<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 June 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)
Texas 75-2495107
- ------------------------------------------------ ---------------------
(State or Other Jurisdiction of Incorporation or (I.R.S. Employer
Organization) Identification No.)
8115 Preston Road, Suite 300
Dallas, Texas 75225
- ---------------------------------------------------- ---------------------
(Address of Principal Executive Offices) (Zip Code)
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 August 9, 1996, approximately 47,368,228 shares of Common Stock
were issued and outstanding.
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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 period 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
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PHYSICIAN RELIANCE NETWORK INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
UNAUDITED
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 25,778 $ 12,405
Accounts receivable, net of
allowances of $14,649 and $12,087, respectively 74,737 49,856
Due from related parties 14,132 2,123
Other receivables 4,255 1,844
Inventories 2,423 3,841
Prepaid expenses and other 1,386 1,965
Deferred income tax 548 361
------------- -------------
Total current assets 123,259 72,395
------------- -------------
Property and equipment:
Land 12,467 9,386
Buildings 50,961 33,502
Furniture and equipment 85,079 66,809
Construction-in-progress 2,227 3,164
------------- -------------
150,734 112,861
Less- Accumulated depreciation (21,790) (16,310)
------------- -------------
Net property and equipment 128,944 96,551
------------- -------------
Investments 2,038 1,997
Service agreements, net 42,456 29,188
Other assets, net 7,038 4,502
------------- -------------
Total assets $ 303,735 $ 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>
June 30, December 31,
1996 1995
------------- -------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 14,316 $ 10,206
Accrued liabilities-
Salaries and benefits 3,477 2,850
Other 2,207 2,775
------------- -------------
5,684 5,625
Due to related party --- 1,105
Federal income tax --- 960
Current maturities of long-term debt 2,039 1,873
------------- -------------
Total current liabilities 22,039 19,769
Long-term debt, net of current maturities 5,820 26,973
Construction and retainage payable 855 7,505
Deferred income taxes 6,102 4,652
------------- -------------
Total liabilities 34,816 58,899
------------- -------------
Stockholders' equity:
Common stock 237 209
Additional paid-in capital 225,297 120,880
Common stock to be issued, 449,628 shares 15,618 8,027
Retained earnings 27,967 16,818
------------- -------------
269,119 145,934
Less-Subscription receivable (200) (200)
------------- -------------
Total stockholders' equity 268,919 145,734
------------- -------------
Total liabilities and stockholders' equity $ 303,735 $ 204,633
============= =============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
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PHYSICIAN RELIANCE NETWORK INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
UNAUDITED
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ----------------------------
1996 1995 1996 1995
----------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
Revenues:
Medical service revenues $ 53,136 $ 28,841 $ 100,667 $ 54,238
Other revenues 3,434 2,057 5,613 3,653
----------- ------------ ------------- -----------
Total revenues 56,570 30,898 106,280 57,891
----------- ------------ ------------- -----------
Costs and expenses:
Salaries and benefits 16,182 8,643 30,262 16,570
Pharmaceuticals and supplies 15,717 7,625 28,388 14,666
General and administrative 11,198 7,788 21,795 14,870
Depreciation and amortization 3,411 1,665 6,643 3,033
Interest expense 259 186 838 355
----------- ------------ ------------- -----------
Total costs and expenses 46,767 25,907 87,926 49,494
----------- ------------ ------------- -----------
Income before taxes and extraordinary item 9,803 4,991 18,354 8,397
----------- ------------ ------------- -----------
Provision (benefit) for income taxes:
Current 3,107 2,286 5,893 4,673
Deferred 720 (319) 1,312 (1,373)
----------- ------------ ------------- -----------
Total provision for income taxes 3,827 1,967 7,205 3,300
----------- ------------ ------------- -----------
Net income $ 5,976 $ 3,024 $ 11,149 $ 5,097
=========== ============ ============= ===========
Net income per share (primary and fully diluted): $ 0.13 $ 0.08 $ 0.25 $ 0.13
=========== ============ ============= ===========
Weighted average shares outstanding 47,748 38,772 45,141 38,772
=========== ============ ============= ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
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PHYSICIAN RELIANCE NETWORK INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
UNAUDITED
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------------
1996 1995
------------ --------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 11,149 $ 5,097
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 6,643 3,111
Deferred income tax, net 1,263 (1,446)
Changes in operating assets and liabilities:
Increase in accounts receivable, net (39,301) (10,754)
Decrease (increase) in inventories and prepaids 1,997 (1,140)
Increase in other assets (2,674) (5,534)
Increase in accounts payable and accrued liabilities 3,209 9,502
Decrease in due to related party (1,105) (1,123)
------------ --------------
Net cash used in operating activities (18,819) (2,287)
------------ --------------
Cash flows from investing activities:
Service agreements (4,468) --
Capital expenditures (37,873) (21,166)
Construction and retainage (6,650) 911
------------ --------------
Net cash used in investing activities (48,991) (20,255)
------------ --------------
Cash flows from financing activities:
Proceeds from long-term borrowings 43,000 10,429
Payments on long-term borrowings (64,137) (9,800)
Proceeds from subscription notes receivable 6,400
Issuance of common stock 102,320 38,078
------------ --------------
Net cash provided by financing activities 81,183 45,107
------------ --------------
Net increase in cash and cash equivalents 13,373 22,565
Cash and cash equivalents, beginning of period 12,405 10,498
------------ --------------
Cash and cash equivalents, end of period $ 25,778 $ 33,063
============ ==============
Cash paid during the period:
Interest, net of amount capitalized $ 504 $ 330
Income taxes $ 5,300 819
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
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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 and six
months ended June 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 and a commitment to issue approximately $7,643 of common stock in
connection with the execution of certain Service Agreements.
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 was
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
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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 ("Medical Service
Revenues") are equal to gross billings of its Affiliated Physician 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 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 believes that as
capitated agreements 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.
The following table summarizes (in thousands) the derivation of
Medical Service Revenues for the periods indicated.
<TABLE>
<CAPTION>
Three Months ended June 30, Six Months ended June 30,
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Gross Medical Billings $ 115,371 $ 72,001 $ 216,904 $ 138,805
Contractual discounts (42,315) (27,463) (79,086) (53,459)
--------- --------- --------- ---------
Gross Medical Revenues 73,056 44,538 137,818 85,346
Provision for uncollectible accounts (1,931) (1,325) (3,253) (3,060)
Amounts Retained by Physicians (17,989) (14,372) (33,898) (28,048)
--------- --------- --------- ---------
Medical Service Revenues $ 53,136 $ 28,841 $ 100,667 $ 54,238
========= ========= ========= =========
</TABLE>
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
8
<PAGE> 9
Consolidated Financial Statements and Notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- --------------------------
1996 1995 1996 1995
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenues:
Medical service revenues 93.9% 93.3% 94.7% 93.7%
Other revenues 6.1 6.7 5.3 6.3
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
Costs and expenses:
Salaries and benefits 28.6 28.0 28.5 28.7
Pharmaceutical and supplies 27.8 24.6 26.7 25.4
General and administrative 19.8 25.2 20.5 25.6
Depreciation and amortization 6.0 5.4 6.3 5.2
----- ----- ----- -----
Income before interest expense, taxes, and
extraordinary item 17.8 16.8 18.0 15.1
Interest expense 0.5 0.6 0.7 0.6
----- ----- ----- -----
Income before income taxes 17.3 16.2 17.3 14.5
Income taxes 6.7 6.4 6.8 5.7
----- ----- ----- -----
Net income 10.6% 9.8% 10.5% 8.8%
===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED JUNE 30, 1996, COMPARED TO THREE MONTHS ENDED JUNE 30, 1995
MEDICAL SERVICE REVENUES. Medical Service Revenues were $53,136,000
for the three months ended June 30, 1996, compared to $28,841,000 for the three
months ended June 30, 1995, representing an increase of $24,295,000 or 84.2%.
The growth in Medical Service Revenues is attributable to a $28,518,000
increase in Gross Medical Revenues generated by affiliated physicians offset by
an increase in Amounts Retained by Physicians of $3,617,000 and an increase in
the provision for uncollectible accounts of $606,000. The growth in Gross
Medical Revenues during the three months ended June 30, 1996, is due to an
increase in the number of physicians by 87 from 153 to 240; an increase in the
number of service locations from 53 to 90; 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 61 medical oncologists, 14
radiation oncologists, and 12 other physicians.
The Company began expansion of its management services to
oncology-related physicians outside the state of Texas in April 1995. Through
June 30, 1996, the Company entered into Service Agreements with physicians in
Iowa, Oregon, Missouri, Washington, Maryland, Arkansas, and New York.
The Company has opened four full-service cancer centers, that include
radiation therapy services, since June 30, 1995 (the Brownsville cancer center
opened in June 1995, the Southwest Dallas cancer center opened in August 1995,
and the North Dallas and Mesquite cancer centers opened in August 1995). In
addition, the Company purchased an existing cancer center and assumed the
operations of another facility in El Paso, Texas, in April 1996.
Amounts Retained by Physicians were 24.6% of Gross Medical Revenues
for the three months ended June 30, 1996, compared to 32.2% of Gross Medical
Revenues for the comparable period in 1995. The decrease in the
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<PAGE> 10
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 36.7% of Gross Medical Billings for the
three months ended June 30, 1996, compared to 38.1% of Gross Medical Billings
for the comparable period in 1995. The provision for uncollectible accounts
related to the Amounts Retained by Physician Groups was 1.7% of Gross Medical
Billings for the three months ended June 30, 1996, compared to 1.8% 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 June 30,
1996, were $3,434,000 compared to $2,057,000 for the three months ended June
30, 1995, representing an increase of $1,377,000, or 66.9%. 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 Company's public offering of 2,690,000 shares of common stock that was
completed in April 1996 ("Offering"). 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
locations opened as of June 30, 1996, to 21 compared to 14 as of June 30, 1995.
SALARIES AND BENEFITS. Salaries and benefits for the three months
ended June 30, 1996, were $16,182,000, compared to $8,643,000 for the three
months ended June 30, 1995, representing an increase of $7,539,000, or 87.2%.
Salaries and benefits include certain costs of clinical nonphysician employee
expenses paid by the Company pursuant to the terms of the Company's 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 28.6% for the three months ended
June 30, 1996, compared to 28.0% for the comparable period in 1995. During the
three months ended June 30, 1996, the Company increased its management
infrastructure, including a chief operating officer, 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 June 30, 1995, have been medical oncologists where such
revenue enhancements have not yet occurred. Approximately 61.3% of the
physicians managed by the Company at June 30, 1996, were medical oncologists
compared to 56.2% 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.
PHARMACEUTICALS AND SUPPLIES. Pharmaceuticals and supplies for the
three months ended June 30, 1996, were $15,717,000 compared to $7,625,000 for
the three months ended June 30, 1995, representing an increase of $8,092,000 or
106.1%. The dollar increase in pharmaceuticals and supplies for the three
months ended June 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 27.8% for the three months ended June 30, 1996,
compared to 24.6% for the three months ended June 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 of medical
oncologists 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 three months ended June 30, 1996, were $11,198,000 compared to $7,788,000
for the three months ended June 30, 1995, representing an
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increase of $3,410,000 or 43.8%. The increase in general and administrative
expenses is attributable in part to additional occupancy costs of $1,507,000
consisting primarily of rents, utilities, and property taxes incurred to
support additional physician office and leased cancer centers that have
commenced operations since June 30, 1995. Purchased services increased
$434,000 primarily as a result of contracting with Baylor University Medical
Center ("BUMC") to provide certain facility 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. Other general and
administrative expenses increased $780,000 as a result of the an increase in
telecommunications expense 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 $689,000.
for the three months ended June 30, 1996, and reflects the Company's current
collections experience. The percentage of general and administrative expenses
to total revenues was 19.8% for the three months ended June 30, 1996, compared
to 25.2% for the three months ended June 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 June 30, 1996, was $3,411,000 compared to $1,665,000 for the
three months ended June 30, 1995, representing an increase of $1,746,000 or
104.9%. Depreciation increased $1,297,000 as a result of the additional office
and cancer center locations that were opened or assumed by the Company since
June 30, 1995. Amortization increased $449,000 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 three months ended June 30, 1996,
was $259,000 compared to $186,000 for the three months ended June 30, 1995,
representing an increase of $73,000 or 39.2%. The increase in interest expense
was due to increased borrowings under the Revolver during the three months
ended June 30, 1996, as compared to the comparable period in 1995. However,
the increased outstanding borrowings during the three months ended June 30,
1996, were repaid in May 1996 from a portion of the proceeds from the Offering.
. Interest expense also includes the interest on seller-financed debt paid to
certain Affiliated Physician Groups as consideration for entering into Service
Agreements.
INCOME TAXES. Income taxes were $3,827,000 for the three months ended
June 30, 1996, compared to $1,967,000 for the three months ended June 30, 1995,
representing an increase of $1,860,000 or 94.6%. 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.
SIX MONTHS ENDED JUNE 30, 1996, COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
MEDICAL SERVICE REVENUES. Medical Service Revenues were $100,667,000
for the six months ended June 30, 1996, compared to $54,238,000 for the six
months ended June 30, 1995, representing an increase of $46,429,000 or 85.6%.
The growth in Medical Service Revenues is attributable to a $52,472,000
increase in Gross Medical Revenues generated by affiliated physicians offset by
an increase in Amounts Retained by Physicians of $5,850,000 and an increase in
the provision for uncollectible accounts of $193,000. The growth in Gross
Medical Revenues during the six months ended June 30, 1996, is due to an
increase in the number of physicians by 87 from 153 to 240; an increase in the
number of service locations from 53 to 90; 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 61 medical oncologists, 14
radiation oncologists, and 12 other physicians.
11
<PAGE> 12
The Company began expansion of its management services to
oncology-related physicians outside the state of Texas in April 1995. Through
June 30, 1996, the Company entered into Service Agreements with physicians in
Iowa, Oregon, Missouri, Washington, Maryland, Arkansas, and New York.
The Company has opened four full-service cancer treatment centers,
that include radiation therapy services, since June 30, 1995 (the Brownsville
cancer center opened in June 1995, the Southwest Dallas cancer center opened in
August 1995, and the North Dallas and Mesquite cancer centers opened in August
1995). The Company assumed the operations of the Midland cancer center in
April 1995, under a ten-year lease. In addition, the Company purchased an
existing cancer center and assumed the operations of another facility in El
Paso, Texas, in April 1996.
Amounts Retained by Physicians were 24.6% of Gross Medical Revenues
for the six months ended June 30, 1996, compared to 32.9% 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 June 30, 1996, compared to 38.5% 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 June 30, 1996, compared to 2.2% 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 six months ended June 30,
1996, were $5,613,000 compared to $3,653,000 for the six months ended June 30,
1995, representing an increase of $1,960,000, or 53.7%. 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 Offering completed in April 1996. The increase in other revenues is
primarily a result of the growth in the number of locations opened as of June
30, 1996, to 21 compared to 14 as of June 30, 1995.
SALARIES AND BENEFITS. Salaries and benefits for the six months ended
June 30, 1996, were $30,262,000, compared to $16,570,000 for the six months
ended June 30, 1995, representing an increase of $13,692,000 or 82.6%.
Salaries and benefits include certain nonphysician employee expenses of the
Company's affiliated physician groups paid by the Company pursuant to the terms
of the Company's 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 28.5%
for the six months ended June 30, 1996, compared to 28.7% for the comparable
period in 1995.
PHARMACEUTICALS AND SUPPLIES. Pharmaceuticals and supplies for the
six months ended June 30, 1996, were $28,388,000 compared to $14,666,000 for
the six months ended June 30, 1995, representing an increase of $13,722,000 or
93.6%. The increase in pharmaceuticals and supplies for the six months ended
June 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 26.7% for the six months ended June 30,
1996, compared to 25.4% for the six months ended June 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.
Approximately 61.3% of the physicians managed by the Company at June 30, 1996,
were medical oncologists compared to 56.2% for the comparable period in 1995.
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. 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.
12
<PAGE> 13
GENERAL AND ADMINISTRATIVE. General and administrative expenses for
the six months ended June 30, 1996, were $21,795,000 compared to $14,870,000
for the three months ended June 30, 1995, representing an increase of
$6,925,000 or 46.6%. The increase in general and administrative expenses is
attributable in part to additional occupancy costs of $2,845,000 consisting
primarily of rents, utilities, and property taxes incurred to support
additional physician office and leased cancer centers that have commenced
operations since June 30, 1995. Purchased services increased $1,552,000
primarily as a result of contracting with BUMC to provide certain facility
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. Other general and administrative expenses increased $1,734,000 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 $794,000 for the three months ended June 30,
1996, and reflects the Company's current collections experience. The
percentage of general and administrative expenses to total revenues was 20.5%
for the six months ended June 30, 1996, compared to 25.6% for the six months
ended June 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
six months ended June 30, 1996, was $6,643,000 compared to $3,033,000 for the
six months ended June 30, 1995, representing an increase of $3,610,000 or
119.0%. Depreciation increased $2,695,000 as a result of the additional office
and cancer center locations that were opened or assumed by the Company since
June 30, 1995. Amortization increased $915,000 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 six months ended June 30, 1996,
was $838,000 compared to $355,000 for the six months ended June 30, 1995,
representing an increase of $483,000 or 136.1%. The increase in interest was
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 $7,205,000 for the six months ended
June 30, 1996, compared to $3,300,000 for the six months ended June 30, 1995,
representing an increase of $3,905,000 or 118.3%. 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 the medical offices, and financing receivables.
More recently, the Company has also used cash, in part, when acquiring assets
(including outstanding accounts receivables) from and entering into Service
Agreements with Affiliated Physician Groups.
Net cash used in operations for the six months ended June 30, 1996,
was $18,819,000. 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 $24,881,000 for the
six months ended June 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 $12,009,000 for the six months ended June 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 from Affiliated Physician Groups
but reimbursable to the Company at the time of entering into a Service
Agreement. 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 six months ended June
30, 1996, was $48,991,000. During the six months ended June 30, 1996, the
Company continued and completed the construction of and acquired the related
equipment for 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 the remodeling and expansion of 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 $4,468,000 was paid to
the Affiliated Physician Groups in Maryland, Arkansas, and New York who entered
into Service Agreements in January, March, and June, respectively. The Company
is currently committed to approximately $5,000,000 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 six months ended June
30, 1996, were $81,183,000. In April 1996, the Company completed the Offering
which resulted in net proceeds to the Company of approximately $102,300,000.
Borrowings under the Revolver prior to the completion of the Offering were
$59,000,000 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
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 working capital.
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 June 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
14
<PAGE> 15
Company's ability to incur future indebtedness, pay cash dividends, sell
assets, and redeem or repurchase Company securities. Currently, the entire
amount of the Revolver of $90 million is available to the Company.
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 $22,000,000 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. 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.
15
<PAGE> 16
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES.
- --------------------------------------------------------------------------------
Effective May 7, 1996, the Company's Articles of Incorporation was
amended to increase the authorized shares of common stock from 50,000,000 to
150,000,000. The additional authorized shares of common stock may be issued by
the Board of Directors, at their discretion and without shareholder approval,
except as may be required by law or the rules of the Nasdaq Stock Market.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- --------------------------------------------------------------------------------
The Company held its Annual Meeting of Shareholders on May 8, 1996
(the "Annual Meeting"). At the Annual Meeting, the shareholders of the Company
voted to elect six directors, Merrick H. Reese, Joseph S. Bailes, Nancy G.
Brinker, Robert W. Daly, Eric A. Kriss, and Boone Powell, Jr., for one-year
terms and until their successors are duly elected and qualified. The following
table sets forth the number of votes cast for and against/withheld with respect
to each of the nominees for director:
<TABLE>
<CAPTION>
Nominee For Against/Withheld
- --------------------- ---------- ----------------
<S> <C> <C>
Merrick H. Reese 16,950,643 116,020
Joseph S. Bailes 16,950,643 116,020
Nancy G. Brinker 16,950,643 116,020
Robert W. Daly 16,950,643 116,020
Eric A. Kriss 16,950,643 116,020
Boone Powell, Jr. 16,943,643 123,020
</TABLE>
At the Annual Meeting the shareholders also voted to amend the
Company's Articles of Incorporation to increase the authorized Common Stock of
the Company to 150,000,000 shares. A total of 12,942,372 votes were cast for
such proposal and 3,982,146 votes were cast against such proposal, with 47,545
abstentions/broker non-votes with respect to the proposal.
The shareholders of the Company also voted to amend certain provisions
of the Company's 1993 Stock Option Plan to increase the number of shares of
Common Stock reserved and authorized for issuance pursuant to the Plan and to
limit the number of shares of Common Stock that may be issued to individual
employees under the Plan. A total of 15,329,534 votes were cast for such
proposal and 1,202,494 votes were cast against such proposal, with 49,530
abstentions/broker non-votes with respect to the proposal.
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 June 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: August 12, 1996 By: /s/ MERRICK H. REESE
-----------------------------------------
Merrick H. Reese, President
and Chief Executive Officer
By: /s/ RANDALL D. KURTZ
-----------------------------------------
Randall D. Kurtz, Executive
Vice President and Chief
Financial Officer
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. --
10.1* -- Restated Security Agreement, dated as of October 1, 1993, by Texas --
Oncology, P.A. in favor of Registrant.
10.2* -- Service Agreement, dated as of October 1, 1993, by and between Texas --
Oncology Pharmacy Services, Inc. and Texas Oncology, P.A.
10.3* -- Amended and Restated Loan and Security Agreement among Bank One, --
Texas, N.A. as administrative lender, Bank One, Texas, N.A., and
NationsBank of Texas, N.A., as lenders, and the Registrant, dated
effective December 31, 1995.
10.4**** -- Series A Convertible Preferred Stock Purchase Agreement, dated as of --
October 8, 1993, by and among the Registrant, Texas Oncology, P.A.,
and certain investors.
10.5* -- Stockholders' Agreement, dated October 8, 1993, by and among the --
Registrant, Texas Oncology, P.A., and certain investors.
10.6* -- Registration Rights Agreement, dated as of October 8, 1993, by and --
among the Registrant, Texas Oncology, P.A., and certain investors.
10.7* -- Series B Convertible Preferred Stock Purchase Agreement, dated as of --
September 16, 1994, between the Registrant and Baylor University
Medical Center.
10.8* -- Stockholders' Agreement, dated as of September 16, 1994, by and among --
the Registrant, Texas Oncology, P.A., and Baylor University Medical
Center.
10.9* -- Registration Rights Agreement, dated as of September 16, 1994, by and --
among the Registrant, Texas Oncology, P.A., and Baylor University
Medical Center.
10.10* -- Promissory Note of Texas Oncology, P.A., dated September 15, 1994, in --
the original principal amount of $6,600,000, payable to the order of
the Registrant.
10.11* -- Lease Agreement, dated as of August 1, 1994, by and between Baylor --
Health Care System, as landlord, and the Registrant, as tenant.
10.12* -- Lease, dated as of September 1, 1992, by and between Mother Frances --
Hospital of Tyler, Texas, as landlord, and the Registrant, as tenant.
10.13* -- Office Lease Agreement, dated as of February 12, 1993, by and between --
Texas Commerce Bank -- Odessa, N.A., as lessor, and the Registrant,
as Lessee.
10.14* -- Arlington Medical Center Medical Office Building Lease Agreement, --
dated as of December 8, 1993, by and between HCA-Arlington, Inc., as
landlord, and the Registrant as tenant.
10.15* -- Sublease, dated as of January 24, 1995, by and between Eagle Snacks, --
Inc., as Sublandlord, and the Registrant, as Subtenant.
</TABLE>
18
<PAGE> 19
<TABLE>
<CAPTION>
Exhibit Sequential
Number Description Page
- ----------- --------------------------------------------------------------------------- ----------
<S> <C> <C> <C>
10.16** -- Lease Agreement, dated as of April 2, 1995, by and between Midland --
County Hospital District, as landlord, and the Registrant, as tenant.
10.17*** -- Office Lease, dated as of November 20, 1996, by and between --
Northcreek Business Park, Ltd., as lessor, and the Registrant, as
lessee.
10.18**** -- First Amendment to Lease, dated as of February 29, 1996, by and --
between Northcreek Business Park, Ltd., as lessor, and the
Registrant,
as lessee.
10.19**** -- Lease Agreement, dated June 16, 1995, between Medical City Dallas --
Limited, as lessor, and the Registrant, as lessee.
10.20**** -- First Amendment to Lease Agreement, dated November 9, 1995, by and --
between Medical City Dallas Limited, as lessor, and the Registrant,
as lessee.
10.21**** -- Lease Agreement, dated as of June 1, 1995, by and between Galen --
Hospitals of Texas, Inc., as lessor, and the Registrant, as lessee.
10.22**** -- Lease Agreement, dated as of June 1, 1995, by and between Galen --
Hospitals of Texas, Inc., as lessor, and the Registrant, as lessee.
10.23***** -- Two Lincoln Centre office sublease agreement between Santa Fe --
International Corporation as landlord and Physician Reliance Network,
Inc., as tenant.
10.24***** -- Amended and Restated Service Agreement between Physician Reliance --
Network, Inc. and Texas Oncology, P.A.
--
EXECUTIVE COMPENSATION PLANS AND MANAGEMENT CONTRACTS
10.26* -- 1993 Stock Option Plan.
10.27* -- 1994 Stock Option Plan for Outside Directors.
10.28* -- Form of Employment Agreement entered into by the Registrant with Drs. --
Reese and Bailes and with Messrs. Kurtz, McGinn, Sims, and Whren.
--
</TABLE>
19
<PAGE> 20
<TABLE>
<CAPTION>
Exhibit Sequential
Number Description Page
<S> <C> <C> <C>
11 -- Statement re net income per common equivalent share. 21
21**** -- Subsidiaries of the Registrant. --
27 -- Financial Data Schedule 22
</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 Transition Report
on Form 10-K for the period from October 1, 1994 through
December 31, 1994.
*** Incorporated by reference to the Registrant's Registration
Statement on Form S-1 (Registration No. 33- 90996).
**** 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 March 31, 1996.
20
<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>
THREE THREE SIX SIX
MONTHS MONTHS MONTHS MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1996 1996 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Weighted average common shares outstanding 46,658,853 38,251,826 44,059,704 38,251,826
Incremental shares related to assumed
exercise of stock options 1,089,542 474,252 1,081,542 474,252
----------- ----------- ----------- -----------
Weighted average common and
common equivalent shares-primary 47,748,395 38,726,078 45,141,246 38,726,078
Incremental shares related to assumed
conversion of common stock subscribed --- 46,350 --- 46,350
----------- ----------- ----------- -----------
Weighted average common and
common equivalent shares-fully diluted 47,748,395 38,772,428 45,141,246 38,772,428
=========== =========== =========== ===========
Net income $ 5,976 $ 3,024 $ 11,149 $ 5,097
=========== =========== =========== ===========
Net income per share (primary and fully diluted) $ 0.13 $ 0.08 $ 0.25 $ 0.13
=========== =========== =========== ===========
</TABLE>
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q FOR THE QUARTER ENDED
MARCH 31, 1996.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 25,778
<SECURITIES> 0
<RECEIVABLES> 107,773
<ALLOWANCES> 14,649
<INVENTORY> 2,423
<CURRENT-ASSETS> 123,259
<PP&E> 150,734
<DEPRECIATION> 21,790
<TOTAL-ASSETS> 303,735
<CURRENT-LIABILITIES> 22,039
<BONDS> 0
<COMMON> 237
0
0
<OTHER-SE> 268,682
<TOTAL-LIABILITY-AND-EQUITY> 303,735
<SALES> 100,667
<TOTAL-REVENUES> 106,280
<CGS> 0
<TOTAL-COSTS> 87,088
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 838
<INCOME-PRETAX> 18,354
<INCOME-TAX> 7,205
<INCOME-CONTINUING> 11,149
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,149
<EPS-PRIMARY> .25
<EPS-DILUTED> .25
</TABLE>
