-----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, BDKLhstWk1BjbLNFnhjIYRRcYjVxc2yY4N2VHFJ43Xuyct5r0NvFrgmTBfv7pBX2 7JEanefUUMXwP2tmGB9YPw== 0001005477-98-001638.txt : 19980518 0001005477-98-001638.hdr.sgml : 19980518 ACCESSION NUMBER: 0001005477-98-001638 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMPLETE MANAGEMENT INC CENTRAL INDEX KEY: 0001002063 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MANAGEMENT CONSULTING SERVICES [8742] IRS NUMBER: 113149119 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-14356 FILM NUMBER: 98622849 BUSINESS ADDRESS: STREET 1: 254 W 31ST ST CITY: NEW YORK STATE: NY ZIP: 10004 BUSINESS PHONE: 2128681188 MAIL ADDRESS: STREET 1: 254 WEST 31ST STREET CITY: NEW YORK STATE: NY ZIP: 10001-2813 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 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, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from____________________to______________________ Commission file number 0-27260 COMPLETE MANAGEMENT, INC. ------------------------- (Exact Name of Registrant as Specified in Its Charter) New York 11-3149119 -------- ---------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 254 West 31st Street, New York, NY 10001-2813 - ---------------------------------------- ---------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code (212) 273-0600 Securities registered under Section 12(b) of the Act: Title of Each Class Name of Exchange on Which Registered ------------------- ------------------------------------ Common Shares, par value New York Stock Exchange $.001 per share Securities registered under Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) 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 |_| As of April 27, 1998, the registrant had a total of 14,068,000 outstanding shares of Common Stock. Forward Looking Statements When used in this Quarterly Report on Form 10-Q, the words "may," "will," "expect," "believe," "anticipate," "continue," "estimate," "project," "intend" and similar expressions are intended to identify forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act regarding events, conditions and financial trends that may affect the Company's future plans of operations, business strategy, results of operations and financial condition. The Company wishes to ensure that such statements are accompanied by meaningful cautionary statements pursuant to the safe harbor established in the Private Securities Litigation Reform Act of 1995. Prospective investors are cautioned that any forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties and that actual results may differ materially from those included within the forward-looking statements as a result of various factors. Such forward-looking statements should, therefore, be considered in light of various important factors, including those set forth herein and others set forth from time to time in the Company's reports and registration statements filed with the Securities and Exchange Commission (the "Commission"). The Company disclaims any intent or obligation to update such forward-looking statements. In particular, in connection with certain past acquisitions and the entry into long-term physician practice management agreements the Company has disclosed expected additions to its revenues from such transactions. Such revenue forecasts are forward-looking information and as such are inherently subject to risk and uncertainty. Important factors, including those set forth below, could cause the Company's actual results from these transactions to differ materially and adversely from the projections, or the additional revenues from these transactions could be offset by a diminution of other revenues. Accordingly, there can be no assurance that the Company will achieve the projected revenues, or, if attained, what effect such revenues will have on the Company's net earnings or earnings per share. In addition, the healthcare industry in general and the physician practice management business in particular are undergoing significant changes, making the Company particularly susceptible to various factors that may affect future results, such as the following: risks relating to the Company's growth strategy; risks relating to the integration in connection with the acquisitions; risks relating to capital requirements; identification of growth opportunities; control of healthcare costs; risks relating to certain legal matters; risks relating to exposure to professional liability; risks relating to government regulations; risks relating to healthcare reform and proposed legislation; and possible volatility of stock price. -2- COMPLETE MANAGEMENT, INC. Index to Form 10-Q March 31, 1998 PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements (unaudited) Page ---- Condensed Consolidated Balance Sheets at March 31, 1998 and at December 31, 1997............................................ 4 Condensed Consolidated Statements of Income for the three months ended March 31, 1998 and 1997............................ 5 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 1998 and 1997............................ 6 Notes to Condensed Consolidated Financial Statements.......... 7-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ................................... 9-14 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K............................... 15 SIGNATURES................................................................... 16 -3- PART I : FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements. COMPLETE MANAGEMENT, INC. Consolidated Balance Sheets
Assets March 31, December 31, 1998 1997 --------------------------------- Current assets: (In thousands, except share data) Cash and cash equivalents $ 5,227 $ 3,689 Marketable securities 5,966 6,894 Notes receivable from a related party 12 12 Notes receivable - other 792 553 Accounts receivable, net of unamortized discount of $938 and $1,087, respectively and allowance for doubtful accounts of $1,918 and $1,438 respectively 75,260 68,312 Short-term investments 2,107 2,107 Prepaid expenses and other current assets 2,834 1,935 --------- --------- Total current assets 92,198 83,502 Long-term portion of accounts receivable, net of unamortized discount of $1,479 and $1,579, respectively 33,296 32,678 Property and equipment, less accumulated depreciation and amortization of $6,607 and $5,665, respectively 28,061 24,707 Intangible assets, less accumulated amortization of $2,771 and $2,183, respectively 52,788 52,951 Debt issuance cost 6,410 6,641 Advances to full service clients 19,958 19,258 Other assets 4,946 6,323 --------- --------- Total assets $ 237,657 $ 226,060 ========= ========= Liabilities and Stockholders' Equity Current liabilities: Accounts payable and accrued expenses $ 5,524 $ 5,218 Income taxes payable 4,378 3,741 Deferred income taxes - current 3,946 3,946 Deferred revenue 115 115 Deferred purchase price 853 5,741 Notes payable 2,742 5,242 Current portion of capital lease obligations 1,806 1,894 Current portion of long-term debt 2,042 10,015 --------- --------- Total current liabilities 21,406 35,912 --------- --------- Deferred income taxes - noncurrent 7,907 7,907 Capital lease - noncurrent 3,912 4,164 Deferred rent 136 136 Convertible subordinated debentures 73,844 73,844 Minority interest 4,190 4,174 Commitments and contingencies -- -- Stockholders' equity: Preferred stock, $.001 par value; authorized, 2,000,000 shares, issued and outstanding, none -- -- Common stock, $.001 par value; authorized, 40,000,000 shares, issued and outstanding, 14,068,000 shares at March 31, 1998 and 11,421,884 shares at December 31, 1997 14 11 Paid-in capital 104,782 79,987 Retained earnings 22,413 20,698 Unrealized loss on marketable securities - available for sale (947) (773) --------- --------- Total stockholders' equity 126,262 99,923 --------- --------- Total liabilities and stockholders' equity $ 237,657 $ 226,060 ========= =========
The accompanying notes are an integral part of these consolidated statements. -4- COMPLETE MANAGEMENT, INC. Consolidated Statements of Income
Three months ended March 31, --------------------------------- 1998 1997 --------------- --------------- (in thousands, except share data) Revenue: From a related party $ 1,759 $ 6,875 Other revenue 17,028 8,478 Interest discount (233) (852) ------------ ------------ Net revenues 18,554 14,501 ------------ ------------ Operating expenses: Cost of revenues 10,474 5,721 General and administration expenses 4,606 5,815 ------------ ------------ Total operating expenses 15,080 11,536 ------------ ------------ Income from operations 3,474 2,965 Reversal of interest discount 482 573 Interest expense (1,864) (1,533) Interest, dividends and other income, net 110 802 Gain on sale of marketable securities 730 9 ------------ ------------ Income before provision for income taxes 2,932 2,816 Provision for income taxes 1,217 1,103 ------------ ------------ Net income $ 1,715 $ 1,713 ============ ============ Basic net income per share $ 0.14 $ 0.17 ============ ============ Basic weighted average number of shares outstanding 12,618,320 10,373,260 ============ ============ Diluted net income per share $ 0.14 $ 0.16 ============ ============ Diluted weighted average number of shares outstanding 18,032,504 15,600,691 ============ ============
The accompanying notes are an integral part of these consolidated statements. -5- COMPLETE MANAGEMENT, INC. Consolidated Statements of Cash Flows
Three months ended March 31, ---------------------------- 1998 1997 ------------ ------------- (in thousands) Cash flows from operating activities: Net income $ 1,715 $ 1,713 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization 1,804 1,048 Discount of accounts receivable, net of amortization -- (279) Gain on sale of marketable securities - available for sale (730) (34) Provision for deferred income taxes -- (251) Income applicable to minority interest 16 -- Changes in operating assets and liabilities: Notes receivable from a related party -- 204 Accounts receivable (7,805) (14,107) Prepaid expenses and other current assets (897) 52 Accounts payable and accrued expenses 309 448 Income taxes payable 637 528 Other assets (800) (720) -------- -------- Net cash used in operating activities (5,751) (11,398) -------- -------- Cash flows from investing activities: Purchase of property and equipment (4,281) (1,911) Businesses acquired (60) (3,316) Loans advanced to acquire businesses (950) (8,805) Repayment of advances to fullservice clients 250 -- Purchase of marketable securities (5,000) (65,356) Proceeds from sales and maturities of marketable securities 6,223 58,828 Proceeds from short-term investments -- 400 -------- -------- Net cash used in investing activities (3,818) (20,160) -------- -------- Cash flows from financing activities: Proceeds from issuance of common stock, net of underwriters' commission 23,115 -- Payment of registration costs of common stock (929) (167) Deferred note issuance cost (45) -- Repayment of notes payable (2,721) -- Repayment of long-term debt (7,973) (397) Repayment of capital lease obligations (340) (149) Proceeds from bank line of credit -- 5,000 -------- -------- Net cash provided by financing activities 11,107 4,287 -------- -------- Net increase (decrease) in cash and cash equivalents 1,538 (27,271) Cash and cash equivalents at the beginning of the period 3,689 40,138 -------- -------- Cash and cash equivalents at the end of the period $ 5,227 $ 12,867 ======== ======== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 2,121 $ 1,790 Taxes 433 660 Noncash investing and financing activities: Capital stock and debt issued for acquisitions of businesses and assets $ 4,905 $ --
The accompanying notes are an integral part of these consolidated statements. -6- COMPLETE MANAGEMENT, INC. Notes to Consolidated Financial Statements March 31, 1998 BASIS OF PRESENTATION AND OPERATIONS The accompanying consolidated financial statements are unaudited and in the opinion of management, reflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation. Operating results for the three-month period ended March 31, 1998 are not necessarily indicative of the results that may be expected for the year ended December 31, 1998. For further information, refer to the financial statements and footnotes thereto included in the audited financial statements of Complete Management, Inc. (the "Company") for the year ended December 31, 1997. Overview The Company provides physician practice management services to medical practices and hospitals located in the New York metropolitan area, particularly New York City, Long Island, the Hudson Valley region and portions of New Jersey and Connecticut. The Company's services range from managing all non-medical aspects of its full service clients' businesses to providing limited non-medical services, such as billing and collection, transcription and temporary staffing to its partial service clients. Additionally, the Company owns and provides administrative support for magnetic resonance imaging ("MRI") and other diagnostic imaging equipment at seven hospitals. The Company also owns Consumer Health Network, Inc., a preferred provider organization ("PPO") operating in New Jersey and, to a more limited extent, New York and Connecticut. Consumer Health Network is the largest PPO in New Jersey. Revenue Recognition The Company earns its fees from full service clients for managing the non-medical aspects of their medical practices, generally under 30 year management agreements. The Company's fees are based on its direct costs plus either a fixed fee or a percentage of such costs. The Company also receives hourly consulting charges, per use fees when MRI and other diagnostic imaging equipment is provided and, in the case of the Company's initial client, Greater Metropolitan Medical Services ("GMMS"), reimbursement of a portion of the Company's corporate overhead expenses. Fixed and percentage fees are subject to periodic upward readjustment after one or two years based on specified formulae or procedures. The Company earns its fees from partial service clients primarily by providing billing and collection services for a fee based on a percentage of collections. Consumer Health Network earns its fees from self-insured employer groups, union groups, insurance companies and other third party payors based primarily on a percentage of the savings generated through the use of its network. The Company's fees for owning and providing administrative support for MRI and other diagnostic imaging equipment are earned on the basis of a charge for each use of the equipment. To the extent permitted by applicable law, management fees due to the Company from its full service clients are collateralized through the assignment, on a full recourse basis, of such client's patient service receivables. The clients' ability to pay these fees is dependent on the Company's ability to collect, on behalf of its full service clients, these receivables. Due to the long-term collection cycle associated with assigned receivables from GMMS, these revenues are discounted using the Company's incremental borrowing rate and management's estimate of the collection cycle. GMMS's primary focus is treating patients with injury-related conditions who carry insurance with various insurance carriers under the workers' compensation and automobile no-fault regulations. The Company has determined, based on actual results and industry factors, that its management fees from GMMS have a collection cycle averaging approximately four years. Accordingly, an interest discount has been taken on the Company's revenues generated by its management fees from GMMS utilizing the Company's current incremental borrowing rate of 7.25% per annum over this collection cycle. The Company recaptures this interest discount in income over a four year period to reflect the presumed collection of these revenues. Actual collection results may differ from the Company's estimate, however, because numerous factors affect the timing and the manner in which receivables are collected (i.e., government regulations). It is the Company's policy to periodically assess the collection of its receivables from clients. As a result, the Company's estimate of its incremental borrowing rate and collection cycle may change. -7- COMPLETE MANAGEMENT, INC. Notes to Consolidated Financial Statements March 31, 1998 Relationship to Full Service Clients The Company earns fees from its full service clients by managing the non-medical aspects of their medical practices, generally under 30 year management agreements. Since the Company does not have an ownership interest in such clients, the Company's consolidated financial statements do not include the financial statements of its full service clients. The activities of the Company's full service clients consist primarily of rendering medical services to patients through physicians and other medical personnel employed by them. Their income statements include (a) fees generated from rendering medical services, (b) compensation to physicians and other medical personnel, (c) other expenses related to rendering medical services and (d) management fees due to the Company. Their principal asset is the accounts receivable due from third party payors and/or patients for the provision of medical services (minimal services are paid for by the patient at the time service is rendered). Their principal liabilities are the amounts due to physicians and other medical personnel for the performance of medical services and the management fees due to the Company under its management agreements. The Company's initial client, GMMS, is 95% owned by Lawrence Shields, a neurologist who is also a co-founder and a major shareholder of the Company. Accordingly, GMMS has been classified as a related party to the Company. In 1997, 1996, and 1995, 28%, 65% and 100% of its gross revenues were generated from agreements with GMMS, respectively. During the first three months of 1998, the percentage of revenues generated from such agreements was 9%. Comprehensive Income Effective March 31, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" which establishes standards for reporting and display of comprehensive income and components (revenue, expenses, gains, and losses) in a full set of general purpose financial statements. For the quarter ended March 31, 1998, accumulated comprehensive income was approximately $768,000, consisting of unrealized gains and losses on marketable securities available-for-sale. -8- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following discussion of the results of operations and financial condition of the Company should be read in conjunction with the Company's unaudited consolidated financial statements and notes thereto included elsewhere in this Quarterly Report. Overview The Company provides physician practice management services to medical practices and hospitals. These services range from managing all non-medical aspects of its full service clients' businesses to providing limited, non-medical services to its partial service clients, such as billing and collection, transcription and temporary staffing. Additionally, the Company owns and provides administrative support for MRI and other diagnostic imaging equipment. The Company also owns Consumer Health Network, the largest preferred provider organization in New Jersey. Full Service Clients The Company earns fees from its full service clients by managing the non-medical aspects of their medical practices, generally under 30 year management agreements. The Company's fees are based on its direct costs plus either a fixed fee or a percentage of such costs. The Company also receives hourly consulting charges, per use fees when MRI and other diagnostic imaging equipment is provided and, in the case of GMMS, reimbursement of a portion of the Company's corporate overhead expenses. The Company had negative cash flow from operations of approximately $5.8 million for the three months ended March 31, 1998. One of the Company's goals, in 1998, is to achieve positive cash flow from operations. The Company has embarked on an expense reduction plan and is currently evaluating all of its client relationships to determine what actions would be necessary to achieve this goal. Such evaluation includes, but is not limited to, an analysis of the relationships with its full service clients where the historical and anticipated collection pattern of the accounts receivable generated by those full service clients would be a barrier to achieving positive cash flow from operations in 1998. Based on the results of this evaluation, the Company may seek to terminate or significantly curtail its relationship with certain of its full service clients. If a significant curtailment or termination of client contracts does occur, such curtailment or termination could have a material impact on the recoverability of certain accounts receivable due from the client, fixed assets utilized in serving the client, and related personnel and lease termination costs. This could have a material impact on the Company's financial position and results of operation. Reference is made to Liquidity and Capital Resources for further discussion of the Company's cash flow. To the extent permitted by applicable law, management fees due to the Company from its full service clients are collateralized through the assignment, on a full-recourse basis, of such clients' patient service accounts receivables. The clients' ability to pay these fees is dependent on the Company's ability to collect, on behalf of its full service clients, these receivables. -9- The following unaudited table sets forth the operating results of the Company's full-service clients for the three-month periods ended March 31, 1998 and 1997. Since the Company does not have an ownership interest in its full service clients, the amounts set forth below are not included in the Company's financial results, except for the management fees earned by the Company. Three Months Ended March 31, ---------------------------- 1998 1997 ---- ---- (in thousands) Gross physician billings $ 27,195 $ 20,147 Contractual allowances (6,342) (3,587) -------- -------- Net physician billings 20,853 16,560 Management fees 10,943 11,484 Medical personnel payroll 6,068 2,952 Other expenses 2,602 2,158 -------- -------- Total expenses 19,613 16,594 -------- -------- Net income $ 1,240 $ (34) ======== ======== Full service clients--management fees: GMMS $ 1,325 $ 6,874 Other clients 9,618 4,610 -------- -------- Total management fees $ 10,943 $ 11,484 ======== ======== The Company's initial client, GMMS, is 95% owned by Lawrence Shields, a neurologist who is also a co-founder and a major shareholder of the Company. Accordingly, GMMS has been classified as a related party to the Company. In 1997, 1996 and 1995, 28%, 65% and 100%, respectively, of the Company's gross revenues were generated from management agreements with GMMS. During the first three months of 1998, the percentage of revenues generated from such agreements was 9%. Partial Service Clients The Company earns its fees from partial service clients primarily by providing billing and collection services for a fee based on a percentage of collections. Preferred Provider Organization Consumer Health Network earns its fees from self-insured employer groups, union groups, insurance companies and other third party payors based primarily on a percentage of the savings generated through the use of its network. Management of Diagnostic Imaging Services The Company's fees for owning and providing administrative support for MRI and other diagnostic imaging equipment are earned on the basis of a charge for each use of the equipment. Year 2000 Compliance Many existing computer systems and software products accept only two digit entries in the date code field. Beginning in the year 2000, and in certain instances prior to the year 2000, these date code fields will need to accept four digit entries to distinguish 21st century dates from 20th century dates. As a result, date critical functions may be materially adversely affected, unless these computer systems and software products are or become able to accept four digit entries ("year 2000 compliant"). In 1997, the Company commenced a comprehensive upgrade of its enterprise-wide management information systems. This upgrade involves substantial changes to the Company's present hardware and software, and is expected to provide certain competitive benefits and also result in the Company's information systems being year 2000 compliant upon completion. Management currently expects the full implementation of the project will involve a commitment of $10 to $15 million over the next three years. The Company expects that with the implementation of its information systems, the year 2000 issues would not pose significant operational problems. There can be no assurance, however, that the Company's systems will be rendered year 2000 compliant in a timely manner, or that the Company will not incur significant unforeseen additional expenses to assure such compliance. Failure to successfully -10- complete and implement the upgrade project on a timely basis would have a material adverse affect on the Company's operations. The Company's financial systems are year 2000 compliant. Results of Operations for the Three Months Ended March 31, 1998 and 1997 The following tables set forth, in dollars and as a percentage of revenues, respectively, certain items in the Company's statements of operations for the three-month period ended March 31, 1998 and 1997:
Three Months Ended March 31, ---------------------------- 1998 1997 ---- ---- (in thousands, except per share data) Revenues $ 18,787 100.0% $15,353 100.0% Interest discount(1) (233) (1.2) (852) (5.5) -------- ----- ------- ----- Net revenues 18,554 98.8 14,501 94.5 Cost of revenues 10,474 55.8 5,721 37.3 General & administrative expenses 4,606 24.5 5,815 37.9 -------- ----- ------- ----- Income from operations 3,474 18.5 2,965 19.3 Interest discount included in income (2) 482 2.6 573 3.7 Interest expense (1,864) (10.0) (1,533) (10.0) Interest, dividend and other income 110 0.6 802 5.2 Gain on sale of marketable securities 730 3.9 9 0.1 -------- ----- ------- ----- Income before provision for taxes 2,932 15.6 2,816 18.3 Provision for income taxes 1,217 6.5 1,103 7.2 -------- ----- ------- ----- Net income $ 1,715 9.1% $ 1,713 11.1% ======== ===== ======= ===== Basic net income per share $ 0.14 $ 0.17 Weighted average number of basic shares outstanding 12,618 10,373 Diluted net income per share $ 0.14 $ 0.16 Weighted average number of diluted shares outstanding 18,033 15,601
(1) Represents interest discount taken to reflect the presumed collection of revenues over a period in excess of one year. See Note 2 to the Consolidated Financial Statements of the Company included in the Annual Report on Form 10-K for the year ended December 31, 1997. (2) Represents recapture of interest discount taken to reflect the presumed collection of revenues over a period in excess of one year. See Note 2 to the Consolidated Financial Statements of the Company included in the Annual Report on Form 10-K for the year ended December 31, 1997. Comparison of the Three Months Ended March 31, 1998 and 1997 Revenues for the first three months of 1998 were $18,787,000 as compared to $15,353,000 for the same period in 1997, an increase of 22.4%. The components of the net increase were services provided to the Company's full service clients, which declined $26,000 the provision of limited non-medical services, such as billing and collection, transcription and temporary staffing, to partial service clients, which added $54,000 of additional revenues, the provision of administrative support for MRI and other diagnostic imaging equipment, which added $2,106,000 of additional revenues, and the acquisition of Consumer Health Network in June 1997, which added $1,300,000 of additional revenues. Within the category of full service clients the revenue from GMMS in the first quarter of 1998 declined to $1,759,000 (9% of total revenue) from $6,875,000 (45% of total revenue) in the first quarter of 1997 while revenue from other full service and other clients and businesses, generally the primary care practices managed by the Company, were $17,028,000 in the first quarter of 1998 compared to $8,478,000 in the first quarter of 1997, or a 101% increase. This change in revenue mix reflects implementation of the Company's program to de-emphasize its reliance on revenues and profits from GMMS' injury related medical practice. Though these revenues generate higher profit margins, the very long collection cycle of injury related accounts receivable leaves GMMS unable to timely pay -11- the management fees charged by the Company and is a significant barrier to the Company achieving its goal of positive cash flow from operations. While the profitability of management of primary care medical practices is lower than that of GMMS the accounts receivable collection cycle is significantly shorter. Cost of revenues for the first quarter of 1998 increased to $10,474,000 from $5,721,000 for the same period in 1997, an increase of $4,753,000. Cost of revenues includes the non-medical costs of physician practices and other costs directly related to the recognition of the Company's revenues, including the costs incurred by the Company to collect patient service receivables. The increase in cost of revenues was primarily attributable to the Company's management of full service clients, which added $2,196,000 of additional costs, the provision of limited non-medical services, such as billing and collection, transcription and temporary staffing, to partial service clients, which added $770,000 of additional costs, the provision of administrative support for MRI and other diagnostic imaging equipment, which added $1,114,000 of additional costs, and the acquisition of Consumer Health Network in June 1997, which added $673,000 of additional costs. As a percentage of revenues, cost of revenues for the first quarter of 1998 increased to 55.8% from 37.3% for the prior year. This decrease in profit margin resulted primarily from a decline in the percentage of the Company's revenues generated by GMMS, a practice with historically high profit margins, and the reclassification of certain general and administrative expenses. General and administrative expenses decreased to $4,606,000 for the first three months of 1998 as compared to $5,815,000 for the same period in 1997, a decrease of $1,209,000. General and administrative expenses represent overhead and administrative expenses excluding costs directly related to operations and the recognition of revenues. The decrease in general and administrative expenses was primarily due to the Company's management of full service clients, which decreased $1,433,000, and the provision of limited non-medical services, such as billing and collection, transcription and temporary staffing, to partial service clients, which decreased $394,000, offset by the provision of administrative support of MRI and other diagnostic imaging equipment, which added $231,000 of additional expenses and the acquisition of Consumer Health Network in June 1997, which added $387,000 of additional expenses. Interest expense increased to $1,864,000 for the first quarter of 1998 from $1,533,000 in 1997 principally due to interest on (a) $10,000,000 principal amount of borrowings incurred under a line of credit (the "Revolving Credit Loan"), $5,000,000 in February 1997 and $5,000,000 in May 1997 and (b) $5,000,000 principal amount of 8% Notes issued on October 17, 1997 as well as capital leases entered into during 1997. Interest, dividend and other income for the first quarter of 1998 increased to $840,000 from $811,000 for the same period of 1997. The primary reason for the increase was due to the sale of marketable securities. Liquidity and Capital Resources To date, the Company has primarily used its cash to support operating activities, including higher levels of receivables generated by increased management fees, to fund acquisitions and for capital expenditures. The Company's primary sources of cash have been the proceeds of its initial public offering and sales of an aggregate of $5,000,000 principal amount of 8% Convertible Subordinated Notes, $40,250,000 principal amount of 8% Convertible Subordinated Debentures due August 15, 2003, $28,750,000 principal amount of 8% Convertible Subordinated Debentures due December 15, 2003, 2,000,000 Common Shares in December 1996, $5,000,000 principal amount of 8% Notes, 2,300,000 Common Shares in February 1998 and, $10,000,000 principal amount of borrowings under the Revolving Credit Loan. At March 31, 1998, the Company had working capital of $70,792,000. The Company's full service clients are liable to the Company for management fees regardless of whether the client receives payment for the medical services rendered. However, the Company has historically deferred collecting amounts owed to it when full service clients have experienced delays in collecting payments for medical services. A substantial majority of the accounts receivable generated by the Company's full service clients, particularly GMMS, remain outstanding for extended periods. The average days outstanding for the Company's full service clients' receivables at March 31, 1998 was 310 days. For this reason, at the beginning of 1997, the Company embarked on a program to accelerate collections of receivables owed to its full service clients. This program includes increased manpower and other resources devoted to collection efforts, consolidation of most billing and collection efforts at a centralized facility, and the earlier use of legal counsel for collection of workers' compensation and no-fault automobile receivables. Net cash used for operating activities during the first quarter of 1998 was $5,751,000 principally due to an increase in accounts receivable of $7,805,000. Accounts receivable increased primarily due to fourth quarter 1997 acquisitions of medical practices under management and to the increased accounts receivable related to the Company's medical lending subsidiary, CMI Capital Corporation. During the first three months of 1998, the Company used $950,000 of cash and issued 316,116 of its Common Shares to fund acquisitions. During that period, the Company -12- also made capital expenditures of $4,281,000 (compared to $1,911,000 for 1997), primarily for computer systems development and expansion of the offices provided to its full service clients. During the first three months of 1998, the Company funded its operating cash flow deficit, acquisitions and capital expenditures primarily through (i) a reduction in the Company's cash and cash equivalents, (ii) a net reduction in marketable securities, and (iii) the sale of 2,300,000 Common Shares in February 1998. At March 31, 1998, $56,679,000 or 52.2%, of the Company's accounts receivable were due from GMMS. These receivables are collateralized by patient service receivables due to GMMS with a face amount of $73,194,000 at such date. GMMS's ability to pay the Company is dependent upon the Company's ability to collect the patient service receivables on behalf of GMMS. On a quarterly basis, the Company reviews, based on estimated rates of collection for each class of patient service and estimated allowances for uncollectible balances, the adequacy of GMMS's collateral. From January 1, 1992 through March 31, 1998, GMMS billed its patients and third-party payors an aggregate of $132,039,000, of which $54,784,000 or 41.5%, had been collected by March 31, 1998. In order for GMMS's patient receivables outstanding at March 31, 1998 to cover the Company's management fees owed by GMMS at that date, 77.4% of such patient receivables must be collected, representing an overall collection rate of 84.4% on GMMS's billings through March 31, 1998. More specifically, at March 31, 1998, approximately $25,900,000 or 35.4%, of GMMS's total patient service receivables were generated through the performance of medical services for which GMMS will be paid only upon the successful resolution of negligence claims by the patients against third parties, either through a judicial determination or settlement. From January 1, 1992 to March 31, 1998, GMMS billed approximately $31,183,000 of such receivables, of which $4,392,000 or 14.1%, had been collected by March 31, 1998. In measuring the adequacy of such receivables as collateral for the Company's management fees to GMMS, the Company has estimated that it will collect, on behalf of GMMS, approximately 55% of these outstanding receivable balances. The Company estimates, based upon industry factors and GMMS's historical collection experience prior to its association with the Company, that the entire collection process for these contingent claims generally ranges from one to seven years. Since 1994, however, the percentage of cases resolved within two years of providing service has declined, which may result in an even longer collection cycle or a lower rate of collection. The Company believes that this decline is the result of payors more consistently deferring settlement of these matters until just prior to trial. In evaluating the adequacy of its collateral from GMMS, the Company considers historical collection patterns important. The Company, however, also believes that the ultimate collection of receivables is dependent on its ability to improve its billing and collection process and its relations with third party payors. Accordingly, the Company's estimate of future collections reflects not only historical results, but also the impact of the improved collection processes and the increased resources being applied to this effort. There can be no assurance, however, that the Company will be able to achieve the collection rate necessary to assure that the Company's management fees from GMMS are paid in full. The inability of the Company to collect a significant portion of its management fees owed by GMMS could have a material adverse effect on the Company. The proposed investment of $10 to $15 million in management information systems is the largest planned capital expenditure over the next three years. Approximately $5 million is scheduled to be spent in 1998. The actual amount and timing of the investment in new management information systems will depend upon technological changes, the pace at which the Company adds new clients through its acquisition program and new offices or additional doctors through expansion of its clients and the Company's cash resources. The balance of the Company's 1998 capital expenditures, estimated at up to approximately $2 million, are expected to be used largely for the renovation and expansion of the offices of certain of its full service clients. In February 1998, the Company completed a secondary public offering of 2,300,000 Common Shares at $10.75 per share and received net proceeds of $22,415,000. Costs incurred with respect to the registration of the Common Shares in addition to the underwriter's commission and expenses, including repayment of $7,966,000 principal amount of the Revolving Credit Loan, were $8,666,000. On February 24, 1998, the Company repaid $2.5 million principal amount of the 8% Notes. The 8% Notes were issued in a private placement in October 1997 in the original principal amount of $5 million. As additional consideration, holders of the 8% Notes received an aggregate of 15,000 Common Shares. The 8% Notes bear interest at 8.0% per annum and were originally due on April 30, 1998. On April 30, 1998, the Company and the holders of the 8% Notes agreed to amend certain terms of the 8% Notes. Pursuant to the amendment, the holder of an 8% Note in the principal amount of $625,000 agreed to waive any right to convert its 8% Note into Common Shares and extended the maturity date with respect to such note to June 1, 1998. The holders of the remaining 8% Notes with an outstanding principal amount of $1,875,000 agreed to extend the maturity date of their notes to the earlier of (i) September 30, 1998 or (ii) the closing of a debt or equity financing by the Company in the amount of at least $10,000,000. If the 8% Notes are due prior to September 30, 1998, the holders of such notes have the right to convert their 8%Notes into Common Shares at a conversion price of $9.00 per share. -13- The balance of the Revolving Credit Loan, $1,034,000 is due on May 22, 1998. In January 1998, in connection with extending the maturity date of the Revolving Credit Loan, such loan became secured by receivables and other assets of the Company. On February 9, 1998, pursuant to the terms of an amendment to the Revolving Credit Loan, the Company agreed to a formula under which it was required to use $7,966,000 of the net proceeds of its equity offering in February 1998 to repay amounts due under the Revolving Credit Loan. In addition, if the Company raises additional debt or equity capital, the Company will be required to apply 50% or 40%, respectively, of the net proceeds thereof to repay the remaining balance of the Revolving Credit Loan. The Company has also agreed to a limit on its use of cash and short-term debt to complete future acquisitions. After giving effect to the offering in February, this limit is $8,208,000 plus 50% of the net proceeds of any additional sales of capital stock. In April 1998, in connection with extending the maturity date of the Revolving Credit Loan to May 22, 1998, the Company paid down $1,000,000 of the then outstanding balance. Since July 1996, the Company has conducted an active acquisition program. The Company and its clients are presently evaluating, as they do on a regular basis, physician practice management companies, medical practices, ancillary service providers and other healthcare-related businesses for possible acquisition, although they are not engaged in active negotiation for any material acquisition. The Company or its full service clients completed the acquisition of nine physician practices during the fourth quarter of 1997 for an aggregate purchase price in cash and common shares of $10,159,000, of which cash payments totaling $3,272,000 were deferred until the first quarter of 1998. To date, the Company has paid $1,341,000 of such deferred amounts. Based on the acquisitions the Company is currently considering it anticipates it could spend for acquisitions all or substantially all of the $8,208,000 currently permitted under the Revolving Credit Loan by the end of the second quarter of 1998. In addition, if the Company is successful in replacing the Revolving Credit Loan with a new senior secured credit facility as discussed below, and repays the balance of the Revolving Credit Loan, it anticipates it could expend substantial additional funds on acquisitions. The Company's cash flow deficit from operations was $5,751,000 for the three month period ended March 31, 1998. The Company expects that it will generate a cash flow deficit from operations for at least the first six months of 1998. In 1997, the Company accelerated efforts to improve collections of third party receivables on behalf of its clients and retained a law firm to conduct collection efforts on its behalf. It has also implemented a thorough review of the expenses it incurs as well as the expenses of its full service clients, with the object of making significant reductions of those expenses. After consultation with, and obtaining the agreement of, certain of its full service clients the Company has implemented, in the first quarter of 1998, expense reductions at the clients and the Company of approximately $7,500,000 on an annualized basis. Further expense reductions are being studied and, after additional consultation with its clients, are expected to be implemented in the second quarter of 1998. The Company believes that such process may result in decisions and actions being taken necessary to achieve its objective of positive cash flows from operations during the second half of 1998. The Company believes that cash and marketable securities, including the proceeds of its February 1998 offering, and cash flow from operations reflecting the expense reductions discussed above, will enable it to meet its working capital and capital expenditure requirements through the second quarter of 1999. The Company currently is in discussions with various financial institutions to replace the Revolving Credit Loan and to provide additional capital to support the Company's business, including acquisitions. The Company has signed a commitment letter for a two year accounts receivable financing facility of up to $40 million. The amount that may be borrowed at any one time is limited by a formula based on eligible receivables (as defined) with the initial borrowing under this facility totaling about $20 million. The commitment letter is conditioned on several factors, including legal documentation satisfactory to the lender and no material adverse changes in the business. It is expected that the transaction will close about the end of May 1998. If the Company is unable to obtain additional financing from this or other sources, it would need to defer substantially all of its capital expenditures for expansion of its clients, and reduce the capital expenditures for management information systems. In addition, the Company's ability to offer cash consideration in connection with acquisitions would be limited and the Company would seek to offer a larger component of debt or equity. The Company's inability to offer cash consideration in its acquisition program could substantially curtail the pace of its acquisitions. The Company expects that these actions, including its cost cutting measures, would be sufficient to permit it to continue operations. However, any significant curtailment of the Company's acquisition program or expenditures needed to expand its full service client's practices would have a significant adverse effect on the growth of the Company's revenues and earnings. -14- PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits Exhibit No. Description ---------- ----------- 3.1 Certificate of Incorporation (incorporated by reference to Exhibit 3.1 of Registration Statement No. 33-97894) 3.2 Certificate of Amendment to the Certificate of Incorporation (incorporated by reference to Exhibit 3.2 of Registration Statement No. 33-97894) 3.3 Certificate of Amendment to the Certificate of Incorporation 11 Computation of Earnings per Share 27 Financial Data Schedule (b) Reports on Form 8-K The Company filed the following reports on Form 8-K during the quarter ended March 31, 1998. Date Item Reported ---- ------------- February 20, 1998 Item 7. Financial Statements, Pro Forma Financial Information and Exhibits -15- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date COMPLETE MANAGEMENT, INC. ------------------------------------------- (Registrant) May 15, 1998 /s/ STEVEN RABINOVICI ---------------------- ------------------------------------------- Steven Rabinovici Chairman, Chief Executive Officer and President May 15, 1998 /s/ ARTHUR GOLDBERG ---------------------- ------------------------------------------- Arthur Goldberg Vice Chairman and Chief Financial Officer May 15, 1998 /s/ ALAN GOLDSTEIN ---------------------- ------------------------------------------- Alan Goldstein Chief Accounting Officer and Vice President - Finance -16- EX-11 2 EXHIBIT 11 Exhibit 11
Number of Basic Diluted Common and Weighted Weighted Common Equivalent Days Average Average Three months ending March 31, 1998 Share Outstanding Shares Shares - --------------------------------------------------------------------------------------------------------------- Common stock outstanding at January 1, 1998 11,421,884 90 11,421,884 Issuance of Common Shares 86,432 82 78,749 78,749 Issuance of Common Shares 197,328 70 153,477 153,477 Issuance of Common Shares 2,561 65 1,850 1,850 Issuance of Common Shares 3,500 65 2,528 2,528 Issuance of Common Shares 20,000 55 12,222 12,222 Issuance of Common Shares 837 43 400 400 Issuance of Common Shares 2,300,000 37 945,556 945,556 Issuance of common shares 3,000 8 267 267 Issuance of common shares 22,458 2 499 499 Exercise of Options 10,000 8 889 889 ---------- ------------------------ Total Primary Shares 14,068,000 12,618,320 12,618,320 ========== ========== Assumed Conversion of Notes and Debentures -- 5,212,319 Assumed Conversion of Options and Warrants -- 201,865 ------------------------ Primary Shares 12,618,320 ---------- Fully Diluted Shares 18,032,504 ----------- Net Income for the three months ended March 31, 1998 $ 1,715,021 $ 1,715,321 Interest Expense on Notes and Debentures -- 888,000 ------------------------ 1,715,321 2,603,321 Basic Earnings per Share $ 0.14 =========== Fully Diluted Earnings per Share $ 0.14 ===========
-17- EX-27 3 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Consolidated Balance Sheet and Statement of Income found on pages 3 & 4 of the company's Form 10-Q for the three months ending March 31, 1998 and is qualified in its entirety by reference to such consolidated financial statements. 3-MOS DEC-31-1998 MAR-31-1998 5,227 8,073 111,968 (4335) 0 92,199 34,689 (6,607) 237,658 21,406 73,844 0 0 14 126,248 237,658 18,787 18,554 10,474 15,081 1,323 0 1,864 2,932 1,217 1,715 0 0 0 1,715 0.14 0.14
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