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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
1934 For the transition period from to
Commission file number 0-29172
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)
(817) 335-5035
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES ( X ) NO ( )
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock July 31, 1999
$.01 par value 21,478,998 shares
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<PAGE>
PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
No.
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
June 30, 1999 and December 31, 1998 2
Condensed Consolidated Statements of Operations
Three Months and Six Months Ended June 30, 1999 and 1998 3
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 1999 and 1998 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 10
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
</TABLE>
<PAGE>
PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(All amounts are expressed in thousands)
<TABLE>
<CAPTION>
June 30, 1999 December 31,
(Unaudited) 1998
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 10,091 $ 13,871
Accounts receivable, net 62,274 51,375
Management fees receivable 9,287 8,490
Due from affiliated medical groups 9,948 8,399
Deferred tax benefit 2,206 2,206
Prepaid expenses and other current assets 14,235 13,043
------------------ ------------------
Total current assets 108,041 97,384
------------------ ------------------
Property and equipment, net 20,909 15,125
Intangible assets, net 188,523 153,402
Long term receivables 43,650 40,429
Other assets 3,478 3,133
------------------ ------------------
Total assets $ 364,601 $ 309,473
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,674 $ 4,683
Payable to affiliated medical groups 10,511 9,455
Accrued salaries, wages and benefits 8,722 8,146
Accrued purchased medical services 5,289 6,087
Accrued expenses and other current liabilities 6,110 6,741
Current maturities of long term debt 3,879 3,232
Current portion of obligations under capital leases 584 557
Current portion of deferred purchase price 2,628 2,137
Income taxes payable 1,538 847
------------------ ------------------
Total current liabilities 43,935 41,885
------------------ ------------------
Long term debt, net of current maturities 124,751 58,130
Obligations under capital leases, net of current portion 432 701
Deferred purchase price, net of current portion 9,306 25,290
Convertible subordinated notes payable 7,564 7,635
Deferred income tax liability 4,058 2,872
Other long term liabilities 393 312
------------------ ------------------
Total liabilities 190,439 136,825
------------------ ------------------
Stockholders' equity:
Common stock 215 211
Additional paid-in capital 155,104 152,786
Common stock to be issued 155 6,005
Treasury stock (2,077) -
Stockholder notes receivable (250) (370)
Retained earnings 21,015 14,016
------------------ ------------------
Total stockholders' equity 174,162 172,648
------------------ ------------------
Total liabilities and stockholders' equity $ 364,601 $ 309,473
================== ==================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(All amounts are expressed in thousands, except for earnings per share)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- ---------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenue $ 76,021 $ 51,994 $ 149,113 $ 92,606
Operating expenses:
Clinic salaries and benefits 27,277 17,715 52,983 31,055
Clinic rent and lease expense 7,134 3,862 13,380 7,061
Clinic supplies 8,970 6,337 17,559 11,195
Purchased medical services 9,751 10,656 21,663 18,788
Other clinic costs 9,870 5,636 18,689 9,958
General corporate expenses 2,253 1,292 4,263 2,375
Depreciation and amortization 3,110 1,749 5,886 3,043
Interest expense 1,266 (170) 2,277 302
----------- ------------ ----------- -----------
Total 69,631 47,077 136,700 83,777
----------- ----------- ----------- -----------
Income before provision for income taxes 6,390 4,917 12,413 8,829
Provision for income taxes 2,428 1,868 4,717 3,355
----------- ----------- ----------- -----------
Net income $ 3,962 $ 3,049 $ 7,696 $ 5,474
=========== =========== =========== ===========
Earnings per share:
Basic $ 0.19 $ 0.17 $ 0.36 $ 0.35
=========== =========== =========== ===========
Diluted $ 0.18 $ 0.15 $ 0.34 $ 0.30
=========== =========== =========== ===========
Weighted average number of common shares outstanding:
Basic 20,867 17,841 21,163 15,784
=========== =========== =========== ===========
Diluted 22,572 20,555 22,952 18,511
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(All amounts are expressed in thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net income $ 7,696 $ 5,474
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities (net of effects
of purchase transactions):
Depreciation and amortization 5,886 3,043
Provision for deferred income taxes 786 582
Changes in assets and liabilities:
Accounts receivable (5,875) (9,923)
Management fees receivable (797) (5,283)
Due from affiliated medical groups (745) 1,349
Prepaid expenses and other assets (2,127) (1,883)
Accounts payable (1,507) (1,210)
Payable to medical groups (20) (231)
Accrued expenses and other liabilities (1,883) 1,251
------------------ ------------------
Net cash provided by (used in) operating activities 1,414 (6,829)
------------------ ------------------
Cash flows from investing activities:
Purchases of property and equipment (2,765) (2,136)
Purchases of clinic assets, net of cash (67,316) (29,648)
Collection of notes receivable 1,462 -
------------------ ------------------
Net cash used in investing activities (68,619) (31,784)
------------------ ------------------
Cash flows from financing activities:
Borrowings under long-term debt 69,000 32,020
Payments on long-term debt (2,512) (63,236)
Payments on capital lease obligations (242) (247)
Payment of deferred financing costs (313) -
Proceeds from issuance of common stock, net 286 72,788
Purchase of treasury shares (2,914) -
Collection of stockholder note receivable 120 -
------------------ ------------------
Net cash provided by financing activities 63,425 41,325
------------------ ------------------
Increase (decrease) in cash and cash equivalents (3,780) 2,712
Cash and cash equivalents, beginning of period 13,871 15,761
------------------ ------------------
Cash and cash equivalents, end of period $ 10,091 $ 18,473
================== ==================
Supplemental disclosure of cash flow information
Cash paid during the period for -
Interest expense $ 3,125 $ 1,781
Income taxes $ 3,153 $ 2,640
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation/Principles of Consolidation
The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission ("SEC"). Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such SEC rules and regulations. Management believes that the
disclosures herein are adequate to prevent the information presented from being
misleading. The foregoing financial information, not audited by independent
public accountants, reflects, in the opinion of the Company, all adjustments
(which included only normal recurring adjustments) necessary for a fair
presentation of the financial position and the results of operations for the
interim periods presented. The results of operations for any interim period are
not necessarily indicative of the results of the operations for the entire year.
It is suggested that these condensed consolidated financial statements be read
in conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998.
Certain prior period amounts have been reclassified to conform with the 1999
presentation.
Earnings Per Share
Basic earnings per share ("EPS") is calculated by dividing income available to
common stockholders by the weighted average number of common shares outstanding
during the period. Common stock to be issued is assumed to be common stock
outstanding and is included in the weighted average number of common shares
outstanding for the basic EPS calculation. Diluted EPS includes the options,
warrants, and other potentially dilutive securities that are excluded from basic
EPS using the treasury method to the extent that these securities are not
anti-dilutive.
Net Revenue
Net revenue represents medical groups and other revenues less amounts paid to
medical groups. The amounts paid to medical groups (typically 80-85% of the
medical groups' operating income) represents distributions paid to the
physicians pursuant to the service agreements between the Company and the
medical groups and primarily consists of the cost of the affiliated physician
services. Under the service agreements, the Company provides each medical group
with the facilities and equipment used in its medical practice, assumes
responsibility for the management of the operations of the practice, and employs
substantially all of the non-physician personnel utilized by the group.
<PAGE>
Net revenue is detailed as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- ---------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Medical groups revenue, net $ 107,133 $ 71,537 $ 211,049 $ 131,216
Other revenue 1,381 1,525 4,249 3,025
----------- ----------- ----------- -----------
Total revenue 108,514 73,062 215,298 134,241
Less- Amounts paid to medical groups (32,493) (21,068) (66,185) (41,635)
----------- ----------- ----------- -----------
Net revenue $ 76,021 $ 51,994 $ 149,113 $ 92,606
=========== =========== =========== ===========
</TABLE>
Medical groups revenue represents the revenue of the medical 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 and transitional management services, and other
miscellaneous revenues.
2. ACQUISITIONS:
Through June 30, 1999 and during 1998, the Company, through its wholly owned
subsidiaries, acquired certain operating assets of the following medical
clinics:
<TABLE>
<CAPTION>
Medical group Date Location
<S> <C> <C> <C>
1999: El Paseo Medical Center January 1999 (a) Las Cruces, NM
Boca Raton Medical Associates February 1999 (b) Boca Raton, FL
Medical Office Services May 1999 Flagstaff, AZ
Family Care Center of Indiana May 1999 Dyer, IN
1998: Berkshire Physicians & Surgeons April 1998 (c) 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 (d) Clearwater, FL
</TABLE>
(a) El Paseo Medical Center was operated by the Company under a
long-term service agreement effective December 1, 1998. The
Company completed its acquisition in January 1999.
<PAGE>
(b) Boca Raton Medical Associates was operated by the Company under an
interim service agreement effective October 1, 1998. The Company
completed its acquisition in February 1999, and entered into a
long-term service agreement with the medical group effective
February 1, 1999.
(c) 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 medical group effective
April 1, 1998.
(d) 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 medical group effective
November 1, 1998.
These acquisitions were accounted for as purchases, and the accompanying
condensed consolidated financial statements include the results of their
operations from the dates of their respective acquisitions. Purchase price
allocations to tangible assets acquired and liabilities assumed are based on the
estimated fair values at the dates of acquisitions and are subject to final
revisions. Simultaneous with each acquisition, the Company entered into a
long-term service agreement with the related medical group. The service
agreements are 40 years in length.
The following unaudited pro forma information reflects the effect of
acquisitions of medical clinics on the consolidated results of operations of the
Company had the acquisitions occurred at January 1, 1998. Future results may
differ substantially from pro forma results and cannot be considered indicative
of future results (in thousands).
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- ---------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenue $ 77,735 $ 64,760 $ 156,934 $ 122,115
=========== =========== =========== ===========
Net income $ 4,069 $ 3,963 $ 8,442 $ 7,276
=========== =========== =========== ===========
Earnings per share
Basic $ 0.19 $ 0.22 $ 0.40 $ 0.45
=========== =========== =========== ===========
Diluted $ 0.18 $ 0.19 $ 0.37 $ 0.39
=========== =========== =========== ===========
Weighted average number of common shares outstanding
Basic 20,867 17,867 21,163 16,007
=========== =========== =========== ===========
Diluted 22,572 20,581 22,952 18,734
=========== =========== =========== ===========
</TABLE>
<PAGE>
The pro forma information presented above does not take into account the
Company's public offering of 6,9000,000 shares of common stock in May 1998, see
Note 5, and a change in the Company's amortization policy, see Note 6.
3. LONG-TERM DEBT:
Long-term debt is summarized as follows (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
<S> <C> <C>
Borrowings under bank credit facility $ 123,500 $ 54,500
Notes payable issued to medical groups 4,939 6,654
Other long-term debt 191 208
------------------ ------------------
128,630 61,362
Less- current maturities (3,879) (3,232)
------------------ ------------------
Long-term debt, net of current maturities $ 124,751 $ 58,130
================== ==================
</TABLE>
4. SUPPLEMENTAL CASH FLOW INFORMATION:
In March 1998, an officer of the Company utilized 43,693 warrants in full
payment of the $600,000 outstanding note balance and $30,875 of accrued interest
receivable.
In March 1998, the Company converted approximately $360,000 of convertible
subordinated notes payable to a medical group into 39,999 shares of the
Company's common stock.
In the second quarter of 1999, the Company converted approximately $71,000 of
convertible subordinated notes payable to a medical group into 7,824 shares of
the Company's common stock.
In the first six months of 1999, an affiliated medical group surrendered 32,896
shares of the Company's common stock as partial payment of an outstanding note
balance and accrued interest.
<PAGE>
5. SUPPLEMENTAL NET EARNINGS PER SHARE DATA:
In May 1998, the Company completed a public offering of 6,900,000 shares of
common stock at a price of $11.00 per share (the "Offering"). The unaudited
supplemental earnings per share data has been calculated assuming the Offering
occurred as of January 1, 1998.
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, 1998 June 30, 1998
<S> <C> <C>
Supplemental net earnings per share
Basic $ 0.16 $ 0.30
================== ==================
Diluted $ 0.14 $ 0.26
================== ==================
Supplemental weighted average number of common shares outstanding (in
thousands)
Basic 21,049 20,827
================== ==================
Diluted 23,762 23,554
================== ==================
</TABLE>
6. CHANGE IN ACCOUNTING ESTIMATE:
Effective July 1, 1998, in compliance with a change in SEC accounting policy,
the Company changed its estimate with respect to the estimated life of its
service agreement rights intangible assets. All existing and future service
agreement rights intangible assets will be amortized over a period not to exceed
25 years from the inception of the respective service agreements. Had the
Company adopted this policy at the beginning of 1998, amortization expense would
have increased and diluted earnings per share would have decreased by
approximately $260,000 and $0.01, respectively, in the second quarter of 1998.
In the six months ending June 30, 1998, amortization expense would have
increased and diluted earnings per share would have decreased by approximately
$480,000 and $0.02, respectively due to the change in the estimated life of its
service agreement rights intangible assets.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We are a medical services company that manages and coordinates the delivery of a
wide variety of healthcare services in non-urban communities. We typically
affiliate with a leading medical group in the community, which becomes our
platform from which we consolidate the delivery of local healthcare services. We
expand this platform by adding ancillary services, physicians and mid-level
providers.
We formed the company in December 1994 and have experienced rapid growth since
then, primarily as a result of entering new communities and also from same
market growth within our communities. We currently operate in 24 communities
where we are affiliated with medical groups comprised of some 775 physicians and
155 mid-level providers. In addition, we are associated with approximately 1,080
physicians in independent practice association ("IPA") networks, including those
managed by Primergy, Inc. ("Primergy"). In March 1999, we entered into a
management agreement with Kingston, New York-based Primergy, a medical network
management company which owns and operates five IPAs in the Hudson Valley of New
York and has under contract more than 500 physicians and covers over 35,000
managed care capitated lives. The management contract also includes an option
for ProMedCo to acquire Primergy based on satisfaction of certain future
conditions.
When affiliating with a medical group, we generally acquire, at fair market
value, the group's non-real estate operating assets and enter into a 40-year
service agreement with the group in exchange for various combinations of cash,
our common stock, other securities issued by us and/or our assumption of certain
liabilities. Our agreements with medical groups are structured to provide a
common incentive for growth. Under these service agreements, we receive a fixed
percentage, typically 15% to 20%, of each group's operating income before
physician compensation. In our more recent affiliations, our share of income
from new ancillary services has been increased to 50%.
Our net revenue represents the medical groups and other revenues (reported at
the estimated realizable amounts from patients, third-party payors and others
for services rendered, net of contractual and other adjustments), less amounts
paid to the medical groups. The amounts paid to the medical groups, typically
80-85% of the medical groups' operating income, primarily consist of the cost of
physician services. Under our service agreements, we provide each medical group
with the facilities and equipment used in its medical practice, assume
responsibility for the management of the operations of the practice and employ
substantially all of the personnel utilized by the group other than the
physicians and mid-level providers. We do not consolidate the operating results
and accounts of the medical groups.
<PAGE>
Results of Operations
We began operations in our first two communities in June and December 1995, and
entered five additional communities in 1996, six in 1997 and eight in 1998.
During the first six months of 1999, we entered three additional communities.
Changes in results of operations were caused primarily by expanding into these
additional communities and same market growth in our existing communities. The
following table sets forth the percentages of revenue represented by certain
items reflected in our condensed consolidated statements of operations.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- ---------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenue 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Clinic salaries and benefits 35.9 34.1 35.5 33.5
Clinic rent and lease expense 9.4 7.4 9.0 7.6
Clinic supplies 11.8 12.2 11.8 12.1
Purchased medical services 12.8 20.4 14.5 20.3
Other clinic costs 12.9 10.8 12.5 10.8
General corporate expenses 3.0 2.5 2.9 2.6
Depreciation and amortization 4.1 3.4 3.9 3.3
Interest expense 1.7 (0.3) 1.5 0.3
------- -------- -------- -------
Income before provision for income taxes 8.4 9.5 8.4 9.5
Provision for income taxes 3.2 3.6 3.2 3.6
------- -------- -------- -------
Net income 5.2% 5.9% 5.2% 5.9%
======= ======== ======== =======
Other Financial Information:
Total revenue, amounts in thousands (1) $ 108,514 $ 73,062 $ 215,298 $ 134,241
Payor breakdown (2)
Commercial and discounted fee-for-service 38.9% 42.7% 38.5% 41.1%
Medicare/Medicaid 29.5 27.2 29.0 27.2
Capitation 15.2 18.0 17.0 18.8
Other 16.4 12.1 15.5 12.9
------- -------- -------- -------
100.0% 100.0% 100.0% 100.0%
======= ======== ======== =======
</TABLE>
(1) Total revenue represents medical group and other revenues 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 total revenue.
<PAGE>
Three Months Ended June 30, 1999 Compared With Three Months Ended June 30, 1998
Net revenue increased by 46.2% to $76.0 million for the quarter ended June 30,
1999, from $52.0 million for the quarter ended June 30, 1998. Approximately
74.9% of this increase was attributable to communities we entered since March
31, 1998, with the balance coming from communities in which we began operations
prior to April 1, 1998. Same market growth in net revenue for communities in
which we operated for longer than one year was over 15% for the quarter ended
June 30, 1999 compared with the quarter ended June 30, 1998.
Overall clinic costs, including purchased medical services, as a percentage of
net revenue decreased to 82.9% for the quarter ended June 30, 1999, compared to
85.0% for the quarter ended June 30, 1998. Purchased medical services reflect
the cost of services required under managed care contracts that are not provided
by our medical groups. Changes in overall clinic costs and individual expense
categories as percentages of net revenue are due to changes in the mix of our
medical groups. The primary reason for the decrease was a change in purchased
medical services, which decreased to 12.8% as a percentage of net revenue for
the second quarter of 1999 compared to 20.4% in the second quarter of 1998. This
change resulted from the relative decrease in full professional and global
capitation revenue caused by our affiliation with additional medical groups and
from the conversion of one of our payor contracts from a global capitation to a
discounted fee-for-service payment contract. The decrease in purchased medical
services was partially offset by increases in clinic salaries and benefits,
clinic rent and lease expense and other clinic costs which increased to 35.9%,
9.4% and 13.0%, respectively, in the second quarter of 1999 compared to 34.1%,
7.4% and 10.8%, respectively in the second quarter of 1998. These increases were
caused by the changes in mix of our medical groups and due to the expansion of
ancillary services we offer within the communities we serve.
General corporate expenses as a percentage of net revenue increased to 3.0% for
the quarter ended June 30, 1999, compared to 2.5% for the quarter ended June 30,
1998. We anticipated this increase in expenses as we continued to add management
resources and technology infrastructure. We believe that increases in the amount
of general corporate expenses will continue as we enter new communities and
expand our operations in existing communities.
Depreciation and amortization as a percentage of net revenue increased to 4.1%
for the quarter ended June 30, 1999, compared to 3.3% for the quarter ended June
30, 1998. This increase resulted primarily from the change in the amortization
period for our service agreement intangible assets. As a result of a change in
SEC accounting policy, effective July 1, 1998, all existing and future service
agreement intangible assets are amortized over a period not to exceed 25 years
from the inception of the respective service agreements. In addition,
depreciation has increased due to changes in the mix of our medical groups, with
our recent affiliations having a relatively higher amount of property and
equipment.
Net interest expense as a percentage of net revenue increased to 1.7% for the
quarter ended June 30, 1999, compared to (0.3)% for the quarter ended June 30,
1998. This increase is a result of the increase in long-term debt relating to
financing our affiliation with additional medical groups. In addition, interest
expense in the second quarter of 1998 was offset by interest income earned on
unused proceeds from a public offering of our common stock that was completed in
May 1998.
<PAGE>
Provision for income taxes reflects an effective rate of 38.0%, which is our
estimated effective rate for all of 1999.
Six Months Ended June 30, 1999 Compared With Year Ended June 30, 1998
Net revenue increased by 61.0% to $149.1 million for the six months ended June
30, 1999, from $92.6 million for the six months ended June 30, 1998. Over
two-thirds of this increase was attributable to communities we entered since
January 1, 1998, with the remainder coming primarily from communities in which
we began operations prior to December 31, 1997. Same market growth in net
revenue for communities in which we operated for longer than one year was over
15% for the six months ended June 30, 1999 compared with the six months ended
June 30, 1998.
Overall clinic costs, including purchased medical services, as a percentage of
net revenue decreased to 83.3% for the six months ended June 30, 1999, compared
to 84.3% for the six months ended June 30, 1998. Purchased medical services
reflect the cost of services required under managed care contracts that are not
provided by our medical groups. Changes in overall clinic costs and individual
expense categories as percentages of net revenue are due to changes in the mix
of our medical groups. The primary reason for the decrease was a change in
purchased medical services, which decreased to 14.5% as a percentage of net
revenue for the six months ending June 30, of 1999 compared to 20.3% in the
first six months of 1998. This change resulted from the relative decrease in
full professional and global capitation revenue caused by our affiliation with
additional medical groups and from the conversion of one of our larger payor
contracts from a capitation basis to a discounted fee-for-service payment
contract. The decrease in purchased medical services was partially offset by an
increase in clinic salaries and benefits, clinic rent and lease expense and
other clinic costs which increased to 35.5%, 9.0% and 12.5%, respectively, in
the six months ending June 30, 1999 compared to 33.5%, 7.6% and 10.8%,
respectively, in the six months ending June 30, 1998. These increases were
caused by the changes in mix of our medical groups and due to the expansion of
ancillary services we offer within the communities we serve.
General corporate expenses as a percentage of net revenue increased to 2.9% for
the six months ended June 30, 1999, compared to 2.6% for the quarter ended June
30, 1998. We anticipated this increase in expenses as we continued to add
management and technology infrastructure. We believe that increases in the
amount of general corporate expenses will continue as we enter new communities
and expand our operations in existing communities.
Depreciation and amortization as a percentage of net revenue increased to 3.9%
for the six months ended June 30, 1999, compared to 3.3% for the six months
ended June 30, 1998. This increase resulted primarily from the change in the
amortization period for our service agreement intangible assets. As a result of
a change in SEC accounting policy, effective July 1, 1998, all existing and
future service agreement intangible assets are amortized over a period not to
exceed 25 years from the inception of the respective service agreements. In
addition, depreciation has increased due to changes in the mix of our medical
groups, with our recent affiliations having a relatively higher amount of
property and equipment.
<PAGE>
Net interest expense as a percentage of net revenue increased to 1.5% for the
six months ended June 30, 1999, compared to 0.3% for the six months ended June
30, 1998. This increase is a result of the increase in long-term debt relating
to financing our affiliation with additional medical groups. In addition,
interest expense in the six months ending June 30, 1998 was offset by interest
income earned on unused proceeds from a public offering of our common stock that
was completed in May 1998.
Provision for income taxes reflects an effective rate of 38.0%, which is our
estimated effective rate for all of 1999.
Year 2000
We are addressing issues associated with the programming code in existing
computer systems as the year 2000 approaches. The "Year 2000" problem is
pervasive and complex, as virtually every computer operation will be affected 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.
We have developed a written plan with respect to the Year 2000 problem. We
formed a committee headed by our Director of Information Technology to evaluate
the readiness of both the systems we use internally and those used by companies
conducting business with us. Our plan was presented to and approved by the Board
of Directors. Senior management is actively involved with the committee and
updates the Board on Year 2000 compliance progress at each Board meeting.
We continue to assess the impact of the Year 2000 issue on our information
systems and operations using both internal and external resources. In doing so,
we have divided our internal processing 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. We have installed a common financial software
package at all but four of our most recent affiliations that is Year 2000
compliant. The remaining four locations are scheduled for installation and
training during the third and fourth quarters of 1999. Our philosophy with
respect to our practice management systems is to utilize the legacy system in
place as long as it can capably serve the physicians' needs. All of our
affiliated medical groups are utilizing practice management systems that are
Year 2000 compliant. Our 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. Based on our current strategy of replacing inadequate practice
management systems, we do not believe that Year 2000 issues will cause a
conversion of one or more of our practice management systems to be more or less
difficult than a typical system conversion. Our primary managed care technology
resides at our risk management subsidiary, PMC Medical Management ("PMC"). PMC
completed upgrading its systems to be Year 2000 compliant in the second quarter
of 1999.
Our plan also requires that Year 2000 assessments be included in the due
diligence process on future medical group affiliations. Any necessary upgrade or
replacement identified in due diligence is added to our Year 2000 plan after the
affiliation is completed.
<PAGE>
We are also in the process of gathering information about the Year 2000
compliance status of our significant suppliers and vendors. The inability of
these suppliers and vendors to complete their Year 2000 resolution processes in
a timely fashion could materially affect our business. We have used
questionnaires, phone surveys and Internet web sites to investigate the Year
2000 status of key external vendors and service providers. We use responses
received to assess the business risks posed to us. We have received responses
from all of our major vendors that provide our most critical business systems
and services. To date, no significant risks have been identified. If such a risk
is identified, we will prioritize the issues and develop contingency plans to
deal with noncompliance. These contingency plans will range from the development
of additional manual processes to contracting for temporary services from third
parties. We plan to have this effort completed during the third quarter of 1999.
We have used a combination of our medical group personnel, major accounting firm
consultants and vendor personnel to perform Year 2000 testing. To date, we have
spent approximately $2.8 million on our Year 2000 effort and estimate another
$700,000 to be incurred through the remainder of the year.
We believe that we have implemented an effective program to resolve the Year
2000 issue in a timely manner. In the event that we do not complete this program
or any necessary remediation, our ability to record revenue or process
collections in a timely fashion could be adversely affected after January 1,
2000. In addition, disruptions in the general economy due to the Year 2000
problem could also materially adversely affect us.
Liquidity and Capital Resources
At June 30, 1999, we had working capital of $64.1 million, compared to $55.5
million at December 31, 1998. This increase in working capital resulted from the
acquisition of net current assets in recent affiliations and from our net cash
provided by operations. Net cash provided by operations for the six months ended
June 30, 1999 was $1.4 million. Net income, combined with depreciation and
amortization and deferred taxes, provided $14.4 million in cash flows. This was
offset by uses of cash of $13.0 million that resulted from increases in accounts
receivable, management fees receivable, due from affiliated medical groups and
other assets, and decreases in accounts payable, amounts payable to affiliated
groups and accrued expenses and other liabilities.
Our accounts receivable increased $5.9 million, net of the effects of purchase
accounting since December 31, 1998. Approximately $1.7 million of this increase
resulted from an increase in revenues in the second quarter of 1999 compared to
the fourth quarter of 1998. Another $2.0 million resulted from increases in
accounts receivable in recent affiliations where we did not acquire assets in
the affiliation and from changes in provider numbers (for reimbursement
purposes) of certain of our affiliated physicians. The remaining $2.2 million
resulted from an increase in accounts receivable days outstanding from 47 days
to 50 days, most of which is related to two affiliated groups. Although 50 days
outstanding compares favorably within the healthcare industry, we are
nonetheless focusing significant efforts at these clinics to improve the
collections and the overall business office processes.
<PAGE>
We had aggregate cash expenditures for purchases of clinic assets of $67.3
million for the six months ended June 30, 1999. Of this amount, $23.6 million
related primarily to deferred payments associated with previously completed
acquisitions and $43.7 million related to acquisitions completed in the first
six months of 1999. Our capital expenditures amounted to $2.8 million for the
six months ended June 30, 1999. Although each of the service agreements with our
affiliated medical groups requires us to provide capital for equipment,
expansion, additional physicians and other major expenditures, we have not
committed a specific amount in advance. Capital expenditures are made based
partially upon the availability of funds, the sources of funds, alternative
projects and an acceptable repayment period.
In November 1998, we authorized a common stock repurchase program whereby we may
repurchase up to $10.0 million of our common stock. During the first six months
of 1999, we purchased 693,103 shares at an average price of $4.21 per share.
On December 17, 1998, we entered into a new credit facility, which was amended
on June 28, 1999. The facility currently provides for a three-year commitment to
fund revolving credit borrowings of up to $152.5 million for acquisitions and
general working capital. This commitment can increase to $165.0 million. The
current commitment is comprised of a $137.5 million commitment that expires
December 31, 2001 and a $15.0 million commitment that expires June 27, 2000. The
interest rate is set at our option and varies based on our 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 June
30, 1999, the effective interest rate under the credit facility was 7.1%. The
credit facility includes certain restrictive covenants, including limitations on
the payment of dividends, as well as requirements for the maintenance of certain
financial ratios. In obtaining the credit facility, we paid a commitment fee and
other closing costs of approximately $1.3 million, which has been capitalized in
other assets on our consolidated balance sheets and is amortized as an
adjustment to interest expense using the effective interest method. At our
option, we can convert the outstanding balance under the credit facility to a
term loan due December 17, 2003. The credit facility is secured by substantially
all of our assets. As of June 30, 1999, we had $123.5 outstanding and $28.7
million available, subject to certain conditions under the agreement.
We had cash and cash equivalents of $10.1 million at June 30, 1999. In addition
to this, our principal sources of liquidity at June 30, 1999 were accounts
receivable of $62.3 million and availability of $28.7 million under the credit
facility. We believe that this will be sufficient to meet our working capital
needs for at least the next twelve months. Our future acquisition, expansion and
capital expenditure programs may, however, require substantial amounts of
additional capital resources. To meet the additional capital needs of these
programs, we will continue to evaluate alternative sources of financing,
including short- and long-term bank indebtedness, additional equity and other
forms of financing, the availability and terms of which will depend upon market
and other conditions. There can be no assurance that we will be able to obtain
additional financing at acceptable terms.
<PAGE>
Forward-Looking Statements
This report includes "forward-looking statements" under the Private Securities
Litigation Reform Act of 1995 about anticipated results, including statements as
to operating results, liquidity and capital resources, and expansion into and
within additional communities. These forward-looking statements are based upon
our internal estimates, which are subject to change because they reflect
preliminary information and our assumptions. Thus, a variety of factors could
cause our actual results and experience to differ materially from the
anticipated results or other expectations we have expressed in the
forward-looking statements. The factors that could cause actual results or
outcomes to differ from our expectations include our ability to:
o continue to operate profitably;
o expand in our existing communities;
o establish operations in additional communities; and
o obtain additional financing upon terms acceptable to us;
along with the uncertainties and other factors described in this report and in
the our public filings and reports.
<PAGE>
Item 2. Changes in Securities and Use of Proceeds
In June 1999, the Company issued 400,301 shares of Common Stock to the former
stockholders of a medical group as post-closing adjustments to the consideration
payable by the Company in connection with its acquisition by the Company in
April 1998. This issuance was exempt from registration under the Securities Act,
pursuant to section 4(2) of the Act as it did not involve any public offering.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of stockholders on May 14, 1999. At the
meeting, the stockholders elected David T. Bailey, M.D. and Jack W. McCaslin as
Class II members of the Board of Directors with terms expiring in 2002. Other
members of the Board of Directors whose terms continue after the meeting include
James F. Herd, M.D. and Charles J. Buysse, M.D., who are Class I directors with
terms expiring in 2001, and Richard E. Ragsdale, E. Thomas Chaney, and H. Wayne
Posey, who are Class III directors with terms expiring in 2000.
The voting results of the election of directors are as follows:
Votes Withheld
Nominee: For Authority
David T. Bailey, M.D. 14,659,190 1,581,674
Jack W. McCaslin 14,454,378 1,786,486
In addition, the stockholders approved an amendment to the 1996 Stock Option
Plan to increase the number of shares of common stock that might be issued
pursuant to stock options granted under the plan by 1,000,000 shares.
The voting results for the amendment to the 1996 stock option plan are as
follows:
For 11,520,490
Against 4,602,924
Abstain 117,450
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
11 Computation of Per Share Earnings
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ H. WAYNE POSEY
H. Wayne Posey Chairman, President, Chief Executive August 16, 1999
Officer, and Director
(Chief Executive Officer)
/s/ ROBERT D. SMITH
Robert D. Smith Senior Vice President - Finance and August 16, 1999
Chief Financial Officer
(Chief Accounting Officer)
</TABLE>
PROMEDCO MANAGEMENT COMPANY
EXHIBIT 11
Computation of Per Share Earnings
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- ---------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BASIC
Weighted average shares outstanding 20,532,275 17,322,667 20,786,647 15,068,166
Contingently issuable shares in business
combinations 335,055 518,454 376,613 715,507
-------------- ------------- ------------- -------------
Number of common shares outstanding 20,867,330 17,841,121 21,163,261 15,783,673
============== ============= ============= =============
DILUTED
Weighted average shares outstanding 20,532,275 17,322,667 20,786,647 15,068,166
Contingently issuable shares in
business combinations 335,055 518,454 376,613 715,507
Net common shares issuable on exercise of
certain stock options and warrants (1) 1,586,728 2,713,668 1,669,806 2,727,004
Other dilutive securities 117,481 - 118,742 -
-------------- ------------- ------------- -------------
Number of common shares outstanding 22,571,539 20,554,789 22,951,808 18,510,677
============== ============= ============= =============
</TABLE>
(1) Net common shares issuable on exercise of certain stock options and warrants
is calculated based on the treasury stock method
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 10,091
<SECURITIES> 0
<RECEIVABLES> 62,274
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 108,041
<PP&E> 28,784
<DEPRECIATION> 7,875
<TOTAL-ASSETS> 364,601
<CURRENT-LIABILITIES> 43,935
<BONDS> 0
0
0
<COMMON> 215
<OTHER-SE> 173,947
<TOTAL-LIABILITY-AND-EQUITY> 364,601
<SALES> 0
<TOTAL-REVENUES> 149,113
<CGS> 0
<TOTAL-COSTS> 134,423
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,277
<INCOME-PRETAX> 12,413
<INCOME-TAX> 4,717
<INCOME-CONTINUING> 7,696
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,696
<EPS-BASIC> 0.36
<EPS-DILUTED> 0.34
</TABLE>
