- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
1934
For the transition period from to
Commission file number 0-21373
ProMedCo Management Company
(Exact name of Registrant as specified in its charter)
Delaware 75-2529809
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
801 Cherry Street, Suite 1450
Fort Worth, Texas 76102
(Address of principal executive offices) (Zip Code)
(817) 335-5035
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES ( X ) NO ( )
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock October 31, 1998
$.01 par value 21,139,889 shares
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
<PAGE>
PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
No.
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
September 30, 1998 and December 31, 1997 2
Condensed Consolidated Statements of Operations
Three Months and Nine Months Ended September 30, 1998 and 1997 3
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1998 and 1997 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
</TABLE>
<PAGE>
PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 1998 December 31,
(Unaudited) 1997
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 12,831,532 $ 15,760,920
Accounts receivable, net 42,552,847 22,463,689
Management fees receivable 9,281,616 1,938,464
Due from affiliated physician groups 2,408,138 2,870,607
Deferred income tax asset 370,200 -
Prepaid expenses and other current assets 10,195,339 6,917,675
------------------ ------------------
Total current assets 77,639,672 49,951,355
------------------ ------------------
Property and equipment, net 15,023,426 10,590,561
Intangible assets, net 127,351,385 77,195,351
Long-term receivables 25,188,639 23,915,884
Long-term receivable from related party 2,000,000 -
Other assets 1,672,526 1,312,999
------------------ ------------------
Total assets $ 248,875,648 $ 162,966,150
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,660,944 $ 3,185,208
Payable to affiliated physician groups 6,799,285 6,562,903
Accrued salaries, wages and benefits 4,326,368 2,895,023
Accrued expenses and other current liabilities 9,674,991 6,014,729
Deferred income tax liability - 174,101
Current maturities of notes payable 3,275,951 3,676,365
Current portion of obligations under capital leases 561,060 609,591
Current portion of deferred purchase price 5,837,891 5,265,713
Income taxes payable 1,139,999 1,051,050
------------------ ------------------
Total current liabilities 37,276,489 29,434,683
------------------ ------------------
Notes payable, net of current maturities 23,976,767 39,688,325
Obligations under capital leases, net of current portion 847,460 1,073,886
Deferred purchase price, net of current portion 7,504,226 7,318,526
Convertible subordinated notes payable 8,702,075 1,765,058
Deferred income tax liability 762,687 1,103,876
Other long-term liabilities 211,613 1,963,059
------------------ ------------------
Total liabilities 79,281,317 82,347,413
------------------ ------------------
Stockholders' equity:
Common stock 208,950 106,868
Additional paid-in capital 151,562,469 58,946,838
Common stock to be issued 7,238,360 20,121,059
Stockholder notes receivable (369,665) (369,665)
Retained earnings 10,954,217 1,813,637
------------------ ------------------
Total stockholders' equity 169,594,331 80,618,737
------------------ ------------------
Total liabilities and stockholders' equity $ 248,875,648 $ 162,966,150
================== ==================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Physician groups revenue, net $ 81,253,975 $ 29,302,573 $ 215,495,583 $ 75,760,198
Less: amounts retained by physician groups 20,157,298 11,496,972 61,792,641 31,037,320
-------------- --------------- --------------- ---------------
Management fee revenue 61,096,677 17,805,601 153,702,942 44,722,878
-------------- --------------- --------------- ---------------
Operating expenses:
Clinic salaries and benefits 19,333,680 6,795,818 50,388,950 17,362,170
Clinic rent and lease expense 4,528,776 1,620,677 11,589,789 4,129,602
Clinic supplies 6,598,383 2,034,422 17,792,959 5,510,504
Purchased medical services 14,813,087 725,486 33,601,088 2,191,535
Other clinic costs 6,649,411 2,100,817 16,607,802 6,033,783
General corporate expenses 1,232,954 1,113,978 3,607,592 2,756,283
Depreciation and amortization 2,074,654 923,093 5,117,919 1,961,520
Interest (income) expense (47,912) 110,468 253,998 227,565
--------------- --------------- --------------- ---------------
55,183,033 15,424,759 138,960,097 40,172,962
-------------- --------------- --------------- ---------------
Income before provision for income taxes 5,913,644 2,380,842 14,742,845 4,549,916
Provision for income taxes 2,247,168 778,494 5,602,265 1,385,835
-------------- --------------- --------------- ---------------
Net income $ 3,666,476 $ 1,602,348 $ 9,140,580 $ 3,164,081
============== =============== =============== ===============
Net earnings per share:
Basic $ 0.17 $ 0.13 $ 0.52 $ 0.29
============== =============== =============== ===============
Diluted $ 0.16 $ 0.11 $ 0.45 $ 0.23
============== =============== =============== ===============
Weighted average number of common shares outstanding:
Basic 21,450,466 12,042,769 17,661,950 10,914,613
============== =============== =============== ===============
Diluted 23,539,875 15,260,449 20,445,620 13,927,376
============== =============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net income $ 9,140,580 $ 3,164,081
Adjustments to reconcile net income to net cash provided by (used in)
operating activities (net of effects of purchase transactions):
Depreciation and amortization 5,117,919 1,961,520
Provision for deferred income taxes 1,115,510 109,046
Changes in assets and liabilities:
Accounts receivable (11,360,149) (2,105,236)
Management fees receivable (5,994,131) (726,767)
Due from affiliated physician groups 462,469 (1,570,472)
Other assets (2,351,653) (2,919,524)
Accounts payable (2,475,080) (231,608)
Payable to physician groups 236,382 2,254,912
Accrued expenses and other liabilities (1,372,498) 1,182,926
------------------- ------------------
Net cash provided by (used in) operating activities (7,480,651) 1,118,878
------------------- ------------------
Cash flows from investing activities:
Purchases of property and equipment (2,987,379) (1,451,354)
Purchases of clinic assets, net of cash (46,122,584) (14,010,972)
Issuance of long term receivables (2,792,324) (600,000)
------------------- ------------------
Net cash used in investing activities (51,902,287) (16,062,326)
------------------- -------------------
Cash flows from financing activities:
Borrowings under long-term debt 47,320,236 2,076,242
Payments on long-term debt (63,470,182) (2,640,048)
Payments on capital lease obligations (336,785) (736,015)
Proceeds from issuance of common stock, net 72,940,281 32,308,489
Purchase and retirement of treasury stock - (382,082)
Issuance of stockholder notes receivable - (218,359)
------------------ -------------------
Net cash provided by financing activities 56,453,550 30,408,227
------------------ ------------------
(Decrease) Increase in cash and cash equivalents (2,929,388) 15,464,779
Cash and cash equivalents, beginning of period 15,760,920 1,633,534
------------------ ------------------
Cash and cash equivalents, end of period $ 12,831,532 $ 17,098,313
================== ==================
Supplemental disclosure of cash flow information
Cash paid during the period for -
Interest expense $ 2,007,963 $ 528,436
Income taxes $ 3,940,971 $ 551,440
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
5
PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation/Principles of Consolidation
The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission ("SEC"). Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such SEC rules and regulations. Management believes that the
disclosures herein are adequate to prevent the information presented from being
misleading. The foregoing financial information, not audited by independent
public accountants, reflects, in the opinion of the Company, all adjustments
(which included only normal recurring adjustments) necessary for a fair
presentation of the financial position and the results of operations for the
interim periods presented. The results of operations for any interim period are
not necessarily indicative of the results of the operations for the entire year.
It is suggested that these condensed consolidated financial statements be read
in conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
Certain prior period amounts have been reclassified to conform with the 1998
presentation.
In March 1997, the Company completed its merger with Western Medical Management
Corp., Inc. ("Reno"), a physician management company. This transaction has been
accounted for as a pooling of interests, as defined by APB No. 16, "Business
Combinations." The accompanying financial statements are based on the assumption
that the companies were combined for the full periods presented and prior
financial statements have been restated to give effect to the combination.
Earnings Per Share
Basic earnings per share ("EPS") is calculated by dividing income available to
common stockholders by the weighted average number of common shares outstanding
during the period. Common stock to be issued is assumed to be common stock
outstanding and is included in the weighted average number of common shares
outstanding for the basic EPS calculation. Diluted EPS includes the options,
warrants, and other potentially dilutive securities that are excluded from basic
EPS using the treasury method to the extent that these securities are not
anti-dilutive.
Management Fee Revenue
Management fee revenue represents physician groups revenue less amounts retained
by physician groups. The amounts retained by physician groups (80-85% of the
physician groups' operating income) represents amounts paid to the physicians
pursuant to the service agreements between the Company and the physician groups.
Under the service agreements, the Company provides each physician group with the
facilities and equipment used in its medical practice, assumes responsibility
for the management of the operations of the practice, and employs substantially
all of the non-physician personnel utilized by the group.
<PAGE>
The Company's management fee revenues are dependent upon the operating income of
the physician groups. As discussed previously, the physician groups retain a
fixed percentage (typically 80-85%) of physician group operating income.
Physician group operating income is defined in the service agreements as the
physician group's net medical revenue less certain contractually agreed-upon
clinic expenses, including non-physician clinic salaries and benefits, rent,
insurance, interest and other direct clinic expenses. The amount of the
physician groups revenue retained and paid to the physician group primarily
consists of the cost of the affiliated services. The remaining amount of the
physician groups operating income (typically 15-20%) and an amount equal to 100%
of the clinic expenses are reflected as management fee revenue earned by the
Company. Other revenue represents fees from management consulting, supplemental
implementation services and other miscellaneous revenues:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Component based upon physician
groups operating income $ 7,150,341 $ 2,028,877 $ 17,805,087 $ 5,477,174
Reimbursement of clinic expenses 52,921,336 13,736,724 131,847,855 36,405,704
Other revenue 1,025,000 2,040,000 4,050,000 2,840,000
-------------- --------------- --------------- ---------------
Management fee revenue $ 61,096,677 $ 17,805,601 $ 153,702,942 $ 44,722,878
============== =============== =============== ===============
</TABLE>
2. ACQUISITIONS:
Through September 30, 1998 and during 1997, the Company, through its wholly
owned subsidiaries, acquired certain operating assets of the following medical
clinics:
<TABLE>
<CAPTION>
Physician Group Effective Date Location
<S> <C> <C> <C>
1998: Berkshire Physicians & Surgeons April 1, 1998 (a) Pittsfield, MA
Primary Medical Clinics May 1, 1998 Midland, TX
Prime Medical Associates June 1, 1998 Hudson, NY
Physicians' Primary Care July 1, 1998 Ft. Myers, FL
Medical Associates of Pinellas November 1, 1998 (b) Clearwater, FL
1997: Naples Medical Center March 1, 1997 Naples, FL
Abilene Diagnostic Clinic June 1, 1997 (c) Abilene, TX
Intercoastal Medical Group August 1, 1997 Sarasota, FL
Beacon Medical Group October 1, 1997 (d) Harrisburg, PA
Cowley Medical Associates (e) November 1, 1997 Harrisburg, PA
Thomas-Spann Clinic December 1, 1997 Corpus Christi, TX
HealthStar, Inc. December 1, 1997 Knoxville, TN
</TABLE>
(a) Berkshire Physicians and Surgeons was operated by the Company under an
interim service agreement effective February 1, 1998. The Company completed
its acquisition in April 1998, and entered into a long-term service
agreement with the physician group effective April 1, 1998.
<PAGE>
(b) Medical Associates of Pinellas was operated by the Company under an interim
service agreement effective May 1, 1998. The Company completed its
acquisition in October 1998 and entered into a long-term service agreement
with the physician group effective November 1, 1998.
(c) 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.
(d) Beacon Medical Group was operated by the Company under an interim service
agreement effective April 1, 1997. The Company completed its acquisition of
certain operating assets on October 1, 1997, and entered into a long-term
service agreement with the physician group effective on that date.
(e) The physicians of Cowley Medical Associates joined the Beacon Medical Group
in December 1997.
These acquisitions were accounted for as purchases, and the accompanying
condensed consolidated financial statements include the results of their
operations from the dates of their respective acquisitions. Purchase price
allocations to tangible assets acquired and liabilities assumed are based on the
estimated fair values at the dates of acquisitions and are subject to final
revisions. Simultaneous with each acquisition, the Company entered into a
long-term service agreement with the related physician group. The service
agreements are 40 years in length.
In addition to the medical clinics acquired, the Company completed its
acquisition of Health Plans, Inc. in December 1997 and renamed the company PMC
Medical Management, Inc. ("PMC"). PMC provides a full range of managed care
services to capitated providers, including clinical quality assessment,
credentialing, claims processing and payment, referral and utilization
management, and case management.
<PAGE>
The following unaudited pro forma information reflects the effect of
acquisitions of medical clinics and PMC on the consolidated results of
operations of the Company assuming that the acquisitions occurred at January 1,
1997. In addition, the following unaudited pro forma information also includes
an adjustment to reflect the Company's change in its estimate with respect to
the estimated life of its service agreement rights intangible assets from 30 to
25 years (see Note 8). Future results may differ substantially from pro forma
results and cannot be considered indicative of future results.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
<S> <C> <C> <C> <C>
1998 1997 1998 1997
Physician groups revenue, net $ 84,216,863 $ 55,457,865 $ 234,127,086 $ 164,254,983
Less: amounts retained by
physician groups 21,727,296 16,848,460 67,263,156 52,505,750
-------------- --------------- --------------- --------------
Management fee revenue $ 62,489,566 $ 38,609,405 $ 166,863,930 $ 111,749,233
============== =============== =============== ==============
Net income $ 3,664,486 $ 1,569,045 $ 9,126,354 $ 3,651,986
============== =============== =============== ==============
Net earnings per share
Basic $ 0.17 $ 0.13 $ 0.51 $ 0.32
============== =============== =============== ==============
Diluted $ 0.16 $ 0.10 $ 0.45 $ 0.26
============== =============== =============== ==============
Weighted average number of common
shares outstanding
Basic 21,450,466 12,460,751 17,832,049 11,332,595
============== =============== =============== ==============
Diluted 23,539,875 15,283,994 20,462,300 13,950,921
============== =============== =============== ==============
</TABLE>
3. LONG-TERM RECEIVABLES:
During 1997, the Company entered into an agreement to lend up to $42.7 million
to an affiliated physician group. The purpose of this loan was to provide the
physician group with liquidity to meet certain obligations, general association
purposes and to strengthen the physician-association relationships. The loan is
secured by certain assets of the association, including the notes receivable by
the association from the individual physicians. In addition, the Company
maintains a first lien on distributions to the physician group under its service
agreement with the association. Four remaining advances of $5.8 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. As of September 30,
1998, the outstanding loan totaled $19.4 million.
In August 1998, the Company signed a promissory note to loan an affiliated
physician group up to $1.9 million. The principal plus accrued interest of 8.5%
is due on May 30, 1999. As of September 30, 1998, the Company had loaned the
physician group $790,380 under this agreement. The Company maintains a first
lien on distributions to the physician group under its service agreement with
the association.
<PAGE>
4. LONG-TERM RECEIVABLE FROM RELATED PARTY:
In August 1998, the Company loaned an officer of the Company $2,000,000.
Beginning in August 2003, the loan will be repaid in annual installments of
$200,000 plus accrued interest of 7.0% with the remaining balance due in August
2008. This loan is secured by a pledge of warrants for shares of the Company's
common stock.
5. LONG-TERM DEBT:
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
<S> <C> <C>
Borrowings under bank credit facility $ 20,175,984 $ 32,968,000
Notes payable issued to physician groups 6,958,870 10,220,775
Other long-term debt 117,864 175,915
------------------ ------------------
27,252,718 43,364,690
Less current maturities (3,275,951) (3,676,365)
------------------- -------------------
Long-term debt, net of current maturities $ 23,976,767 $ 39,688,325
================== ==================
</TABLE>
In connection with the affiliation with Berkshire Physicians & Surgeons in
Pittsfield, MA, the Company issued convertible subordinated notes totaling $7.6
million. The notes accrue interest at the rate of 4.75% paid annually on March
31 and can be converted into shares of the Company's common stock any time after
April 17, 1999 and prior to March 31, 2005 at a conversion price of $15.35,
subject to adjustment under the note agreements.
6. SUPPLEMENTAL CASH FLOW INFORMATION:
In March 1998, an officer of the Company surrendered 43,693 warrants in full
payment of a $600,000 outstanding note balance and $30,875 of accrued interest
receivable.
In March and April 1998, the Company converted $359,991 and $324,774 of
convertible subordinated notes payable to a physician group into 39,999 and
36,094 shares of the Company's common stock, respectively.
<PAGE>
7. SUPPLEMENTAL NET EARNINGS PER SHARE DATA:
In May 1998, the Company completed a public offering of 6,900,000 shares of
common stock at a price of $11.00 per share, and in March 1997 the Company sold
4,000,000 shares of common stock at a price of $9.00 in a public offering
(collectively the "Offerings"). The unaudited supplemental earnings per share
data has been calculated assuming the Offerings occurred as of the beginning of
each respective period.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Supplemental net earnings per share
Basic $ 0.17 $ 0.08 $ 0.44 $ 0.17
============= ============= ============= =============
Diluted $ 0.16 $ 0.07 $ 0.38 $ 0.14
============= ============= ============= =============
Supplemental weighted average number of common shares
outstanding
Basic 21,450,466 18,942,769 21,005,906 18,869,558
============= ============= ============= =============
Diluted 23,539,875 22,160,449 23,789,576 21,882,321
============= ============= ============= =============
</TABLE>
8. CHANGE IN ACCOUNTING ESTIMATE:
Effective July 1, 1998, the Company changed its estimate with respect to the
estimated life of its service agreement rights intangible assets. All existing
and future service agreement rights intangible assets will be amortized over a
period not to exceed 25 years from the inception of the respective service
agreements. Had the Company adopted this policy at the beginning of 1997,
amortization expense would have increased and diluted earnings per share would
have decreased by approximately $187,000 and $0.01, respectively in the third
quarter of 1997 and $404,000 and $0.02, respectively in the first nine months of
1997. On the same basis, amortization expense for the first nine months of 1998
would have increased by approximately $480,000 resulting in a decrease in
diluted earning per share of $0.02.
<PAGE>
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
ProMedCo Management Company, ("ProMedCo" or the "Company") a Delaware
corporation, is a physician practice management company that consolidates its
affiliated physician groups into primary-care-driven multi-specialty networks.
ProMedCo commenced operations in December 1994 and affiliated with its initial
physician group in June 1995. The Company's rapid growth since June 1995 has
resulted primarily from its affiliation with additional physician groups. The
Company currently is affiliated with multi-specialty physician groups in 13
states, comprised of 606 physicians and 130 mid-level providers (primarily
physician assistants and nurse practitioners), and is associated with 580
physicians in independent practice association ("IPA") networks. The Company
also provides a full range of managed care services to capitated providers,
including clinical quality assessment, credentialing, claims processing and
payment, referral and utilization management, and case management. The Company
is currently providing such services to the Company's associated IPAs and to
those of its affiliated groups that have entered into capitation arrangements,
together covering approximately 100,000 managed care capitated lives.
When affiliating with a physician group, the Company generally acquires at fair
market value the group's non-real estate operating assets and enters into a
40-year service agreement with the group in exchange for a combination of common
stock, cash, other securities of the Company, and/or the assumption of certain
liabilities. Under the service agreement, the Company receives a fixed
percentage (typically 15-20%) of the physician groups' operating income (as
defined) and shares between 25% and 50% of the group's surplus or deficit under
risk-sharing arrangements pursuant to capitated managed care contracts. Although
the group's physicians retain full control over the practice of medicine,
ProMedCo manages all day-to-day operations other than the provision of medical
services. The Company is continually seeking additional physician groups with
which to affiliate and is currently engaged in negotiations with several such
groups.
ProMedCo focuses on pre-managed care secondary markets located principally
outside of or adjacent to large metropolitan areas. The key elements of the
Company's strategy are to (i) continue to penetrate pre-managed-care markets;
(ii) affiliate with primary-care-oriented multi-specialty groups; (iii) expand
its affiliated groups' market presence through the addition of physicians and
selected ancillary services; (iv) optimize managed care opportunities for its
groups; and (v) align the Company's economic interests with those of its
physician partners.
Results of Operations
The Company commenced operations in December 1994 and affiliated with its first
physician group in June 1995 and its second group in December 1995. The Company
entered into affiliations with five additional groups in 1996, seven additional
groups during 1997, and six additional groups in the first nine months of 1998.
Changes in results of operations were caused primarily by affiliations with
these additional physician groups.
<PAGE>
The following table sets forth the percentages of physician groups revenue
represented by certain items reflected in the Company's condensed consolidated
statements of operations.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Physician groups revenue, net 100.0% 100.0% 100.0% 100.0%
Less: amounts retained by physician groups 24.8 39.2 28.7 41.0
------- ------ ------ ------
Management fee revenue 75.2 60.8 71.3 59.0
------- ------ ------ ------
Operating expenses:
Clinic salaries and benefits 23.8 23.2 23.3 22.8
Clinic rent and lease expense 5.6 5.5 5.4 5.5
Clinic supplies 8.1 6.9 8.3 7.3
Purchased medical services 18.2 2.5 15.6 2.9
Other clinic costs 8.2 7.1 7.7 8.0
General corporate expenses 1.5 3.8 1.7 3.6
Depreciation and amortization 2.6 3.2 2.4 2.6
Interest expense (income) (0.1) 0.4 0.1 0.3
------- ------ ------ ------
67.9 52.6 64.5 53.0
------- ------ ------ ------
Income before provision for income taxes 7.3 8.1 6.8 6.0
Provision for income taxes 2.8 2.6 2.6 1.8
------- ------ ------ ------
Net income 4.5% 5.5% 4.2% 4.2%
======= ====== ====== ======
</TABLE>
Physician groups revenue increased by 177% to $81.3 million for the quarter
ended September 30, 1998, from $29.3 million for the quarter ended September 30,
1997. For the nine months ended September 30, 1998, physician groups revenue
increase by 184% to $215.5 million from $75.8 million for the nine months ended
September 30, 1997. Approximately 76% of the growth in physician groups revenue
for the nine months ended September 30, 1998 is attributable to new affiliations
since September 30, 1997, with the balance coming from increases in revenues
from affiliated physician groups in place prior to September 30, 1997.
One of the more significant impacts to the Company's business has been an
increase in revenues from capitation contracts with HMOs. While virtually
non-existent in early 1997, these revenues account for approximately 20% of the
Company's physician groups revenue. This increase in capitation affects certain
other income statement items quite significantly. Purchased medical services has
increased to 18.2% of physician groups revenue for the quarter ended September
30, 1998 from 2.5% for the same period a year ago. This is directly attributable
to the increase in capitation, which requires the procurement of medical
services not provided by the local affiliated physician group. Offsetting this
increase is a related decrease in amount retained by physicians. Since
capitation generates more aggregate dollars to affiliated physician groups, but
less as a percentage of physician groups revenue, the amount retained by
physicians will be lower as a percentage of physician groups revenue than under
the ordinary fee-for-service model.
<PAGE>
General corporate expenses as a percentage of physician groups revenue declined
to 1.5% for the quarter ended September 30, 1998, compared to 3.8% for the
quarter ended September 30, 1997. For the nine months ended September 30, 1998,
general corporate expenses as a percentage of physician groups revenue declined
to 1.7% compared to 3.6% for the nine months ended September 30, 1997. While
these costs declined as a percentage of physician groups revenue, the amount of
general corporate expenses increased to $1.2 million for the quarter ended
September 30, 1998 from $1.1 million for the quarter ended September 30, 1997,
and increased to $3.6 million for the nine months ended September 30, 1998 from
$2.8 million for the nine months ended September 30, 1997. This increase in
expenses was expected as the Company continues to add management and technology
infrastructure.
Depreciation and amortization, as a percentage of physician groups revenue,
decreased to 2.6% for the quarter ended September 30, 1998, compared to 3.2% for
the quarter ended September 30, 1997. For the nine months ended September 30,
1998, depreciation and amortization as a percentage of physician groups revenue
decreased to 2.4% compared to 2.6% for the nine months ended September 30, 1997.
This decrease is attributable to differences in the mix of assets acquired in
the various affiliations that have occurred over the past year. Effective July
1, 1998, the Company changed its estimate with respect to the estimated life of
its service agreement rights intangible assets. All existing and future service
agreement rights intangible assets will be amortized over a period not to exceed
25 years from the inception of the respective service agreements.
Net interest expense (income) as a percentage of physician groups revenue
decreased to (0.1)% for the quarter ended September 30, 1998, compared to 0.4%
for the quarter ended September 30, 1997. For the nine months ended September
30, 1998, net interest expense as a percentage of physician groups revenue
decreased to 0.1% from 0.3% for the nine months ended September 30, 1997. This
decrease is related to interest income from a loan receivable from an affiliated
physician group and the investment of unused proceeds from the Company's public
offering of its common stock (the "Offering"), effective May 8, 1998. The
increase in interest income was offset by an increase in long-term debt during
the period prior to the Offering relating to the affiliation with additional
physician groups.
Provision for income taxes reflects an effective rate of 38%, the Company's
estimated effective rate for all of 1998.
<PAGE>
Year 2000
The Company is aware of issues associated with the programming code in existing
computer systems as the year 2000 approaches. The "Year 2000" problem is
pervasive and complex, as virtually every computer operation will be affected in
the same way by the rollover of the two digit year value to 00. The issue is
whether computer systems will properly recognize date sensitive information when
the year changes to 2000. Systems that do not properly recognize such
information could generate erroneous data or cause a system to fall.
The Company continues to assess the impact of the Year 2000 issue on its
information systems and operations using both internal and external resources.
The Company divides the software into three broad categories: financial
(including general ledger, accounts payable, fixed assets, purchasing and
inventory control), practice management (including billing and accounts
receivable) and managed care. The Company is in the process of installing a new,
common financial software package at all locations that is certified Year 2000
compliant. Since the implementation of the financial software is part of the
Company's ongoing development of its technology infrastructure, there are no
incremental costs resulting from the Year 2000 issue. The Company's philosophy
with respect to practice management systems is to utilize the legacy system in
place as long as it can capably serve the physicians' needs. With disparate
practice management systems in place at the Company's various affiliated groups,
the Year 2000 assessment process continues with each new affiliation. Inadequate
or noncompliant practice management systems could be acquired in a new
affiliation, which would require system remediation or replacement. Given these
issues, the Company is currently unable to estimate the costs of the remediation
or replacements that may be required. With its current strategy of replacing
inadequate practice management systems, however, the Company does not believe
that Year 2000 issues will cause a conversion of one or more of its practice
management systems to be more or less difficult than a typical system
conversion. The Company's primary managed care technology resides at its risk
management subsidiary, PMC Medical Management ("PMC"). PMC is currently
upgrading its systems to be Year 2000 compliant. This process is expected to be
completed in the first quarter of 1999 and the costs are not currently estimated
to be material.
The Company is also in the process of gathering information about the year 2000
compliance status of its significant suppliers and vendors. The inability of
suppliers and vendors to complete their Year 2000 resolution process in a timely
fashion could materially impact the Company. The potential effect on the Company
of non-compliance by suppliers and vendors has not yet been determined
Management of the Company believes it has an effective program in place to
resolve the Year 2000 issue in a timely manner. In the event that the Company
does not complete any additional phases, the Company's ability to record revenue
or process collections in a timely fashion would be adversely impacted after
January 1, 2000. In addition, disruptions in the general economy due to the Year
2000 problem could also materially adversely affect the Company.
The Company currently has no contingency plans in place in the event it does not
complete all phases of its Year 2000 program. The Company plans to evaluate the
status of its efforts in June 1999 to determine whether such a plan is
necessary.
<PAGE>
Liquidity and Capital Resources
At September 30, 1998, the Company had working capital of $40.4 million,
compared to $20.5 million at December 31, 1997. Cash used in operations for the
nine months ended September 30, 1998 was $7.5 million. This is primarily
attributable to an overall increase in accounts receivable resulting, in part,
from the Company's growth in revenues, but more significantly from a "ramp up"
in accounts receivable of approximately $6.3 million at the Company's largest
affiliate. The structure of this transaction, which was completed in November
1997, did not include acquisition of the group's accounts receivable. Net
accounts receivable of $42.6 million at September 30, 1998 amounted to 48 days
of net physician groups revenue (excluding other revenues) for the third quarter
of 1998, compared to 47 days for the second quarter of 1998. This slight rise in
days outstanding can be attributed to upgrading the practice management systems
at certain locations during the third quarter. During the implementation phase,
accounts receivable will temporarily increase and then return to normal the
following quarter. During the third quarter the Company made a $1.5 million
retirement plan contribution relating to a 1998 affiliation. This liability was
assumed as part of the transaction and was recorded in purchase accounting. Net
income combined with depreciation and amortization, deferred taxes, a decrease
in due from affiliated physician groups and an increase in payable to physician
groups to provide $16.1 million in cash flows. This was offset by uses of cash
of $23.6 million resulting from increases in accounts receivable, management
fees receivable, other assets and decreases in accounts payable and accrued
expenses and other liabilities.
The Company had aggregate cash expenditures for purchases of clinic assets of
$46.1 million for the nine months ended September 30, 1998. Of this,
approximately $18.4 million relates to the Berkshire affiliation in Pittsfield,
MA, $18.2 million relates to new affiliations completed in 1998, and the
remaining amounts relate primarily to deferred payments associated with
previously completed acquisitions. The Company has commitments to spend
approximately $35.3 million in total consideration for new affiliations that are
currently under letters of intent. Capital expenditures amounted to $3.0 million
for the nine months ended September 30, 1998.
In November 1998, the Company authorized the adoption of a common stock
repurchase program whereby the Company may repurchase up to $10 million of its
common stock, from time to time, in the open market and in privately negotiated
transactions on terms and conditions acceptable to the Company.
<PAGE>
In April 1998, the Company completed an expansion of its Credit Facility from
$50 million to $70 million. The Credit Facility provides for working capital and
acquisition financing, subject to certain restrictions. The interest rate is, at
the Company's option, either the adjusted 30-day commercial paper rate, one
month LIBOR plus 2.31% to 3.25%, or the bank's prime rate plus 0.25% to 1.13%,
depending on certain debt levels. The Credit Facility, which expires January 2,
2004, contains certain restrictive covenants, including prohibitions on paying
dividends, limitations on capital expenditures and maintenance of minimum net
worth and certain financial ratios. At September 30, 1998, outstanding
borrowings against the Credit Facility were $20.2 million and the current
effective interest rate was 7.90%.
The Company is in the final stages of establishing a new, subsequently expanded,
senior credit facility. This new facility, will replace the existing senior
credit facility and will be used to refinance existing senior debt, finance new
physician group affiliations, expand existing physician groups and for general
corporate purposes.
In connection with the affiliation with Berkshire Physicians & Surgeons in
Pittsfield, MA, the Company issued convertible subordinated notes totaling $7.6
million. The notes accrue interest at the rate of 4.75% paid annually on March
31 and can be converted into shares of the Company's common stock any time after
April 17, 1999 and prior to March 31, 2005 at a conversion price of $15.35,
subject to adjustment under the note agreements. In addition to the convertible
subordinated notes, the Company signed a promissory note to loan the physician
group up to $1.9 million in August 1998. The principal on this promissory note
plus accrued interest of 8.5% is due on May 30, 1999. As of September 30, 1998,
the Company had loaned the physician group $790,380 under this agreement.
In May 1998, the Company completed a public offering of 6,900,000 shares of its
common stock at a price of $11.00 per share. Proceeds of $71.9 million, net of
underwriters' discount and expenses of the offering were used primarily to pay
down outstanding borrowings under the Credit Facility.
The Company had cash and cash equivalents of $12.8 million at September 30,
1998. In addition to this, the Company's principal sources of liquidity are
accounts receivable of $42.6 million at September 30, 1998 and availability
under the working capital portion of the bank line of credit of $10 million. The
Company believes that the combination of these sources will be sufficient to
meet the Company's working capital needs for the next twelve months. The
Company's future acquisition, expansion and capital expenditure programs will
require substantial amounts of capital resources. To meet the capital needs of
these programs, the Company will continue to evaluate alternative sources of
financing, including short- and long-term bank indebtedness, additional equity
and other forms of financing, the availability and terms of which will depend
upon market and other conditions. There can be no assurance that additional
financing will be available on terms acceptable to the Company.
<PAGE>
Forward-Looking Statements
This report includes certain forward-looking statements about anticipated
results, including statements as to operating results, liquidity and capital
resources, and negotiations with and acquisitions of additional physician
groups. Such forward-looking statements are based upon internal estimates which
are subject to change because they reflect preliminary information and
management assumptions, and a variety of factors could cause the Company's
actual results and experience to differ materially from the anticipated results
or other expectations expressed in the forward-looking statements. The factors
which could cause actual results or outcomes to differ from such expectations
include the extent of the Company's success in (i) consummating affiliations
with additional physician groups; (ii) negotiating managed care contracts and
managing the medical risk assumed thereunder, (iii) obtaining additional
financing upon terms acceptable to the Company, and (iv) negotiating favorable
reimbursement rates with third-party payors, along with the uncertainties and
other factors described herein and in the Company's public filings and reports.
<PAGE>
Item 2. Changes in Securities and Use of Proceeds
In July and August 1998, the Company issued 57,098 shares of Common Stock to two
physician groups in connection with their affiliations with the Company. As of
September 30, 1998, the Company had commitments to issue an aggregate of 627,780
shares of Common Stock to physician groups and their stockholders in connection
with its affiliations with five physician groups between November 1997 and
August 1998. Of the 627,780 shares of Common Stock to be issued to physician
groups, the Company expects to issue 233,343 shares in the fourth quarter of
1998 and 394,437 shares in the first quarter of 1999. Each of such issuances was
or will be exempt from registration under the Securities Act, pursuant to
section 4(2) of the Act as they did not involve any public offering.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
11 Computation of Per Share Earnings
27 Financial Data Schedule
(b) Reports on Form 8-K
On May 1, 1998, the Company filed a report on Form 8-K
reporting an affiliation with a physician group in Berkshire,
Massachusetts, pursuant to Item 2. of Form 8-K.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ H. WAYNE POSEY
H. Wayne Posey President, Chief Executive November 16, 1998
Officer, and Director
(Chief Executive Officer)
/s/ ROBERT D. SMITH
Robert D. Smith Senior Vice President and November 16, 1998
Chief Financial Officer
(Chief Accounting Officer)
</TABLE>
PROMEDCO MANAGEMENT COMPANY
EXHIBIT 11
Computation of Per Share Earnings
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
BASIC
Weighted average shares outstanding 20,806,408 10,063,095 17,001,933 8,934,939
Contingently issuable shares in
business combinations 644,058 1,979,674 660,017 1,979,674
------------- ------------- ------------- ----------------
Number of common shares outstanding 21,450,466 12,042,769 17,661,950 10,914,613
============= ============= ============= ================
DILUTED
Weighted average shares outstanding 20,806,408 10,063,095 17,001,933 8,934,939
Contingently issuable shares in
business combinations 644,058 1,979,674 660,017 1,979,674
Net common shares issuable on
exercise of certain stock options
and warrants (1) 2,089,409 3,217,680 2,783,670 3,012,763
Other dilutive securities - - - -
------------- ------------- ------------- ----------------
Number of common shares outstanding 23,539,875 15,260,449 20,445,620 13,927,376
============= ============= ============= ================
</TABLE>
(1) Net common shares issuable on exercise of certain stock options and warrants
is calculated based on the treasury stock method
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 12,831,532
<SECURITIES> 0
<RECEIVABLES> 42,552,847
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 77,639,672
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 248,875,648
<CURRENT-LIABILITIES> 37,276,489
<BONDS> 0
0
0
<COMMON> 208,950
<OTHER-SE> 169,385,381
<TOTAL-LIABILITY-AND-EQUITY> 248,875,648
<SALES> 0
<TOTAL-REVENUES> 215,495,583
<CGS> 0
<TOTAL-COSTS> 200,498,740
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 253,998
<INCOME-PRETAX> 14,742,845
<INCOME-TAX> 5,602,265
<INCOME-CONTINUING> 9,140,580
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,140,580
<EPS-PRIMARY> 0.52
<EPS-DILUTED> 0.45
</TABLE>
