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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 September 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 October 31, 1999
$.01 par value 21,732,423 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
September 30, 1999 and December 31, 1998 2
Condensed Consolidated Statements of Operations
Three Months and Nine Months Ended September 30, 1999 and 1998 3
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 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 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>
September 30, 1999 December 31,
(Unaudited) 1998
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 11,104 $ 13,871
Accounts receivable, net 61,436 51,375
Management fees receivable 9,894 8,490
Due from affiliated medical groups 9,992 8,399
Deferred tax benefit 2,206 2,206
Prepaid expenses and other current assets 19,574 13,043
------------------ ------------------
Total current assets 114,206 97,384
------------------ ------------------
Property and equipment, net 23,075 15,125
Intangible assets, net 220,978 153,402
Long-term receivables 42,785 40,429
Other assets 3,239 3,133
------------------ ------------------
Total assets $ 404,283 $ 309,473
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,933 $ 4,683
Payable to affiliated medical groups 11,109 9,455
Accrued salaries, wages and benefits 8,183 8,146
Accrued purchased medical services 9,605 6,087
Accrued expenses and other current liabilities 5,907 6,741
Current maturities of long-term debt 12,464 3,232
Current portion of obligations under capital leases 522 557
Current portion of deferred purchase price 2,400 2,137
Income taxes payable 1,564 847
------------------ ------------------
Total current liabilities 57,687 41,885
------------------ ------------------
Long-term debt, net of current maturities 132,742 58,130
Obligations under capital leases, net of current portion 411 701
Deferred purchase price, net of current portion 19,302 25,290
Convertible subordinated notes payable 10,162 7,635
Deferred income tax liability 4,810 2,872
Other long-term liabilities 81 312
------------------ ------------------
Total liabilities 225,195 136,825
------------------ ------------------
Stockholders' equity:
Common stock 217 211
Additional paid-in capital 156,010 152,786
Common stock to be issued 90 6,005
Treasury stock (2,077) -
Stockholder notes receivable (250) (370)
Retained earnings 25,098 14,016
------------------ ------------------
Total stockholders' equity 179,088 172,648
------------------ ------------------
Total liabilities and stockholders' equity $ 404,283 $ 309,473
================== ==================
The accompanying notes are an integral part of these financial statements.
</TABLE>
<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 Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net revenue $ 84,317 $ 61,097 $ 233,430 $ 153,703
Operating expenses:
Clinic salaries and benefits 28,989 19,334 81,972 50,389
Clinic rent and lease expense 7,340 4,529 20,720 11,590
Clinic supplies 9,514 6,598 27,073 17,793
Purchased medical services 13,631 14,813 35,294 33,601
Other clinic costs 10,972 6,649 29,661 16,608
General corporate expenses 2,396 1,233 6,659 3,607
Depreciation and amortization 3,093 2,075 8,979 5,118
Interest expense 1,798 (48) 4,075 254
------------- ---------------- --------------- ---------------
Total 77,733 55,183 214,433 138,960
------------- --------------- --------------- ---------------
Income before provision for income taxes 6,584 5,914 18,997 14,743
Provision for income taxes 2,502 2,248 7,219 5,602
------------- --------------- --------------- ---------------
Net income $ 4,082 $ 3,666 $ 11,778 $ 9,141
============= =============== =============== ===============
Earnings per share:
Basic $ 0.19 $ 0.17 $ 0.56 $ 0.52
============= ============== ============== ===============
Diluted $ 0.18 $ 0.16 $ 0.51 $ 0.45
============= ============== ============== ===============
Weighted average number of common shares outstanding:
Basic 21,053 21,450 21,126 17,662
============== ============== ============== ===============
Diluted 22,978 23,540 23,291 20,446
============== ============== ============== ===============
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(All amounts are expressed in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net income $ 11,778 $ 9,141
Adjustments to reconcile net income to net cash provided by
(used in) operating activities (net of effects of purchase transactions):
Depreciation and amortization 8,979 5,118
Provision for deferred income taxes 1,488 1,116
Changes in assets and liabilities:
Accounts receivable, net (5,892) (11,360)
Management fees receivable (1,342) (5,994)
Due from affiliated medical groups (789) 462
Prepaid expenses and other assets (3,641) (2,352)
Accounts payable (369) (2,475)
Payable to affiliated medical groups 495 236
Accrued expenses and other liabilities (3,090) (1,373)
----------- -----------
Net cash provided by (used in) operating activities 7,617 (7,481)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (4,885) (2,987)
Purchases of clinic assets, net of cash acquired (84,494) (46,123)
Collection of notes receivable 1,462 (2,792)
---------- -----------
Net cash used in investing activities (87,917) (51,902)
----------- -----------
Cash flows from financing activities:
Borrowings under long-term debt 90,000 47,320
Payments on long-term debt (8,816) (63,470)
Payments on capital lease obligations (390) (336)
Payment of deferred financing costs (736) -
Proceeds from issuance of common stock, net 269 72,940
Purchase of treasury shares (2,914) -
Collection of stockholder note receivable 120 -
------------ -----------
Net cash provided by financing activities 77,533 56,454
------------ -----------
Decrease in cash and cash equivalents (2,767) (2,929)
Cash and cash equivalents, beginning of period 13,871 15,761
----------- -----------
Cash and cash equivalents, end of period $ 11,104 $ 12,832
============ ===========
Supplemental disclosure of cash flow information
Cash paid during the period for -
Interest expense $ 5,567 $ 2,008
Income taxes $ 4,927 $ 3,941
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
20
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. For the three month and nine month period ending September 30,
1999, approximately 2.9 million of stock stock options were excluded from the
computation of diluted EPS because the options' exercise prices were greater
than the average market price of the common shares.
Net Revenue
Net revenue represents total revenue less amounts paid to medical groups. The
amounts paid to medical groups (typically 80-85% of the group's operating
income) represents amounts paid to the groups pursuant to the service agreements
between the Company and the groups and primarily consists of the cost of the
services of the group's physicians. 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-provider personnel
utilized by the group.
<PAGE>
Net revenue is detailed as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Total revenue $ 113,658 $ 81,254 $ 328,956 $ 215,496
Amounts paid to medical groups 29,341 20,157 95,526 61,793
----------- ----------- ----------- -----------
Net revenue $ 84,317 $ 61,097 $ 233,430 $ 153,703
=========== =========== =========== ===========
</TABLE>
Total revenue consists primarily of billings and charges to patients, third
party payors and others and payments received under capitated contracts for
professional and ancillary services rendered. Total revenue also includes
amounts earned for other services rendered, including contract billing; medical
directorships; transition management; strategic planning and management
consulting. Revenues are recorded at the estimated realizable amounts, net of
contractual and other adjustments. Revenue under certain third party payor
agreements is subject to audit and retroactive adjustments. Provisions for third
party settlements and adjustments are estimated in the period the related
services are rendered and adjusted in future periods as the 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.
2. ACQUISITIONS:
Through September 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
MedGroup August 1999 Prescott, AZ
Horizon Medical Group October 1999 (c) Columbus, GA
1998: Berkshire Physicians & Surgeons April 1998 (d) 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 (e) Clearwater, FL
</TABLE>
(a) The Company operated El Paseo Medical Center under a long-term
service agreement effective December 1, 1998. The Company
completed its acquisition in January 1999.
(b) The Company operated Boca Raton Medical Associates 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 effective February 1, 1999.
<PAGE>
(c) The Company operated Horizon Medical Group under an interim
service agreement effective July 1, 1998. The Company completed
its acquisition in October 1999, and entered into a long-term
service agreement effective October 1, 1999.
(d) The Company operated Berkshire Physicians and Surgeons 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 effective April 1, 1998.
(e) The Company operated Medical Associates of Pinellas 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 effective November 1, 1998.
Effective August 1, 1999, the Company, through a wholly-owned subsidiary,
completed its acquisition of Primergy, Inc., ("Primergy"). Based in Kingston,
New York, Primergy is a medical network management company which owns and
operates five IPAs in the Hudson Valley of New York and has under contract more
than 1,000 physicians.
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 medical group 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 groups and Primergy 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 Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net revenue $ 86,414 $ 79,263 $ 252,518 $ 207,825
=========== ========== ========== ===========
Net income $ 4,406 $ 4,396 $ 12,927 $ 10,109
=========== ========== ========== ===========
Earnings per share
Basic $ 0.21 $ 0.20 $ 0.61 $ 0.56
=========== ========== =========== ===========
Diluted $ 0.19 $ 0.18 $ 0.55 $ 0.48
=========== ========== =========== ===========
Weighted average number of common
shares outstanding
Basic 21,240 21,706 21,355 18,084
=========== ========== =========== ===========
Diluted 23,165 23,795 23,519 20,868
=========== =========== =========== ===========
</TABLE>
The pro forma net income for the three months ended September 30, 1999 is only
slightly larger than the amount for the same pro forma period in 1998 as
incremental growth in clinic contribution of over 10% was offset by higher
general corporate expenses which includes no pro forma adjustments.
<PAGE>
The pro forma information presented above does not take into account the
Company's public offering of 6,900,000 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>
September 30, December 31,
1999 1998
<S> <C> <C>
Borrowings under bank credit facility $ 139,500 $ 54,500
Notes payable issued to medical groups 4,547 6,654
Other long-term debt 1,159 208
------------------ ------------------
145,206 61,362
Less- current maturities (12,464) (3,232)
------------------- ------------------
Long-term debt, net of current maturities $ 132,742 $ 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 and third quarters of 1999, the Company converted approximately
$106,000 of convertible subordinated notes payable to a medical group into
11,736 shares of the Company's common stock.
In the first nine 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>
Nine Months Ended
<S> <C>
September 30, 1998
Supplemental net earnings per share
Basic $ 0.47
===============
Diluted $ 0.42
===============
Supplemental weighted average number of common shares outstanding (in
thousands)
Basic 21,006
===============
Diluted 23,790
===============
</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 $480,000 and $0.02, respectively, in the nine months ending
September 30, 1998.
<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 (such as nurse practitioners and physician assistants).
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 790 physicians and
150 mid-level providers. In addition, we are associated with approximately 1,800
physicians in independent practice association ("IPA") networks.
Our agreements with medical groups are structured to provide a common incentive
for growth. When affiliating with a medical group, we typically 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. 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%. We also share between 25%
and 50% of each group's surplus or deficit under risk-sharing arrangements
pursuant to capitated managed care contracts.
We have also developed alternative affiliation structures which require minimal
initial investment and have recently closed one such affiliation. The related
25-year service agreement gives us a lower percentage of the group's operating
income than our typical agreement, but entitles us to 50% of the income from
ancillary services added following the initial affiliation date. The service
agreement also allows the group to terminate the agreement for any reason at
five-year intervals, but only if the group purchases all of the practice assets
then owned by us and pays us a multiple of additional cash flows created since
the initial affiliation date.
Our net revenue represents total revenue for services rendered (reported at the
estimated realizable amounts from patients, third-party payors and others, 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>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
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 nine months of 1999, we entered three additional communities.
Changes in results of operations were caused primarily by expanding into
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 Nine Months Ended
September 30, September 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 34.4 31.7 35.2 32.8
Clinic rent and lease expense 8.7 7.4 8.9 7.5
Clinic supplies 11.3 10.8 11.6 11.6
Purchased medical services 16.2 24.2 15.1 21.9
Other clinic costs 13.0 10.9 12.7 10.8
General corporate expenses 2.8 2.0 2.9 2.3
Depreciation and amortization 3.7 3.4 3.8 3.3
Interest expense 2.1 (0.1) 1.7 0.2
------- --------- -------- -------
Income before provision for income taxes 7.8 9.7 8.1 9.6
Provision for income taxes 3.0 3.7 3.1 3.6
------- -------- -------- -------
Net income 4.8% 6.0% 5.0% 6.0%
======= ======== ======== =======
Other Financial Information:
Total revenue, amounts in thousands (1) $ 113,658 $ 81,254 $ 328,956 $ 215,496
Payor breakdown (2)
Commercial and discounted fee-for-service 37.7% 37.7% 38.2% 40.3%
Medicare/Medicaid 29.9 30.0 29.3 29.3
Capitation 17.2 20.4 17.1 18.8
Other 15.2 11.9 15.4 11.6
------- -------- -------- -------
100.0% 100.0% 100.0% 100.0%
======= ======== ======== =======
</TABLE>
(1) Total revenue represents amounts received for professional and ancillary
services and for other services, such as contract billing; medical
directorship and transition management. These amounts are recorded at the
estimated realizable amounts, net of contractual and other adjustments. Our
net revenue represents revenue, reduced by amounts paid to the medical
groups.
(2) As a percentage of total revenue.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
Three Months Ended September 30, 1999 Compared With Three Months Ended
September 30, 1998
Net revenue increased by 38.0% to $84.3 million for the quarter ended September
30, 1999, from $61.1 million for the quarter ended September 30, 1998.
Approximately two-thirds of this increase was attributable to communities we
entered since September 30, 1998, with the balance coming from communities in
which we began operations prior to October 1, 1998. Same market growth in net
revenue for communities in which we operated for longer than one year was over
13% for the quarter ended September 30, 1999 compared with the quarter ended
September 30, 1998.
Overall clinic costs, including purchased medical services, as a percentage of
net revenue decreased to 83.6% for the quarter ended September 30, 1999,
compared to 85.0% for the quarter ended September 30, 1998. Purchased medical
services reflect the cost of services required under managed care contracts that
are not provided by our medical groups. The primary reason for the overall
decrease in clinic expenses as a percentage of net revenue was a change in
purchased medical services, which decreased to 16.2% as a percentage of net
revenue for the third quarter of 1999, compared to 24.2% in the third quarter of
1998. This change resulted from the relative decrease in full professional and
global capitation revenue (compared to total revenue) caused by our affiliation
with additional medical groups having lower concentration of capitation and from
the conversion of one of our payor contracts from a capitation arrangement to a
discounted fee-for-service payment contract. The decrease in purchased medical
services was partially offset by increases, as a percentage of net revenue, in
clinic salaries and benefits, clinic rent and lease expense and other clinic
costs which increased to 34.4%, 8.7% and 13.0%, respectively, in the third
quarter of 1999 compared to 31.7%, 7.4% and 10.9%, 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 2.8% for
the quarter ended September 30, 1999, compared to 2.0% for the quarter ended
September 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 3.7%
for the quarter ended September 30, 1999, compared to 3.4% for the quarter ended
September 30, 1998. This increase resulted primarily from an increase in
depreciation due to changes in the mix of our medical groups, with certain of
our more recent affiliations having a relatively higher amount of property and
equipment.
Net interest expense as a percentage of net revenue increased to 2.1% for the
quarter ended September 30, 1999, compared to (0.1)% for the quarter ended
September 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 third 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.
Provision for income taxes reflects an effective rate of 38.0%, which is our
estimated effective rate for all of 1999.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
Nine Months Ended September 30, 1999 Compared With Nine Months Ended
September 30, 1998
Net revenue increased by 51.9% to $233.4 million for the nine months ended
September 30, 1999, from $153.7 million for the nine months ended September 30,
1998. Approximately three-fourths 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 nine months ended September 30, 1999
compared with the nine months ended September 30, 1998.
Overall clinic costs, including purchased medical services, as a percentage of
net revenue decreased to 83.5% for the nine months ended September 30, 1999,
compared to 84.6% for the nine months ended September 30, 1998. Purchased
medical services reflect the cost of services required under managed care
contracts that are not provided by our medical groups. The primary reason for
the overall decrease in clinic expenses as a percentage of net revenue was a
change in purchased medical services, which decreased to 15.1% as a percentage
of net revenue for the nine months ending September 30, 1999, compared to 21.9%
in the first nine months of 1998. This change resulted from the relative
decrease in full professional and global capitation revenue (compared to total
revenue) caused by our affiliation with additional medical groups and from the
conversion of one of our larger payor contracts from a capitation arrangement 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 35.2%,
8.9% and 12.7%, respectively, in the nine months ending September 30, 1999
compared to 32.8%, 7.5% and 10.8%, respectively, in the nine months ending
September 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 nine months ended September 30, 1999, compared to 2.3% for the quarter ended
September 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 3.8%
for the nine months ended September 30, 1999, compared to 3.3% for the nine
months ended September 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 certain of our more recent affiliations having a
relatively higher amount of property and equipment.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
Net interest expense as a percentage of net revenue increased to 1.7% for the
nine months ended September 30, 1999, compared to 0.2% for the nine months ended
September 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 nine months ending September 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 in the final stages of completing our company-wide review and testing to
address 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
including reviewing test results and contingency plans and updates the Board of
Directors 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 of our affiliations that is Year 2000 compliant. 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.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
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.
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 are in the process of finalizing contingency plans.
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 $3.6 million on our Year 2000 effort and estimate less than
$500,000 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 September 30, 1999, we had working capital of $56.5 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 nine
months ended September 30, 1999 was $7.6 million. Net income, combined with
depreciation and amortization and deferred taxes and an increase in payable to
affiliated physician groups, provided $22.7 million in cash flows. This was
offset by uses of cash of $15.1 million that resulted from increases in accounts
receivable, management fees receivable, due from affiliated medical groups and
other assets, and decreases in accounts payable, and accrued expenses and other
liabilities.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
Our accounts receivable increased $5.9 million, net of the effects of purchase
accounting since December 31, 1998. Approximately $1.9 million of this increase
resulted from an increase in revenues in the third 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 $2.0 million resulted
from an increase in accounts receivable days outstanding from 47 days to 49
days. During the third quarter, we reduced the number of days in accounts
receivable from 50 days as of June 30, 1999 to 49 days as of September 30, 1999.
While our days outstanding compares favorably within the healthcare industry, we
are nonetheless focusing significant efforts at all of our clinics to continue
to improve the collections and the overall business office processes.
We had aggregate cash expenditures for purchases of clinic assets of $84.5
million for the nine months ended September 30, 1999. Of this amount, $25.6
million related primarily to deferred payments associated with previously
completed acquisitions and $58.9 million related to acquisitions completed in
the first nine months of 1999. Our capital expenditures amounted to $4.9 million
for the nine months ended September 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 nine 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 $157.5 million for acquisitions and
general working capital. The commitment is comprised of $142.5 million maximum
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 September 30, 1999, the effective interest rate under the
credit facility was 7.4%. 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 and subsequent amendments, we paid commitment fees and other
closing costs of approximately $1.7 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 September 30, 1999, we had $139.5 outstanding and $18.0 million
available, subject to certain conditions under the agreement.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
In connection with the affiliation of a physician group, the Company issued
convertible subordinated notes totaling $1,850,000. The notes accrue interest at
a rate of 5% paid annually on July 30 and can be converted into shares of the
Company's common stock at a conversion price of $5.08, subject to adjustment
under the note agreement.
We had cash and cash equivalents of $11.1 million at September 30, 1999. In
addition to this, our principal sources of liquidity at September 30, 1999 were
accounts receivable of $61.4 million and availability of $18.0 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.
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 July 1999, the Company issued 9,658 shares of Common Stock to the former
stockholder of a medical group as post-closing adjustments to the consideration
payable by the Company in connection with its acquisition by the Company in
August 1998. In August 1999, the Company issued 249,513 shares of Common Stock
to the former stockholders of a medical network management company as
consideration in connection with its acquisition in August 1999. These issuances
were exempt from registration under the Securities Act, pursuant to section 4(2)
of the Act as it did not involve any public offering.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
11 Computation of Per Share Earnings
27 Financial Data Schedule
(b) Reports on Form 8-K
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 November 15, 1999
Officer, and Director
(Chief Executive Officer)
/s/ ROBERT D. SMITH
Robert D. Smith Senior Vice President - Finance and November 15, 1999
Chief Financial Officer
(Chief Accounting Officer)
</TABLE>
<PAGE>
PROMEDCO MANAGEMENT COMPANY
EXHIBIT 11
Computation of Per Share Earnings
(All amounts are expressed in thousands, except for earnings per share)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
BASIC
Weighted average shares outstanding 21,043 20,806 20,873 17,002
Contingently issuable shares in business
combinations 10 644 253 660
------ ------ ------ -------
Number of common shares outstanding 21,053 21,450 21,126 17,662
====== ====== ====== =======
DILUTED
Weighted average shares outstanding 21,043 20,806 20,873 17,002
Contingently issuable shares in business
combinations 10 644 253 660
Net common shares issuable on exercise of
certain stock options and warrants (1) 1,324 2,090 1,559 2,784
Other dilutive securities 601 - 606 -
------- ------- ------- -------
Number of common shares outstanding 22,978 23,540 23,291 20,446
======= ======= ======= =======
Net income $ 4,082 $ 3,666 $ 11,778 $ 9,141
Interest expense, net of tax assuming conversion
of convertible subordinated notes payable 66 - 199 -
-------- --------- -------- --------
$ 4,148 $ 3,666 $ 11,977 $ 9,141
======= ========= ======== ========
(1) Net common shares issuable on exercise of certain stock options and warrants is calculated based on the treasury stock method
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 11,104
<SECURITIES> 0
<RECEIVABLES> 61,436
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 114,206
<PP&E> 32,377
<DEPRECIATION> 9,302
<TOTAL-ASSETS> 404,283
<CURRENT-LIABILITIES> 57,687
<BONDS> 0
0
0
<COMMON> 217
<OTHER-SE> 178,871
<TOTAL-LIABILITY-AND-EQUITY> 404,283
<SALES> 0
<TOTAL-REVENUES> 233,430
<CGS> 0
<TOTAL-COSTS> 210,358
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,075
<INCOME-PRETAX> 18,997
<INCOME-TAX> 7,219
<INCOME-CONTINUING> 11,778
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,778
<EPS-BASIC> 0.56
<EPS-DILUTED> 0.51
</TABLE>
