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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, 2000
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 3200
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, 2000
--------------------- -------------
$.01 par value 21,177,148 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, 2000 and December 31, 1999 2
Condensed Consolidated Statements of Operations
Three Months and Six Months Ended June 30, 2000 and 1999 3
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2000 and 1999 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 2. Changes in Securities and Use of Proceeds 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
</TABLE>
<PAGE>
PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(All amounts are expressed in thousands)
<TABLE>
<CAPTION>
June 30, 2000 December 31,
(Unaudited) 1999
------------------ ------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,103 $ 7,625
Accounts receivable, net 66,046 63,811
Management fees receivable 16,504 9,905
Due from affiliated medical groups 14,112 14,758
Deferred tax benefit 537 537
Income tax receivable 1,411 -
Prepaid expenses and other current assets 16,578 14,681
------------------ ------------------
Total current assets 122,291 111,317
------------------ ------------------
Property and equipment, net 26,318 24,352
Intangible assets, net 240,299 227,006
Long-term receivables 51,379 50,355
Deferred income taxes 565 993
Other assets 6,902 5,290
------------------ ------------------
Total assets $ 447,754 $ 419,313
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,690 $ 6,418
Payable to affiliated medical groups 11,947 10,297
Accrued salaries, wages and benefits 7,276 7,578
Accrued purchased medical services 8,795 9,722
Accrued expenses and other current liabilities 8,803 7,321
Current maturities of long-term debt 1,156 11,463
Current portion of obligations under capital leases 364 476
Current portion of deferred purchase price 2,659 2,293
Income taxes payable - 3,643
------------------ ------------------
Total current liabilities 48,690 59,211
------------------ ------------------
Long-term debt, net of current maturities 134,821 149,674
Obligations under capital leases, net of current portion 222 343
Deferred purchase price, net of current portion 16,809 17,592
Convertible subordinated notes payable 8,906 9,484
Other long-term liabilities 814 378
------------------ ------------------
Total liabilities 210,262 236,682
------------------ ------------------
Redeemable convertible preferred stock 51,468 -
Stockholders' equity:
Common stock 220 219
Additional paid-in capital 156,586 156,106
Common stock to be issued 90 90
Treasury stock (2,956) (2,865)
Stockholder notes receivable (250) (250)
Retained earnings 32,334 29,331
------------------ ------------------
Total stockholders' equity 186,024 182,631
------------------ ------------------
Total liabilities and stockholders' equity $ 447,754 $ 419,313
================== ==================
</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,
-------------------------- ---------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenue $ 89,785 $ 76,021 $ 183,336 $ 149,113
Operating expenses:
Clinic salaries and benefits 31,121 27,277 62,937 52,983
Clinic rent and lease expense 8,425 7,134 16,506 13,380
Clinic supplies 10,401 8,970 20,803 17,559
Purchased medical services 16,039 9,751 32,589 21,663
Other clinic costs 11,743 9,870 23,733 18,689
General corporate expenses 2,939 2,253 5,479 4,263
Depreciation and amortization 3,922 3,110 7,761 5,886
Interest expense 3,825 1,266 6,998 2,277
----------- ----------- ----------- -----------
Total 88,415 69,631 176,806 136,700
----------- ----------- ----------- -----------
Income before provision for income taxes and
extraordinary charge 1,370 6,390 6,530 12,413
Provision for income taxes 591 2,428 2,758 4,717
----------- ----------- ----------- -----------
Net income before extraordinary charge 779 3,962 3,772 7,696
Extraordinary charge-loss on extinguishment of debt,
net of benefit from income taxes of approximately $468 647 - 647 -
----------- ----------- ----------- -----------
Net income 132 3,962 3,125 7,696
Dividends earned on preferred stock 122 - 122 -
----------- ----------- ----------- -----------
Net income available to common stockholders $ 10 $ 3,962 $ 3,003 $ 7,696
=========== =========== =========== ===========
Net earnings per share
Basic
Income before extraordinary charge $ 0.03 $ 0.19 $ 0.17 $ 0.36
Extraordinary charge (0.03) - (0.03) -
---------- ----------- ----------- -----------
Net income $ 0.00 $ 0.19 $ 0.14 $ 0.36
=========== =========== =========== ===========
Diluted
Income before extraordinary charge $ 0.03 $ 0.18 $ 0.15 $ 0.34
Extraordinary charge (0.03) - (0.03) -
----------- ----------- ----------- -----------
Net income $ 0.00 $ 0.18 $ 0.13 $ 0.34
=========== =========== =========== ===========
Weighted average number of common shares outstanding:
Basic 22,097 20,867 22,090 21,163
=========== =========== =========== ===========
Diluted 22,492 22,572 24,846 22,952
=========== =========== =========== ===========
</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
----------------------------------------
2000 1999
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,125 $ 7,696
Adjustments to reconcile net income to net cash provided by operating
activities (net of effects of purchase transactions):
Depreciation and amortization 7,761 5,886
Provision for deferred income taxes 378 786
Changes in assets and liabilities:
Accounts receivable, net (5,613) (5,875)
Management fees receivable (6,674) (797)
Due from affiliated medical groups 2,797 (745)
Prepaid expenses and other assets (360) (2,127)
Accounts payable 1,648 (1,507)
Payable to affiliated medical groups 1,563 (20)
Accrued expenses and other liabilities (2,289) (1,883)
------------------ ------------------
Net cash provided by operating activities 2,336 1,414
------------------ ------------------
Cash flows from investing activities:
Purchases of property and equipment (3,129) (2,765)
Purchases of clinic assets, net of cash acquired (15,169) (67,316)
(Increase) decrease in notes receivable (3,366) 1,462
------------------ ------------------
Net cash used in investing activities (21,664) (68,619)
------------------ ------------------
Cash flows from financing activities:
Borrowings under long-term debt 180,500 69,000
Payments on long-term debt (209,550) (2,512)
Payments on capital lease obligations (233) (242)
Payment of deferred financing costs (2,756) (313)
Proceeds from issuance of common stock, net 2 286
Proceeds from issuance of preferred stock, net 51,468 -
Purchase of treasury shares (625) (2,914)
Collection of stockholder note receivable - 120
------------------ ------------------
Net cash provided by financing activities 18,806 63,425
------------------ ------------------
Decrease in cash and cash equivalents (522) (3,780)
Cash and cash equivalents, beginning of period 7,625 13,871
------------------ ------------------
Cash and cash equivalents, end of period $ 7,103 $ 10,091
================== ==================
Supplemental disclosure of cash flow information
Cash paid during the period for -
Interest expense $ 8,427 $ 3,125
Income taxes $ 7,354 $ 3,153
</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, 1999.
Certain prior period amounts have been reclassified to conform with the 2000
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. Options, warrants, and the effects
redeemable, convertible preferred stock and other potentially dilutive
securities are excluded from basic EPS. Diluted EPS includes the options and
warrants using the treasury method and the redeemable convertible preferred
stock and convertible subordinated notes using the if-converted method, to the
extent that these securities are not anti-dilutive. For the three-month and
six-month periods ending June 30, 2000, approximately 3.4 and 3.8 million of
stock options, respectively, were excluded from the computation of diluted EPS
because the options' exercise prices were greater than the average market price
of the common shares. For the three-month and six-month periods ending June 30,
2000, approximately 675,000 and 551,000 shares assumed on the conversion of
convertible subordinated notes were excluded from the computation of diluted EPS
because the impact is anti-dilutive. Similarly, the impact of redeemable,
convertible preferred stock is excluded from the computation of diluted EPS for
the three-month period ending June 30, 2000 since the impact is anti-dilutive.
Net Revenue
Net revenue represents total revenue reduced by amounts paid to medical groups.
The amounts paid to medical groups (typically 80-85% of the medical 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.
Net revenue is detailed as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- ---------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Total revenue 124,212 108,514 255,419 215,298
Less- Amounts paid to medical groups (34,427) (32,493) (72,083) (66,185)
----------- ----------- ----------- -----------
Net revenue $ 89,785 $ 76,021 $ 183,336 $ 149,113
=========== =========== =========== ===========
</TABLE>
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; interim management; strategic and financial planning and
management consulting. Revenue is 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 June 30, 2000 and during 1999, 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>
2000: Breton Medical Group (a) June 2000 California, MD
First Choice Medical (b) January 2000 Flower Mound, TX
1999: El Paseo Medical Center January 1999 (c) Las Cruces, NM
Boca Raton Medical Associates February 1999 (d) 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 (e) Columbus, GA
</TABLE>
(a) The physicians of Breton Medical Group combined with the
physicians of Shah Associates, which had previously affiliated
with the Company in November 1998.
(b) The physicians of First Choice Medical combined with the
HealthFirst Medical Group, which had previously affiliated with
the Company in June 1996.
(c) 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.
(d) 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.
(e) 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.
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 that owns and
operates five IPAs in the Hudson Valley of New York and has under contract more
than 1,500 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 typically 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, 1999.
Future results may differ substantially from pro forma results and cannot be
considered indicative of future results (in thousands except for per share
amounts).
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- ---------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenue $ 89,790 $ 83,355 $ 183,903 $ 168,921
=========== =========== =========== ===========
Net income before extraordinary charge $ 662 $ 4,190 $ 3,663 $ 8,064
=========== =========== =========== ===========
Earnings per share before extraordinary
charge per share
Basic $ 0.03 $ 0.20 $ 0.17 $ 0.38
=========== =========== =========== ===========
Diluted $ 0.03 $ 0.19 $ 0.16 $ 0.35
=========== =========== =========== ===========
Weighted average number of common
shares outstanding
Basic 22,097 21,117 22,090 21,413
=========== =========== =========== ===========
Diluted 22,492 22,822 24,846 23,202
=========== =========== =========== ===========
</TABLE>
3. LONG-TERM DEBT:
Long-term debt is summarized as follows (in thousands):
June 30, December 31,
2000 1999
---------- ---------
Borrowings under bank credit facility $ 133,500 $ 156,000
Notes payable issued to medical groups 1,634 4,309
Other long-term debt 843 828
---------- ---------
135,977 161,137
Less- current maturities (1,156) (11,463)
----------- ---------
Long-term debt, net of current maturities $ 134,821 $ 149,674
========== =========
In 2000, the Company entered into a two-stage transaction in which it issued an
aggregate of 530,000 shares of convertible preferred stock to affiliates of
Goldman, Sachs & Co. for aggregate gross proceeds of $55 million. The first
stage of the transaction, which was completed in January 2000, involved the
issuance of $16 million principal amount of senior subordinated notes and
1,250,000 shares of common stock for $16 million. In the second stage, which
closed in June 2000, 405,000 shares of Series A Convertible Preferred Stock and
125,000 shares of Series B Convertible Preferred Stock were issued to the new
investors in exchange for the notes, common stock, and an additional $39
million, bringing the total investment to $55 million. Both series of
convertible preferred stock have a liquidation preference of $100 per share and
are convertible into shares of the Company's common stock. The conversion price
of the Series A is $2.50 per common share, and the conversion price of the
Series B is $4.00 per common share, subject to adjustment in accordance with
customary anti-dilution provisions.
In connection with the completion of the second stage of the Goldman, Sachs
transaction, the Company expanded its credit facility by $20 million. The new
commitment is comprised of a $57.5 million term loan that matures March 30,
2006, a $20.0 million term loan that matures June 12, 2006, and a $100.0 million
maximum revolving commitment that expires December 17, 2003. In connection with
the new, expanded credit facility, the Company was required to write off the
unamortized deferred financing costs relating to the prior credit facility. The
resulting extraordinary charge amounted to approximately $647,000, net of
applicable income taxes of approximately $468,000.
4. SUPPLEMENTAL CASH FLOW INFORMATION:
In the first quarter of 2000, the Company converted approximately $35,000 of
convertible subordinated notes payable to a medical group into 3,912 shares of
the Company's common stock.
In the first six months of 2000 and 1999, an affiliated medical group
surrendered 39,700 and 32,896 shares, respectively, of the Company's common
stock as partial payment of an outstanding note balance and accrued interest.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
ProMedCo, headquartered in Fort Worth, Texas, is a medical services company that
coordinates and manages the delivery of a wide variety of healthcare services in
non-urban communities. We believe that these non-urban communities, which have
fewer healthcare providers and lower HMO penetration than urban areas, offer an
opportunity for us to capture a substantial portion of local healthcare
expenditures. To enter these markets, we affiliate with a leading group,
establishing a platform from which we can grow our market share by adding
ancillary services and providers.
We currently operate in 25 communities throughout the United States, where we
are affiliated with medical groups comprised of approximately 820 physicians and
170 mid-level providers. In addition, the Company is associated with
approximately 2,000 physicians in associated 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 that require minimal
initial investment and closed one such affiliation in 1999. 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 the services of the groups'
physicians. 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 clinic and employ substantially all of
the non-provider personnel. We do not consolidate the operating results and
accounts of the medical groups.
Results of Operations
After beginning operations in our first two communities 1995, we entered five
additional communities in 1996, six in 1997, eight in 1998 and four in 1999. In
addition to entering new markets, we continuously work to expand our market
share through affiliations with additional physicians and selective additions of
ancillary services. Changes in results of operations are generally caused by our
expansion into additional communities and same market growth in our existing
communities. We faced several challenges during the second quarter of 2000.
Several delays in closing the equity investment from Goldman, Sachs had a
negative impact on us in a number of major ways: delaying important acquisition
opportunities, creating a distraction for senior management and for anyone
associated with ProMedCo and eroding the interest of new prospects who chose to
wait until the transaction was concluded. In addition, higher-than-expected
seasonal impact on revenues, realignment in certain markets and higher interest
rates all combined to adversely impact the results of the quarter.
The following table sets forth the percentages of net 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,
-------------------------- ---------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenue 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Clinic salaries and benefits 34.7 35.9 34.4 35.5
Clinic rent and lease expense 9.4 9.4 9.0 9.0
Clinic supplies 11.6 11.8 11.3 11.8
Purchased medical services 17.9 12.8 17.8 14.5
Other clinic costs 13.1 12.9 12.9 12.5
General corporate expenses 3.3 3.0 3.0 2.9
Depreciation and amortization 4.3 4.1 4.2 3.9
Interest expense 4.2 1.7 3.8 1.5
------- -------- -------- -------
Income before provision for income taxes 1.5 8.4 3.6 8.4
Provision for income taxes 0.6 3.2 1.5 3.2
------- -------- -------- -------
Net income before extraordinary charge 0.9 5.2 2.1 5.2
Extraordinary charge, net of tax benefit 0.8 - 0.4 -
------- -------- -------- --------
Net income 0.1% 5.2% 1.7% 5.2%
======= ======== ======== =======
Other Financial Information:
Total revenue, amounts in thousands (1) $ 124,212 $ 108,514 $ 255,419 $ 215,298
Payor breakdown (2)
Commercial and discounted fee-for-service 42.2% 38.9% 41.4% 38.5%
Medicare/Medicaid 30.0 29.5 30.0 29.0
Capitation 15.5 15.2 15.9 17.0
Other 12.3 16.4 12.7 15.5
------- -------- -------- -------
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 interim 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.
Three Months Ended June 30, 2000 Compared With Three Months Ended June 30, 1999
Net revenue increased by 18.2% to $89.8 million for the quarter ended June 30,
2000, from $76.0 million for the quarter ended June 30, 1999. Same market growth
in net revenue for communities in which we operated for longer than one year was
over 5% for the three months ended June 30, 2000 compared with the same period
ended June 30, 1999. The remainder of the growth in net revenue was attributable
to communities we entered since April 1, 1999.
Overall clinic costs, including purchased medical services, as a percentage of
net revenue increased to 86.7% for the quarter ended June 30, 2000, compared to
82.8% for the quarter ended June 30, 1999. Purchased medical services reflect
the cost of services required under managed care contracts that are not provided
by our medical groups and supplemental services to support incremental ancillary
services. The primary reason for the overall increase in clinic expenses as a
percentage of net revenue was a change in purchased medical services, which
increased to 17.9% as a percentage of net revenue for the first second quarter
of 2000, compared to 12.8% in the first six months of 1999. This change resulted
from the relative increase in ancillary revenue and the related expenses to
provide these services. The increase in purchased medical services was partially
offset by decreases, as a percentage of net revenue, in clinic salaries and
benefits and clinic supplies which decreased to 34.7% and 11.6%, respectively,
in the second quarter of 2000 compared to 35.9% and 11.8%, respectively in the
second quarter of 1999.
General corporate expenses as a percentage of net revenue increased to 3.3% for
the quarter ended June 30, 2000, compared to 3.0% for the quarter ended June 30,
1999. 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 continues to grow.
Depreciation and amortization as a percentage of net revenue increased to 4.3%
for the quarter ended June 30, 2000, compared to 4.1% for the quarter ended June
30, 1999. 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 4.2% for the
quarter ended June 30, 2000, compared to 1.7% for the quarter ended June 30,
1999. This increase is primarily the result of an overall effective rate on our
credit facility which was 11.3% as of June 30, 2000 compared to 7.1% as of June
30, 1999. In addition, there was an increase in interest from the issuance of
subordinated notes payable as part of the Goldman, Sachs transaction.
Provision for income taxes reflects an effective rate of 42.0%, which is our
estimated effective rate for all of 2000.
<PAGE>
Six Months Ended June 30, 2000 Compared With Six Months Ended June 30, 1999
Net revenue increased by 22.9% to $183.3 million for the six months ended June
30, 2000, from $149.1 million for the six months ended June 30, 1999. Same
market growth in net revenue for communities in which we operated for longer
than one year was over 5% for the six months ended June 30, 2000 compared with
the same period ended June 30, 1999. The remainder of the growth in net revenue
was attributable to communities we entered since January 1, 1999.
Overall clinic costs, including purchased medical services, as a percentage of
net revenue increased to 85.4% for the six months ended June 30, 2000, compared
to 83.3% for the six months ended June 30, 1999. Purchased medical services
reflect the cost of services required under managed care contracts that are not
provided by our medical groups and supplemental services to support incremental
ancillary services. The primary reason for the overall increase in clinic
expenses as a percentage of net revenue was a change in purchased medical
services, which increased to 17.8% as a percentage of net revenue for the first
six months of 2000, compared to 14.5% in the first six months of 1999. This
change resulted from the relative increase in ancillary revenue and the related
expenses to provide these services. The increase in purchased medical services
was partially offset by decreases, as a percentage of net revenue, in clinic
salaries and benefits and clinic supplies which decreased to 34.4% and 11.3%,
respectively, in the first six months of 2000 compared to 35.5% and 11.8%,
respectively in the first six months of 1999.
General corporate expenses as a percentage of net revenue increased to 3.0% for
the six months ended June 30, 2000, compared to 2.9% for the six months ended
June 30, 1999. 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 continues to grow.
Depreciation and amortization as a percentage of net revenue increased to 4.2%
for the six months ended June 30, 2000, compared to 3.9% for the six months
ended June 30, 1999. 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 3.8% for the
six months ended June 30, 2000, compared to 1.5% for the six months ended June
30, 1999. This increase is primarily the result of an overall effective rate on
our credit facility which was 11.3% as of June 30, 2000 compared to 7.1% as of
June 30, 1999. In addition, there was an increase in interest from the issuance
of subordinated notes payable as part of the Goldman, Sachs transaction.
Provision for income taxes reflects an effective rate of 42.0%, which is our
estimated effective rate for all of 2000.
<PAGE>
Liquidity and Capital Resources
At June 30, 2000, we had working capital of $73.6 million, compared to $52.1
million at December 31, 1999. This increase in working capital resulted
primarily from the refinancing of our credit facility which included a portion
which was due in June 2000. Net cash provided by operations for the six months
ended June 30, 2000 was $2.3 million. Net income, combined with depreciation and
amortization and deferred taxes, a decrease in due from affiliated medical
groups and an increases in accounts payable and payable to affiliated physician
groups, provided $17.2 million in cash flows. This was offset by uses of cash of
$14.9 million that resulted from increases in accounts receivable, management
fees receivable and other assets, and a decrease in accrued expenses and other
liabilities.
Our accounts receivable increased $5.6 million, net of the effects of purchase
accounting since December 31, 1999. The increase is due primarily to the
increase in revenues in the first six months of 2000 compared to the fourth
quarter of 1999. For the second quarter of 2000, the number of days in accounts
receivable was 48.0 days, which is a slight increase from the number of days in
accounts receivable of 47.2 days for the fourth quarter of 1999. While our
days-outstanding compares favorably within the healthcare industry, we continue
to focus 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 $15.2
million for the six months ended June 30, 2000. Of this amount, $13.1 million
related primarily to deferred payments associated with previously completed
acquisitions and $2.1 million related to acquisitions completed in the six
months of 2000. Our capital expenditures amounted to $3.1 million for the six
months ended June 30, 2000. 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 return on investment.
During the first six months of 2000, the Company loaned $3.4 million to
affiliated medical groups and to affiliated physicians. Loans totaling $2.3
million were used for new physicians starting their practice. Additionally, in
June 2000, we lent an affiliated medical group $1.1 million who used the
proceeds to purchase split-dollar life insurance policies for the physicians in
the group.
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 six months of
2000, we purchased 43,317 shares at an average price of $2.28 per share.
In 2000, we entered into a two-stage transaction in which we issued an aggregate
of 530,000 shares of convertible preferred stock to affiliates of Goldman, Sachs
& Co. for aggregate gross proceeds of $55 million. The first stage of the
transaction, which was completed in January 2000, involved the issuance of $16
million principal amount of our senior subordinated notes and 1,250,000 shares
of our common stock for $16 million. In the second stage, which closed 405,000
shares of Series A Convertible Preferred Stock and 125,000 shares of Series B
Convertible Preferred Stock in June 2000, the new investors exchanged the notes,
common stock, and an additional $39 million, bringing the total investment to
$55 million. Both series of convertible preferred stock have a liquidation
preference of $100 per share and are convertible into shares of our common
stock. The conversion price of the Series A is $2.50 per common share and the
conversion price of the Series B is $4.00 per common share, subject to
adjustment in accordance with customary anti-dilution provisions.
On June 12, 2000, and in connection with the completion of the second stage of
the Goldman Sachs transaction, we entered into a new credit facility with a
syndicate of banks, to provide for a commitment of up to $177.50 million for
acquisitions and general working capital. The revised commitment is comprised of
a $57.5 million term loan that matures March 30, 2006, a $20.0 million term loan
that matures June 12, 2006, and a $100.0 million maximum revolving commitment
that expires December 17, 2003. The term loans require scheduled quarterly
principal payments beginning in March 2003. The interest rate is set at our
option and varies based on our leverage, as follows: (i) the prime rate plus
1.0% to 3.5%, or (ii) the Eurodollar rate plus 2.5% to 3.5%. As of June 30,
2000, the effective interest rate under the credit facility was 11.3%. 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. The credit facility is secured by substantially all of our
assets. In obtaining the credit facility, we paid fees and other closing costs
of approximately $2.7 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. As of June 30, 2000, we had $133.5
million outstanding and $43.5 million available, subject to certain conditions
under the agreement.
We had cash and cash equivalents of $7.1 million at June 30, 2000. In addition
to this, our principal sources of liquidity at June 30, 2000 were accounts
receivable of $66.0 million and availability of $43.5 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 additional capital resources.
To meet any 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
our public filings and reports.
Item 2. Changes in Securities and Use of Proceeds
In May 2000, the Company issued 178,362 shares of Common Stock to stockholders
of a physician group in connection with December 1997 affiliation. In June 2000,
the Company issued 405,000 shares of Series A Convertible Preferred Stock and
125,000 shares of Series B Convertible Preferred Stock to affiliates of Goldman,
Sachs and Co. in completion of a financial transaction. These issuances were
exempt from registration under the Securities Act, pursuant to section 4(2) of
the Act as they did not involve any public offering.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
11 Computation of Per Share Earnings
27 Financial Data Schedule
(b) Reports on Form 8-K
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 14, 2000
Officer, and Director
(Chief Executive Officer)
/s/ ROBERT D. SMITH
--------------------------------------
Robert D. Smith Senior Vice President - Finance and August 14, 2000
Chief Financial Officer
(Chief Accounting Officer)
</TABLE>
