of $62.7 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 $12.1 million at March 31, 1998. In
addition to this, the Company's principal sources of liquidity are accounts
receivable of $28.0 million at March 31, 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.
<PAGE>
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 addition 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 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.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ H. WAYNE POSEY
H. Wayne Posey President, Chief Executive May 15, 1998
Officer, and Director
(Chief Executive Officer)
/s/ ROBERT D. SMITH
Robert D. Smith Vice President - Finance May 15, 1998
(Chief Accounting Officer)
</TABLE>
EXHIBIT 11
Computation of Per Share Earnings
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
<S> <C> <C>
BASIC
Weighted average shares outstanding 12,788,615 5,584,121
Contingently issuable shares in business combinations 827,272 3,085,222
------------- -------------
Number of common shares outstanding 13,615,887 8,669,343
============= =============
DILUTED
Weighted average shares outstanding 12,788,615 5,584,121
Contingently issuable shares in business combinations 827,272 3,085,222
Net common shares issuable on exercise of certain stock
options and warrants (1) 2,874,964 2,947,886
Other dilutive securities - -
------------- -------------
Number of common shares outstanding 16,490,851 11,617,229
============= =============
</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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 12,140,802
<SECURITIES> 0
<RECEIVABLES> 27,980,501
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 53,787,916
<PP&E> 14,855,921
<DEPRECIATION> 3,824,060
<TOTAL-ASSETS> 170,193,021
<CURRENT-LIABILITIES> 33,692,395
<BONDS> 0
0
0
<COMMON> 135,028
<OTHER-SE> 83,433,774
<TOTAL-LIABILITY-AND-EQUITY> 170,193,021
<SALES> 0
<TOTAL-REVENUES> 61,179,791
<CGS> 0
<TOTAL-COSTS> 56,795,430
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 472,219
<INCOME-PRETAX> 3,912,142
<INCOME-TAX> 1,486,614
<INCOME-CONTINUING> 2,425,528
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,425,528
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.15
</TABLE>
