As filed with the Securities and Exchange Commission on April 15, 1998
Registration No. 333-
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM S-3
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
---------------
PROMEDCO MANAGEMENT COMPANY
Delaware 75-2529809
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
---------------
801 Cherry Street, Suite 1450
Fort Worth, Texas 76102
(817) 335-5035
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
---------------
H. Wayne Posey
President and Chief Executive Officer
ProMedCo Management Company
801 Cherry Street, Suite 1450
Fort Worth, Texas 76102
(817) 335-5035
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------
Copies of communications to:
Michael Joseph, Esq. Jeffrey A. Chapman, Esq.
Dyer Ellis & Joseph Vinson & Elkins L.L.P.
600 New Hampshire Ave., N.W. 3700 Trammell Crow Center
Suite 1100 2001 Ross Avenue
Washington, DC 20037 Dallas, Texas 75201
(202) 944-3000 (214) 220-7700
---------------
Approximate Date of Commencement of Proposed Sale to the Public: As
soon as practicable after this Registration Statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or reinvestment plans, please check the following box. |_|
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. |_|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. |_|
<PAGE>
CALCULATION OF REGISTRATION FEE:
<TABLE>
<CAPTION>
Proposed Proposed
maximum maximum
Title of each offering price aggregate Amount of
class of securities Amount to be per offering registration
to be registered registered security(1) price(1) fee(2)
<S> <C> <C> <C> <C>
Common Stock, $0.01 par value 7,360,000 shares $13.6875 $100,740,000 $29,718.30
================================================== ================== =============== ================= =================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Computed in accordance with Rule 457(c).
---------------
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment which specifically states that
this Registration Statement shall thereafter become effective in accordance
with Section 8(a) of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
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<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
Subject to Completion, Dated April 15, 1998
PROSPECTUS
dated , 1998
6,400,000 SHARES
[ProMedCo LOGO]
COMMON STOCK
Of the 6,400,000 shares of Common Stock offered hereby, 6,000,000 are being
issued and sold by ProMedCo Management Company ("ProMedCo" or the "Company") and
400,000 are being offered by a stockholder of the Company (the "Selling
Stockholder"). See "Principal and Selling Stockholders."
The Common Stock is traded on the Nasdaq National Market under the symbol
"PMCO." On April , 1998, the last reported sale price of the Common Stock was $
per share. See "Price Range of Common Stock and Dividend Policy."
See "Risk Factors" beginning on page 6 for a discussion of certain factors that
should be considered by prospective investors.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Proceeds to
Price to Underwriting Proceeds to Selling
Public Discount(1) Company(2) Stockholder
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share................................. $ $ $ $
- -------------------------------------------------------------------------------------------------------------------
Total(3).................................. $ $ $ $
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company and the Selling Stockholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted the Underwriters a 30-day option to purchase up
to an additional 960,000 shares of Common Stock solely to cover
over-allotments, if any, at the Price to Public less the Underwriting
Discount. If all such shares are purchased, the total Price to Public,
Underwriting Discount, and Proceeds to Company will be $ , $ , and $ ,
respectively. See "Underwriting."
The shares of Common Stock are offered by the Underwriters subject to prior sale
when, as, and if delivered to and accepted by the Underwriters and subject to
their right to reject orders in whole or in part. It is expected that
certificates for such shares will be available for delivery at the offices of
Piper Jaffray Inc. in Minneapolis, Minnesota on or about , 1998.
PIPER JAFFRAY INC.
BEAR, STEARNS & CO. INC.
COWEN & COMPANY
<PAGE>
[Map of United States showing locations of affiliated physician groups]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SHARES OF COMMON STOCK.
SUCH TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF COMMON STOCK TO COVER
SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION
OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE
"UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. As used herein, the terms "ProMedCo" and the
"Company" refer to ProMedCo Management Company and its consolidated
subsidiaries. Except as otherwise indicated, all information in this Prospectus
assumes no exercise of the Underwriters' over-allotment option.
The Company
ProMedCo is a physician practice management company that consolidates
its affiliated physician groups into primary-care-driven multi-specialty
networks. The Company focuses on pre-managed-care secondary markets located
principally outside or adjacent to large metropolitan areas. The Company
believes that the primary care physician increasingly will be the principal
point of access to the healthcare delivery system and will, directly or
indirectly, control a growing percentage of healthcare expenditures, and it
therefore affiliates with physician groups having a primary care orientation.
ProMedCo assists in expanding and integrating the affiliated groups into
comprehensive multi-specialty networks to increase their market presence. The
groups expand through affiliations with additional primary care physicians and
specialists and selective additions of ancillary services. The groups are thus
well positioned to become the physician component of locally developing managed
care delivery systems. In addition to providing operating and expansion capital,
the Company provides its affiliated groups with a broad range of strategic and
management expertise and services.
The Company currently is affiliated with multi-specialty physician
groups in 11 states, comprised of 435 physicians and 115 mid-level providers
(primarily physician assistants and nurse practitioners), and is associated with
540 physicians in independent practice association ("IPA") networks. This
includes Berkshire Physicians & Surgeons, P.C. ("Berkshire"), a multi-specialty
physician group comprised of 79 physicians, 15 mid-level providers and 14 IPA
physicians with which the Company has agreed to affiliate and is managing on an
interim basis. Since the Company's March 1997 initial public offering, the total
number of ProMedCo's providers has grown to 1,090 from 192, its annual physician
groups revenue has grown to $265 million from $65 million (each on a pro forma
basis), and the number of states in which it operates has increased nearly
threefold.
The Company has also significantly augmented its managed care
contracting, information systems, and clinical expertise through its December
1997 acquisition of Health Plans, Inc., since renamed PMC Medical Management,
Inc. ("PMC"). PMC is a provider of medical management services to capitated
physician networks. Utilizing state-of-the-art information systems, 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. PMC 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
purchases the group's non-real estate operating assets and enters into a
long-term service agreement with the group in exchange for a combination of
Common Stock, cash, other securities of the Company, and/or assumption of
liabilities. Under the service agreement, the Company receives a fixed
percentage (typically 15-20%) of the physician group's 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.
3
<PAGE>
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.
The Company was incorporated in Texas in 1993 and reincorporated in
Delaware in January 1997. Its executive offices are located at 801 Cherry
Street, Suite 1450, Fort Worth, Texas 76102, and its telephone number is (817)
335-5035.
The Offering
<TABLE>
<CAPTION>
<S> <C>
Common Stock offered by the Company........................................ 6,000,000 shares
Common Stock offered by the Selling Stockholder............................ 400,000 shares
Common Stock to be outstanding after the Offering.......................... 18,802,226 shares (1)
Use of proceeds to the Company............................................. Repayment of debt, acquisitions
and working capital
Nasdaq National Market symbol.............................................. PMCO
</TABLE>
(1) Based upon the number of shares outstanding as of December 31, 1997, as
adjusted to reflect the subsequent issuance of 2,220,126 shares in
connection with prior physician group affiliations. Does not include (i)
660,355 shares to be issued during 1998 in connection with prior physician
group affiliations and the acquisition of PMC, (ii) an estimated 450,000
shares to be issued in connection with the Berkshire affiliation, (iii)
4,366,074 shares reserved for issuance upon exercise of outstanding options
and warrants with a weighted average exercise price of $3.80 per share, and
(iv) 1,105,000 shares reserved for issuance upon conversion of convertible
subordinated notes and exercise of options to be issued in payment of
interest on certain notes.
4
<PAGE>
Summary Financial Data
<TABLE>
<CAPTION>
Year Ended December 31,
Pro Forma
As Adjusted
1995 1996 1997 1997 (1) (2)
------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Physician groups revenue, net..................... $ 13,188,405 $ 47,036,801 $ 127,716,775 $ 264,851,063
Less: amounts retained by physician groups........ 5,344,688 20,791,605 47,075,240 83,559,854
-------------- -------------- --------------- ----------------
Management fee revenue............................ 7,843,717 26,245,196 80,641,535 181,291,209
------------- -------------- -------------- ---------------
Net income (loss)................................. $ (1,251,514) $ (1,570,853) $ 5,473,184 $ 8,548,002
============= ============== ============== ===============
Net earnings (loss) per share:
Basic.......................................... $ (0.16) $ (0.20) $ 0.48 $ 0.46
Diluted........................................ $ (0.16) $ (0.20) $ 0.38 $ 0.40
Weighted average number of common shares
outstanding:
Basic.......................................... 7,871,746 7,870,908 11,375,662 18,650,655
Diluted........................................ 7,871,746 7,870,908 14,224,198 21,499,191
Other Data (at end of period)(3):
Affiliated physicians............................. 51 146 354 435
Mid-level providers............................... 17 46 100 115
IPA physicians.................................... -- -- 528 540
------------- -------------- -------------- ---------------
Total providers................................... 68 192 982 1,090
============= ============== ============== ===============
Number of states.................................. 2 4 10 11
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
Pro Pro Forma As
Actual Forma (4) Adjusted (5)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents......................................... $ 15,760,920 $ 16,945,962 $ 52,210,323
Working capital................................................... 20,516,672 20,294,852 55,559,213
Total assets...................................................... 162,966,150 200,172,737 235,437,098
Long-term debt, less current maturities........................... 49,845,795 73,545,795 26,510,156
Total stockholders' equity........................................ 80,618,737 86,918,737 169,218,737
</TABLE>
- --------------------
(1) Gives effect to the 1997 Affiliations (as defined herein), the Christie
affiliation (as defined herein) and the pending Berkshire affiliation as if
they had been completed on January 1, 1997. See "Pro Forma Consolidated
Financial Statements."
(2) Adjusted to give effect to the sale of 6,000,000 shares of Common Stock
offered by the Company hereby, at an assumed offering price of $14.50 per
share, and the application of the estimated net proceeds therefrom,
assuming the Offering was completed on January 1, 1997. See "Use of
Proceeds."
(3) Other data for 1995 and 1996 include one group which was acquired in 1997
and was accounted for as a pooling of interests.
(4) Gives effect to the pending Berkshire affiliation as if it had been
completed on December 31, 1997.
(5) Adjusted to give effect to the sale of 6,000,000 shares of Common Stock
offered by the Company hereby, at an assumed offering price of $14.50 per
share, and the application of the estimated net proceeds therefrom. See
"Use of Proceeds."
5
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following should be considered carefully in evaluating an investment in the
Common Stock offered hereby.
Risks Associated with Growth Strategy
The Company's strategy involves growth through affiliation with
physician groups and the expansion of their practices. The Company is subject to
various risks associated with this strategy, including the risks that the
Company will be unable to identify and recruit suitable affiliation candidates,
successfully expand and manage the practices of the groups with which it
affiliates, or successfully integrate such groups into its existing operations,
including its management information systems. The Company's growth is dependent
on its ability to affiliate with physicians, to manage and control costs, and to
realize economies of scale. There can be no assurance that the Company will be
able to achieve and manage its planned growth or that suitable physician groups
will continue to be available for affiliation upon terms satisfactory to the
Company, if at all. In addition, there can be no assurance that the Company will
be able to continue to attract and retain a sufficient number of qualified
physicians and other healthcare professionals to continue to expand its
operations or otherwise to maintain an adequate infrastructure to support
continued growth. See "Business."
Limited Capital; Need for Additional Financing
Implementation of the Company's growth strategy requires substantial
capital resources. Such resources will be needed to acquire the assets of
additional physician groups and for the effective integration, operation, and
expansion of affiliated groups. The Company expects that its capital
requirements over the next several years will substantially exceed capital
generated from operations, the net proceeds of this offering (the "Offering"),
and borrowings available under its current credit facility. To finance its
capital requirements, the Company intends from time to time to issue additional
equity securities and incur additional debt. A greater amount of debt or
additional equity financing could be required to the extent that the Company's
Common Stock fails to maintain a market value sufficient to warrant its use in
future affiliations or to the extent that physician groups are unwilling to
accept Common Stock in exchange for their operating assets. There can be no
assurance that the Company will be able to obtain additional required capital on
satisfactory terms. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
Concentration of Revenue
The Company's management fee revenue for the year ended December 31,
1997 was derived from 13 physician groups, of which four accounted for 10% or
more of such revenue. While the Company's service agreements are for terms of 40
years and may be terminated only for cause, a termination or significant
deterioration of the Company's relationship with one or more of its affiliated
physician groups could have a material adverse effect upon the Company. In
addition, each of the Company's affiliated physician groups operates within a
limited geographic area, and a deterioration of economic or other conditions
within such area could have a material adverse impact upon the group. Such a
result, as well as any other deterioration in the financial condition of any of
the affiliated physician groups, could also have a material adverse effect on
the Company. See "Business."
6
<PAGE>
Government Regulation
Federal and state laws regulate the healthcare industry and the
relationships among physicians and other providers of healthcare services.
Medicare and Medicaid Fraud and Abuse. The fraud and abuse provisions
of the Medicare and Medicaid statutes prohibit the payment or receipt of any
remuneration for the referral of Medicare or Medicaid patients or for
recommendations, leasing, arranging, ordering, or purchasing of Medicare- or
Medicaid-covered services and impose significant penalties for false or improper
billing for physician services. In addition, these laws impose restrictions on
physicians' referrals for certain designated health services to entities with
which they have financial relationships. Violations of these laws may result in
substantial civil or criminal penalties to individuals or entities, including
exclusion from participation in the Medicare and Medicaid programs. Such
exclusion or penalties, if applied to the Company's affiliated physicians, could
have a material adverse effect upon the Company. See "Business -- Government
Regulation."
State Regulation. The laws of many states, including those in which most of
the Company's affiliated physician groups are located, prohibit non-physician
entities from practicing medicine. In addition to prohibiting the practice of
medicine, numerous states limit the ability of non-physicians to receive
physician practice revenues. In most states, such so-called "fee-splitting" laws
provide that the laws are violated only if a physician shares fees with a
referral source. The Florida Board of Medicine, however, has recently
interpreted the Florida fee-splitting law very broadly so as arguably to include
the payment of any percentage-based management fee, even to a management company
that does not refer patients to the managed group. Although the Company believes
its operations as currently conducted are in material compliance with existing
applicable laws, there can be no assurance that the Company's contractual
arrangements with affiliated physicians will not be successfully challenged as
constituting fee splitting or the unlicensed practice of medicine or that the
enforceability of such arrangements will not be limited. There can be no
assurance that review of the business of the Company and its affiliates by
courts or regulatory authorities will not result in a determination that could
adversely affect their operations or that changes in the healthcare regulatory
environment will not restrict the Company's existing operations or expansion. In
the event that any legislature, regulatory authority or court limits or
prohibits the Company from carrying on its business or from expanding the
operations of the Company to certain jurisdictions, structural and
organizational modifications of the Company's arrangements may be required,
which could have a material adverse effect on the Company. See "Business --
Government Regulation."
Reform Initiatives. There have been numerous initiatives at the federal
and state levels for comprehensive reforms affecting the availability of and
payment for healthcare. The Company believes that such initiatives will continue
during the foreseeable future. Certain reforms previously proposed could, if
adopted, have a material adverse effect on the Company. See "Business --
Government Regulation."
Reliance on Medical Service Providers
Each of the Company's affiliated physician groups enters into
employment agreements with its physicians. Such agreements generally are for an
initial term of five years. Although the Company, in conjunction with the
affiliated physician groups, will endeavor to extend such contracts, in the
event a
7
<PAGE>
significant number of physicians terminate their relationships with the
Company's affiliated physician groups at the expiration of their employment
agreements or otherwise, the Company could be adversely affected. See "Business
- -- Affiliation Structure."
Changes in Basis of Payment for Healthcare Services
The Company derives most of its revenue from its affiliated physician
groups. Substantially all of the revenue of the affiliated groups is derived
from third-party payors. The Company estimates that approximately 25% of the net
physician groups revenue is currently derived from government-sponsored
healthcare programs (principally the Medicare and Medicaid programs). The
healthcare industry is experiencing a trend toward cost containment, as
government and other third-party payors seek to impose lower reimbursement and
utilization rates upon providers and negotiate reduced payment schedules with
them. The Company believes that this trend will continue to result in a
reduction in per-patient revenue from historical levels. Further reductions in
payments to physicians or other changes in reimbursement for healthcare services
could have a material adverse effect on the Company. See "Business --Government
Regulation."
Risks Associated with Managed Care Contracts
A significant part of the Company's growth strategy involves assisting
its affiliated physician groups in obtaining capitated managed care contracts
and managing the medical risk associated with such contracts. In some instances
the Company itself enters into such contracts. Such capitated managed care
contracts typically are with health maintenance organizations ("HMOs"). Under
such contracts the physician group or the Company accepts a pre-determined
amount per member per month, referred to as a "capitation" payment, in exchange
for providing all necessary covered services to the members covered by the
contract, thus shifting much of the risk of providing care from the payor to the
physician group or the Company. Such an arrangement results in a greater
predictability of revenue, but exposes the physician group or the Company to the
risk of fluctuations in the costs of providing the services. To the extent that
patients covered by such contracts require more frequent or extensive care than
is anticipated, operating margins may be reduced and the revenue derived from
such contracts may be insufficient to cover the costs of the services provided.
Because the distribution to the Company is increased or decreased by a
percentage of the groups' surplus or deficit under risk-sharing arrangements
pursuant to capitated managed care contracts, the Company assumes some of the
groups' risks under such contracts entered into by the groups. Accordingly, any
reduction of operating margins or incurrence of losses from capitated managed
care contracts could have a material adverse effect on the Company. Although the
Company maintains stop-loss insurance with respect to its and its affiliated
groups' risk-sharing contracts, there can be no assurance that such insurance
will cover all of the Company's risk under these contracts.
Recently, many providers have experienced pricing pressures in
negotiating with HMOs. In addition, employer groups are becoming increasingly
successful in negotiating reductions in the growth of premiums paid for their
employees' health insurance, which tends to depress the reimbursement for
healthcare services. At the same time, employer groups are demanding higher
accountability from payors and providers of healthcare services with respect to
accessibility, quality and service. If these trends continue, the cost of
providing physician services could increase while the level of reimbursement
could grow at a lower rate or even decrease. Although the Company has had
demonstrated experience in negotiating managed care contracts and managing
medical risk assumed under such contracts, there can
8
<PAGE>
be no assurance that the Company will be able to negotiate satisfactory
risk-sharing or capitated arrangements or be able to manage such medical risk
successfully. See "Business."
Risk of Applicability of Insurance Regulations
The Company and its affiliated groups intend to continue to enter into
contracts with managed care organizations ("MCOs"), such as HMOs, whereby the
Company and its affiliated groups assume risk in connection with providing
healthcare services under capitation arrangements. If the Company or its
affiliated groups are considered to be in the business of insurance as a result
of entering into such risk-sharing arrangements, they could become subject to a
variety of regulatory and licensing requirements applicable to insurance
companies or HMOs, which could have a material adverse effect upon the Company.
Limited History of Profitability
The Company has operated only since December 1994. It has grown
principally through acquisitions and is pursuing a strategy of growth. For the
years ended December 31, 1995 and 1996, the Company incurred net losses of $1.3
million and $1.6 million, respectively. Although it reported net income of $5.5
million for the year ended December 31, 1997, there can be no assurance that the
Company will continue to be profitable. In addition, the Company may experience
significant quarter-to-quarter variations in operating results. The Company's
management fee revenue is dependent upon the physician groups' net medical
revenues less certain contractually agreed-upon clinic expenses, including
non-physician clinic salaries and benefits, rent, insurance, interest, and other
direct clinic expenses. In addition, the distribution to the Company is
increased or decreased by a percentage of the physician groups' surplus or
deficit under risk-sharing arrangements pursuant to capitated managed care
contracts. See "Selected Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Possible Exposure to Professional Liability
In recent years, physicians, hospitals, and other participants in the
healthcare industry have become subject to an increasing number of lawsuits
alleging medical malpractice and related legal theories. Many of these lawsuits
involve large claims and substantial defense costs. In addition, through its
employment of non-physician healthcare personnel, the Company could be named in
actions involving care provided by the affiliated physician groups assisted by
such personnel. The Company maintains professional malpractice and general
liability insurance. In addition, the Company's service agreements require
affiliated physicians to maintain professional liability insurance coverage of
the practice and of each employee and agent of the practice. The Company
generally is a named insured under such policies and is indemnified under each
of the service agreements by the physician groups for liabilities resulting from
the performance of medical services. Certain types of risks and liabilities are
not covered by insurance, however, and there can be no assurance that coverage
will continue to be available upon terms satisfactory to the Company or that the
coverage will be adequate to cover losses. Malpractice insurance, moreover, can
be expensive and varies from state to state. Successful malpractice claims
asserted against the physician groups or the Company could have a material
adverse effect on the Company. See "Business -- Insurance."
9
<PAGE>
Risks Related to Intangible Assets
As a result of the Company's various acquisition transactions,
intangible assets (net of accumulated amortization) of approximately $77.2
million have been recorded on the Company's balance sheet at December 31, 1997
($106.1 million on a pro forma basis at December 31, 1997). Using a composite
average life of 30 years for the service agreements, amortization expense will
be approximately $1.7 million per year ($2.7 million per year on a pro forma
basis). Acquisitions that result in the recognition of intangible assets will
cause amortization expense further to increase. A substantial portion of the
amortization generated by these intangible assets is not deductible for tax
purposes. Although the Company's net unamortized balance of intangible assets
acquired and anticipated to be acquired was not considered to be impaired as of
December 31, 1997, any future determination that a significant impairment has
occurred would require the write-off of the impaired portion of unamortized
intangible assets, which could have a material adverse effect on the Company's
results of operations. See Note 2 of Notes to Consolidated Financial Statements.
Competition
The physician practice management industry is highly competitive. The
Company is subject to significant competition both in affiliating with physician
groups and in seeking managed care contracts on behalf of its affiliated groups.
Its competitors include hospitals, MCOs and other physician practice management
companies. In comparison with the Company, many of its competitors are larger
and have substantially greater resources, provide a wider variety of services
and have longer established relationships with purchasers of such services.
There can be no assurance that the Company will be able to compete effectively,
that additional competitors will not enter the market, or that such competition
will not make it more difficult to enter into affiliations with physician groups
on terms beneficial to the Company.
The Company also experiences competition in the recruitment and
retention of qualified physicians and other healthcare professionals on behalf
of its affiliated physician groups. There can be no assurance that the Company
will be able to recruit or retain a sufficient number of qualified physicians
and other healthcare professionals to continue to expand its operations.
Possible Volatility of Price
The trading prices of the Company's Common Stock could be subject to
wide fluctuations in response to quarter-to-quarter variations in the Company's
operating results, material announcements by the Company, governmental
regulatory action, general conditions in the healthcare industry, or other
events or factors, many of which are beyond the Company's control. In addition,
the stock market has experienced extreme price and volume fluctuations, which
have particularly affected the market prices of many healthcare services
companies and which have often been unrelated to the operating performance of
such companies. The Company's operating results in future quarters may be below
the expectations of securities analysts and investors. In such event, the price
of the Common Stock would likely decline, perhaps substantially. See
"Underwriting."
Anti-Takeover Provisions
10
<PAGE>
Certain provisions of the Company's Certificate of Incorporation and
certain provisions of the Delaware General Corporation Law may make it difficult
to change control of the Company and replace incumbent management. For example,
the Certificate of Incorporation provides for a staggered Board of Directors and
permits the Board of Directors, without stockholder approval, to issue
additional shares of Common Stock or establish one or more classes or series of
Preferred Stock having such number of shares, designations, relative voting
rights, dividend rates, liquidation and other rights, preferences and
limitations as the Board of Directors may determine. In addition, the Company
has a stockholder rights plan that could further discourage attempts to acquire
control of the Company. See "Management."
Shares Eligible for Future Sale
Sales of substantial amounts of Common Stock in the public market
following the Offering, or the perception that such sales could occur, could
adversely affect prevailing market prices of the Common Stock and could impair
the future ability of the Company to raise capital through the sale of its
equity securities. The Company is unable to predict the effect, if any, that
future sales of Common Stock or the availability of Common Stock for sale may
have on the market price of the Common Stock prevailing from time to time.
Certain existing stockholders have the right to require the Company to register
their Common Stock from time to time. See "Shares Eligible for Future Sale."
Dividends
The Company has never paid cash dividends on its Common Stock and does
not currently intend to pay cash dividends. It is not likely that any cash
dividends will be paid in the foreseeable future. See "Price Range of
Common Stock and Dividend Policy."
Impact of Year 2000
The Company continues to assess the impact of the Year 2000 issue on
its information systems and operations. With disparate systems in place at the
Company's various affiliated groups, the assessment process also extends to 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 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 to be more 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.
Forward-Looking Statements
This Prospectus 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 that 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
11
<PAGE>
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.
12
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the Offering, after deducting
expenses payable by the Company and assuming an offering price of $14.50 per
share, will be approximately $82.3 million ($95.5 million if the Underwriters'
over-allotment option is exercised). The Company intends to use approximately
$55.0 million of such proceeds to repay indebtedness under its revolving credit
agreement (the "Credit Facility") and the balance to finance future affiliations
with physician groups, for working capital and for other general corporate
purposes. Pending application of the net proceeds, the Company intends to invest
the net proceeds in short-term, interest-bearing securities. For information
concerning the terms of the Credit Facility, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
While the Company is continually seeking additional physician groups
with which to affiliate and is currently engaged in negotiations with several
such groups, it currently has no agreement or understanding to affiliate with
any group other than Berkshire. There can be no assurance that these
negotiations will culminate in binding agreements or that these or any other
such affiliations will occur. See "Risk Factors -- Risks Associated with Growth
Strategy."
The Company will not receive any of the proceeds of the shares being
sold by the Selling Stockholder.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Since March 12, 1997, the Common Stock has been traded on the Nasdaq
National Market under the symbol "PMCO." The following table sets forth the high
and low sale prices per share of the Common Stock as reported by the Nasdaq
National Market for each calendar quarter since the commencement of trading.
High Low
1997
First Quarter (commencing March 12).................. $ 9.25 $ 9.00
Second Quarter....................................... 9.25 6.00
Third Quarter........................................ 11.00 6.75
Fourth Quarter....................................... 11.63 8.00
1998
First Quarter........................................ 16.25 8.75
Second Quarter (through April 13).................... 14.88 13.50
The Company has never paid cash dividends on its Common Stock. The
Company currently intends to retain any earnings to finance the growth and
development of its business and does not anticipate paying cash dividends in the
foreseeable future. Any payment of cash dividends in the future will depend upon
the financial condition, capital requirements, and earnings of the Company, as
well as other factors the Board of Directors may deem relevant. In addition, the
Company is currently restricted under the terms of its Credit Facility from
paying any dividends to stockholders without the prior written consent of the
lenders. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
13
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
December 31, 1997 (i) on a pro forma basis to give effect to the pending
Berkshire affiliation and (ii) as adjusted to reflect the sale by the Company of
the Common Stock offered hereby, assuming a public offering price of $14.50 per
share and after deducting the applicable underwriting discount and estimated
expenses payable by the Company, and the application of the estimated net
proceeds therefrom as described under "Use of Proceeds." See "Pro Forma
Consolidated Financial Information."
<TABLE>
<CAPTION>
December 31, 1997
Pro Pro Forma
Actual Forma As Adjusted
<S> <C> <C> <C>
Current maturities of long-term debt (1)...................... $ 9,551,669 $ 9,551,669 $ 9,551,669
============== ============== ===============
Long-term debt, net of current maturities (1)................. $ 49,845,795 $ 73,545,795 $ 26,510,156
Stockholders' equity:
Preferred Stock, $0.01 par value; 20,000,000
shares authorized; no shares issued and
outstanding............................................. -- -- --
Common Stock, $0.01 par value; 50,000,000
shares authorized; 10,686,767 shares
issued and and outstanding;
11,136,767 shares issued and outstanding
pro forma and 17,136,767 shares
issued and outstanding pro forma as
adjusted (2)............................................ 106,868 111,368 171,368
Additional paid-in-capital................................. 58,946,838 65,242,338 147,482,338
Common Stock to be issued; 2,875,073 shares................ 20,121,059 20,121,059 20,121,059
Stockholder notes receivable............................... (369,665) (369,665) (369,665)
Retained earnings.......................................... 1,813,637 1,813,637 1,813,637
-------------- -------------- ---------------
Total stockholders' equity............................ 80,618,737 86,918,737 169,218,737
============== ============== ===============
Total capitalization.................................. $ 130,464,532 $ 160,464,532 $ 195,728,893
============== ============== ===============
</TABLE>
- ----------------
(1) See Note 7 to Consolidated Financial Statements for information concerning
long-term debt and capital lease obligations.
(2) Excludes 4,366,074 shares reserved for issuance upon exercise of
outstanding options and warrants, at a weighted average exercise price of
$3.80 per share, and 1,105,000 shares reserved for issuance upon conversion
of convertible subordinated notes and exercise of options to be issued in
payment of interest on certain notes.
14
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data presented below should be read in
conjunction with the consolidated financial statements and the notes thereto of
the Company and, the financial statements and notes thereto of Southwest
Clinical Practices, IMG, Inc., Health Plans, Inc., Berkshire Physicians &
Surgeons, P.C., Pro Forma Consolidated Financial Statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus or incorporated herein by reference. The
selected unaudited pro forma as adjusted statement of operations data for the
year ended December 31, 1997 give effect to the affiliations with Naples Medical
Center, Abilene Diagnostic Clinic, Intercoastal Medical Group, Beacon Medical
Group, Cowley Medical Associates, Thomas-Spann Clinic, Healthstar, Inc. and
Health Plans, Inc. completed between March and December 1997 (the "1997
Affiliations"), the affiliation with Christie Clinic Association (the "Christie
affiliation"), the pending Berkshire affiliation and the Offering (assuming an
offering price of $14.50 per share) as if they had been completed on January 1,
1997. The selected unaudited pro forma balance sheet data as of December 31,
1997 give effect to the pending Berkshire affiliation, and the selected
unaudited pro forma as adjusted balance sheet data as of December 31, 1997 give
further effect to the Offering, as if they had been completed on December 31,
1997. Such pro forma data are presented for illustrative purposes only and do
not purport to represent what the Company's results would have been if such
events had occurred at the dates indicated, nor do such data purport to project
the financial position or results of operations for any future period or as of
any future date.
<TABLE>
<CAPTION>
July 1, 1994
(Inception) to
December 31, Year Ended December 31,
Pro Forma
As Adjusted(1)(2)
1994 1995 1996 1997 1997
------------- -------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Physician groups revenue, net........ $ 4,040,924 $ 13,188,405 $ 47,036,801 $127,716,775 $ 264,851,063
Less: amounts retained
by physician groups 1,781,775 5,344,688 20,791,605 47,075,240 83,559,854
------------- -------------- ------------ -------------- --------------
Management fee revenue............... 2,259,149 7,843,717 26,245,196 80,641,535 181,291,209
Operating expenses:
Clinic salaries and benefits.... 1,689,007 4,249,813 11,694,973 29,859,718 62,020,240
Clinic rent and lease expense... 242,235 708,020 2,670,138 7,016,261 13,763,194
Clinic supplies................. 261,811 624,370 3,213,443 9,667,085 19,625,269
Purchased medical services...... 170,909 781,000 969,650 7,946,989 43,325,896
Other clinic costs.............. 183,158 1,759,013 5,018,876 10,883,588 19,905,051
General corporate expenses...... 172,462 802,980 2,633,585 3,793,552 3,793,552
Depreciation and amortization... 64,170 203,482 723,641 2,942,604 5,785,748
Interest expense................ 6,659 20,958 209,474 456,175 (714,842)
Merger costs.................... -- -- 682,269 -- --
------------ ------------- -------------- ------------ --------------
2,790,411 9,149,636 27,816,049 72,565,972 167,504,108
------------ ------------- -------------- ------------ --------------
Income (loss) before
provision for income taxes (531,262) (1,305,919) (1,570,853) 8,075,563 13,787,101
Provision for income taxes........... 12,566 (54,405) -- 2,602,379 5,239,099
------------ ------------- -------------- ------------ --------------
Net income (loss).................... $ (543,828) $ (1,251,514) $ (1,570,853) $ 5,473,184 $ 8,548,002
============ ============= ============== ============ ==============
Net earnings (loss) per share:
Basic........................... $ (0.07) $ (0.16) $ (0.20) $ 0.48 $ 0.46
============ ============= ============== ============ ==============
Diluted......................... $ (0.07) $ (0.16) $ (0.20) $ 0.38 $ 0.40
============ ============= ============= ============ ==============
Weighted average number of
common shares outstanding:
Basic........................... 7,871,746 7,871,746 7,870,908 11,375,662 18,650,655
============ ============= ============== ============ ==============
Diluted......................... 7,871,746 7,871,746 7,870,908 14,224,198 21,499,191
============ ============= ============== ============ ==============
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
December 31, 1997
Pro Pro Forma
Actual Forma (3) As Adjusted (4)
----------------- ------------------ -----------------
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.............................. $ 15,760,920 $ 16,945,962 $ 52,210,323
Working capital........................................ 20,516,672 20,294,852 55,559,213
Total assets........................................... 162,966,150 200,172,737 235,437,098
Long-term debt, less current maturities................ 49,845,795 73,545,795 26,510,156
Total stockholders' equity............................. 80,618,737 86,918,737 169,218,737
</TABLE>
(1) Gives effect to the 1997 Affiliations, the Christie affiliation and the
pending Berkshire affiliation as if they had been completed on January 1,
1997.
(2) Adjusted to give effect to the sale of 6,000,000 shares of Common Stock
offered hereby, at an assumed offering price of $14.50 per share, and the
application of the estimated net proceeds therefrom, assuming the Offering
was completed on January 1, 1997. See "Use of Proceeds."
(3) Gives effect to the pending Berkshire affiliation as if it had been
completed on December 31, 1997.
(4) Adjusted to give effect to the sale of 6,000,000 shares of Common Stock
offered hereby, at an assumed offering price of $14.50 per share, and the
application of the estimated net proceeds therefrom. See "Use of Proceeds."
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
ProMedCo 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 during 1996 and
1997 has resulted primarily from its affiliation with additional physician
groups. The Company also contracts with HMOs and other third-party payors to
arrange for the provision of comprehensive health services to their members on a
capitation basis.
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. The Company is continually seeking additional physician
groups with which to affiliate and at any time is typically engaged in
negotiations with several such groups.
Physician groups revenue represents the revenue of the physician
groups, reported at the estimated realizable amounts from patients, third-party
payors and others for services rendered, net of contractual and other
adjustments, and under capitated managed care contracts. Management fee revenue
represents physician groups revenue less amounts retained by physician groups.
The amounts retained by physician groups (typically 80-85% of the physician
group operating income) represent 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 non-medical operations of the practice, and employs
substantially all of the non-physician personnel utilized by the group. The
Company's management fee revenue is dependent upon the operating income of the
physician groups. Physician group operating income is defined in the service
agreements as the physician group's net medical revenues less certain
contractually agreed-upon clinic expenses, including non-physician clinic
salaries and benefits, rent, insurance, interest, and other direct clinic
expenses. The amount of the physician groups' revenue retained and paid to the
physician groups primarily consists of the cost of the affiliated physicians'
services. The remaining amount of the physician group operating income
(typically 15-20%) and an amount equal to 100% of the clinic expenses are
reflected as management fee revenue earned by the Company. The distribution to
the Company is increased or decreased by a percentage (typically ranging from
25% to 50%) of the groups' surplus or deficit under capitated managed care
contracts.
Operating expenses consist of the expenses incurred by the Company in
fulfilling its obligations under the service agreements. These expenses are the
same as the operating costs and expenses that would have been incurred by the
affiliated groups, including non-physician salaries, employee benefits, medical
supplies, purchased medical services, building rent, equipment leases,
malpractice insurance premiums, management information systems, and other
expenses related to clinic operations. The distribution to the group for
providing medical services is increased or decreased by a percentage of the
physician group's surplus or deficit, respectively, in net revenue under
risk-sharing arrangements pursuant to capitated managed care contracts.
17
<PAGE>
Because of the significance of individual group affiliations and the
level of capitation and other revenues, clinic cost expense ratios and operating
margins will vary with each new affiliation. The mix of physician specialties
and ancillary services affects the level of clinic salaries and benefits and
clinic supplies, and the margins on capitated revenues generally are lower than
those on fee-for-service revenues (although capitated revenues can provide
incremental profit with little or no additional capital investment). 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 a percentage of physician groups revenue will vary based on the
size of each affiliated group's offices and the current market rental rate for
medical office space in the particular geographic markets. Capitation
arrangements may require the purchase of medical services that are not provided
by the group accepting capitation. These purchased medical services may include
hospitalization, emergency room care and other technical or specialty services.
The ratio of purchased medical services to associated capitation revenues will
vary depending upon the terms of the individual contracts and the amount of
services that can be provided by the particular group. 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.
In addition to the clinic expenses discussed above, the Company incurs
personnel and administrative expenses in connection with maintaining a corporate
office function that provides management, administrative, marketing and
acquisition services to the affiliated groups. The Company's profitability
depends on, among other things, increasing market share, expanding healthcare
services, enhancing operating efficiencies, and developing favorable contractual
relationships with payors.
For the year ended December 31, 1997, four of the Company's affiliated
physician groups each contributed 10% or more of the Company's management fee
revenue. Clinics in Champaign, Illinois; Temple, Texas; Naples, Florida; and
Abilene, Texas represented approximately 18%, 16%, 14%, and 11% of management
fee revenue, respectively.
In addition to managing its affiliated physician groups, the Company,
through PMC, manages an IPA in Maine and New Hampshire. Revenues from this IPA
consist of capitation and risk pool payments under managed care contracts with
HMOs. Such revenues are currently included in physician groups revenue. Related
operating expenses consist of the cost of providing the medical services
required by the HMO members covered by the contracts, and are reflected
primarily as purchased medical services.
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 during 1996
and seven additional groups during 1997. Changes in results of operations were
caused primarily by affiliations with these additional physician groups.
18
<PAGE>
The following table sets forth the percentages of physician groups
revenue represented by certain items reflected in the Company's consolidated
statements of operations.
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Physician groups revenue, net............................................. 100.0% 100.0% 100.0%
Less: amount retained by physician groups................................ 40.5 44.2 36.9
--------- --------- ---------
Management fee revenue.................................................... 59.5 55.8 63.1
Operating expenses:
Clinic salaries and benefits........................................... 32.3 24.8 23.3
Clinic rent and lease expense.......................................... 5.4 5.7 5.5
Clinic supplies........................................................ 4.7 6.8 7.6
Purchased medical services............................................. 5.9 2.1 6.2
Other clinic costs..................................................... 13.3 10.7 8.5
General corporate expenses............................................. 6.1 5.6 3.0
Depreciation and amortization.......................................... 1.5 1.5 2.3
Interest expense (revenue)............................................. 0.2 0.4 0.4
Merger costs........................................................... 0.0 1.5 0.0
--------- --------- ---------
69.4% 59.1% 56.8%
--------- --------- ---------
Income (loss) before provision for income taxes........................... (9.9) (3.3) 6.3
Provision for income taxes................................................ (0.4) 0.0 2.0
--------- --------- ---------
Net income (loss)......................................................... (9.5)% (3.3)% 4.3%
========= ========= =========
</TABLE>
Year Ended December 31, 1997 Compared with Year Ended December 31, 1996
Physician groups revenue increased by 172% to $127.7 million for the
year ended December 31, 1997 from $47.0 million for the year ended December 31,
1996. New affiliations in 1997 produced $48.8 million of this increase,
including $10.4 million of revenues from full professional and global capitation
contracts, with $27.2 million resulting growth in revenues from affiliations
completed prior to 1996 and from a full year of revenue production from
affiliations completed in 1996. Another $4.7 million of other revenues from
consulting and transitional services contributed to this increase in 1997.
Amounts retained by physician groups increased by 126% to $47.1 million
for the year ended December 31, 1997 from $20.8 million for the year ended
December 31, 1996. This increase resulted primarily from new affiliations in
1997 and a full year of operations from affiliations completed in 1996. As a
percentage of physician groups revenue, amounts retained by physician groups
declined to 36.9% for the year ended December 31, 1997, compared to 44.2% for
the year ended December 31, 1996. This decline resulted primarily from an
increase in revenues from capitation contracts, which generate more aggregate
dollars to the affiliated physician groups, but less as a percentage of
physician groups revenue, 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 51.1% for the year ended
December 31, 1997, compared to 50.1% for the year ended December 31, 1996.
Purchased medical services created the largest increase as a percentage of
physician groups revenue, increasing to 6.2% in 1997 compared to 2.1% in 1996.
This increase is directly related to the increase in full professional and
global capitation revenues.
19
<PAGE>
General corporate expenses as a percentage of physician groups revenue
declined to 3.0% for the year ended December 31, 1997, compared to 5.6% for the
year ended December 31, 1996. While these costs declined as a percentage of
physician groups revenue, the amount of general corporate expenses increased 44%
to $3.8 million for the year ended December 31, 1997 from $2.6 million for the
year ended December 31, 1996. This increase in expenses was expected as the
Company continued to add management and technology infrastructure. While
management expects these increases in amounts to continue 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 2.3% for the year ended December 31, 1997, compared to 1.5%
for the year ended December 31, 1996. This increase resulted primarily from
increased amortization of service agreement rights obtained in the new
affiliations in 1997, as well as differences in the mix of assets acquired in
connection with these affiliations.
Net interest expense as a percentage of physician groups revenue
remained consistent at 0.4% for both the years ended December 31, 1997 and 1996.
Although long term debt levels increased in the latter part of 1997, the
resulting interest expense was offset by interest income earned in the earlier
part of 1997 on unused proceeds from the Company's initial public offering.
Provision for income taxes reflects an effective rate of 32.2%. This
effective rate is lower than the expected Federal statutory rate due to the
realization of net operating loss carryforwards, which had been previously
reserved. At December 31, 1997, all net operating loss carryforwards had been
utilized and recognized.
Year Ended December 31, 1996 Compared with Year Ended December 31, 1995
Physician groups revenue increased to $47.0 million for the year ended
December 31, 1996 from $13.2 million for the year ended December 31, 1995. The
increase in physician groups revenue resulted primarily from the various
affiliations with physician groups in 1996.
Amounts retained by physician groups as a percentage of physician
groups revenue increased to 44.2% for the year ended December 31, 1996, compared
with 40.5% for the year ended December 31, 1995. Overall clinic costs as a
percentage of physician groups revenue declined to 50.1% for the year ended
December 31, 1996, compared with 61.6% for the year ended December 31, 1995. 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.
20
<PAGE>
General corporate expenses as a percentage of physician groups revenue
declined to 5.6% for the year ended December 31, 1996, compared with 6.1% for
the year ended December 31, 1995. The amount of these expenses increased during
1996, 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 remained constant at 1.5% for the year ended December 31, 1996, compared
with the year ended December 31, 1995.
Net interest expense as a percentage of physician groups revenue
increased to 0.4% for the year ended December 31, 1996, compared with net
interest income of 0.2% for the year ended December 31, 1995, primarily due to
increased debt associated with the acquisition of physician practices.
Provision for income taxes reflects no income tax expense for the year
ended December 31, 1996. This resulted from fully reserving for the tax effects
of the net operating loss generated during the year.
21
<PAGE>
Summary of Operations by Quarter
The following table presents unaudited quarterly operating results for
the preceding eight quarters. The Company believes that all necessary
adjustments, consisting only of normal, recurring adjustments, have been
included in the amounts stated below to present fairly the quarterly results
when read in conjunction with the Company's consolidated financial statements
and notes thereto included elsewhere in this Prospectus. Future quarterly
results may fluctuate depending on, among other things, the timing and number of
affiliations with physicians groups. Results of operations for any particular
quarter are not necessarily indicative of results of operations for a full year
or for future periods.
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, June 30, September 30, December 31, March 31, June 30, September 30, December 31,
1996 1996 1996 1996 1997 1997 1997 1997
--------- --------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Physician groups
revenue, net $7,091,429 $10,041,414 $12,672,590 $17,231,368 $20,725,577 $25,732,048 $29,302,573 $51,956,577
Less: amounts retained by
physician groups......... 3,428,089 4,712,459 5,332,128 7,318,929 9,008,171 10,532,177 11,496,972 16,037,920
---------- ---------- ----------- ----------- ----------- ----------- ----------- -----------
Management fee revenue...... 3,663,340 5,328,955 7,340,462 9,912,439 11,717,406 15,199,871 17,805,601 35,918,657
Operating expenses:
Clinic salaries
and benefits 1,741,516 2,483,746 3,301,399 4,168,312 4,639,895 5,926,457 6,795,818 12,497,548
Clinic rent and
lease expense 411,372 549,656 727,252 981,858 1,079,862 1,429,063 1,620,677 2,886,659
Clinic supplies.......... 404,298 639,858 972,824 1,196,463 1,513,716 1,962,366 2,034,422 4,156,581
Purchased medical
services 134,815 157,306 289,116 388,413 685,158 780,510 725,486 5,755,835
Other clinic costs....... 801,206 1,196,244 1,342,318 1,679,108 1,778,472 2,154,875 2,100,817 4,849,424
General corporate
expenses 581,596 676,099 643,704 732,186 818,772 823,533 1,113,978 1,037,269
Depreciation and
amortization 51,564 67,068 204,369 400,640 435,875 602,552 923,093 981,084
Interest expense
(revenue) (19,625) 33,071 59,024 137,004 115,949 1,148 110,468 228,610
Merger costs............. -- -- 139,501 542,768 -- -- -- --
---------- ---------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss)
before provision
for income taxes.......... (443,402) (474,093) (339,045) (314,313) 649,707 1,519,367 2,380,842 3,525,647
Provision for
income taxes -- -- -- -- 194,912 412,429 778,494 1,216,544
---------- ----------- ----------- ----------- ----------- ----------- ----------- ----------
Net income (loss)........... $ (443,402) $ (474,093) $ (339,045) $ (314,313) $ 454,795 $ 1,106,938 $ 1,602,348 $ 2,309,103
========== ========== =========== =========== =========== =========== =========== ===========
Net earnings (loss) per share:
Basic.................... $ (0.06) $ (0.06) $ (0.04) $ (0.04) $ 0.05 $ 0.09 $ 0.13 $ 0.18
========== ========== =========== =========== =========== =========== =========== ===========
Diluted.................. $ (0.06) $ (0.06) $ (0.04) $ (0.04) $ 0.04 $ 0.07 $ 0.11 $ 0.15
========== ========== =========== =========== =========== =========== =========== ===========
Weighted average number of
common shares outstanding:
Basic.................... 7,871,406 7,870,746 7,870,746 7,870,746 8,669,343 12,031,726 12,042,769 12,507,883
========== ========== =========== =========== =========== =========== =========== ===========
Diluted.................. 7,871,406 7,870,746 7,870,746 7,870,746 11,617,229 14,904,451 15,260,449 15,355,033
========== ========== =========== =========== =========== =========== =========== ===========
Other Data (at end of period):
Affiliated physicians....... 51 72 118 146 180 186 224 354
Mid-level providers......... 9 16 27 46 53 52 56 100
IPA physicians.............. -- -- -- -- -- -- -- 528
---------- ---------- ----------- ----------- ----------- ----------- ----------- -----------
Total providers............. 60 88 145 192 233 238 280 982
========== ========== =========== =========== =========== =========== =========== ===========
Number of states............ 2 3 3 4 5 5 6 10
</TABLE>
Liquidity and Capital Resources
At December 31, 1997, the Company had working capital of $20.5 million,
compared to $2.3 million at December 31, 1996. This increase resulted primarily
from the acquisition of current assets (primarily accounts receivable) in excess
of current liabilities assumed in new affiliations. Although each new
affiliation will have its own specific structure, the Company typically acquires
current assets well in excess of the current liabilities it assumes.
22
<PAGE>
Cash from operations for the year ended December 31, 1997 amounted to
$1.3 million. Net income, combined with depreciation and amortization, deferred
taxes, and increases in accounts payable and amounts payable to affiliated
physician groups provided $16.4 million in cash flows. This was offset by
increases in accounts receivable, management fees receivable, due from
affiliated physician groups, prepaid and other current assets and other assets
and decreases in accrued expenses and other current liabilities totaling $15.1
million. This positive cash flow from operations in 1997 marked an improvement
over 1996 and 1995, in which the Company experienced usage of cash in operations
of $1.2 million and $0.9 million, respectively.
The Company had aggregate cash expenditures of $22.4 million and issued
or committed to issue an aggregate of 3.5 million shares of its common stock for
the acquisition of clinic assets during the year ended December 31, 1997. Of the
cash expenditures, $1.0 million was for additional physicians at existing
clinics and deferred payments associated with previously completed acquisitions.
Capital expenditures amounted to $2.8 million for the year ended December 31,
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 Credit
Facility from $25 million to $50 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 or one month LIBOR plus 2.70% to 3.25%, or the bank's base rate plus
0.35% to 0.88%, 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 December 31,
1997, outstanding borrowings against the Credit Facility were $33.0 million and
the effective interest rate was 8.5%. The Company has successfully negotiated
expansion of the Credit Facility to $70 million.
In connection with the August 1997 Christie Clinic affiliation, the
Company agreed to lend the physician group a total of $42.7 million, the
proceeds of which are being utilized by the group's physicians. An initial loan
of $3.0 million was funded in November 1997 and $16.4 million in December 1997,
with additional loans of $5.825 million to be funded each December through 2001.
This note receivable is recorded in long term receivables in the Company's
consolidated balance sheet. The note receivable earns interest at 8% and is an
interest-only loan, payable monthly, through November 2007, after which the
balance is to be repaid in annual installments through December 2022. After
December 2007, an amount equal to one twelfth of the annual amortization is
required to be set aside by the physician group each month to fund each upcoming
annual installment.
In connection with the March 1997 Naples affiliation, the Company
issued $8.6 million of notes payable in three equal annual installments in 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
(valued in accordance with the Black-Scholes model), provided 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.
23
<PAGE>
The Company had cash and cash equivalents of $15.8 million at December
31, 1997. In addition to cash, the Company's principal sources of liquidity were
accounts receivable of $24.4 million at December 31, 1997 and availability under
the working capital portion of the Credit Facility of $7.3 million. The Company
believes that the combination of these sources, together with the proceeds of
the Offering, will be sufficient to meet its 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.
Berkshire Affiliation
During the year ended December 31, 1997, Berkshire generated total net
revenue of $42.1 million and incurred a net loss of $6.7 million. See
Consolidated Financial Statements of Berkshire Physicians & Surgeons, P.C. The
Company believes that Berkshire's loss was largely the result of expenses
associated with changing the strategic direction of Berkshire to managed care,
high outside provider costs, and distributions to newly employed physicians
under guaranteed-compensation arrangements not yet commensurate with physician
productivity. Under the Company's service agreement with Berkshire, all
physician distributions are based upon productivity. The Company estimates that
annual physician distributions would have been reduced by $7.2 million had the
service agreement been effective throughout 1997. The Company also believes that
it can, through PMC, substantially improve Berkshire's managed care operations.
See Pro Forma Consolidated Statement of Operations.
24
<PAGE>
BUSINESS
General
ProMedCo is a physician practice management company that consolidates
its affiliated physician groups into primary-care-driven multi-specialty
networks. The Company focuses on pre-managed-care secondary markets located
principally outside or adjacent to large metropolitan areas. The Company
believes that the primary care physician increasingly will be the principal
point of access to the healthcare delivery system and will, directly or
indirectly, control a growing percentage of healthcare expenditures, and it
therefore affiliates with physician groups having a primary care orientation.
ProMedCo assists in expanding and integrating the affiliated groups into
comprehensive multi-specialty networks to increase their market presence. The
groups expand through affiliations with additional primary care physicians and
specialists and selective additions of ancillary services. The groups are thus
well positioned to become the physician component of locally developing managed
care delivery systems. In addition to providing operating and expansion capital,
the Company provides its affiliated groups with a broad range of strategic and
management expertise and services.
The Company currently is affiliated with multi-specialty physician
groups in 11 states, comprised of 435 physicians and 115 mid-level providers
(primarily physician assistants and nurse practitioners), and is associated with
540 physicians in associated IPA networks. This includes Berkshire, a
multi-specialty physician group comprised of 79 physicians, 15 mid-level
providers and 14 IPA physicians with which the Company has agreed to affiliate
and is managing on an interim basis. Since the Company's March 1997 initial
public offering, the total number of ProMedCo's providers has grown to 1,090
from 192, its annual physician groups revenue has grown to $265 million from $65
million (each on a pro forma basis), and the number of states in which it
operates has increased nearly threefold.
The Company has also significantly augmented its managed care
contracting, information systems, and clinical expertise through its December
1997 acquisition of Health Plans, Inc., since renamed PMC. PMC is a provider of
medical management services to capitated physician networks. Utilizing
state-of-the-art information systems, 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. PMC 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.
Industry Overview
The healthcare delivery system in the United States has been undergoing
substantial change, largely in response to concerns over the quality and
escalating cost of healthcare. National expenditures for healthcare grew from
$250 billion in 1980 to $1,035 billion in 1996. Of the total estimated 1996
expenditures, physicians received approximately $202 billion for their own
services and controlled an additional $600 billion through the referral of
patients for additional care and services provided by others.
The substantial increase in healthcare expenditures has led to the
widespread establishment and growth of MCOs, consisting primarily of HMOs and
preferred provider organizations ("PPOs"). As MCO enrollment has grown, so has
MCO influence over physicians and other healthcare providers.
25
<PAGE>
MCOs have increased their efforts to reduce costs and bring about greater
accountability with respect to the quality and appropriateness of care.
As a result of increased enrollment in managed care health plans,
physicians and other healthcare providers, in order to retain broad access to
patients, are seeking to become components of vertically integrated healthcare
delivery systems that provide a full range of services for the MCOs that operate
those plans. Typically, the physician and hospital components of these
integrated systems contract with MCOs to provide medical and hospital services
to MCO enrollees pursuant to risk-sharing and other arrangements. Such
risk-sharing arrangements commonly consist of "capitated" risk contracts, under
which providers undertake to provide a specified range of services for a
predetermined fixed fee per enrollee. Such an arrangement results in a greater
predictability of revenues, but exposes the provider to the risk of fluctuations
in the costs of providing the services. To the extent that patients or enrollees
covered by such contracts require more frequent or extensive care than is
anticipated, operating margins may be reduced and the revenues derived from such
contracts may be insufficient to cover the costs of the services provided. Many
physician groups are concluding that, in order to compete effectively in the
managed care environment, they need to have greater control over the delivery of
a wider range of healthcare services and expenditures. Accordingly, an
increasing number of physician groups are entering into capitation arrangements
under which they assume contractual risk and responsibility for healthcare
provided by others.
The private practice of medicine remains a largely fragmented market.
The American Medical Association reports that, of the approximately 613,000
physicians actively involved in patient care in the United States, only 34% are
currently practicing in groups. Many of these are small to mid-sized physician
groups, which are at a competitive disadvantage in the managed care environment.
They generally do not have the market presence, expertise, or sophisticated cost
accounting and quality management systems required for capitated risk-sharing
arrangements. In addition, they often lack the capital required to purchase new
medical equipment and information systems to enhance the efficiency and quality
of their practices.
Physician groups are increasingly turning to physician-driven
organizations such as ProMedCo to provide the professional management expertise
and capital required to compete in the managed care environment and otherwise to
assist them with the increasingly complex management of physician practices.
ProMedCo believes that this has resulted in a need for management organizations
committed to preserving the professional autonomy of physician groups and whose
economic incentives are fully aligned with those of physicians. Because of the
unique position of primary care physicians in managing the delivery of
healthcare by both providing primary care and controlling patient referrals,
ProMedCo further believes that multi-specialty groups with a substantial primary
care orientation are likely to be best positioned to succeed in the emerging
managed care environment.
Strategy
The Company's strategy is to affiliate with leading physician groups in
pre-managed-care secondary markets and expand and integrate them into
comprehensive multi-specialty networks to increase their market presence and
position them to become the physician component of managed care delivery systems
as they develop in their local markets. Management believes that it has
consistently demonstrated its discipline to follow this strategy by declining to
pursue affiliation opportunities that have significantly deviated from it. The
key elements of the Company's strategy are as follows:
26
<PAGE>
Continue to Penetrate Pre-Managed-Care Markets. Notwithstanding the
increasing presence of MCOs, managed care is just beginning to reach many
communities, located outside or adjacent to large metropolitan areas. ProMedCo
seeks to affiliate in such markets with high quality physician groups that
recognize the need for outside managerial, financial, and business expertise,
that are committed to expanding their practices, and that are, or have the
potential to be, the leading multi-specialty groups within their markets.
Affiliate with Primary-Care-Oriented Multi-Speciality Groups. ProMedCo
believes that the primary care physician increasingly will manage the delivery
of healthcare services to patients by providing primary care and controlling
patient referrals for specialist, hospital, and other healthcare services.
Because of this central role, the Company believes that multi-specialty
physician groups with a primary care orientation can more effectively manage
capitated risk than other participants in the healthcare delivery system. The
Company believes that a single multi-specialty network of primary care
physicians and specialists not only provides a comprehensive range of services
that is attractive to MCOs, but also offers flexibility to MCOs to contract for
a broad or narrow range of physician services.
Expand Existing Groups. ProMedCo seeks to increase the market presence
of each of its affiliated groups within the group's local market. The Company
facilitates expansion of the groups through affiliations with and recruitment of
other primary care physicians and selected specialists, recruitment of physician
extenders, and expansion of selected ancillary services.
Optimize Managed Care Opportunities. ProMedCo seeks to optimize managed
care contracting opportunities initially by affiliating with physician groups
having a strong local market presence. At the appropriate time in each market,
the Company establishes local systems and programs for the medical management of
capitated risk and, as MCOs move into the market, seeks to negotiate favorable
managed care contracts. ProMedCo believes that the strong market positions of
its affiliated groups, combined with PMC's demonstrated medical management
expertise, will enable its affiliated groups to manage such risk effectively
while generating new sources of revenue.
Align Economic Interests. ProMedCo believes that affiliations with
practice management organizations whose incentives are fully aligned with the
interests of physicians are more attractive to physicians than affiliations with
hospitals or MCOs. Accordingly, ProMedCo employs an affiliation structure under
which the income of both the Company and the physicians within each group
depends upon the operating income of the group, providing a common incentive to
expand the group and increase its efficiency.
Development and Operations
Market Development
ProMedCo's development objective is to affiliate with leading primary
care groups or primary-care-oriented multi-specialty groups within
pre-managed-care secondary markets. The Company performs research and market
analyses to identify priority markets, which generally are communities that have
populations of at least 30,000 and less than 500,000, typically have less than
20% HMO penetration, and meet other market criteria. Such market criteria relate
to, among other things, the number of primary care physicians relative to
demand, Medicare payment rates, physician group competition, proximity to other
ProMedCo groups, the number of hospitals, demographics, population growth, and
the likelihood
27
<PAGE>
of significant future HMO growth. The Company estimates that there are over
1,200 markets representing a total population of approximately 120 million, and
containing an estimated 144,000 physicians generating $50-60 billion in
revenues, that currently satisfy its priority market criteria. The Company ranks
these markets based upon the degree to which they satisfy its criteria, enabling
the Company further to prioritize its development efforts.
Within its priority markets, ProMedCo seeks to affiliate either with
primary care groups or with multi-specialty groups that are committed to the
importance of primary care physicians. The Company seeks to affiliate with
groups that have a reputation for providing high quality care and have a
substantial share of their local markets or the potential to acquire such share.
These groups are frequently the largest groups in their markets.
Once ProMedCo has identified a group meeting its criteria, the Company
conducts preliminary discussions to ascertain the group's interest in an
affiliation. If such interest is established, the Company conducts site visits,
analyzes financial and other data, and conducts an extensive due diligence
investigation into the group's operations, leadership, and commitment to
long-term growth. Assuming a favorable outcome of the investigation, the Company
prepares a comprehensive business plan for presentation to the group and
proposes to purchase the group's operating assets and enter into a long-term
service agreement. See "--Affiliation Structure."
Upon affiliation with a group, the Company immediately begins to
facilitate expansion of the group within its local market. Group expansion may
be accomplished through affiliations with additional primary-care and specialty
physicians in the community, recruitment of physicians from outside the
community, addition of physician extenders and expansion of ancillary services
such as radiology and laboratory services. The Company will also seek to improve
the group's profitability through management of expenses and strengthening of
existing managed care contracts and conversion to capitation.
Current Operations
Giving pro forma effect to the pending affiliation with Berkshire,
which the Company is currently managing under an interim service agreement, the
Company currently provides medical management expertise to 1,090 providers in 11
states, consisting of approximately 435 physicians and 115 mid-level providers
in affiliated physician groups and 540 physicians in associated IPA networks.
Approximately 60% of the physicians in ProMedCo's affiliated physician
groups are primary care providers. The primary care physicians consist of family
practitioners, general internists, pediatricians, obstetrician/gynecologists,
and urgent-care physicians. Increasingly, these physicians are augmented by
mid-level providers, primarily consisting of physician assistants and nurse
practitioners, whom the Company believes significantly increase the efficiency
of delivery of a group's primary care services. Each of the physician groups
also provides, to varying degrees, medical specialty services and ancillary
services. Medical specialties currently include anesthesiology, endocrinology,
gastroenterology, general surgery, infectious diseases, nephrology, neurology,
occupational medicine, orthopedic surgery, otolaryngology, pulmonology,
rheumatology, and urology. Each of the physician groups is continually seeking
to expand its practice through the addition of primary care physicians and
specialties. The physician groups offer, to varying degrees, a range of
ancillary services such as audiology, clinical laboratories, diagnostic imaging,
and stress testing. The Company and each of its affiliated groups
28
<PAGE>
continually evaluate the addition of ancillary services to enhance the growth
and profitability of such group.
The IPAs are organizations of independent primary care providers and
specialists that contract to provide physician and other healthcare services to
HMOs and other MCOs. The members maintain their individual practices and,
through the IPA organization, share information and managed care systems,
actuarial and financial analysis, medical management and managed care contract
services provided by the Company through PMC.
The following table sets forth information concerning the Company's
providers.
<TABLE>
<CAPTION>
Beginning Of
ProMedCo Mid-Level Medical
Location Affiliation Physicians Providers Specialties
<S> <C> <C> <C> <C> <C>
Affiliated Physician Groups:
North Texas Medical Surgical, P.A........... Denton, TX June 1995 8 -- 3
Abilene Diagnostic Clinic Practices......... Abilene, TX December 1995 36 11 9
Cullman Primary Care, P.C................... Cullman, AL March 1996 11 3 1
Morgan-Haugh, P.S.C......................... Mayfield, KY April 1996 13 2 6
HealthFirst Medical Group, P.A.............. Lake Worth, TX June 1996 14 7 4
King's Daughters Clinic, P.A................ Temple, TX September 1996 44 13 17
The Medical Group of Northern Nevada........ Reno, NV October 1996 17 11 7
Naples Medical Center, P.A.................. Naples, FL March 1997 38 4 18
Beacon Medical Group, P.C.(1)............... Harrisburg, PA April 1997 37 3 7
Intercoastal Medical Group, Inc............. Sarasota, FL August 1997 24 2 4
Christie Clinic Association................. Champaign, IL August 1997 87 39 44
Thomas-Spann Clinic, P.A.................... Corpus Christi, TX December 1997 12 1 3
HealthStar Physicians, P.C.................. Knoxville, TN December 1997 13 4 6
Berkshire Physicians &
Surgeons, P.C.(2)....................... Pittsfield, MA February 1998 79 15 14
------ -------
433 115
IPA Physicians:
PMC Medical Management IPA.................. Maine and
New Hampshire June 1997 510
Christie Clinic IPA......................... Champaign, IL August 1997 18
Berkshire Physicians &
Surgeons IPA(2).......................... Pittsfield, MA February 1998 14
-----
542
Total Providers....................... 1,090
</TABLE>
(1) In December 1997 Beacon Medical Group combined with Cowley Medical
Associates, which had become affiliated with ProMedCo effective November
1997.
(2) Operating under an interim service agreement pending closing of
affiliation.
Management Services
Upon affiliating with a physician group, ProMedCo immediately assumes
the management of all aspects of the group's operations other than the provision
of medical services. The operating assets acquired by the Company are provided
for the exclusive use of the group, and substantially all non-physician
personnel utilized in the group's practice become employees of the Company.
ProMedCo
29
<PAGE>
provides the full range of administrative services required for the group's
operations, including facilities management and the purchase of medical
malpractice insurance, supplies, and equipment, and a broad spectrum of
financial and accounting services, including budgeting, billing and third-party
reimbursement services. The Company also provides each group with operating
capital and expansion capital for affiliations with other physicians, additions
of ancillary services, and improvements of existing facilities and equipment. As
MCOs expand their presence into the local market, the Company provides expertise
in the negotiation of managed care contracts and the management of risk-sharing
arrangements. Currently, four of the Company's affiliated groups derive a
significant portion of their revenues from managed care contracts.
While the Company provides a centralized source of expertise in all
aspects of management, it believes that each physician group presents different
operational issues and challenges and therefore employs a system of
decentralized local management of each group. The Company generally retains the
group's existing administrative staff as ProMedCo employees, adding additional
management personnel as the group expands. The physicians in the group continue
to maintain full professional control of the practice of medicine, including the
hiring and termination of physicians and the setting of practice guidelines and
standards. The Company establishes for each group a policy council comprised
equally of physicians and ProMedCo representatives to determine the broad
strategic and operational policies of the group. See "--Affiliation Structure."
The Company believes that sophisticated information systems are
essential to reducing the cost and improving the quality of healthcare. Basic
practice management systems have long been necessary for efficient patient
scheduling and registration, billing, and collections. In the future, the
integration of financial practice, managed care, and clinical systems is
expected to be imperative for physician groups to remain competitive. Clinical
systems will provide information in the physician's workplace -- such as case
management, practice guidelines, and clinical pathways -- that will facilitate
the improvement of patient care. Electronic medical records will automate the
clinical workflow and allow access to patient records from multiple sites, thus
providing more effective clinical decision support and increasing the quality of
care. Systems that effectively measure clinical outcomes and patient
satisfaction are likely to become increasingly important as quality becomes a
more significant factor in maintaining and increasing market share.
Rather than attempting to develop its own proprietary information
systems, ProMedCo believes it is more cost-effective, in light of the rapidly
changing healthcare and information technology environments, to utilize systems
developed and proven by independent companies. Although there are many systems
currently under development, none is yet available that, in the Company's
opinion, effectively addresses all of the evolving needs of physician groups.
The Company initially works with its affiliated physician groups to maximize the
performance of the groups' existing systems. As MCOs increase their penetration
of each group's market, new or enhanced information systems will be implemented
as required. Ultimately, the Company expects to interface all of its affiliated
clinics with a central data repository for consolidation and evaluation of
operating, clinical, and financial data. It has made substantial progress toward
that end, having selected its preferred practice management system vendors and
having installed a new general ledger software package that it expects to extend
to all of its affiliated groups by year end.
Additionally, the Company significantly augmented its managed care
contracting, information systems, and clinical expertise through the acquisition
of PMC, a provider of medical management
30
<PAGE>
services to capitated providers of physician services. Utilizing
state-of-the-art information systems, including some proprietary systems, 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. PMC is currently
providing such services, covering over 100,000 MCO members, to the Company's
affiliated physician groups that have entered into risk-sharing contracts with
MCOs and to the Company's three associated IPAs, the largest of which was being
managed by PMC at the time of the acquisition. The Company believes that PMC's
information systems and physician network managed care expertise will enable the
Company to effectively manage the medical risk undertaken by the Company and its
affiliated groups under risk-sharing contracts.
Affiliation Structure
ProMedCo utilizes an affiliation structure that fully aligns the
interests of the Company with those of its physician partners. Moreover, each
physician group retains professional autonomy and control over its medical
practices through continued ownership and governance of its professional
corporation or similar organization.
When a physician group has agreed to affiliate with ProMedCo, the
Company generally purchases the group's operating assets, excluding real estate,
and the group enters into a long-term service agreement with the Company in
exchange for a combination of Common Stock, cash, other securities of the
Company, and/or assumption of certain liabilities. The Company has utilized, and
may continue to utilize, Common Stock in payment of a portion of its
consideration for the assets of affiliated physician groups.
The service agreements between the Company and the physician groups are
for a term of 40 years and cannot be terminated by either party without cause,
consisting primarily of bankruptcy or material default. Under the service
agreement, the Company provides the physician group with the facilities and
equipment used in the group's 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. Upon expiration of the term
of a service agreement or in the event of termination, the physician group is
required to purchase the assets related to the practice, including intangible
assets, then owned by the Company at their current book value. Concurrently with
the execution of a service agreement, the physician group is required to enter
into an employment contract with each of its physicians, typically for an
initial term of five years. In those affiliations involving the Company's
purchase of the group's operating assets, the employment contract provides for
the repayment by the physician of all or a portion of the physician's share of
the consideration paid by ProMedCo for such assets and service agreement in the
event of the physician's breach of the contract. Each physician group also
enters into an agreement not to compete with the Company, and each physician's
employment contract includes an agreement not to compete with the physician
group during the period of his or her employment and for a period of time
thereafter, typically two years. The employment contract also provides that the
Company is a third-party beneficiary entitled to enforce the repayment provision
and the agreement not to compete.
The income of both the Company and the physicians within each group is
dependent upon the operating income of the group. Under its service agreement,
the Company receives a fixed percentage (typically 15-20%) of group operating
income, which is defined as the group's net revenue less certain contractually
agreed-upon clinic expenses before physician salaries and other
physician-related expenses. In addition, the Company typically receives
implementation and transitional fees in return for significant
31
<PAGE>
up-front services required in the first one to three months of the affiliation.
The distribution to the Company is increased or decreased by a percentage
(typically ranging from 25% to 50%) of the group's surplus or deficit,
respectively, arising from risk-sharing arrangements pursuant to capitated
managed care contracts. Thus, both the Company and the physicians have
incentives to improve the group's operating income and revenue surplus under
risk-sharing arrangements, and both share the risk that the group may have
limited or no operating income or a deficit under its risk-sharing arrangements.
Although the risk-sharing provisions did not have a material effect upon the
Company's operating income through 1997, the Company expects such provisions to
become significant as managed care emerges in its groups' local markets and its
groups increase their participation in risk-sharing arrangements. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The policy council established for each group is comprised equally of
physicians and ProMedCo representatives. The council meets periodically to
consider and determine broad policies regarding strategic and operational
planning, marketing, arrangements with MCOs, and other major issues involved in
the group's operations. This ensures that the physicians within each group
retain a significant voice in the expansion and operation on their group, while
benefiting from ProMedCo's management experience and expertise.
Competition
The physician practice management industry is highly competitive. The
Company is subject to significant competition both in affiliating with physician
groups and in seeking managed care contracts on behalf of its affiliated groups.
Its competitors include hospitals, managed care organizations, other physician
groups, and other physician practice management companies. Many of the Company's
competitors are larger, have substantially greater resources, and have longer
established relationships with purchasers of healthcare services than the
Company. There can be no assurance that the Company will be able to compete
effectively, that additional competitors will not enter the market, or that such
competition will not make it more difficult to enter into affiliations with
physician groups on terms beneficial to the Company.
The Company also experiences competition in the recruitment and
retention of qualified physicians and other healthcare professionals on behalf
of its affiliated physician groups. There can be no assurance that the Company
will be able to recruit or retain a sufficient number of qualified physicians
and other healthcare professionals to continue to expand its operations.
Government Regulation
As a participant in the healthcare industry, the Company's operations
and relationships are subject to extensive and increasing regulation by a number
of governmental entities at the federal and state levels.
The Company believes its operations are in material compliance with applicable
laws. Because the structure of its relationship with physician groups is
relatively new, however, many aspects of the Company's business operations have
not been the subject of state or federal regulatory interpretation. There can
therefore be no assurance that a review of the Company's or the affiliated
physicians' business by courts or regulatory authorities will not result in a
determination that could adversely affect the operations of the Company or that
the healthcare regulatory environment will not change so as to restrict or
require modification of the Company's or its affiliated physician groups'
operations or limit their liability to expand.
32
<PAGE>
The Company estimates that approximately 25% of the net physician
groups revenue of the Company is derived from payments made by
government-sponsored healthcare programs (principally Medicare and Medicaid). As
a result, any change in government reimbursement regulations, policies,
practices, interpretations, or statutes could adversely affect the operations of
the Company. There are also state and federal civil and criminal status imposing
substantial penalties, including civil and criminal fines and imprisonment, on
healthcare providers that fraudulently or wrongfully bill governmental or other
third-part payors for healthcare services.
The laws of many states prohibit business corporations such as the
Company from practicing medicine and employing physicians to practice medicine.
The Company performs only non-medical administrative services, does not hold
itself out as a provider of medical services, and does not exercise influence or
control over the practice of medicine by the physicians with whom it is
affiliated. Accordingly, the Company believes it is not in violation of
applicable state laws relating to the practice of medicine. In addition to
prohibiting the practice of medicine, numerous states limit the ability of
entities such as the Company to control physician revenues or to receive
portions of such revenues in excess of the value of services provided. In most
states, such so-called "fee-splitting" laws provide that the laws are violated
only if a physician shares fees with a referral source. The Florida Board of
Medicine, however, has recently interpreted the Florida fee-splitting law very
broadly so as arguably to include the payment of any percentage-based management
fee, even to a management company that does not refer patients to the managed
group. The interpretation of the Florida Board of Medicine has been appealed. If
it is not reversed, the decision could require modification of the service
agreements covering the Company's affiliated groups in Florida. There can be no
assurance that further action by government authorities regarding the structure
of the Company's relationship with its affiliated physician groups and managed
IPAs, in Florida or elsewhere, will not have an adverse effect upon the Company.
Certain provisions of the Social Securities Act, commonly referred to
as the fraud and abuse provisions, prohibit the payment or receipt of any form
of remuneration in return for the referral of Medicare or Medicaid patients care
opportunities, or in return for the recommendation, arrangement, purchase,
lease, or order of items or services that are covered by Medicare or Medicaid
programs. Many states have adopted similar prohibitions against payments that
are intended to induce referrals of Medicaid and other third-party payor
patients. Although the Company believes that neither it nor any of its
affiliated physician groups is in violation of any such prohibitions, its
operations do not fit within any of the existing or proposed federal safe
harbors and may therefore be subject to challenge.
Significant prohibitions against physician referrals were enacted by
Congress in the Omnibus Budget Reconciliation Act of 1993. Subject to certain
exemptions, a physician or a member of his or her immediate family is prohibited
by this legislation from referring Medicare or Medicaid patients to an entity
providing "designated health services" in which the physician has an ownership
or investment interest or with which the physician has entered into a
compensation arrangement. Some states have also enacted similar so-called
"physician self-referral" laws, and additional states may follow. The Company
believes that its practices fit within exemptions contained in such statutes.
Nevertheless, expansion of the operations of the Company to certain
jurisdictions may require structural and organizational modifications of the
Company's relationships with physician groups to comply with new or revised
state statutes.
Because the Company's affiliated physician groups remain separate legal
entities, they may be deemed competitors subject to a range of antitrust laws
that prohibit anti-competitive conduct, including
33
<PAGE>
price fixing, concerted refusals to deal, and division of market. The Company
intends to comply with such state and federal laws in its development of
integrated healthcare delivery networks, but there can be no assurance that a
review of the Company's business by courts or regulatory authorities will not
result in a determination that could adversely affect the operation of the
Company and its affiliated physician groups.
Several states regulate the managed care support activities of
organizations other than insurers. In particular, claims administration and
utilization review functions may require licensure and the various elements of
the operations of the Company may be subject to regulation. The Company believes
that PMC holds all necessary licenses for its business activities. However, it
cannot be assured that it will receive necessary regulatory approvals for all
states in which it intends to conduct business, nor that the applicable
operational requirements will not adversely affect the profitability of the
Company.
As a result of the continued escalation of healthcare costs and the
inability of many individuals to obtain health insurance, numerous proposals
have been or may be introduced in the U.S. Congress and state legislators
relating to healthcare reform. There can be no assurance as to the ultimate
content, timing, or effect of any healthcare reform legislation, nor is it
possible at this time to estimate the impact of potential legislation, which
could be material, on the Company.
Insurance
The Company's affiliated physician groups maintain medical malpractice
liability insurance in the amount of $1 million per occurrence and $3 million in
the aggregate. The Company is named as the additional insured on the policies
maintained by each of its affiliated groups. The Company also maintains general
liability and umbrella coverage, including excess malpractice coverage of $5
million per occurrence and $5 million in the aggregate. The cost and
availability of such coverage has varied widely in recent years. The Company
maintains individual and aggregate stop-loss insurance coverage with respect to
its and its affiliated groups' risk-sharing contracts. While the Company
believes its insurance coverage is adequate for its current operations, there
can be no assurance that the coverage maintained by the Company will be
sufficient to cover all future claims or will continue to be available in
adequate amounts or at a reasonable cost.
Employees
The Company currently employs approximately 2,400 people, giving effect
to the Berkshire affiliation, including those employed in its corporate office.
The Company is not party to any collective bargaining agreement with a labor
union and considers its relations with its employees to be good. The Company
does not employ any of the physicians practicing in its affiliated groups.
34
<PAGE>
Properties
The Company currently leases approximately 5,500 square feet of space
at 801 Cherry Street in Fort Worth, Texas, where its headquarters are located,
under a lease terminable upon 60 days' notice by either party. The Company
believes these facilities are adequate for its current uses and that additional
space is available to accommodate its anticipated growth.
The Company leases, subleases, or occupies pursuant to its service
agreements the clinic facilities at which its affiliated physician groups
conduct their practices. The leases have varying terms ranging from
month-to-month to ten years. The Company anticipates that as the affiliated
practices continue to grow and add new services, expanded facilities will be
required.
Legal Proceedings
The Company and its affiliated physician groups are from time to time
subject to medical malpractice claims and other various claims and legal actions
that arise in the ordinary course of business. Such claims, if successful, could
result in substantial damage awards that may exceed the limits of insurance
coverage. The Company does not engage in the practice of medicine or provide
medical services, nor does it control the practice of medicine by its affiliated
physician groups or the compliance with regulatory requirements directly
applicable to such groups. Nevertheless, there can be no assurance that the
Company will not become subject to such claims in the future.
35
<PAGE>
MANAGEMENT
The following table sets forth certain information regarding the
directors and executive officers of the Company:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
H. Wayne Posey (1)(2)............................ 59 President, Chief Executive Officer, and Director
Dale K. Edwards.................................. 35 Senior Vice President-- Development
Deborah A. Johnson............................... 45 Senior Vice President-- Administration and
Secretary
Charles W. McQueary.............................. 45 Senior Vice President-- Operations
Robert M. Sontheimer............................. 57 Senior Vice President-- Managed Care
Robert D. Smith.................................. 37 Vice President-- Finance
Gregory A. Wagoner, M.D.......................... 51 Vice President-- Medical Affairs
Richard E. Ragsdale (1)(2)(3).................... 54 Chairman and Director
David T. Bailey, M.D.(4)......................... 52 Director
Charles J. Buysse, M.D........................... 52 Director
E. Thomas Chaney (1)(2)(3)....................... 55 Director
James F. Herd, M.D............................... 61 Director
Jack W. McCaslin(4).............................. 58 Director
</TABLE>
(1) Member of Executive Committee
(2) Member of Compensation Committee
(3) Member of Option Committee
(4) Member of Audit Committee
H. Wayne Posey, a co-founder of the Company, has been the President,
Chief Executive Officer, and a Director of the Company since its inception. Mr.
Posey was a healthcare consultant from 1975 until 1994, most recently as the
principal in charge of the healthcare services division of McCaslin & Company,
P.C., a public accounting and consulting company in Fort Worth, Texas. Mr. Posey
was employed by Hospital Affiliates International, Inc., a publicly owned
hospital management company, from 1970 until 1975, holding the positions of
Controller, Vice President and Controller, and Senior Vice President of
Operations, and he also served on the company's Board of Directors and Executive
Committee. He serves as a director of Gentle Dental Services Corporation, a
publicly held dental practice management company.
Dale K. Edwards has served as a Vice President of the Company with
primary responsibility for developing affiliations with physician groups since
November 1994 and as Senior Vice President since July 1997. From November 1993
to November 1994, Mr. Edwards was Vice President of Physician Network
Development with Columbia/HCA Healthcare Corporation, an integrated healthcare
delivery company, and with Medical Care America, Inc., a publicly owned operator
of outpatient surgical centers, prior to its acquisition by Columbia/HCA. From
1991 to 1993, Mr. Edwards was Vice President of Managed Care and Regional Vice
President of Sales of Medical Care America. Previously, he was employed by
HealthPlus, a regional HMO in the Sate of Washington, as an Account Executive.
36
<PAGE>
Deborah A. Johnson has served as Senior Vice President --
Administration of the Company since October 1996 and as Secretary since February
1997. From February 1995 to October 1996 Ms. Johnson was, successively, Senior
Vice President -- Operations and Senior Vice President --Administration of
MedPartners, Inc., a physician practice management company. From 1978 to 1994
Ms. Johnson served in various executive capacities with Humana Inc., an
integrated healthcare delivery company, Galen Health Care, Inc., a hospital
management company, and Columbia/HCA. Her positions have included Legal Counsel,
Director of Strategic Planning, Vice President-Information Systems, and Vice
President-Internal Audit.
Charles W. McQueary has served as Senior Vice President -- Operations
of the Company since December 1997. Prior to joining the Company, he was
Regional Vice President for MedPartners, Inc., a publicly traded physician
practice management company, from November 1995 to May 1997. He served as Chief
Operating Officer and Chief Financial Officer of Asthma and Allergy Care
America, Inc., a physician practice management company, from September 1993 to
November 1995, as Senior Vice President and Chief Financial Officer of Lifetime
Corporation, a publicly traded home healthcare company which wholly owned
Kimberly Quality Care. From October 1987 to September 1993, Mr. McQueary was
president of his own privately held consulting firm, specializing in healthcare
acquisitions and physician practice management.
Robert M. Sontheimer has served as Senior Vice President with primary
responsibility for managed care services to affiliated physicians and formation
and management of IPA networks since December 1997. He was the founder of PMC,
the capitation management services provider acquired by the Company in December
1997, and has served as its president and chief executive officer since
September 1992.
Robert D. Smith served as Vice President and Controller of the Company
since January 1997 and Vice President -- Finance since April 1, 1998. From
September 1996 to January 1997, Mr. Smith was Controller of Rykoff-Sexton, Inc.,
a publicly owned foodservice distribution company. He was Controller of US
Foodservice, a privately owned foodservice distribution company, from November
1993 until its merger with Rykoff-Sexton in 1996. Mr. Smith was employed by
White Swan, Inc., a privately owned foodservice distribution company, from July
1992 until it was acquired by US Foodservice in 1993. He joined White Swan as
its Controller and subsequently served as Chief Financial Officer and was a
member of its board of directors. Prior to joining White Swan, Mr. Smith was a
Senior Manager with Ernst & Young.
Gregory A. Wagoner, M.D., who also holds an M.B.A. degree, has been
Vice President --Medical Affairs of the Company since December 1997. He also
serves as Medical Director of PMC, a position he has held since April 1997. From
1995 to March 1997 he served as Vice President of Medical Affairs of FHP
International Corporation, an HMO that was publicly held until its acquisition
in February 1997. From 1991 to 1994, he served as Regional Medical Director with
Cigna HealthCare of California.
Richard E. Ragsdale, a co-founder of the Company, has served as the
Chairman of its Board of Directors since its inception. He was also a co-founder
and has served as the Chairman of the Board of Directors of Community Health
Systems, a non-urban hospital management company, since its inception in 1985,
and has been a director of The RehabCare Group, Inc., a publicly owned
rehabilitation services management company, since 1993.
37
<PAGE>
David T. Bailey, M.D. has served as a Director of the Company since January
1996. Dr. Bailey also serves as President of Abilene Diagnostic Clinic,
P.L.L.C., a ProMedCo affiliated physician group. Dr. Bailey is Board Certified
with the American Board of Family Practice and has been a full-time practicing
family physician since 1973. He has served as Chairman of the Department of
Family Practice both at Hendrick Medical Center and Abilene Regional Hospital in
Abilene. He also served as Chairman of the Board Trustees at Abilene Christian
Schools from 1983 to 1994.
Charles J. Buysse, M.D. has been in the private practice of medicine
in Naples, Florida, since 1975. He is President of Naples Medical Center, P.A.,
a ProMedCo affiliated physician group, and has been a Director of the Company
since November 1997.
E. Thomas Chaney has served as President, Chief Executive Officer, and
as director of Community Health Systems, Inc., which he co-founded in 1985,
since its inception. A co-founder of the Company, he has served as a Director
since its inception.
James F. Herd, M.D. has been in private practice in obstetrics and
gynecology in Fort Worth, Texas since 1968. During 1994, he was the President of
the Tarrant County Medical Society. From 1986 to 1990, he served as Chief and
Vice Chief of Staff of Harris Methodist Hospital in Fort Worth.
He has been a Director of the Company since its inception in July 1994.
Jack W. McCaslin has been the managing principal of McCaslin & Company,
P.C. and its predecessor, McCaslin, Wright & Greenwood, P.C. since 1983. He has
served as a Director of the Company since its inception.
The Board of Directors has established an Executive Committee, a
Compensation Committee, an Option Committee, and an Audit Committee. The
Executive Committee exercises the powers of the Board of Directors in the
management of the business and affairs of the Company between Board meetings to
the extent permitted by applicable law. The Compensation Committee reviews and
determines the compensation of executive officers. The Option Committee
administers the Company's option plan and determines the grant of options to
persons eligible under the plans. The Audit Committee's functions include
recommending to the Board of Directors the engagement of the Company's
independent public accountants, reviewing with such accountants the plans for
and the results and scope of their auditing engagement, and certain other
matters relating to their services provided to the Company, including the
independence of such accountants.
38
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding
beneficial ownership of the Company's Common Stock as of April 13, 1998 by (i)
each person who is known by the Company to be the beneficial owner of more than
five percent of the Company's outstanding Common Stock, (ii) each Director of
the Company, (iii) certain executive officers of the Company, (iv) the Selling
Stockholder, and (v) all Directors and executive officers of the Company as a
group, together with their respective percentage ownership of such shares before
the Offering and as adjusted to reflect the sale of Common Stock offered hereby.
Except as otherwise indicated, the Company believes that the beneficial owners
of the Common Stock listed, based on information furnished by such owners, have
sole investment and voting power with respect to such shares, subject to
community property laws where applicable. Unless otherwise indicated, the
address of each stockholder is: c/o ProMedCo Management Company, 801 Cherry
Street, Suite 1450, Fort Worth, Texas 76102.
<TABLE>
<CAPTION>
Shares Beneficially
Shares Beneficially Owned Owned After
Number and Address Before the Offering(1) Shares the Offering
of Beneficial Owner Number Percent Being Sold Number Percent
<S> <C> <C> <C> <C> <C>
H. Wayne Posey................................ 1,544,665 11.2% 400,000 1,144,665 5.8%
Richard E. Ragsdale........................... 2,021,540 14.6% -- 2,021,540 10.7%
David T. Bailey, M.D.(2)...................... 2,350 * -- 2,350 *
Charles J. Buysse, M.D........................ 2,200 * -- 2,200 *
E. Thomas Chaney.............................. 1,114,780 8.3% -- 1,114,780 5.7%
James F. Herd, M.D............................ 155,020 1.2% -- 155,020 *
Jack W. McCaslin.............................. 377,952 2.9% -- 377,952 2.0%
Robert D. Smith............................... 11,500 * -- 11,500 *
Robert M. Sontheimer.......................... 278,593 2.1% -- 278,593 1.5%
Charles W. McQueary........................... 8,000 * -- 8,000 *
Richard D'Antoni.............................. 321,000 2.4% -- 321,000 1.7%
Dale K. Edwards............................... 104,000 * -- 104,000 *
R. Alan Gleghorn.............................. 69,400 * -- 69,400 *
Deborah A. Johnson............................ 31,666 * -- 31,666 *
Abilene Diagnostic Clinic, P.L.L.C. 1,994,250 15.4% -- 1,994,250 0.5%
T. Rowe Price Associates(3)................... 844,900 8.3% -- 844,900
Bessemer Venture Partners III L.P.(4) 691,528 6.9% -- 691,528
All Directors and executive officers
as a group (12 persons).................... 5,083,991 39.2% 400,000 4,683,991 26.8%
</TABLE>
- ---------------------
* Less than 1%
(1) Includes shares issuable upon the exercise of options that are exercisable
withing 60 days of the date of this Prospectus. The shares underlying such
options are deemed to be outstanding for the purpose of computing the
percentage of outstanding stock owned by such persons individually and by
each group of which they are a member, but are not deemed to be outstanding
for the purpose of computing the percentage of any other person.
(2) Excludes 1,994,250 shares held by Abilene Diagnostic Clinic, P.L.L.C., of
which Dr. Bailey is President.
(3) Based upon a Schedule 13G filed with the Securities and Exchange Commission
(the "Commission") on February 10, 1998. The stockholder has sole
investment power with respect to all of such shares and sole voting power
with respect to 362,300 of such shares. These securities are owned by
various individual and institutional investors for which T. Rowe Price
Associates, Inc. serves as investment adviser with power to direct
investments and/or sole power to vote the securities. For purposes of the
reporting requirements of the Securities Exchange Act of 1934, T. Rowe
Price Associates is deemed to be a beneficial owner of such securities;
however, T. Rowe Price Associates expressly disclaims that it is in fact,
the beneficial owner of such securities. The address of T. Rowe Price
Associates is 100 East Pratt Street, Baltimore, Maryland 21202.
39
<PAGE>
(4) Based upon a Schedule 13G filed with the Commission on February 12, 1998.
Comprised of 655,310 shares as to which the owner has sole investment and
voting power and 36,218 shares as to which it has shared investment and
voting power. The address of Bessemer Venture Partners is 1025 Old Country
Road, Suite 205, Westbury, New York 11590.
40
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
On a pro forma basis after giving effect to the Offering and the
pending Berkshire affiliation, 18,802,226 shares of Common Stock (19,762,226 if
the Underwriters' over-allotment option is exercised in full) were outstanding
as of December 31, 1997. Upon completion of the Offering, or %, of such shares
may be sold without restriction under the Securities Act. The remaining shares
are "restricted securities" within the meaning of Rule 144 promulgated under the
Securities Act (the "Restricted Shares"), and may be publicly resold only if
registered under the Securities Act or sold in accordance with an applicable
exemption from registration, such as Rule 144.
In general, under Rule 144 as currently in effect, a person who has
beneficially owned Restricted Shares for at least one year, including an
"affiliate" of the Company, is entitled to sell within any three-month period a
number of shares of Common Stock that does not exceed the greater of 1% of the
then outstanding shares of Common Stock of the Company or the average weekly
trading volume of Common Stock on the open market during the four calendar weeks
preceding the date of which notice of the sale is filed with the Commission.
Sales under Rule 144 are subject to certain restrictions relating to manner of
sale, notice and availability of current public information about the Company. A
person who has not been an "affiliate" at any time during the 90 days preceding
a sale, and who has beneficially owned shares for at least two years, is
entitled to sell such shares free of certain of these restrictions.
The shares of Common Stock offered hereby may be resold without
restriction under the Securities Act except for any such shares acquired by an
"affiliate" of the Company, which shares will be subject to the resale
limitations of Rule 144. The Company is unable to make any prediction as to the
effect, if any, that the availability of Common Stock for sale, or the future
sales of Common Stock, under Rule 144 or otherwise, will have on the prevailing
market price of Common Stock. Sales of substantial amounts of Common Stock in
the public market, or the perception of the availability of shares for sale,
could adversely affect the prevailing market price of the Common Stock.
The Company's directors and officers have agreed not to dispose of any
shares of Common Stock for a period of 90 days from the date of this Prospectus,
other than pursuant to the Offering, without the prior written consent of Piper
Jaffray Inc., as representative of the Underwriters. See "Underwriting."
Certain holders have demand and "piggyback" registration rights with
respect to shares of Common Stock held by them or issuable to them, which rights
allow them to require the Company, subject to certain conditions, to file a
registration statement covering the sale of such shares. In addition, the
Company has filed a registration statement covering approximately shares of
Common Stock reserved for issuance under the Company's stock option plans.
41
<PAGE>
UNDERWRITING
The Underwriters named below have agreed, subject to the terms of a
Purchase Agreement, to purchase from the Company and the Selling Stockholder the
number of shares of Common Stock set forth opposite their names below. The
Underwriters are committed to purchase and pay for all such shares if any are
purchased.
Number
Name of Shares
Piper Jaffray Inc.......................................
Bear, Stearns & Co. Inc.................................
Cowen & Company.........................................
Total.........................................
The Underwriters have advised the Company and the Selling Stockholder
that they propose to offer the shares directly to the public at the public
offering price set forth on the cover page of this Prospectus and to selected
dealers at such price less a concession not in excess of $ per share. The
Underwriters may allow and such dealers may reallow a concession not in excess
of $ per share to certain other brokers and dealers. After the public offering,
the public offering price, concession and reallowance, and other selling terms
may be changed by the Underwriters.
The Company has granted to the Underwriters an option, exercisable
during the 30-day period after the date of this Prospectus, under which the
Underwriters may purchase up to an additional 960,000 shares of Common Stock
from the Company at the Price to Public less the Underwriting Discount set forth
on the cover page of the Prospectus. The Underwriters may exercise the option
only to cover over-allotments, if any. To the extent such option is exercised,
each Underwriter will become obligated, subject to certain conditions, to
purchase approximately the same percentage of such additional shares as it was
obligated to purchase under the Purchase Agreement.
The officers and directors of the Company, who will beneficially own in
the aggregate shares of Common Stock upon completion of the Offering, have
agreed that they will not sell, offer to sell, distribute, or otherwise dispose
of any shares of Common Stock owned by them for a period of 90 days after the
date of this Prospectus, without the prior written consent of Piper Jaffray Inc.
The Company has agreed that it will not, without the prior written consent of
Piper Jaffray Inc., offer, sell, issue, or otherwise dispose of any shares of
Common Stock, options, or warrants to acquire shares of Common Stock or
securities exchangeable for or convertible into shares of Common Stock during
the 90-day period following the date of this Prospectus, except that the Company
may issue shares upon the exercise of options and warrants granted prior to the
date hereof, may grant additional options under its stock option plans, and may
issue Common Stock in connection with affiliations with new physician groups.
The Company and the Selling Stockholder have agreed to indemnify the
Underwriters against certain liabilities, including civil liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.
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<PAGE>
In order to facilitate the Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock during and after the Offering. Specifically, the Underwriters may
over-allot or otherwise create a short position in the Common Stock for their
own account by selling more shares of Common Stock than have been sold to them
by the Company. The Underwriters may elect to cover any such short position by
purchasing shares of Common Stock in the open market or by exercising the over-
allotment option granted to the Underwriters. In addition, the Underwriters may
stabilize or maintain the price of the Common Stock by bidding for or purchasing
shares of Common Stock in the open market and may impose penalty bids, under
which selling concessions allowed to syndicate members or other broker-dealers
participating in the Offering are reclaimed if shares of Common Stock previously
distributed in the Offering are repurchased in connection with stabilization
transactions or otherwise. The effect of these transactions may be to stabilize
or maintain the market price of the Common Stock at a level above that which
might otherwise prevail in the open market. The imposition of a penalty bid may
also affect the price of the Common Stock to the extent that it discourages
resales thereof. No representations are made as to the magnitude or effect of
any such stabilization or other transactions. Such transactions may be effected
on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
In connection with this Offering, certain Underwriters (and selling
group members) may also engage in passive market making transactions in the
Common Stock on the Nasdaq National Market. Passive market making consists of
displaying bids on the Nasdaq National Market limited by the prices of
independent market makers and effecting purchases limited by such prices and in
response to order flow. Rule 103 of Regulation M promulgated by the Commission
limits the amount of net purchases that each passive market maker may make and
the displayed size of each bid. Passive market making may stabilize the market
price of the Common Stock at a level above that which might otherwise prevail in
the open market and, if commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the issuance of the Common Stock offered hereby will be
passed upon for the Company by Dyer Ellis & Joseph P.C., Washington, D.C.
Certain legal matters with respect to such securities will be passed upon for
the Underwriters by Vinson & Elkins L.L.P., Dallas, Texas.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1996 and 1997 and for the years ended December 31, 1995, 1996, and 1997 included
in this Prospectus and elsewhere in the Registration Statement (as defined
herein) have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.
The financial statements of Southwest Florida Clinical Practices and
IMG, Inc. incorporated by reference in this Prospectus have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
The financial statements of Health Plans, Inc. appearing in the
Company's Current Report on Form 8-K dated February 17, 1998 for the year ended
December 31, 1996, have been audited by Ernst
43
<PAGE>
& Young LLP, independent auditors, as set forth in their report thereon included
therein and incorporated herein by reference. Such financial statements referred
to above are incorporated herein by reference in reliance upon such reports
given upon the authority of such firm as experts in accounting and auditing.
The consolidated financial statements of Berkshire Physicians & Surgeons,
P.C. as of December 31, 1996 and 1997 and for the years ended December 31, 1996
and 1997 included in this Prospectus have been audited by Coopers &
Lybrand,L.L.P. independent accountants, as indicated in their reports with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). In accordance
with the Exchange Act, the Company files reports, proxy and information
statements and other information with the Commission. The reports, proxy and
information statements and other information can be inspected and copied at the
public reference facilities that the Commission maintains at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional
offices located at 7 World Trade Center, 13th Floor, New York, New York 10048,
and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
these materials can be obtained at prescribed rates from the Public Reference
Section of the Commission at the principal offices of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549. In addition, the Commission maintains a
site on the World Wide Web at http://www.sec.gov that contains reports, proxy
and information statements and other information regarding registrants that file
electronically with the Commission.
The Company has filed with the Commission a registration statement on
Form S-3 (the "Registration Statement") under the Securities Act, with respect
to the Common Stock. This Prospectus, which constitutes a part of the
Registration Statement, does not contain all the information set forth in the
Registration Statement, certain items of which are contained in schedules and
exhibits to the Registration Statement as permitted by the rules and regulations
of the Commission. Statements made in this Prospectus concerning the contents of
any documents referred to herein are not necessarily complete. With respect to
each such document filed with the Commission as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description, and
each such statement shall be deemed qualified in its entirety by such reference.
The Common Stock is quoted on the Nasdaq National Market under the
symbol "PMCO." Reports, proxy and information statements and other information
concerning the Company may be inspected at the offices of the Nasdaq National
Market, 1735 K Street, N.W., Washington, D.C. 20006.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission under
the Exchange Act are hereby incorporated by reference into this Prospectus:
(a) the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997;
44
<PAGE>
(b) the description of the Common Stock contained in the Company's Form
8-A Registration Statement filed with the Commission on March 3, 1997
(File No. 0-21373);
(c) the Company's definitive proxy statement for its 1998 Annual
Meeting of Stockholders filed with the Commission on April , 1998;
(d) the financial statements of Southwest Florida Clinical Practices,
included in the Company's Amendment to Report on Form 8-K filed with
the Commission on July 7, 1997;
(e) the financial statements of IMG, Inc. (formerly known as
Intercoastal Medical Group, Inc.), included in the Company's Amendment
to Report on Form 8-K filed with the Commission on December 22, 1997;
and
(f) the financial statements of Health Plans, Inc., included in the
Company's Amendment to Report on Form 8-K filed with the Commission on
February 17, 1998.
All documents filed by the Company pursuant to Sections 13(a), 13(c),
14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus and
prior to the termination of the Offering shall be deemed to be incorporated by
reference into this Prospectus and to be a part hereof from the respective dates
of filing of such documents.
Any statement or information contained herein or in any document all or
part of which is incorporated or deemed to be incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Prospectus to
the extent that a statement or information contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement or information. Any such
statement or information so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to any person to whom this
Prospectus is delivered, upon the written or oral request of such person, a copy
of any or all of the foregoing documents incorporated herein by reference (other
than certain exhibits to such documents). Requests for such copies should be
directed to .
45
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
ProMedCo Management Company
Pro Forma Consolidated Financial Statements (Unaudited)................................................... F-2
Pro Forma Consolidated Balance Sheet as of December 31, 1997 (Unaudited)......................... F-3
Pro Forma Consolidated Statement of Operations for the Year Ended
December 31, 1997 (Unaudited)............................................................... F-4
Notes to Pro Forma Consolidated Financial Statements (Unaudited)................................. F-5
Consolidated Financial Statements:
Report of Independent Public Accountants......................................................... F-10
Consolidated Balance Sheets as of December 31, 1996 and 1997 F-11
Consolidated Statements of Operations for the Three Years Ended
December 31, 1997........................................................................... F-13
Consolidated Statements of Stockholders' Equity for the Three
Years Ended December 31, 1997............................................................... F-14
Consolidated Statements of Cash Flows for the Three Years Ended
December 31, 1997........................................................................... F-15
Notes to Consolidated Financial Statements....................................................... F-16
Berkshire Physicians & Surgeons, P.C.
Consolidated Financial Statements:
Report of Independent Accountants................................................................ F-33
Consolidated Balance Sheets as of December 31, 1996 and 1997 F-34
Consolidated Statements of Operations for the years ended
December 31, 1996 and 1997.................................................................. F-35
Consolidated Statements of Changes in Shareholders' Equity (Deficit)
for the years ended December 31, 1996 and 1997.............................................. F-36
Consolidated Statements of Cash Flows for the years ended
December 31, 1996 and 1997.................................................................. F-37
Notes to Consolidated Financial Statements....................................................... F-38
</TABLE>
F-1
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The pro forma consolidated balance sheet presented below gives effect
to the pending Berkshire Affiliation and the Offering as if such transactions
had occurred on December 31, 1997.
The pro forma consolidated statement of operations for the year ended
December 31, 1997, gives effect to the 1997 Affiliations, the Christie
affiliation, the pending Berkshire affiliation and the Offering as if such
transactions had been completed on January 1, 1997. The pro forma consolidated
statement of operations is based on the financial statements of the Company and
the affiliated physician groups, giving effect to the pending Berkshire
Affiliation and the 1997 Affiliations under the purchase method of accounting,
and the assumptions and adjustments in the accompanying notes to pro forma
consolidated financial information.
The pro forma consolidated financial statements have been prepared by
management based on the audited financial statements of the affiliated physician
groups, adjusted where necessary to reflect the affiliations and related
operations as if the service agreements between the Company and such groups had
been in effect during the entire periods presented. These pro forma consolidated
financial statements are presented for illustrative purposes only and are not
indicative of the results that would have occurred if the pending Berkshire
affiliation, the 1997 Affiliations or the Christie affiliation had been
completed on January 1, 1997 or that may be obtained in the future. The pro
forma consolidated financial statements should be read in conjunction with the
audited consolidated financial statements and notes thereto of the Company and
Berkshire Physicians & Surgeons, P.C. included elsewhere in this Prospectus and
for, Abilene Diagnostic Clinic, P.L.L.C. included in the Company's registration
statement on Form S-1 and related prospectus dated March 12, 1997, the Southwest
Florida Clinic Practices included in the Company's Current Report on Form 8-K
dated April 23, 1997, IMG, Inc. included in the Company's Current Report on Form
8-K dated October 8, 1997 and Health Plans, Inc., included in the Company's
Current Report on Form 8-K dated December 2, 1997.
F-2
<PAGE>
Pro Forma Consolidated Balance Sheet
December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Berkshire Berkshire Offering Pro Forma
Historical Historical (a) Adjustments Pro Forma Adjustments (e) as Adjusted
<S> <C> <C> <C> <C> <C> <C>
Cash................................ $ 15,760,920 $ 1,185,042 $ -- $ 16,945,962 $ 35,264,361 $ 52,210,323
Accounts receivable................. 24,420,979 4,402,454 -- 28,823,433 28,823,433
Management fee receivable........... 1,938,464 -- -- 1,938,464 -- 1,938,464
Due from affiliated physician
groups............................ 2,870,607 -- -- 2,870,607 -- 2,870,607
Prepaid expense and other current
assets............................ 4,960,385 1,397,271 -- 6,357,656 -- 6,357,656
------------- ------------- ------------- ------------- -------------- --------------
Total current assets............ 49,951,355 6,984,767 -- 56,936,122 35,264,361 92,200,483
Property and equipment.............. 10,590,561 4,649,052 (3,577,791)(b) 11,661,822 -- 11,661,822
Intangible assets................... 77,195,351 -- 28,930,476 (a) 106,125,827 -- 106,125,827
Long term receivables............... 23,915,884 -- -- 23,915,884 -- 23,915,884
Other assets........................ 1,312,999 220,083 -- 1,533,082 -- 1,533,082
------------- ------------- ------------- ------------- -------------- --------------
Total assets.................... $ 162,966,150 $ 11,853,902 $ 25,352,685 $ 200,172,737 $ 35,264,361 $ 235,437,098
============= ============= ============= ============= ============== ==============
Accounts payable.................... $ 6,687,168 $ 3,774,701 $ -- $ 10,461,869 $ -- $ 10,461,869
Payable to affiliated physician
groups............................ 6,562,903 -- -- 6,562,903 -- 6,562,903
Accrued physician compensation -- 1,879,175 -- 1,879,175 -- 1,879,175
Accrued salaries, wages and benefits 2,895,023 1,552,711 -- 4,447,734 -- 4,447,734
Accrued expenses and other current
liabilities....................... 2,512,769 -- -- 2,512,769 -- 2,512,769
Deferred income tax liability 174,101 -- -- 174,101 -- 174,101
Current maturities of notes payable 3,676,365 7,569,132 (7,569,132)(b) 3,676,365 -- 3,676,365
Current portion of obligations under
capital leases.................... 609,591 644,665 (644,665)(b) 609,591 -- 609,591
Current portion of deferred purchase
price............................. 5,265,713 -- -- 5,265,713 -- 5,265,713
Income taxes payable................ 1,051,050 -- -- 1,051,050 -- 1,051,050
------------- ------------- ------------- ------------- -------------- --------------
Total current liabilities 29,434,683 15,420,384 (8,213,797) 36,641,270 -- 36,641,270
Notes payable, net of current
maturities........................ 39,688,325 339,172 (339,172)(b) 53,755,964 (47,035,639) 6,720,325
14,067,639 (d)
Obligations under capital leases, net
of current portion................ 1,073,886 2,014,670 (2,014,670)(b) 1,073,886 -- 1,073,886
Deferred purchase price, net of
current portion................... 7,318,526 -- -- 7,318,526 -- 7,318,526
Convertible subordinated notes
payable........................... 1,765,058 -- 9,632,361 (d) 11,397,419 -- 11,397,419
Deferred income tax liability 1,103,876 -- -- 1,103,876 -- 1,103,876
Other long term liabilities 1,963,059 -- -- 1,963,059 -- 1,963,059
------------- ------------- ------------- ------------- -------------- --------------
Total liabilities................. 82,347,413 17,774,226 13,132,361 113,254,000 (47,035,639) 66,218,361
Common stock........................ 106,868 334 (334)(c) 111,368 60,000 171,368
4,500 (d)
Additional paid in capital.......... 58,946,838 593,052 (593,052)(c) 65,242,338 82,240,000 147,482,338
6,295,500 (d)
Common stock to be issued........... 20,121,059 -- 20,121,059 -- 20,121,059
Stockholder notes receivable (369,665) (335,204) 335,204 (c) (369,665) -- (369,665)
Accumulated earnings (deficit) 1,813,637 (6,178,506) 6,178,506 (c) 1,813,637 -- 1,813,637
------------- ------------- ------------- ------------- -------------- --------------
Total stockholders' equity 80,618,737 (5,920,324) 12,220,324 86,918,737 82,300,000 169,218,737
------------- ------------- ------------- ------------- -------------- --------------
Total liabilities and stockholders'
equity.......................... $ 162,966,150 $ 11,853,902 $ 25,352,685 $ 200,172,737 $ 35,264,361 $ 235,437,098
============= ============= ============= ============= ============== ==============
</TABLE>
F-3
<PAGE>
Pro Forma Consolidated Statement of Operations
for the Year Ended December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
1997 1997 Berkshire Berkshire Offering Pro Forma
Historical(f) Transactions(g) Adjustments Affiliation Adjustments Pro Forma Adjustments(w) as Adjusted
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Physician groups
revenue, net....... $127,716,775 $95,005,638 $ -- $42,128,650 $ -- $264,851,063 $ $264,851,063
Less: Amounts retained
by physician group 47,075,240 28,631,514 (28,631,514)(h) 14,877,480 (14,877,480)(p) 83,559,854 83,559,854
-- 28,819,657 h) 7,664,957 (p)
Management fee
revenue............ 80,641,535 66,374,124 (188,143) 27,251,170 7,212,523 181,291,209 -- 181,291,209
Operating expenses
Clinic salaries and
benefits......... 29,859,718 23,616,700 (2,799,907)(i) 12,035,052 (691,323)(q) 62,020,240 62,020,240
Clinic rent and lease
expense.......... 7,016,261 4,428,419 -- 2,173,514 145,000 (r) 13,763,194 13,763,194
Clinic supplies.... 9,667,085 6,638,431 -- 3,319,753 -- 19,625,269 19,625,269
Purchased medical
services......... 7,946,989 25,647,017 -- 9,731,890 -- 43,325,896 43,325,896
Other clinic costs 10,883,588 5,365,285 (24,322)(j) 4,435,660 (755,160)(s) 19,905,051 19,905,051
General corporate
expenses......... 3,793,552 -- -- -- -- 3,793,552 3,793,552
Depreciation and
amortization..... 2,942,604 932,151 (223,318)(k) 1,218,025 (359,301)(t) 5,785,748 5,785,748
-- 311,238 (l) 964,349 (u)
Interest expense
(revenue), net 456,175 312,285 (242,295)(m) 949,683 (949,683)(v) (43,187) (671,655) (714,842)
-- (1,026,880)(g)(m) 457,537 (v)
------------ ----------- --------- --------- -----------
72,565,972 66,940,288 (4,005,493) 33,863,577 (1,188,581) 168,175,763 (671,655) 167,504,108
------------ ----------- --------- ----------- ----------- ----------- -------- ----------
Income (loss) before
provision for
income taxes....... 8,075,563 (566,164) 3,817,350 (6,612,407) 8,401,104 13,115,446 671,655 13,787,101
Provision for income
taxes.............. 2,602,379 (87,406) 1,789,192 (n) 58,569 621,136 (w) 4,983,870 255,229 5,239,099
------------ ----------- --------- ---------- ----------- ----------- ------- -----------
Net income (loss)..... $ 5,473,184 $ (478,758) $2,028,158 $(6,670,976) $ 7,729,968 $ 8,131,576 $416,426 $ 8,548,002
============ =========== ========== =========== =========== ============ ======== ===========
Net income (loss) per
share outstanding
Basic............ $ 0.48 $ 0.46
Diluted.......... $ 0.38 $ 0.40
Weighted average number
of common shares
outstanding
Basic............ 11,375,662 18,650,655
Diluted.......... 14,224,198 21,499,191
</TABLE>
F-4
<PAGE>
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
During 1997 and through the date of this Prospectus, the Company
acquired or will acquire certain operating assets and assumed certain operating
liabilities of physician groups located in Florida, Massachusetts, Pennsylvania,
Tennessee and Texas. The Company also entered into a long term service agreement
with a physician group in Illinois. In addition, the Company acquired all of the
outstanding stock of Health Plans, Inc. ("HPI"), since renamed PMC Medical
Management, Inc. ("PMC") which provides a full range of managed care services to
capitated providers.
Physician Groups Revenue, Net
Physician groups revenue represents the revenue of the affiliated
physician groups reported at the estimated realizable amounts from patients,
third-party payors, and others for services rendered, net of contractual and
other adjustments.
Management Fee Revenue
Management fee revenue represents physician groups revenue less amounts
retained by physician groups. The amounts retained by physician groups
(typically 80-85% of the physical group operating income) represent amounts paid
to the physician groups pursuant to the service agreements between the Company
and the physician groups. Under the service agreements, the Company provides
each physician group with the facilities and equipment used in its medical
practice, assumes responsibility for the management of the operations of the
practice, and employs substantially all of the non-physician personnel utilized
by the group.
The Company's management fee revenue is dependent upon the operating
income of the physician groups. Physician group operating income is defined in
the service agreements as the physician group's net medical revenue less certain
contractually agreed-upon clinic expenses, including non-physician clinic
salaries and benefits, rent, insurance, interest, and other direct clinic
expenses. The amount of the physician groups revenue retained and paid to the
physician groups primarily consists of the cost of the affiliated physicians'
services. The remaining amount of the physician group operating income
(typically 15-20%) and an amount equal to 100% of the clinic expenses are
reflected as management fee revenue earned by the Company.
Pro Forma Consolidated Balance Sheet
The adjustments reflected in the December 31, 1997 pro forma consolidated
balance sheet are as follows:
(a) To record the assets acquired and liabilities assumed by ProMedCo (to be
adjusted for assets not acquired and liabilities not assumed, as noted in
note (b)) in the pending Berkshire affiliation. This acquisition has been
accounted for by the purchase method of accounting and, accordingly, the
purchase price has been preliminarily allocated to the assets acquired and
liabilities assumed based on the estimated fair values as of December 31,
1997. Certain balances have been reclassified from the historical audited
financial statements of Berkshire to conform with the Company's
presentation. The total consideration of the transaction is approximately
$30.0 million, consisting of $14.1 million cash, $6.3 million of the
Company's Common Stock, and $9.6 million of
F-5
<PAGE>
convertible subordinated notes. The cash portion of the
consideration will be funded through additional borrowings
under the Company's Credit Facility. The fair value of the
clinic net assets was determined based on an analysis of
estimated future clinic operating results. The following
methods and assumptions were used to estimate fair value:
Cash and cash equivalents -- The historical carrying amount
approximates fair value.
Accounts receivable, net -- The Company reviewed the specific
receivable balances and determined that their historical
carrying amount approximates their fair value.
Property and equipment, net -- The Company acquires only
specific non-real estate assets. The Company performed an
asset review and determined that the historical carrying
amount approximates fair value.
Liabilities assumed -- Given the short term nature of the
liabilities assumed, the historical carrying amount
approximates their fair value.
Intangible assets -- In connection with the allocation of the
purchase price to identifiable intangible assets, the Company
analyzes the nature of each group, number of service sites and
ability to recruit addition physicians, the group's relative
market position, the length of time each group has been in
existence, and the term and enforceability of the service
agreement. Because the Company does not practice medicine,
maintain patient relationships, hire physicians, enter into
employment and non-competition agreements with the physicians,
or directly contract with payors, the intangible asset created
in the purchase allocation process is associated solely with
the service agreement of the physician group. The service
agreements are for a term of 40 years and cannot be terminated
by either party without cause, consisting primarily of
bankruptcy or material default.
The Company believes that there is no material value allocable
to the employment and non-competition agreements entered into
the physician group and the individual physicians. The primary
economic beneficiary of these agreements is the physician
group, an entity that the Company does not legally control. In
addition, any damages under the agreements are paid solely to
the physician group for purposes of replacing departing
physicians. Generally, due to low expected physician turnover
in the industry and the ability of the physician group to
replace departing physicians, the Company believes there would
be no significant economic loss to either the physician group
or the Company due to physician departure. The physician
groups continually recruit physicians and, as appropriate and
necessary, subsequently add qualified physicians to the group.
This manner of operations allows the physician group to
perpetuate itself as individual physicians retire or are
otherwise replaced. The Company believes that the physician
groups with which it has service agreements thus are
long-lived entities with an indeterminable life, and that the
physicians, customer demographics, and various contracts will
be continuously replaced. The service agreement intangible is
being amortized on a straight-line method over a composite
average life of 30 years.
F-6
<PAGE>
(b) To eliminate assets not acquired and liabilities not assumed
by ProMedCo in the pending Berkshire affiliation as stated in
the purchase agreement.
(c) To eliminate the owner's equity of Berkshire in connection
with the purchase accounting for the affiliation.
(d) To record borrowings under the Company's Credit Facility for
the cash payment, stock issued and subordinated notes payable
issued at closing in exchange for assets acquired and
liabilities assumed in connection with the pending Berkshire
affiliation. The subordinated notes payable will bear interest
at 4.75% and are convertible at a 20% premium to the Closing
Price of the Company's Common Stock, as defined in the
purchase agreement for the Berkshire affiliation.
(e) To reflect the effects of the Offering.
Pro Forma Consolidated Statement of Operations
The adjustments reflected in the pro forma consolidated statement of operations
for the year ended December 31, 1997 are as follows:
(f) The historical consolidated statement of operations includes
the combined results of operations of the Company and Western
Medical Management Corp., Inc. ("Reno"). The Reno business
combination (the "Reno merger") was completed on March 17,
1997, and was accounted for as a pooling of interests.
(g) The 1997 Transactions column represents the historical
revenues and expenses of the physician groups for that portion
of the year preceding the groups' affiliation with the
Company. The 1997 Transactions include Abilene Diagnostic
Clinic, P.L.L.C.; Naples Medical Center, P.A.; Naples
Obstetrics & Gynecology, M.D., P.A.; IMG, Inc.; Cowley Medical
Associates, P.C.; Health Plans, Inc.; HealthStar, Inc.;
Thomas-Spann Clinic, P.A.; and the Christie affiliation.
Following the October 1997 Christie affiliation, the Company
agreed to lend the physician group a total of $42.7 million.
An initial loan of $3.0 million was funded in November 1997
and an additional $16.4 million was funded in December 1997,
with additional loans of $5.825 million to be funded each
December through 2001. The note receivable earns interest at
an annual rate of 8% and is an interest only loan, payable
monthly, through November 2007, after which the balance is to
be repaid in annual installments through December 2022.
(h) To eliminate the historical amounts retained by physician
groups, physician benefits and other physician-related costs
and to record the amounts retained by physician groups to the
percentage specified in the service agreement (typically
80-85% of each of the physician group's operating income) for
each affiliated physician group in the 1997 Affiliations, the
Christie affiliation and the Reno merger. The adjustment is
for the periods that the physician groups were not managed
under the service agreements.
F-7
<PAGE>
(i) To eliminate the salaries and benefits of mid-level providers
at historical levels in the 1997 Transactions for the periods
not covered by the service agreements. The service agreements
provide that these costs are the responsibility of the
physician groups and thus are included in the amounts retained
by physician groups. The adjustment is for the periods the
physician groups were not managed in the service agreements.
(j) To eliminate physician benefits and other physician related
costs, such as professional licenses, continuing education and
subscriptions that will not be paid by the Company.
(k) To eliminate the depreciation and amortization expense
recorded by the physician groups associated with assets not
acquired in the 1997 Transactions at historical values. The
adjustment is for the periods the physician groups were not
managed under the service agreements.
(l) To adjust depreciation expense and amortization expense in the
1997 Transactions. For service agreement rights, the
adjustment for amortization expense is computed by dividing
total service agreement rights acquired by a composite average
life of 30 years, less agreement amortization expense recorded
on an historical basis. The adjustments assume the acquired
assets were held for the entire period presented.
(m) To eliminate interest expense related to liabilities not
assumed and record interest on debt issued in connection with
the 1997 Transactions. Additional interest income is recorded
on the loan to Christie Clinic Association based on the
outstanding balance as of December 31, 1997 as if the amount
had been outstanding as of January 1, 1997.
(n) To record an estimate of the overall provision for income
taxes for the consolidated operations of the historical
results of the Company plus the 1997 Transactions at an
estimated effective rate of 38%.
(o) The pending Berkshire affiliation represents the historical
consolidated revenues and expenses of Berkshire Physicians &
Surgeons, P.C. for the year ended December 31, 1997. Certain
balances have been reclassified from the historical financial
statements to conform with the Company's presentation.
(p) To eliminate the historical amounts retained by the physician
group and record the amounts retained by the physician group
based on the percentage specified in the service agreement
entered into with the physician group.
(q) To eliminate the salaries and benefits of mid-level providers
at historical levels for the periods not covered by the
service agreements. The service agreement provides that these
costs are the responsibility of the physician group and thus
are included in the amounts retained by physician groups.
(r) To record additional rent expense related to the rental of
clinic space from the physician group.
F-8
<PAGE>
(s) To eliminate physician related costs, such as professional
licenses, continuing education and subscriptions that will not
be paid by the Company.
(t) To eliminate the depreciation and amortization expense
associated with assets not acquired, at historical values.
(u) To adjust depreciation and amortization expense. For service
agreement rights, the adjustment for amortization expense is
computed by dividing total service agreement rights acquired
by a composite average life of 30 years, less agreement
amortization expense recorded on an historical basis. The
adjustments assume the acquired assets were held for the
entire period presented.
(v) To eliminate interest expense related to liabilities not
assumed and record interest on debt issued in connection with
the pending Berkshire affiliation.
(w) To record an estimate of the provision for income taxes for
the pro forma results of operations from pending Berkshire
affiliation at an estimated effective rate of 38%.
(x) To reduce interest expense assuming repayment of outstanding
borrowings under the Credit Facility with a portion of the
proceeds of the Offering received as of January 1, 1997, net
of estimated federal and state income taxes at a combined rate
of 38%.
F-9
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
ProMedCo Management Company:
We have audited the accompanying consolidated balance sheets of ProMedCo
Management Company (a Delaware corporation) and subsidiaries as of December 31,
1996 and 1997, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ProMedCo Management Company and
subsidiaries as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Fort Worth, Texas,
March 3, 1998
F-10
<PAGE>
PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1996 1997
------------- ----------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................. $ 1,633,534 $ 15,760,920
Accounts receivable, net of allowances of approximately
$4,035,000 and $19,281,000, respectively........................ 6,227,228 24,420,979
Management fees receivable............................................ 1,266,598 1,938,464
Due from affiliated physician groups.................................. 660,278 2,870,607
Prepaid expenses and other current assets............................. 742,845 4,960,385
------------- ----------------
Total current assets............................................. 10,530,483 49,951,355
Property and equipment, net of accumulated depreciation of
approximately $865,000 and $2,630,000, respectively................... 3,930,191 10,590,561
Intangible assets, net of accumulated amortization of $289,000
and $1,775,000, respectively.......................................... 14,860,171 77,195,351
Long term receivables........................................................ -- 23,915,884
Other assets ................................................................ 1,238,929 1,312,999
------------- ----------------
Total assets.................................................... $ 30,559,77 $ 162,966,150
============= ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-11
<PAGE>
PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - (Continued)
<TABLE>
<CAPTION>
December 31,
1996 1997
------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable....................................................... $ 1,505,762 $ 6,687,168
Payable to affiliated physician groups................................. 1,341,876 6,562,903
Accrued salaries, wages and benefits................................... 1,153,558 2,895,023
Accrued expenses and other current liabilities......................... 2,353,381 2,512,769
Deferred income tax liability.......................................... -- 174,101
Current maturities of notes payable.................................... 1,151,191 3,676,365
Current portion of obligations under capital leases.................... 589,438 609,591
Current portion of deferred purchase price............................. 181,986 5,265,713
Income taxes payable................................................... -- 1,051,050
--------------- ----------------
Total current liabilities...................................... 8,277,192 29,434,683
Notes payable, net of current maturities..................................... 4,585,173 39,688,325
Obligations under capital leases, net of current portion..................... 1,030,171 1,073,886
Deferred purchase price, net of current portion.............................. -- 7,318,526
Convertible subordinated notes payable....................................... 1,800,274 1,765,058
Deferred income tax liability................................................ -- 1,103,876
Other long term liabilities.................................................. 393,575 1,963,059
--------------- ----------------
Total liabilities.............................................. 16,086,385 82,347,413
--------------- ----------------
Commitments and contingencies
SeriesA redeemable convertible preferred stock, 700,000
shares authorized; 500,000 and 0 shares issued and
outstanding in 1996 and 1997, respectively............................. 2,957,641 --
Redeemable common stock, 165,296 and 0 shares issued
and outstanding in 1996 and 1997, respectively......................... 991,776 --
Stockholders' equity:
Preferred stock, $0.01 par value, 20,000,000 shares
authorized, 0 shares issued and outstanding........................ -- --
Class B Common Stock, $0.01 par value; 2,600,000
shares authorized; 1,226,150 and 0 shares issued and
outstanding in 1996 and 1997, respectively......................... 12,262 --
Common stock, $0.01 par value; 50,000,000 shares
authorized; 3,187,129 and 10,686,767 shares issued
and outstanding in 1996 and 1997, respectively..................... 31,871 106,868
Additional paid-in-capital............................................. 11,987,480 58,946,838
Common stock to be issued, 187,482 and 2,875,073
shares, in 1996 and 1997, respectively............................. 2,303,212 20,121,059
Stockholder notes receivable........................................... (151,306) (369,665)
Accumulated earnings (deficit)......................................... (3,659,547) 1,813,637
---------------- ---------------
Total stockholders' equity..................................... 10,523,972 80,618,737
---------------- ---------------
Total liabilities and stockholders' equity..................... $ 30,559,774 $ 162,966,150
================ ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-12
<PAGE>
PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1996 1997
------------ ------------ -------------
<S> <C> <C> <C>
Physician groups revenue, net ..................... $ 13,188,405 $ 47,036,801 $ 127,716,775
Less- Amounts retained by physician groups ........ 5,344,688 20,791,605 47,075,240
------------ ------------ -------------
Management fee revenue ............................ 7,843,717 26,245,196 80,641,535
Operating expenses:
Clinic salaries and benefits ................. 4,249,813 11,694,973 29,859,718
Clinic rent and lease expense ................ 708,020 2,670,138 7,016,261
Clinic supplies .............................. 624,370 3,213,443 9,667,085
Purchased medical services ................... 781,000 969,650 7,946,989
Other clinic costs ........................... 1,759,013 5,018,876 10,883,588
General corporate expenses ................... 802,980 2,633,585 3,793,552
Depreciation and amortization ................ 203,482 723,641 2,942,604
Interest expense ............................. 20,958 209,474 456,175
Merger costs ................................. -- 682,269 --
------------ ------------ -------------
Total operating expenses .............. 9,149,636 27,816,049 72,565,972
------------ ------------ -------------
Income (loss) before provision (benefit) for
income taxes ................................. (1,305,919) (1,570,853) 8,075,563
Provision (benefit) for income taxes .............. (54,405) -- 2,602,379
------------ ------------ -------------
Net income (loss) ................................. $ (1,251,514) $ (1,570,853) $ 5,473,184
============ ============ =============
Net earnings (loss) per share
Basic ........................................ $ (0.16) $ (0.20) $ 0.48
Diluted....................................... $ (0.16) $ (0.20) $ 0.38
Weighted average number of common shares
outstanding......................................
Basic......................................... 7,871,746 7,870,908 11,375,662
Diluted....................................... 7,871,746 7,870,908 14,224,198
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-13
<PAGE>
PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Class B Additional Common Stockholder Accumulated
Common Stock Common Stock Paid-In Stock To Notes Earnings
Shares Amount Shares Amount Capital Be Issued Receivable (Deficit) Total
--------- ------ --------- ------ ----------- --------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December
31, 1994, as
previously
reported............... 1,226,150 12,262 1,878,0$0 18,780 $ 673,561 $ -- $(33,500) $(169,890) 501,213
Adjustments
for pooling of
interest
(Note 3)............... -- -- 421,549 4,215 1,585,003 -- -- (667,290) 921,928
--------- ------ --------- ------ ----------- --------- -------- ---------- ----------
Balance, December
31, 1994, as
restated............... 1,226,150 12,262 2,299,549 22,995 2,258,564 -- (33,500) (837,180) 1,423,141
Common stock
subscribed............. -- -- -- -- -- 4,000 (4,000) -- --
Common stock
and warrants
issued................. -- -- 21,000 210 62,936 -- (10,000) -- 53,146
Stockholder
notes payments......... -- -- -- -- -- -- 15,666 -- 15,666
Net loss................ -- -- -- -- -- -- -- (1,251,514) (1,251,514)
--------- ------ --------- ------ ----------- --------- -------- ---------- ----------
Balance, December
31, 1995............... 1,226,150 12,262 2,320,549 23,205 2,321,500 4,000 (31,834) (2,088,694) 240,439
Common stock
issued................. -- -- 843,729 8,437 9,634,903 -- (120,000) -- 9,523,340
Stock options
exercised.............. -- -- 22,851 229 31,077 -- (31,306) -- --
Stock
subscription
canceled............... -- -- -- -- -- (4,000) 4,000 -- --
Common stock
to be issued........... -- -- -- -- -- 2,303,212 -- -- 2,303,212
Stockholder
notes payments......... -- -- -- -- -- -- 27,834 -- 27,834
Net loss................ -- -- -- -- -- -- -- (1,570,853) (1,570,853)
--------- ------ --------- ------ ----------- --------- -------- ---------- ----------
Balance, December
31, 1996............... 1,226,150 12,262 3,187,129 31,871 11,987,480 2,303,212 (151,306) (3,659,547) 10,523,972
Common stock
issued in
initial public
offering, net.......... -- -- 4,000,000 40,000 31,705,000 -- -- -- 31,745,000
Redeemable
preferred shares
converted.............. -- -- 500,000 5,000 2,952,641 -- -- -- 2,957,641
Redeemable
common shares
converted.............. -- -- 165,296 1,653 990,123 -- -- -- 991,776
Class B common
converted............. (1,226,150) (12,262) 1,226,150 12,262 -- -- -- -- --
Warrants and
options
exercised.............. -- -- 59,786 597 92,142 -- -- -- 92,739
Subordinated
notes payable
converted.............. -- -- 3,912 39 35,177 -- -- -- 35,216
Common stock
issued and to
be issued, net......... -- -- 1,608,656 16,087 11,565,716 17,817,847 (249,671) -- 29,149,979
Treasury stock
purchased
and retired............ -- -- (64,162) (64) (381,441) -- -- -- (382,082)
Stockholder
notes payments......... -- -- -- -- -- -- 31,312 -- 31,312
Net income............... -- -- -- -- -- -- -- 5,473,184 5,473,184
--------- ------ --------- ------ ----------- --------- -------- ---------- ----------
Balance, December
31, 1997............... -- $ -- 10,686,767 $106,868 $58,946,838 $20,121,059 $(369,665) $1,813,637 $80,618,737
========= ===== ========== ====== =========== ========== ========= ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-14
<PAGE>
PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1996 1997
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (1,251,514) $ (1,570,853) $ 5,473,184
Adjustments to reconcile net income
(loss) to net cash provided by (used
in)operating activities (net of effects
of purchase transactions)
Depreciation and amortization 203,482 723,641 2,942,604
Deferred provision for income taxes - - 329,840
Net gain on sale of fixed assets (53,370) (229,251) -
Noncash compensation - 14,750 -
Changes in assets and liabilities-
Accounts receivable (345,472) (785,773) (7,179,281)
Management fees receivable (116,968) (1,149,630) (592,551)
Due from affiliated physician groups - (428,830) (1,972,295)
Prepaid expenses and other current assets 63,216 (205,401) (2,574,430)
Other assets (13,949) (172,985) (402,298)
Accounts payable 459,442 (96,932) 2,459,925
Payable to affiliated physician groups (402) 1,242,641 5,191,027
Accrued expenses and other current liabilities 155,381 1,468,040 (2,401,270)
------------- -------------- --------------
Net cash provided by (used in)
operating activities (900,154) (1,190,583) 1,274,455
------------- -------------- --------------
Cash flows from investing activities:
Purchases of property and equipment (88,234) (1,102,029) (2,817,907)
Proceeds from sale of equipment 218,890 242,175 -
Purchases of clinic assets, net of cash (90,424) (2,435,905) (22,391,718)
Increase in long term receivables (net of
effects of purchase transactions) - - (20,024,375)
Net cash provided by (used in)
investing activities 40,232 (3,295,759) (45,234,000)
------------- -------------- --------------
Cash flows from financing activities:
Borrowings under notes payable 623,740 4,482,557 30,550,891
Payments on notes payable (146,118) (331,715) (2,838,760)
Payments on capital leases (82,895) (70,132) (561,998)
Payment of deferred financing costs - (565,137) (300,500)
Payment of deferred offering costs - (564,427) -
Proceeds from issuance of Series A redeemable
convertible preferred stock 2,953,358 - -
Proceeds from issuance of common stock 63,146 125,000 31,837,739
Purchase and retirement of treasury shares - - (382,082)
Issuance (payments) of stockholder notes receivable, net 5,666 (3,636) (218,359)
------------- -------------- --------------
Net cash provided by financing activities 3,416,897 3,072,510 58,086,931
------------- -------------- -------------
Increase (decrease) in cash and cash equivalents 2,556,975 (1,413,832) 14,127,386
Cash and cash equivalents, beginning of period 490,391 3,047,366 1,633,534
------------- -------------- -------------
Cash and cash equivalents, end of period $ 3,047,366 $ 1,633,534 $ 15,760,920
============= ============== =============
Supplemental disclosure of cash flow information (See Notes 3 and 7):
Cash paid during the year-
Interest expense $ 37,320 $ 137,242 $ 689,199
Income taxes $ 67,420 $ - $ 1,299,118
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-15
<PAGE>
PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1996 and 1997
1. DESCRIPTION OF BUSINESS
ProMedCo Management Company and subsidiaries ("ProMedCo" or the
"Company"), a Delaware corporation, is engaged in operating and managing
physician groups. ProMedCo commenced operations in 1994 and has since affiliated
with approximately 980 providers in 10 states consisting of approximately 350
physicians and 100 mid-level providers (primarily physician assistants and nurse
practitioners) in affiliated physician groups and approximately 530 physicians
in associated IPA networks. During 1997, the Company expanded the scope of its
services by acquiring a provider of capitation management services. These
services include clinical quality assessment, enrollment and patient
registration, capitation processing and payment, utilization management and case
management. Through this wholly-owned subsidiary, the Company contracts with
health maintenance organizations ("HMOs") and other third-party payors to
arrange for the provision of comprehensive health services to their members on a
capitation basis. Currently, the Company provides such services covering
approximately 100,000 capitated lives through its affiliated groups, as well as
through associated IPA networks.
The Company, through its wholly-owned subsidiaries, acquires certain
net assets of and manages physician groups under long term service agreements
with affiliated physician groups. The Company provides administrative and
technical support for professional services rendered by the physician groups
under service agreements. Under the service agreements, the Company is
reimbursed for all clinic expenses, as defined in the agreement, and
participates at varying levels in the excess of net clinic revenue over clinic
expenses.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation/Basis of Consolidation
The consolidated financial statements have been prepared on the accrual
basis of accounting and include the accounts of the Company and its wholly owned
subsidiaries. The Company's subsidiaries acquire the operating assets and assume
certain liabilities of the physician groups and account for the Company's
management activities with the physician groups under the Company's long term
service agreements. The Company does not consolidate the operating results and
accounts of the affiliated physician groups. For display purposes, the Company
has presented the physician groups revenues and amounts retained by the
physician groups (typically 80-85% of the physician groups' operating income and
is paid to the affiliated physicians in accordance with the service agreements)
in the accompanying consolidated statements of operations to arrive at the
Company's management fee revenue. (See further discussion below.) All
significant intercompany accounts and transactions have been eliminated.
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 Offering (see Notes 3 and 8). This
transaction has been accounted for as a pooling of interests, as defined by APB
F-16
<PAGE>
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.
Certain prior year balances have been reclassified to conform to the
1997 presentation.
Physician Groups Revenue, Net
Physician groups revenue represents the revenue of the physician groups
reported at the estimated realizable amounts from patients, third-party payors,
and others for services rendered, net of contractual and other adjustments.
Revenue under certain third-party payor agreements is subject to audit
and retroactive adjustments. Provisions for third-party payor settlements and
adjustments are estimated in the period the related services are rendered and
adjusted in future periods as final settlements are determined. There are no
material claims, disputes, or other unsettled matters that exist to management's
knowledge concerning third-party reimbursements. In addition, management
believes there are no retroactive adjustments that would be material to the
Company's financial statements. During 1996 and 1997, the Company estimates that
approximately 30% and 25%, respectively, of net physician groups revenue, was
received under government-sponsored healthcare programs (principally, the
Medicare and Medicaid programs). The physician groups have numerous agreements
with managed care organizations and other payors to provide physician services
based on negotiated fee schedules. No individual managed care organization or
other payor is material to the Company.
Management Fee Revenue
Management fee revenue represents physician groups revenue less amounts
retained by physician groups. The amounts retained by physician groups
(typically 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.
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, depreciation, 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 physician 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.
F-17
<PAGE>
Management fee revenue is detailed as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------------- -------------- ------------
<S> <C> <C> <C>
Component based upon percentage
of physician groups operating income.................. $ 943,180 $ 2,378,966 $ 9,043,126
Reimbursement of clinic expenses...................... 6,900,537 23,866,230 65,626,945
Revenue from non-affiliated physician groups.......... -- -- 1,317,179
Other revenue......................................... -- -- 4,654,285
------------- -------------- ------------
Management fee revenue..................................... $ 7,843,717 $ 26,245,196 $ 80,641,535
============= ============== ============
</TABLE>
Concentration of Risk
For the year ended December 31, 1997, four of the Company's affiliated
physician groups each contributed 10% or more of the Company's management fee
revenue. Clinics in Champaign, Illinois; Temple, Texas; Naples, Florida; and
Abilene, Texas represented approximately 18%, 16%, 14% and 11% of management fee
revenue, respectively.
Clinic Expenses and General Corporate Expenses
Clinic expenses represent substantially all clinic operating expenses,
including clinic salaries and benefits, rent, supplies, maintenance and repairs,
insurance, utilities, depreciation, interest and other direct clinic expenses.
General corporate expenses represent primarily the salaries and benefits of
corporate headquarters personnel, rent, travel, and other administrative
expenses.
Net Earnings (Loss) Per Share
In September 1995, the Company's Board of Directors declared a
two-for-one split of the Company's Common Stock including the Class B Common
Stock. All share and per share amounts have been restated to reflect the stock
split.
The Company adopted the Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings per Share" effective December 31, 1997. 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
(loss) available to common shareholders 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. Options, warrants, and
other potentially dilutive securities are excluded from the calculation of basic
EPS. 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.
There is no difference between basic and diluted EPS for the years
ended December 31, 1995 and 1996 because options, warrants and convertible
subordinated notes payable have an anti-dilutive effect. Similarly, the
convertible subordinated notes payable have been excluded from diluted EPS in
the year ended December 31, 1997 because they are considered to be
anti-dilutive. The following is a reconciliation of basic and diluted EPS for
the year ended December 31, 1997:
F-18
<PAGE>
<TABLE>
<CAPTION>
Income Shares Per-Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
Basic EPS............................................. $ 5,473,184 11,375,662 $ 0.48
===========
Effect of dilutive securities
Options............................................ -- 657,273
Warrants........................................... -- 2,191,263
---------------- -------------
Diluted EPS........................................... $ 5,473,184 14,224,198 $ 0.38
================ ============= ===========
</TABLE>
In accordance with SFAS No. 128, the net earnings (loss) per share for
all prior periods have been restated.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of
three months or less when purchased to be cash equivalents. Cash and cash
equivalents as of December 31, 1997, include approximately $6,317,000 of cash
held in escrow accounts for the payment of premiums under split-dollar life
insurance contracts. (See Note 6.)
Accounts Receivable
Accounts receivable principally represents receivables from patients
and other third party payors for medical services provided by the physician
groups. Such amounts are recorded net of contractual allowances and estimated
bad debts.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment are calculated using the straight-line method over the estimated
useful lives of the assets, which range from three to ten years. Leasehold
improvements are amortized on a straight-line basis over the shorter of the
lease term or estimated useful life of the assets. Routine maintenance and
repairs are charged to expense as incurred, while major renewals or improvements
are capitalized.
Intangible Assets
Service Agreement Rights
The Company's acquisitions involve the purchase of tangible and
intangible assets and the assumption of certain liabilities of the affiliated
physician groups. As part of the purchase allocation, the Company allocates the
purchase price to the tangible assets acquired and liabilities assumed, based on
estimated fair market values. In connection with each acquisition, the Company
enters into long term service agreements with the affiliated physician groups.
The service agreements are for a term of 40 years and cannot be terminated by
either party without cause, consisting primarily of bankruptcy or material
default.
In connection with the allocation of the purchase price to identifiable
intangible assets, the Company analyzes the nature of each group with which a
service agreement is entered into, including the number of physicians in each
group, number of service sites and ability to recruit additional
F-19
<PAGE>
physicians, the Group's relative market position, the length of time each group
has been in existence, and the term and enforceability of the service agreement.
Because the Company does not practice medicine, maintain patient relationships,
hire physicians, enter into employment and noncompete agreements with the
physicians, or directly contract with payors, the intangible asset created in
the purchase allocation process is associated solely with the service agreement
with the physician group.
The Company believes that there is no material value allocable to the
employment and noncompete agreements entered into between the physician group
and the individual physicians. The primary economic beneficiary of these
agreements is the physician group, an entity that the Company does not legally
control. In addition, any damages under the agreements are paid solely to the
physician group for purposes of replacing departing physicians. Generally, due
to low expected physician turnover in the industry and the ability of the
physician group to actively replace departing physicians, there would be no
significant economic loss to either the physician group or the Company due to
physician departure. The physician groups continually recruit physicians and, as
appropriate and necessary, subsequently add qualified physicians to the group.
This manner of operations allows the physician group to perpetuate itself as
individual physicians retire or are otherwise replaced. The Company believes
that the physician groups with which it has service agreements thus are
long-lived entities with an indeterminable life, and that the physicians,
customer demographics, and various contracts will be continuously replaced. The
service agreement intangible is being amortized on a straight-line method over a
composite average life of 30 years.
Excess of Cost of Acquired Assets Over Fair Value
Excess of cost of acquired assets over fair value (goodwill) is
amortized using the straight-line method over thirty years.
Impairment of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," the Company periodically reviews its intangible
assets for impairment whenever events or changes in circumstances indicate that
the carrying amount of the asset may not be recoverable. If this review
indicates that the carrying amount of the asset may not be recoverable, based on
the undiscounted cash flows of the operations over the remaining amortization
period, then the carrying value of the asset is reduced to fair value. Among the
factors that the Company will continually evaluate are unfavorable changes in
each physician group's relative market share and local market competitive
environment, current period and forecasted operating and cash flow levels of the
physician group and its impact on the management fee earned by the Company, and
legal factors governing the practice of medicine.
Income Taxes
The Company accounts for income taxes under the liability method which
states that deferred taxes are to be determined based on the estimated future
tax effects of differences between the financial statement and tax bases of
assets and liabilities given the provisions of enacted tax laws. Deferred income
tax provisions and benefits are based on the changes to the asset or liability
from period to period. The Company and its subsidiaries file a consolidated tax
return.
Use of Estimates
F-20
<PAGE>
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 123, "Accounting for Stock-Based Compensation," which allows
entities to measure compensation costs related to awards of stock-based
compensation using either the fair value method or the intrinsic value method.
Under the fair value method, compensation expense is measured at the grant date
based on the fair value of the award. Under the intrinsic value method,
compensation expense is equal to the excess, if any, of the quoted market price
of the stock at the grant date over the amount the employee must pay to acquire
the stock. Entities electing to measure compensation costs using the intrinsic
value method must make pro forma disclosures of net income and earnings per
share as if the fair value method had been applied. The Company has elected to
account for stock-based compensation programs using the intrinsic value method.
The following pro forma disclosures are presented to reflect amounts as if the
fair value method were applied:
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1996 1997
------------- ------------- -------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
Net income (loss).......................................... $ (1,251,514) $ (2,045,455) $ 3,921,296
============= ============= =============
Basic net earnings (loss) per share........................ $ (0.16) $ (0.26) $ 0.34
============= ============== =============
</TABLE>
The Company used the minimum value method to estimate the fair values
of options for the above pro forma information. For purposes of the minimum
value method, the Company used U.S. Treasury strip rates for its risk-free
interest rates, assumed no future dividends and assumed the expected life of the
options through the applicable expiration dates. For 1995 and 1996, the years
prior to the Offering, the Company assumed no volatility, and assumed a
volatility rate of 58% in 1997. Also see Note 8 -- Stock Option Plans.
New Accounting Pronouncement
The Financial Accounting Standards Board's Emerging Issues Task Force
has issued its abstract, Issue 97-2, "Application of FASB Statement No. 94 and
APB Opinion No. 16 to Physician Practice Management Entities and Certain Other
Entities with Contractual Arrangements" ("EITF 97-2"). EITF 97-2 addresses
issues relating to (1) whether a "controlling financial interest" can be
established through a contractual management agreement under FASB Statement No.
94, (2) whether a transaction between a physician practice management entity
("PPM") and a physician practice in which the PPM enters into a management
agreement with the physician practice should be considered a business
combination and thus accounted for under APB No. 16, (3) whether the
pooling-of-interests method of accounting may be followed in certain
circumstances, (4) what are the common types of intangibles that should be
considered in performing the purchase price allocation and (5) whether an
employee of the
F-21
<PAGE>
physician practice should be considered an employee of the PPM for purposes of
accounting for that individual's stock-based compensation.
The primary effect of this pronouncement on the Company will be the
presentation of revenues. The Company currently presents net physician groups
revenues in its statement of operations. The Company expects to adopt this
pronouncement in the fourth quarter of 1998 and, with such, will no longer
present net physician groups revenue in its consolidated statement of
operations.
3. ACQUISITIONS
Medical Clinics
During 1997, 1996, and 1995, the Company, through its wholly-owned
subsidiaries, acquired certain operating assets or all of the outstanding stock
of the following physician groups:
<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
1996: Cullman Primary Care March 6, 1996 Cullman, AL
Morgan-Haugh April 1, 1996 Mayfield, KY
HealthFirst Medical Group June 1, 1996 Lake Worth, TX
King's Daughters Clinic September 1, 1996 Temple, TX
1995: North Texas Medical Surgical June 1, 1995 Denton, TX
</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.
The acquisitions of the operating assets and liabilities have been
accounted for by the purchase method of accounting and, accordingly, the
purchase price has been allocated to the tangible assets acquired and
liabilities assumed based on the estimated fair values at the dates of
acquisition. Simultaneous with each acquisition, the Company entered into a long
term service agreement with each physician group. In conjunction with certain
acquisitions, the Company is obligated to make deferred payments to physician
groups. Such amounts are included in deferred purchase price in the
F-22
<PAGE>
accompanying consolidated balance sheets. The following is the preliminary
allocation of purchase price for the acquisitions completed during the year
ended December 31, 1997.
Fair value of assets acquired................................ $ 33,468,257
Liabilities assumed.......................................... (11,296,484)
Intangible assets............................................ 63,821,926
----------------
85,993,699
Less - Fair value of common stock issued and to be issued.... 29,964,077
Less - Notes issued.......................................... 9,780,602
Less - Deferred purchase price (payable in cash)............. 12,402,253
----------------
Cash purchase price.......................................... $ 33,846,767
================
For certain acquisitions occurring close to or at the end of the
period, the estimated fair values are preliminary and, therefore, are subject to
change. Under the purchase agreements, the purchase price is adjustable by the
Company for a period between 90 to 120 days after the closing of the transaction
in order to finalize the fair values of the assets acquired and liabilities
assumed.
Health Plans, Inc.
Effective December 1, 1997, the Company, through its wholly-owned
subsidiary, completed its acquisition of Health Plans, Inc., and renamed the
company PMC Medical Management, Inc. ("PMCMM"). PMCMM provides capitation
management services through risk contracting with HMOs and other third-party
payors. The total consideration for the transaction was approximately $8.5
million which consisted of $1.7 million cash and $6.8 million of the Company's
common stock and stock options.
Pro Forma Information
The following unaudited pro forma information reflects the effect of
acquisitions on the consolidated results of operations of the Company had the
acquisitions occurred at January 1, 1996. Future results may differ
substantially from pro forma results and cannot be considered indicative of
future results.
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1997
-------------- --------------
(unaudited) (unaudited)
<S> <C> <C>
Physician groups revenue, net................................. $ 122,605,838 $ 171,827,614
Less- Amounts retained by physician groups 43,701,877 58,001,796
-------------- --------------
Management fee revenue........................................ $ 78,903,961 $ 113,825,818
============== ==============
Net income.................................................... $ 2,525,608 $ 5,372,738
============== ==============
Basic net earnings per share.................................. $ 0.29 $ 0.44
============== ==============
Weighted average number of shares outstanding................. 8,757,139 12,200,655
============== ==============
</TABLE>
F-23
<PAGE>
Pro forma net income and pro forma net income per share for the year
ended December 31, 1997 are lower than historical net income and net earnings
per share for the same period primarily due to a higher pro forma tax rate,
which assumes that all net operating loss carryforwards would have been
recognized prior to 1997.
Western Medical Management Corp. Inc.
As discussed in Note 1, the Company completed its merger with Reno in
March 1997, the date of the 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>
Twelve Months Ending Twelve Months Ending Three Months Ending
December 31, 1995 December 31, 1996 March 31, 1997
ProMedCo Reno ProMedCo Reno ProMedCo Reno
<S> <C> <C> <C> <C> <C> <C>
Physician groups
revenue, net.......... $ 1,918,029 $ 11,270,376 $ 34,641,222 $12,395,579 $17,343,665 $ 3,381,912
Less: amounts retained
by physician groups 759,513 4,585,175 15,322,220 5,469,385 7,669,484 1,338,687
Management fee revenue 1,158,516 6,685,201 19,319,002 6,926,194 9,674,181 2,043,225
------------ ------------ -------------- ----------- ----------- -----------
Operating expenses
Clinic expenses....... 1,023,606 7,098,610 16,460,181 7,106,899 8,025,524 1,671,579
General corporate
expenses........... 802,980 -- 2,633,585 -- 818,772 --
Depreciation and
amortization....... 34,302 169,180 610,827 112,814 391,507 44,368
Interest expense...... (5,030) 25,988 163,714 45,760 112,666 3,283
Merger costs.......... -- -- -- 682,269 -- --
------------ ------------ -------------- ----------- ----------- -----------
1,855,858 7,293,778 19,868,307 7,947,742 9,348,469 1,719,230
------------ ------------ -------------- ----------- ----------- -----------
Income (loss) before
provision for income
taxes................. (697,342) (608,577) (549,305) (1,021,548) 325,712 323,995
Provision for income taxes -- (54,405) -- -- 97,714 97,198
------------ ------------ -------------- ----------- ----------- -----------
Net income (loss)........ $ (697,342) $ (554,172) $(549,305) $(1,021,548) $ 227,998 $ 226,797
============ =========== ============= =========== =========== ===========
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
December 31,
1996 1997
------------- ----------------
Furniture, fixtures, and equipment......... $ 4,193,498 $ 12,212,561
Leasehold improvements..................... 601,241 1,008,421
------------- ----------------
4,794,739 13,220,982
Less- Accumulated depreciation............. (864,548) (2,630,421)
------------- ----------------
Property and equipment, net................ $ 3,930,191 $ 10,590,561
============= ================
5. INTANGIBLE ASSETS
F-24
<PAGE>
Intangible assets are summarized as follows:
December 31,
1996 1997
-------------- ---------------
Service agreement rights.............. $ 15,148,866 $ 73,200,258
Excess of cost of acquired
assets over fair value............ - 5,770,534
-------------- ---------------
15,148,866 78,970,792
Less- Accumulated amortization........ (288,695) (1,775,441)
-------------- ---------------
Intangible assets, net................ $ 14,860,171 $ 77,195,351
============== ===============
6. LONG TERM RECEIVABLES
During 1997, the Company entered into an agreement to lend up to $42.7
million to an affiliated physician group. The loan will be funded in six
advances. The first advance was made on November 15, 1997 in the amount of $3
million. The second advance was made on December 1, 1997 in the amount of $16.4
million. The next four advances of $5.825 million each will be made annually on
December 1, beginning in 1998. Interest is payable to the Company monthly at an
annual rate of 8.0%. The loan will be repaid in fifteen annual payments
beginning on November 30, 2008. Certain assets of the affiliated physician group
have been pledged as security under the loan, and the loan provides certain
rights to offset against distributions under the service agreement in the event
of default under the loan agreement. As of December 31, 1997, the outstanding
loan totaled $19.4 million, and the Company estimates that the carrying value of
this receivable approximates fair value.
During 1997 and in connection with the certain acquisitions, the
Company entered into split-dollar life insurance agreements with the physicians
and prior owners of the physician groups. Under these agreements, the Company
purchases life insurance in the name of the individual seller. Upon the death of
the individual seller, the amount of the premiums paid by the Company will be
returned. In addition, these receivables are guaranteed by the individual policy
holders. The total of the premiums that will be returned to the Company is $25.0
million. The $3.9 million carrying value of these receivables as of December 31,
1997, represents the present value of the premiums that will be returned to the
Company based on the estimated actuarial life of the policy holders and an
implied interest rate of 6.75%. The accretion of this receivable from the
initial carrying value to the full premium amount is recorded as a reduction to
amortization expense in the accompanying consolidated statements of operations.
In May 1997, the Company loaned $600,000 to an officer of the Company.
Beginning in May 2001, the loan will be repaid in five equal annual payments
plus accrued interest of 6.5%.
F-25
<PAGE>
7. NOTES PAYABLE, OTHER LONG TERM DEBT AND OBLIGATIONS UNDER
CAPITAL LEASES
Notes payable are summarized as follows:
<TABLE>
<CAPTION>
December 31,
1996 1997
-------------- ----------------
<S> <C> <C>
Borrowings under Revolving Credit Facility........................... $ 4,157,027 $ 32,968,000
Notes payable to physician group; unsecured;
due in three annual installments in April
1998, 1999, and 2000; 9% interest payable
in cash or options to purchase the
Company's common stock.......................................... -- 8,608,602
Notes payable to physician group; unsecured;
due in four annual installments in December
1998, 1999, 2000, and 2001; 5% interest
payable annually................................................ -- 1,172,000
Note payable to physician group; unsecured;
due in two equal installments of principal
and 7% interest in April 1997 and 1998.......................... 851,549 440,173
Note payable to a bank, interest at prime
plus 1.5%, paid in February 1997................................ 300,000 --
Other notes payable.................................................. 427,788 175,915
-------------- ----------------
5,736,364 43,364,690
Less- Current portion................................................ (1,151,191) (3,676,365)
Notes payable, net................................................... $ 4,585,173 $ 39,688,325
============== ================
</TABLE>
The maturities of notes payable at December 31, 1997, are as follows:
1998................................................ $ 3,676,365
1999................................................ 8,210,199
2000................................................ 9,755,926
2001................................................ 6,886,600
2002................................................ 6,593,600
Thereafter.......................................... 8,242,000
--------------
$ 43,364,690
In connection with the issuance of notes payable to stockholders and
one other party in 1995, the Company issued 150,000 warrants to purchase common
stock at $2.50 per share. On June 30, 1996, the warrants were exercised in
exchange for forgiveness of the notes payable.
Revolving Credit Facility
Effective July 15, 1996, the Company entered into a revolving credit
agreement which was subsequently amended and restated November 13, 1997 (the
"Credit Facility"). The Credit Facility provides for a six-year commitment to
fund revolving credit borrowings of up to $50.0 million for acquisitions and
general working capital purposes. Beginning on April 1, 1999, the Credit
Facility
F-26
<PAGE>
converts to a term loan with twenty quarterly payments equal to 5% of the
outstanding balance on January 1, 1999. Under the terms of the Credit Facility,
the Company paid a commitment fee of approximately $780,000 which has been
capitalized in other assets in the accompanying consolidated balance sheets and
amortized as an adjustment to interest expense using the effective interest
method. The interest rate under the Credit Facility will be set at the Company's
option and varies based on selected financial ratios, as defined, as follows:
(i) 30-day commercial paper rate of an issuer whose corporate bonds are rated
"AA," plus 2.70% to 3.25%; (ii) reserve adjusted LIBOR, as defined, plus 2.70%
to 3.25%; or (iii) prime rate plus 0.35% to 0.88% depending on certain debt
levels. As of December 31, 1997, the effective interest rate on the Credit
Facility was 8.5% based on the 30-day commercial paper rate as adjusted. The
Credit Facility includes certain restrictive covenants including limitations on
the payment of dividends as well as the maintenance of certain financial ratios.
The Credit Facility is secured by substantially all the assets of the Company.
As of December 31, 1997, the Company had $17.0 million available for acquisition
purposes under the Credit Facility of which $7.3 million was also available for
working capital, subject to certain conditions as defined by the agreement.
Convertible Subordinated Notes Payable
On March 29, 1996, in connection with the affiliation of two physician
groups, the Company issued $1,800,274 in convertible subordinated notes. The
notes bear interest at 7.0% and mature in March 2003. The notes may, at the
election of the noteholders, be converted into shares of common stock at a
conversion price of $9.00 per share, subject to certain limitations and
automatic conversions as defined in the note agreements. During 1997, one
noteholder converted $35,216 of notes into 3,912 shares of the Company's common
stock.
Obligations Under Capital Leases
In connection with affiliations with physician groups and in the
ordinary course of business, the Company assumed the obligation of various
equipment under capital leases. As of December 31, 1997, future minimum lease
payments under capital leases are as follows:
1998.......................................... $ 749,017
1999.......................................... 582,706
2000.......................................... 424,458
2001.......................................... 198,685
-------------
1,954,866
Less- Portion attributable to interest........ (271,389)
-------------
Obligations under capital leases.............. 1,683,477
Less- Current portion......................... (609,591)
-------------
$ 1,073,886
8. REDEEMABLE CONVERTIBLE PREFERRED STOCK, COMMON STOCK, AND
STOCKHOLDERS' EQUITY
The Company has authorized the issuance of 70,000,000 shares of stock,
of which (a) 20,000,000 shares, par value $0.01 per share, are to be designated
Preferred Stock (of which 700,000 shares are to be designated Series A
Redeemable Convertible Preferred Stock), (b) 47,400,000 shares,
F-27
<PAGE>
par value $0.01 per share, are to be of a class designated Common Stock, and (c)
2,600,000 shares, par value $0.01 per share, are to be of a class designated
Class B Common Stock.
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 $36.0 million and $33.5 million, respectively. In addition, net
proceeds were reduced by approximately $1.8 million of expenses relating to the
Offering.
Series A Redeemable Convertible Preferred Stock
During 1996, the Company issued 500,000 shares of Series A Redeemable
Convertible Preferred Stock and warrants to purchase an additional 200,000
shares of Preferred Stock. The warrants are exercisable at $4.50 per share and
expire on December 6, 2000. Upon the completion of the Offering, the 500,000
shares of Series A Redeemable Convertible Preferred Stock were automatically
converted into Common stock.
Between December 6, 1995 and the completion of the Offering, the
Company was required for all shares or share equivalents of Common stock issued,
excluding shares and share equivalents issued in connection with an acquisition
or shares issued in connection with a redemption or conversion when the share
equivalent was issued prior to December 6, 1995, to grant options to purchase
shares of Common stock to Preferred Stockholders in an amount equal to their
percentage ownership of the Company prior to the issuance. During 1996, options
to purchase 47,230 shares of Common stock were granted to Preferred
Stockholders, of which 7,743 were exercisable at prices ranging from $6.00 to
$10.20 per share. During 1997 and prior to the completion of the Offering,
additional options to purchase 294 shares of Common stock were granted to
Preferred Stockholders with an exercise price of $12.00.
Redeemable Common Stock
In connection with an acquisition in 1995, the Company issued 165,296
shares of Redeemable Common Stock for $991,776. On the completion of the
Offering, the 165,296 shares of Redeemable Common Stock were automatically
converted into Common stock.
Class B Common Stock
During 1994, the Company issued 613,075 Class B units, each consisting
of two shares of Class B Common Stock and a warrant to purchase 1.5756 shares of
Class B Common Stock at an exercise price of $1.25 per share. The warrants are
exercisable on or before June 30, 2004. The Company also granted an option to
purchase 77,500 Class B units at an exercise price of $0.50 per unit. The
options are fully vested and may be exercised until September 30, 2004. As of
December 31, 1997, no warrants or options have been exercised. The Class B
Common Stock had a liquidation preference, subordinate to the Preferred Stock,
at an amount equal to $1.00 per share. Each share of Class B Common Stock was
automatically converted into Common stock on the completion of the Offering.
F-28
<PAGE>
Common Stock
During 1994, the Company issued 907,000 Common stock units, each
consisting of two shares of Common stock and a warrant to purchase 1.5756 shares
of Common stock at an exercise price of $1.25 per share. The warrants are
exercisable on or before June 30, 2003. As of December 31, 1997, 56,686 warrants
have been exercised.
Common Stock To Be Issued
In connection with acquisitions completed in 1997, common shares valued
at $20,121,059 will be issued in 1998. The number of common shares to be issued
and the price per share was fixed at the consummation date of the specific
acquisitions in 1997.
In connection with acquisitions completed in 1996, common shares valued
at $2,303,212 were issued in 1997. The number of shares to be issued and the
price per share was fixed at the consummation date of the specific acquisitions
in 1996 and 1995.
Stock Option Plans
The Company has reserved 1,500,000 shares of Common stock for issuance
under its 1994 Stock Option Plan and 2,100,000 shares of Common stock for
issuance under its 1996 Stock Option Plan (collectively the "Stock Option
Plans"). Options granted under the Plans may be either incentive stock options
("ISO") or nonqualified stock options ("NQSO"). The option price per share shall
not be less than the fair market value of the Company's Common stock at the date
of grant. Generally, options vest over a five-year period and expire in either
2004 or 2006. As of December 31, 1997, options to purchase 1,947,729 shares
remain available for grant under the Stock Option Plans.
The following table summarizes the activity in the Stock Option Plans:
Weighted-Average
Outstanding Price Per Share Exercise Price
December 31, 1994 80,000 $0.50 - $ 2.50 $1.50
Granted 546,200 $0.50 - $ 6.00 $4.99
Exercised - - -
Canceled (121,000) $3.00 - $ 6.00 $3.36
-----------
December 31, 1995 505,200 $0.50 - $ 6.00 $4.83
Granted 805,800 $6.00 - $ 14.00 $7.81
Exercised (23,200) $0.50 - $ 6.00 $5.24
Canceled (223,400) $0.50 - $ 9.00 $5.89
-----------
December 31, 1996 1,064,400 $0.50 - $ 14.00 $6.85
Granted 626,071 $6.00 - $ 12.00 $7.88
Exercised (3,100) $6.00 $6.00
Canceled (61,400) $6.00 - $ 9.00 $6.67
-----------
December 31, 1997 1,625,971 $0.50 - $ 14.00 $6.71
===========
Stock options available for exercise under the Stock Option Plans as of
December 31, 1995, 1996, and 1997, totaled 8,000, 170,720, and 653,464,
respectively.
F-29
<PAGE>
When the Company entered into the Credit Facility in 1996 (see Note 7),
the Company issued 46,875 options to purchase the Company's Common stock at
$10.00 per share. These options are outstanding and exercisable.
9. INCOME TAXES
The provision for income tax expenses for the years ended December 31,
1995, 1996 and 1997 consists of:
1995 1996 1997
------------- ------------- -------------
Current
Federal $ 1,731 $ - $ 2,146,759
State - - 125,780
Deferred
Federal (56,136) - 306,510
State - - 23,330
------------- ------------- -------------
$ (54,405) $ - $ 2,602,379
============== ============= =============
Deferred income tax assets (liabilities) reflect net tax effects of
temporary differences between the amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's net deferred tax liability are as
follows:
F-30
<PAGE>
<TABLE>
<CAPTION>
December 31,
1996 1997
<S> <C> <C>
Current deferred tax assets (liabilities)
Operating loss carryforwards $ 493,153 $ -
Unrealized gains on security investments - (381,323)
Non-deductible accrued expenses 346,637 207,222
------------- -------------
839,790 (174,101)
Non-current deferred tax liabilities
Property and equipment, principally due to
differences in depreciation - (299,838)
Clinic service agreements - (729,896)
Other 152,511 (74,142)
------------- --------------
152,511 (1,103,876)
------------- --------------
Net deferred tax asset(liability) 992,301 (1,277,977)
Valuation allowance (992,301) -
------------- --------------
$ - $ (1,277,977)
============= ==============
</TABLE>
10. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires disclosure about the fair value of financial instruments for which it
is practicable to estimate fair value. As of December 31, 1996 and 1997, the
fair value of the Company's cash and cash equivalents, accounts receivable,
accounts payable, due to physician groups and accrued expenses approximated
their carrying value because of the short maturities of those financial
instruments. The fair value of the Company's long term debt also approximates
its carrying value since the related notes bear interest at current market
rates.
The estimated fair value of the convertible subordinated notes payable
to physician groups was approximately $1,800,274 and $1,985,690 as of December
31, 1996 and 1997, respectively. The carrying value of these notes was
$1,800,274 and $1,765,058 as of December 31, 1996 and 1997, respectively. The
estimated fair value of these convertible subordinated notes payable is based on
the greater of their face value and the closing market value of the common
shares into which they could have been converted at the respective balance sheet
date.
11. COMMITMENTS AND CONTINGENCIES
Leases
Operating leases generally consist of short-term leases for the office
space where the physician groups are located. Lease expense of approximately
$716,000, $2,740,000, and $7,086,000 for the years ended 1995, 1996 and 1997,
respectively, reflect lease commitments for medical practice office space,
medical practice equipment, corporate office space, and corporate equipment.
F-31
<PAGE>
The following is a schedule of future minimum lease payments under
noncancelable operating leases as of December 31, 1997.
1998............................................. $ 5,929,466
1999............................................. 5,428,666
2000............................................. 4,906,781
2001............................................. 4,150,848
2002............................................. 3,649,947
Thereafter....................................... 20,952,100
--------------
$ 45,017,808
Litigation
The Company is subject to various claims and legal actions that arise
in the ordinary course of business. In the opinion of management, the ultimate
resolution of such matters will not have a material adverse effect on the
Company's financial position or results of operations.
Insurance
The Company and the physician groups are insured with respect to
medical malpractice risks on a claims- made basis. Management is not aware of
any claims against the Company or the physician groups that might have a
material impact on the Company's financial position or results of operations.
Year 2000
The Company continues to assess the impact of the Year 2000 Issue on its
information systems and operations. With disparate systems in place at the
Company's various affiliated groups, the assessment process also extends to 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 unable to estimate the costs of 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 to be any more difficult than a
typical system conversion. If the issues prove more significant than
anticipated, or if noncompliant third-party systems "re-infect" the Company's
Year 2000 compliant systems, there could be a material adverse impact on the
Company.
F-32
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Berkshire Physicians & Surgeons, P.C.:
We have audited the accompanying consolidated balance sheets of Berkshire
Physicians & Surgeons, P.C. and subsidiaries (the "Corporation") as of December
31, 1996 and 1997, and the related consolidated statements of operations,
changes in shareholders' equity (deficit) and cash flows for the years then
ended. These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Berkshire
Physicians & Surgeons, P.C. and subsidiaries as of December 31, 1996 and 1997,
and the consolidated results of their operations and their cash flows for the
years then ended in conformity with generally accepted accounting principles.
COOPERS & LYBRAND, L.L.P.
Boston, Massachusetts
March 31, 1998, excedpt for
Notes 1 and 14, as to
which the date is
April 14, 1998
F-34
<PAGE>
BERKSHIRE PHYSICIANS & SURGEONS, P.C.
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1997
<TABLE>
<CAPTION>
ASSETS 1996 1997
--------------- --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................... $ 822,190 $ 1,185,042
Patient accounts receivable (net of allowance for doubtful
accounts of $873,000 and $1,165,000 in 1997 and 1996,
respectively)......................................................... 4,798,917 4,402,454
Other receivables....................................................... 1,256,889 886,484
Inventories............................................................. 324,153 439,846
Prepaid and other current assets........................................ 213,270 70,941
--------------- --------------
Total current assets.............................................. 7,415,419 6,984,767
Property and equipment, net................................................ 4,411,680 4,649,052
Other assets............................................................... 453,858 220,083
--------------- --------------
Total assets...................................................... $ 12,280,957 $ 11,853,902
=============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Note payable - line of credit........................................... 3,062,781 6,755,136
Accounts payable and accrued expenses................................... 2,640,575 3,774,701
Accrued pension plan contribution....................................... 1,256,710 1,552,711
Accrued physician compensation.......................................... 753,819 1,879,175
Current portion of long-term debt....................................... 220,980 813,996
Current portion of obligations under capital leases..................... 510,451 644,665
--------------- --------------
Total current liabilities......................................... 8,445,316 15,420,384
Long-term debt, net of current installments................................ 789,014 339,172
Obligations under capital leases, net of current installments.............. 1,927,432 2,014,670
--------------- --------------
Total liabilities................................................. 11,161,762 17,774,226
--------------- --------------
Commitments and contingencies (Notes 1, 2, 5, 6, 9, 10, 11, 12 and 14)
Shareholders' equity (deficit):
Common stock, $1 par value, 1,000 shares authorized; 334 and 352 shares
issued and outstanding at December 31, 1997
and 1996, respectively.................................................. 352 334
Paid-in capital......................................................... 728,034 593,052
Advances to shareholders................................................ (101,661) (335,204)
Retained earnings (deficit)............................................. 492,470 (6,178,506)
--------------- --------------
Total shareholders' equity (deficit).............................. 1,119,195 (5,920,324)
--------------- --------------
Total liabilities and shareholders' equity (deficit) $ 12,280,957 $ 11,853,902
=============== ==============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-35
<PAGE>
BERKSHIRE PHYSICIANS & SURGEONS, P.C.
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 1996 and 1997
<TABLE>
<CAPTION>
1996 1997
--------------- --------------
<S> <C> <C>
Net patient service revenue................................................ $ 30,326,902 $ 32,698,750
Risk contract revenue...................................................... 10,676,064 10,026,491
Other revenue.............................................................. 722,857 957,409
--------------- --------------
Total revenue......................................................... 41,725,823 43,682,650
--------------- --------------
Operating expenses:
Physicians' salaries and wages.......................................... 11,208,235 12,354,057
Other salaries and wages................................................ 7,993,601 9,246,413
Physician benefits...................................................... 2,096,542 2,523,423
Employee benefits....................................................... 2,417,907 2,788,639
Referral services....................................................... 9,600,821 9,731,890
Supplies and other expenses............................................. 6,348,943 6,915,722
Rent.................................................................... 1,639,83 2,173,514
Professional liability insurance........................................ 817,949 803,917
Interest................................................................ 367,525 949,683
Depreciation and amortization........................................... 1,239,214 1,218,025
Provision for doubtful accounts......................................... 796,000 1,554,000
--------------- --------------
Total operating expenses............................................ 44,526,571 50,259,283
--------------- --------------
Loss from operations................................................ (2,800,748) (6,576,633)
Other expense.............................................................. (4,443) (35,774)
--------------- --------------
Loss before income taxes.......................................... (2,805,191) (6,612,407)
Income tax expense (benefit) .............................................. (1,400,684) 58,569
--------------- --------------
Net loss.......................................................... $ (1,404,507) $ (6,670,976)
=============== ==============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-36
<PAGE>
BERKSHIRE PHYSICIANS & SURGEONS, P.C.
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY (DEFICIT)
for the years ended December 31, 1996 and 1997
<TABLE>
<CAPTION>
Total
Additional Retained Shareholders'
Common Stock Paid-In Advances to Earnings Equity
Shares Amount Capital Shareholders (Deficit) (Deficit)
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996.......... 364 $ 364 $ 817,670 $ (159,408) $ 1,896,977 $ 2,555,603
Issuance of additional shares to
physicians........................ 4 4 29,996 -- -- 30,000
Cancellation of shares due
to physician retirement or
termination....................... (16) (16) (119,632) -- -- (119,648)
Payments received on advances
to shareholders................... -- -- -- 57,747 -- 57,747
Net loss............................ -- -- -- -- (1,404,507) (1,404,507)
---------- --------- ----------- ------------- ------------ ------------
Balance at December 31, 1996........ 352 352 728,034 (101,661) 492,470 1,119,195
Cancellation of shares due to
physician retirement or
termination....................... (18) (18) (134,982) -- -- (135,000)
Advances to shareholders............ -- -- (268,427) -- (268,427)
Payments received on advances
to shareholders................... -- -- -- 34,884 -- 34,884
Net loss............................ -- -- -- -- (6,670,976) (6,670,976)
---------- --------- ----------- ------------- ------------ ------------
Balance at December 31, 1997........ 334 $ 334 $ 593,052 $ (335,204) $ (6,178,506) $ (5,920,324)
========== ========= =========== ============= ============ ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-37
<PAGE>
BERKSHIRE PHYSICIANS & SURGEONS, P.C.
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1996 and 1997
<TABLE>
<CAPTION>
1996 1997
--------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................................ $ (1,404,507) $ (6,670,976)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization......................................... 1,239,214 1,218,025
Provision for doubtful accounts....................................... 796,000 1,554,000
Loss on disposal of property and equipment............................ -- 35,774
Deferred income taxes................................................. (1,445,616) --
Changes in operating assets and liabilities:
Patient accounts receivable......................................... (219,531) (1,157,537)
Other receivables................................................... (1,105,166) 370,405
Inventories......................................................... (79,341) (115,693)
Prepaid and other current assets.................................... 75,245 142,329
Accounts payable and accrued expenses............................... 729,313 1,134,126
Accrued pension plan contribution................................... 47,766 296,001
Accrued physician compensation...................................... 145,163 1,125,356
--------------- --------------
Net cash used in operating activities............................. (1,221,460) (2,068,190)
--------------- --------------
Cash flows from investing activities:
Additions to property, plant and equipment.............................. (1,699,303) (1,233,504)
Decreases in other assets............................................... 15,459 (23,892)
--------------- --------------
Net cash used in investing activities............................. (1,683,844) (1,257,396)
--------------- --------------
Cash flows from financing activities:
Proceeds from note payable - line of credit............................. 10,902,781 24,292,701
Proceeds from equipment loans........................................... 270,000 --
Proceeds from capital lease financing................................... 2,011,633 770,597
Proceeds from mortgage.................................................. -- 600,000
Principal payments on note payable - line of credit..................... (9,790,000) (20,600,346)
Principal payments under capital lease obligations...................... (261,985) (549,145)
Principal payments on mortgage payable.................................. (6,075) (242,826)
Principal payments on equipment loan.................................... (209,500) (214,000)
Additional advances to shareholders..................................... -- (268,427)
Principal payments on notes from shareholders........................... 57,747 34,884
Cash received from issuance of common stock............................. 30,000 --
Cash paid to terminated physicians for common stock..................... (119,648) (135,000)
--------------- --------------
Net cash provided by financing activities......................... 2,884,953 3,688,438
--------------- --------------
Net increase (decrease) in cash and cash equivalents....................... (20,351) 362,852
Cash and cash equivalents, at beginning of year............................ 842,541 822,190
--------------- --------------
Cash and cash equivalents, at end of year.................................. $ 822,190 $ 1,185,042
=============== ==============
Supplemental disclosure of cash flow information: Cash paid during the year for:
Interest.............................................................. $ 358,501 $ 754,238
Income taxes.......................................................... 12,300 63,769
</TABLE>
Supplemental disclosure of noncash financing activities:
In 1997, the Corporation refinanced an equipment lease obligation totaling
$786,233 with another lessor who directly repaid the outstanding balance on
the refinanced lease.
The accompanying notes are an integral part of the consolidated
financial statements.
F-38
<PAGE>
BERKSHIRE PHYSICIANS & SURGEONS, P.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Significant Accounting Policies:
Organization
Berkshire Physicians & Surgeons, P.C. (the "Corporation" or "BP&S") is
a 81 physician, primary care, multi-specialty and multiple location
professional services corporation. The Corporation's service areas
include central and southern Berkshire County, Hampden County, and
Hampshire County, Massachusetts, and adjacent areas of Litchfield
County, Connecticut, and Columbia County, New York.
Its principal services include primary, specialty and urgent care,
surgical, laboratory, mammography and radiological services.
The Corporation has three wholly owned subsidiaries, Commonwealth
Health Management Services, Inc. ("CHMS"), Commonwealth Independent
Practice Association, Inc. ("CIPA") and Great Barrington Medical
Realty, LLC (GBMR). CHMS is a management services organization formed
in 1994. The purpose of CHMS is to provide the necessary administrative
and medical management structure to enable the physicians within the
Corporation's network to collectively enter into health service
contracts. CIPA was established as an independent practice membership
association to organize physicians to provide services to the
Corporation's members. CHMS is the only member of the association.
During 1997, the Corporation established GBMR, a limited liability
company whose sole purpose is to develop, own and operate a medical
office building. This building will be leased to the Corporation as
general medical office space.
Basis of Presentation
The accompanying financial statements have been prepared assuming that
the Corporation will continue as a going concern. The Corporation has
suffered recurring operating losses from operations, has a significant
amount of debt which is currently payable and has a net capital
deficiency, however, on April 14, 1998 the Corporation executed an
irrevocable merger agreement with ProMedCo Management Company ("PMCO")
(Note 14), which should provide the Corporation with adequate financial
support on an ongoing basis.
Basis of Accounting
The financial statements are prepared on the accrual basis of
accounting.
F-39
<PAGE>
BERKSHIRE PHYSICIANS & SURGEONS, P.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (cont.)
Principles of Consolidation
The consolidated financial statements include the accounts of the
Corporation and its wholly-owned subsidiaries CHMS, CIPA and GBMR. All
significant intercompany transactions have been eliminated in
consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates. Estiamtes are used when accounting for the
collectibility of patient accounts receivable and other receivables,
depreciation and amortization, accrued expenses and taxes.
Cash and Cash Equivalents
The Corporation considers all highly liquid debt instruments with a
maturity at date purchased of three months or less to be cash
equivalents.
Net Patient Service Revenue and Patient Accounts Receivable
Net patient service revenue is reported at the established net
realizable amounts from patients, third party payors and others for
services rendered, including estimated retroactive adjustments under
reimbursement agreements with third party payors. Net patient service
revenue and accounts receivable are recorded when patient services are
performed. Adjustments and settlements under reimbursement agreements
with third party payors are accrued on an estimated basis in the period
the related services are rendered and adjusted in future periods as
final settlements are determined. Such adjustments and final
settlements with third-party payors, which could materiallly and
adversely affect the Corporation, are reflected in operations at the
time of the adjustment or settlement.
Inventories
Inventories which consist of pharmaceuticals, and medical and office
supplies are recorded at the lower of cost, determined by the first-in,
first-out method, or market.
Property and Equipment
Property and equipment are recorded at cost. Expenditures for renewals
and betterments are capitalized and maintenance and repairs are
expensed. The Corporation provides for depreciation of property and
equipment for financial statement reporting purposes using the
straight-line method over the estimated useful lives of the various
assets. Capital leases are recorded at the lower of the fair market
value of the asset or the present value of the minimum
F-40
<PAGE>
BERKSHIRE PHYSICIANS & SURGEONS, P.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (cont.)
lease payments. Assets recorded under capital leases are amortized
using the straight-line method over the life of the related lease or
the life of the asset, whichever is shorter. The carrying amounts of
assets sold or otherwise disposed of and the related allowance for
depreciation are eliminated from the accounts in the period of
disposal, with the resulting gain or loss reflected in operations.
Impairment of Long-Lived Assets
The Corporation reviews long-lived assets and certain indentifiable
intangibles for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeded the fair
value of the assets.
Other Assets
Other assets, which primarily consist of costs incurred in connection
with the organization and start-up of the Corporation, as well as costs
and intangible assets resulting from the acquisition of physician
groups, have been capitalized and are being amortized over three years.
Amortization expense of other assets amounted to $257,621 and $257,667
for the years ended December 31, 1996 and 1997, respectively.
Accumulated amortization amounted to $380,187 and $637,854 at December
31, 1996 and 1997, respectively.
Risk Contract Revenue and Referral Services
The Corporation has entered into risk sharing agreements with health
maintenance organizations (HMOs). Under these agreements, the
Corporation earns revenue based on the number of members to which it
provides services to, regardless of the amount of services actually
performed. Throughout the year, cash is distributed by the HMO's on a
capitated and fee-for-service basis to the Corporation for services
provided by the Corporation. The HMO's also distribute cash on a
fee-for-service basis to other providers. The Corporation records
payments to other providers under these agreements as risk referral
services expenses. The amount of revenues earned is subject to a
settlement calculation performed subsequent to year-end based on actual
performance under the agreements. Total revenue recorded on these
contracts for 1996 and 1997 amounted to $13.4 million and $13.3
million, respectively, of which $2.7 million and $3.3 million have been
recorded as net patient service revenue representing medical services
provided by the Corporation's physicians. As of December 31, 1996 and
1997, amounts due to BP&S from the HMOs were approximately $1.1 million
and $497,000, respectively. Settlements with the HMOs, which could
materially and adversely affect the Corporation, are reflected in
operations at the time of the settlement.
Income Taxes
The Corporation uses the liability method of accounting for income
taxes as set forth in Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes".
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities
and their financial reporting amounts at each year-end based on enacted
tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances
are established when necessary to reduce deferred tax assets to the
amount expected to be realized. Income tax expense is the tax payable
for the period and the change during the period in deferred tax assets
and liabilities.
F-41
<PAGE>
BERKSHIRE PHYSICIANS & SURGEONS, P.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (cont.)
Reclassifications
Certain amounts in the 1996 financial statements have been reclassified
to conform with the 1997 presentation.
2. Net Patient Service Revenue:
The Corporation has agreements with Medicare, Medicaid, Blue Cross, and
various other commercial insurance companies, preferred provider
organizations and health maintenance organizations that provide for
payments to the Corporation at amounts different from its established
rates. The basis of these payments include discounts from established
charges, capitated rates, and fee screens. Differences between
established rates and agreed-upon payments are included as a reduction
to net patient service revenue or risk contract revenue. A significant
portion of the Corporation's revenue is derived through arrangements
with these third-party payors. As such, the Corporation is dependent on
these payors to carry out its operating activities.
3. Property and Equipment:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
1996 1997
----------------- ---------------
<S> <C> <C>
Land and buildings.......................................... $ 325,000 $ 1,420,661
Equipment, furniture and fixtures........................... 6,778,464 7,141,644
Leasehold improvements...................................... 1,142,715 1,175,930
Construction in progress.................................... 754,283 446,174
----------------- ---------------
9,000,462 10,184,409
Accumulated depreciation and amortization................... (4,588,782) (5,535,357)
----------------- ---------------
Property and equipment, net................................. $ 4,411,680 $ 4,649,052
================= ===============
</TABLE>
Depreciation and amortization expense for the years ended December 31,
1996 and 1997 was $981,593 and $960,358, respectively.
4. Advances To Shareholders:
The Corporation provides financing to shareholder physicians to enable
them to purchase shares of stock from the Corporation. Interest is
accrued at market interest rates on outstanding amounts. Total
principal outstanding at December 31, 1996 and 1997 was $101,661 and
$66,777, respectively. The Corporation accrued approximately $5,182 and
$4,799 of interest income from advances to shareholders for the year
ended December 31, 1996 and 1997, respectively. In addition, during
1997, the Corporation advanced $268,427 to shareholder physicians in
compensation beyond their earned compensation for 1997. The Corporation
expects the advances to be collected or netted against compensation in
1998.
F-42
<PAGE>
BERKSHIRE PHYSICIANS & SURGEONS, P.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (cont.)
5. Insurance:
The Corporation is insured with respect to professional liability
insurance on a claims made basis up to $1,000,000 per individual claim
and $3,000,000 in the aggregate. The policies are subject to annual
renewal and cover only those claims made during the term of the policy
but not for occurrences for which claims made after expiration of the
policy. The Corporation is self insured for claims exceeding the
insured amounts. The physicians also have professional liability
insurance, primarily on an occurrence basis, up to $1,000,000 or
$2,000,000 per individual claim and $3,000,000 or $6,000,000 in the
aggregate. The Corporation intends to renew its present insurance
coverage. Management was not aware of any claims against it or its
providers which are estimated to exceed their insurance limits.
The Corporation is self insured for the majority of employee health
insurance up to $65,000 per participant and approximately $1,620,000 in
the aggregate. Management has recorded an estimated liability of its
exposure under the plan as of December 31, 1996 and 1997.
6. Note Payable and Long-Term Debt:
Note Payable
The Corporation maintains a demand bank line of credit collateralized
by certain of the Corporation's assets in the amount of $7,500,000
($3,500,000 at December 31, 1996). The loan agreement stipulates
interest at the bank's base rate plus 1% in 1996 (9.25% at December 31,
1996) and 3% in 1997 (11.50% at December 31, 1997) and the line expires
on May 31, 1998. Total outstanding on the line of credit was
$3,062,781 and $6,755,136 at December 31, 1996 and 1997, respectively.
The loan agreement also stipulates that the Corporation will have
to pay additional interest when the line is repaid equal to .8125%
of the greater of the assumed value of the Corporation in cash or
equivalents in a Capital Placement, as defined or $25,000,000 if
repaid on or before April 15, 1998. The rate to calculate the
additional interest inceases to .875% if the line is repaid between
April 16, 1998 and May 31, 1998 and increases to 1.625% if the line is
repaid after May 31, 1998. The Corporation estimated and accrued
additional interest of $146,000 payable through December 31, 1997
in accounts payable and accrued expenses. This estimate was based on a
pro-rata share of the additional interest, assuming a repayment date
of April 15, 1998, for the period from May 30, 1997 (the date of the
loan agreement) through April 15, 1998.
F-43
<PAGE>
BERKSHIRE PHYSICIANS & SURGEONS, P.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (cont.)
Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1996 1997
----------------- ----------------
<S> <C> <C>
Variable rate equipment loan, at bank's base rate plus 1% (9.50%
at December 31, 1997), payable in monthly installments of
variable amounts, with a fixed principal portion of
$13,333 per month through May 2000, collateralized by
certain of the Corporation's assets.............................. $ 546,667 $ 386,608
Variable rate equipment loan, at bank's base rate plus 1%
(9.50% at December 31, 1997), payable in monthly
installments of variable amounts, with a fixed principal
portion of $4,500 through January 2001, collateralized
by certain of the
Corporation's assets............................................. 220,500 166,560
Fixed rate, 8.0% mortgage payable to a bank, collateralized
by a building.................................................... 242,827
Fixed rate, 16% mortgage payable to a group of investors,
interest payable monthly and principal payable in full on
April 3, 1998, collateralized by a building...................... 600,000
----------------- ----------------
1,009,994 1,153,168
Less current portion............................................. 220,980 813,996
----------------- ----------------
$ 789,014 $ 339,172
================== ================
</TABLE>
Maturities of long-term debt as follows:
Year Ending December 31, Amount
1998 $ 813,996
1999 214,065
2000 120,607
2001 4,500
-----------------
$ 1,153,168
The variable note equipment loans were paid in full subsequent to
year-end as part of a lease refinancing (Note 14). The Corporation
is currently in negotiations to extend the maturity of the $600,000
mortgage to April 3, 1999.
F-44
<PAGE>
BERKSHIRE PHYSICIANS & SURGEONS, P.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (cont.)
7. Income Taxes:
The income tax expense (benefit) included in the statement of
operations for the years ended December 31, 1996 and 1997 is as
follows:
<TABLE>
<CAPTION>
1996 1997
--------------- ---------------
<S> <C> <C>
Currently payable:
Federal................................................... $ 44,932 $ 58,569
State..................................................... -- --
--------------- ---------------
44,932 58,569
=============== ===============
Deferred:
Federal................................................... (1,104,301) --
State..................................................... (341,315) --
--------------- ---------------
(1,445,616) --
Income tax expense (benefit) ............................... $ (1,400,684) $ 58,569
--------------- ---------------
</TABLE>
The Corporation's income tax expense (benefit) differs from the
statutory benefit as follows:
<TABLE>
<CAPTION>
1996 1997
--------------- ---------------
<S> <C> <C>
Expected federal benefit at statutory rate $ (953,764) $ (2,248,218)
State taxes, net of federal income tax benefit (382,233) (396,744)
Meals and entertainment disallowance........................ 17,675 18,293
Valuation allowance on deferred tax assets 280,090 2,626,669
Other, net.................................................. (362,452) 58,569
--------------- ---------------
$ (1,400,684) $ 58,569
=============== ===============
</TABLE>
Significant components of net deferred tax liabilities, which are
primarily the result of the Corporation recording amounts for financial
statements purposes using the accrual method and for tax reporting
purposes using the cash basis, are as follows:
<TABLE>
<CAPTION>
1996 1997
--------------- ---------------
<S> <C> <C>
Deferred tax liabilities:
Patient accounts receivable............................... $ 1,932,464 $ 1,772,868
Depreciation.............................................. 188,676 232,716
Other accrued assets...................................... 715,917 556,779
--------------- ---------------
Total deferred tax liabilities.......................... 2,837,057 2,562,363
--------------- ---------------
Deferred tax assets:
Accounts payable and accrued expenses..................... 1,366,922 2,276,815
Operating loss carryforwards.............................. 1,750,225 3,095,410
--------------- ---------------
Total deferred tax assets................................. 3,117,147 5,372,225
Net deferred tax asset before valuation allowance........... 280,090 2,809,862
Valuation allowance......................................... (280,090) (2,809,862)
--------------- ---------------
Net deferred tax liabilities......................... -- --
=============== ===============
</TABLE>
F-45
<PAGE>
BERKSHIRE PHYSICIANS & SURGEONS, P.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (cont.)
At December 31, 1997, the Corporation has net operating loss
carryforwards of approximately $7.1 million for federal and state
income tax reporting purposes. These net operating loss
carryforwards expire in 2013 for federal income taxes
and 2003 for state income taxes. As required by SFAS No. 109,
management of the Corporation has evaluated the positive and
negative evidence bearing on the realizability of its deferral tax
assets. Management has considered the Corporation's earnings history
and established the above valuation allowance due to the uncertainty
associated with the future utilization of operating loss carryforwards
above existing net deferred tax liabilities.
8. Employee Benefit Plans:
The Corporation has a defined contribution 401(k) and Retirement Plan
that covers substantially all shareholders and employees. The
Corporation, at the Board of Directors' election, provides a base
contribution and matches shareholder and employee contributions up to
approved levels of eligible compensation. The Corporation has expensed
contributions to the 401(k) and Retirement Plan for 1996 and 1997 of
$1,256,710 and $1,552,711, respectively.
9. Leases:
The Corporation has entered into various operating leases for office
and clinical space, and medical equipment. These leases are classified
as operating leases with the rental expense charged to operations as
incurred. Rental expense under all leases was $1,639,834 and $2,173,514
for 1996 and 1997, respectively.
Included in property, plant and equipment are assets, primarily
computer, medical equipment and office equipment, held under capital
leases. Assets held under capital leases at gross amounted to
approximately $3.1 million (net book value of $1.6 million) and $3.9
million (net book value of $1.9 million) at December 31, 1996 and 1997,
respectively.
The following is a schedule by year of future minimum lease payments
under operating and capital leases as of December 31, 1997 (Note 14):
Operating Capital
Year ending December 31,
1998.................................... $ 1,916,468 $ 886,484
1999.................................... 1,843,966 872,093
2000.................................... 1,885,110 680,676
2001.................................... 1,695,197 564,817
2002.................................... 1,536,998 227,246
Thereafter.............................. 6,049,536 4,649
----------------- ---------------
Total minimum lease payments............ $ 14,927,275 3,235,965
================= ---------------
Less amounts representing interest 576,630
--------------
2,659,335
Less current portion.................... 644,665
--------------
Long-term portion....................... $ 2,014,670
===============
F-46
<PAGE>
BERKSHIRE PHYSICIANS & SURGEONS, P.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (cont.)
10. Concentration of Credit Risk:
Financial instruments which potentially subject the Corporation to
concentrations of credit risk consist primarily of cash and cash
equivalents, accounts receivable, other receivables and advances to
shareholders. The Corporation places its cash and cash equivalents with
an institution who management believes is of high quality. At times,
such amounts may be in excess of the Federal Deposit Insurance
Corporation insurance limits. However, management believes that credit
risk related to these deposits is minimal. Advances to shareholders are
due from practicing physicians only (see Note 4). The Corporation has
the ability to retain bonus payments and final termination benefits to
settle outstanding advances.
The primary business of the Corporation is to provide health care
services to its patients. The Corporation grants credit without
collateral to its patients, many of whom are local residents and are
insured under various third party agreements. The Corporation is
dependent upon these payors As of December 31, 1996 and 1997, the
composition of accounts receivable from patients and third party
payors, was as follows:
1996 1997
------------ -----------
Medicare and Medicaid..................... 30% 32%
HMO Blue ................................. 15 14
Blue Shield............................... 5 7
Commercial and managed care............... 29 33
Self-pay and other........................ 21 14
--------- ----------
100% 100%
========== ==========
At December 31, 1996 and 1997, other receivables primarily consist of
settlements from HMOs related to risk sharing agreements and
receivables for contractual services.
11. Related Party Transactions:
In addition to advances to shareholders (see Note 4), the Corporation
rents office space from certain physicians which have ownership in the
Corporation. Total rental payments made to these physicians were
$63,729 and $78,129 in 1996 and 1997, respectively. These lease
agreements extend through 2001.
12. Contingencies:
General. The Corporation is subject to complaints, claims and
litations which have arisen in the normal course of business, including
professional liability claims (Note 5) and several asserted and
unasserted litigation cases. It is management's and legal counsel's
belief that the outcome of these matters will not have a material
adverse effect on the Corporation's financial position, results of
operations or cash flows.
Regulatory. The Corporation is subject to compliance with laws and
regulations of various governmental agencies. Recently, governmental
review of compliance
F-47
<PAGE>
BERKSHIRE PHYSICIANS & SURGEONS, P.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (cont.)
with these laws and regulations has increased, resulting in fines and
penalties for noncompliance by individual health care providers. While
no regulatory inquiries have been made at the Corporation,
compliance with these laws and regulations is subject to future
government review, interpretation or actions which are unknown and
unasserted at this time.
13. Disclosures About Fair Value of Financial Instrument:
The methods and assumptions used to estimate the fair value of each
class of financial instruments, for those instruments for which it is
practicable to estimate that value, and the estimated fair values of
the financial instruments are as follows:
Cash and Cash Equivalents
The carrying amount approximates fair value because of the short
effective maturity of these instruments.
Notes Payable and Long-term Debt
The fair value of the Corporation's notes payable and long-term debt
is estimated based on the current rates offered by the Corporation for
siminar debt. The carrying value of the Corporation's long-term debt
approximates its fair value as of December 31, 1997.
14. Subsequent Events:
Merger
On April 14, 1998, the Corporation executed a merger agreement with
PMCO, a physician practice management company based in Fort Worth,
Texas, wherein the Corporation will become a wholly-owned subsidiary of
PMCO. The merger agreement was signed in contemplation of a closing
within a few days and PMCO waived all conditions thereto precedent to a
closing. The merger agreement requires PMCO to discharge all debt as
of the closing date.
Lease Agreement
On March 30, 1998, the Corporation entered into a noncancelable sale
leaseback agreement in which it agreed to refinance or sell
furniture and equipment with a net book value of approximately
$1.8 million to the Corporation's current equipment leasing vendor. As
part of the agreement, the leasing company refinanced or paid the
outstanding balances on all of the capital leases and the outstanding
balances of the two equipment loans owed to a bank which totaled $3.2
million. The new lease specifies that the Corporation will make 57
monthly payments of $67,032 beginning on April 1, 1998. At the end
of the lease, the Corporation has the option of purchasing the
equipment from the leasing company at a fixed price of $550,000, to
extend the term of the lease or to procure a replacement lease or
purchase by an unrelated party.
F-48
<PAGE>
No dealer, salesperson, or other person is authorized to give any information or
make any representations not contained in this Prospectus in connection with the
offer made by this Prospectus, and, if given or made, such information or
representations must not be relied upon as having been authorized by the Company
or the Underwriters. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any of the securities offered hereby by anyone
in any jurisdiction in which such offer or solicitation is not authorized or in
which the person making such offer or solicitation is not qualified to do so or
to anyone to whom it is unlawful to make such an offer or solicitation. Neither
the delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that the affairs of the Company since the
date hereof or the information contained herein is correct as of any time
subsequent to the date of this Prospectus.
TABLE OF CONTENTS
Page
Prospectus Summary...............................
Risk Factors.....................................
Use of Proceeds..................................
Price Range of Common Stock and Dividend
Policy........................................
Capitalization...................................
Selected Financial Data..........................
Management's Discussion and Analysis
of Financial Condition and Results of
Operations....................................
Business.........................................
Management.......................................
Principal and Selling Stockholders...............
Shares Eligible for Future Sale..................
Underwriting.....................................
Legal Matters....................................
Experts..........................................
Available Information............................
Incorporation of Certain Documents by
Reference.....................................
Index to Financial Statements....................
6,400,000 SHARES
[ProMedCo logo]
ProMedCo Management
Company
COMMON STOCK
--------------------
P R O S P E C T U S
--------------------
PIPER JAFFRAY INC.
BEAR, STEARNS & CO. INC.
COWEN & COMPANY
, 1998
<PAGE>
PART II.
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The following table sets forth all expenses payable in connection with
the registration of the Common Stock that is the subject of this Registration
Statement, all of which shall be borne by the Company. All the amounts shown are
estimates except for the registration fee, the Nasdaq listing fee, and the NASD
filing fee.
To Be Paid By
Registrant
Securities and Exchange Commission registration fee......... $ 29,718.30
Nasdaq listing fee.......................................... *
National Association of Securities Dealers filing fee....... *
Printing and engraving expenses............................. *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Blue sky filing fees........................................ *
Miscellaneous............................................... *
-----------
Total................................................... $ *
===========
* To be supplied by amendment
Item 15. Indemnification of Directors and Officers.
The Company's Certificate of Incorporation and By-laws provide for
indemnification of directors, officers, agents, and employees of the Company to
the fullest extent permitted by law. Under Delaware law, a corporation may
indemnify any person who was or is a party or is threatened to be made a party
to an action (other than an action by or in the right of the corporation) by
reason of his service as a director or officer of the corporation, or his
service, at the corporation's request, as a director, officer, employee, or
agent of another corporation or other enterprise, against expenses (including
attorneys' fees) that are actually and reasonably incurred by him ("Expenses"),
and judgments, fines and amounts paid in settlement that are actually and
reasonably incurred by him, in connection with the defense or settlement of such
action, provided that he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the corporation's best interests and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
that his conduct was unlawful. Although Delaware law permits a corporation to
indemnify any person referred to above against Expenses in connection with the
defense or settlement of an action by or in the right of the corporation,
provided that he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the corporation's best interests, if such person has
been judged liable to the corporation, indemnification is only permitted to the
extent that the Court of Chancery (or the court in which the action was brought)
determines that, despite the adjudication of liability, such person is entitled
to indemnity for such Expenses as the court deems proper. The determination as
to whether a person seeking indemnification has met the required standard of
conduct is to be made (1) by a majority vote of a quorum of disinterested
members of the board of directors, or (2) by independent legal counsel in a
written opinion, if such a quorum does not exist or if the disinterested
directors so direct, or (3) by the stockholders.
II-1
<PAGE>
The General Corporation Law of the State of Delaware also provides for mandatory
indemnification of any director, officer, employee or agent against Expenses to
the extent such person has been successful in any proceeding covered by the
statute. In addition, the General Corporation Law of the State of Delaware
provides the general authorization of advancement of a director's or officer's
litigation expenses in lieu of requiring the authorization of such advancement
by the board of directors in specific cases, and that indemnification and
advancement of expenses provided by the statute shall not be deemed exclusive of
any other rights to which those seeking indemnification or advancement of
expenses may be entitled under any by-law, agreement or otherwise.
Item 16. Exhibits.
(a) The following is a list of exhibits furnished:
1* Form of Purchase Agreement.
2 Asset Purchase Agreement dated as of January 19, 1996 by and among
ProMedCo, Inc., ProMedCo of Abilene, inc. and Abilene Diagnostic Clinic,
P.L.L.C. (1)
2(a) First Amendment to Asset Purchase Agreement dated as of January 19, 1996 by
and among ProMedCo, Inc., ProMedCo of Abilene, inc., and Abilene Diagnostic
Clinic, P.L.L.C. (1)
2.1 Plan and Agreement for Reorganization dated as of September 13, 1996 by and
between ProMedCo, Inc., ProMedCo of Temple, Inc., and King's Daughters
Clinics, P.A. (1)
2.2 Agreement for Statutory merger dated as of November 7, 1996 by and between
ProMedCo, Inc., ProMedCo of Northern Nevada, Inc. and Western medical
Management Corporation, Inc. (1)
3.1 Form of Restated Certificate of Incorporation of ProMedCo Management
Company. (1)
3.2 By-laws of ProMedCo Management Company. (1)
4 Form of Rights Agreement. (1)
5* Opinion of Counsel
10.1 Interim Service Agreement dated as of January 19, 1996 by and between
ProMedCo of Abilene, inc. and Abilene Diagnostic Clinic, P.L.L.C. (1)(2)
10.1(a) First Amendment to Service Agreement and Interim Service Agreement dated
as of January 19, 1996 by and between ProMedCo of Abilene, inc. and Abilene
Diagnostic Clinic, P.L.L.C. (1)
10.2 Service Agreement dates as of January 19, 1996 by and between ProMedCo of
Abilene, Inc. and Abilene Diagnostic Clinic, P.L.L.C. (1)(2)
10.3 Service Agreement dates as of March 12, 1996 by and between ProMedCo, Inc.
of Cullman, Inc. and Cullman Primary Care, P.C. (1)(2)
10.4 Service Agreement dated as of April 1, 1996 by and between ProMedCo of
Mayfield, Inc. and Morgan-Haugh, P.S.C. (1)(2)
10.5 Amended and Restated Service Agreement dated as of June 24, 1996 by and
between ProMedCo of Lake Worth, Inc. and Tarrant Family Practice, P.A.
(1)(2)
10.6 Service Agreement dated as of June 30, 1995 by and between ProMedCo of
Denton, Inc. and North Texas Medical Surgical Clinic, P.A. (1)(2)
10.7 Credit Agreement dated as of June 12, 1996 among ProMedCo, Inc., the
Lenders referred to therein, and Nationscredit Commercial Corporation, as
Agent. (1)
10.8 1996 Stock Option Plan. (1)
10.9 Employee Stock Purchase Plan. (1)
II-2
<PAGE>
10.10 Employment Agreement with H. Wayne Posey. (1)
10.11 Employment Agreement with Richard R. D'Antoni. (1)
10.12 Amended and Restated Employment Agreement with Dale K. Edwards. (1)
10.13 Employment Agreement with R. Alan Gleghorn. (1)
10.14 Employment Agreement with Rick E. Weymier. (1)
10.15 Employment Agreement with Deborah A. Johnson. (1)
10.16 Service Agreement dated as of September 1, 1996 by and between ProMedCo of
Temple, Inc. and Physicians of King's Daughters, P.A. (1)
10.17 Employment Agreement with Robert D. Smith. (1)
10.18 Form of Service Agreement by and between ProMedCo of Northern Nevada, Inc.
and Knutzen Goring Medical Group, Ltd. DBA The Northern Nevada Medical
Group. (1)(2)
10.19 1994 Stock Option Plan. (1)
10.20 Asset Purchase Agreements as of April 23, 1997 by and between ProMedCo
Management Company, ProMedCo of Southwest Florida, Inc., Naples Medical
Center, P.A. and Naples Obstetrics & Gynecology, M.D., P.A. Included as
Appendix 2.9A to the Agreement is the Service Agreement by and between
ProMedCo of Southwest Florida and Naples Medical Center, P.A. (3)
10.21 Asset Purchase Agreement as of August 12, 1997 by and between ProMedCo
Management Company, PHB Management Company, Inc. and HealthAmerica
Pennsylvania, Inc. Service Agreement by and between PHB Management
Company, Inc. and HealthAmerica Pennsylvania, Inc. effective October 1,
1997. (4)
10.22 Stock Purchase Agreement as of October 8, 1997 by and between ProMedCo
Management Company, ProMedCo of Sarasota, Inc., IMG, Inc. (formerly known
as Intercoastal Medical Group, Inc.), and Intercoastal Medical Group,
Inc. Service Agreement by and between ProMedCo of Sarasota and
Intercoastal Medical Group, Inc., effective August 1, 1997. (5)
10.23 Agreement for Statutory Merger by and between HP Acquisition Corp., a
Wholly Owned Subsidiary of ProMedCo Management Company, with PBMA Health
Systems, Inc. and Health Plans, Inc. dated July 25, 1997. (6)
10.24 Amended and Restated Credit Agreement dated as of November 13, 1997 among
ProMedCo Management Company, the Lenders referred to therein, and
Nationscredit Commercial Corporation, as Agent. (7)
11 Computation of Net Income Per Share. (7)
22 List of Subsidiaries. (7)
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Ernst & Young LLP.
23.3 Consent of Coopers & Lybrand L.L.P.
24 Power of Attorney (included in signature page).
27 Financial Data Schedule.
- ---------------------
* To be filed by amendment
(1) Filed as an exhibit of the same number to the Company's registration
statement on Form S-1 (File No. 333-10557).
(2) Confidential treatment has been requested and an application has been
separately filed with the Commission.
II-3
<PAGE>
(3) Filed as exhibit 2.3 to the Company's report on Form 8-K filed with the
Commission on May 7, 1997.
(4) Filed as an exhibit to the Company's report on Form 8-K filed with the
Commission on October 15, 1997.
(5) Filed as an exhibit to the Company's report on Form 8-K filed with the
Commission on October 23, 1997.
(6) Filed as an exhibit to the Company's report on Form 8-K filed with the
Commission on December 17, 1997.
(7) Filed as an exhibit to the Company's report on Form 10-K filed with the
Commission on March 26, 1998.
Item 17. Undertakings.
The undersigned Registrant hereby undertakes:
(1) The registrant hereby undertakes that, for purposes of determining
any liability under the Securities Act of 1933, each filing of the registrant's
annual report pursuant to section 13(a) or section 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(2) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(3) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of the registration
statement as of the time it was declared effective.
(4) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Fort Worth
and State of Texas on the 15th day of April 1998.
PROMEDCO MANAGEMENT COMPANY
By: /s/ H. WAYNE POSEY
H. Wayne Posey
President and Chief Executive Officer
POWER OF ATTORNEY TO SIGN AMENDMENTS
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below does hereby constitute and appoint MICHAEL JOSEPH and JOHN F. KEARNEY, and
each of them, with full power to act without the other, his true and lawful
attorney-in-fact and agent for him and in his name, place and stead, in any and
all capacities, to sign any or all amendments to this Registration Statement,
including without limitation any registration statement for the same Offering
that is to be effective upon filing pursuant to Rule 462(b) under the Securities
Act of 1933, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises in order to effectuate the same,
as fully, for all intents and purposes, as he might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
any of them, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/S/ H. WAYNE POSEY April 15, 1998
H. Wayne Posey President, Chief Executive Officer,
and Director
(Principal Executive Officer)
/S/ ROBERT D. SMITH April 15, 1998
Robert D. Smith Vice President-Finance
(Principal Financial and Accounting
Officer)
April , 1998
Richard R. Ragsdale Chairman and Director
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
April , 1998
David T. Bailey, M.D. Director
April , 1998
Charles J. Buysse, M.D. Director
/S/ E. THOMAS CHANEY April 15, 1998
E. Thomas Chaney Director
/S/ JAMES F. HERD, M.D. April 15, 1998
James F. Herd, M.D. Director
/S/ JACK W. MCCASLIN April 15, 1998
Jack W. McCaslin Director
II-6
</TABLE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or incorporated by
reference in this Registration Statement.
ARTHUR ANDERSEN LLP
April 14, 1998
Exhibit 23.2
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the caption "Experts" in
the Registration Statement (Form S-3) and related Prospectus of ProMedCo
Management Company for the registration of 7,360,000 shares of its common stock
and to the incorporation by reference therein of our report dated May 8, 1997,
with respect to the financial statements of Health Plans, Inc. for the year
ended December 31, 1996, included in its Current Report on Form 8-K dated
February 17, 1998, filed with the Securities and Exchange Commission.
ERNST & YOUNG LLP
April 14, 1998
Boston, Massachusetts
Exhibit 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-3
of our report dated March 31, 1998, except for Notes 1 and 14, as to which the
date is April 14, 1998, on our audits of the financial statements of Berkshire
Physicians and Surgeons, P.C. We also consent to the reference to our firm under
the caption "Experts."
Boston, Massachusetts COOPERS & LYBRAND L.L.P.
April 14, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 15,760,920
<SECURITIES> 0
<RECEIVABLES> 24,420,979
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 49,951,355
<PP&E> 13,220,982
<DEPRECIATION> 2,630,421
<TOTAL-ASSETS> 162,966,150
<CURRENT-LIABILITIES> 29,434,683
<BONDS> 0
0
0
<COMMON> 106,868
<OTHER-SE> 80,511,869
<TOTAL-LIABILITY-AND-EQUITY> 162,966,150
<SALES> 0
<TOTAL-REVENUES> 127,716,775
<CGS> 0
<TOTAL-COSTS> 119,185,037
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 456,175
<INCOME-PRETAX> 8,075,563
<INCOME-TAX> 2,602,379
<INCOME-CONTINUING> 5,473,184
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,473,184
<EPS-PRIMARY> 0.48
<EPS-DILUTED> 0.38
</TABLE>