SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission File Number 0-29172
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)
Registrant's telephone number, including area code: (817) 335-5035
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the registrant's Common Stock held by
non-affiliates of the registrant as of March 1, 1999 (computed by reference to
the closing price of such stock on the Nasdaq National Market) was $80,666,956.
As of March 1, 1999, there were 21,061,215 shares of the registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT WHERE INCORPORATED
Portions of the Registrant's definitive Proxy Statement
regarding the 1999 Annual Meeting of Stockholders Part III
<PAGE>
PROMEDCO MANAGEMENT COMPANY
FORM 10-K
Table of Contents
<TABLE>
<CAPTION>
Item Page
Part I
<S> <C> <C>
1 Business........................................................................................... 1
2 Properties......................................................................................... 8
3 Legal Proceedings.................................................................................. 8
4 Submission of Matters to a Vote of Security Holders................................................ 8
Part II
5 Market for Registrant's Common Equity and Related Stockholder Matters.............................. 9
6 Selected Financial Data............................................................................ 10
7 Management's Discussion and Analysis of Financial Condition and Results of
Operations......................................................................................... 11
7A Quantitative and Qualitative Disclosures About Market Risk......................................... 20
8 Financial Statements............................................................................... 20
9 Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure......................................................................................... 20
Part III
10 Directors and Executive Officers of the Registrant................................................. 21
11 Executive Compensation............................................................................. 21
12 Security Ownership of Certain Beneficial Owners and Management..................................... 21
13 Certain Relationships and Related Transactions..................................................... 21
Part IV
14 Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................... 22
</TABLE>
<PAGE>
PART I
Item 1. Business
General
ProMedCo Management Company ("ProMedCo" or the "Company") is a medical
services company that manages and coordinates the delivery of healthcare in
secondary markets. By affiliating with leading primary care driven,
multi-specialty physician groups, the Company establishes dominate, local
healthcare delivery platforms, thus providing physicians the opportunity for
increasing control of medical expenditures in their communities. The groups
expand through affiliations with additional primary care physicians and
specialists and selective additions of ancillary services. In addition to
providing operating and expansion capital, the Company provides its affiliated
groups with a broad range of strategic and management expertise and services.
The Company also offers a full range of medical management services to capitated
physician networks. The Company currently is affiliated with multi-specialty
physician groups in 14 states, comprised of approximately 685 physicians and 130
mid-level providers (primarily physician assistants and nurse practitioners),
and is associated with approximately 585 physicians in associated independent
practice association ("IPA") networks.
Development and Operations
Market Development
ProMedCo's development objective is to position itself and its
physician partners to control a major share of healthcare expenditures within
each local market by focusing exclusively on secondary markets. The Company
performs research and market analyses to identify priority markets, which
generally are communities that have populations of at least 30,000 and less than
500,000, typically have less than 20% HMO penetration, and meet other market
criteria. Such market criteria relate to, among other things, the number of
primary care physicians relative to demand, Medicare payment rates, physician
group competition, proximity to other ProMedCo groups, the number of hospitals,
demographics, population growth, and the likelihood of significant future HMO
growth. The Company estimates that there are over 1,200 markets representing a
total population of approximately 120 million, and containing an estimated
144,000 physicians generating $50 - 60 billion in revenues, that currently
satisfy its priority market criteria. The Company ranks these markets based upon
the degree to which they satisfy its criteria, enabling the Company to further
prioritize its development efforts.
Within its priority markets, ProMedCo seeks to affiliate either with
primary care groups or with multi-specialty groups that are committed to the
importance of primary care physicians. The Company seeks to affiliate with
groups that have a reputation for providing high quality care and have a
substantial share of their local markets or the potential to acquire such share.
These groups are frequently the largest groups in their markets.
Once ProMedCo has identified a group meeting its criteria, the Company
conducts preliminary discussions to ascertain the group's interest in an
affiliation. If such interest is established, the Company conducts site visits,
analyzes financial and other data, and conducts an extensive due diligence
investigation into the group's operations, leadership, and commitment to
long-term growth. Assuming a favorable outcome of the investigation, the Company
prepares a comprehensive business plan for presentation to the group and
proposes to affiliate with the group through a long-term service agreement. See
"--Affiliation Structure."
Upon affiliation with a group, the Company immediately begins to
facilitate expansion of the group within its local market. Group expansion may
be accomplished through affiliations with additional primary-care and specialty
physicians in the community, recruitment of physicians from outside the
community, addition of mid-level providers and expansion of ancillary services
such as radiology and laboratory services. The Company will also seek to improve
the group's profitability through management of expenses and strengthening of
existing managed care contracts and ultimately controlling a greater share of
healthcare expenditures in the market.
<PAGE>
Current Operations
The Company currently provides management services and expertise to
approximately 1,400 providers in 14 states, consisting of approximately 685
physicians and 130 mid-level providers in affiliated physician groups and
approximately 585 physicians in associated IPA networks.
Approximately 69% of the physicians in ProMedCo's affiliated physician
groups are primary care providers. The primary care physicians consist of family
practitioners, general internists, pediatricians, obstetrician/gynecologists,
and urgent-care physicians. Increasingly, these physicians are augmented by
mid-level providers, primarily consisting of physician assistants and nurse
practitioners, whom the Company believes significantly increase the efficiency
of delivery of a group's primary care services. Each of the physician groups
also provides, to varying degrees, medical specialty services and ancillary
services. Medical specialties currently include anesthesiology, endocrinology,
gastroenterology, general surgery, infectious diseases, nephrology, neurology,
occupational medicine, orthopedic surgery, otolaryngology, pulmonology,
rheumatology, and urology. Each of the physician groups is continually seeking
to expand its practice through the addition of primary care physicians and
specialists. The physician groups offer, to varying degrees, a range of
ancillary services such as audiology, clinical laboratories, diagnostic imaging,
and stress testing. The Company and each of its affiliated groups continually
evaluate the addition of ancillary services to enhance the growth and
profitability of such group.
The IPAs are organizations of independent primary care providers and
specialists that contract to provide physician and other healthcare services to
HMOs and other managed care organizations ("MCOs"). The members maintain their
individual practices and, through the IPA organization, share information and
managed care systems, actuarial and financial analysis, medical management and
managed care contract services provided by the Company.
<PAGE>
The following table sets forth information concerning the Company's
providers as of March 1, 1999:
<TABLE>
<CAPTION>
Beginning Of
ProMedCo Mid-Level
Location Affiliation Physicians Providers
<S> <C> <C> <C> <C>
Affiliated Physician Groups:
North Texas Medical Surgical, P.A. Denton, TX June 1995 8 -
Abilene Diagnostic Clinic Practices Abilene, TX December 1995 47 12
Cullman Primary Care, P.C. Cullman, AL March 1996 15 3
Morgan-Haugh, P.S.C. Mayfield, KY April 1996 17 6
HealthFirst Medical Group, P.A. Lake Worth, TX June 1996 20 7
King's Daughters Clinic, P.A. Temple, TX September 1996 49 8
The Medical Group of Northern Nevada Reno, NV October 1996 23 8
Naples Medical Center, P.A. Naples, FL March 1997 39 9
Beacon Medical Group, P.C.(1) Harrisburg, PA April 1997 41 3
Intercoastal Medical Group, Inc. Sarasota, FL August 1997 26 2
Christie Clinic Association Champaign, IL August 1997 88 20
Thomas-Spann Clinic, P.A. Corpus Christi, TX December 1997 13 -
HealthStar Physicians, P.C. Knoxville, TN December 1997 25 5
Berkshire Physicians & Surgeons, P.C. (2) Pittsfield, MA February 1998 102 23
Permian Basin Physician Group, P.A. Midland, TX May 1998 13 2
Medical Associates of Pinellas, L.L.C. Clearwater, FL July 1998 50 5
Shah Associates MD, L.L.C. Hollywood, MD July 1998 35 2
Physicians' Primary Care of
Southwest Florida, P.L. Ft. Myers, FL August 1998 42 9
Boca Raton Medical Associates, P.A. Boca Raton, FL October 1998 12 1
El Paseo Medical Center, Inc. Las Cruces, NM December 1998 18 7
----- -----
683 132
IPA Physicians:
PMC Medical Management IPA Maine
New Hampshire June 1997 510
Christie Clinic IPA Champaign, IL August 1997 18
Berkshire Physicians & Surgeons IPA Pittsfield, MA February 1998 15
Prime Physicians Network IPA Hudson, NY June 1998 40
-----
583
Total Providers 1,398
</TABLE>
(1) In December 1997 Beacon Medical Group combined with Cowley Medical
Associates, which had become affiliated with ProMedCo effective November
1997.
(2) Includes Prime Medical Associates, P.C. located in Hudson, NY, which is
managed along with Berkshire Physicians & Surgeons, by Commonwealth Health
Management Services, Inc., ProMedCo's local subsidiary in Pittsfield, MA.
<PAGE>
Management Services
Upon affiliating with a physician group, ProMedCo immediately assumes
the management of all aspects of the group's operations other than the provision
of medical services. The operating assets that are typically acquired by the
Company are provided for the exclusive use of the group, and substantially all
non-physician personnel utilized in the group's practice become employees of the
Company. ProMedCo provides the full range of administrative services required
for the group's operations, including facilities management and the purchase of
medical malpractice insurance, supplies, and equipment, and a broad spectrum of
financial and accounting services, including budgeting, billing and third-party
reimbursement services. The Company also provides each group with operating
capital and expansion capital for affiliations with other physicians, additions
of ancillary services, and improvements of existing facilities and equipment. As
MCOs expand their presence into the local market, the Company provides expertise
in the negotiation of managed care contracts and the management of risk-sharing
arrangements.
While the Company provides a centralized source of expertise in all
aspects of management, it believes that each physician group presents different
operational issues and challenges and therefore employs a system of
decentralized local management of each group. The Company generally retains the
group's existing administrative staff as ProMedCo employees, adding additional
management personnel as the group expands. The physicians in the group continue
to maintain full professional control of the practice of medicine, including the
hiring and termination of physicians and the setting of practice guidelines and
standards. The Company establishes for each group a policy council comprised
equally of physicians and ProMedCo representatives to determine the broad
strategic and operational policies of the group. See "--Affiliation Structure."
The Company believes that sophisticated information systems are
essential to reducing the cost and improving the quality of healthcare. Basic
practice management systems have long been necessary for efficient patient
scheduling and registration, billing, and collections. In the future, the
integration of financial practice, managed care, and clinical systems is
expected to be imperative for physician groups to remain competitive. Clinical
systems will provide information in the physician's workplace--such as case
management, practice guidelines, and clinical pathways--that will facilitate the
improvement of patient care. Electronic medical records will automate the
clinical workflow and allow access to patient records from multiple sites, thus
providing more effective clinical decision support and increasing the quality of
care. Systems that effectively measure clinical outcomes and patient
satisfaction are likely to become increasingly important as quality becomes a
more significant factor in maintaining and increasing market share.
Rather than attempting to develop its own proprietary information
systems, ProMedCo believes it is more cost-effective, in light of the rapidly
changing healthcare and information technology environments, to utilize systems
developed and proven by independent companies. Although there are many systems
currently under development, none is yet available that, in the Company's
opinion, effectively addresses all of the evolving needs of physician groups.
The Company initially works with its affiliated physician groups to maximize the
performance of the groups' existing systems. If MCOs increase their penetration
of a group's market, new or enhanced information systems will be implemented as
required. Ultimately, the Company expects to interface all of its affiliated
clinics with a central data repository for consolidation and evaluation of
operating, clinical, and financial data. To that end, the Company has installed
a common general ledger and financial package in each of its subsidiaries (other
than the most recent affiliations), providing the platform for comparative
benchmarking.
Additionally, the Company offers 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, covering over
120,000 MCO members, to the Company's affiliated physician groups that have
entered into risk-sharing contracts with MCOs and to three of the Company's
associated IPAs.
Affiliation Structure
ProMedCo utilizes an affiliation structure that fully aligns the
interests of the Company with those of its physician partners. Moreover, each
physician group retains professional autonomy and control over its medical
practices through continued ownership and governance of its professional
corporation or similar organization.
<PAGE>
When a physician group has agreed to affiliate with ProMedCo, the
Company generally purchases the group's operating assets, excluding real estate,
and the group enters into a long-term service agreement with the Company in
exchange for a combination of common stock, cash, other securities of the
Company, and/or assumption of certain liabilities. The Company has utilized, and
may continue to utilize, common stock in payment of a portion of its
consideration for the assets of affiliated physician groups, providing that the
economics of the transaction justify its use.
The service agreements between the Company and the physician groups are
for a term of 40 years and cannot be terminated by either party without cause,
consisting primarily of bankruptcy or material default. Under the service
agreement, the Company provides the physician group with the facilities and
equipment used in the group's medical practice, assumes responsibility for the
management of the operations of the practice, and employs substantially all of
the non-physician personnel utilized by the group. Upon expiration of the term
of a service agreement or in the event of termination, the physician group is
required to purchase the assets related to the practice, including intangible
assets, then owned by the Company at their current book value. Concurrently with
the execution of a service agreement, the physician group is required to enter
into an employment contract with each of its physicians, typically for an
initial term of five years. In those affiliations involving the Company's
purchase of the group's operating assets, the employment contract provides for
the repayment by the physician of all or a portion of the physician's share of
the consideration paid by ProMedCo for such assets and service agreement in the
event of the physician's breach of the contract. Each physician group also
enters into an agreement not to compete with the Company, and each physician's
employment contract includes an agreement not to compete with the physician
group during the period of his or her employment and for a period of time
thereafter, typically two years. The employment contract also provides that the
Company is a third-party beneficiary entitled to enforce the repayment provision
and the agreement not to compete.
The income of both the Company and the physicians within each group is
dependent upon the operating income of the group. Under its service agreement,
the Company receives a fixed percentage (typically 15-20%) of group operating
income, which is defined as the group's net revenue less certain contractually
agreed-upon clinic expenses before physician salaries and other
physician-related expenses. In addition, the Company typically receives
implementation and transitional fees in return for significant up-front services
required in the first one to three months of the affiliation. The distribution
to the Company is increased or decreased by a percentage (typically ranging from
25% to 50%) of the group's surplus or deficit under risk-sharing arrangements
pursuant to capitated managed care contracts. Thus, both the Company and the
physicians have incentives to improve the group's operating income and surplus
under risk-sharing arrangements, and both share the risk that the group may have
limited or no operating income or a deficit under its risk-sharing arrangements.
The policy council established for each group is comprised equally of
physicians and ProMedCo representatives. The council meets periodically to
consider and determine broad policies regarding strategic and operational
planning, marketing, arrangements with MCOs, and other major issues involved in
the group's operations. This ensures that the physicians within each group
retain a significant voice in the expansion and operation on their group, while
benefiting from ProMedCo's management experience and expertise.
Competition
The medical services industry is competitive, although less so now than
in prior years. The Company is subject to competition both in affiliating with
physician groups and in seeking managed care contracts on behalf of its
affiliated groups. Its competitors include hospitals, MCOs, other physician
groups, and other medical services companies. There can be no assurance that the
Company will be able to compete effectively, that additional competitors will
not enter the market, or that such competition will not make it more difficult
to enter into affiliations with physician groups on terms beneficial to the
Company.
The Company also experiences competition in the recruitment and
retention of qualified physicians and other healthcare professionals on behalf
of its affiliated physician groups. There can be no assurance that the Company
will be able to recruit or retain a sufficient number of qualified physicians
and other healthcare professionals to continue to expand its operations.
<PAGE>
Government Regulation
As a participant in the healthcare industry, the Company's operations
and relationships are subject to extensive and increasing regulation by a number
of governmental entities at the federal and state levels. The Company believes
its operations are in material compliance with applicable laws. Because the
structure of its relationship with physician groups is relatively new, however,
many aspects of the Company's business operations have not been the subject of
state or federal regulatory interpretation. There can therefore be no assurance
that a review of the Company's or the affiliated physicians' business by courts
or regulatory authorities will not result in a determination that could
adversely affect the operations of the Company or that the healthcare regulatory
environment will not change so as to restrict or require modification of the
Company's or its affiliated physician groups' operations or limit their
liability to expand.
The Company estimates that approximately 30% of the net physician
groups revenue of the Company is derived from payments made by
government-sponsored healthcare programs (principally Medicare and Medicaid). As
a result, any change in government reimbursement regulations, policies,
practices, interpretations, or statutes could adversely affect the operations of
the Company. There are also state and federal civil and criminal status imposing
substantial penalties, including civil and criminal fines and imprisonment, on
healthcare providers that fraudulently or wrongfully bill governmental or other
third-part payors for healthcare services.
The laws of many states prohibit business corporations such as the
Company from practicing medicine and employing physicians to practice medicine.
The Company performs only non-medical administrative services, does not hold
itself out as a provider of medical services, and does not exercise influence or
control over the practice of medicine by the physicians with whom it is
affiliated. Accordingly, the Company believes it is not in violation of
applicable state laws relating to the practice of medicine. In addition to
prohibiting the practice of medicine, numerous states limit the ability of
entities such as the Company to control physician revenues or to receive
portions of such revenues in excess of the value of services provided. In most
states, such so-called "fee-splitting" laws provide that the laws are violated
only if a physician shares fees with a referral source. The Florida Board of
Medicine, however, has recently interpreted the Florida fee-splitting law very
broadly so as arguably to include the payment of any percentage-based management
fee, even to a management company that does not refer patients to the managed
group. The interpretation of the Florida Board of Medicine has been appealed. If
it is not reversed, the decision could require modification of the service
agreements covering the Company's affiliated groups in Florida. There can be no
assurance that further action by government authorities regarding the structure
of the Company's relationship with it affiliated physician groups and managed
IPAs, in Florida or elsewhere, will not have an adverse effect upon the Company.
Certain provisions of the Social Security Act, commonly referred to as
the fraud and abuse provisions, prohibit the payment or receipt of any form of
remuneration in return for the referral of Medicare or Medicaid patients care
opportunities, or in return for the recommendation, arrangement, purchase,
lease, or order of items or services that are covered by Medicare or Medicaid
programs. Many states have adopted similar prohibitions against payments that
are intended to induce referrals of Medicaid and other third-party payor
patients. Although the Company believes that neither it nor any of its
affiliated physician groups is in violation of any such prohibitions, its
operations do not fit within any of the existing or proposed federal safe
harbors and may therefore be subject to challenge.
Significant prohibitions against physician referrals were enacted by
Congress in the Omnibus Budget Reconciliation Act of 1993. Subject to certain
exemptions, a physician or a member of his or her immediate family is prohibited
by this legislation from referring Medicare or Medicaid patients to an entity
providing "designated health services" in which the physician has an ownership
or investment interest or with which the physician has entered into a
compensation arrangement. Some states have also enacted similar so-called
"physician self-referral" laws, and additional states may follow. The Company
believes that its practices fit within exemptions contained in such statutes.
Nevertheless, expansion of the operations of the Company to certain
jurisdictions may require structural and organizational modifications of the
Company's relationships with physician groups to comply with new or revised
state statutes.
Because the Company's affiliated physician groups remain separate legal
entities, they may be deemed competitors subject to a range of antitrust laws
that prohibit anti-competitive conduct, including price fixing, concerted
refusals to deal, and division of market. The Company intends to comply with
such state and federal laws in its
<PAGE>
development of integrated healthcare delivery networks, but there can be no
assurance that a review of the Company's business by courts or regulatory
authorities will not result in a determination that could adversely affect the
operation of the Company and its affiliated physician groups.
Several states regulate the managed care support activities of
organizations other than insurers. In particular, claims administration and
utilization review functions may require licensure and the various elements of
the operations of the Company may be subject to regulation. The Company believes
that PMC holds all necessary licenses for its business activities. However, it
cannot be assured that it will receive necessary regulatory approvals for all
states in which it intends to conduct business, nor that the applicable
operational requirements will not adversely affect the profitability of the
Company.
As a result of the continued escalation of healthcare costs and the
inability of many individuals to obtain health insurance, numerous proposals
have been or may be introduced in the U.S. Congress and state legislators
relating to healthcare reform. There can be no assurance as to the ultimate
content, timing, or effect of any healthcare reform legislation, nor is it
possible at this time to estimate the impact of potential legislation, which
could be material, on the Company.
Insurance
The Company's affiliated physician groups maintain medical malpractice
liability insurance in the amount of $1.0 million per occurrence and $3.0
million in the aggregate. The Company is named as the additional insured on the
policies maintained by each of its affiliated groups. The Company also maintains
general liability and umbrella coverage. The umbrella policy has limits of $1.0
million per occurrence and a $10.0 million aggregate. The cost and availability
of such coverage has varied widely in recent years. The Company maintains
individual and aggregate stop-loss insurance coverage with respect to its and
its affiliated groups' risk-sharing contracts. While the Company believes its
insurance coverage is adequate for its current operations, there can be no
assurance that the coverage maintained by the Company will be sufficient to
cover all future claims or will continue to be available in adequate amounts or
at a reasonable cost.
Employees
The Company currently employs approximately 3,400 people, including
those employed in its corporate office. The Company is not party to any
collective bargaining agreement with a labor union and considers its relations
with its employees to be good. The Company does not employ any of the physicians
practicing in its affiliated groups.
Item 2. Properties
The Company currently leases approximately 8,000 square feet of space
at 801 Cherry Street in Fort Worth, Texas, where its headquarters are located,
under a lease terminable upon 60 days' notice by either party. The Company
believes these facilities are adequate for its current uses and that additional
space is available to accommodate its anticipated growth.
The Company leases, subleases, or occupies pursuant to its service
agreements the clinic facilities at which its affiliated physician groups
conduct their practices. The leases have varying terms ranging from
month-to-month to ten years. The Company anticipates that as the affiliated
practices continue to grow and add new services, expanded facilities will be
required.
<PAGE>
Item 3. Legal Proceedings
The Company and its affiliated physician groups are from time to time
subject to medical malpractice claims and other various claims and legal actions
that arise in the ordinary course of business. Such claims, if successful, could
result in substantial damage awards that may exceed the limits of insurance
coverage. The Company does not engage in the practice of medicine or provide
medical services, nor does it control the practice of medicine by its affiliated
physician groups or the compliance with regulatory requirements directly
applicable to such groups. Nevertheless, there can be no assurance that the
Company will not become subject to such claims in the future.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Since March 12, 1997, the Common Stock has been traded on the Nasdaq
National Market under the symbol "PMCO." The following table sets forth the high
and low sale prices per share of the Common Stock as reported by the Nasdaq
National Market for each calendar quarter since the commencement of trading.
<TABLE>
<CAPTION>
High Low
<S> <C> <C>
1997
First Quarter (commencing March 12)..................................... $ 9.25 $ 9.00
Second Quarter.......................................................... 9.25 6.00
Third Quarter........................................................... 11.00 6.75
Fourth Quarter.......................................................... 11.63 8.00
1998
First Quarter........................................................... 16.25 8.81
Second Quarter.......................................................... 15.87 8.81
Third Quarter........................................................... 10.75 8.87
Fourth Quarter.......................................................... 7.87 4.12
1999
First Quarter (through March 12)........................................ 6.62 4.00
</TABLE>
The Company has not paid any cash dividends on its common stock since
its formation. It presently intends to retain its earnings for use in its
business and therefore does not anticipate paying any cash dividends in the
foreseeable future. The payment of any future dividends will be determined by
the Board of Directors in light of conditions then existing, including the
Company's earnings, financial condition and requirements, restrictions in
financing agreements, business conditions, and other factors. In addition, the
Company's ability to pay dividends or make distributions to its stockholders is
restricted by the terms of its credit facility. As of March 1, 1999, there were
379 holders of record of Common Stock.
During 1998, the Company issued 2,955,015 shares of Common Stock to
stockholders of seven physician groups in connection with their affiliations
with the Company. As of December 31, 1998, the Company had commitments to issue
an aggregate of 412,771 shares of Common Stock to physician groups and their
stockholders in connection with its affiliations with a physician group in April
1998 and three roll-in physicians to existing groups during the third and fourth
quarter of 1998. Such shares are expected to be issued in the second 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.
<PAGE>
Item 6. Selected Financial Data
The selected financial data presented below should be read in
conjunction with the consolidated financial statements and the notes thereto of
the Company and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Form 10-K. Prior year selected
financial data have been restated to include the results of operations and
balance sheet data for Western Medical Management Corp., Inc., which merged with
the Company in March 1997, and has been accounted for as a pooling of interests.
<TABLE>
<CAPTION>
July 1, 1994
(Inception) to
December 31, Years Ended December 31,
1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C>
Statements of Operations Data:
Net revenue..................................... $ 2,259,149 $ 7,843,717 $26,245,196 $80,641,535 $222,502,115
Operating expenses:
Clinic salaries and benefits.................... 1,689,007 4,249,813 11,694,973 29,859,718 74,676,074
Clinic rent and lease expense................... 242,235 708,020 2,670,138 7,016,261 17,186,828
Clinic supplies................................. 261,811 624,370 3,213,443 9,667,085 24,873,718
Purchased medical services...................... 170,909 781,000 969,650 7,946,989 45,444,439
Other clinic costs.............................. 183,158 1,759,013 5,018,876 10,883,588 25,699,233
General corporate expenses...................... 172,462 802,980 2,633,585 3,793,552 5,612,103
Depreciation and amortization................... 64,170 203,482 723,641 2,942,604 7,238,960
Interest expense................................ 6,659 20,958 209,474 456,175 1,104,273
Merger costs.................................... - - 682,269 - -
----------- ----------- ----------- ----------- -----------
2,790,411 9,149,636 27,816,049 72,565,972 201,835,628
Income (loss) before provision for (benefit
from) income taxes and
extraordinary charge ...................... (531,262) (1,305,919) (1,570,853) 8,075,563 20,666,487
Provision for (benefit from) income taxes....... 12,566 (54,405) - 2,602,379 7,853,266
----------- ----------- ----------- ----------- -----------
Net income (loss) before extraordinary charge .. (543,828) (1,251,514) (1,570,853) 5,473,184 12,813,221
Extraordinary charge - loss on
extinguishment of debt, net of
$375,000 income taxes ..................... - - - - (611,192)
----------- ----------- ----------- ----------- -----------
Net income (loss)............................... $ (543,828) $(1,251,514) $(1,570,853) $ 5,473,184 $12,202,029
=========== =========== =========== =========== ===========
Net earnings (loss) per share:
Basic:
Income (loss) before extraordinary charge. $ (0.07) $ (0.16) $ (0.20) $ 0.48 $ 0.69
Extraordinary charge....................... - - - - (0.03)
----------- ----------- ----------- ----------- -----------
Net income (loss) ......................... $ (0.07) $ (0.16) $ (0.20) $ 0.48 $ 0.66
=========== =========== =========== =========== ===========
Diluted
Income (loss) before extraordinary charge. $ (0.07) $ (0.16) $ (0.20) $ 0.38 $ 0.61
Extraordinary charge....................... - - - - (0.03)
----------- ----------- ----------- ----------- -----------
Net income (loss).......................... $ (0.07) $ (0.16) $ (0.20) $ 0.38 $ 0.58
=========== =========== =========== =========== ===========
Weighted average number of common shares
outstanding:
Basic........................................... 7,871,746 7,871,746 7,870,908 11,375,662 18,621,988
=========== =========== =========== =========== ===========
Diluted......................................... 7,871,746 7,871,746 7,870,908 14,224,198 20,957,771
=========== =========== =========== =========== ===========
Balance Sheet Data:
Cash and cash equivalents....................... $ 490,391 $ 3,047,366 $ 1,633,534 $15,760,920 $13,870,967
Working capital................................. 951,542 3,376,293 2,253,291 24,207,077 55,497,946
Total assets.................................... 2,317,951 6,203,340 30,559,774 162,966,150 306,658,872
Long term debt, less current maturities......... 57,625 278,962 7,809,193 56,603,135 94,939,599
Redeemable equity securities.................... - 3,945,134 3,949,417 - -
Total stockholders' equity...................... 1,423,141 240,439 10,523,972 80,618,737 172,647,506
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
ProMedCo is a medical services company that manages and coordinates the
delivery of healthcare in secondary markets. By affiliating with leading primary
care driven, multi-specialty physician groups, the Company establishes dominant,
local healthcare delivery platforms thus providing physicians the opportunity
for increasing control of medical expenditures in their communities. ProMedCo
commenced operations in December 1994 and affiliated with its initial physician
group in June 1995. The Company's rapid growth during 1996, 1997 and 1998 has
resulted from its strong
<PAGE>
same net revenue market growth consistently exceeding 15%, with the balance of
the growth coming from affiliations with additional physician groups. The groups
expand through affiliations with additional primary care physicians and
specialists and selective additions of ancillary services. In addition to
providing operating and expansion capital, the Company provides its affiliated
groups with a broad range of strategic and management expertise and services.
The Company currently is affiliated with multi-specialty physician groups in 14
states, comprised of approximately 685 physicians and 130 mid-level providers
(primarily physician assistants and nurse practitioners), and is associated with
585 physicians in associated independent practice association ("IPA") networks.
The Company also offers a full range of medical management services to
capitated physician networks. Utilizing sophisticated information systems,
ProMedCo 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 to its
associated IPAs and to those of its affiliated groups that have entered into
capitation arrangements, together covering over 120,000 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. The Company is continually seeking additional physician
groups with which to affiliate and at any time is typically engaged in
negotiations with several such groups.
The Company's net revenue represents the revenue of the physician
groups reported at the estimated realizable amounts from patients, third-party
payors, and others for services rendered, net of contractual and other
adjustments and is further reduced by the amounts paid to physician groups. The
amounts paid to physician groups (typically 80-85% of the physician groups'
operating income) pursuant to the service agreements primarily consist of the
cost of the affiliated physician services. 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 does not consolidate the operating
results and accounts of the physician groups under EITF 97-2, "Applications of
FASB No. 94 and APB No. 16 to Physician Practice Management Entities and Certain
Other Entities under Contracted Management Agreement."
Operating expenses consist of the expenses incurred by the Company in
fulfilling its obligations under the service agreements. These expenses are the
same as the operating costs and expenses that would have been incurred by the
affiliated groups, including non-physician salaries, employee benefits, medical
supplies, purchased medical services, building rent, equipment leases,
malpractice insurance premiums, management information systems, and other
expenses related to clinic operations.
Because of the significance of individual group affiliations and the
level of capitation and other revenues, expense ratios and operating margins
will vary with each new affiliation. The mix of physician specialties and
ancillary services affects the level of clinic salaries and benefits and clinic
supplies, and the margins on capitated revenues generally are lower than those
on fee-for-service revenues (although capitated revenues can provide incremental
profit with little or no additional capital investment). Generally, primary care
and office-based physician practices require a higher number of support staff
than specialty care or hospital-based practices. Clinic rent and lease expense
as a percentage of physician groups revenue will vary based on the size of each
affiliated group's offices, the current market rental rate for medical office
space in the particular geographic markets and the amount of medical and other
equipment under lease. Capitation arrangements may require the purchase of
medical services that are not provided by the group accepting capitation. These
purchased medical services may include hospitalization, emergency room care and
other technical or specialty services. The ratio of purchased medical services
to associated capitation revenues will vary depending upon the terms of the
individual contracts and the amount of services that can be provided by the
particular group. Other clinic costs will vary as a percentage of physician
groups revenue based on regional cost differences and the Company's ability to
implement operational efficiencies and negotiate more favorable purchasing
arrangements.
In addition to the clinic expenses discussed above, the Company incurs
personnel and administrative expenses in connection with maintaining a corporate
office function that provides management, administrative and acquisition
<PAGE>
services to its affiliated groups. The Company's profitability depends on, among
other things, increasing market share, expanding healthcare services, enhancing
operating efficiencies, and maintaining favorable contractual relationships with
payors.
For the year ended December 31, 1998, two of the Company's affiliated
physician groups each contributed 10% or more of the Company's net revenue.
Clinics in Champaign, IL, and Pittsfield, MA, represented approximately 25% and
14% of net revenue, respectively.
In addition to managing its affiliated physician groups, the Company
manages an IPA in Maine and New Hampshire. Revenues from this IPA consist of
capitation and risk pool payments under managed care contracts with HMOs. Such
revenues represent less than 10% of total net revenue. Related operating
expenses consist of the cost of providing the medical services required by the
HMO members covered by the contracts, and are reflected primarily as purchased
medical services.
Results of Operations
The Company commenced operations in December 1994 and affiliated with
its first physician group in June 1995 and its second group in December 1995.
The Company entered into affiliations with five additional groups during 1996,
seven additional groups during 1997, and with eight additional groups in 1998.
Changes in results of operations were caused primarily by affiliations with
these additional physician groups.
The following table sets forth the percentages of net revenue
represented by certain items reflected in the Company's consolidated statements
of operations.
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1997 1998
----------- ----------- ---------
<S> <C> <C> <C>
Statements of Operations:
Net revenue............................................................. 100.0% 100.0% 100.0%
Operating expenses:
Clinic salaries and benefits......................................... 44.6 37.0 33.5
Clinic rent and lease expense........................................ 10.2 8.7 7.7
Clinic supplies...................................................... 12.2 12.0 11.2
Purchased medical services........................................... 3.7 9.9 20.4
Other clinic costs................................................... 19.1 13.5 11.6
General corporate expenses........................................... 10.0 4.7 2.5
Depreciation and amortization........................................ 2.8 3.6 3.3
Interest expense .................................................... 0.8 0.6 0.5
Merger costs......................................................... 2.6 0.0 0.0
---------- --------- --------
106.0 90.0 90.7
---------- --------- --------
Income (loss) before provision for income taxes and
extraordinary charge................................................ (6.0) 10.0 9.3
Provision for income taxes.............................................. 0.0 3.2 3.5
---------- --------- --------
Income (loss) before extraordinary charge............................... (6.0) 6.8 5.8
Extraordinary charge, net of tax........................................ 0.0 0.0 (0.3)
---------- --------- --------
Net income (loss)....................................................... (6.0)% 6.8% 5.5%
========== ========= ========
<PAGE>
Other Financial Information:
Physician groups revenue, amounts in thousands (1) .................. $ 47,037 $ 127,717 $310,454
Payor breakdown (2)
Commercial and discounted fee-for service........................ 42.1% 39.2% 36.3%
Medicare/Medicaid................................................ 29.5 24.7 29.6
Capitation....................................................... 13.9 16.4 20.7
Other............................................................ 14.5 19.7 13.4
---------- --------- --------
100.0% 100.0% 100.0%
========== ========= ========
</TABLE>
- - -----------------
(1) Physician groups revenues represent the revenue of the physician groups
reported at the estimated realizable amounts from patients, third-party
payors and others for services rendered, net of contractual and other
adjustments.
(2) As a percentage of physician groups revenues
Year Ended December 31, 1998 Compared with Year Ended December 31, 1997
Net revenue increased by 176% to $222.5 million for the year ended
December 31, 1998, from $80.6 million for the year ended December 31, 1997. New
affiliations in 1998 produced $56.9 million of this increase and $78.5 million
of the increase results from a full year of revenue production and growth from
affiliations completed in 1997. In addition, there was $6.5 million growth in
revenues from affiliations completed prior to 1997.
Overall clinic costs, including purchased medical services, as a
percentage of net revenue increased to 84.4% for the year ended December 31,
1998, compared to 81.1% for the year ended December 31, 1997. The change in
overall clinic costs and specific items is due to the mix of affiliated
physician groups managed by the Company. Purchased medical services created the
largest increase as a percentage of net revenue, increasing to 20.4% in 1998
compared to 9.9% in 1997. This increase is directly related to the increase in
full professional and global capitation revenues, which requires the purchase of
services outside the group.
General corporate expenses as a percentage of net revenue declined to
2.5% for the year ended December 31, 1998, compared to 4.7% for the year ended
December 31, 1997. While these costs declined as a percentage of net revenue,
the amount of general corporate expenses increased 47.9% to $5.6 million for the
year ended December 31, 1998 from $3.8 million for the year ended December 31,
1997. This increase in expenses was expected as the Company continued to add
management and technology infrastructure. Management expects these increases in
amounts to continue as the Company increases the number of affiliated physician
groups.
Depreciation and amortization as a percentage of net revenue decreased
to 3.3% for the year ended December 31, 1998, compared to 3.6% for the year
ended December 31, 1997. This decrease results primarily from differences in the
mix of assets acquired in connection with these affiliations, but also reflects
the impacts of declining consideration levels on new affiliations in the later
part of 1998.
Net interest expense as a percentage of net revenue decreased to 0.5%
for the year ended December 31, 1998, compared to 0.6% for the year ended
December 31, 1997. Although long term debt levels increased in the latter part
of 1998, the resulting interest expense was offset by interest income earned in
the earlier part of 1998 on unused proceeds from the Company's public offering
of its common stock.
Provision for income taxes reflects an effective rate of 38.0%. This
effective rate is higher than the expected Federal statutory rate primarily due
to the impact of state income taxes.
In December 1998, the Company replaced its then existing credit
facility. In connection with this transaction, the Company was required to write
off the unamortized deferred financing costs relating to the prior credit
facility. The resulting, extraordinary charge amounted to approximately
$611,000, net of applicable income taxes of approximately $375,000.
<PAGE>
Year Ended December 31, 1997 Compared with Year Ended December 31, 1996
Net revenue increased by 207% to $80.6 million for the year ended
December 31, 1997 from $26.2 million for the year ended December 31, 1996. New
affiliations in 1997 produced $37.8 million of this increase and affiliations
completed in December 1995 through 1996 produced a $16.6 million increase.
Overall clinic costs, including purchased medical services, as a
percentage of net revenue decreased to 81.1% for the year ended December 31,
1997, compared to 89.8% for the year ended December 31, 1996. Decreases in
clinic salaries and benefits and other clinic costs were offset partially by an
increase in purchased medical services. The change in overall clinic costs and
within the individual expense categories is caused primarily by the mix of
affiliated physician groups managed by the Company.
General corporate expenses as a percentage of net revenue declined to
4.7% for the year ended December 31, 1997, compared to 10.0% for the year ended
December 31, 1996. While these costs declined as a percentage of net revenue,
the amount of general corporate expenses increased 44.0% to $3.8 million for the
year ended December 31, 1997 from $2.6 million for the year ended December 31,
1996. This increase in expenses was expected as the Company continued to add
management and technology infrastructure.
Depreciation and amortization as a percentage of net revenue increased
to 3.6% for the year ended December 31, 1997, compared to 2.8% for the year
ended December 31, 1996. This increase resulted primarily from increased
amortization of service agreement rights obtained in the new affiliations in
1997, as well as differences in the mix of assets acquired in connection with
these affiliations.
Net interest expense as a percentage of net revenue decreased to 0.6%
for the year ended December 31, 1997, compared to 0.8% for the year ended
December 31, 1996. Although long term debt levels increased in the latter part
of 1997, the resulting interest expense was offset by interest income earned in
the earlier part of 1997 on unused proceeds from the Company's initial public
offering.
Provision for income taxes reflects an effective rate of 32.2%. This
effective rate is lower than the expected Federal statutory rate due to the
realization of net operating loss carryforwards, which had been previously
reserved. At December 31, 1997, all net operating loss carryforwards had been
utilized and recognized.
<PAGE>
Summary of Operations by Quarter
The following table presents unaudited quarterly operating results for
the preceding eight quarters. The Company believes that all necessary
adjustments, consisting only of normal, recurring adjustments, have been
included in the amounts stated below to present fairly the quarterly results
when read in conjunction with the Company's consolidated financial statements
and notes thereto included elsewhere in this Form 10-K. Future quarterly
results may fluctuate depending on, among other things, the timing and number of
affiliations with physician groups. Results of operations for any particular
quarter are not necessarily indicative of results of operations for a full year
or for future periods.
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
Mar. 31, Jun. 30, Sep. 30, Dec. 3 1 Mar. 31, Jun. 30, Sep. 30, Dec. 31,
1997 1997 1997 1997 1998 1998 1998 1998
----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statements of Operations Data:
Net revenue $11,717,406 $15,199,871 $17,805,601 $35,918,657 $40,612,453 $51,993,812 $61,096,677 $68,799,173
Operating expenses:
Clinic salaries and
benefits 4,639,895 5,926,457 6,795,818 12,497,548 13,340,225 17,715,045 19,333,680 24,287,124
Clinic rent and lease
expense 1,079,862 1,429,063 1,620,677 2,886,659 3,199,036 3,861977 4,528,776 5,597,039
Clinic supplies 1,513,716 1,962,366 2,034,422 4,156,581 4,857,545 6,337,031 6,598,383 7,080,759
Purchased medical
services 685,158 780,510 725,486 5,755,835 8,131,910 10,656,091 14,813,087 11,843,351
Other clinic costs 1,778,472 2,154,875 2,100,817 4,849,424 4,321,958 5,636,433 6,649,411 9,091,431
General corporate
expenses 818,772 823,533 1,113,978 1,037,269 1,083,158 1,291,480 1,232,954 2,004,511
Depreciation and
amortization 435,875 602,552 923,093 981,084 1,294,260 1,749,005 2,074,654 2,121,041
Interest expense
(revenue) 115,949 1,148 110,468 228,610 472,219 (170,309) (47,912) 850,275
Income before provision
for income taxes and
extraordinary charge 649,707 1,519,367 2,380,842 3,525,647 3,912,142 4,917,059 5,913,644 5,923,642
Provision for income taxes 194,912 412,429 778,494 1,216,544 1,486,614 1,868,482 2,247,168 2,251,002
----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income before
extraordinary charge 454,795 1,106,938 1,602,348 2,309,103 2,425,528 3,048,577 3,666,476 3,672,640
Extraordinary charge - loss
on extinguishment
of debt, net of
$375,000 of income taxes - - - - - - - (611,192)
----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income $ 454,795 $1,106,938 $1,602,348 $2,309,103 $2,425,528 $3,048,577 $3,666,476 $3,061,448
=========== ========== ========== ========== ========== ========== ========== ==========
Net earnings (loss) per share:
Basic
Income before
extraordinary charge $ 0.05 $ 0.09 $ 0.13 $ 0.18 $ 0.18 $ 0.17 $ 0.17 $ 0.17
Extraordinary charge - - - - - - - (0.03)
----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income $ 0.05 $ 0.09 $ 0.13 $ 0.18 $ 0.18 $ 0.17 $ 0.17 $ 0.14
=========== ========== ========== ========== ========== ========== ========== ==========
Diluted
Income before
extraordinary charge $ 0.04 $ 0.08 $ 0.11 $ 0.15 $ 0.15 $ 0.15 $ 0.16 $ 0.16
Extraordinary charge - - - - - - - (0.03)
----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income $ 0.04 $ 0.08 $ 0.11 $ 0.15 $ 0.15 $ 0.15 $ 0.16 $ 0.13
=========== ========== ========== ========== ========== ========== ========== ==========
Weighted average
number of common shares
outstanding:
Basic 8,669,343 12,031,726 12,042,769 12,507,883 13,615,887 17,841,121 21,450,466 21,514,216
=========== ========== ========== ========== ========== ========== ========== ==========
Diluted 11,617,229 14,704,451 15,260,449 15,355,033 16,490,851 20,554,789 23,539,875 23,330,729
=========== ========== ========== ========== ========== ========== ========== ==========
Other Data (at end of period):
Total providers 233 238 280 982 1,097 1,285 1,316 1,398
=========== ========== ========== ========== ========== ========== ========== ==========
Affiliated physicians 180 186 224 354 440 592 606 683
Mid-level providers 53 52 56 100 115 123 127 132
IPA physicians -- -- -- 528 542 583 583 583
Number of states 5 5 6 10 11 13 13 14
</TABLE>
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
<PAGE>
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
fail.
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 its internal procession 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 has installed a new, common
financial software package at all locations that is certified Year 2000
compliant. 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. Of the Company's existing affiliated groups, only three
locations are utilizing practice management systems that are not currently Year
2000 compliant. Two of these locations have been scheduled for system
conversions and upgrades in the second quarter of 1999 to handle increased
patient volume. These planned conversions will be Year 2000 compliant. The third
location utilizes on a system maintained by a local hospital; ProMedCo is
working with the hospital to complete Year 2000 testing during the second
quarter of 1999. 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 during 1999. 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 second 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.
Liquidity and Capital Resources
At December 31, 1998, the Company had working capital of $55.5 million,
compared to $24.2 million at December 31, 1997. This increase resulted primarily
from the acquisition of current assets (primarily accounts receivable) in excess
of current liabilities assumed in new affiliations. About 30% of this increase
resulted from an increase in accounts receivable in affiliations where ProMedCo
did not buy the existing accounts receivable of the group (see discussion
below). Although each new affiliation will have its own specific structure, the
Company typically acquires current assets well in excess of the current
liabilities it assumes.
Cash used in operations for the year ended December 31, 1998 amounted
to $12.5 million. This is primarily attributable to a "ramp up" in accounts
receivable of approximately $11.1 million in physician group affiliations
completed in the fourth quarter of 1997 and during 1998, where the Company did
not acquire the medical group's existing accounts receivable. Overall, net
accounts receivable of $51.4 million at December 31, 1998 amounted to 47 days of
net physician groups revenue (excluding other revenues) for the fourth quarter
of 1998. While this measure of net accounts receivable has risen since the first
quarter of 1998, when days outstanding was 42 days, the increase in days
outstanding can be attributed, in part, to the "ramp up" in accounts receivable
for the affiliations discussed above, as
<PAGE>
well as increases resulting from changes in payor mix, most notably in
Medicare/Medicaid from 25% in 1997 to 30% in 1998. Net income, combined with
depreciation and amortization, deferred taxes, and an increase in payable to
affiliated physician groups, accrued expenses and other current liabilities
provided $23.8 million in cash flows. This was offset by increases in accounts
receivable, management fees receivable, due from affiliated physician groups,
prepaid expenses and other current assets and other assets and decreases in
accounts payable totaling $36.3 million.
The Company had aggregate cash expenditures of $57.4 million and issued
or committed to issue an aggregate of approximately 500,000 shares of its common
stock for the acquisition of clinic assets during the year ended December 31,
1998. Of the cash expenditures, $14.9 million was for additional physicians at
existing clinics and deferred payments associated with previously completed
acquisitions. Capital expenditures amounted to $4.1 million for the year ended
December 31, 1998. Although each of the Company's service agreements with its
affiliated physician groups requires the Company to provide capital for
equipment, expansion, additional physicians and other major expenditures, no
specific amounts have been committed in advance. Capital expenditures are made
based partially upon the availability of funds, the sources of funds,
alternative projects and an acceptable repayment period.
During May 1998, the Company completed a public offering of 6,900,000
shares of common stock at a price of $11.00 per share (the "Secondary
Offering"). Gross and net proceeds from the Secondary Offering were $75.9
million and $72.5 million, respectively. In addition, net proceeds were reduced
by approximately $600,000 of expenses relating to the Secondary Offering.
Effective December 17, 1998, the Company entered into a new revolving
credit agreement (the "Credit Facility"). The Credit Facility provides for a
three-year commitment to fund revolving credit borrowings of up to $125.0
million for acquisitions and general working capital purposes. The interest rate
under the Credit Facility is set at the Company's options and varies based on
the Company's leverage, as follows: (i) the higher of the federal funds rate
plus 0.5% to 1.25% or the prime rate plus 0.0% to 0.75%, or (ii) the Eurodollar
rate plus 1.25% to 2.25%. As of December 31, 1998, the effective interest rate
on the Credit Facility was 7.2%. The Credit Facility includes certain
restrictive covenants including limitations on the payment of dividends as well
as the maintenance of certain financial ratios. Under the terms of the Credit
Facility, the Company paid a commitment fee and other closing costs of
approximately $1 million which has been capitalized in other assets in the
accompanying consolidated balance sheets and is amortized as an adjustment to
interest expense using the effective interest method. At the Company's option,
the Company can convert the outstanding balance on the Credit Facility to a term
loan which is due December 17, 2003. The Credit Facility is secured by
substantially all the assets of the Company. As of December 31, 1998, the
Company had $70.5 million available under the Credit Facility subject to certain
conditions as defined by the agreement.
In connection with the August 1997 Christie Clinic affiliation, the
Company agreed to lend the physician group a total of $42.7 million, the
proceeds of which are being utilized by the group's physicians. An initial loan
of $3.0 million was funded in November 1997, $16.4 million was funded in
December 1997, $5.83 million was funded in December 1998, with additional loans
of $5.83 million to be funded each December through 2001. This note receivable
is recorded in long term receivables in the Company's consolidated balance
sheet. The note receivable earns interest at 8% and is an interest-only loan,
payable monthly, through November 2007, after which the balance is to be repaid
in annual installments through December 2022. After December 2007, an amount
equal to one twelfth of the annual amortization is required to be set aside by
the physician group each month to fund each upcoming annual installment. Certain
assets of the affiliated physician group have been pledged as security under the
loan, and the loan provides certain rights of offset against distributions to
the physician group under the service agreement in the event of default under
the loan agreement. As of December 31, 1998, the outstanding loan totaled $25.2
million, and the Company estimates that the carrying value this receivable
approximates the fair value.
In November 1998, the Company entered into a similar agreement with a
new physician group to loan $8 million, all of which was funded on November 12,
1998. The purpose of this loan was to provide the physician group with liquidity
for general corporate purposes and to strengthen the physician-association
relationships. Interest is payable to the Company monthly at an annual rate of
8.0%. The principal will be repaid in 180 monthly payments beginning on November
30, 2008. Certain assets of the affiliated physician group have been pledged as
security under the loan, and the loan provides certain rights of offset against
distributions to the physician group under the service
<PAGE>
agreement in the event of default under the loan agreement. As of December 31,
1998, the outstanding loan totaled $8.0 million, and the Company estimates that
the carrying value this receivable approximates the fair value.
In connection with the March 1997 Naples affiliation, the Company
issued $8.6 million of notes payable in three equal annual installments in April
1998, 1999 and 2000. The notes bear interest at 9%, with interest payable in
options to purchase the Company's common stock at a price of $9.00 per share
(valued in accordance with the Black-Scholes model), provided the market price
for the stock is above the exercise price at the time of payment. Interest may
be paid in cash at the option of either party if the market price for the stock
is $9.00 or less at the time of payment.
In April 1998, in connection with the affiliation of a new physician
group, the Company issued $6.5 million in convertible subordinated notes. The
notes bear interest 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.
The Company had cash and cash equivalents of $13.9 million at December
31, 1998. In addition to cash, the Company's principal sources of liquidity were
accounts receivable of $51.4 million at December 31, 1998 and availability under
the working capital portion of the Credit Facility of $70.5 million. The Company
believes that the combination of these sources will be sufficient to meet its
working capital needs for the next twelve months. The Company's future
acquisition, expansion and capital expenditure programs will require substantial
amounts of capital resources. To meet the capital needs of these programs, the
Company will continue to evaluate alternative sources of financing, including
short- and long-term bank indebtedness, 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 Form 10-K 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. The Company notes that such forward-looking statements are
based upon internal estimates, which are subject to change because they reflect
preliminary information and management assumptions, and that 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
Company's forward-looking statements. The factors that could cause actual
results or outcomes to differ from such expectations include the extent of the
Company's success in (i) negotiating the acquisition of additional physician
groups; (ii) integrating all operations within the planned time frame; (iii)
locating and negotiating additional financing at terms that are acceptable to
the Company; and (iv) negotiating favorable reimbursement rates, along with the
uncertainties and other factors described from time to time in the Company's
public filings and reports.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 8. Financial Statements
The Company's Consolidated Financial Statements are listed in Item
14(a)(1), included at the end of this report on Form 10-K beginning on page F-1,
and incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
<PAGE>
Part III
Item 10. Directors and Executive Officers of the Registrant.
The information required by Item 10 will be contained in the Company's
Proxy Statement for the 1999 Annual Meeting of Stockholders under the captions
"Directors and Nominees," "Executive Officers of the Company" and "Compliance
with Section 16(a) of the Securities Exchange Act of 1934."
Item 11. Executive Compensation.
The information required by Item 11 will be contained in the Company's
Proxy Statement for the 1999 Annual Meeting of Stockholders under the caption
"Executive Compensation," and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by Item 12 will be contained in the Company's
Proxy Statement for the 1999 Annual Meeting of Stockholders under the caption
"Common Stock Ownership of Certain Beneficial Owners and Management," and is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The information required by Item 13 will be contained in the Company's
Proxy Statement for the 1999 Annual Meeting of Stockholders under the caption
"Compensation Committee Interlocks and Insider Participation and Certain
Transactions," and is incorporated herein by reference.
<PAGE>
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) (1) List of Financial Statements. The following is a list of the
financial statements included at the end of this Report of Form 10-K beginning
on page F-1:
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 1997 and 1998
Consolidated Statements of Operations for the Years Ended December 31,
1996, 1997 and 1998
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1996, 1997 and 1998
Consolidated Statements of Cash Flows for the Years Ended December 31,
1996, 1997 and 1998
Notes to Consolidated Financial Statements
(2) List of Financial Statement Schedules. All schedules have been
omitted because they are not applicable or not required, or the required
information is provided in the financial statements or notes thereto.
(b) Reports on Form 8-K.
No Reports on Form 8-K were filed during the fourth quarter of 1998.
(c) List of Exhibits. The following is a list of exhibits furnished.
Copies of exhibits will be furnished upon written request of any stockholder at
a charge of $.25 per page plus postage.
Exhibit
Number Description
1 Form of Purchase Agreement. (1)
2 Asset Purchase Agreement dated as of January 19, 1996 by and
among ProMedCo, Inc., ProMedCo of Abilene, inc. and
Abilene Diagnostic Clinic, P.L.L.C. (2)
2(a) First Amendment to Asset Purchase Agreement dated as of
January 19, 1996 by and among ProMedCo, Inc., ProMedCo of
Abilene, inc., and Abilene Diagnostic Clinic, P.L.L.C. (2)
2.1 Plan and Agreement for Reorganization dated as of
September 13, 1996 by and between ProMedCo, Inc., ProMedCo
of Temple, Inc., and King's Daughters Clinics, P.A. (2)
2.2 Agreement for Statutory merger dated as of November 7,
1996 by and between ProMedCo, Inc., ProMedCo of Northern
Nevada, Inc. and Western medical Management Corporation,
Inc. (2)
3.1 Form of Restated Certificate of Incorporation of ProMedCo
Management Company. (2)
3.2 By-laws of ProMedCo Management Company. (2)
4 Form of Rights Agreement. (2)
10.1 Interim Service Agreement dated as of January 19, 1996 by
and between ProMedCo of Abilene, inc. and Abilene
Diagnostic Clinic, P.L.L.C. (2)(3)
10.1(a) First Amendment to Service Agreement and Interim Service
Agreement dated as of January 19, 1996 by and between
ProMedCo of Abilene, inc. and Abilene Diagnostic Clinic,
P.L.L.C. (2)
10.2 Service Agreement dated as of January 19, 1996 by and between
ProMedCo of Abilene, Inc. and Abilene Diagnostic
Clinic, P.L.L.C. (2)(3)
10.3 Service Agreement dated as of March 12, 1996 by and between
ProMedCo, Inc. of Cullman, Inc. and Cullman Primary
Care, P.C. (2)(3)
10.4 Service Agreement dated as of April 1, 1996 by and between
ProMedCo of Mayfield, Inc. and Morgan-Haugh, P.S.C. (2)(3)
10.5 Amended and Restated Service Agreement dated as of June
24, 1996 by and between ProMedCo of Lake Worth, Inc. and
Tarrant Family Practice, P.A. (2)(3)
<PAGE>
10.6 Service Agreement dated as of June 30, 1995 by and between
ProMedCo of Denton, Inc. and North Texas Medical Surgical
Clinic, P.A. (2)(3)
10.7 Credit Agreement dated as of June 12, 1996 among ProMedCo,
Inc., the Lenders referred to therein, and NationsCredit
Commercial Corporation, as Agent. (2)
10.8 1996 Stock Option Plan. (2)
10.9 Employee Stock Purchase Plan. (2)
10.10 Employment Agreement with H. Wayne Posey. (2)
10.11 Employment Agreement with Richard R. D'Antoni. (2)
10.12 Amended and Restated Employment Agreement with Dale K.
Edwards. (2)
10.13 Employment Agreement with R. Alan Gleghorn. (2)
10.14 Employment Agreement with Rick E. Weymier. (2)
10.15 Employment Agreement with Deborah A. Johnson. (2)
10.16 Service Agreement dated as of September 1, 1996 by and
between ProMedCo of Temple, Inc. and Physicians of King's
Daughters, P.A. (2)
10.17 Employment Agreement with Robert D. Smith. (2)
10.18 Form of Service Agreement by and between ProMedCo of
Northern Nevada, Inc. and Knutzen Goring Medical Group, Ltd.
DBA The Northern Nevada Medical Group. (2)(3)
10.19 1994 Stock Option Plan. (2)
10.20 Asset Purchase Agreements as of April 23, 1997 by and between
ProMedCo Management Company, ProMedCo of Southwest Florida,
Inc., Naples Medical Center, P.A. and Naples Obstetrics &
Gynecology, M.D., P.A. Included as Appendix 2.9A to the
Agreement is the Service Agreement by and between ProMedCo of
Southwest Florida and Naples Medical Center, P.A. (4)
10.21 Asset Purchase Agreement as of August 12, 1997 by and between
ProMedCo Management Company, PHB Management Company,
Inc. and HealthAmerica Pennsylvania, Inc.
Service Agreement by and between PHB Management Company,
Inc. and HealthAmerica Pennsylvania, Inc. effective October 1,
1997. (5)
10.22 Stock Purchase Agreement as of October 8, 1997 by and between
ProMedCo Management Company, ProMedCo of Sarasota,
Inc., IMG, Inc. (formerly known as Intercoastal Medical
Group, Inc.), and Intercoastal Medical Group, Inc. Service
Agreement by and between ProMedCo of Sarasota and Intercoastal
Medical Group, Inc., effective August 1, 1997. (6)
10.23 Agreement for Statutory Merger by and between HP Acquisition
Corp., a Wholly Owned Subsidiary of ProMedCo Management
Company, with PBMA Health Systems, Inc. and Health Plans, Inc.
dated July 25, 1997. (7)
10.24 Amended and Restated Credit Agreement dated as of November
13, 1997 among ProMedCo Management Company, the Lenders
referred to therein, and NationsCredit Commercial Corporation,
as Agent. (8)
10.25 Agreement for Statutory Merger between ProMedCo Management
Company, ProMedCo of Berkshire, Inc. and Berkshire
Physicians & Surgeons, P.C., dated April 14, 1998. (9)
10.26 Service Agreement between Commonwealth Health Management
Services, Inc. and BP&S, P.C., dated April 1, 1998. (9)
10.27 Second Amended and Restated Credit Agreement dated as of
April 16, 1998 among ProMedCo Management Company, the
Lenders referred to therein, and NationsCredit Commercial
Corporation, as Agent. (1)
<PAGE>
10.28 Credit Agreement dated as of December 17, 1998 among ProMedCo
Management Company, the Lenders referred to therein and
NationsBank, N.A. as Agent and NationsBanc Montgomery
Securities, LLC, as Arranger
11 Computation of Net Income Per Share.
21 List of Subsidiaries.
23.1 Consent of Independent Public Accountants.
27 Financial Data Schedule.
(1) Filed as an exhibit of the same number to the Company's registration
statement on Form S-3 (File No. 333-50105).
(2) Filed as an exhibit of the same number to the Company's registration
statement on Form S-1 (File No. 333-10557).
(3) Confidential treatment has been requested and an application has been
separately filed with the Commission.
(4) Filed as exhibit 2.3 to the Company's report on Form 8-K filed with the
Commission on May 7, 1997.
(5) Filed as an exhibit to the Company's report on Form 8-K filed with the
Commission on October 15, 1997.
(6) Filed as an exhibit to the Company's report on Form 8-K filed with the
Commission on October 23, 1997.
(7) Filed as an exhibit to the Company's report on Form 8-K filed with the
Commission on December 17, 1997.
(8) Filed as an exhibit to the Company's report on Form 10-K filed with the
Commission on March 26, 1998.
(9) Filed as an exhibit to the Company's report on Form 8-K filed with the
Commission on May 1, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PROMEDCO MANAGEMENT COMPANY
By: /s/ H. WAYNE POSEY
H. Wayne Posey
Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ H. WAYNE POSEY Chairman, President, Chief Executive March 31, 1999
- - --------------------------------------
H. Wayne Posey Officer and Director
(Principal Executive Officer)
/s/ ROBERT D. SMITH Senior Vice President-Finance and March 31, 1999
- - --------------------------------------
Robert D. Smith Chief Financial Officer
(Principal Financial and Accounting
Officer)
/s/ RICHARD R. RAGSDALE Director March 31, 1999
- - --------------------------------------
Richard R. Ragsdale
/s/ DAVID T. BAILEY, M.D. Director March 31, 1999
- - --------------------------------------
David T. Bailey, M.D.
/s/ CHARLES J. BUYSSE, M.D. Director March 31, 1999
- - --------------------------------------
Charles J. Buysse, M.D.
/s/ E. THOMAS CHANEY Director March 31, 1999
- - --------------------------------------
E. Thomas Chaney
/s/ JAMES F. HERD, M.D. Director March 31, 1999
- - ---------------------------------------
James F. Herd, M.D.
/s/ JACK W. MCCASLIN Director March 31, 1999
- - --------------------------------------
Jack W. McCaslin
</TABLE>
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
ProMedCo Management Company Page
<S> <C>
Report of Independent Public Accountant.........................................................................F-1
Consolidated Balance Sheets as of December 31, 1997 and 1998 ...................................................F-2
Consolidated Statements of Operations for the Three Years Ended
December 31, 1998............................................................................................ F-4
Consolidated Statements of Stockholders' Equity for the Three Years Ended
December 31, 1998.............................................................................................F-5
Consolidated Statements of Cash Flows for the Three Years Ended
December 31, 1998.............................................................................................F-6
Notes to Consolidated Financial Statements......................................................................F-7
</TABLE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
ProMedCo Management Company:
We have audited the accompanying consolidated balance sheets of ProMedCo
Management Company (a Delaware corporation) and subsidiaries as of December 31,
1997 and 1998, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ProMedCo Management Company and
subsidiaries as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Fort Worth, Texas,
March 12, 1999
F-1
<PAGE>
PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
ASSETS 1997 1998
------ -------------- --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 15,760,920 $ 13,870,967
Accounts receivable, net of allowances of approximately
$19,281,000 and $45,281,000, respectively 22,463,689 51,375,337
Management fees receivable 1,938,464 8,490,099
Due from affiliated physician groups 2,870,607 5,584,651
Deferred tax benefit - 2,205,835
Prepaid expenses and other current assets 6,917,675 13,042,824
-------------- --------------
Total current assets 49,951,355 94,569,713
Property and equipment, net of accumulated depreciation of approximately
$2,630,000 and $5,668,000, respectively 10,590,561 15,125,569
Intangible assets, net of accumulated amortization of approximately
$1,775,000 and $5,967,000, respectively 77,195,351 153,402,297
Long term receivables 23,915,884 40,428,738
Other assets 1,312,999 3,132,555
-------------- --------------
Total assets $ 162,966,150 $ 306,658,872
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - (Continued)
<TABLE>
<CAPTION>
December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1998
------------------------------------ -------------- --------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 3,185,208 $ 4,683,218
Accrued salaries, wages and benefits 6,562,903 8,146,391
Payable to affiliated physician groups 2,895,023 6,640,636
Accrued purchased medical services 3,251,751 6,087,151
Accrued expenses and other current liabilities 2,762,978 6,741,451
Deferred income tax liability 174,101 -
Current maturities of notes payable 3,676,365 3,231,551
Current portion of obligations under capital leases 609,591 557,449
Current portion of deferred purchase price 1,575,308 2,137,154
Income taxes payable 1,051,050 846,766
-------------- --------------
Total current liabilities 25,744,278 39,071,767
Notes payable, net of current maturities 39,688,325 58,130,408
Obligations under capital leases, net of current portion 1,073,886 701,042
Deferred purchase price, net of current portion 11,008,931 25,289,764
Convertible subordinated notes payable 1,765,058 7,634,626
Deferred income tax liability 1,103,876 2,871,838
Other long term liabilities 1,963,059 311,921
-------------- --------------
Total liabilities 82,347,413 134,011,366
-------------- --------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value, 20,000,000 shares authorized and no
shares outstanding - -
Common stock, $0.01 par value; 50,000,000 shares authorized;
10,686,767 and 21,024,415 shares issued and outstanding in 1997
and 1998, respectively 106,868 210,244
Additional paid-in-capital 58,946,838 152,785,961
Common stock to be issued, 2,875,073 and 412,771 shares, in 1997 and
1998, respectively 20,121,059 6,005,300
Stockholder notes receivable (369,665) (369,665)
Accumulated earnings 1,813,637 14,015,666
-------------- --------------
Total stockholders' equity 80,618,737 172,647,506
-------------- --------------
Total liabilities and stockholders' equity $ 162,966,150 $ 306,658,872
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1997 1998
<S> <C> <C> <C>
Net revenue $ 26,245,196 $ 80,641,535 $ 222,502,115
Operating expenses:
Clinic salaries and benefits 11,694,973 29,859,718 74,676,074
Clinic rent and lease expense 2,670,138 7,016,261 17,186,828
Clinic supplies 3,213,443 9,667,085 24,873,718
Purchased medical services 969,650 7,946,989 45,444,439
Other clinic costs 5,018,876 10,883,588 25,699,233
General corporate expenses 2,633,585 3,793,552 5,612,103
Depreciation and amortization 723,641 2,942,604 7,238,960
Interest expense, net 209,474 456,175 1,104,273
Merger costs 682,269 - -
-------------- -------------- --------------
Total operating expenses 27,816,049 72,565,972 201,835,628
------------- -------------- --------------
Income (loss) before provision for income taxes and
extraordinary charge (1,570,853) 8,075,563 20,666,487
Provision for income taxes - 2,602,379 7,853,266
------------- -------------- --------------
Net income (loss) before extraordinary charge (1,570,853) 5,473,184 12,813,221
Extraordinary charge - loss on extinguishment of debt, net
of income taxes of approximately $375,000 - - (611,192)
------------- -------------- --------------
Net income (loss) $ (1,570,853) $ 5,473,184 $ 12,202,029
============= ============== ==============
Net earnings (loss) per share:
Basic
Income (loss) before extraordinary charge $ (0.20) $ 0.48 $ 0.69
Extraordinary charge - - (0.03)
------------- -------------- --------------
Net income (loss) $ (0.20) $ 0.48 $ 0.66
============= ============== ==============
Diluted
Income (loss) before extraordinary charge $ (0.20) $ 0.38 $ 0.61
Extraordinary charge - - (0.03)
------------- -------------- --------------
Net income (loss) $ (0.20) $ 0.38 $ 0.58
============= ============== ==============
Weighted average number of common shares outstanding:
Basic 7,870,908 11,375,662 18,621,988
Diluted 7,870,908 14,224,198 20,957,771
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Class B Additional Common Stockholder Accumulated
Common Stock Common Stock Paid-In Stock To Notes Earnings
Shares Amount Shares Amount Capital Be Issued Receivable (Deficit) Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December
31, 1995 1,226,150 12,262 2,320,549 23,205 2,321,500 4,000 (31,834) (2,088,694) 240,439
Common stock
issued - - 843,729 8,437 9,634,903 - (120,000) - 9,523,340
Stock options
exercised - - 22,851 229 31,077 - (31,306) - -
Stock
subscription
canceled - - - - - (4,000) 4,000 - -
Common stock
to be issued - - - - - 2,303,212 - - 2,303,212
Stockholder
notes payments - - - - - - 27,834 - 27,834
Net loss - - - - - - - (1,570,853) (1,570,853)
--------- --------- --------- -------- ----------- ---------- --------- ---------- -----------
Balance, December
31, 1996 1,226,150 12,262 3,187,129 31,871 11,987,480 2,303,212 (151,306) (3,659,547) 10,523,972
Common stock
issued in
initial public
offering, net - - 4,000,000 40,000 31,705,000 - - - 31,745,000
Redeemable
preferred
shares
converted - - 500,000 5,000 2,952,641 - - - 2,957,641
Redeemable
common shares
converted - - 165,296 1,653 990,123 - - - 991,776
Class B common
converted (1,226,150) (12,262) 1,226,150 12,262 - - - - -
Warrants and
options
exercised - - 59,786 597 92,142 - - - 92,739
Subordinated
notes payable
converted - - 3,912 39 35,177 - - - 35,216
Common stock
issued and
to be issued,
net - - 1,608,656 16,087 11,565,716 17,817,847 (249,671) - 29,149,979
Treasury stock
purchased
and retired - - (64,162) (641) (381,441) - - - (382,082)
Stockholder
notes payments - - - - - - 31,312 - 31,312
Net income - - - - - - - 5,473,184 5,473,184
--------- --------- --------- -------- ----------- --------- --------- ---------- -----------
Balance, December
31, 1997 - - 10,686,767 106,868 58,946,838 20,121,059 (369,665) 1,813,637 80,618,737
--------- --------- --------- -------- ----------- --------- --------- ---------- -----------
Common stock
offering, net - - 6,900,000 69,000 71,820,496 - - - 71,889,496
Warrants and
options exercised - - 406,540 4,065 547,038 - - - 551,103
Subordinated notes
payable converted - - 76,093 761 684,004 - - - 684,765
Common stock
issued and to
be issued, net - - 2,955,015 29,550 20,787,585 (14,115,759) - - 6,701,376
Net income - - - - - - - 12,202,029 12,202,029
--------- --------- --------- -------- ----------- --------- --------- ---------- -----------
Balance, December
31, 1998 - $ - 21,024,415 $210,244 $152,785,961 $6,005,300 $(369,665) $14,015,666 $172,647,506
========= ========= ========= ======== =========== ========== ======== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1997 1998
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) before extraordinary charge $ (1,570,853) $ 5,473,184 $ 12,813,221
Extraordinary charge (611,192)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities
(net of effects of purchase transactions)-
Depreciation and amortization 723,641 2,942,604 7,238,960
Deferred provision for income taxes - 329,840 1,267,343
Net gain on sale of fixed assets (229,251) - -
Noncash compensation 14,750 - -
Changes in assets and liabilities-
Accounts receivable (785,773) (7,179,281) (19,963,539)
Management fees receivable (1,149,630) 457,449 (6,644,822)
Due from affiliated physician groups (428,830) (1,972,295) (2,714,044)
Prepaid expenses and other current assets (205,401) (3,624,430) (1,226,703)
Other assets (172,985) (402,298) (639,685)
Accounts payable (96,932) 1,558,148 (5,122,401)
Payable to affiliated physician groups 1,242,641 5,191,027 1,539,123
Accrued expenses and other current liabilities 1,468,040 (1,499,493) 1,539,337
------------- -------------- -------------
Net cash provided by (used in) operating
activities (1,190,583) 1,274,455 (12,524,402)
------------- ------------- --------------
Cash flows from investing activities:
Purchases of property and equipment (1,102,029) (2,817,907) (4,081,535)
Proceeds from sale of equipment 242,175 - -
Purchases of clinic assets, net of cash (2,435,905) (22,391,718) (57,373,146)
Increase in notes receivables (net of effects of
purchase transactions) - (20,024,375) (17,458,211)
------------- -------------- --------------
Net cash used in investing activities (3,295,759) (45,234,000) (78,912,892)
-------------- ------------- --------------
Cash flows from financing activities:
Borrowings under notes payable 4,482,557 30,550,891 132,775,099
Payments on notes payable (331,715) (2,838,760) (114,777,966)
Payments on capital leases (70,132) (561,998) (424,986)
Payment of deferred financing costs (565,137) (300,500) (1,007,546)
Payment of deferred offering costs (564,427) - -
Proceeds from issuance of common stock 125,000 31,837,739 72,982,740
Purchase and retirement of treasury shares - (382,082) -
Issuance of stockholder notes receivable (3,636) (218,359) -
-------------- ------------- -------------
Net cash provided by financing activities 3,072,510 58,086,931 89,547,341
------------- ------------- -------------
Increase (decrease) in cash and cash equivalents (1,413,832) 14,127,386 (1,889,953)
Cash and cash equivalents, beginning of period 3,047,366 1,633,534 15,760,920
------------- ------------- -------------
Cash and cash equivalents, end of period $ 1,633,534 $ 15,760,920 $ 13,870,967
============= ============= =============
Supplemental disclosure of cash flow information (See Notes 3 and 7):
Cash paid during the year-
Interest expense $ 137,242 $ 689,199 $ 3,165,463
Income taxes $ - $ 1,299,118 $ 6,668,295
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 and 1998
1. DESCRIPTION OF BUSINESS
ProMedCo Management Company ("ProMedCo" or the "Company"), a Delaware
corporation, is a medical services company that manages and coordinates the
delivery of healthcare in secondary markets. The Company focuses exclusively on
secondary markets, in which it establishes local delivery systems using the
platform of primary care-driven, multi-specialty physician groups. By
affiliating with leading primary care driven, multi-specialty physician groups,
the Company establishes dominant, local healthcare delivery platforms thus
providing physicians the opportunity for increasing control of medical
expenditures in their communities. The groups expand through affiliations with
additional primary care physicians and specialists and selective additions of
ancillary services. In addition to providing operating and expansion capital,
the Company provides its affiliated groups with a broad range of strategic and
management expertise and services. The Company also offers a full range of
medical management services to capitated physician networks. The Company
currently is affiliated with multi-specialty physician groups in 14 states,
comprised of approximately 685 physicians and 130 mid-level providers (primarily
physician assistants and nurse practitioners), and is associated with 585
physicians in associated independent practice association ("IPA") networks.
The Company, through its wholly-owned subsidiaries, typically acquires certain
net assets of and manages physician groups under long term service agreements
with affiliated physician groups. The Company provides administrative and
technical support for professional services rendered by the physician groups
under service agreements. Under the service agreements, the Company is
reimbursed for all clinic expenses, as defined in the agreement, and
participates at varying levels in the excess of net clinic revenue over clinic
expenses.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation/Basis of Consolidation
The consolidated financial statements have been prepared on the accrual basis of
accounting and include the accounts of the Company and its wholly owned
subsidiaries. The Company's subsidiaries acquire the operating assets and assume
certain liabilities of the physician groups and account for the Company's
management activities with the physician groups under the Company's long term
service agreements. The Company does not consolidate the operating results and
accounts of the physician groups under EITF 97-2, "Applications of FASB No. 94
and APB No. 16 to Physician Practice Management Entities and Certain other
Entities under Contracted Management Agreement". All significant intercompany
accounts and transactions have been eliminated.
In November 1996, the Company entered into a definitive agreement with Western
Medical Management Corp., Inc. ("Reno"), a physician management company. Under
the terms of the agreement, Reno exchanged its common stock for common stock of
the Company upon consummation of the initial public offering (the "Initial
Offering") (see Notes 3 and 8). 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.
Certain prior year balances have been reclassified to conform to the 1998
presentation.
Net Revenue
Net revenue represents physician groups revenue less amounts paid to physician
groups. The amounts paid to physician groups (typically 80-85% of the physician
groups' operating income) represents amounts paid to the physicians pursuant to
the service agreements between the Company and the physician groups and
primarily consists of the cost of the affiliated physician services. Under the
service agreements, the Company provides each
F-7
<PAGE>
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.
Net revenue is detailed as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------------- -------------- --------------
<S> <C> <C> <C>
Physician groups revenue, net $ 47,036,801 $ 120,961,775 $ 304,689,084
Other revenue - 6,755,000 5,765,000
-------------- --------------- --------------
Total revenue 47,036,801 127,716,775 310,454,084
Amounts paid to physician groups 20,791,605 47,075,240 87,951,969
-------------- -------------- --------------
Net revenue $ 26,245,196 $ 80,641,535 $ 222,502,115
</TABLE>
Physician groups revenue represents the revenue of the physician groups reported
at the estimated realizable amounts from patients, third-party payors, and
others for services rendered, net of contractual and other adjustments. Revenue
under certain third-party payor agreements is subject to audit and retroactive
adjustments. Provisions for third-party payor settlements and adjustments are
estimated in the period the related services are rendered and adjusted in future
periods as final settlements are determined. There are no material claims,
disputes, or other unsettled matters that exist to management's knowledge
concerning third-party reimbursements. In addition, management believes there
are no retroactive adjustments that would be material to the Company's financial
statements. Other revenue represents fees from management consulting,
supplemental implementation services, and other miscellaneous revenues.
Accounts Receivable
Accounts receivable principally represents receivables from patients and other
third party payors for medical services provided by the physician groups. Such
amounts are recorded net of contractual allowances and estimated bad debts.
Management continually monitors and periodically adjusts its allowances
associated with these receivables based on estimated collection and payment
rates. Any adjustments to these estimates are made in the period that they
become known and quantifiable. Under the terms of the service agreements, the
affiliated physician groups retain a percentage (typically 80-85%) of the risks
associated with uncollectible receivable amounts.
Concentration of Risk
During 1996, 1997 and 1998, approximately 30%, 25% and 30%,
respectively, of physician group revenue was received under government-sponsored
healthcare programs (principally, the Medicare and Medicaid programs). The
physician groups have numerous agreements with managed care organizations and
other payors to provide physician services based on negotiated fee schedules.
The Company also receives payments under capitation arrangements with various
managed care organizations. During 1996, 1997 and 1998, approximately 14%, 16%
and 21%, respectively, of physician groups revenue received under capitation
arrangements. No individual managed care organization or other payor is material
to the Company.
For the year ended December 31, 1998, two of the Company's affiliated physician
groups each contributed 10% or more of the Company's net revenue. Clinics in
Champaign, Illinois and Pittsfield, Massachusetts represented approximately 25%
and 14% of net revenue, respectively.
General Corporate Expenses
General corporate expenses represent primarily the salaries and benefits of
corporate headquarters personnel, rent, travel, and other administrative
expenses.
F-8
<PAGE>
Net Earnings (Loss) Per Share
The Company adopted the Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings per Share" effective December 31, 1997. SFAS No. 128 simplifies
the computation of EPS by replacing the presentation of primary EPS with a
presentation of basic EPS. Basic EPS is calculated by dividing income (loss)
available to common shareholders by the weighted average number of common shares
outstanding during the period. Common stock to be issued is assumed to be common
stock outstanding and is included in the weighted average number of common
shares outstanding for the basic EPS calculation. Options, warrants, and other
potentially dilutive securities are excluded from the calculation of basic EPS.
Diluted EPS includes the options, warrants, and other potentially dilutive
securities that are excluded from basic EPS using the treasury method to the
extent that these securities are not anti-dilutive.
There is no difference between basic and diluted EPS for the years ended
December 31, 1996 because options, warrants and convertible subordinated notes
payable have an anti-dilutive effect. Similarly, the convertible subordinated
notes payable have been excluded from diluted EPS in the years ended December
31, 1997 and 1998 because they are considered to be anti-dilutive. Following is
a reconciliation of basic and diluted EPS for the years ended December 31, 1997
and December 31, 1998:
<TABLE>
<CAPTION>
Income Shares Per-Share
December 31, 1997 (Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Basic EPS $ 5,473,184 11,375,662 $ 0.48
======
Effect of dilutive securities
Options - 657,273
Warrants - 2,191,263
-------------- -------------
Diluted EPS $ 5,473,184 14,224,198 $ 0.38
-------------- ------------- ======
December 31, 1998
Basic EPS, income before extraordinary charge $ 12,813,221 18,621,988 $ 0.69
Effect of dilutive securities
Options - 402,020
Warrants - 1,933,763
-------------- -------------
Diluted EPS, income before extraordinary charge 12,813,221 20,957,771 $ 0.61
Extraordinary charge - loss on extinguishment of
debt, net of $375,000 of income taxes (611,192) - (0.03)
-------------- ------------- ------
Diluted EPS, net income $ 12,202,029 20,957,771 $ 0.58
============== ============= ======
</TABLE>
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of three
months or less when purchased to be cash equivalents. Cash and cash equivalents
as of December 31, 1997 and December 31, 1998, include approximately $6,317,000
and $4,738,000, respectively of cash held in escrow accounts for the payment of
premiums under split-dollar life insurance contracts (see Note 6.).
Management Fees Receivable
Management fees receivable represent amounts receivable from affiliated
physician groups for interim management and other services. These amounts are
typically received within one to four months after the services are rendered.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment are calculated using the straight-line method over the estimated
useful lives of the assets, which range from three to fifteen years. Leasehold
improvements are amortized on a straight-line basis over the shorter of the
lease term or estimated useful life of the assets. Routine maintenance and
repairs are charged to expense as incurred, while major renewals or improvements
are capitalized.
F-9
<PAGE>
Intangible Assets
Service Agreement Rights
The Company's affiliations typically involve the purchase of tangible and
intangible assets and the assumption of certain liabilities of the affiliated
physician groups. As part of the purchase allocation, the Company allocates the
purchase price to the tangible assets acquired and liabilities assumed, based on
estimated fair market values. In connection with each acquisition, the Company
enters into long term service agreements with the affiliated physician groups.
The service agreements are for a term of 40 years and cannot be terminated by
either party without cause, consisting primarily of bankruptcy or material
default.
In connection with the allocation of purchase price to identifiable intangible
assets, the Company analyzes the nature of each group with which a service
agreement is entered into, including the number of physicians in each group,
number of service sites and ability to recruit additional 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, or enter into employment and noncompete agreements with the
physicians, the intangible asset created in the purchase allocation process is
associated solely with the service agreement with the physician group.
The Company believes that there is no material value allocable to the employment
and noncompete agreements entered into between the physician group and the
individual physicians. The primary economic beneficiary of these agreements is
the physician group, an entity that the Company does not legally control. In
addition, any damages under the agreements are paid solely to the physician
group for purposes of replacing departing physicians. Generally, due to low
expected physician turnover in the industry and the ability of the physician
group to actively replace departing physicians, there would be no significant
economic loss to either the physician group or the Company due to physician
departure. The physician groups continually recruit physicians and, as
appropriate and necessary, subsequently add qualified physicians to the group.
This manner of operations allows the physician group to perpetuate itself as
individual physicians retire or are otherwise replaced. The Company believes
that the physician groups with which it has service agreements are thus 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 25 years. (See also Note 10).
Excess of Cost of Acquired Assets Over Fair Value
Excess of cost of acquired assets over fair value (goodwill) is amortized using
the straight-line method over 25 years. (See also Note 10).
Impairment of Long-Lived Assets
The Company periodically reviews its intangible assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
asset may not be recoverable. If this review indicates that the carrying amount
of the asset may not be recoverable, based on the undiscounted cash flows of the
operations over the remaining amortization period, then the carrying value of
the asset is reduced to estimated fair value. Among the factors that the Company
will continually evaluate are unfavorable changes in each physician group's
relative market share and local market competitive environment, current period
and forecasted operating and cash flow levels of the physician group and its
impact on the management fee earned by the Company, and legal factors governing
the practice of medicine. At December 31, 1997 and 1998, no impairment existed.
Income Taxes
The Company accounts for income taxes under the liability method which states
that deferred taxes are to be determined based on the estimated future tax
effects of differences between the financial statement and tax bases of assets
and liabilities given the provisions of enacted tax laws. Deferred income tax
provisions and benefits are based on the changes to the asset or liability from
period to period. The Company and its subsidiaries file a consolidated tax
return.
F-10
<PAGE>
Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123, "Accounting for Stock-Based Compensation," which allows entities to
measure compensation costs related to awards of stock-based compensation using
either the fair value method or the intrinsic value method. Under the fair value
method, compensation expense is measured at the grant date based on the fair
value of the award. Under the intrinsic value method, compensation expense is
equal to the excess, if any, of the quoted market price of the stock at the
grant date over the amount the employee must pay to acquire the stock. Entities
electing to measure compensation costs using the intrinsic value method must
make pro forma disclosures of net income and earnings per share as if the fair
value method had been applied. The Company has elected to account for
stock-based compensation programs using the intrinsic value method. The
following pro forma disclosures are presented to reflect amounts as if the fair
value method were applied:
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1997 1998
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
Net income (loss) $ (2,045,455) $ 3,921,296 $ 10,762,451
Basic net earnings (loss) per share $ (0.26) $ 0.34 $ 0.58
Diluted net earnings (loss) per share $ (0.26) $ 0.28 $ 0.51
</TABLE>
For disclosure purposes, the Company used U.S. Treasury strip rates for its
risk-free interest rates, assumed no future dividends and assumed the expected
life of the options through the applicable expiration dates. For 1996, prior to
the Initial Offering, the Company assumed no volatility, and assumed a
volatility rate of 58% and 88% in 1997 and 1998, respectively. See Note 8.
3. ACQUISITIONS
Medical Groups
During 1998, 1997 and 1996, the Company, through its wholly-owned subsidiaries,
acquired certain operating assets or all of the outstanding stock of the
following physician groups:
<TABLE>
<CAPTION>
Physician Group Effective Date Location
<S> <C> <C> <C>
1998: Berkshire Physicians & Surgeons April 1998 (a) Pittsfield, MA
Primary Medical Clinics May 1998 Midland, TX
Prime Medical Associates June 1998 Hudson, NY
Physicians' Primary Care July 1998 Ft. Myers, FL
Medical Associates of Pinellas November 1998 (b) Clearwater, FL
</TABLE>
F-11
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
1997: Naples Medical Center March 1997 Naples, FL
Abilene Diagnostic Clinic June 1997 (c) Abilene, TX
Intercoastal Medical Group August 1997 Sarasota, FL
Beacon Medical Group October 1997 (d) Harrisburg, PA
Cowley Medical Associates (e) November 1997 Harrisburg, PA
Thomas-Spann Clinic December 1997 Corpus Christi, TX
HealthStar, Inc. December 1997 Knoxville, TN
1996: Cullman Primary Care March 1996 Cullman, AL
Morgan-Haugh April 1996 Mayfield, KY
HealthFirst Medical Group June 1996 Lake Worth, TX
King's Daughters Clinic September 1996 Temple, TX
</TABLE>
(a) Berkshire Physicians and Surgeons was operated by the Company
under an interim service agreement effective February 1, 1998. The
Company completed its acquisition in April 1998, and entered into
a long-term service agreement with the physician group effective
April 1, 1998.
(b) 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 in June
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 in October 1997, and
entered into a long-term service agreement with the physician
group effective on that date.
(e) The physicians of Cowley Medical Associates combined with the
Beacon Medical Group in December 1997.
The acquisitions of the operating assets and liabilities have been accounted for
by the purchase method of accounting and, accordingly, the purchase price has
been allocated to the tangible assets acquired and liabilities assumed based on
the estimated fair values at the dates of acquisition. Simultaneous with each
acquisition, the Company entered into a long term service agreement with each
physician group. In conjunction with certain acquisitions, the Company is
obligated to make deferred payments to physician groups. Such amounts are
included in deferred purchase price in the accompanying consolidated balance
sheets. The following is the preliminary allocation of purchase price for the
acquisitions completed during the year ended December 31, 1998.
<TABLE>
<CAPTION>
<S> <C>
Fair value of assets acquired $ 17,074,862
Liabilities assumed (11,950,186)
Intangible assets 80,217,372
85,342,048
Less - Fair value of common stock issued and to be issued 6,270,328
Less - Notes issued 6,554,469
Less - Deferred purchase price (payable in cash) 23,217,622
---------------
Cash purchase price $ 49,299,629
===============
</TABLE>
For certain acquisitions occurring close to or at the end of the period, the
estimated fair values are preliminary and, therefore, are subject to change.
Under the purchase agreements, the purchase price is adjustable by the Company
for a period between 60 to 120 days after the closing of the transaction in
order to finalize the fair values of the assets acquired and liabilities
assumed.
F-12
<PAGE>
Health Plans, Inc.
Effective December 1, 1997, the Company, through a wholly-owned subsidiary,
completed its acquisition of Health Plans, Inc., and renamed the company PMC
Medical Management , Inc. ("PMC"). PMC provides capitation management services
through risk contracting with HMOs and other third-party payors. The total
consideration for the transaction was approximately $8.5 million which consisted
of $1.7 million cash and $6.8 million of the Company's common stock and stock
options.
Pro Forma Information
The following unaudited pro forma information reflects the effect of
acquisitions of medical groups and PMC on the consolidated results of operations
of the Company assuming that the acquisitions occurred at January 1, 1997.
Future results may differ substantially from pro forma results and cannot be
considered indicative of future results.
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1998
(unaudited) (unaudited)
<S> <C> <C>
Net revenue $ 178,866,227 $ 252,135,793
=============== ===============
Net income before extraordinary charge $ 6,905,946 $ 13,766,474
=============== ===============
Net income before extradordinary charge per share
Basic $ 0.59 $ 0.73
=============== ===============
Diluted $ 0.47 $ 0.65
=============== ===============
Weighted average number of common shares outstanding
Basic 11,790,919 18,750,802
=============== ===============
Diluted 14,639,455 21,086,585
=============== ===============
</TABLE>
Western Medical Management Corp. Inc.
As discussed in Note 1, the Company completed its merger with Reno in March
1997, the date of the Initial Offering. The accompanying condensed consolidated
financial statements are based on the assumption that the companies were
combined for the full periods presented and prior financial statements have been
restated to give effect to the combination. The following unaudited information
reflects the separate results of the combined entities for periods prior to the
combination:
<TABLE>
<CAPTION>
Twelve Months Ending Three Months Ending
December 31, 1996 March 31, 1997
ProMedCo Reno ProMedCo Reno
<S> <C> <C> <C> <C>
Net revenue $ 19,319,002 $ 6,926,194 $ 9,674,181 $ 2,043,225
Operating expenses
Clinic expenses 16,460,181 7,106,899 8,025,524 1,671,579
General corporate expenses 2,633,585 - 818,772 -
Depreciation and amortization 610,827 112,814 391,507 44,368
Interest expense 163,714 45,760 112,666 3,283
Merger costs - 682,269 - -
------------- -------------- ------------- -------------
Income (loss) before provision for
income taxes (549,305) (1,021,548) 325,712 323,995
Provision for income taxes - - 97,714 97,198
------------- -------------- ------------- -------------
Net income (loss) $ (549,305) $ (1,021,548) $ 227,998 $ 226,797
============= ============== ============= =============
</TABLE>
F-13
<PAGE>
4. PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
<TABLE>
<CAPTION>
December 31,
1997 1998
<S> <C> <C>
Furniture, fixtures, and equipment $ 12,212,561 $ 18,430,494
Leasehold improvements 1,008,421 2,362,598
--------------- ----------------
13,220,982 20,793,092
Less- Accumulated depreciation (2,630,421) (5,667,523)
---------------- -----------------
Property and equipment, net $ 10,590,561 $ 15,125,569
=============== ================
</TABLE>
5. INTANGIBLE ASSETS
Intangible assets are summarized as follows:
<TABLE>
<CAPTION>
December 31,
1997 1998
<S> <C> <C>
Service agreement rights $ 73,200,258 $ 152,889,768
Excess of cost of acquired assets over fair value 5,770,534 6,479,090
--------------- ----------------
78,970,792 159,368,858
Less- Accumulated amortization (1,775,441) (5,966,561)
---------------- -----------------
Intangible assets, net $ 77,195,351 $ 153,402,297
=============== ================
</TABLE>
6. LONG TERM RECEIVABLES
During 1997, the Company entered into an agreement to lend up to $42.7 million
to an affiliated physician group. The 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
being funded in six advances. As of December 31, 1998, three advances totaling
$25.2 million had been made. The remaining three advances of $5.825 million each
will be made annually on December 1, 1999, 2000 and 2001. Interest is payable to
the Company monthly at an annual rate of 8.0%. The loan will be repaid in
fifteen annual payments beginning on November 30, 2008. Certain assets of the
affiliated physician group have been pledged as security under the loan, and the
loan provides certain rights to offset against distributions under the service
agreement in the event of default under the loan agreement. As of December 31,
1998, the outstanding loan totaled $25.2 million, and the Company estimates the
carrying value of this receivable approximates the fair value.
In November 1998, the Company entered into a similar agreement with a new
physician group to loan $8.0 million, all of which was funded on November 12,
1998. The purpose of this loan was to provide the physician group with liquidity
for general association purposes and to strengthen the physician-association
relationships. Interest is payable to the Company monthly at an annual rate of
8.0%. The loan will be repaid in 180 monthly payments beginning on November 30,
2008. Certain assets of the affiliated physician group have been pledged as
security under the loan, and the loan provides certain rights to offset against
distributions under the service agreement in the event of default under the loan
agreement. As of December 31, 1998, the outstanding loan totaled $8.0 million,
and the Company estimates the carrying value of this receivable approximates the
fair value.
F-14
<PAGE>
During 1997 and 1998 and in connection with the certain acquisitions, the
Company entered into split-dollar life insurance agreements with the physicians
and prior owners of certain physician groups. Under these agreements, the
Company purchases life insurance in the name of the individual seller. Upon the
death of the individual seller, the amount of the premiums paid by the Company
will be returned. In addition, these receivables are guaranteed by the
individual policy holders. The total of the premiums that will be returned to
the Company is $28.8 million. The Company initially records the present value of
future premiums receivable as long term receivables in the allocation of
purchase price, using a discount rate of 6.75% over the estimated actuarial life
of the policy owners. The accretion of this receivable from the initial carrying
value to the full premium amount is recorded as a reduction of amortization
expense in the accompanying consolidated statements of operations. At December
31, 1998 and 1997, the carrying value of these receivables was $5.2 million and
$3.9 million, respectively.
In May 1997, the Company loaned $600,000 to an officer of the Company. This
note, plus interest at 6.5%, was repaid in March 1998. In August 1998, the
Company loaned an officer of the Company $2.0 million. 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 up to 620,665 shares of the Company's common stock.
7. NOTES PAYABLE, OTHER LONG TERM DEBT
AND OBLIGATIONS UNDER CAPITAL LEASES
Notes payable are summarized as follows:
<TABLE>
<CAPTION>
December 31,
1997 1998
<S> <C> <C>
Borrowings under Revolving Credit Facility $ 32,968,000 $ 54,500,000
Notes payable to physician group; unsecured; due
in three annual installments
in April 1998, 1999 and 2000; 9%
interest payable annually in cash
or options to purchase the
Company's
common stock 8,608,602 5,786,870
Notes payable to physician group; unsecured; due
in four annual installments in December
1998, 1999, 2000, and 2001; 5% interest
payable annually 1,172,000 866,950
Note payable to physician group; unsecured; due
in two equal installments of principal and 7%
interest in April 1997 and 1998 440,173 -
Other notes payable 175,915 208,139
------------- -------------
43,364,690 61,361,959
Less- Current portion (3,676,365) (3,231,551)
------------- -------------
Notes payable, net $ 39,688,325 $ 58,130,408
============= =============
</TABLE>
The maturities of notes payable at December 31, 1998, are as follows:
1999 $ 3,231,551
2000 3,298,179
2001 54,809,795
2002 20,000
2003 2,434
-------------
$ 61,361,959
Revolving Credit Facility
Effective December 17, 1998, the Company entered into a new revolving credit
agreement (the "Credit Facility"). The Credit Facility provides for a three-year
commitment to fund revolving credit borrowings of up to $125.0 million for
acquisitions and general working capital purposes. Initial borrowings under the
new facility of $52.5
F-15
<PAGE>
million were used to payoff the Company's previous revolving credit facility
(see Note 11.) and pay certain financing costs. Under the terms of the Credit
Facility, the Company paid a commitment fee and other closing costs of
approximately $1 million which has been capitalized in other assets in the
accompanying consolidated balance sheets and amortized as an adjustment to
interest expense using the effective interest method. At the Company's option,
the Company can convert the outstanding balance on the Credit Facility to a term
loan which is due December 17, 2003.
The interest rate under the Credit Facility is set at the Company's options and
varies based on the Company's leverage ratio, as follows: (i) the higher of the
federal funds rate plus 0.5% to 1.25% or the prime rate 0.0% to 0.75%, or (ii)
the Eurodollar rate plus 1.25% to 2.25%. As of December 31, 1998, the effective
interest rate on the Credit Facility was 7.2%. The Credit Facility includes
certain restrictive covenants including limitations on the payment of dividends
as well as the maintenance of certain financial ratios. The Credit Facility is
secured by substantially all the assets of the Company. As of December 31, 1998,
the Company had $70.5 million available under the Credit Facility subject to
certain conditions as defined by the agreement.
Convertible Subordinated Notes Payable
In March 1996, in connection with the affiliation of two physician groups, the
Company issued $1.8 million in convertible subordinated notes. The notes bear
interest of 7.0% and mature in March 2003. The notes may, at the election of the
noteholders, be converted into shares of common stock at a conversion price of
$9.00 per share, subject to certain limitations and automatic conversions as
defined in the note agreements. During 1997, one noteholder converted
approximately $35,000 of notes into 3,912 shares of the Company's common stock.
During 1998, noteholders converted approximately $685,000 of notes into 76,093
shares of the Company's common stock.
In April 1998, in connection with the affiliation of a new physician group, the
Company issued $6.5 million in convertible subordinated notes. The notes bear
interest 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.
Obligations Under Capital Leases
In connection with affiliations with physician groups and in the ordinary course
of business, the Company assumed the obligation of various equipment under
capital leases. As of December 31, 1998, future minimum lease payments under
capital leases are as follows:
1999 $ 592,159
2000 455,394
2001 277,079
2002 63,221
2003 22,842
-----------------
1,410,695
Less- Portion attributable to interest (152,204)
-----------------
Obligations under capital leases 1,258,491
Less- Current portion (557,449)
-----------------
$ 701,042
8. REDEEMABLE CONVERTIBLE PREFERRED STOCK,
COMMON STOCK, AND STOCKHOLDERS' EQUITY
The Company has authorized the issuance of 70,000,000 shares of stock, of which
(a) 20,000,000 shares, par value $0.01 per share, are to be designated Preferred
Stock (of which 700,000 shares are to be designated Series A Redeemable
Convertible Preferred Stock) and (b) 50,000,000 shares, par value $0.01 per
share, are to be of a class designated Common Stock.
F-16
<PAGE>
During March 1997, the Company completed the Initial Offering of its common. The
Initial Offering consisted of 4,000,000 shares of common stock sold at a price
of $9.00 per share. Gross and net proceeds from the Initial Offering were $36.0
million and $33.5 million, respectively. In addition, net proceeds were reduced
by approximately $1.8 million of expenses relating to the Initial Offering.
During May 1998, the Company completed a public offering of 6,900,000 shares of
common stock at a price of $11.00 per share (the "Secondary Offering"). Gross
and net proceeds from the Secondary Offering were $75.9 million and $72.5
million , respectively. In addition, net proceeds were reduced by approximately
$600,000 of expenses relating to the Secondary Offering.
Redeemable Common Stock
In connection with an acquisition in 1995, the Company issued 165,296 shares of
Redeemable Common Stock for $991,776. On the completion of the Initial Offering,
the 165,296 shares of Redeemable Common Stock were automatically converted into
common stock.
Class B Common Stock
During 1994, the Company issued 1,226,150 shares of Class B Common Stock and
warrants to purchase 965,916 shares of Class B Common Stock at an exercise price
of $1.25 per share. The Company also granted an option to purchase 155,000 Class
B Common Stock at an exercise price of $0.50 per unit. Each share of Class B
Common Stock, automatically converted into common stock on the completion of the
Initial Offering. Similarly, the rights to purchase shares of Class B Common
Stock under the warrants and options were converted into warrants and options to
purchase shares of common stock. The warrants are exercisable on or before
September 30, 2004 and warrants to purchase 926,410 shares of common stock were
outstanding as of December 31, 1998.
Common Stock Warrants
During 1994, the Company issued warrants to purchase 1,428,998 shares of common
stock at an exercise price of $1.25 per share. The warrants are exercisable on
or before June 30, 2003. As of December 31, 1998, warrants to purchase 1,079,695
shares of common stock were outstanding.
Common Stock To Be Issued
In connection with acquisitions completed in 1998, common shares valued at
$6,005,300 will be issued in 1999. The number of common shares to be issued and
the price per share were fixed at the consummation date of the specific
acquisitions in 1998.
In connection with acquisitions completed in 1997, common shares valued at
$20,121,059 were issued in 1998. The number of shares to be issued and the price
per share were fixed at the consummation date of the specific acquisitions in
1997.
Stock Option Plans
The Company has reserved 1,500,000 shares of common stock for issuance under its
1994 Stock Option Plan and 2,100,000 shares of common stock for issuance under
its 1996 Stock Option Plan (collectively the "Stock Option Plans"). Options
granted under the Plans may be either incentive stock options ("ISO") or
nonqualified stock options ("NQSO"). The option price per share shall not be
less than the fair market value of the Company's Common stock at the date of
grant. Generally, options vest over a five-year period and expire ten years
after the option was issued. As of December 31, 1998, options to purchase
1,337,629 shares remain available for grant under the Stock Option Plans.
F-17
<PAGE>
The following table summarizes the activity in the Stock Option Plans:
<TABLE>
<CAPTION>
Weighted-Average
Outstanding Price Per Share Exercise Price
<S> <C> <C> <C>
December 31, 1996 1,064,400 $0.50 - $14.00 $6.85
Granted 626,071 $6.00 - $12.00 $7.88
Exercised (3,100) $6.00 $6.00
Canceled (61,400) $6.00 - $9.00 $6.67
-----------
December 31, 1997 1,625,971 $0.50 - $14.00 $6.71
Granted 709,400 $4.69 - $15.00 $9.00
Exercised (117,350) $0.50 - $9.00 $5.25
Canceled (96,100) $6.00 - $14.00 $7.02
-----------
December 31, 1998 2,121,921 $0.50 - $14.00 $7.69
===========
</TABLE>
Stock options exercisable under the Stock Option Plans as of December 31, 1996,
1997 and 1998, totaled 170,720; 653,464 and 701,791, respectively.
In 1996, the Company entered into a credit facility which has subsequently been
refinanced (see Note 7). In connection with the original credit facility, the
Company issued 46,875 options to purchase the Company's Common stock at $10.00
per share. These options are outstanding and exercisable.
9. INCOME TAXES
The provision for income taxes for the years ended December 31, 1996, 1997 and
1998 consists of:
<TABLE>
<CAPTION>
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
Current
Federal $ - $ 2,146,759 5,820,968
State - 125,780 764,955
Deferred
Federal - 306,510 1,044,093
State - 23,330 223,250
------------- ------------- -------------
$ - $ 2,602,379 $ 7,853,266
============= ============= =============
</TABLE>
Total provision for income taxes differed from the amount computed by applying
the U.S. Federal income tax rate of 35% to earnings before taxes and
extraordinary charge as a result of the following:
<TABLE>
<CAPTION>
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
Federal tax (benefit) at statutory rate $ (534,090) $ 2,826,447 $ 7,233,271
State income taxes, net of federal income tax
benefit (10,986) 422,352 687,400
Change in valuation allowance 571,118 (992,301) -
Amortization of nondeductible service agreement
rights - 209,234 187,445
Accretion of future premiums receivable - (171,409) (291,022)
Other (26,042) 308,056 36,172
------------- ------------- ------------
Total provision for income taxes $ - $ 2,602,379 $ 7,853,266
============= ============= ============
</TABLE>
F-18
<PAGE>
Deferred income tax assets (liabilities) reflect net tax effects of temporary
differences between the amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. In connection
with acquisition of a medical groups in 1998, the Company recorded certain net
operating loss carryforwards ("NOL's") and other deferred income tax assets and
liabilities, net of a valuation allowance, through purchase accounting. These
NOL's begin to expire in 2012. Significant components of the Company's net
deferred tax liability are as follows:
<TABLE>
<CAPTION>
December 31,
1997 1998
<S> <C> <C>
Current deferred tax assets (liabilities)
Operating loss carryforwards $ - $ 3,006,000
Unrealized gains on security investments (381,323) -
Non-deductible accrued expenses 207,222 295,051
------------- -------------
(174,101) 3,301,051
Valuation allowance - (1,095,216)
------------- -------------
(174,101) 2,205,835
Non-current deferred tax liabilities
Property and equipment, principally due to
differences in depreciation (299,838) (299,838)
Service agreement rights (729,896) (2,023,720)
Other (74,142) (548,280)
------------- -------------
(1,103,876) (2,871,838)
------------- -------------
$ (1,277,977) $ (666,003)
============= =============
</TABLE>
10. 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 to conform to
industry standards. 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 by approximately
$221,000 or $0.01 per share for the year ended December 31, 1997. On the same
basis, amortization expense for the year ended 1998 would have increased by
approximately $480,000 resulting in a decrease in diluted earnings per share of
$0.01.
11. EXTRAORDINARY CHARGE
On December 17, 1998, the Company replaced its then existing credit facility
with a new revolving credit facility (see Note 7). In connection with this
transaction, the Company was required to write off the unamortized deferred
financing costs relating to the prior credit facility. The resulting
extraordinary charge amounted to approximately $611,000, net of applicable
income taxes of approximately $375,000.
12. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
As of December 31, 1997 and 1998, the fair value of the Company's cash and cash
equivalents, accounts receivable, accounts payable, due to physician groups and
accrued expenses approximated their carrying value because of the short
maturities of those financial instruments. The fair value of the Company's long
term debt also approximates its carrying value since the related notes bear
interest at current market rates.
The estimated fair value of the convertible subordinated notes payable to
physician groups was $1,985,690 and $7,634,626 as of December 31, 1997 and 1998,
respectively. The carrying value of these notes was $1,765,058 and $7,634,626 as
of December 31, 1997 and 1998, respectively. The estimated fair value of these
convertible
F-19
<PAGE>
subordinated notes payable is based on the greater of their face value and the
closing market value of the common shares into which they could have been
converted at the respective balance sheet date.
13. SEGMENT REPORTING
The Company has two operating segments: the management of physician groups and
provision of capitation and medical management services to IPA networks.
However, since the management of IPA networks represents less than 10% of the
Company's revenue and assets, the Company's consolidated financial statements
approximate the operations and assets of the physician group management
segment. The Company regularly reviews the operating results of each of the
different medical groups. However, since each of the medical groups have similar
economic characteristics, the Company has aggregated all of the medical groups
into one reporting segment.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies (see Note 2). Intersegment sales and
transfers are based on the actual cost of services provided. The Company
evaluates performance based on profit or loss from operations before income
taxes and extraordinary gains or losses.
The Company has no net revenues attributed to customers outside of the United
States and no assets are located in foreign countries.
14. EMPLOYEE BENEFIT PLAN
The Company sponsors a 401(k) retirement plan (the "Plan") covering
substantially all employees. Participants may make voluntary contributions to
the Plan up to 15% of their compensation, as defined. Company contributions vary
by subsidiary and may include a matching contribution of 0% to 4.5% of the
participant's contributions and a discretionary contribution as a percentage of
the participant's compensation. The Plan was adopted in late 1997 and the
Company's expense during that period was minimal. During 1998, the Company
recognized expense of $1.5 million related to the Plan.
15. COMMITMENTS AND CONTINGENCIES
Leases
Operating leases generally consist of short-term leases for medical practice
office space, medical practice equipment, corporate office space, and corporate
equipment. Lease expense amounted to approximately $2,740,000; $7,086,000 and
$17,324,000 for the years ended 1996, 1997, and 1998, respectively.
The following is a schedule of future minimum lease payments under noncancelable
operating leases as of December 31, 1998.
1999 $ 13,217,640
2000 12,730,633
2001 12,051,143
2002 11,093,363
2003 10,259,025
Thereafter 34,455,504
------------------
$ 93,807,308
==================
Litigation
The Company is subject to various claims and legal actions that arise in the
ordinary course of business. In the opinion of management, the ultimate
resolution of such matters will not have a material adverse effect on the
Company's financial position or results of operations.
F-20
<PAGE>
Insurance
The Company and the physician groups are insured with respect to medical
malpractice risks on a claims- made basis. Management is not aware of any claims
against the Company or the physician groups that might have a material impact on
the Company's financial position or results of operations.
F-21
PROMEDCO MANAGEMENT COMPANY
EXHIBIT 11
Computation of Per Share Earnings
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1998
<S> <C> <C>
BASIC
Weighted average shares outstanding 9,320,174 17,995,797
Contingently issuable shares in business combinations 2,055,488 626,191
------------------ -----------------
Number of common shares outstanding 11,375,662 18,621,988
================== =================
DILUTED
Weighted average shares outstanding 9,320,174 17,995,797
Contingently issuable shares in business combinations 2,055,488 626,191
Net common shares issuable on exercise of certain
stock options and warrants (1) 2,848,536 2,335,783
Other dilutive securities - -
------------------ -----------------
Number of common shares outstanding 14,224,198 20,957,771
================== =================
</TABLE>
(1) Net common shares issuable on exercise of certain stock options and
warrants is calculated based on the treasury stock method
PROMEDCO MANAGEMENT COMPANY
EXHIBIT 21
List of Subsidiaries
State of
Subsidiary Incorporation
ProMedCo of Abilene, Inc. Delaware
Commonwealth Health Management Services, Inc. Massachusetts
ProMedCo of Champaign, Inc. Illinois
ProMedCo of The Coastal Bend, Inc. Delaware
ProMedCo of Cullman, Inc. Alabama
ProMedCo of Denton, Inc. Delaware
ProMedCo of Fort Myers, Inc. Florida
PHB Management Company, Inc. PA
ProMedCo of Lake Worth, Inc. Delaware
ProMedCo of Las Cruces, Inc. New Mexico
ProMedCo of Mayfield, Inc. Kentucky
ProMedCo of Permian Basin, Inc. Delaware
ProMedCo of East Tennessee, Inc. Tennessee
ProMedCo of Southwest Florida, Inc. Florida
ProMedCo of Pinellas/Pasco, Inc. Florida
PMC Medical Management, Inc. Maine
ProMedCo of the Hudson Valley, Inc. 14-1809486
ProMedCo of Northern Nevada, Inc. Nevada
ProMedCo of Southern Maryland, Inc. Maryland
ProMedCo of Sarasota, Inc. Florida
ProMedCo of Temple, Inc. Delaware
PROMEDCO MANAGEMENT COMPANY
EXHIBIT 23.1
Consent of Arthur Andersen
Consent of Independent Public Accounts
As independent public accountants, we hereby consent to the
incorporation of our report dated March 12, 1999, with respect to the
consolidated financial statements of ProMedCo Management Company and
subsidiaries included in the Form 10-K, into the Company's previously filed
Registration Statement File on Form S-8, No. 333-37695.
ARTHUR ANDERSEN, LLP
March 31, 1999
Fort Worth, Texas
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 13,870,967
<SECURITIES> 0
<RECEIVABLES> 51,375,337
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 94,569,713
<PP&E> 20,793,092
<DEPRECIATION> 5,667,523
<TOTAL-ASSETS> 306,658,872
<CURRENT-LIABILITIES> 39,071,767
<BONDS> 0
0
0
<COMMON> 210,244
<OTHER-SE> 172,437,262
<TOTAL-LIABILITY-AND-EQUITY> 306,658,872
<SALES> 0
<TOTAL-REVENUES> 222,502,115
<CGS> 0
<TOTAL-COSTS> 200,731,355
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,104,273
<INCOME-PRETAX> 20,666,487
<INCOME-TAX> 7,853,266
<INCOME-CONTINUING> 12,813,221
<DISCONTINUED> 0
<EXTRAORDINARY> 611,192
<CHANGES> 0
<NET-INCOME> 12,202,029
<EPS-PRIMARY> 0.66
<EPS-DILUTED> 0.58
</TABLE>
