-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AVjn7qD6NAXCGxKSzRVrZXfthCYtE23flWGcqYOS4MWSfIX85JCmjblQXQK3RBO2 +aP0Qcre/lNPFpLrjhAfGA== 0000925328-99-000105.txt : 19991117 0000925328-99-000105.hdr.sgml : 19991117 ACCESSION NUMBER: 0000925328-99-000105 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROMEDCO MANAGEMENT CO CENTRAL INDEX KEY: 0001011630 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-OFFICES & CLINICS OF DOCTORS OF MEDICINE [8011] IRS NUMBER: 752529809 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-29172 FILM NUMBER: 99756241 BUSINESS ADDRESS: STREET 1: 801 CHERRY ST STREET 2: SUITE 1450 CITY: FORT WORTH STATE: TX ZIP: 76102 BUSINESS PHONE: 8173355035 MAIL ADDRESS: STREET 1: 801 CHERRY ST STREET 2: SUITE 1450 CITY: FORT WORTH STATE: TX ZIP: 76102 FORMER COMPANY: FORMER CONFORMED NAME: PROFESSIONAL MEDICAL MANAGEMENT CO DATE OF NAME CHANGE: 19960906 10-Q 1 3RD QUARTER 10-Q - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES INDEX
Page No. 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
PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (All amounts are expressed in thousands)
September 30, 1999 December 31, (Unaudited) 1998 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.
PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (All amounts are expressed in thousands, except for earnings per share)
Three Months Ended Nine Months Ended September 30, September 30, 1999 1998 1999 1998 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.
PROMEDCO MANAGEMENT COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (All amounts are expressed in thousands)
Nine Months Ended September 30, 1999 1998 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.
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. Net revenue is detailed as follows (in thousands):
Three Months Ended Nine Months Ended September 30, September 30, 1999 1998 1999 1998 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 =========== =========== =========== ===========
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:
Medical group Date Location 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
(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. (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).
Three Months Ended Nine Months Ended September 30, September 30, 1999 1998 1999 1998 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 =========== =========== =========== ===========
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. 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):
September 30, December 31, 1999 1998 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 ================== ==================
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. 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.
Nine Months Ended 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 ===============
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. 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. 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.
Three Months Ended Nine Months Ended September 30, September 30, 1999 1998 1999 1998 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% ======= ======== ======== =======
(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. 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. 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. 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. 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. 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. 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. 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. 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.
Signature Title Date /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)
EX-11 2 COMPUTATION OF PER SHARE EARNINGS PROMEDCO MANAGEMENT COMPANY EXHIBIT 11 Computation of Per Share Earnings (All amounts are expressed in thousands, except for earnings per share)
Three Months Ended Nine Months Ended September 30, September 30, 1999 1998 1999 1998 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
EX-27 3 FDS --
5 1,000 U.S. DOLLARS 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 1 11,104 0 61,436 0 0 114,206 32,377 9,302 404,283 57,687 0 0 0 217 178,871 404,283 0 233,430 0 210,358 0 0 4,075 18,997 7,219 11,778 0 0 0 11,778 0.56 0.51
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