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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 March 31, 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 0-21373
ProMedCo Management Company
(Exact name of Registrant as specified in its charter)
Delaware 75-2529809
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
801 Cherry Street, Suite 1450
Fort Worth, Texas 76102
(Address of principal executive offices) (Zip Code)
(817) 335-5035
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES ( X ) NO ( )
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock April 30, 1999
$.01 par value 21,061,215 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
March 31, 1999 and December 31, 1998 2
Condensed Consolidated Statements of Operations
Three Months Ended March 31, 1999 and 1998 3
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 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 9
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
</TABLE>
<PAGE>
PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(All amounts are expressed in thousands)
<TABLE>
<CAPTION>
March 31, 1999 December 31,
(Unaudited) 1998
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 15,363 $ 13,871
Accounts receivable, net 55,934 51,375
Management fees receivable 7,464 8,490
Due from affiliated physician groups 4,862 5,585
Deferred tax benefit 2,206 2,206
Prepaid expenses and other current assets 14,790 13,043
------------------ ----------------
Total current assets 100,619 94,570
------------------ ----------------
Property and equipment, net 15,911 15,125
Intangible assets, net 172,755 153,402
Long term receivables 40,632 40,429
Other assets 3,409 3,133
------------------ ----------------
Total assets $ 333,326 $ 306,659
================== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,766 $ 4,683
Payable to affiliated physician groups 6,842 6,641
Accrued salaries, wages and benefits 8,404 8,146
Accrued purchased medical services 6,096 6,087
Accrued expenses and other current liabilities 6,224 6,741
Current maturities of notes payable 3,302 3,232
Current portion of obligations under capital leases 496 557
Current portion of deferred purchase price 2,245 2,137
Income taxes payable 726 847
------------------ ----------------
Total current liabilities 39,101 39,071
------------------ ----------------
Notes payable, net of current maturities 96,098 58,130
Obligations under capital leases, net of current portion 605 701
Deferred purchase price, net of current portion 8,662 25,290
Convertible subordinated notes payable 7,635 7,635
Deferred income tax liability 3,430 2,872
Other long term liabilities 1,532 312
------------------ ----------------
Total liabilities 157,063 134,011
------------------ ----------------
Stockholders' equity:
Common stock 211 211
Additional paid-in capital 152,801 152,786
Common stock to be issued 6,005 6,005
Treasury stock (254) -
Stockholder notes receivable (250) (370)
Retained earnings 17,750 14,016
------------------ ----------------
Total stockholders' equity 176,263 172,648
------------------ ----------------
Total liabilities and stockholders' equity $ 333,326 $ 306,659
================== ================
</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
March 31,
1999 1998
<S> <C> <C>
Net revenue $ 73,092 $ 40,612
Operating expenses:
Clinic salaries and benefits 25,706 13,340
Clinic rent and lease expense 6,246 3,199
Clinic supplies 8,589 4,858
Purchased medical services 11,912 8,132
Other clinic costs 8,819 4,322
General corporate expenses 2,010 1,083
Depreciation and amortization 2,776 1,294
Interest expense 1,011 472
------------------ ---------------
67,069 36,700
------------------ ---------------
Income before provision for income taxes 6,023 3,912
Provision for income taxes 2,289 1,486
------------------ ---------------
Net income $ 3,734 $ 2,426
================== ===============
Earnings per share:
Basic $ 0.17 $ 0.18
================== ===============
Diluted $ 0.16 $ 0.15
================== ===============
Weighted average number of common shares outstanding:
Basic 21,457 13,616
================== ===============
Diluted 23,193 16,491
================== ===============
</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>
Three Months Ended
March 31,
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,734 $ 2,426
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities (net of effects
of purchase transactions):
Depreciation and amortization 2,776 1,294
Provision for deferred income taxes 458 341
Changes in assets and liabilities:
Accounts receivable (2,588) (6,267)
Management fees receivable 1,026 (2,476)
Due from affiliated physician groups 723 1,681
Other assets (1,164) (1,410)
Accounts payable (1,004) (1,188)
Payable to physician groups (239) 1,359
Accrued expenses and other liabilities (1,434) 2,221
------------ ----------
Net cash provided by (used in) operating activities 2,288 (2,019)
------------ ----------
Cash flows from investing activities:
Purchases of property and equipment (1,098) (1,213)
Purchases of clinic assets, net of cash (36,961) (3,648)
Increase in notes receivable (561) -
------------ ----------
Net cash used in investing activities (38,620) (4,861)
------------ ----------
Cash flows from financing activities:
Borrowings under long-term debt 38,031 2,625
Payments on long-term debt (19) (36)
Payments on capital lease obligations (157) (124)
Proceeds from issuance of common stock, net 18 795
Purchase of treasury shares (169) -
Collection of stockholder note receivable 120 -
------------ ----------
Net cash provided by financing activities 37,824 3,260
------------ ----------
Increase (decrease) in cash and cash equivalents 1,492 (3,620)
Cash and cash equivalents, beginning of period 13,871 15,761
------------ ----------
Cash and cash equivalents, end of period $ 15,363 $ 12,141
============ ==========
Supplemental disclosure of cash flow information
Cash paid during the period for -
Interest expense $ 1,787 $ 919
Income taxes $ 1,965 $ 953
</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.
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 physician groups and other revenues less amounts paid to
physician groups. The amounts paid to physician groups (typically 80-85% of the
physician groups' operating income) represents distributions paid to the
physicians pursuant to the service agreements between the Company and the
physician groups and primarily consists of the cost of the affiliated physician
services. Under the service agreements, the Company provides each physician
group with the facilities and equipment used in its medical practice, assumes
responsibility for the management of the operations of the practice, and employs
substantially all of the non-physician personnel utilized by the group.
Net revenue is detailed as follows (in thousands):
Three Months Ended March 31,
1999 1998
Physician groups revenue, net $ 103,916 $ 59,679
Other revenue 2,868 1,500
---------- ---------
Total revenue 106,784 61,179
Less- Amounts paid to physician groups (33,692) (20,567)
---------- ---------
Net revenue $ 73,092 $ 40,612
========== =========
<PAGE>
Physician groups revenue represents the revenue of the physician groups reported
at the estimated realizable amounts from patients, third-party payors, and
others for services rendered, net of contractual and other adjustments. Revenue
under certain third-party payor agreements is subject to audit and retroactive
adjustments. Provisions for third-party payor settlements and adjustments are
estimated in the period the related services are rendered and adjusted in future
periods as final settlements are determined. There are no material claims,
disputes, or other unsettled matters that exist to management's knowledge
concerning third-party reimbursements. In addition, management believes there
are no retroactive adjustments that would be material to the Company's financial
statements. Other revenue represents fees from management consulting,
supplemental implementation services, and other miscellaneous revenues.
2. ACQUISITIONS:
Through March 31, 1999 and during 1998, the Company, through its wholly owned
subsidiaries, acquired certain operating assets of the following medical
clinics:
<TABLE>
<CAPTION>
Physician 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
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.
(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 physician 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 physician group effective
April 1, 1998.
<PAGE>
(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 physician 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 physician 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 March 31,
1999 1998
<S> <C> <C>
Net revenue $ 73,484 $ 53,516
=========== ==========
Net income $ 3,753 $ 2,834
=========== ==========
Earnings per share
Basic $ 0.17 $ 0.20
=========== ==========
Diluted $ 0.16 $ 0.17
=========== ==========
Weighted average number of common shares outstanding
Basic 21,457 14,036
=========== ==========
Diluted 23,193 16,911
=========== ==========
</TABLE>
3. LONG-TERM DEBT:
Long-term debt is summarized as follows (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
<S> <C> <C>
Borrowings under bank credit facility $ 92,500 $ 54,500
Notes payable issued to physician groups 6,654 6,654
Other long-term debt 246 208
------------------ ------------------
99,400 61,362
Less- current maturities (3,302) (3,232)
------------------ ------------------
Long-term debt, net of current maturities $ 96,098 $ 58,130
================== ==================
</TABLE>
<PAGE>
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 $359,991 of convertible subordinated notes
payable to a physician group into 39,999 shares of the Company's common stock.
In the first quarter of 1999, an affiliated physician group surrendered 19,113
shares of the Company's common stock as partial payment of an outstanding note
balance and accrued interest.
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.
Three Months
Ended
March 31,1998
Supplemental net earnings per share
Basic $ 0.14
==================
Diluted $ 0.12
==================
Supplemental weighted average number of
common shares outstanding (in thousands)
Basic 20,516
==================
Diluted 23,391
==================
6. CHANGE IN ACCOUNTING ESTIMATE:
Effective July 1, 1998, the Company changed its estimate with respect to the
estimated life of its service agreement rights intangible assets. All existing
and future service agreement rights intangible assets will be amortized over a
period not to exceed 25 years from the inception of the respective service
agreements. Had the Company adopted this policy at the beginning of 1998,
amortization expense would have increased and diluted earnings per share would
have decreased by approximately $220,000 and $0.01, respectively, in the first
quarter of 1998.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
ProMedCo is a medical services company that manages and coordinates the delivery
of healthcare in secondary markets. By affiliating with leading primary care
driven, multi-specialty physician groups, the Company establishes dominant,
local healthcare delivery platforms thus providing physicians the opportunity
for increasing control of medical expenditures in their communities. ProMedCo
commenced operations in December 1994 and affiliated with its initial physician
group in June 1995. The Company's rapid growth since June 1995 has resulted
primarily from its affiliation with additional physician groups and from the
subsequent same-market growth of those groups following affiliation. The groups
expand through affiliations with additional primary care physicians and
specialists and selective additions of ancillary services. In addition to
providing operating and expansion capital, the Company provides its affiliated
groups with a broad range of strategic and management expertise and services.
The Company currently is affiliated with multi-specialty physician groups in 16
states, comprised of approximately 740 physicians and 155 mid-level providers
(primarily physician assistants and nurse practitioners), and is associated with
approximately 1,080 physicians in associated independent practice association
("IPA") networks, including those managed by Primergy, Inc. ("Primergy"). In
March 1999, the Company entered into a management agreement with Kingston, New
York-based Primergy, a physician 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 events.
The Company also provides a full range of managed care services to capitated
providers, including clinical quality assessment, credentialing, claims
processing and payment, referral and utilization management, and case
management. The Company is currently providing such services to it's associated
IPAs and to those of its affiliated groups that have entered into capitation
arrangements, together covering over 150,000 managed care capitated lives.
When affiliating with a physician group, the Company generally acquires at fair
market value the group's non-real estate operating assets and enters into a
40-year service agreement with the group in exchange for a combination of common
stock, cash, other securities of the Company, and/or the assumption of certain
liabilities. Under the service agreements, the Company receives a fixed
percentage (typically 15-20%) of the physician groups' operating income (as
defined) and shares between 25% and 50% of the group's surplus or deficit under
risk-sharing arrangements pursuant to capitated managed care contracts. In many
of the more recent affiliations, the Company also receives 50% of the profits
from new ancillary services added during the term of the service agreement.
Although the group's physicians retain full control over the practice of
medicine, ProMedCo manages all day-to-day operations other than the provision of
medical services. The Company is continually seeking additional physician groups
with which to affiliate and is currently engaged in negotiations with several
such groups.
The Company's net revenue represents the revenue of the physician groups
reported at the estimated realizable amounts from patients, third-party payors,
and others for services rendered, net of contractual and other adjustments and
further reduced by the amounts paid to physician groups. The amounts paid to
physician groups (typically 80-85% of the physician groups' operating income)
pursuant to the service agreements primarily consist of the cost of the
affiliated physician services. Under the service agreements, the Company
provides each physician group with the facilities and equipment used in its
medical practice, assumes responsibility for the management of the operations of
<PAGE>
the practice, and employs substantially all of the non-physician personnel
utilized by the group. The Company does not consolidate the operating results
and accounts of the physician groups under EITF 97-2, "Applications of FASB No.
94 and APB No. 16 to Physician Practice Management Entities and Certain Other
Entities under Contracted Management Agreement."
Results of Operations
The Company commenced operations in December 1994 and affiliated with its first
physician group in June 1995 and its second group in December 1995. The Company
entered into affiliations with five additional groups in 1996, seven additional
groups during 1997, and eight additional groups in 1998. During the first
quarter of 1999, the Company entered into affiliations with two additional
groups. Changes in results of operations were caused primarily by affiliations
with these additional physician groups. The following table sets forth the
percentages of physician groups revenue represented by certain items reflected
in the Company's condensed consolidated statements of operations.
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
<S> <C> <C>
Net revenue 100.0% 100.0%
Operating expenses:
Clinic salaries and benefits 35.2 32.8
Clinic rent and lease expense 8.5 7.9
Clinic supplies 11.8 12.0
Purchased medical services 16.3 20.0
Other clinic costs 12.1 10.6
General corporate expenses 2.7 2.7
Depreciation and amortization 3.8 3.2
Interest expense 1.4 1.2
----------- -----------
Income before provision for income taxes 8.2 9.6
Provision for income taxes 3.1 3.6
----------- -----------
Net income 5.1% 6.0%
=========== ===========
Other Financial Information:
Total revenue, amounts in thousands (1) $ 106,784 $ 61,179
Payor breakdown (2)
Commercial and discounted fee-for-service 37.6% 37.4%
Medicare/Medicaid 28.3 27.1
Capitation 18.4 21.6
Other 15.7 13.9
----------- -----------
100.0% 100.0%
=========== ===========
</TABLE>
(1) Total revenue represents physician 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.
(2) As a percentage of physician groups revenues.
<PAGE>
Net revenue increased by 80% to $73.1 million for the quarter ended March 31,
1999, from $40.6 million for the quarter ended March 31, 1998. Approximately 74%
of this growth in physician groups revenue is attributable to new affiliations
since March 31, 1998, with the balance coming from increases in revenues from
affiliated physician groups in place prior to March 31, 1998 and from an
increases in other revenues. Same-market growth in net revenue for physician
groups affiliated with the Company for longer than one year was over 15% for the
quarter ended March 31, 1999 compared with the quarter ended March 31, 1998.
Overall clinic costs, including purchased medical services, as a percentage of
net revenue increased to 83.9% for the quarter ended March 31, 1999, compared to
83.3% for the quarter ended March 31, 1998. The change in overall clinic costs
and to the individual expense categories is due to the mix of affiliated
physician groups managed by the Company. Clinic salaries and benefits and other
clinic costs created the largest increase as a percentage of net revenue,
increasing to 35.2% and 12.1%, respectively, in the first quarter of 1999
compared to 32.8% and 10.6%, respectively in the first quarter of 1998. These
increases were partially offset by a decrease in purchased medical services
which decreased to 16.3% as a percentage of net revenue for the first quarter of
1999 compared to 20.0% in the first quarter of 1998. These changes are directly
related to the mix of affiliated physician groups and the relative decrease in
full professional and global capitation revenues caused by the affiliation of
additional physician groups.
General corporate expenses as a percentage of net revenue remained constant at
2.7% for the quarter ended March 31, 1999, and for the quarter ended March 31,
1998. While these costs remained constant as a percentage of net revenue, the
amount of general corporate expenses increased 85.6% to $2.0 million for the
quarter ended March 31, 1999 from $1.1 million for the quarter ended March 31,
1998. This increase in expenses was expected as the Company continued to add
management and technology infrastructure. Management expects these increases in
amounts to continue as the Company increases the number of affiliated physician
groups.
Depreciation and amortization as a percentage of net revenue increased to 3.8%
for the quarter ended March 31, 1999, compared to 3.2% for the quarter ended
March 31, 1998. This increase results primarily from the Company's change in the
amortization period for its service agreement rights intangible assets.
Effective July 1, 1998, all existing and future service agreement rights
intangible assets are amortized over a period not to exceed 25 years from the
inception of the respective service agreements.
Net interest expense as a percentage of net revenue increased to 1.4% for the
quarter ended March 31, 1999, compared to 1.2% for the quarter ended March 31,
1998. This increase is directly related to the increase in long term debt
relating to the affiliation with additional physician groups.
Provision for income taxes reflects an effective rate of 38%, the Company's
estimated effective rate for all of 1999.
<PAGE>
Year 2000
The Company is aware of issues associated with the programming code in existing
computer systems as the year 2000 approaches. The "Year 2000" problem is
pervasive and complex, as virtually every computer operation will be affected in
the same way by the rollover of the two digit year value to 00. The issue is
whether computer systems will properly recognize date sensitive information when
the year changes to 2000. Systems that do not properly recognize such
information could generate erroneous data or cause a system to fail.
The Company continues to assess the impact of the Year 2000 issue on its
information systems and operations using both internal and external resources.
The Company divides its internal 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. The Company has installed a new, common
financial software package at all locations that is certified Year 2000
compliant. The Company's philosophy with respect to practice management systems
is to utilize the legacy system in place as long as it can capably serve the
physicians' needs. Of the Company's affiliated medical groups, only three
locations are utilizing practice management systems that are not currently Year
2000 compliant. Two of these locations have been scheduled for system
conversions and upgrades in the second quarter of 1999 to handle increased
patient volume. These planned conversions will be Year 2000 compliant. The third
location utilizes a system maintained by a local hospital; ProMedCo is working
with the hospital to complete Year 2000 testing during the second quarter of
1999. The Year 2000 assessment process continues with each new affiliation.
Inadequate or noncompliant practice management systems could be acquired in a
new affiliation, which would require system remediation or replacement. Given
these issues, the Company is currently unable to estimate the costs of the
remediation or replacements that may be required during 1999. With its current
strategy of replacing inadequate practice management systems, however, the
Company does not believe that Year 2000 issues will cause a conversion of one or
more of its practice management systems to be more or less difficult than a
typical system conversion. The Company's primary managed care technology resides
at its risk management subsidiary, PMC Medical Management ("PMC"). PMC is
currently upgrading its systems to be Year 2000 compliant. This process is
expected to be completed in the second quarter of 1999 and the costs are not
currently estimated to be material.
The Company is also in the process of gathering information about the Year 2000
compliance status of its significant suppliers and vendors. The inability of
suppliers and vendors to complete their Year 2000 resolution process in a timely
fashion could materially impact the Company. The potential effect on the Company
of non-compliance by suppliers and vendors has not yet been determined.
Management of the Company believes it has an effective program in place to
resolve the Year 2000 issue in a timely manner. In the event that the Company
does not complete any additional phases, the Company's ability to record revenue
or process collections in a timely fashion would be adversely impacted after
January 1, 2000. In addition, disruptions in the general economy due to the Year
2000 problem could also materially adversely affect the Company.
<PAGE>
The Company currently has no contingency plans in place in the event it does not
complete all phases of its Year 2000 program. The Company plans to evaluate the
status of its efforts in June 1999 to determine whether such a plan is
necessary.
Liquidity and Capital Resources
At March 31, 1999, the Company had working capital of $61.5 million, compared to
$55.5 million at December 31, 1998. Cash provided by operations for the quarter
ended March 31, 1999 was $2.3 million. Net accounts receivable of $55.9 million
at March 31, 1999 amounted to 47 days of net physician groups revenue (excluding
other revenues) for the first quarter of 1999. Net income combined with
depreciation and amortization, deferred taxes, and a decrease in management fees
receivable and due from affiliated physician groups provided $8.7 million in
cash flows. This was offset by uses of cash of $6.4 million resulting from
increases in accounts receivable, and other assets and decreases in accounts
payable, payable to physician groups and accrued expenses and other liabilities.
The Company had aggregate cash expenditures for purchases of clinic assets of
$37.0 million for the quarter ended March 31, 1999. Of this amount, $22.1
million relates primarily to deferred payments associated with previously
completed acquisitions and $14.9 million relates to acquisitions completed in
the first quarter of 1999. Capital expenditures amounted to $1.1 million for the
quarter ended March 31, 1999. Although each of the Company's service agreements
with its affiliated physician groups requires the Company to provide capital for
equipment, expansion, additional physicians and other major expenditures, no
specific amount has been committed in advance. Capital expenditures are made
based partially upon the availability of funds, the sources of funds,
alternative projects and an acceptable repayment period.
In November 1998, the Company authorized the adoption of a common stock
repurchase program whereby the Company may repurchase up to $10 million of its
common stock. During the first quarter of 1999, the Company purchased 35,000
shares of its own common stock at an average price of $4.75 per share.
Subsequent to the end of the first quarter, the Company purchased an additional
658,103 shares at an average price of $4.18 per share.
The Company's revolving credit agreement (the "Credit Facility") provides for a
three-year commitment to fund revolving credit borrowings of up to $125.0
million for acquisitions and general working capital purposes. The interest rate
under the Credit Facility is set at the Company's option and varies based on the
Company's leverage, as follows: (i) the higher of the federal funds rate plus
0.5% to 1.25% or the prime rate plus 0.0% to 0.75%, or (ii) the Eurodollar rate
plus 1.25% to 2.25%. As of March 31, 1999, the effective interest rate on the
Credit Facility was 7.36%. The Credit Facility includes certain restrictive
covenants including limitations on the payment of dividends as well as the
maintenance of certain financial ratios. At the Company's option, the Company
can convert the outstanding balance on the Credit Facility to a term loan, which
would be due December 17, 2003. The Credit Facility is secured by substantially
all the assets of the Company.
<PAGE>
The Company had cash and cash equivalents of $15.4 million at March 31, 1999. In
addition to this, the Company's principal sources of liquidity are accounts
receivable of $55.9 million at March 31, 1998 and availability under the Credit
Facility of $32.2 million. The Company believes that the combination of these
sources will be sufficient to meet the Company's working capital needs for the
next twelve months. The Company's future acquisition, expansion and capital
expenditure programs will require substantial amounts of capital resources. To
meet the capital needs of these programs, the Company will continue to evaluate
alternative sources of financing, including short- and long-term bank
indebtedness, additional equity and other forms of financing, the availability
and terms of which will depend upon market and other conditions. There can be no
assurance that additional financing will be available on terms acceptable to the
Company.
Forward-Looking Statements
This report includes certain forward-looking statements about anticipated
results, including statements as to operating results, liquidity and capital
resources, and negotiations with and acquisitions of additional physician
groups. Such forward-looking statements are based upon internal estimates which
are subject to change because they reflect preliminary information and
management assumptions, and a variety of factors could cause the Company's
actual results and experience to differ materially from the anticipated results
or other expectations expressed in the forward-looking statements. The factors
which could cause actual results or outcomes to differ from such expectations
include the extent of the Company's success in (i) consummating affiliations
with additional physician groups; (ii) negotiating managed care contracts and
managing the medical risk assumed thereunder, (iii) obtaining additional
financing upon terms acceptable to the Company, and (iv) negotiating favorable
reimbursement rates with third-party payors, along with the uncertainties and
other factors described herein and in the Company's public filings and reports.
<PAGE>
Item 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 May 17, 1999
Officer, and Director
(Chief Executive Officer)
/s/ ROBERT D. SMITH
Robert D. Smith Senior Vice President - Finance and May 17, 1999
Chief Financial Officer
(Chief Accounting Officer)
</TABLE>
PROMEDCO MANAGEMENT COMPANY
EXHIBIT 11
Computation of Per Share Earnings
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
<S> <C> <C>
BASIC
Weighted average shares outstanding 21,043,846 12,788,615
Contingently issuable shares in business combinations 412,770 827,272
------------- -------------
Number of common shares outstanding 21,456,616 13,615,887
============= =============
DILUTED
Weighted average shares outstanding 21,043,846 12,788,615
Contingently issuable shares in business combinations 412,770 827,272
Net common shares issuable on exercise of certain stock
options and warrants (1) 1,735,997 2,874,964
Other dilutive securities - -
------------- -------------
Number of common shares outstanding 23,192,613 16,490,851
============= =============
</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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 15,363
<SECURITIES> 0
<RECEIVABLES> 55,934
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 100,619
<PP&E> 22,445
<DEPRECIATION> 6,534
<TOTAL-ASSETS> 333,326
<CURRENT-LIABILITIES> 39,101
<BONDS> 0
0
0
<COMMON> 211
<OTHER-SE> 176,052
<TOTAL-LIABILITY-AND-EQUITY> 333,326
<SALES> 0
<TOTAL-REVENUES> 73,092
<CGS> 0
<TOTAL-COSTS> 66,058
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,011
<INCOME-PRETAX> 6,023
<INCOME-TAX> 2,289
<INCOME-CONTINUING> 3,734
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,734
<EPS-PRIMARY> 0.17
<EPS-DILUTED> 0.16
</TABLE>
