<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
[ ] 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 0-24872
Physician Reliance Network, Inc.
---------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C>
Texas 75-2495107
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(State or Other Jurisdiction of Incorporation or (I.R.S. Employer
Organization) Identification No.)
8115 Preston Road, Suite 300
Dallas, Texas 75225
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(Address of Principal Executive Offices) (Zip Code)
</TABLE>
Registrant's Telephone Number, Including Area Code: (214) 692-3800
-----------------------
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
--- ----
As of November 11, 1996, approximately 47,435,425 shares of Common Stock were
issued and outstanding.
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
The condensed consolidated financial statements include the accounts of
Physician Reliance Network, Inc. and its wholly owned subsidiaries
(collectively, the "Company"), and have been prepared by the Company, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. It is suggested that these condensed consolidated financial
statements be read in conjunction with the audited consolidated financial
statements and the notes thereto included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1995, as filed with the Securities
and Exchange Commission. In the opinion of the Company, all adjustments
necessary to present fairly the information in the following consolidated
financial statements of the Company have been included. Please be advised that
the results of operations for interim periods are not necessarily indicative of
the results for the full year.
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 3
PHYSICIAN RELIANCE NETWORK INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
UNAUDITED
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 13,181 $ 12,405
Accounts receivable, net of
allowances of $17,119 and $12,087, respectively 87,075 49,856
Due from related parties 5,541 2,123
Other receivables 5,061 1,844
Inventories 2,665 3,841
Prepaid expenses and other 1,933 1,965
Deferred income tax 603 361
------------- -------------
Total current assets 116,059 72,395
------------- -------------
Property and equipment:
Land 12,469 9,386
Buildings 53,941 33,502
Furniture and equipment 89,994 66,809
Construction-in-progress 4,341 3,164
------------- -------------
160,745 112 ,861
Less-Accumulated depreciation (25,514) (16,310)
------------- -------------
Net property and equipment 135,231 96,551
------------- -------------
Investments 1,733 1,997
Service agreements, net 66,543 29,188
Other assets, net 7,329 4,502
------------- -------------
Total assets $ 326,895 $ 204, 633
============= =============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE> 4
PHYSICIAN RELIANCE NETWORK INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
UNAUDITED
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 13,508 $ 10,206
Accrued liabilities-
Salaries and benefits 4,133 2,850
Other 2,799 2,775
------------- --------------
6,932 5,625
Due to related party 1,479 1,105
Federal income tax --- 960
Current maturities of long-term debt 3,435 1,873
------------- --------------
Total current liabilities 25,354 19,769
Long-term debt, net of current maturities 10,673 26,973
Construction and retainage payable 711 7,505
Deferred income taxes 6,461 4,652
------------- --------------
Total liabilities 43,199 58,899
------------- --------------
Stockholders' equity:
Common stock 238 209
Additional paid-in capital 225,610 120,880
Common stock to be issued, 878,010 shares 25,225 8,027
Retained earnings 32,823 16,818
------------- --------------
283,896 145,934
Less-Subscription receivable (200) (200)
------------- --------------
Total stockholders' equity 283,696 145,734
------------- --------------
Total liabilities and stockholders' equity $ 326,895 $ 204,633
============= ==============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE> 5
PHYSICIAN RELIANCE NETWORK INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
UNAUDITED
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ---------------------------------
1996 1995 1996 1995
------------- ------------- ---------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Medical service revenues $60,095 $33,587 $160,762 $87,825
Other revenues 2,722 1,649 8,335 5,302
------- ------- -------- -------
Total revenues 62,817 35,236 169,097 93,127
------- ------- -------- -------
Costs and expenses:
Salaries and benefits 17,586 9,325 47,847 25,895
Pharmaceuticals and supplies 19,511 8,103 47,899 22,769
General and administrative 12,981 9,333 34,776 24,203
Depreciation and amortization 4,429 1,864 11,072 4,897
Interest expense 282 57 1,121 412
------- ------- -------- -------
Total costs and expenses 54,789 28,682 142,715 78,176
------- ------- -------- -------
Income before taxes and extraordinary item 8,028 6,554 26,382 14,951
Provision (benefit) for income taxes:
Current 2,867 3,112 8,889 7,785
Deferred 305 (523) 1,488 (1,896)
------- ------- -------- -------
Total provision for income taxes 3,172 2,589 10,377 5,889
------- ------- -------- -------
Net income $ 4,856 $ 3,965 $ 16,005 $ 9,062
======= ======= ======== =======
Net income per share (primary and fully $ 0.10 $ 0.10 $ 0.34 $ 0.23
diluted):
======= ======= ======== =======
Weighted average shares outstanding 49,477 39,716 46,882 39,716
======= ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
<PAGE> 6
PHYSICIAN RELIANCE NETWORK INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
UNAUDITED
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------
1996 1995
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 16,005 $ 9,062
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 11,072 5,014
Deferred income tax, net 1,567 (1,969)
Changes in operating assets and liabilities:
Increase in accounts receivable, net (37,714) (18,188)
Increase in other receivables (6,635) (533)
Decrease (increase) in inventories and prepaids 1,047 (1,682)
Increase in other assets (2,453) (1,506)
Increase in accounts payable and accrued liabilities 3,649 13,810
Increase in due to related party 374 1,047
-------- --------
Net cash used in operating activities (13,088) 5,055
-------- --------
Cash flows from investing activities:
Payments for service agreements (12,904) (2,490)
Capital expenditures (47,541) (35,904)
Construction and retainage (6,794) 2,070
-------- --------
Net cash used in investing activities (67,239) (36,324)
-------- --------
Cash flows from financing activities:
Contribution from minority interests --- 1,750
Proceeds from long-term borrowings 43,000 9,800
Payments on long-term borrowings (64,531) (9,856)
Proceeds from subscription notes receivable --- 6,400
Issuance of common stock 102,634 36,585
-------- --------
Net cash provided by financing activities 81,103 44,679
Net increase in cash and cash equivalents
-------- --------
776 13,410
Cash and cash equivalents, beginning of period 12,405 10,498
-------- --------
Cash and cash equivalents, end of period $ 13,181 $ 23,908
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
<PAGE> 7
PHYSICIAN RELIANCE NETWORK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1. BASIS OF PRESENTATION:
The condensed consolidated financial statements include the accounts of
Physician Reliance Network, Inc. and its subsidiaries for the three months and
nine months ended September 30, 1996, and 1995. All significant intercompany
transactions have been eliminated. Certain reclassifications of prior year
amounts have been made to conform to the current year presentation.
2. SUPPLEMENTAL CASH FLOW INFORMATION:
Supplemental schedule of noncash investing and financing activities are
as follows:
During 1996, the Company acquired assets in exchange for $2,125 of
common stock, a commitment to issue approximately $17,250 of common stock, and
the issuance of a long-term promissory note of $6,300 in connection with the
execution of certain Service Agreements.
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1996 1995
--------- ----------
<S> <C> <C>
Cash paid during the period:
Interest, net of amount capitalized $ 678 $ 349
Income taxes $8,445 $ 950
</TABLE>
3. COMMON STOCK:
In April 1996, the Company completed a public offering of 2,690,000
shares of common stock. The net proceeds to the Company from the offering were
approximately $102,300 of which $59,000 was used to repay amounts outstanding
under the Company's revolving credit facility. The remainder of the net
proceeds have and will be used for future capital expenditures, acquisitions,
amounts paid to Affiliated Physician Groups as consideration for entering into
service agreements, and for working capital.
Effective May 7, 1996, the Company's Articles of Incorporation were
amended to increase the authorized shares of common stock from 50,000,000 to
150,000,000, and the Company's Employee Option Plan was amended to increase the
number of shares authorized to be issued under the plan from 637,201 shares to
1,637,201 shares.
In June 1996, the Company issued Common Stock in connection with a 2
for 1 stock split effected in the form of a stock dividend to shareholders of
record on May 31, 1996.
7
<PAGE> 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
Consolidated Financial Statements and Notes thereto included in its December
31, 1995, Annual Report on Form 10-K and with the Condensed Consolidated
Financial Statements included in this Form 10-Q.
OVERVIEW
The Company provides the management, facilities, administrative and
technical support, and ancillary services necessary to establish and maintain a
fully-integrated network of outpatient oncology care. The Company's affiliated
physician groups ("Affiliated Physician Groups") provide all aspects of care
related to the diagnosis and treatment of cancer on an outpatient basis,
including medical oncology, radiation oncology, gynecological oncology, and
diagnostic radiology. The Company earns its revenues for services provided
under its service agreements ("Service Agreements") with the Affiliated
Physician Groups. The Company's medical service revenues (the "Medical Service
Revenues") are equal to gross billings of its Affiliated Physicians Groups
("Gross Medical Billings") less contractual discounts, provision for
uncollectible accounts, and amounts retained by physicians pursuant to the
service agreements ("Amounts Retained by Physicians"). Under the Service
Agreements, the Company receives a fee for services rendered, and the method of
determining the fee varies based upon the agreement entered into with the
physician groups. The Company's most significant service agreement is with
Texas Oncology, P.A. ("Texas Service Agreement"). Effective January 1, 1996,
the method of calculating the Company's management fee under the Texas Service
Agreement was amended. Prior to the amendment, the management fee was based
upon a percentage of Gross Medical Revenues. Under the amended Texas Service
Agreement, the management fee to the Company is based upon a percentage of the
earnings before interest and taxes ("Earnings") plus the nonphysician expenses
of the related practice locations. The Company and Texas Oncology, P.A.
("TOPA") believe that this change in calculating the Company's management fee
and the related Amounts Retained by Physicians better aligns the incentives of
the Company and TOPA for the development and the expansion of service lines and
locations as well as the management of the cost of providing services. The
Company also believes that as capitated agreements or case rates with payors
increase, a management fee based upon Earnings is more appropriate and that an
increasing amount of its revenues in the future will be from management service
agreements with a management fee based upon Earnings rather than based on Gross
Medical Revenues. Currently, approximately 90 percent of the Company's
revenues is derived from management service agreement with a management fee
based upon earnings.
The following table summarizes (in thousands) the derivation of Medical
Service Revenues for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1996 1995 1996 1995
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Gross Medical Billings $129,414 $ 75,500 $ 346,318 $214,305
Contractual discounts (47,207) (24,662) (126,293) (78,121)
-------- -------- --------- --------
Gross Medical Revenues 82,207 50,838 220,025 136,184
Provision for uncollectible accounts (1,989) (1,451) (5,242) (4,511)
Amounts Retained by Physicians (20,123) (15,800) (54,021) (43,848)
-------- -------- --------- --------
Medical Service Revenues $ 60,095 $ 33,587 $ 160,762 $ 87,825
======== ======== ========= ========
</TABLE>
8
<PAGE> 9
The following table sets forth the percentages of total revenue
represented by certain items reflected in the income statement. The
information that follows should be read in conjunction with the Company's
Condensed Consolidated Financial Statements and Notes thereto included
elsewhere herein.
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1996 1995 1996 1995
-------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Revenues:
Medical service revenues 95.7% 95.3% 95.1% 94.3%
Other revenues 4.3 4.7 4.9 5.7
------ ------ ------ ------
Total revenues 100.0 100.0 100.0 100.0
Costs and expenses:
Salaries and benefits 28.0 26.4 28.3 27.8
Pharmaceutical and supplies 31.1 23.0 28.3 24.4
General and administrative 20.7 26.5 20.6 26.0
Depreciation and amortization 7.1 5.3 6.5 5.3
------ --- ------ ------
Income before interest expense, taxes,
and extraordinary item 13.1 18.8 16.3 16.5
Interest expense 0.4 0.2 0.7 0.5
------ --- ------ ------
Income before income taxes 12.7 18.6 15.6 16.0
Income taxes 5.0 7.3 6.1 6.3
------ ------ ------ ------
Net income 7.7% 11.3% 9.5% 9.7%
====== ====== ====== ======
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1996, COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1995
MEDICAL SERVICE REVENUES. Medical Service Revenues were $60,095,000
for the three months ended September 30, 1996, compared to $33,587,000 for the
three months ended September 30, 1995, representing an increase of $26,508,000
or 78.9%. The growth in Medical Service Revenues is attributable to a
$31,369,000 increase in Gross Medical Revenues generated by affiliated
physicians offset by an increase in Amounts Retained by Physicians of
$4,323,000 and an increase in the provision for uncollectible accounts of
$538,000. The growth in Gross Medical Revenues during the three months ended
September 30, 1996, is due to an increase in the number of physicians by 92
from 183 to 275; an increase in the number of service locations from 64 to 101;
and expansion of services provided at existing locations. The increase over
the comparable period of the prior year in the number of physicians is
comprised of 68 medical oncologists, 8 radiation oncologists, and 16 other
physicians.
The Company began expansion of its management services to oncology-
related physicians outside the state of Texas in April 1995. Through September
30, 1996, the Company has entered into Service Agreements with physicians in
Iowa, Oregon, Missouri, Washington, Maryland, Arkansas, New York, and
Minnesota.
9
<PAGE> 10
Since September 30, 1995, the Company has opened a full-service cancer
center that includes radiation therapy services in El Paso, Texas (June 1996)
and purchased an existing cancer center in El Paso, Texas and assumed the
operations of another facility in Las Cruces, New Mexico (April 1996).
Amounts Retained by Physicians were 24.5% of Gross Medical Revenues for
the three months ended September 30, 1996, compared to 31.1% of Gross Medical
Revenues for the comparable period in 1995. The decrease in the percentage is
due to the expansion of services offered through the Company's facilities, the
change in calculating the Company's management fee under the Texas Service
Agreement, and the addition of new Agreements entered into with Affiliated
Physician Groups outside of Texas.
Contractual discounts were 36.5% of Gross Medical Billings for the
three months ended September 30, 1996, compared to 32.7% of Gross Medical
Billings for the comparable period in 1995. The provision for uncollectible
accounts related to the Amounts Retained by Physician Groups was 1.5% of Gross
Medical Billings for the three months ended September 30, 1996, compared to
1.9% for the comparable period in 1995. The provisions for contractual
discounts and uncollectible accounts reflect the Company's current collection
experience.
OTHER REVENUES. Other revenues for the three months ended September
30, 1996, were $2,722,000 compared to $1,649,000 for the three months ended
September 30, 1995, representing an increase of $1,073,000, or 65.1%. Other
revenues are primarily derived from retail pharmacy operations located in
certain of the Company's cancer centers and larger physician offices and
research activities performed by the Company's affiliated physicians that are
sponsored by pharmaceutical companies. The Company's pharmacy locations
provide convenient oncologic and pain management pharmaceuticals to patients.
The increase in other revenues is primarily a result of the growth in the
number of retail pharmacy locations opened as of September 30, 1996, to 23
compared to 10 as of September 30, 1995.
SALARIES AND BENEFITS. Salaries and benefits for the three months
ended September 30, 1996, were $17,586,000, compared to $9,325,000 for the
three months ended September 30, 1995, representing an increase of $8,261,000,
or 88.6%. Salaries and benefits include costs of clinical nonphysician
employees paid by the Company pursuant to the terms of the Service Agreements.
The dollar increase in the salaries and benefits was due to the addition of
clinical and nonclinical personnel required to support the increase in
Affiliated Physician Groups managed by the Company. The percentage of salaries
and benefits to total revenues was 28.0% for the three months ended September
30, 1996, compared to 26.4% for the comparable period in 1995. Beginning in
April 1996, the Company increased its management infrastructure to support its
development of a national presence. The Company has also continued to develop
enhanced services within its service locations, such as radiation therapy,
where the incremental cost of providing services is less than the increase in
the revenues generated; however, a larger percentage of the physicians and
related services added since September 30, 1995, have been medical oncologists
where such revenue enhancements have not yet occurred. Approximately 63.6% of
the physicians managed by the Company at September 30, 1996, were medical
oncologists, compared to 58.5% for the comparable period in 1995. The increase
in the percentage of medical oncologists is a result of the Company's focus on
the development of and entry into new geographical markets where the Company
intends to develop the integrated oncology network.
PHARMACEUTICALS AND SUPPLIES. Pharmaceuticals and supplies for the
three months ended September 30, 1996, were $19,511,000 compared to $8,103,000
for the three months ended September 30, 1995, representing an
increase of $11,408,000 or 140.8%. The dollar increase in pharmaceuticals and
supplies for the three months ended September 30, 1996, compared with the
comparable period in the prior year is attributable to an increase in infusion,
radiation, and breast diagnostic services generated by the Affiliated Physician
Groups, both through the increased number of physicians and the enhancement of
services provided in physician offices and cancer centers. The percentage of
pharmaceuticals and supplies to total revenues was 31.1% for the three months
ended September 30, 1996, compared to 23.0% for the three months ended
September 30, 1995. This increase was primarily a result of a change in the
mix of specialties of the Affiliated Physician Groups managed by the Company to
a larger percentage
10
<PAGE> 11
of medical oncologists and a result of overall cost increases. The medical
oncologist, primarily uses chemotherapy, which involves the injection and
infusion of pharmaceuticals in the treatment of cancer.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for
the three months ended September 30, 1996, were $12,981,000 compared to
$9,333,000 for the three months ended September 30, 1995, representing an
increase of $3,648,000 or 39.1%. The increase in general and administrative
expenses is attributable in part to additional occupancy costs of $2,024,000
consisting primarily of rents, utilities, and property taxes incurred to
support additional physician offices and leased cancer centers that have
commenced operations since September 30, 1995. Purchased services decreased
$38,000 due to a $437,000 decrease in laboratory costs resulting from the
Company discontinuing certain services that were subcontracted to Baylor
University Medical Center ("BUMC") offset by an $399,000 increase related to
subcontracting for external radiology services, and contracting maintenance
coverage, and temporary personnel requirements with outside consultants and
services to support the additional physician growth. Other general and
administrative expenses increased $1,080,000 as a result of an increase in
telecommunications and marketing expenses to service the additional site
locations and increased level of travel to service the additional site
locations and related Affiliated Physician Groups as well as develop new
markets. The provision for uncollectible accounts related to Medical Service
Revenues increased $582,000. for the three months ended September 30, 1996, and
reflects the Company's current collections experience. The percentage of
general and administrative expenses to total revenues was 20.7% for the three
months ended September 30, 1996, compared to 26.5% for the three months ended
September 30, 1995. The decrease in the percentage is due to the addition of
enhanced services at the Company's practice site locations that do not result
in corresponding increases in general and administrative expenses.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the
three months ended September 30, 1996, was $4,429,000 compared to $1,864,000
for the three months ended September 30, 1995, representing an increase of
$2,565,000 or 137.6%. Depreciation increased $1,999,000 as a result of the
additional office and cancer center locations that were opened or assumed by
the Company since September 30, 1995. Amortization increased $566,000 as a
result of the increase in Service Agreement costs incurred as consideration for
the Affiliated Physician Groups entering into Service Agreements.
INTEREST. Interest expense for the three months ended September 30,
1996, was $282,000 compared to $57,000 for the three months ended September 30,
1995, representing an increase of $225,000 or 394.7%. The increase in interest
expense was due to increased amounts outstanding and owed to Affiliated
Physician Groups as consideration, in part, for entering into Service
Agreements with the Company. No amounts were outstanding on the Company's
revolving line of credit ("Revolver") at September 30, 1996 and 1995.
INCOME TAXES. Income taxes were $3,172,000 for the three months ended
September 30, 1996, compared to $2,589,000 for the three months ended September
30, 1995, representing an increase of $583,000 or 22.5%. Federal income taxes
were provided on the taxable income of the Company at 35%, and state income
taxes were provided using the applicable statutory rates in effect.
NINE MONTHS ENDED SEPTEMBER 30, 1996, COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1995
MEDICAL SERVICE REVENUES. Medical Service Revenues were $160,762,000
for the nine months ended September 30, 1996, compared to $87,825,000 for the
nine months ended September 30, 1995, representing an increase of $72,937,000
or 83.0%. The growth in Medical Service Revenues is attributable to a
$83,841,000 increase in Gross Medical Revenues generated by Affiliated
Physician Groups offset by an increase in Amounts Retained by Physicians of
$10,173,000 and an increase in the provision for uncollectible accounts of
$731,000. The growth in Gross Medical Revenues during the three months ended
September 30, 1996, is due to an increase in the number of physicians by 92
from 183 to 275; an increase in the number of service locations from 64 to 101;
and
11
<PAGE> 12
expansion of services provided at existing locations. The increase over the
comparable period of the prior year in the number of physicians is comprised of
68 medical oncologists, 8 radiation oncologists, and 16 other physicians.
The Company began expansion of its management services to oncology-
related physicians outside the state of Texas in April 1995. Through September
30, 1996, the Company entered into Service Agreements with physicians in Iowa,
Oregon, Missouri, Washington, Maryland, Arkansas, New York, and Minnesota.
Since September 30, 1995, the Company has opened a full-service cancer
center that includes radiation therapy services in El Paso, Texas (June 1996)
and purchased an existing cancer center in El Paso, Texas and assumed the
operations of another facility in Las Cruces, New Mexico (April 1996).
Amounts Retained by Physicians were 24.6% of Gross Medical Revenues for
the nine months ended September 30, 1996, compared to 32.2% of Gross Medical
Revenues for the comparable period in 1995. The decrease in the percentage is
due to the expansion of services offered through the Company's facilities, the
change in calculating the Company's management fee under the Texas Service
Agreement, and the addition of new Service Agreements entered into with
Affiliated Physician Groups outside of Texas.
Contractual discounts were 36.5% of Gross Medical Billings for the nine
months ended September 30, 1996 and 1995. The provision for uncollectible
accounts related to the Amounts Retained by Physician Groups was 1.5% of Gross
Medical Billings for the nine months ended September 30, 1996, compared to 2.1%
for the comparable period in 1995. The provisions for contractual discounts
and uncollectible accounts reflect the Company's current collection experience.
OTHER REVENUES. Other revenues for the nine months ended September 30,
1996, were $8,335,000 compared to $5,302,000 for the nine months ended
September 30, 1995, representing an increase of $3,033,000, or 57.2%. Other
revenues are primarily derived from retail pharmacy operations located in
certain of the Company's cancer centers and larger physician offices, research
activities performed by the Company's affiliated physicians that are sponsored
by pharmaceutical companies, and interest income from investing the proceeds
from the public offering of 2,690,000 shares of common stock completed in April
1996 ("Offering"). The increase in other revenues is primarily a result of the
growth in the number of retail pharmacy locations opened as of September 30,
1996, to 23 compared to 10 as of September 30, 1995.
SALARIES AND BENEFITS. Salaries and benefits for the nine months ended
September 30, 1996, were $47,847,000, compared to $25,895,000 for the nine
months ended September 30, 1995, representing an increase of $21,952,000 or
84.8%. Salaries and benefits include certain costs of clinical nonphysician
employees paid by the Company pursuant to the terms of the Service Agreements.
The dollar increase in the salaries and benefits is due to the increased number
of clinical and nonclinical personnel required to support the increase in
Affiliated Physician Groups managed by the Company. The percentage of salaries
and benefits to total revenues was 28.3% for the nine months ended September
30, 1996, compared to 27.8% for the comparable period in 1995. The increase in
the percentage is due to the Company increasing its management infrastructure
to support its development of a national presence. The Company has also
continued to develop enhanced services within its service locations, such as
radiation therapy, where the incremental cost of providing services is less
than the increase in the revenues generated; however, a larger percentage of
the physicians and related services added since September 30, 1995, have been
medical oncologists where such revenue enhancements have not yet occurred.
Approximately 63.6% of the physicians managed by the Company at September 30,
1996, were medical oncologists, compared to 58.5% for the comparable period in
1995. The increase in the percentage of medical oncologists is a result of the
Company's focus on the development of and entry into new geographical markets
where the Company intends to develop the integrated oncology network.
PHARMACEUTICALS AND SUPPLIES. Pharmaceuticals and supplies for the
nine months ended September 30, 1996, were $47,899,000 compared to $22,769,000
for the nine months ended September 30, 1995, representing an
12
<PAGE> 13
increase of $25,130,000 or 110.4%. The increase in pharmaceuticals and
supplies for the nine months ended September 30, 1996, compared with the
comparable period in the prior year is attributable to an increase in infusion,
radiation, and breast diagnostic services performed by affiliated physicians.
The percentage of pharmaceuticals and supplies to total revenues was 28.3% for
the nine months ended September 30, 1996, compared to 24.4% for the nine months
ended September 30, 1995. This increase was primarily a result of a change in
the mix of specialties of the Affiliated Physician Groups managed by the
Company and a result of overall cost increases. The medical oncologist, who is
a cancer patient's primary caregiver, primarily uses chemotherapy, which
involves the injection and infusion of pharmaceuticals in the treatment of
cancer.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for
the nine months ended September 30, 1996, were $34,776,000 compared to
$24,203,000 for the nine months ended September 30, 1995, representing an
increase of $10,573,000 or 43.7%. The increase in general and administrative
expenses is attributable in part to additional occupancy costs of $4,878,000
consisting primarily of rents, utilities, and property taxes incurred to
support additional physician office and leased cancer centers that have
commenced operations since September 30, 1995. Purchased services increased
$1,512,000 primarily as a result of contracting with BUMC to provide certain
facility and lab services at the Company's largest cancer center; supporting
the increased computer hardware and software required to support the physician
growth; and contracting temporary personnel requirements with outside
consultants and services. The increase in purchased services was offset by a
decrease in the lab services provided by BUMC during the third quarter when the
Company discontinued offering these services. Other general and administrative
expenses increased $2,817,000 as a result of the increase in telecommunications
and marketing expenses to service the additional site locations and increased
level of travel to service the additional site locations and related Affiliated
Physician Groups as well as develop new markets. The provision for
uncollectible accounts related to Medical Service Revenues increased $1,366,000
for the nine months ended September 30, 1996, and reflects the Company's
current collections experience. The percentage of general and administrative
expenses to total revenues was 20.6% for the nine months ended September 30,
1996, compared to 26.0% for the nine months ended September 30, 1995. The
decrease in the percentage is due to the addition of enhanced services at the
Company's practice site locations that do not result in corresponding increases
in general and administrative expenses.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the
nine months ended September 30, 1996, was $11,072,000 compared to $4,897,000
for the nine months ended September 30, 1995, representing an increase of
$6,175,000 or 126.1%. Depreciation increased $4,694,000 as a result of the
additional office and cancer center locations that were opened or assumed by
the Company since September 30, 1995. Amortization increased $1,481,000 as a
result of the increase in Service Agreement costs incurred as consideration for
the Affiliated Physician Groups entering into Service Agreements with the
Company.
INTEREST. Interest expense for the nine months ended September 30,
1996, was $1,121,000 compared to $412,000 for the nine months ended September
30, 1995, representing an increase of $709,000 or 172.1%. The increase in
interest was primarily due to increased borrowings under the Revolver during
1996 prior to the completion of the Offering in April 1996. The Company used a
portion of the proceeds from the Offering to repay amounts outstanding under
the Revolver. A portion of the proceeds from the Company's public offering of
3,795,000 and 2,000,000 shares of common stock completed in November 1994 and
May 1995, respectively, were also used to repay amounts outstanding under the
Revolver. Interest expense also includes the interest on seller-financed debt
paid as consideration for Affiliated Physician Groups entering into Service
Agreements.
INCOME TAXES. Income taxes were $10,377,000 for the nine months ended
September 30, 1996, compared to $5,889,000 for the nine months ended September
30, 1995, representing an increase of $4,488,000 or 76.2%. Federal income
taxes were provided on the taxable income of the Company at 35%, and state
income taxes were provided using the applicable statutory rates in effect.
13
<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically generated its cash flows from operations,
bank financing, and the sale of securities. The Company's primary cash
requirements are for construction of cancer centers, acquisition of equipment
for the cancer centers and medical offices, and financing receivables. More
recently, the Company has also used cash, in part, when acquiring assets
(including accounts receivable) from and entering into Service Agreements with
Affiliated Physician Groups.
Net cash used in operations for the nine months ended September 30,
1996, was $13,088,000. Collections on the Company's accounts receivable, which
are purchased at the end of each month under the terms of the Service
Agreements, are an integral part of the Company's liquidity from operating
activities. Under the terms of the Service Agreements, the accounts receivable
are purchased net of estimated contractual discounts and estimated
uncollectible accounts. In addition, the Company typically purchases the
outstanding accounts receivables of Affiliated Physician Groups when a group
enters into a Service Agreement. Net cash was used from operations of
$37,714,000 for the nine months ended September 30, 1996, as a result of the
continued growth in the Company's existing business, the increase in the number
of physicians that have affiliated with the Company, and the corresponding
impact that the growth had on the dollar amount of medical service receivables
purchased by the Company and financed by cash flows from operations. Net cash
was used from operations of $3,418,000 for the nine months ended September 30,
1996, as a result of an increase in amounts due from related parties. These
amounts arise primarily from short- term working capital advances made to the
Affiliated Physician Groups and liabilities assumed by the Company at the time
of entering into a Service Agreement from Affiliated Physician Groups but
reimbursable to the Company . These amounts used by operations were offset by
cash flows resulting from the increase in accounts payable and accrued
liabilities related to the growth in the Company's business and the related
financing of its expenditures through terms that the Company has negotiated
with its vendors.
Net cash used in investing activities for the nine months ended
September 30, 1996, was $67,239,000. During the nine months ended September
30, 1996, the Company completed and equipped the El Paso cancer treatment
center that opened in mid-June 1996, a diagnostic imaging center located
adjacent to the Mesquite cancer center that opened in mid-May 1996, and
remodeled and expanded the Plano, Sherman, and Midland cancer centers. The
Company also purchased and commenced operations of an existing free-standing
cancer center in El Paso in April 1996. In January 1996, the Company made a
final payment on twelve computerized tomography scan machines. The Company
purchased land for future development of cancer centers in Eugene, Oregon and
Abilene, Texas, and construction commenced in July 1996 on the Abilene cancer
center. Approximately $12,904,000 was paid to the Affiliated Physician Groups
in Maryland, Arkansas, New York, and Minnesota who entered into Service
Agreements in January, March, June and July, respectively. The Company is
currently committed to approximately $7,500,000 in capital expenditures related
to construction activities and the acquisition of equipment. These
expenditures are expected to be funded primarily using proceeds from the
Offering completed in April 1996 and from borrowings under the Revolver.
Net cash flows from financing activities for the nine months ended
September 30, 1996, were $81,103,000. In April 1996, the Company completed the
Offering which resulted in net proceeds to the Company of approximately
$102,300,000. Cumulative borrowings under the Revolver prior to the completion
of the Offering were $59,000,000, $43,000,000 of which was borrowed during
1996, and were used to finance the Company's ongoing construction and
development activities, the acquisition of equipment, and for working capital
purposes. The borrowings under the Revolver were repaid from a portion of the
proceeds from the Offering. The remainder of the proceeds from the Offering
have been and are expected to be used for future capital expenditures,
acquisitions, amounts paid to Affiliated Physician Groups as consideration for
entering into Service Agreements, and for other general corporate purposes.
14
<PAGE> 15
The Revolver provides for maximum borrowings of up to $90 million
(based on a calculation of the Company's borrowing base). The Company has the
option of financing borrowings under the Revolver at either a LIBOR- based rate
(LIBOR plus 1% at September 30, 1996) or the Prime Rate. The Revolver also
contains covenants that, among other things, require the Company to maintain
certain financial ratios and impose restrictions on the Company's ability to
incur future indebtedness, pay cash dividends, sell assets, and redeem or
repurchase Company securities. The Company is in compliance with all covenants
contained in the Revolver.
In June 1996, the Company paid a dividend in the form of a 2 for 1
stock split to shareholders of record on May 31, 1996.
The Company expects that its principal use of funds in the foreseeable
future will be for construction of cancer treatment centers and the acquisition
of the related equipment which is expected to be $3,000,000 through the
remainder of 1996; acquisition of medical practice assets; consideration for
entering into Service Agreements with physician practices; repayment of notes
issued in connection with the acquisition of Service Agreements; debt
repayments under the Revolver; and working capital. The Company believes that
the remaining proceeds from the Offering and unused borrowing capacity under
the Revolver will be sufficient to meet its needs in the near term. The
Company believes that recent declines in the price per share of the Company's
common stock does not make additional offerings of common stock to the public
likely in the short-term. The Company believes that it has adequate access to
other forms of financing at reasonable terms to meet the capital requirements
of its construction and network development programs through 1997 including but
not limited to increasing the amounts available to borrow under the Revolver.
However, no assurance exists that such additional financing will be available
on terms acceptable to the Company. In addition, the Company will continue to
construct facilities under build-to-suit arrangements pursuant to long-term
operating leases if the implicit cost of construction is equal to or less than
the cost for the Company to construct its own facilities.
FORWARD-LOOKING STATEMENTS/RISK FACTORS
This Form 10-Q contains certain forward-looking statements regarding
the anticipated financial and operating results of the Company. The Company
undertakes no obligation to publicly release any revisions to any
forward-looking statements contained herein to reflect events or circumstances
occurring after the date hereof or to reflect the occurrence of unanticipated
events. In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, the Company is including the
following cautionary statements identifying important factors that could cause
the Company's actual results to differ materially from those projected in
forward-looking statements made by, or on behalf of, the Company. These
factors, many of which are beyond the Company's control, include the Company's
dependence on fees and revenues generated by physicians employed by TOPA; the
Company's ability to identify expansion opportunities; the Company's ability to
achieve operating efficiencies associated with integrating physician practices
and expanding the services offered by its Affiliated Physician Groups; the
Company's ability to obtain suitable financing to support its expansion
objectives; changes in governmental regulation of the relationships between the
Company and the Affiliated Physician Groups; changes in payment for medical
services, including Medicare and Medicaid programs; the Company's ability to
provide services on a risk-sharing or capitated basis; competitive pressures
affecting physician practice management companies and physician groups with
whom the Company contracts; diversion of management's attention from operations
to respond to lawsuits against the Company; and potential exposure to
professional and product liability claims.
15
<PAGE> 16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In March 1996, Methodist Hospitals of Dallas ("Methodist") filed a
lawsuit in the District Court of Dallas, County, Texas against the Company and
TOPA. This lawsuit asserts various claims, including claims of monopolization,
conspiracy to monopolize, unfair competition, and tortious interference with
contractual relationships. Methodist seeks both injunctive relief and
unspecified monetary and punitive damages. This matter is expected to go to
trial in November 1997. The Company has denied each of Methodist's claims,
believes this lawsuit is without merit, and intends to vigorously defend
itself. The Company is not aware of any governmental actions to assert claims
against TOPA or the Company similar to those asserted by Methodist.
In September and October, 1996, the Company was named as a defendant in
two lawsuits, filed by Robert N. Abendschein and Alan Hinerfeld, respectively,
in Texas state courts and one lawsuit, filed by Susan Kaufman, in Texas federal
court. One or more of these lawsuits also names TOPA, various directors of the
Company, and the Company's underwriters as defendants. Kaufman and Abendschein
seek recovery on behalf of all persons who purchased shares of the Company's
common stock from February 12, 1996, to July 11, 1996. Similarly, Hinerfeld
seeks recovery on behalf of all persons who purchased the Company's common
stock between April 23, 1996, and July 11, 1996. The lawsuits allege violations
of state and federal securities laws, fraud, and negligent misrepresentation.
As relief, they seek unspecified monetary damages; Abendschein also seeks
punitive damages. The Company has answered the Kaufman suit. Once responsive
pleadings are filed in Hinerfeld and Abendschein, the Company anticipates that
class discovery will commence. In a similar lawsuit filed in the Texas state
court, Charles Jackson purports to represent all persons who purchased and
presently own shares of the Company's common stock from May 9, 1995, to
September 4, 1996. Jackson also names TOPA, the Company's underwriters, and
various of the Company's directors as defendants. Jackson alleges violations of
state securities laws, the Texas Deceptive Trade Practices Act, fraud, and
negligent misrepresentation. Jackson seeks unspecified monetary and punitive
damages. Responsive pleadings have been filed. The Company denies the claims
asserted in each of these lawsuits, believes the lawsuits are without merit,
and intends to vigorously defend itself. The Company is not aware of any
governmental actions to assert claims against TOPA or the Company similar to
those asserted in this litigation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits: See Index to Exhibits on page 21.
(b) No reports on Form 8-K were filed during the quarterly period
ended September 30, 1996.
16
<PAGE> 17
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.
PHYSICIAN RELIANCE NETWORK, INC.
Date: November 13, 1996 By: /s/ MERRICK H. REESE
--------------------------------
Merrick H. Reese, President and
Chief Executive Officer
By: /s/ RANDALL D. KURTZ
--------------------------------
Randall D. Kurtz,
and Chief Financial
17
<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Sequential
Number Description Page
----------- ------------------------------------------------------------------------------- ----------
<S> <C> <C> <C>
3.1*** -- Articles of Incorporation of Registrant. --
3.2* -- Bylaws of the Registrant. --
4.1* -- See Exhibits 3.1 and 3.2 for provisions of the Articles of --
Incorporation and Bylaws defining rights of the holders of the Common
Stock of the Registrant.
4.2* -- Form of Stock Certificate for the Common Stock of the Registrant. --
11 -- Statement re net income per common equivalent share. --
21** -- Subsidiaries of the Registrant.
27 -- Financial Data Schedule
</TABLE>
- -------------------------
* Incorporated by reference to the Registrant's Registration
Statement on Form S-1 (Registration No. 33-84436).
** Incorporated by reference to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1995.
*** Incorporated by reference to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended 6/30/96.
<PAGE> 1
EXHIBIT 11
PHYSICIAN RELIANCE NETWORK, INC. AND SUBSIDIARIES
NET INCOME PER COMMON EQUIVALENT SHARES
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
SIX SIX
THREE THREE MONTHS MONTHS
MONTHS ENDED MONTHS ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Weighted average common shares outstanding 48,494,010 38,800,700 45,898,762 38,800,700
Incremental shares related to assumed
exercise of stock options 983,336 868,080 983,336 868,080
------------- ------------- ------------- -------------
Weighted average common and
common equivalent shares-primary 49,477,346 39,668,780 46,882,098 39,668,780
Incremental shares related to assumed
conversion of common stock subscribed --- 46,350 --- 46,350
------------- ------------- ------------- -------------
Weighted average common and
common equivalent shares-fully diluted 49,477,346 39,715,130 46,882,098 39,715,130
============= ============= ============= =============
Net income $ 4,856 $ 3,965 $ 16,005 $ 9,062
============= ============= ============= =============
Net income per share (primary and fully diluted) $ 0.10 $ 0.10 $ 0.34 $ 0.23
============= ============= ============= =============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 13,181
<SECURITIES> 0
<RECEIVABLES> 114,796
<ALLOWANCES> (17,119)
<INVENTORY> 2,665
<CURRENT-ASSETS> 116,059
<PP&E> 160,745
<DEPRECIATION> 22,514
<TOTAL-ASSETS> 326,895
<CURRENT-LIABILITIES> 25,354
<BONDS> 0
238
0
<COMMON> 0
<OTHER-SE> 283,458
<TOTAL-LIABILITY-AND-EQUITY> 326,895
<SALES> 160,762
<TOTAL-REVENUES> 169,097
<CGS> 0
<TOTAL-COSTS> 141,594
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,121
<INCOME-PRETAX> 26,382
<INCOME-TAX> 10,377
<INCOME-CONTINUING> 16,005
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 46,882
<EPS-PRIMARY> .34
<EPS-DILUTED> .34
</TABLE>
