SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities and Exchange Act of 1934
Date of Report (date of earliest event reported):
December 2, 1997
ProMedCo Management Company
(Exact name of Registrant as specified in its charter)
Delaware 0-21373 75-2529809
(State of (Commission File No.) (IRS Employer
Incorporation) Identification No.)
801 Cherry Street, Suite 1450
Fort Worth, Texas 76102
(Address of principal executive offices, including zip code)
(817)335-5035
(Registrant's telephone number, including area code)
<PAGE>
The undersigned Registrant hereby amends Item 7 of its current report on Form
8-K which was filed with the Securities and Exchange Commission on December 17,
1997, as follows:
Item 7. Financial Statements and Exhibits
(a) Financial Statements of Business Acquired
The audited financial statements of Health Plans, Inc. as of
December 31, 1996
The unaudited financial statements of Health Plans, Inc. as of
September 31, 1997
(b) Pro Forma Financial Information
Unaudited Pro Forma Consolidated Balance Sheet as of December
31, 1996
Unaudited Pro Forma Consolidated Statement of Operations for
the year ended December 31, 1996
Unaudited Pro Forma Consolidated Balance Sheet as of September
30, 1997
Unaudited Pro Forma Consolidated Statement of Operations for
the nine months ended September 30, 1997
Notes to Pro Forma Consolidated Financial Information
The unaudited pro forma consolidated financial statements
should be read in conjunction with the historical financial
statements and notes thereto, included in the Company's
registration statement on Form S-1 and related prospectus
dated March 12, 1997.
<PAGE>
Report of Independent Auditors
The Board of Directors
Health Plans, Inc.
We have audited the accompanying balance sheet of Health Plans, Inc., a
subsidiary of PBMA Health Systems, Inc., as of December 31, 1996, and the
related statements of income, stockholders' equity, and cash flows for the year
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 audit. The financial statements for the year
ended December 31, 1995 were audited by other auditors whose report dated March
8, 1996 expressed an unqualified opinion on those statements.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the 1996 financial statements referred to above present fairly,
in all material respects, the financial position of Health Plans, Inc. at
December 31, 1996, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
May 8, 1997
2
<PAGE>
Health Plans, Inc.
Balance Sheets
<TABLE>
<CAPTION>
December 31
1996 1995
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents ........................................................... $ 1,729,368 $ 1,390,968
Accounts receivable ................................................................. 1,719,764 1,021,438
Prepaid expenses and other current assets ........................................... 51,629 37,394
Deferred income taxes (Note 9) ...................................................... 213,000 147,000
Income tax receivable ............................................................... 30,000 54,000
----------- -----------
Total current assets ................................................................... 3,743,761 2,650,800
Investments (Note 3) ................................................................... 4,005,280 3,470,823
Other assets ........................................................................... 4,602 15,648
Leasehold improvements and equipment:
Leasehold improvements .............................................................. 309,986 270,390
Equipment ........................................................................... 848,948 702,098
----------- -----------
1,158,934 972,488
Less allowances for depreciation .................................................... (663,315) (488,827)
495,619 483,661
----------- -----------
Total assets ........................................................................... $ 8,249,262 $ 6,620,932
=========== ===========
Liabilities and stockholders' equity Current liabilities:
Accounts payable and accrued expenses ............................................... $ 117,758 $ 167,758
Accrued payroll and amounts withheld ................................................ 1,266,796 1,240,213
Accrual for purchased medical services .............................................. 1,132,919 1,077,809
Deferred revenue .................................................................... 150,096
Note payable, including accrued interest (Notes 4 and 5) ............................ 1,830,010
----------- -----------
Total current liabilities .............................................................. 4,497,579 2,485,780
Accrued preferred dividends payable (Notes 4 and 5) .................................... 247,500
Deferred income taxes (Note 9) ......................................................... 146,000 37,000
Stockholders' equity (Notes 4, 5 and 6):
Nonvoting common stock, $.01 par value; authorized
shares--1,000,000; issued and outstanding--none
Common stock, $.01 par value; authorized shares--1,000,000;
issued and outstanding--109,087 in 1996 and 100,000 in 1995 ....................... 1,091 1,000
Additional paid-in capital .......................................................... 107,996 99,000
Preferred stock, $15 par value; nonvoting convertible; authorized
shares--200,000; issued and outstanding--none in 1996 and
100,000 in 1995 ................................................................... 1,500,000
Unrealized gain on securities available for sale, net of tax ........................ 260,037 108,380
Retained earnings ................................................................... 3,236,559 2,142,272
Total stockholder's equity ............................................................. 3,605,683 3,850,652
----------- -----------
Total liabilities and stockholders' equity ............................................. $ 8,249,262 $ 6,620,932
=========== ===========
</TABLE>
See accompanying notes.
3
<PAGE>
Health Plans, Inc.
Statements of Income
Year ended December 31
1996 1995
Management service revenue (Note 4) .......... $ 9,206,294 $ 9,462,123
Premium revenue .............................. 6,594,888 4,168,558
Other revenue ................................ 319,269 318,562
------------ ------------
16,120,451 13,949,243
Operating expenses (Note 4):
Salaries, wages and employee benefits ..... 6,945,232 6,794,043
Purchased medical services ................ 5,086,083 3,772,638
Administrative expenses ................... 1,400,514 1,096,863
Supplies and other expenses ............... 135,790 148,605
Professional fees ......................... 484,501 153,285
Depreciation and amortization ............. 185,534 152,471
Interest .................................. 25,887
14,263,541 12,117,905
------------ ------------
Income before income taxes ................... 1,856,910 1,831,338
Income taxes (Note 9) ........................ (706,000) (693,730)
------------ ------------
Net income ................................... $ 1,150,910 $ 1,137,608
============ ============
See accompanying notes.
4
<PAGE>
Health Plans, Inc.
Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Additional Unrealized
Common Paid-In Preferred Gain on Retained
Stock Capital Stock Securities Earnings Total
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 $1,000 $ 99,000 $ 1,500,000 $1,147,164 $ 2,747,164
Net income 1,137,608 1,137,608
Accumulated preferred
dividends (142,500) (142,500)
Unrealized gain on securities,
net of taxes of $72,000 $108,380 108,380
------- --------- ---------- -------- ---------- ----------
Balance at December 31, 1995 1,000 99,000 1,500,000 108,380 2,142,272 3,850,652
Net income 1,150,910 1,150,910
Accumulated preferred
dividends (56,623) (56,623)
Redemption of 100,000 shares
of preferred stock (1,500,000) (1,500,000)
Proceeds from issuance of
9,087 shares of common
stock through exercise of
stock options 91 8,996 9,087
Unrealized gain on securities,
net of taxes of $102,000 151,657 151,657
-------- -------- ------------ -------- ---------- -----------
Balance at December 31, 1996 $1,091 $107,996 $ -0- $260,037 $3,236,559 $ 3,605,683
======== ======== ============ ======== ========== ===========
</TABLE>
See accompanying notes.
5
<PAGE>
Health Plans, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31
1996 1995
<S> <C> <C>
Operating activities
Net income ........................................................................... $ 1,150,910 $ 1,137,608
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ................................................... 185,534 152,471
(Gain) loss on sale of investments .............................................. (39,756) 3,871
Changes in operating assets and liabilities:
Accounts receivable ........................................................... (698,326) (809,622)
Prepaid expenses and other current assets ..................................... (14,235) 4,813
Deferred income taxes ......................................................... (59,000) (92,000)
Income taxes receivable ....................................................... 24,000 (211,500)
Accounts receivable and accrued expenses ...................................... (50,000) 81,866
Accrued payroll and amounts withheld .......................................... 26,583 394,070
Accrual for purchased medical services ........................................ 55,110 1,008,018
Deferred revenue .............................................................. 150,096
Accrued interest .............................................................. 25,887
----------- -----------
Net cash provided by operating activities ............................................ 756,803 1,669,595
Investing activities
Proceeds from sale of marketable securities .......................................... 1,133,632 328,921
Purchases of marketable securities ................................................... (1,374,676) (871,762)
Purchases of leasehold improvements and equipment .................................... (186,446) (136,155)
----------- -----------
Net cash used in investing activities ................................................ (427,490) (678,996)
Financing activity
Proceeds from exercise of stock options .............................................. 9,087
Net cash provided by financing activity .............................................. 9,087
----------- -----------
Increase in cash and cash equivalents ................................................ 338,400 990,599
Cash and cash equivalents at beginning of year ....................................... 1,390,968 400,369
----------- -----------
Cash and cash equivalents at end of year ............................................. $ 1,729,368 $ 1,390,968
=========== ===========
Supplemental information:
Income taxes paid ................................................................. $ 741,000 $ 997,230
=========== ===========
Accrued dividends payable (noncash transaction) ................................... $ 56,623 $ 142,500
=========== ===========
Unrealized appreciation in investments (recorded net of tax
effect of $102,000 in 1996 and $72,000 in 1995) ................................. $ 253,657 $ 180,380
=========== ===========
</TABLE>
Also, in 1996, the previously outstanding preferred stock was redeemed which
will be paid under the terms of a note agreement which is not reflected as a
cash flow.
See accompanying notes.Organization and Operation
6
<PAGE>
Health Plans, Inc. (Health Plans or Corporation), located in Falmouth, Maine,
is a for-profit subsidiary of PBMA Health Systems, Inc. (HSI).
Health Plans is a Maine business corporation organized for the primary purpose
of providing health care management and managed care services. Health Plans also
contracts with licensed HMOs and other third-party payors to provide or to
arrange for the provision of comprehensive health services to the HMO members on
a capitation basis through the Health Plans health care network. Health Plans
pays capitation or negotiated fees for services provided by outside parties.
Significant Accounting Policies
Cash and Cash Equivalents
Health Plans considers all highly liquid deposits and short-term investments to
be cash equivalents.
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.
Estimates also affect the reported amounts of revenues and expenses during the
reporting period. This most significant areas which are affected by the use of
estimates include accounts receivable under capitation agreements and the
accrual for purchased medical services.
Concentration of Credit Risk
Financial instruments which subject Health Plans to credit risk consist of cash
equivalents and accounts receivable. The risk with respect to cash equivalents
is minimized by the Corporation's policy of investing in financial instruments
with short-term maturities issued by highly rated financial institutions. Health
Plans accounts receivable are due from three HMO entities located in New England
for payment under capitated fee arrangements. The risk with respect to accounts
receivable is minimized by the credit worthiness of HMO entities contracted.
During 1996, 41% of the Corporation's revenues were generated by three New
England HMO entities. Management does not anticipate any credit losses related
to these receivables and has not experienced any losses historically.
7
<PAGE>
Significant Accounting Policies (continued)
Investments
Health Plans classifies all marketable securities as available for sale and are
valued at fair value. Unrealized gains or losses on marketable securities are
reflected as a separate component of stockholders' equity, net of applicable
income tax. Actual realized gains and losses are reflected in operations and are
based upon specific identification of securities traded.
Leasehold Improvements and Equipment
Leasehold improvements and equipment are stated on the basis of cost.
Depreciation of equipment and of assets recorded as leasehold improvements are
determined using the straight-line method in a manner intended to amortize the
cost of assets over their estimated useful lives or the lease terms, whichever
is shorter.
Management Service Revenue
Health Plans recognizes its management service revenue in the period earned on
an accrual basis.
Premium Revenue
Premium revenue represents contracts which Health Plans has entered into with
several HMO's to provide medical services for a defined population. These
contracts are subject to cancellation by either party within notification
periods set forth in the contracts. Payment terms are renegotiated annually.
Capitation premiums are due monthly and are recognized as revenue during the
period in which services are obligated to be provided.
As part of an incentive program, the respective HMO's retain a percentage of the
capitation as a risk-sharing fund. In the event that utilization deviates from
budgeted amounts, Health Plans and the HMO's share any excess/deficit based upon
certain risk-sharing provisions.
8
<PAGE>
Significant Accounting Policies (continued)
Purchased Medical Services
Health Plans has contracted with physicians to provide primary medical care and
other services which Health Plans is obligated to provide under HMO contracts.
Health Plans compensates providers on a capitated basis or negotiated fees. The
cost of the health care services contract is accrued in the period in which it
is provided to a member based in part on estimates, including an accrual for
medical services provided but not reported. Included as a reduction of purchased
medical expenses in 1996 is approximately $200,000 of expenses, net of the bonus
and tax effect, included in prior-year estimates which were reversed in 1996.
Reinsurance (Stop-Loss)
Reinsurance premiums are reported as health care cost and reinsurance recoveries
are reported as a reduction of related health care costs.
Stock Options
The Corporation has certain stock option plans in effect for key employees,
advisors and directors. Options are granted in accordance with the option plans
and are granted at market value as determined by an independent appraisal or the
latest calculation by management using the same assumptions as the latest
outside valuation.
Pension Plan
Health Plans sponsors a defined-contribution plan for employees. Under the plan,
the employer contributes 3% of eligible earnings to employees' accounts, and
matches 50% of employees' contribution to a maximum of 3% of eligible earnings.
Health Plans' expense related to the plan was $216,500 in 1996 and $208,600 in
1995.
Income Taxes
Income taxes are recorded based upon the liability method as prescribed by
Financial Accounting Standards Board (FASB) Statement No. 109, "Accounting for
Income Taxes." The Corporation files a consolidated tax return with HSI, its
parent.
9
<PAGE>
Significant Accounting Policies (continued)
Employee Bonus Plan
Among other plans, the Corporation has an employee bonus plan under which 35% of
operating income is available for distribution to employees of Health Plans.
Reclassifications
Certain amounts in the prior year have been reclassified to permit comparison.
3. Investments
The fair value of investments at December 31 is as follows:
1996 1995
---------- ----------
Debt securities with rates ranging
from 4% to 7% and maturing
in years 1997 to 2004 $2,129,323 $2,644,844
Marketable equity securities 1,592,170 752,026
Equity mutual funds 283,787 73,953
---------- ----------
$4,005,280 $3,470,823
========== ==========
Realized gains and losses on marketable securities were $54,223 and $14,467,
respectively, in 1996 and $-0- and $3,871, respectively, in 1995.
Unrealized gains and losses on marketable equity securities and mutual funds
were $439,262 and $5,225, respectively, at December 31, 1996 and $182,855 and
$2,475, respectively, at December 31, 1995. The related cost of marketable
equity securities and mutual funds were $1,441,920 and $645,599 at December 31,
1996 and 1995, respectively. The estimated fair value of debt securities equal
cost at December 31, 1996 and 1995.
At December 31, 1996, Health Plans has $395,208, $1,535,365 and $198,750 of debt
securities which will mature within one year, after one year through five years
and after five years through ten years, respectively.
10
<PAGE>
4. Significant Contract
Health Plans contracts with Martin's Point to provide certain administrative and
management services. In October 1996, the contract was amended to provide
certain risk management and information systems services through October 1997,
at which time the management contract will expire. Health Plans received
$9,001,135 and $9,392,249 for services provided in 1996 and 1995, respectively.
Revenue in 1997 under the contract will be $4,075,000. As a result of the change
in the management contract, Health Plans has also reduced its annual operating
expenses, through staff reductions and other measures, by approximately
$4,350,000.
Health Plans also contracts with Martin's Point to provide primary care services
to Health Plans' patients. In 1996, Health Plans recorded $608,000 in expenses
relating to this contract and $423,000 in 1995.
In 1996, as part of the amended agreement with Martin's Point, Martin's Point
redeemed Health Plans' preferred stock of $1,500,000 and accrued preferred
dividends of $304,123 in exchange for a note valued at $1,804,123 which had
accrued interest of $25,887 at December 31, 1996. The note and all accrued
interest at 9.25% will be paid in four equal installments of $475,000 during
1997.
At December 31, 1996 and 1995, the Corporation had a net payable of $15,688 and
a net receivable of $35,500, respectively, from Martin's Point for certain
expenses paid by and on behalf of Martin's Point.
5. Capitalization
PBMA Health Systems, Inc. owns 100,000 outstanding shares of common stock and
the remaining are held by an officer of the Corporation. Health Plans has
200,000 shares of authorized preferred stock of which 100,000 shares previously
outstanding were redeemed in 1996 (see Note 4).
In 1995, the Corporation authorized 1,000,000 shares of nonvoting common stock.
No shares have been issued.
Voting common stock has full voting rights and the preferred stock has no voting
rights except in regard to authorization or issuance of additional shares or
classes of stock, a merger or consolidation of the Corporation with another
corporation, or the sale of substantially all of the Corporation's assets. The
Corporation is required to reserve and keep available sufficient shares of
authorized voting stock to permit conversion of the preferred stock in
accordance with the agreement.
11
<PAGE>
5. Capitalization (continued)
Holders of the preferred stock are entitled to certain conversion provisions to
common stock, to receive a pro rata share of any declared dividends on common
stock as well as preferred dividends and are subject to certain provisions by
the Corporation.
6. Stock Option Plans
The Corporation has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB 25) and related
Interpretations in accounting for its employee stock options. Under APB 25,
because the exercise price of the Corporation's employee stock options equals
the fair value of the underlying stock on the date of grant, no compensation
expense is recognized. The "minimum value" method for nonpublic companies has
been utilized to calculate the excess of the fair value of the stock at the date
of grant over the present value of the exercise price over the expected exercise
life of the option ranging from two to six years at a rate of 5.44% to 7.62%. No
dividend payments are expected. The effect of applying Financial Accounting
Standards Board Statement's 123's, Accounting for Stock-Based Compensation,
fair-value method to the Corporation's stock-based awards result in net income
that is not materially different from amounts reported.
The weighted-average fair value of options granted in 1995 and the
weighted-average remaining contractual life of options outstanding at December
31, 1996 was $1.94 and eight years, respectively.
The Corporation has certain incentive stock option plans (the Plans) available
for key employees, advisors and directors. Under the Plans at December 31, 1996,
a total of 499,413 shares of both common voting and common nonvoting have been
reserved for issuance. Of the total shares reserved, 246,913 shares represent
voting common of which 160,988 are reserved for issuance based upon certain
anti-dilutive provisions. The nonvoting common shares reserved for issuance
total 252,500 of which 164,500 are reserved for issuance based upon certain
anti-dilutive provisions.
The exercise price of the options is based upon fair value as set forth in the
stock option plans. All options may be exercised immediately upon vesting and
all options granted expire ten years from the grant date. Shares purchased under
the option program are restricted and may only be sold to the Corporation. The
Corporation must purchase shares owned pursuant to the Plans at fair value in
the event that an employee terminates employment and puts the shares to the
Corporation.
12
<PAGE>
6. Stock Option Plans (continued)
A summary of option activity is as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------------------- -------------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
-------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 135,812 $ 5.73 79,012 $ 1.88
Granted 56,800 11.08
Canceled (22,500) (4.74)
Exercised (9,087) (1.00)
----------------- -----------------
Outstanding at end of year 104,225 6.35 135,812 5.73
================= =================
Price range at close of year $2.00 - $11.25 $1.00 - $11.25
================= =================
Exercisable at close of year 82,384 6.37 86,637 5.69
================= =================
Available for grant at close of year 395,88 372,688
================= =================
</TABLE>
7. Stop-Loss Insurance
The Corporation has certain stop-loss insurance arrangements to limit its losses
on individual claims. The policies cover the cost of each member's annual health
care services in excess of a $50,000 deductible up to a maximum benefit payable
of $1,000,000 per covered member per policy period.
8. HMO Licensure
On October 26, 1994, the Corporation was granted an HMO license under the laws
of the State of Maine (State). Such licensure allows the Corporation to enter
into full risk contracts or to provide medical services directly with employees
and other groups.
Health Plans is subject to certain regulatory oversight under its HMO license.
Health Plans is required to maintain a certain net worth under the statutory
requirements which is $1,000,000 at December 31, 1996.
13
<PAGE>
9. Income Taxes
Health Plans' income tax expense for the period ended December 31 is as follows:
1996 1995
-------------------------
Current:
Federal $609,000 $608,940
State 156,000 176,790
-------------------------
765,000 785,730
Deferred:
Federal (46,200) (71,300)
State (12,800) (20,700)
(59,000) (92,000)
-------------------------
$706,000 $693,730
=========================
Deferred income taxes arise from temporary differences between the tax basis of
assets and liabilities and reported amounts in the financial statements. These
differences relate principally to the Corporation's method of depreciation and
amortization, temporary differences due to timing of payment of payroll accruals
and claim reserves and unrealized gains on investment securities.
10. Operating Leases
The Corporation leases office space under short-term leasing arrangements. Rent
expense was approximately $185,000 and $155,000 for 1996 and 1995, respectively.
14
<PAGE>
<PAGE>
Health Plans, Inc.
Unaudited Condensed Balance Sheet
as of September 30, 1997
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,101,609
Accounts receivable, net 2,966,007
Prepaid expenses and other current assets 595,601
-----------------
Total current assets 5,663,217
INVESTMENTS 3,034,245
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of 807,967 723,118
OTHER ASSETS 855,000
-----------------
Total assets $ 10,275,580
=================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,370,682
Accrued salaries, wages and benefits 815,229
Accrued expenses and other current liabilities 150,097
Accrual for purchased medical services 2,703,684
Current maturities of long-term debt 750,000
-----------------
Total current liabilities 5,789,692
OTHER LONG TERM LIABILITIES 360,988
-----------------
Total liabilities 6,150,680
STOCKHOLDERS' EQUITY:
Common stock 1,501
Additional paid in capital 190,561
Unrealized gain on securities 583,483
Retained earnings 3,349,355
-----------------
Total stockholders' equity 4,124,900
-----------------
Total liabilities and stockholders' equity $ 10,275,580
=================
The accompanying notes are an intergral part of these financial
statements.
<PAGE>
Health Plans, Inc.
Unaudited Condensed Statement of Operations
For the Nine Months Ended September 30, 1997
NET REVENUES $ 11,319,268
-----------------
OPERATING EXPENSES
Salaries, wages and employee benefits 2,014,243
Purchased medical services 7,924,988
Administrative expenses 461,392
Supplies and other expenses 32,262
Professional fees 434,144
Depreciation and amortization 194,254
Interest expense 69,990
-----------------
11,131,273
INCOME BEFORE PROVISION FOR INCOME TAXES 187,995
PROVISION FOR INCOME TAXES 75,199
NET INCOME $ 112,796
=================
The accompanying notes are an intergral part of these financial
statements.
<PAGE>
Health Plans, Inc.
Unaudited Condensed Statement of Stockholders' Equity
For the Nine Months Ended September 30, 1997
<TABLE>
<CAPTION>
Additional Unrealized
Common Paid-in Gain on Retained
Stock Capital Securities Earnings Total
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996 $ 1,091 $ 107,996 $ 260,037 $ 3,236,559 $ 3,605,683
Proceeds from issuance
of 41,025 shares of
common stock through
exercise of stock options 410 82,565 - - 82,975
Unrealized gain on securities,
net of taxes of $214,988 - - 323,446 - 323,446
Net income, unaudited - - - 112,796 112,796
---------- ---------- ---------- ------------ ------------
BALANCE, September 30, 1997 $ 1,501 $ 190,561 $ 583,483 $ 3,349,355 $ 4,124,900
========== ========== ========== ============ ============
</TABLE>
The accompanying notes are an intergral part of these financial statements.
<PAGE>
Health Plans, Inc.
Unaudited Condensed Statement of Cash Flows
For the Nine Months Ended September 30, 1997
NET CASH USED IN OPERATIONS $ (633,064)
-----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (372,151)
Allowance for marketable equity securities 323,446
Net proceeds from sale of long term investments 971,035
-----------------
Net cash provided by investing activities 922,330
-----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 82,975
NET INCREASE IN CASH AND CASH EQUIVALENTS 372,241
CASH AND CASH EQUIVALENTS, December 31, 1996 1,729,368
-----------------
CASH AND CASH EQUIVALENTS, September 30, 1997 $ 2,101,609
=================
The accompanying notes are an intergral part of these financial statements.
<PAGE>
Health Plans, Inc.
Notes to Interim Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying condensed unaudited interim financial statements of Health
Plans, Inc. (the "Company" or "HPI") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
the rules and regulations of the Securities and Exchange Commission. They do not
include all information and footnotes required by generally accepted accounting
principles for complete financial statements. Although management believes that
the disclosure is adequate to prevent the information from being misleading, the
interim financial statements should be read in conjunction with the Company's
audited financial statements included elsewhere in this 8-K/A filing. In the
opinion of Company management, all adjustments, consisting of normal recurring
accruals, considered necessary for a fair presentation, have been included.
Operations
The Company is a Maine corporation and is a for-profit subsidiary of PBMA Health
Systems, Inc. ("HIS"). The Company is organized for the primary purpose of
providing health care management and managed care services. HPI also contracts
with licensed HMOs and other third-party payors to provide or to arrange for the
provision for comprehensive health services to the HMO members on a capitation
basis through the HPI health care network. HPI pays capitation or negotiated
fees for services provided by outside parties.
2. SUBSEQUENT EVENT
On December 2, 1997, ProMedCo Management Company a Delaware corporation, through
wholly owned subsidiary, HP Acquisition Corp. (collectively "ProMedCo") acquired
all of the outstanding stock of HPI. The total consideration for the transaction
was approximately $8.5 million, which consisted of $1.7 million cash and $6.8
million of ProMedCo's common stock and stock options.
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The pro forma as adjusted consolidated balance sheet gives effect to the
acquisition of all of the outstanding stock of Health Plans, Inc. (the "HPI
Acquisition") as if it had been completed on December 31, 1996 and also reflects
the initial public offering of ProMedCo Management Company's ("ProMedCo" or the
"Company") Common Stock in March 1997 (the "Offering") and the conversion of all
outstanding Series A Redeemable Convertible Preferred Stock and Class B Common
Stock of the Company into Common Stock and the termination of the Company's
contingent obligation to repurchase all outstanding Redeemable Common Stock, all
of which occurred simultaneously with the closing of the Offering, as if such
transactions had occurred on December 31, 1996.
The pro forma as adjusted consolidated statement of operations for the year
ended December 31, 1996, gives effect to the HPI Acquisition as if it had been
completed on January 1, 1996. The historical as adjusted statement of operations
gives effect to the Offering and to the prior affiliations with Abilene
Diagnostic Clinic, P.L.L.C., Cullman Family Practice, P.C.; Family Medical
Clinic, P.C.; Morgan-Haugh, P.S.C.; HealthFirst Services, Inc.; Tarrant Family
Practice, P.A., King's Daughters Clinic, P.A., Naples Medical Center, P.A.,
Naples Obstetrics & Gynecology, M.D., P.A., and IMG, Inc. (the "Prior
Transactions"), completed during 1996 and 1997, as if they had been completed on
January 1, 1996. The pro forma as adjusted consolidated statement of operations
information is based on the financial statements of the Company and the
affiliated physician groups, giving effect to the HPI Acquisition and the Prior
Transactions under the purchase method of accounting, and the assumptions and
adjustments in the accompanying notes to pro forma consolidated financial
information.
The pro forma consolidated financial information has been prepared by
management based on the audited financial statements of the affiliated physician
groups, adjusted where necessary to reflect the acquisitions and related
operations as if the service agreements between the Company and such groups had
been in effect during the entire periods presented. This pro forma consolidated
financial information is presented for illustrative purposes only and is not
indicative of the results that would have occurred if the HPI Acquisition or the
Prior Transactions had been completed on January 1, 1996 or that may be obtained
in the future. The pro forma consolidated financial information should be read
in conjunction with the audited consolidated financial statements and notes
thereto of Health Plans, Inc. included elsewhere in this filing and for the
Company, Abilene Diagnostic Clinic, P.L.L.C., Cullman Family Practice, P.C.,
Family Medical Clinic, P.C., Morgan-Haugh, P.S.C., HealthFirst Services, Inc.,
and Tarrant Family Practice, P.A., included in the Company's registration
statement on Form S-1 and related prospectus dated March 12, 1997, the Southwest
Florida Clinic Practices included in the Company's 8-K filing dated April 23,
1997, and IMG, Inc. included in the Company's 8-K filing dated October 8, 1997.
<PAGE>
PRO FORMA CONSOLIDATED BALANCE SHEET
December 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
Offering Prior Prior
Adjustments Transactions Transactions Histor- HPI HPI Pro
Histor- and Equity Histor- Adjust- ical As Histor- Adjust- Forma as
ical(a) Conversions(b) ical(c) ments Adjusted ical(f) ments Adjusted
ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents $ 1,633,534 $31,764,065 $ 569,911 $(21,069,004)(e) $12,898,506 $1,729,368 $(1,730,727)(h) $ 12,897,147
Accounts
receivable, net 6,227,228 - 7,251,106 (1,071,296)(d) 12,407,038 1,719,764 - 14,126,802
Inventory 225,212 - 30,989 - 256,201 - - 256,201
Management fees
receivable 1,266,598 - - (1,200,000)(d) 66,598 - - 66,598
Due from affiliated
physician groups 660,278 - - - 660,278 - - 660,278
Prepaid expenses and
other current assets 517,633 - 203,934 (143,778)(d) 577,789 294,629 - 872,418
---------- ----------- ----------- ------------ ----------- ---------- ----------- ------------
Total current
assets 10,530,483 31,764,065 8,055,940 (23,484,078) 26,866,410 3,743,761 (1,730,727) 28,879,444
Investments - - - - - 4,005,280 - 4,005,280
Property and
equipment, net 3,930,191 - 1,803,507 - 5,733,698 495,619 - 6,229,317
Intangible assets,
net 14,860,171 - - 26,773,043 (c) 41,633,214 - 4,940,781 (f) 46,573,995
Other assets 1,238,929 (564,427) 252,200 14,443,255 (c) 15,369,957 4,602 - 15,374,559
---------- ----------- ----------- ------------ ----------- ---------- ----------- ------------
Total assets $30,559,774 $31,199,638 $10,111,647 $17,732,220 $89,603,279 $8,249,262 $ 3,210,054 $101,062,595
========== ============ =========== ============ =========== ========== =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,505,762 $ - $ 1,059,033 $ (557,361)(d) $ 2,007,434 $ 117,758 $ - $ 2,125,192
Payable to
affiliated
physician
groups 1,341,876 - - - 1,341,876 - - 1,341,876
Management fees
payable - - 573,715 (573,715)(d) - - - -
Accrued salaries,
wages and
benefits 1,153,558 - - - 1,153,558 1,266,796 - 2,420,354
Accrual for
purchased medical
services - - - - - 1,132,919 - 1,132,919
Accrued expenses
and other current
liabilities 2,353,381 1,035,573 1,338,398 (887,331)(d) 3,840,021 150,096 - 3,990,117
Advances from
affiliated
company - - 700,174 (700,174)(d) - - - -
Current maturities
of long-term
debt 1,151,191 - 2,167,502 (2,167,502)(d) 1,151,191 1,830,010 - 2,981,201
Current maturities
of capital leases 589,438 - - - 589,438 - - 589,438
Deferred purchase
price 181,986 - - - 181,986 - - 181,986
---------- ----------- ----------- ------------ ----------- ---------- ----------- ------------
Total current
liabilities 8,277,192 1,035,573 5,838,822 (4,886,083) 10,265,504 4,497,579 - 14,763,083
Notes payable,
net 4,585,173 (1,715,935) 976,833 (976,833)(d) 11,565,092 - - 11,565,092
8,695,854 (e)
Obligations under
capital leases 1,030,171 - 174,325 (174,325)(d) 1,030,171 - - 1,030,171
Convertible
subordinated notes
payable 1,800,274 - - - 1,800,274 - - 1,800,274
Deferred purchase
price - - - 6,317,230 (e) 6,317,230 - - 6,317,230
Other long term
liabilities 393,575 - - - 393,575 146,000 - 539,575
---------- ----------- ----------- ------------ ----------- ---------- ----------- ------------
Total liabilities 16,086,385 (680,362) 6,989,980 8,975,843 31,371,846 4,643,579 36,015,425
<PAGE>
Series A Redeemable
convertible
preferred 2,957,641 (2,957,641) - - - - - -
Redeemable common
stock 991,776 (991,776) - - - - - -
Stockholders' equity:
Preferred stock - - - - - - - -
Class B common stock 12,262 (12,262) - - - - - -
Common stock 31,871 58,915 2,553,346 (2,553,346)(d) 110,583 1,091 (1,091)(g) 117,810
19,797 (e) 7,227 (h)
Additional paid
in capital 11,987,480 35,782,764 395,016 (395,016)(d) 59,628,491 107,996 (107,996)(g) 66,437,001
11,858,247 (e) 6,808,510 (h)
Unrealized gains
on securities
available for
sale - - - - - 260,037 (260,037)(g) -
Common stock to
be issued 2,303,212 - - - 2,303,212 - - 2,303,212
Stockholder notes
receivable (151,306) - - - (151,306) - - (151,306)
Retained earnings
(Accumulated
deficit) (3,659,547) - 173,305 (173,305)(d) (3,659,547) 3,236,559 (3,236,559)(g) (3,659,547)
---------- ----------- ----------- ------------ ----------- ---------- ----------- ------------
Total
stockholders'
equity 10,523,972 35,829,417 3,121,667 8,756,377 58,231,433 3,605,683 3,210,054 65,047,170
---------- ----------- ----------- ------------ ----------- ---------- ----------- ------------
Total liabilities
and stockholders'
equity $30,559,774 $31,$99,638 $10,111,647 $ 17,732,220 $89,603,279 $8,249,262 $ 3,210,054 $101,062,595
========== =========== =========== ============ =========== ========== =========== ============
</TABLE>
See accompanying notes to pro forma consolidated financial information
<PAGE>
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
Prior
Prior Acquisition Offering Historical HPI HPI Pro Forma
Histor- Acquisi- Adjust- Adjust- As Acquisi- Adjust- As
ical(i) tions(j) ments ments(r) Adjusted tion(s) ments Adjusted
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Physician groups
revenue, net $46,996,262 $49,502,406 $ - $ - $96,498,668 $16,120,451 - $112,619,119
Less: amounts
retained by physician
groups 20,791,607 21,791,201 (27,260,588)(k) - 40,753,282 - - 40,753,282
25,431,062 (k)
----------- ----------- ------------ ------- ----------- ----------- -------- ------------
Management fee revenue 26,204,655 27,711,205 1,829,526 - 55,745,386 16,120,451 - 71,865,837
Operating expenses:
Clinic salaries and
benefits 11,778,563 11,761,942 (2,315,116)(l) - 21,225,389 6,945,232 - 28,170,621
Clinic rent and
lease expense 2,684,002 2,780,897 17,630 (m) - 5,482,529 - - 5,482,529
Clinic supplies 2,860,454 2,157,136 - - 5,017,590 135,790 - 5,153,380
Other clinic costs 6,202,760 9,667,221 (478,609)(k) - 15,391,372 6,971,098 - 22,362,470
General corporate
expenses 2,633,585 - - - 2,633,585 - - 2,633,585
Depreciation and
amortization 723,641 858,193 (28,933)(n) - 2,339,052 185,534 - 2,698,401
786,151 (o) 173,815 (t)
Merger costs 682,269 - - - 682,269 - - 682,269
Interest expense 210,234 298,667 (215,063)(p) (51,098) 1,084,944 25,887 - 1,110,831
842,204 (p)
----------- ----------- ------------ ------- ----------- ----------- -------- ------------
27,775,508 27,524,056 (1,391,736) (51,098) 53,856,730 14,263,541 173,815 68,294,086
Income (loss) before
provision for
income taxes (1,570,853) 187,149 3,221,262 51,098 1,888,656 1,856,910 (173,815) 3,571,751
Provision (benefit)
for income taxes - (93,974) 792,246 (q) 19,417 717,689 706,000 (66,424)(u) 1,357,265
----------- ----------- ------------ ------- ----------- ----------- -------- ------------
Net income (loss) $(1,570,853) $ 281,123 $2,429,016 $31,681 $1,170,967 $1,150,910 $(107,391) $ 2,214,486
=========== =========== =========== ======= =========== =========== ======== ============
Net income (loss)
per share $ (0.19) $ 0.08 $ 0.14
=========== ========== ============
Weighted average
number of common
shares outstanding 8,395,186 14,673,492 15,396,180
========= ========== ==========
</TABLE>
See accompanying notes to pro forma consolidated financial information.
<PAGE>
PRO FORMA CONSOLIDATED BALANCE SHEET
September 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
HPI HPI Pro Forma
Historical Historical(f) Adjustments as Adjusted
ASSETS
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 17,098,313 $ 2,101,609 $(1,730,727)(h) $ 17,469,195
Accounts receivable, net 13,807,217 2,966,007 - 16,773,224
Inventory 278,685 - - 278,685
Management fees receivable 161,105 - - 161,105
Due from affiliated physician groups 2,206,265 - - 2,206,265
Prepaid expenses and other current assets 3,222,920 595,601 - 3,818,521
------------ ----------- ----------- ------------
Total current assets 36,774,505 5,663,217 (1,730,727) 40,706,995
Investments - 3,034,245 - 3,034,245
Property and equipment, net 6,337,628 723,118 - 7,060,746
Intangible assets, net 46,237,534 - 4,421,564 (f) 50,659,098
Other assets 16,332,234 855,000 - 17,187,234
------------ ----------- ----------- ------------
Total assets $105,681,901 $10,275,580 $ 2,690,837 $118,648,318
============ =========== =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,437,015 $ 1,370,682 $ - $ 2,807,697
Payable to affiliated physician groups 3,596,788 - - 3,596,788
Accrued salaries, wages and benefits 1,628,373 815,229 - 2,443,602
Accrued expenses and other current liabilities2,757,731 150,097 - 2,907,828
Accrual for purchased medical services - 2,703,684 - 2,703,684
Current maturities of long-term debt 3,668,146 750,000 - 4,418,146
Current maturities of capital leases 137,180 - - 137,180
Deferred purchase price 8,434,428 - - 8,434,428
------------ ----------- ----------- ------------
Total current liabilities 21,659,661 5,789,692 27,449,353
Notes payable, net 15,245,130 - - 15,245,130
Obligations under capital leases 746,414 - - 746,414
Convertible subordinated notes payable 1,800,274 - - 1,800,274
Other long term liabilities 1,716,481 360,988 - 2,077,469
------------ ----------- ----------- ------------
Total liabilities 41,167,960 6,150,680 - 47,318,640
Stockholders' equity:
Preferred stock - - - -
Common stock 100,621 1,501 (1,501)(g) 107,848
7,227 (h)
Additional paid in capital 53,400,407 190,561 (190,561)(g) 60,208,917
6,808,510 (h)
Unrealized gain on securities 583,483 (583,483)(g) -
Common stock to be issued 11,878,044 - - 11,878,044
Stockholder notes receivable (369,665) - (369,665)
Retained earnings (Accumulated deficit) (495,466) 3,349,355 (3,349,355)(g) (495,466)
-------------- ------------- ----------------- -----------
Total stockholders' equity 64,513,941 4,124,900 2,690,837 71,329,678
------------ ----------- ----------- ------------
Total liabilities and stockholders' equity $105,681,901 $10,275,580 $ 2,690,837 $118,648,317
============ =========== =========== ============
</TABLE>
See accompanying notes to pro forma consolidated financial information
<PAGE>
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
Nine Months Ended September 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Prior Offering Historical HPI HPI Pro Forma
Histor- Trans- Adjust- Adjust- As Acquisi- Adjust- As
ical(i) actions(j) ments ments(r) Adjusted tion(s) ments Adjusted
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Physician groups
revenue, net $75,760,198 $11,686,333 $- $- $87,446,531 $11,319,268 $- $98,765,799
Less: amounts
retained by
physician group 31,037,320 3,937,530 (3,937,530)(k) - 35,407,283 - - 35,407,283
4,369,963 (k) -
Management fee
revenue 44,722,878 7,748,803 (432,433) - 52,039,248 11,319,268 - 63,358,516
Operating expenses:
Clinic salaries and
benefits 17,362,170 2,882,504 (279,907)(l) - 19,964,767 2,014,243 - 21,979,010
Clinic rent and
lease expense 4,129,602 762,154 - - 4,891,756 - - 4,891,756
Clinic supplies 5,510,504 1,009,281 - - 6,519,785 32,262 - 6,552,047
Other clinic costs 8,225,318 1,674,747 (1,263)(m) - 9,898,802 8,820,524 - 18,719,326
General corporate
expenses 2,756,283 - - - 2,756,283 - - 2,756,283
Depreciation and
amortization 1,961,520 263,079 20,330 (n) - 2,707,955 194,254 - 3,061,539
463,026 (o) 159,330(t)
Interest expense 227,565 4,075 (4,075)(p) (30,386) 281,700 69,990 - 351,690
84,521 (p) -
--------- ---------- ------------ ------- ---------- ---------- -------- ----------
40,172,962 6,595,840 282,632 (30,386) 47,021,048 11,131,273 159,330 58,311,651
--------- ---------- ------------ ------- ---------- ---------- -------- ----------
Income (loss)
before provision
for income 4,549,916 1,152,963 (715,065) 30,386 5,018,200 187,995 (159,330) 5,046,865
Provision (benefit)
for incomes
taxes 1,385,835 - 509,534 (q) 11,546 1,906,915 75,199 (64,305)(u) 1,917,809
--------- ---------- ------------ ------- ---------- ---------- -------- ----------
Net income (loss) $3,164,081 $1,152,963 $(1,224,599) $18,840 $3,111,285 $ 112,796 $(95,025) $3,129,056
========= ========== ============= ======= ========== =========== ======== ==========
Net income (loss)
per share $ 0.23 $ 0.21 $ 0.20
========= ========== =====
Weighted average
number of common
shares outstanding 13,939,114 14,994,059 15,716,747
========== ========== ==========
</TABLE>
See accompanying notes to pro forma consolidated financial information.
<PAGE>
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
Through December 2, 1997 and during 1996 the Company, through its wholly
owned subsidiaries, acquired certain operating assets and assumed certain
operating liabilities of seven physician groups located in Alabama, Florida,
Kentucky, Pennsylvania and Texas. In addition to physician practices, the
Company, through its wholly owned subsidiary, acquired all of the outstanding
stock of Health Plans, Inc. ("HPI") which provides capitation management
services through risk contracting with third-party payors.
Physician Groups Revenue, Net
Physician groups revenue represents the revenue of the affiliated physician
groups reported at the estimated realizable amounts from patients, third-party
payors, and others for services rendered, net of contractual and other
adjustments.
Management Fee Revenue
Management fee revenue represents physician groups revenue less amounts
retained by physician groups. The amounts retained by physician groups
(typically 85% of the physician group operating income) represent amounts paid
to the physician groups pursuant to the service agreements between the Company
and the physician groups. Under the service agreements, the Company provides
each physician group with the facilities and equipment used in its medical
practice, assumes responsibility for the management of the operations of the
practice, and employs substantially all of the non-physician personnel utilized
by the group.
The Company's management fee revenue is dependent upon the operating income
of the physician groups. Physician group operating income is defined in the
service agreements as the physician group's net medical revenue less certain
contractually agreed-upon clinic expenses, including non-physician clinic
salaries and benefits, rent, insurance, interest, and other direct clinic
expenses. The amount of the physician groups revenue retained and paid to the
physician groups primarily consists of the cost of the affiliated physicians'
services. The remaining amount of the physician group operating income
(typically 15%) and an amount equal to 100% of the clinic expenses are reflected
as management fee revenue earned by the Company.
Pro Forma Consolidated Balance Sheet
The adjustments reflected in the December 31, 1996 and September 30, 1997 pro
forma consolidated balance sheets are as follows:
The December 31, 1996 historical consolidated balance sheet includes the
combined assets, liabilities and stockholders' equity of the Company
and Western Medical Management Corp. Inc. ("Reno") at December 31,
1996. The Reno business combination was completed on March 17, 1997,
and has been accounted for as a pooling of interests.
To reflect the effects of the Offering and the conversion of all Series A
Redeemable Convertible Preferred Stock and Class B Common Stock into
Common Stock and the termination of the Company's contingent obligation
to repurchase Redeemable Common Stock that occurred simultaneous with
the Offering. The equity conversions assume that all stock was
converted using a one-for-one conversion ratio, as provided in the
Company's Certificate of Incorporation.
<PAGE>
(c) To record the assets acquired and liabilities assumed by ProMedCo in
the acquisition of the Southwest Florida Clinic Practices and IMG, Inc.
which were completed during 1997. 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 acquired only a specified portion
of the accounts receivable. The Company reviewed the specific
receivable balances and determined that their historical carrying
amount approximates their fair value.
Property and equipment, net--The Company performed an asset review and
determined that the historical carrying amount approximates fair
value.
Liabilities assumed--Given the short term nature of the liabilities
assumed, the historical carrying amount approximates their fair
value.
Intangible assets--In connection with the allocation of the purchase
price to identifiable intangible assets, the Company analyzes the
nature of each group, number of service sites and ability to
recruit additional physicians, the group's relative market
position, the length of time each group has been in existence, and
the term and enforceability of the service agreement. Because the
Company does not practice medicine, maintain patient
relationships, hire physicians, enter into employment and
non-competition agreements with the physicians, or directly
contract with payors, the intangible asset created in the purchase
allocation process is associated solely with the service agreement
with the physician group. The service agreements are for a term of
40 years and cannot be terminated by either party without cause,
consisting primarily of bankruptcy or material default.
The Company believes that there is no material value allocable to
the employment and non-competition agreements entered into between
the physician group and the individual physicians. The primary
economic beneficiary of these agreements is the physician group,
an entity that the Company does not legally control. In addition,
any damages under the agreements are paid solely to the physician
group for purposes of replacing departing physicians. Generally,
due to low expected physician turnover in the industry and the
ability of the physician group to replace departing physicians,
the Company believes there would be no significant economic loss
to either the physician group or the Company due to physician
departure. The physician groups continually recruit physicians
and, as appropriate and necessary, subsequently add qualified
physicians to the group. This manner of operations allows the
physician group to perpetuate itself as individual physicians
retire or are otherwise replaced. The Company believes that the
physician groups with which it has service agreements thus are
long-lived entities with an 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.
<PAGE>
(d) To eliminate assets not acquired and liabilities not assumed by
ProMedCo in the Prior Transactions which were completed in 1997 as
stated in the respective purchase agreements, and to eliminate the
owner's equity in connection with the purchase accounting for the
acquisitions.
(e) To record the cash paid and notes payable issued at closing in exchange
for assets acquired and liabilities assumed in connection with the
Prior Transactions which were completed during 1997.
(f) To record the assets acquired and liabilities assumed by ProMedCo in
the HPI Acquisition. This acquisition has been accounted for by the
purchase method of accounting and, accordingly, the purchase price has
been preliminary allocated to the assets acquired and liabilities
assumed based on the estimated fair values. The total consideration for
the transactions was approximately $8.5 million, which consisted of
$1.7 cash and $6.8 million of the Company's common stock and stock
options. The fair value of the net assets was determined based on an
analysis of estimated future 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.
Investments--All marketable securities are classified as available for
sale and are valued at fair value.
Property and equipment, net and other assets--The Company performed an
asset review and determined that the historical carrying amount
approximates fair value.
Intangible assets--In connection with the allocation of the purchase
price to identifiable intangible assets, the Company analyzes the
nature of each business acquired. The goodwill intangible is being
amortized on a straight-line method over 30 years.
Liabilities assumed--Given the short term nature of the liabilities
assumed, the historical carrying amount approximates their fair
value.
(g) To eliminate the stockholders' equity of HPI in connection with the
purchase accounting for the acquisition.
(h) To record the cash paid and stocks issued by the Company at closing in
exchange all of the outstanding stock of HPI.
Pro Forma Consolidated Statement of Operations
The adjustments reflected in the pro forma consolidated statement of operations
for the year ended December 31, 1996 and the nine months ended September 30,
1997 are as follows:
(i) The historical consolidated statement of operations includes the
combined results of
<PAGE>
operations of the Company and Reno for the year ended December 31, 1996
and the nine months ended September 30, 1997. The Reno business
combination was completed on March 17, 1997, and has been accounted for
as a pooling of interests.
The Prior 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 Prior Transactions
include Cullman Family Practice, P.C., Family Medical Clinic, P.C.,
Morgan-Haugh, P.S.C., HealthFirst Services, Inc., Tarrant Family
Practice, P.A., King's Daughters Clinic, P.A., which were acquired in
1996 and Abilene Diagnostic Clinic, P.L.L.C., Naples Medical Center,
P.A., Naples Obstetrics & Gynecology, M.D., P.A., and IMG, Inc. which
were acquired in 1997.
(k) To eliminate the historical amounts retained by physician groups,
physician benefits, other physician-related costs and to record the
amounts retained by physician groups to the percentage specified in the
service agreement (typically 85% of each of the physician group's
operating income) for each affiliated physician group in the Prior
Transactions and Reno. The adjustment is for the periods that the
physician groups were not managed under the service agreements.
(l) To eliminate the salaries of physician extenders at historical levels
in the Prior Transactions for the periods not covered by the service
agreements. The service agreements provide that these costs are for the
account of the physician groups. The adjustment is for the periods the
physician groups were not managed under the service agreements.
(m) To record additional rental expense related to the rental of clinic
space from the physician groups in the Prior Transactions. The
adjustment is for the periods the physician groups were not managed
under the service agreements.
(n) To eliminate the depreciation and amortization expense recorded by the
physician groups in the Prior Transactions at historical values. The
adjustment is for the periods the physician groups were not managed
under the service agreements.
(o) To adjust depreciation expense and amortization expense in the Prior
Transactions. The adjustment for depreciation expense is computed by
dividing total fixed assets acquired by the weighted average life of
the fixed assets acquired (approximately seven years), less
depreciation expense recorded on an historical basis. The adjustment
for amortization expense is computed by dividing total service
agreement rights acquired by a composite average life of 30 years, less
agreement amortization expense recorded on an historical basis. The
adjustments assume the acquired assets were held for the entire period
presented.
(p) To eliminate interest expense related to liabilities not assumed in
connection with the Prior Transactions and record interest on debt
issued in connection with the acquisitions.
(q) To record an estimate of the overall provision for income taxes for the
consolidated operations of the historical results of the Company plus
the Prior Transactions, as adjusted, at an estimated effective rate of
38%.
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(r) To reduce interest expense assuming repayment of the Company's Credit
Facility borrowings with a portion of the proceeds of the Offering
received by the Company as of January 1, 1996, net of estimated federal
and state income taxes at a combined rate of 38%.
The HPI Acquisition represents the historical combined revenues and
expenses of the Health Plans, Inc.
(t) To adjust amortization expense. The adjustment for amortization expense
is computed by dividing total goodwill acquired by thirty years, less
goodwill amortization recorded on an historical basis.
(u) To record an estimate of the provision for income taxes for the HPI
Acquisition at an estimated rate of 38%.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ProMedCo Management Company
By: /s/ Robert D. Smith
Robert D. Smith
Chief Accounting Officer
Date: February 17, 1998
