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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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 (I.R.S. Employer
of incorporation or organization) Identification No.)
5420 LBJ Freeway, Suite 900
Dallas, Texas 75240
- ----------------------------------- -----------------------------
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (972) 392-8700
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value per share
Series One Junior Preferred Stock Purchase Rights
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(Title of class)
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of March 24, 1998, 49,195,000 shares of Common Stock were
outstanding. The aggregate market value of the Common Stock held by
non-affiliates of the Registrant as of such date was approximately $515,219,000
(based upon the closing sale price of the Common Stock on The Nasdaq Stock
Market's National Market on March 24, 1998 of $13.375 per share). For purposes
of this calculation, shares held by non-affiliates excludes only those shares
beneficially owned by officers, directors and shareholders beneficially owning
10% or more of the outstanding Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement relating to the
Registrant's Annual Meeting of Shareholders to be held on May 12, 1998 are
incorporated by reference into Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
GENERAL
Physician Reliance Network, Inc. (the "Company") provides the
management services, facilities and equipment, administrative and technical
support, and ancillary services necessary for physicians to establish and
maintain a fully integrated network of outpatient oncology care. As of
December 31, 1997, the Company had operations in Texas, Iowa, Oregon,
Washington, Missouri, Maryland, Arkansas, New York, Minnesota, Illinois,
Florida, and New Mexico and provided its services to 326 physicians. The
physicians affiliated with the Company provide all aspects of care related to
the diagnosis and outpatient treatment of cancer, including medical oncology,
radiation oncology, gynecological oncology, and diagnostic radiology.
The Company was incorporated under the laws of the State of Texas in
June 1993. In October 1993, the Company consummated a series of transactions
(the "Reorganization"), resulting in the reorganization of certain limited
partnerships and a corporation affiliated with Texas Oncology, P.A.
(collectively referred to as the "Predecessor Entities"). The Predecessor
Entities had been formed by Texas Oncology, P.A. ("TOPA"), a professional
association then comprised of approximately 61 physicians, and its physicians
and management personnel, to acquire real estate, construct physician offices
and cancer centers, and equip the offices and cancer centers for use by TOPA
physicians in providing services to their patients. In connection with the
Reorganization, the Company and TOPA entered into a service agreement, the
terms of which required the Company to provide TOPA with facilities, equipment,
non-physician personnel, and administrative, management, and non-medical
advisory services, as well as services relating to the purchasing and
administering of pharmaceuticals and supplies. For the years ended December 31,
1997, 1996, and 1995, approximately 63%, 85%, and 97%, respectively, of the
Company's revenues were derived from services provided to TOPA. See "--Service
Agreements."
The Company's principal executive offices are located at 5420 LBJ
Freeway, Suite 900, Dallas, Texas, 75240, and its telephone number at that
address is (972) 392-8700. The Company transacts business directly and
indirectly through its wholly owned subsidiaries, TOPS Pharmacy Services, Inc.
("TOPS") and PRN Research, Inc. ("PRN Research"), and through Innovative Medical
Communications, Inc. ("IMC") in which the Company owns an 80% interest. Unless
the context otherwise requires, references herein to the Company include its
subsidiaries.
PHYSICIAN MANAGEMENT SERVICES
The Company's primary business is providing the management services,
equipment, and facilities necessary for the operation of a physician group
practice principally engaged in the diagnosis and treatment of cancer. The
services provided by the Company are concentrated in the following three areas:
FINANCIAL SERVICES. The Company provides the physician groups with
whom the Company contracts the capital necessary to develop and equip cancer
centers and physician offices and the billing and accounts receivable
management services necessary to deal with complex reimbursement requirements.
The Company also combines the purchasing power of numerous physicians with
respect to medical supplies, equipment, and pharmaceuticals.
CLINICAL SERVICES. The Company provides and manages the facilities
used by physicians. The Company also assists practices in recruiting
additional physicians, provides and trains the nonphysician support staff
necessary to operate the Company's facilities, and provides the technical and
ancillary services required for outpatient treatment of oncology patients.
MANAGEMENT EXPERTISE. As both public and private payors have taken a
more active role in the delivery of health care, the administrative burden on
physicians has increased. The Company provides the management expertise
necessary to comply with applicable laws and regulations. The Company also
assists in the scheduling of patients, the purchasing and management of medical
supplies and inventories, and the staffing of multiple health care delivery
sites.
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CLINIC OPERATIONS
The physicians and physician groups with whom the Company contracts
provide outpatient medical services primarily to cancer patients. Through the
use of the Company's facilities and equipment, physicians can offer a wide
array of services primarily for outpatient cancer treatment, including bone
marrow and stem cell transplantation, mammography, breast imaging, diagnosis,
nuclear medicine, ultrasound, x-ray, laboratory, pharmacy, and patient
education services. Physicians providing services at the Company's facilities
are employed by an affiliated physician group, not the Company, and maintain
full control over their medical practices. The Company is not engaged in the
practice of medicine.
The Company primarily operates two types of facilities: physician
offices and cancer centers.
PHYSICIAN OFFICES. At December 31, 1997, the Company operated 74
full-time physician offices located in 46 cities in twelve states. The
physician's office is where a patient interacts most frequently with an
oncologist. A typical physician's office is staffed with two medical
oncologists and nine support personnel. The support personnel include nurses,
lab and radiology technicians, and patient service coordinators. Physician
offices also contain the equipment necessary to administer single agent
chemotherapy. By contrast, multi-agent and multi-modality chemotherapies are
generally performed in the Company's cancer centers. Additional services that
may be offered at a physician's office include routine diagnostic services,
patient evaluation and management services, and coordination of care and
ancillary services such as laboratory, x-ray, and pharmacy services.
CANCER CENTERS. At December 31, 1997, the Company operated 23 cancer
centers, had two additional new centers under development, two cancer centers
under development to replace existing facilities, and one cancer center
undergoing expansion. Each of the Company's cancer centers is designed and
equipped to provide substantially all of the outpatient diagnostic and
treatment programs necessary to treat a cancer patient. Among the many
services offered at a cancer center, in addition to medical oncology and
radiation therapy services, are diagnostic radiology, patient education and
support services, infusion chemotherapy, pharmacy services, and nutritional
counseling. In addition, the typical cancer center has community rooms,
facilities for patient meetings and patient self-help programs, counseling
areas, and training facilities. Each of the Company's free-standing cancer
centers is equipped with at least one linear accelerator and a simulator that
is used to plan radiation treatment, a pharmacy, and a laboratory. Most of the
cancer centers have infusion areas where chemotherapy lasting several hours can
be administered and infusion rooms where more complex chemotherapies, which
historically required hospitalization, can be administered.
A typical cancer center has two medical oncologists, one radiation
oncologist, and eight support personnel for each physician. The support
personnel include nurses, lab and radiology technicians, a physicist, a
pharmacist, and patient service coordinators.
The Company's cancer centers are either free-standing or located
adjacent to an acute care hospital. The Company's free-standing cancer centers
generally are located in close proximity to other health care providers. The
cancer centers located adjacent to an acute care hospital are located in Tyler,
Texas (Mother Francis Hospital), Dallas, Texas (Baylor University Medical
Center), Arlington, Texas (South Arlington Hospital), Midland, Texas (Midland
Memorial Hospital), North Dallas, Texas (Columbia Hospital at Medical City
Dallas), and Beaumont, Texas (Sisters of Charity of the Incarnate Word). The
Company is currently constructing new free-standing cancer centers to replace
its existing cancer centers in Eugene, Oregon and Columbia, Missouri which are
currently located adjacent to an acute care hospital. The Company's largest
cancer center is the Sammons Cancer Center located adjacent to Baylor
University Medical Center ("BUMC") in Dallas, Texas. The Sammons Cancer Center
is staffed by 19 medical oncologists, three gynecological oncologists, three
radiation oncologists, and four diagnostic radiologists. Services offered at
this center that are not offered at most of the Company's other cancer centers
include breast diagnostic imaging, gynecological oncology, outpatient bone
marrow and stem cell transplantation, and high dose chemotherapy with stem cell
transplant support.
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RETAIL PHARMACY SERVICES
At December 31, 1997, the Company operated 27 pharmacies and had five
additional pharmacies under development. Each of the Company's pharmacies are
located within the Company's physician offices or cancer centers. These
pharmacies offer a full range of cancer pharmaceuticals and supplies from a
variety of manufacturers. Each pharmacy is managed by a registered pharmacist
and employs additional support staff.
The pharmacies are licensed as retail pharmacies. The Company's
pharmaceutical services include preparation of (i) chemotherapy products
administered in the Company's facilities; (ii) research medications; (iii)
chemotherapy-related retail prescriptions; and (iv) pharmaceuticals for
ambulatory infusion and home infusion. Clinical services provided by the
pharmacies include monitoring drug interactions; educating patients; providing
drug information to physicians, nurses, and patients; and ongoing drug
utilization reviews.
CLINICAL RESEARCH
The Company manages clinical trials on behalf of pharmaceutical
companies and biotechnology companies. In general, the clinical trial programs
relate to research designed to focus on: (i) improving cancer survival rates;
(ii) studying therapies that may improve a patient's quality of life; (iii)
exploring ways to lower the costs of cancer treatment; and (iv) developing
innovative cancer treatments in conjunction with pharmaceutical and
biotechnology companies. The Company assists in a number of aspects in the
conduct of clinical trials including protocol development, data coordination,
institutional review board coordination, contract review and negotiation,
pharmacy services, and clinical facilities.
On June 30, 1997, the Company, through PRN Research entered into a
comprehensive clinical development alliance (the "Ilex Agreement") with Ilex
(TM) Oncology, Inc. ("Ilex"), a drug development company focused exclusively
on cancer. See "-- Service Agreements."
SERVICE AGREEMENTS
The Company provides services and facilities and equipment for
physicians under long-term service agreements (the "Service Agreements") with
physician groups (the "Affiliated Physician Groups"). Under the Service
Agreements, the Company is typically the sole and exclusive manager of all
day-to-day business functions of physicians employed by Affiliated Physician
Groups, providing facilities, equipment, supplies, support personnel, and
management and financial advisory services. Specifically, the Company, among
other things, (i) prepares annual financial statements; (ii) purchases
inventories and supplies; (iii) manages billing and collecting; (iv) supervises
and maintains custody of files and records; (v) performs clerical, accounting,
and computer services functions; (vi) advises on public relations and
advertising; and (vii) assists in the recruitment of physicians. In return,
the Company receives a monthly fee. The Service Agreements generally have 40
year initial terms with automatic five-year extensions thereafter unless either
party gives notice to the other not to renew prior to the expiration of the
term. The Service Agreements are not terminable earlier by the Affiliated
Physician Groups except in the event of the Company's bankruptcy or a material
breach of the Service Agreement. In addition, an operating board is formed
under each of the Service Agreements. The operating board has equal
representation from the Company and the Affiliated Physician Group. The
operating board meets periodically, approves certain items having a significant
impact on the Affiliated Physician Group, and advises the Company on the
management, administrative policies, and development of the oncology network
and related facilities.
Effective June 30, 1997, the Company entered into the Ilex Agreement.
Ilex is a contract research organization ("CRO") that focuses exclusively on
research of cancer-related pharmaceuticals. Under the terms of the Ilex
Agreement, the Company has agreed that its sites can be used for trials managed
or sponsored by Ilex, and Ilex has agreed to promote the Company as a preferred
vendor for clinical trial sites. The Company has also agreed to promote Ilex as
the preferred CRO for clinical trials; provide scientific review services to
Ilex to evaluate proposed clinical trials; and assist in clinical trials design.
In addition, the Company has the right of first refusal to participate to the
maximum extent possible in all trials managed or sponsored by Ilex. As
consideration for entering into the Ilex Agreement, the Company received 312,188
shares of Ilex common stock. The
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Company will also receive 314,000 additional shares of Ilex common stock in
each of 1998, 1999, and 2000. In addition, the Company will receive up to
1,255,988 additional shares should Ilex meet certain operational financial
targets. The Ilex Agreement terminates December 31, 2007.
COMPETITION
The business of providing management services to physicians is highly
competitive. The Company is aware of several competitors focusing exclusively
on the management of oncology practices and several other health care companies
providing at least some management services to oncologists. In addition, there
are numerous other companies, including hospitals, large medical group
practices, health maintenance organizations, and insurance companies, that are
expanding their presence in the physician management market. Some of the
Company's competitors have longer operating histories and significantly greater
resources than the Company.
The Affiliated Physician Groups, upon whose success the Company is
dependent, also face significant competition for providing medical and related
services and for the recruitment of physicians and nonphysician personnel.
Hospitals, sole practitioners, single and multi-specialty medical groups, and
managed care organizations all compete with the Affiliated Physician Groups.
GOVERNMENT REGULATION
As a participant in the health care industry, the Company's operations
and relationships are subject to extensive and increasing regulation by a
number of governmental entities at the federal, state, and local levels. The
Company is also subject to laws and regulations relating to business
corporations in general. The Company believes its operations are in material
compliance with applicable laws. Nevertheless, many aspects of the Company's
business operations, including the structure of the relationship between the
Company and the Affiliated Physician Groups, have not been the subject of state
or federal regulatory interpretation.
Approximately 35% of the revenues of the Affiliated Physician Groups
is derived from payments made by government-sponsored health care programs
(principally, Medicare and Medicaid). As a result, any change in government
reimbursement regulations, policies, practices, interpretations, or statutes
could adversely affect the operations of the Company. The federal Medicare
program is based on a system of reimbursement for physician services, known as
the resource based relative value scale schedule ("RBRVS"). The Company
expects that annual adjustments to RBRVS payment levels and other future
changes in Medicare reimbursement will continue to result in a reduction from
historical levels in the per-patient Medicare revenue received by the
Affiliated Physician Groups.
The laws of many states prohibit business corporations such as the
Company from practicing medicine, employing physicians to practice medicine, or
engaging in activities such as fee-splitting with physicians. The Company does
not employ physicians to practice medicine, does not represent to the public or
its clients that it offers medical services, and does not control the clinical
aspects of the practice of medicine by the physicians with whom it contracts.
Accordingly, the Company believes that it is not in violation of applicable
state laws relating to the practice of medicine and that its receipt of a
management fee for services provided to the Affiliated Physician Groups does
not violate laws prohibiting certain fee-splitting arrangements. The laws in
most states regarding fee-splitting and the corporate practice of medicine have
been subjected to limited judicial and regulatory interpretation and,
therefore, no assurances can be given that the Company's activities will be
found to be in compliance if challenged. In addition, expansion of the
operations of the Company to certain jurisdictions may require structural and
organizational modifications of the structure of the Company's relationships
with physician groups.
Certain provisions of the Social Security Act, commonly referred to as
the "Anti-kickback Statute," prohibit the offer, payment, solicitation, or
receipt of any form of remuneration in return for the referral of Medicare or
state health program patients or patient care opportunities, or in return for
the purchase, lease, or order of items or services that are covered by Medicare
or state health programs. The Anti-kickback Statute is broad in scope and has
been broadly interpreted by courts in many jurisdictions. Read literally, the
statute places at risk many legitimate business arrangements, potentially
subjecting such arrangements to lengthy, expensive investigations and
prosecutions initiated
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by federal and state governmental officials. The applicability of the
Anti-kickback Statute and other related state and federal statutes to business
relationships and transactions such as exist between the Company and the
Affiliated Physician Groups has not been subject to any significant judicial or
regulatory interpretation. The Company believes that its receipt of payments
from physician groups for services provided pursuant to the Service Agreements
does not violate the Anti-kickback Statute since the Company does not receive
remuneration for, nor is it in a position to make or influence, the referrals
of patients or services reimbursed under government programs to the Affiliated
Physician Groups. To the extent the Company is deemed to be either a referral
source or a separate provider under the Service Agreements and to receive
referrals from physicians, it could be subject to scrutiny and prosecution for
any violation of the Anti-kickback Statute. Violation of the Anti-kickback
Statute is a felony, punishable by fines of up to $25,000 per violation, and
exclusion from participation in the Medicare or Medicaid programs, and
imprisonment for up to five years. In addition, the U.S. Department of Health
and Human Services may impose civil penalties excluding violators from
participation in Medicare or state health programs.
In 1991, in part to address concerns regarding the breadth of the
Anti-kickback Statute, the federal government published regulations that
provide exceptions, or "safe harbors," for transactions that will be deemed not
to violate the Anti-kickback Statute. Additional safe harbors were published
in 1993 offering new protections under the Anti- kickback Statute to eight
activities, including referrals within group practices consisting of active
investors. Compliance with the safe harbors is not required; however,
financial relationships that do not fit within a safe harbor are subject to
government scrutiny and potential prosecution under the broad prohibition of
the Anti-kickback Statute. Although the Company believes that its operations
are in material compliance with the Anti-kickback Statute, such operations do
not fit within any of the existing safe harbors in part because the aggregate
annual payment to the Company under the Service Agreements is not established
in advance but, rather, is based on a predetermined formula.
Significant prohibitions against physician referrals were enacted by
Congress in the Omnibus Budget Reconciliation Act of 1993 ("OBRA"). These
prohibitions commonly known as "Stark II," amended prior physician self-
referral legislation known as "Stark I" by dramatically enlarging the field of
physician-owned or physician-interested entities to which the referral
prohibitions apply. Effective January 1, 1995, Stark II prohibits a physician
from referring Medicare or Medicaid patients to an entity providing "designated
health services" in which the physician has an ownership or investment
interest, or with which the physician has entered into a compensation
arrangement. The designated health services include diagnostic radiology
services, radiation therapy services, physical and occupational therapy
services, durable medical equipment and supplies, parenteral and enteral
nutrients, equipment and supplies, prosthetic and orthotic devices, orthotics,
prosthetics, outpatient prescription drugs, home health services, and inpatient
and outpatient hospital services. The penalties for violating Stark II include
a prohibition on payment by these government programs, civil penalties of as
much as $15,000 for each violative referral, and $100,000 for participation in
a "circumvention scheme." Proposed regulations implementing Stark II were
published in January 1998 and will likely become effective in 1998. To the
extent that the Company or any of its Affiliated Physician Groups is deemed to
be subject to the prohibitions contained in Stark II, the Company believes its
activities fall within the permissible activities defined in Stark II.
In performing administrative billing and collection services for the
Affiliated Physician Groups, the Company is subject to state and federal laws
that govern the submission of claims for reimbursement. These laws generally
prohibit an individual or entity from knowingly and willfully presenting a
claim (or causing a claim to be presented) for payment from Medicare, Medicaid,
or other third-party payors that is false or fraudulent. The standard for
"knowing and willful" often includes conduct that amounts to a reckless
disregard for whether accurate information is presented by claims processors.
Penalties under these statutes include substantial civil and criminal fines,
exclusion from the Medicare program, and imprisonment. One of the most
prominent of these laws is the federal False Claims Act, which may be enforced
by the federal government directly or by a qui tam plaintiff on the
government's behalf. Under the False Claims Act, both the government and the
private plaintiff, if successful, are permitted to recover substantial monetary
penalties as well as an amount equal to three times actual damages. In recent
cases, some qui tam plaintiffs have taken the position that violations of the
Anti-kickback Statute and Stark II should also be prosecuted as violations of
the federal False Claims Act. Although the Company believes that it has
procedures to ensure the accurate completion of claims forms and requests for
payment, the laws and regulations defining the parameters of proper Medicare or
Medicaid billing are frequently unclear and have not been subjected to
extensive judicial or
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agency interpretation. Billing errors can occur despite the Company's best
efforts to prevent or correct them, and no assurances can be given that the
government will regard such errors as inadvertent and not in violation of the
False Claims Act or related statutes.
EXECUTIVE OFFICERS
The following table sets forth information concerning executive
officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
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<S> <C> <C>
John T. Casey 52 Chairman and Chief Executive Officer
Merrick H. Reese, M.D. 60 Vice Chairman
O. Edwin French 51 President and Chief Operating Officer
Joseph S. Bailes, M.D. 42 Executive Vice President and National Medical Director
Michael N. Murdock 43 Executive Vice President and Chief Financial Officer
George P. McGinn, Jr. 41 Executive Vice President and General Counsel and Secretary
</TABLE>
JOHN T. CASEY has been Chairman of the Board and Chief Executive
Officer of the Company since October, 1997. Mr. Casey has been active in
healthcare leadership roles for over 25 years. Mr. Casey served as president
and chief operating officer of American Medical International ("AMI") from 1991
until 1995, when that company was acquired by Tenet Healthcare. Prior to 1991,
Mr. Casey served as chief executive officer of several large regional healthcare
systems, including Samaritan Health Services in Phoenix, Methodist Health
Systems in Memphis, and Presbyterian/St. Luke's Medical Center in Denver. From
1995 until joining the Company, Mr. Casey was chairman and chief executive
officer of InteCare ("InteCare"), an entrepreneurial venture.
MERRICK H. REESE, M.D. has been a director of the Company since its
formation in June 1993 and Vice Chairman of the Company since October 1997.
Dr. Reese served as Chairman of the Board, President, and Chief Executive
Officer of the Company from its formation until October 1997. Dr. Reese has
been president and a director of TOPA, a physician professional association and
affiliate of the Company, since 1983. Dr. Reese received his medical degree
from The University of Texas Southwestern Medical School at Dallas in 1963 and
is a board certified medical oncologist.
O. EDWIN FRENCH has been President and Chief Operating Officer of the
Company since October 1997. From 1995 until joining the Company, Mr. French
was President of an international hospital consulting company focusing on
improving efficiency and reducing costs at hospitals. From 1992 through 1995,
Mr. French served as senior vice-president of AMI. Prior to 1992, Mr. French
served in executive management positions of several large regional healthcare
systems, including Samaritan Health Services in Phoenix, Methodist Health
Systems in Memphis, and Presbyterian/St. Luke's Medical Center in Denver.
JOSEPH S. BAILES, M.D. has been a director, Executive Vice President,
and National Medical Director of the Company since its formation in June 1993.
Since 1986, Dr. Bailes has been employed as a medical oncologist by TOPA. Dr.
Bailes received his medical degree from The University of Texas Southwestern
Medical School at Dallas in 1981 and is a board certified medical oncologist.
Dr. Bailes is also a director of Texas Regional Bancshares, Inc.
MICHAEL N. MURDOCK has been an Executive Vice President and the
Company's Chief Financial Officer since June 1997. From 1995 to June 1997,
Mr. Murdock was Chief Financial Officer of InteCare. Prior to 1995, Mr. Murdock
held various positions with AMI.
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GEORGE P. MCGINN, JR. has been Executive Vice President and General
Counsel of the Company since May 1995, and Secretary since May 1996. For 10
years prior to May 1995, Mr. McGinn was engaged in the private practice of law
with Bass, Berry & Sims PLC in Nashville, Tennessee.
EMPLOYEES
At December 31, 1997, the Company had 1,192 employees. The Company
believes that its relations with its employees are good.
ITEM 2. PROPERTIES
The Company's principal executive offices are located in approximately
66,000 square feet of space in Dallas, Texas, subject to a lease agreement that
expires in August 2001. The Company's financial services operations are
located in approximately 22,000 square feet of space in Dallas, Texas, subject
to a lease agreement that expires in January 2001.
At December 31, 1997, the Company operated 23 cancer centers, had two
cancer centers under development, two cancer centers under development to
replace existing facilities, and one cancer center undergoing expansion. Of
the 23 cancer centers operated by the Company, 12 are owned by the Company and
11 are operated pursuant to lease agreements. The lease agreements for the
cancer centers are operating leases with a term of ten years, except for the
Tyler Cancer Center which has a lease term of 15 years and the Las Cruces
Cancer Center which has a lease term expiring in December 1999. Of the 23
cancer centers operated by the Company, seven were acquired as existing cancer
centers and 16 have been developed by the Company. The following table
contains information concerning the Company's cancer centers.
<TABLE>
<CAPTION>
SIZE OWNED/
LOCATION (SQUARE FEET) DATE OPENED LEASED
-------- ------------- ----------- ------
<S> <C> <C> <C>
Plano, Texas(1).................. 19,730 March 1988 Owned
Sherman, Texas(1)................ 24,541 October 1988 Owned
Paris, Texas(1).................. 21,800 November 1992 Owned
Longview, Texas(1)............... 24,800 May 1993 Owned
Odessa, Texas(1)................. 29,400 June 1994 Leased
Tyler, Texas(2).................. 18,400 August 1994 Leased
McAllen, Texas(1)................ 32,300 August 1994 Owned
Dallas, Texas(2)................. 105,000 August 1994 Leased
Arlington, Texas(2).............. 21,900 December 1994 Leased
Midland, Texas (2)............... 18,500 April 1995 Leased
Brownsville, Texas(1)............ 21,100 May 1995 Owned
Mesquite, Texas(1)............... 28,000 September 1995 Owned
Southwest Dallas, Texas(1)....... 28,000 September 1995 Owned
North Dallas, Texas(2)........... 52,400 October 1995 Leased
El Paso, Texas(1)................ 34,600 April 1996 Owned
Las Cruces, New Mexico(1)........ 7,200 April 1996 Leased
El Paso, Texas(1)................ 29,200 June 1996 Owned
</TABLE>
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<TABLE>
SIZE OWNED/
LOCATION (SQUARE FEET) DATE OPENED LEASED
-------- ------------- ----------- ------
<S> <C> <C> <C>
Columbia, Missouri(3).......... 6,500 April 1997 Leased
Fort Worth, Texas(1)........... 22,513 April 1997 Owned
Abilene, Texas(1).............. 21,958 May 1997 Owned
Austin, Texas(1)............... 21,924 June 1997 Leased
Eugene, Oregon(3).............. 6,767 June 1997 Leased
Beaumont, Texas(2)............. 12,559 November 1997 Leased
</TABLE>
(1) Denotes a free-standing cancer center.
(2) Denotes a cancer center located adjacent to an acute care hospital.
(3) Denotes a cancer center that is currently located adjacent to an acute
care hospital. A free-standing facility in the area is currently under
construction by the Company.
ITEM 3. LEGAL PROCEEDINGS
The provision of medical services and the conduct of clinical trials
by physician groups with which the Company contracts entail an inherent risk of
professional liability claims. The Company does not control the practice of
medicine by physicians or the compliance with certain regulatory and other
requirements directly applicable to physicians and physician groups. Because
the Company purchases and resells pharmaceutical products and related medical
supplies, it faces the risk of product liability claims. The Company from time
to time is a party to claims, suits, or complaints relating to services and
products provided by the Company or physicians to whom the Company provides
services. The Company maintains insurance coverage that it believes to be
adequate both as to risks and amounts. In addition, pursuant to the Service
Agreements, the Affiliated Physician Groups are required to maintain
comprehensive professional liability insurance. Successful malpractice claims
asserted against Affiliated Physician Groups or the Company could, however,
have a material adverse effect on the Company. Except as provided below, the
Company is not, and in 1997 was not, subject to claims or legal actions which,
upon resolution, the Company believes could have a material adverse effect on
the Company's financial position, results of operations or liquidity.
METHODIST HOSPITALS. In March 1998, the Company, TOPA, and Methodist
Hospitals of Dallas ("Methodist") reached a preliminary agreement to settle the
previously disclosed lawsuit filed by Methodist in March 1996 in the District
Court of Dallas County, Texas, asserting various claims, including antitrust and
tort claims. Under the terms of the agreement, Methodist has agreed to release
the Company and TOPA from any liability and the lawsuit, including all claims
related thereto, will be dismissed with prejudice. As part of the settlement,
the Company and TOPA have agreed to limit the expansion of certain services and
the number of physicians in Dallas County. The Company and TOPA believe that
such limitations will not materially adversely affect the Company's or TOPA's
results of operations or growth plans. Although the essential terms of the
settlement have been agreed to, final documents have not been signed and there
is no guarantee that final documents will be signed.
JACKSON, KAUFMAN AND HINERFELD. As previously disclosed, the Company
reached an agreement to settle the lawsuits identified as Jackson, Kaufman and
Hinerfeld. In January and February, 1998, these cases were dismissed with
prejudice and all members of the settlement class became barred from
prosecuting, pursuing or litigating any claims asserted in Jackson, Kaufman and
Hinerfeld.
9
<PAGE> 10
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
Not applicable
PART II
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The Common Stock is traded on The Nasdaq Stock Market's National
Market (the "Nasdaq National Market") under the symbol "PHYN." The following
table sets forth the range of high and low bid prices of the Common Stock for
each of the years ended December 31, 1997 and 1996, as reported on the Nasdaq
National Market. Prices have been adjusted to reflect a two-for-one stock
split effected in the form of a 100% stock dividend on June 10, 1996.
<TABLE>
<CAPTION>
1996 HIGH LOW
------ ------
<S> <C> <C>
First Quarter ................ $23.63 $18.63
Second Quarter ............... 27.50 19.25
Third Quarter ................ 22.75 10.50
Fourth Quarter ............... 15.50 4.75
1997
First Quarter ................ $ 9.00 $ 5.06
Second Quarter ............... 10.69 5.00
Third Quarter................. 11.44 7.81
Fourth Quarter................ 12.88 9.25
</TABLE>
As of March 24, 1998, there were approximately 590 shareholders of
record and approximately 6,000 beneficial shareholders of the Common Stock.
The Company has never declared or paid any cash dividends on its Common Stock.
The payment of cash dividends in the future will depend on the Company's
earnings, financial condition, capital needs, and other factors deemed
pertinent by the Company's Board of Directors, including the limitations, if
any, on the payment of dividends under state law and then-existing credit
agreements. It is the present policy of the Company's Board of Directors to
retain earnings, if any, to finance the operations and expansion of the
Company's business. In addition, the Company's revolving credit facility does
not currently permit the payment of cash dividends.
All securities of the Company that have been sold by the Company
during the fiscal year ended December 31, 1997, without registration under the
securities Act of 1933, as amended, have been previously disclosed in the
Company's Quarterly Reports on Form 10-Q.
10
<PAGE> 11
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following tables set forth selected consolidated financial data of
the Company, which should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and with the
Company's Consolidated Financial Statements and Notes thereto included
elsewhere herein. The selected consolidated financial data for the years ended
September 30, 1993 and 1994, the three months ended December 31, 1994, and the
years ended December 31, 1995, 1996, and 1997 have been derived from the
consolidated financial statements of the Predecessor Entities and the Company
audited by Arthur Andersen LLP, independent public accountants. The selected
consolidated financial data for the three months ended December 31, 1993, has
been derived from the unaudited consolidated financial statements of the
Company which, in the opinion of management, include all adjustments (which
consist of only normal recurring adjustments) necessary for a fair presentation
of the financial condition and results of operations of the Company for that
period.
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
ENTITIES -------------------------------------------
-------------- THREE MONTHS ENDED
YEAR ENDED YEAR ENDED DECEMBER 31,
SEPTEMBER 30, SEPTEMBER 30, -------------------------
1993 1994 1993 1994
-------------- ------------- --------- ---------
<S> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Medical practice revenues, net .................. $ 59,726 $ 86,313 $ 17,707 $ 34,346
Amounts retained by physicians .................. (21,614) (30,343) (5,919) (12,672)
--------- --------- --------- ---------
Management fees ................................. 38,112 55,970 11,788 21,674
Other revenues .................................. 1,808 3,270 281 1,510
--------- --------- --------- ---------
Total revenues ............................... 39,920 59,240 12,069 23,184
Salaries and benefits ........................... 12,436 18,866 3,988 6,750
Pharmaceuticals and supplies .................... 10,653 15,996 3,190 5,674
General and administrative ...................... 8,527 10,554 2,130 4,763
Provision for uncollectible accounts ............ 1,718 4,164 821 1,796
Reorganization .................................. 647(1) -- -- --
Depreciation and amortization ................... 1,783 2,487 512 1,253
--------- --------- --------- ---------
Income (loss) before interest, taxes, and
extraordinary item ......................... 4,156 7,173 1,428 2,948
Interest expense ................................ 1,276 1,682 377 604
--------- --------- --------- ---------
Income (loss) before income taxes and
extraordinary item ......................... 2,880 5,491 1,051 2,344
Income tax provision (benefit) .................. 371 3,128(2) 1,388(2) 929
--------- --------- --------- ---------
Income (loss) before extraordinary item ...... 2,509 2,363 (337) 1,415
Extraordinary item .............................. -- (302)(3) -- --
--------- --------- --------- ---------
Net income (loss) ............................... $ 2,509 $ 2,061 $ (337) $ 1,415
========= ========= ========= =========
EARNINGS PER SHARE: (4) (5)
Basic:
Per share income (loss) before extraordinary
item.......................................... $ 0.12 $ (0.01) $ 0.05
Per share extraordinary item .................... $ (0.02) -- --
Per share net income (loss) ................... $ 0.10 $ (0.01) $ 0.05
Diluted:
Per share income (loss) before extraordinary
item ......................................... $ 0.08 $ (0.01) $ 0.04
Per share extraordinary item .................... $ (0.01) -- --
Per share net income (loss) ................... $ 0.07 $ (0.01) $ 0.04
BALANCE SHEET DATA:
Working capital .................................. $ 1,276 $ 19,484 $ 23,162 $ 28,378
Total assets ..................................... 40,583 85,923 47,937 98,886
Long-term debt and capital lease obligations ..... 19,554 38,838 22,725 --
Redeemable convertible preferred
stock ......................................... -- 24,400 10,000 --
Stockholders' equity ............................. 8,653 5,995 3,498 80,622
<CAPTION>
COMPANY
-----------------------------------
YEAR ENDED
DECEMBER 31,
-----------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
STATEMENT OF INCOME DATA:
Medical practice revenues, net .................. $ 190,664 $ 296,907 $ 387,391
Amounts retained by physicians .................. (61,442) (72,414) (96,183)
--------- --------- ---------
Management fees ................................. 129,222 224,493 291,208
Other revenues .................................. 8,051 13,826 26,227
--------- --------- ---------
Total revenues ............................... 137,273 238,319 317,435
Salaries and benefits ........................... 37,778 66,879 86,862
Pharmaceuticals and supplies .................... 33,605 70,822 105,758
General and administrative ...................... 25,777 37,988 57,606
Provision for uncollectible accounts ............ 8,483 11,030 51,703
Reorganization .................................. -- -- --
Depreciation and amortization ................... 7,653 15,894 21,017
--------- --------- ---------
Income (loss) before interest, taxes, and
extraordinary item ......................... 23,977 35,706 (5,511)
Interest expense ................................ 672 1,939 4,107
--------- --------- ---------
Income (loss) before income taxes and
extraordinary item ......................... 23,305 33,767 (9,618)
Income tax provision (benefit) .................. 9,190 13,271 (2,386)
--------- --------- ---------
Income (loss) before extraordinary item ...... 14,115 20,496 (7,232)
Extraordinary item .............................. -- -- --
--------- --------- ---------
Net income (loss) ............................... $ 14,115 $ 20,496 $ (7,232)
========= ========= =========
EARNINGS PER SHARE: (4) (5)
Basic:
Per share income (loss) before extraordinary
item.......................................... $ 0.35 $ 0.44 $ (0.14)
Per share extraordinary item .................... -- -- --
Per share net income (loss) ................... $ 0.35 $ 0.44 $ (0.14)
Diluted:
Per share income (loss) before extraordinary item $ 0.34 $ 0.43 $ (0.14)
Per share extraordinary item .................... -- -- --
Per share net income (loss) ................... $ 0.34 $ 0.43 $ (0.14)
BALANCE SHEET DATA:
Working capital .................................. $ 52,626 $ 78,769 $ 78,721
Total assets ..................................... 204,633 355,341 400,634
Long-term debt and capital lease obligations ..... 26,973 14,121 49,961
Redeemable convertible preferred
stock ......................................... -- -- --
Stockholders' equity ............................. 145,734 294,776 290,304
</TABLE>
(1) Amount represents cost incurred in connection with the Reorganization.
(2) Amount includes $1,250 of deferred taxes for the assets acquired during
the Reorganization.
(3) Amount represents early retirement of debt as of March 1994 in connection
with consolidating substantially all of the Company's indebtedness under a
single credit facility. The amount is net of a deferred tax benefit of
$156.
(4) Per share data for the periods prior to the fiscal year ended September
30, 1994, is not presented because there is no reasonable basis to
estimate the number of shares of Common Stock that would have been
outstanding in these periods. Per share data presented for periods prior
to the year ended December 31,1996, has been restated to reflect a
two-for-one stock split effected in the form of a 100% stock dividend on
June 10, 1996. See Note 12 of Notes to the Company's Consolidated
Financial Statements.
(5) Basic and diluted earnings per share are presented in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
and replaces primary and basic earnings per share previously reported.
See Note 9 of Notes to the Company's Consolidated Financial Statements.
11
<PAGE> 12
ITEM 7. 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 elsewhere herein.
OVERVIEW
The Company provides the management services, facilities and
equipment, administrative and technical support, and other services necessary
to establish and maintain a fully-integrated network of outpatient oncology
care. The Affiliated Physician Groups provide 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 provided under its Service Agreements with the
Affiliated Physician Groups. Under the Service Agreements, the Company
receives a management fee ("Management Fee") for services rendered, and the
method of determining the Management Fee earned by the Company varies by each
Service Agreement.
The Company's most significant service agreement is with TOPA ("Texas
Service Agreement"). The Management Fee under the Texas Service Agreement is
calculated based upon a percentage of the earnings before interest and taxes
("Earnings") plus certain nonphysician expenses of the related practice
locations. The Texas Service Agreement represented approximately 68% and 85%
of the Company's Management Fees for the years ended December 31, 1997, and
1996, respectively. Approximately 93% and 90% of the Company's Management Fees
earned for each of the years ended December 31, 1997, and 1996, respectively,
were derived from Service Agreements in which the Management Fee is calculated
based on Earnings, and approximately 7% and 10%, respectively, were derived
from Service Agreements in which the Management Fee is calculated based on a
percentage of the medical practice revenues of the Affiliated Physician Group.
The following table summarizes the derivation of Management Fees for
the periods indicated (in thousands).
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Medical Practice Revenues, net ............ $ 190,664 $ 296,907 $ 387,391
Amounts Retained by Physicians .............. (61,442) (72,414) (96,183)
--------- --------- ---------
Management Fees ........................... $ 129,222 $ 224,493 $ 291,208
========= ========= =========
</TABLE>
12
<PAGE> 13
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
Consolidated Financial Statements and Notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------------
1995 1996 1997
------ ------ -----
<S> <C> <C> <C>
Management fees 94.1% 94.2% 91.7%
Other revenues 5.9 5.8 8.3
------ ------ -----
Total revenues 100.0 100.0 100.0
Salaries and benefits 27.5 28.1 27.4
Pharmaceutical and supplies 24.5 29.7 33.3
General and administrative 18.8 15.9 18.1
Provision for uncollectible accounts 6.2 4.6 16.3
Depreciation and amortization 5.5 6.7 6.6
------ ------ -----
Income (loss) before interest expense
and taxes 17.5 15.0 (1.7)
Interest expense 0.5 0.8 1.3
------ ------ -----
Income (loss) before income taxes 17.0 14.2 (3.0)
Income tax provision (benefit) 6.7 5.5 (0.7)
------ ------ -----
Net income (loss) 10.3% 8.6% (2.3)%
====== ====== =====
</TABLE>
YEAR ENDED DECEMBER 31, 1997, COMPARED TO YEAR ENDED DECEMBER 31, 1996
MANAGEMENT FEES. Management Fees were $291,208,000 for the year ended
December 31, 1997, compared to $224,493,000 for the year ended December 31,
1996, representing an increase of $66,715,000, or 29.7%. The growth in
Management Fees is attributable to a $90,484 increase in Medical Practice
Revenues offset by an increase in Amounts Retained by Physicians of $23,769,000.
The growth in Medical Practice Revenues during the year ended December 31, 1997,
is attributable to an increase in the number of physicians by 36 from 290 to
326; an increase in the number of service locations from 106 to 121; 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
28 medical oncologists, six radiation oncologists, and two other physicians.
In 1997, the Company opened three full-service cancer centers that
include radiation therapy services in Fort Worth, Texas (April 1997), Abilene,
Texas (June 1997), and Austin, Texas (June 1997). In addition, the Company
began providing radiation technical services through the operation of existing
radiation therapy facilities in Columbia, Missouri (April 1997), Eugene, Oregon
(June 1997), and Beaumont, Texas (November 1997). These radiation technical
services provided at the Eugene and Beaumont facilities are being provided
through joint ventures with hospitals in these markets where the Company acts
as the general partner. A full-service cancer center is currently under
construction in Eugene, Oregon to consolidate the medical oncology and
radiation oncology practices.
Amounts Retained by Physicians were 24.8% of Medical Practice Revenues
for the year ended December 31, 1997, compared to 23.4% of Medical Practice
Revenues for the comparable period in 1996. Beginning January 1, 1997, the
Company has guaranteed that the Amounts Retained by Physicians will be at least
$5,195,000 under the terms of the Service Agreement with the Company's
Minnesota physician group provided that certain targets are met. For the year
ended December 31, 1997, the Company paid an additional $847,000 to the
Minnesota physician
13
<PAGE> 14
group and, therefore, reduced its Management Fee pursuant to such guarantee.
Management Fees derived from payors who have contracted with the
Affiliated Physician Groups to provide services on a discounted fee-for-service
basis accounted for approximately 45% of the Affiliated Physician Groups'
business during the year ended December 31, 1997. Approximately 35% of the
Medical Practice Revenues generated by the Affiliated Physician Groups for the
year ended December 31, 1997, were from government agencies, primarily Medicare
and Medicaid.
OTHER REVENUES. Other revenues for the year ended December 31, 1997,
were $26,227,000 compared to $13,826,000 for the year ended December 31, 1996,
representing an increase of $12,401,000, or 89.7%. 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, revenues attributable to the Company's 80 percent interest in IMC,
the Company's equity interest in ILEX, and interest income. The increase in
other revenues was primarily attributable to the development and expansion of
existing business within the Company's retail pharmacy and research lines of
business. Other revenues also increased as a result of revenues derived from
IMC, a company that provides educational services and publications to
physicians, and the receipt of 312,000 shares of common stock of ILEX, a
pharmaceutical research company, in connection with the execution of the Ilex
Agreement.
SALARIES AND BENEFITS. Salaries and benefits for the year ended
December 31, 1997, were $86,862,000 compared to $66,879,000 for the year ended
December 31, 1996, representing an increase of $19,983,000, or 29.9%. Salaries
and benefits include costs of clinical nonphysician employees of Affiliated
Physician Groups paid by the Company pursuant to the terms of the Service
Agreements. The dollar increase in salaries and benefits was attributable to
the addition of clinical and nonclinical personnel required to support the
increase in the number of Affiliated Physician Groups managed by the Company.
The percentage of salaries and benefits to total revenues was 27.4% for the
year ended December 31, 1997, compared to 28.1% for the comparable period in
1996. This decrease is primarily attributable to the increase in Other
Revenues where the increased revenues were greater than the incremental
increase in salary and benefit expenses.
PHARMACEUTICALS AND SUPPLIES. Pharmaceuticals and supplies for the
year ended December 31, 1997, were $105,758,000 compared to $70,822,000 for the
year ended December 31, 1996, representing an increase of $34,936,000, or
49.3%. The dollar increase in pharmaceuticals and supplies 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 33.3% for the year ended December 31, 1997, compared to 29.7% for
the year ended December 31, 1996. This increase was primarily the result of an
increased number of medical oncology practices managed by the Company in 1997
as compared to 1996. During 1996, the Company added 61 medical oncologists,
and their operations are fully reflected in 1997 as compared to 1996. Revenues
generated by medical oncologists have a greater percentage of pharmaceutical
expenses than revenues generated by other physicians, such as radiation
oncologists, since the primary form of treatment performed by the medical
oncologist is through infusion therapy.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for
the year ended December 31, 1997, were $57,606,000 compared to $37,988,000 for
the year ended December 31, 1996, representing an increase of $19,618,000, or
51.6%. The percentage of general and administrative expenses to total revenues
was 18.1% for the year ended December 31, 1997, compared with 15.9% for the year
ended December 31, 1996. During 1997, the Company recorded a $3,133,000
nonrecurring charge which included costs for legal and other expenses related to
the shareholder litigation that was settled in January 1998 and the antitrust
litigation that was settled in March 1998, and the write-off of certain deferred
costs. In addition, the Company incurred fees of $2,558,000 in 1997 for
consulting services designed to improve medical office operations. The other
increase in general and administrative expenses resulted from increased lease
costs, reference laboratory services, temporary clerical work,
telecommunications, and maintenance and other occupancy costs to support the
Company's additional service locations.
14
<PAGE> 15
PROVISION FOR UNCOLLECTIBLE ACCOUNTS. The provision for uncollectible
accounts for the year ended December 31, 1997, was $51,703,000 compared to
$11,030,000 for the year ended December 31, 1996, representing an increase of
$40,673,000. During 1997, the Company provided approximately $37,841,000 in
additional provision for uncollectible accounts receivable. The additional
provision was for accounts receivable that the Company does not deem to be
collectible and resulted from a review of its outstanding accounts receivable
and past collection experiences and practices. The Company believes that the
current provision accurately reflects the collectibility of accounts receivable
outstanding at December 31, 1997.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the
year ended December 31, 1997, was $21,017,000 compared to $15,894,000 for the
year ended December 31, 1996, representing an increase of $5,123,000, or 32.2%.
Depreciation increased $4,352,000 as a result of the additional office and
cancer center locations that were opened or assumed by the Company since 1996.
Amortization increased $771,000 as a result of the increase in Service Agreement
costs incurred as consideration for the Affiliated Physician Groups entering
into Service Agreements. These costs are amortized over the term of the related
Service Agreements.
INTEREST. Interest expense for the year ended December 31, 1997, was
$4,107,000 compared to $1,939,000 for the year ended December 31, 1996,
representing an increase of $2,168,000, or 111.8%. The increase in interest
expense was attributable to increased amounts owed to Affiliated Physician
Groups as consideration, in part, for entering into Service Agreements. In
addition, the Company borrowed funds under its revolving line of credit (the
"Revolver") during 1997 to finance its capital expenditures, amounts paid to
Affiliated Physician Groups under the terms of the Service Agreements and the
related asset purchase agreements, and for working capital purposes. During
April 1996, the Company completed a public offering of Common Stock and used the
net proceeds of approximately $102,470,000 to finance such expenditures in 1996
and to repay amounts outstanding at that time under the Revolver.
INCOME TAXES. The income tax benefit for the year ended December 31,
1997, was $2,386,000 compared to an income tax provision of $13,271,000 for the
year ended December 31, 1996, representing a decrease of $15,657,000, or 118.0%.
The Company intends to carry back the loss reported for the year ended December
31, 1997, to prior year income tax returns and obtain a refund. Income taxes
were provided on the taxable income of the Company for federal and state
reporting purposes using the applicable effective rates, except that the
additional provision for uncollectible accounts was provided at the applicable
federal rate only.
YEAR ENDED DECEMBER 31, 1996, COMPARED TO YEAR ENDED DECEMBER 31, 1995
MANAGEMENT FEES. Management Fees were $224,493,000 for the year ended
December 31, 1996, compared to $129,222,000 for the year ended December 31,
1995, representing an increase of $95,271,000, or 73.7%. The growth in
Management Fees is attributable to a $106,243,000 increase in Medical Practice
Revenues offset by an increase in Amounts Retained by Physicians of $10,972,000.
The growth in Medical Practice Revenues during the year ended December 31, 1996,
is due to an increase in the number of physicians by 84 from 206 to 290; an
increase in the number of service locations from 73 to 106; 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, nine radiation oncologists, and 14 other physicians.
In 1996, the Company opened a cancer center in El Paso, Texas (June
1996) and assumed the operations of existing cancer centers in El Paso, Texas
(April 1996) and Las Cruces, New Mexico (April 1996).
Amounts Retained by Physicians were 24.4% of Medical Practice Revenues
for the year ended December 31, 1996, compared to 32.2% of Medical Practice
Revenues for the comparable period in 1995. This decrease is due to the
expansion of services offered through the Company's existing facilities, the
change in calculating the Management Fee under the Texas Service Agreement, and
the addition of new Service Agreements.
15
<PAGE> 16
Management Fees derived from payors who have contracted with the
Affiliated Physician Groups to provide services on a discounted fee-for-service
basis accounted for approximately 45% of the Affiliated Physician Groups
business during the year ended December 31, 1996. Approximately 35% of the
Medical Practice Revenues generated by the Affiliated Physician Groups for the
year ended December 31, 1996, were from government agencies, primarily Medicare
and Medicaid.
OTHER REVENUES. Other revenues for the year ended December 31, 1996,
were $13,826,000 compared to $8,051,000 for the year ended December 31, 1995,
representing an increase of $5,775,000, or 71.7%. 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 Affiliated Physician Groups that are sponsored by pharmaceutical companies,
and interest income. The increase in other revenues is primarily a result of
the growth in the number of retail pharmacy locations opened as of December 31,
1996, to 24 compared to 21 as of December 31, 1995, and the development of the
12 pharmacy locations that were opened during 1995.
SALARIES AND BENEFITS. Salaries and benefits for the year ended
December 31, 1996, were $66,879,000 compared to $37,778,000 for the year ended
December 31, 1995, representing an increase of $29,101,000, or 77.0%. Salaries
and benefits include costs of clinical nonphysician employees of Affiliated
Physician Groups paid by the Company pursuant to the terms of the Service
Agreements. The dollar increase in 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 28.1% for the year ended December
31, 1996, compared to 27.5% for the comparable period in 1995. Beginning in
April 1996, the Company also increased its management infrastructure to support
its development of a national presence. In addition, a larger percentage of
the physicians and related services added since December 31, 1995, are medical
oncologists for which revenue enhancements related to the development and
integration of the oncology business through the addition of cancer centers
have not yet occurred. Approximately 64.1% of the physicians in the Affiliated
Physician Groups managed by the Company at December 31, 1996, were medical
oncologists, compared to 60.6% for the comparable period in 1995. The increase
in the percentage of medical oncologists during the year ended December 31,
1996, is a result of the Company's focus on the development of and entry into
new geographical markets where the Company intends to develop integrated
oncology networks in the future.
PHARMACEUTICALS AND SUPPLIES. Pharmaceuticals and supplies for the
year ended December 31, 1996, were $70,822,000 compared to $33,605,000 for the
year ended December 31, 1995, representing an increase of $37,217,000, or
110.7%. The dollar increase in pharmaceuticals and supplies 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 29.7% for the year ended December 31, 1996, compared to 24.5% for
the year ended December 31, 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 overall cost
increases. Revenues generated by medical oncologists have a greater percentage
of pharmaceutical expenses than revenues generated in a cancer center.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for
the year ended December 31, 1996, were $37,988,000 compared to $25,777,000 for
the year ended December 31, 1995, representing an increase of $12,211,000, or
47.4%. The increase in general and administrative expenses resulted from
increased lease costs, reference laboratory services, telecommunications, and
maintenance and other occupancy costs to support both the Company's additional
and expanded service locations. The percentage of general and administrative
expenses to total revenues was 15.9% for the year ended December 31, 1996,
compared to 18.8% for the year ended December 31, 1995. The decrease in the
percentage is due to the addition of enhanced services at the Company's
practice site locations, primarily during the latter half of 1995, that did not
result in corresponding increases in general and administrative expenses.
PROVISION FOR UNCOLLECTIBLE ACCOUNTS. The provision for uncollectible
accounts for the year ended December 31, 1996, was $11,030,000 compared to
$8,483,000 for the year ended December 31, 1995, representing
16
<PAGE> 17
an increase of $2,547,000 or 30.0%. The provision for uncollectible accounts
represents the Company's estimate of current collection experience.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the
year ended December 31, 1996, was $15,894,000 compared to $7,653,000 for the
year ended December 31, 1995, representing an increase of $8,241,000, or
107.7%. Depreciation increased $6,052,000 as a result of the additional office
and cancer center locations that were opened or assumed by the Company since
1995. Amortization increased $2,189,000 as a result of the increase in Service
Agreement costs incurred as consideration for the Affiliated Physician Groups
entering into Service Agreements. These costs are amortized over the term of
the related Service Agreements.
INTEREST. Interest expense for the year ended December 31, 1996, was
$1,939,000 compared to $672,000 for the year ended December 31, 1995,
representing an increase of $1,267,000, or 188.5%. The increase in interest
expense was due to increased amounts owed to Affiliated Physician Groups as
consideration, in part, for entering into Service Agreements with the Company.
In addition, the Company borrowed funds under the Revolver at the beginning of
1996, which amounts were repaid using proceeds from the Company's public
offering of Common Stock in April 1996. No amounts were outstanding under the
Revolver at December 31, 1996.
INCOME TAXES. Income taxes were $13,271,000 for the year ended
December 31, 1996, compared to $9,190,000 for the year ended December 31, 1995,
representing an increase of $4,081,000, or 44.4%. 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 then in effect.
SUMMARY OF OPERATIONS BY QUARTER
The following table presents unaudited quarterly operating results for
each of the Company's last eight fiscal quarters. The Company believes that
all necessary adjustments have been included in the amounts stated below to
present fairly the quarterly results when read in conjunction with the
Consolidated Financial Statements. Future quarterly results may fluctuate
depending on the addition of physicians, physician offices, and cancer centers.
Results of operations for any particular quarter are not necessarily indicative
of results of operations for a full year or predictive of future periods.
17
<PAGE> 18
<TABLE>
<CAPTION>
1996 QUARTER ENDED 1997 QUARTER ENDED
----------------------------------------- ------------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Total ........................... $ 49,710 $ 56,570 $ 62,817 $ 69,222 $ 72,773 $ 72,714 $ 84,483 $ 87,465
Income (loss) before
income taxes ................. 8,551 9,803 8,028 7,385 8,426 (34,229) 7,832 8,353
Net incom ....................... 5,173 5,976 4,856 4,491 5,098 (22,383) 4,908 5,145
NET INCOME (LOSS) PER SHARE:
Net income (loss) per
common share (1)(3)
Basic ..................... $ 0.12 $ 0.13 $ 0.10 $ 0.09 $ 0.10 $ (0.44) $ 0.10 $ 0.10
Fully diluted ............. 0.12 0.13 0.10 0.09 0.10 (0.44) 0.10 0.10
Weighted average shares
outstanding (1)(3)
Basic ..................... 42,514 46,658 48,494 48,857 50,550 50,562 50,599 50,735
Fully diluted ............. 43,545 47,689 49,141 49,307 50,733 50,562 51,051 51,324
OPERATING DATA:
Medical practice revenues ....... $ 63,440 $ 71,125 $ 80,218 $ 82,124 $ 87,260 $ 91,986 $ 97,972 $110,223
Number of physicians(2) ......... 225 240 275 290 299 318 326 326
Number of full time
physician offices (2) ........ 48 53 60 64 64 66 68 74
Number of cancer
centers(2) ................... 16 17 17 17 17 22 22 23
Number of states ................ 7 9 10 11 11 11 12 12
</TABLE>
(1) Per share and share data presented for the quarter ended March 31,
1996, have been restated to reflect a two-for- one stock split that was
effected in the form of a stock dividend on June 10, 1996.
(2) At period end.
(3) Basic and diluted earnings per share are presented in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings per
Share," and replaces primary and basic earnings per share previously
reported. See Note 9 of the Notes to the Company's Consolidated
Financial Statements.
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 cancer centers and medical offices, financing receivables, and acquiring
assets from and entering into Service Agreements with Affiliated Physician
Groups.
Net cash provided by operations for the year ended December 31, 1997,
was $6,705,000. Net cash provided by operations includes an $8,158,000
increase in income tax receivable. This cash will be received when the Company
files its current year tax return, which will result in a refund of the taxes
paid in calendar year 1997. The balance of the refund will be received by
carrying back the remaining loss to prior year tax returns. The Company has
advanced to its Affiliated Physician Groups amounts needed for working capital
purposes primarily to assist with the development of new markets. The advances
increased approximately $6,723,000 to $15,312,000 at December 31, 1997, as
compared to $8,589,000 at December 31, 1996. These advances bear interest at a
market rate (8.5% at December 31, 1997).
18
<PAGE> 19
Net cash used in investing activities for the year ended December 31,
1997, was $39,345,000. During the year ended December 31, 1997, the Company
paid approximately $8,467,000 to Affiliated Physician Groups in connection with
entering into Service Agreements. The Company contributed $4,058,000 for a 50%
general partner interest in a limited partnership formed to construct a new
cancer center in Eugene, Oregon. The Company also completed the construction
of cancer centers in Fort Worth, Texas; Austin, Texas; and Abilene, Texas. In
addition to the cancer center in Eugene, Oregon, the Company commenced
construction of new cancer centers in Maplewood, Minnesota, and Columbia,
Missouri. These expenditures were funded primarily from borrowings under the
Revolver.
Net cash flows from financing activities for the year ended December
31, 1997, were $27,733,000. At December 31, 1997, borrowings under the
Revolver were $32,000,000, which were used to finance the Company's ongoing
construction and development activities, the acquisition of equipment, payments
in connection with management service agreement transactions, and for working
capital purposes. During the year ended December 31, 1997, payments of
$4,698,000 were made to Affiliated Physician Groups on Company-financed notes
that were issued as part of the consideration for entering into Service
Agreements.
The Revolver provides for maximum borrowings of $140,000,000. The
Company has the option of financing borrowings under the Revolver at either a
LIBOR-based rate (LIBOR plus .70% at December 31, 1997) or at Bank One Texas,
N.A.'s prime rate (8.5% at December 31, 1997). The Revolver contains covenants
that, among other things, require the Company to maintain certain financial
ratios and impose restrictions on the Company's ability to pay cash dividends,
sell assets, and redeem or repurchase the Company's securities. At December
31, 1997, $32,000,000 was outstanding under the Revolver, and $108,000,000 was
available for borrowing.
The Company expects that its principal use of funds in the foreseeable
future will be for the construction of cancer centers and the acquisition of
related equipment; the acquisition of medical practice assets; payments to
Affiliated Physician Groups as consideration for entering into Service
Agreements; 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 unused borrowing capacity under the Revolver will
be sufficient to meet its needs; and, therefore, the Company does not
anticipate raising capital through offerings of common stock to the public in
the near- term. The Company believes 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 1998, including but not
limited to increasing the amount available for borrowing under the Revolver.
However, no assurance exists that such additional financing will be available
in the future or that, if available, it 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.
YEAR 2000 COMPLIANCE
The Company is dependent upon its computer systems to bill patients
for services rendered by the Affiliated Physician Groups and to accumulate and
report the related revenues and expenses of Affiliated Physician Groups. The
Company's principal patient accounting system is not currently capable of
processing year 2000 transactions; however, the vendor is currently addressing
the modifications that are required to make the system operational for the year
2000. In addition, the Company is currently installing a new general ledger,
materials management, and accounts payable system that is year 2000 compatible.
This new financial system is expected to be fully installed and operational by
the third quarter of 1998. The Company does not believe the costs to make
their patient accounting systems and other ancillary computer systems
operational for the year 2000 will be material and such costs will be funded
through operations or working capital advances under the Revolver.
19
<PAGE> 20
FORWARD-LOOKING STATEMENTS/RISK FACTORS
This Form 10-K contains certain forward-looking statements regarding
the anticipated financial and operating results of the Company. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. 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 the Affiliated Physician Groups, particularly 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,
particularly TOPA; the Company's ability to obtain suitable financing to
support its expansion objectives; the Company's ability to effectively collect
its accounts receivable; increases in the costs of pharmaceuticals; changes in
governmental regulation regarding 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; and potential exposure to professional and product liability claims.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
20
<PAGE> 21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS PAGE
- ----------------------------- ----
<S> <C>
Report of Independent Public Accountants 22
Consolidated Balance Sheets as of December 31, 1996 and 1997 23
Consolidated Statements of Income for the Years Ended 25
December 31, 1995, 1996, and 1997
Consolidated Statements of Stockholders' Equity for the 26
Years Ended December 31, 1995, 1996, and 1997
Consolidated Statements of Cash Flows for the 27
Years Ended December 31, 1995, 1996, and 1997
Notes to Consolidated Financial Statements 28
INDEX TO FINANCIAL STATEMENT SCHEDULES
- --------------------------------------
Report of Independent Public Accountants 44
Schedule II - Reserves for Uncompensated Care 45
</TABLE>
For selected quarterly financial data, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Summary of
Operations by Quarter" beginning on page 12 hereof.
21
<PAGE> 22
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Physician Reliance Network, Inc.:
We have audited the accompanying consolidated balance sheets of Physician
Reliance Network, Inc. (a Texas corporation - Note 1) and subsidiaries as of
December 31, 1996 and 1997, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1995, 1996, and 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Physician Reliance Network,
Inc. and subsidiaries as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, 1996, and 1997, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
February 6, 1998
22
<PAGE> 23
PHYSICIAN RELIANCE NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 7,679 $ 2,772
Investment in common stock, net of valuation allowance of
$1,131 at December 31, 1997 -- 2,301
Accounts receivable, net of allowances of $19,797 and
$49,818 at December 31, 1996 and 1997, respectively 94,599 87,160
Due from related parties 8,589 15,312
Other receivables 1,238 2,855
Inventories 4,481 8,078
Prepaid expenses and other 1,067 1,445
Income tax receivable 657 8,815
Deferred income tax 507 1,089
--------- ---------
Total current assets 118,817 129,827
--------- ---------
Property and equipment:
Land 12,493 15,240
Buildings 51,511 62,084
Furniture and equipment 99,162 121,363
Construction-in-progress 7,898 472
--------- ---------
171,064 199,159
Less- Accumulated depreciation (29,394) (46,676)
--------- ---------
Net property and equipment 141,670 152,483
--------- ---------
Investments 1,734 4,717
Service agreements, net of accumulated amortization of $2,387
and $4,959 at December 31, 1996 and 1997, respectively 86,383 104,773
Excess of purchase price over the fair value of net assets
acquired, net of accumulated amortization of $525 and $866
at December 31, 1996 and 1997, respectively 5,751 7,793
Other assets, net 986 1,041
--------- ---------
Total assets $ 355,341 $ 400,634
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
23
<PAGE> 24
PHYSICIAN RELIANCE NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands, except per share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1997
--------- ---------
<S> <C> <C>
Current liabilities:
Accounts payable $ 21,400 $ 24,380
Accrued liabilities-
Salaries and benefits 4,739 7,969
Other 3,153 3,262
--------- ---------
7,892 11,231
Deferred revenue -- 1,904
Due to related parties 6,060 4,908
Current maturities of long-term debt 4,696 8,138
Current maturities of capital lease obligations -- 545
--------- ---------
Total current liabilities 40,048 51,106
Long-term debt, net of current maturities 14,121 42,009
Capital lease obligations, net of current maturities -- 377
Subordinated convertible promissory notes -- 7,275
Construction and retainage payable 540 275
Deferred income taxes 5,856 9,042
Minority interest -- 246
--------- ---------
Total liabilities 60,565 110,330
--------- ---------
Commitments and contingencies
Stockholders' equity:
Series A and B preferred stock, 10,000 shares authorized,
no shares issued or outstanding -- --
Series One Junior preferred stock, 500 shares authorized,
no shares issued or outstanding -- --
Common stock, no par value, $.01 stated value per
share, 150,000 shares authorized, 47,631 and 48,999 shares
issued at December 31, 1996 and 1997, respectively 476 490
Additional paid-in capital 230,024 240,543
Common stock to be issued, 1,351 shares 26,962 19,885
Valuation adjustment - Investment in common stock -- (696)
Retained earnings 37,314 30,082
--------- ---------
Total stockholders' equity 294,776 290,304
--------- ---------
Total liabilities and stockholders' equity $ 355,341 $ 400,634
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
24
<PAGE> 25
PHYSICIAN RELIANCE NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Management fees $ 129,222 $ 224,493 $ 291,208
Other revenues 8,051 13,826 26,227
--------- --------- ---------
Total revenues 137,273 238,319 317,435
--------- --------- ---------
Costs and expenses:
Salaries and benefits 37,778 66,879 86,862
Pharmaceuticals and supplies 33,605 70,822 105,758
General and administrative 25,777 37,988 57,606
Provision for uncollectible accounts 8,483 11,030 51,703
Depreciation and amortization 7,653 15,894 21,017
Interest expense 672 1,939 4,107
--------- --------- ---------
Total costs and expenses 113,968 204,552 327,053
--------- --------- ---------
Income (loss) before taxes 23,305 33,767 (9,618)
Provision (benefit) for income taxes:
Current 4,006 12,213 (5,425)
Deferred 5,184 1,058 3,039
--------- --------- ---------
Total provision (benefit) for income taxes 9,190 13,271 (2,386)
--------- --------- ---------
Net income (loss) $ 14,115 $ 20,496 $ (7,232)
========= ========= =========
Net income (loss) per common share
Basic $ 0.35 $ 0.44 $ (0.14)
========= ========= =========
Diluted
$ 0.34 $ 0.43 $ (0.14)
========= ========= =========
Weighted average shares outstanding
Basic 40,462 46,643 50,635
========= ========= =========
Diluted 41,012 47,433 50,635
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
25
<PAGE> 26
PHYSICIAN RELIANCE NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
VALUATION
ADJUSTMENT -
COMMON STOCK ADDITIONAL COMMON INVESTMENT IN
--------------------- PAID-IN STOCK TO COMMON RETAINED SUBSCRIPTION
SHARES AMOUNT CAPITAL BE ISSUED STOCK EARNINGS RECEIVABLE TOTAL
--------- --------- --------- --------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1994 37,708 $ 377 $ 84,142 $ -- $ -- $ 2,703 $ (6,600) $ 80,622
Issuance of
common stock 4,000 40 37,743 -- -- -- -- 37,783
Common stock to
be issued -- -- -- 6,814 -- -- -- 6,814
Net income -- -- -- -- -- 14,115 -- 14,115
Payment on
common stock
subscribed -- -- -- -- -- -- 6,400 6,400
--------- --------- --------- --------- --------- --------- --------- ---------
Balance,
December 31, 1995 41,708 417 121,885 6,814 -- 16,818 (200) 145,734
Issuance of
common stock 5,923 59 108,139 (1,602) -- -- -- 106,596
Common stock to
be issued -- -- -- 21,750 -- -- -- 21,750
Net income -- -- -- -- -- 20,496 -- 20,496
Payment on
common stock
subscribed -- -- -- -- -- -- 200 200
--------- --------- --------- --------- --------- --------- --------- ---------
Balance,
December 31, 1996 47,631 476 230,024 26,962 -- 37,314 -- 294,776
Issuance of
common stock 1,368 14 10,519 (9,341) -- -- -- 1,192
Common stock to
be issued -- -- -- 2,264 -- -- -- 2,264
Net loss -- -- -- -- -- (7,232) -- (7,232)
Valuation
adjustment -
Investment in
common stock -- -- -- -- (696) -- -- (696)
--------- --------- --------- --------- --------- --------- --------- ---------
Balance,
December 31, 1997 48,999 $ 490 $ 240,543 $ 19,885 $ (696) $ 30,082 $ -- $ 290,304
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
26
<PAGE> 27
PHYSICIAN RELIANCE NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 14,115 $ 20,496 $ (7,232)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities-
Depreciation and amortization 7,810 15,894 21,017
Deferred income taxes 5,104 1,058 3,039
Writedown of accounts receivable and certain assets -- -- 40,655
Undistributed earnings of investments 9 -- (437)
Gain on sale of investment in ambulatory surgery center -- -- (511)
Amortization of deferred revenues -- -- (1,716)
Changes in operating assets and liabilities-
Increase in accounts receivable, net (28,888) (44,743) (32,905)
(Increase) decrease in other receivables 30 (5,860) (16,498)
Increase in inventories and prepaid expenses (3,449) (294) (3,975)
Increase in accounts payable and accrued liabilities 8,449 12,501 6,420
Increase (decrease) in due to related party (2,241) 4,955 (1,152)
--------- --------- ---------
Net cash provided by operating activities 939 4,007 6,705
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures (49,572) (58,203) (27,582)
Construction and retainage 2,362 (6,966) (265)
Service agreements (13,627) (21,131) (9,593)
Capital contributions to limited partnership -- -- (4,058)
Proceeds received from sale of investment in ambulatory
surgery center -- -- 1,950
Other (1,918) (2,774) 203
--------- --------- ---------
Net cash used in investing activities (62,755) (89,074) (39,345)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from long-term borrowings 30,731 36,000 32,000
Payments on long-term borrowings (9,978) (58,329) (4,698)
Long-term debt issuance costs -- -- (333)
Issuance of common stock 36,570 102,470 764
Proceeds from subscription receivable 6,400 200 --
--------- --------- ---------
Net cash provided by financing activities 63,723 80,341 27,733
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 1,907 (4,726) (4,907)
Cash and cash equivalents, beginning of period 10,498 12,405 7,679
--------- --------- ---------
Cash and cash equivalents, end of period $ 12,405 $ 7,679 $ 2,772
========= ========= =========
Cash paid during the period:
Interest, net of amount capitalized $ 330 $ 1,561 $ 3,248
Income taxes 4,069 7,355 2,951
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
27
<PAGE> 28
PHYSICIAN RELIANCE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share information)
1. ORGANIZATION:
General
Physician Reliance Network, Inc. ("PRN" or the "Company") was formed by
Texas Oncology P.A. ("TOPA") in June 1993. The Company provides the management
services, facilities and equipment, administrative and technical support, and
ancillary services necessary for physicians to establish and maintain a
fully-integrated network of outpatient oncology care. The Company also
operates directly and indirectly through its wholly-owned subsidiaries TOPS
Pharmacy Services, Inc. and PRN Research, Inc. and through its 80 percent
interest in Innovative Medical Communications, Inc.
As of December 31, 1997, the Company had operations in Texas, Iowa, Oregon,
Washington, Missouri, Maryland, Arkansas, New York, Minnesota, Illinois,
Florida, and New Mexico and provided its services to 326 physicians.
Service Agreements
The Company enters into service agreements (the "Service Agreements") with
physician groups (the "Affiliated Physician Groups"). Under the Service
Agreements, the Company is the sole and exclusive manager of all day-to-day
business functions of the Affiliated Physician Groups providing facilities,
equipment, supplies, support personnel, and management and financial advisory
services. In return, the Company receives a monthly fee. The Service
Agreements generally have 40 year initial terms with automatic five-year
extensions thereafter unless either party gives notice not to renew to the
other prior to the expiration term. The Service Agreements generally are not
terminable earlier by the Affiliated Physician Groups except in the event of
the Company's bankruptcy or material breach of the Service Agreement.
The Company's most significant Service Agreement is with TOPA, and it
accounted for approximately 97%, 85%, and 63% of the Company's management fee
revenue for the years ended December 31, 1995, 1996, and 1997, respectively.
2. SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The consolidated financial statements include the accounts of PRN and its
subsidiaries for the years ended December 31, 1995, 1996, and 1997. All
significant intercompany transactions have been eliminated. Certain prior
period amounts have been reclassified to conform with the current year
presentation.
28
<PAGE> 29
PHYSICIAN RELIANCE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash and cash equivalents.
Accounts Receivable
Accounts receivable represent receivables from patients and other
third-party payors for medical services provided by the Affiliated Physician
Groups. Generally, under the terms of the Service Agreements, the Company
purchases the accounts receivable outstanding at the end of each month from the
Affiliated Physician Groups, net of estimated allowances. Therefore, accounts
receivable are a function of medical practice revenues (gross billings less
estimated contractual and other adjustments, "Medical Practice Revenues")
rather than the management fee earned by the Company ("Management Fee").
Accounts receivable are stated net of an allowance for uncollectibles,
which is charged to operations or to the Affiliated Physician Group under
Service Agreements, as appropriate, based on an evaluation of potential losses.
Due from Related Parties
The Company has advanced to certain of its Affiliated Physician Groups,
primarily TOPA, amounts needed for working capital purposes primarily to assist
with the development of new markets. The advances bear interest at a rate
negotiated by the Company and the Affiliated Physician Groups, which
approximates the prime lending rate (8.50% at December 31, 1997).
Inventories
Inventories consist of pharmaceuticals and medical supplies and are carried
at the lower of cost or market on a first-in, first-out basis.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over estimated useful lives, generally 25 years for
buildings and ranging from 3 to 10 years for furniture and equipment.
Depreciation expense was $7,037, $13,090, and $17,442 for the years ended
December 31, 1995, 1996, and 1997, respectively. Maintenance costs and repairs
are expensed as incurred. Interest costs incurred during the construction of
major capital additions are capitalized as property. The Company capitalized
interest costs of approximately $78 for the year ended December 31, 1996. No
interest was capitalized for the year ended December 31, 1997.
29
<PAGE> 30
PHYSICIAN RELIANCE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Management Service Agreements and Excess of Purchase Price Over the Fair Values
of Net Assets Acquired
The Company pays certain Affiliated Physician Groups amounts as
consideration for entering into a Service Agreement. These costs are amortized
over the initial term of the related Service Agreement and are reflected as
Service agreements in the accompanying consolidated balance sheets. The
Company has acquired certain businesses and paid amounts in excess of the fair
value of the net assets received. The amounts recorded for excess of purchase
price over the fair value of net assets acquired are being amortized on a
straight-line basis over 20 years and are reflected as Excess of purchase price
over the fair value of net assets acquired in the accompanying consolidated
balance sheets.
Construction and Retainage Payable
Construction and retainage payable are reflected as long-term liabilities
since these costs are expected to be financed with long-term debt.
Management Fees
Management fees represent Medical Practice Revenues less amounts retained
by physicians. The amounts retained by physicians represent the contractual
amounts retained by Affiliated Physician Groups under Service Agreements and
are used by the Affiliated Physician Groups to provide physician salaries,
benefits, malpractice, and other expenses incidental to their practice.
The following table summarizes the derivation of Management Fees for the
years ended December 31, 1995, 1996, and 1997.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Medical Practice Revenues..... $ 190,664 $ 296,907 $ 387,391
Amounts Retained by
Physicians................... (61,442) (72,414) (96,183)
-------- --------- ---------
Management Fees............. $ 129,222 $ 224,493 $ 291,208
========= ========= =========
</TABLE>
Medical Practice Revenues include amounts expected to be collected from
government-sponsored health care programs (principally Medicare and Medicaid).
Approximately 35%, of Medical Practice Revenues represented services rendered
under such government-sponsored health care programs for the years ended
December 31, 1995, 1996, and 1997. Revenue under certain third-party payor
agreements is subject to audit and retroactive adjustments. No material claims,
disputes, or other unsettled matters exist to management's knowledge concerning
third-party reimbursements.
Income Taxes
The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes." Deferred taxes
arise primarily from the recognition of revenues and expenses in different
periods for income tax and financial reporting purposes.
30
<PAGE> 31
PHYSICIAN RELIANCE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Net Income (Loss) Per Common Share
Effective December 15, 1997, the Company adopted SFAS No. 128, "Earnings
Per Share." Under SFAS No. 128, the basic earnings per share is calculated by
dividing net income by the weighted average number of shares of common stock
outstanding during the period. Common stock to be issued at a future date to
Affiliated Physician Groups is treated as outstanding in determining basic
earnings per share. In addition, diluted earnings per share is calculated
using the weighted average number of shares of common stock and common stock
equivalents. Per share amounts and weighted average number of shares
outstanding for the years ended December 31, 1995 and 1996, have been restated
to conform with the requirements of SFAS No. 128.
Financial Instruments
The Company discloses the estimated fair values of its financial
instruments in accordance with SFAS No. 107, "Disclosure about Fair Value of
Financial Instruments." Cash and cash equivalents, investment in common stock,
accounts receivable, accounts payable, and accrued liabilities are reflected in
the consolidated balance sheets at fair value because of the short-term
maturity of those instruments. The fair value of long-term debt at December
31, 1997, was $59,422 compared to its carrying value of $58,344 and at December
31, 1996, was $19,510 compared to its carrying value of $18,817. The fair
value of long-term debt was determined using the Company's incremental
borrowing rate under the Company's revolving credit facility (the "Revolver")
at December 31, 1997 (7.0%) and December 31, 1996 (6.5%).
Long-Lived Assets
On January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets to be Disposed Of." Under SFAS No. 121, the
amounts recorded by the Company for property and equipment, Service Agreements,
and other assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. If this review indicates that the carrying amounts of an asset
may not be recoverable, as determined based on the undiscounted cash flows of
the operations acquired over the remaining amortization period, the carrying
value of the asset is reduced to fair value. Among the factors that the
Company will continually evaluate are unfavorable changes in each of the
geographic markets in which the Company has entered into Service Agreements,
including the relative market share of the Affiliated Physician Group, the
competitive environment, current period and forecasted operating and cash flow
levels from the Company's Service Agreements, and legal and regulatory factors
governing reimbursement and the practice of medicine.
Accounting Pronouncements Not Adopted
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," which requires presentation of total nonowner
changes in equity for all periods displayed. The Company plans to adopt this
statement for the year ending December 31, 1998.
In June 1997, the Financial Accounting Standards Board also issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information."
This standard defines reporting requirements for operating segments and related
information about products and services, geographic areas, and reliance on
major customers. The Company is evaluating the impact of this statement on its
current reporting and expects to adopt the new standard for its year ending
December 31, 1998.
31
<PAGE> 32
PHYSICIAN RELIANCE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Supplemental Cash Flow Information
During 1997, the Company acquired $14,231 in assets net of assumed
liabilities in exchange for common stock of $470, notes payable of $1,909,
subordinated convertible promissory notes of $9,400, and commitments to issue
common stock of $2,452 in connection with the execution of Service Agreements.
The Company also acquired $921 in equipment through the assumption of the
related capital lease obligations. In addition, the Company acquired $3,432 in
common stock of Ilex(TM) Oncology, Inc. ("ILEX") as consideration for entering
into an agreement and provided a valuation allowance for the investment in
common stock of $1,131, net of applicable income taxes of $435. See Note 3-
Investment in Common Stock.
3. INVESTMENT IN COMMON STOCK:
On June 30, 1997, one of the Company's subsidiaries, PRN Research, Inc.,
entered into a comprehensive clinical development alliance with ILEX, a drug
development company focused exclusively on cancer. Under the terms of the
agreement, the Company will refer all contract research business to ILEX. In
1997, ILEX issued to the Company 312 shares of ILEX common stock. In addition,
ILEX will issue 315 shares of ILEX common stock to the Company in each of 1998,
1999, and 2000. ILEX will also issue up to 1,256 additional shares of ILEX
common stock through 2000 contingent upon the performance of ILEX's contract
clinical research business and other conditions.
The Company accounts for its investment in common stock in accordance with
SFAS No. 115, "Accounting for Certain Instruments in Debt and Equity
Securities." In accordance with SFAS No. 115, the Company's investment in
common stock is considered available for sale. Available-for-sale securities
represent those securities that do not meet the classification of
held-to-maturity, are not actively traded, and are carried at fair value.
Unrealized gains and losses on these securities are excluded from earnings and
are reported as a separate component of stockholders' equity, net of applicable
taxes, until realized.
The fair value of the shares received of $3,432 was recorded as investment
in common stock and deferred revenues as of the date of the transaction. The
deferred revenue is being amortized into income over a twelve-month period and
is reflected in other revenues in the accompanying consolidated statements of
income.
As of December 31, 1997, a valuation allowance of $1,131 was provided as a
result of a decline in the market value of ILEX common stock. In accordance
with the provisions of SFAS No. 115, the valuation allowance is shown as a
reduction to stockholders' equity net of applicable income taxes of $435.
4. INVESTMENTS:
Investments at December 31, 1996, and 1997, consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1997
------ ------
<S> <C> <C>
Oregon Cancer Center, Ltd. ("OCCL") $ -- $4,494
Texas Surgery Center, Ltd. ("TSCL") 1,459 --
Real estate partnership 275 223
------ ------
$1,734 $4,717
====== ======
</TABLE>
32
<PAGE> 33
PHYSICIAN RELIANCE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company accounts for its investments in partnerships using the equity
method of accounting.
On February 1997, the Company disposed of its 46% general partnership
interest in TSCL for $1,950 and recognized a gain of $511. TSCL operated an
out-patient ambulatory surgery center located in Dallas, Texas.
In June 1997, the Company acquired a 50% general partnership interest in
OCCL for $3,200. OCCL was formed to construct a 32,000 square foot cancer
center in Eugene, Oregon. The Company contributed its position in its Service
Agreement with the Affiliated Physician Group in Eugene, Oregon, and OCCL's
sole limited partner, a hospital located in Eugene, Oregon, contributed its
radiation therapy business. Additional capital contributions of $858 were made
in 1997 by each of the general and limited partners to finance the construction
of the cancer center.
5. LONG-TERM DEBT AND SUBORDINATED CONVERTIBLE PROMISSORY NOTES:
Long-term debt and subordinated convertible promissory notes consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
DESCRIPTION 1996 1997
- --------------------------------------------------------------- --------- ---------
<S> <C> <C>
Credit Facility bearing interest at prime (8.25% and 8.5% at
December 31, 1996 and 1997, respectively) or LIBOR
(5.5% and 5.3% at December 31, 1996 and 1997,
respectively) plus 1% and 0.9% at December 31, 1996 and
1997 respectively, maturing in 2002 $ -- $ 32,000
Notes payable bearing interest at rates ranging from 8%
to 10%, maturing between 1999 to 2005 18,817 16,022
Subordinated convertible promissory notes bearing interest at
rates ranging from 6% to prime plus 1%, maturing between
1998 and 2002 -- 9,400
--------- ---------
Total 18,817 57,422
Less-current maturities (4,696) (8,138)
--------- ---------
Long-term debt $ 14,121 $ 49,284
========= =========
</TABLE>
Effective June 6, 1997, the Company amended the Revolver. The amendment,
among other things, increased the amounts available for borrowing under the
Revolver from $90 million to $140 million and reduced the interest rate charged
on borrowings. The Revolver matures June 6, 2002. The Revolver contains
covenants that, among other things, require the Company to maintain certain
financial ratios and imposes restrictions on the Company's ability to incur
future indebtedness, pay dividends, sell assets, or redeem or repurchase
Company securities. At December 31, 1997, the Company was in compliance with
the Revolver covenants and had $108 million available under the Revolver for
borrowing.
In April 1997, the Company issued $8,500 of convertible promissory notes as
partial consideration for physician groups to enter into a Service Agreement.
The notes bear interest at the prime rate plus 1% and are convertible at the
option of the holder of the notes into 1,559 shares of the Company's common
stock over each of the next four years. In July 1997, the Company issued $900
of convertible promissory notes as partial consideration for a physician group
to enter into a Service Agreement. The notes bear interest at 6% and are
convertible at the option of the holder of the notes into 67 shares of the
Company's common stock in 2002.
33
<PAGE> 34
PHYSICIAN RELIANCE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
As of December 31, 1997, the maturities of long-term debt and subordinated
convertible promissory notes are as follows:
<TABLE>
<CAPTION>
Subordinated
Long-Term Convertible
Debt Promissory Notes Total
------------ ---------------- ------------
<S> <C> <C> <C>
1998 $ 6,013 $ 2,125 $ 8,138
1999 5,599 2,125 7,724
2000 3,516 2,125 5,641
2001 450 2,125 2,575
2002 32,115 900 33,015
Thereafter 329 -- 329
------------ ------------ ------------
$ 48,022 $ 9,400 $ 57,422
============ ============ ============
</TABLE>
6. LEASES:
In December 1997, the Company assumed capital lease obligations associated
with medical equipment in connection with the acquisition of a diagnostic
imaging center. The gross amount of assets under capital leases at December
31, 1997, is $920 and is shown in furniture and equipment in the accompanying
consolidated balance sheets. The Company had no assets under capital leases at
December 31, 1996.
Future minimum lease payments under capital leases together with the
present value of the net minimum lease payments as of December 31, 1997, are:
<TABLE>
<S> <C>
1998 $ 585
1999 388
2000 8
------
Total minimum lease payments 981
Less: Amount representing interest (59)
------
Present value of minimum lease payments $ 922
======
</TABLE>
The Company leases certain facilities and equipment under operating leases.
Generally, real estate leases are for primary terms of three to five years for
medical offices and ten to 15 years for leased cancer centers with options to
renew for additional periods, and equipment leases are for terms of one to four
years.
Future commitments under noncancelable operating leases as of December 31,
1997, are as follows:
<TABLE>
<S> <C>
1998 $13,927
1999 12,442
2000 11,480
2001 10,035
2002 8,215
Thereafter 31,618
-------
$87,717
=======
</TABLE>
Rent expense was $6,685, $11,252, and $15,609 for the years ended December
31, 1995, 1996, and 1997, respectively.
34
<PAGE> 35
PHYSICIAN RELIANCE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES:
The Company enters into commitments with various construction companies
and equipment vendors in connection with the development of cancer centers. As
of December 31, 1997, the Company's commitments were approximately $6,000.
The provision of medical services and the conduct of clinical trials
by the Affiliated Physician Groups entail an inherent risk of professional
liability claims. The Company does not control the practice of medicine by
physicians or the compliance with certain regulatory and other requirements
directly applicable to physicians and physician groups. Because the Company
purchases and resells pharmaceutical products and related medical supplies, it
faces the risk of product liability claims. The Company from time to time is a
party to claims, suits, or complaints relating to services and products
provided by the Company or physicians to whom the Company provides services.
The Company maintains insurance coverage that it believes to be adequate both
as to risks and amounts. In addition, pursuant to the Service Agreements, the
Affiliated Physician Groups are required to maintain comprehensive professional
liability insurance. Successful malpractice claims asserted against Affiliated
Physician Groups or the Company could, however, have a material adverse effect
on the Company.
In March 1996, Methodist Hospitals of Dallas ("Methodist") filed a
lawsuit against the Company and TOPA asserting various claims, including claims
of monopolization and unfair competition. This matter is set for trial in
March 1998. See Note 13 -- "Subsequent Event."
In September 1996, the Company was named as defendant in various suits
representing a class of all persons who purchased and still owned shares from
the period of November 1996 through the date that the suits were filed. In
general, these suits asserted that the Company failed to disclose that it had
engaged in certain improper accounting practices, that the relationship between
the Company and certain of the Affiliated Physician Groups violated federal and
state law, and that certain of the Affiliated Physician Groups have charged the
Medicare program amounts in excess of the cost of delivering certain services.
In December 1997, the Company reached an agreement to settle these lawsuits.
In January and February, 1998, these cases were dismissed with prejudice, and
all members of the settlement class became barred from prosecuting, pursuing,
or litigating any claims asserted in these cases.
The service agreement with the Minnesota physician group provides for
a reduction of the Company's management fee under certain circumstances. For
the year ended December 31, 1997, the Company's management fees was reduced by
$847.
35
<PAGE> 36
PHYSICIAN RELIANCE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
8. INCOME TAXES:
The provision (benefit) for income taxes for the years ended December 31,
1995, 1996, and 1997, consisted of the following:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal $ 3,705 $ 10,869 $ (6,690)
State 301 1,344 1,265
Deferred:
Federal 4,436 876 2,726
State 748 182 313
---------- ---------- ----------
Total $ 9,190 $ 13,271 $ (2,386)
========== ========== ==========
</TABLE>
A reconciliation between reported income tax expense and the amount
computed by applying the statutory Federal income tax rate of 34% for the years
ended December 31, 1995, 1996, and 1997, is as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Computed tax expense (benefit) $ 7,924 $ 11,481 $ (3,270)
State taxes 1,049 1,526 1,578
Federal deduction for state taxes (367) (534) (552)
Incremental federal tax rate 234 338 (96)
Other, net 350 460 (46)
-------- -------- --------
Total $ 9,190 $ 13,271 $ (2,386)
======== ======== ========
</TABLE>
The components of deferred income tax expense for the years ended December
31, 1995, 1996, and 1997, are as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Allowance for doubtful accounts $ 2,247 $ (37) $ (10)
Expenses incurred in connection with the
Reorganization 149 (132) --
Property and equipment 2,995 568 2,161
Management service agreement and other
asset amortization 154 804 1,034
Accrued vacation (361) (145) (146)
-------- -------- --------
$ 5,184 $ 1,058 $ 3,039
======== ======== ========
</TABLE>
36
<PAGE> 37
PHYSICIAN RELIANCE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The tax effects of temporary differences that give rise to the deferred tax
assets and liabilities at December 31, 1996 and 1997, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
--------- ---------
<S> <C> <C>
Deferred tax assets-
Accrued vacation $ 507 $ 654
Valuation adjustment-Investment in common stock -- 435
--------- ---------
Total deferred tax assets 507 1,089
Deferred tax liabilities-
Property and equipment (5,029) (7,248)
Management service agreements and other assets (954) (1,987)
Reorganization expenses and other 127 193
--------- ---------
Total deferred tax liabilities (5,856) (9,042)
--------- ---------
Net deferred tax liabilities $ (5,349) $ (7,953)
========= =========
</TABLE>
9. EARNINGS PER SHARE:
The following is a reconciliation of the components of earnings per share
for the years ended December 31, 1995, 1996, and 1997.
<TABLE>
<CAPTION>
Year Ended December 31, 1995 --
PER-SHARE
INCOME SHARES AMOUNT
------ ------ ------
<S> <C> <C> <C>
Basic earnings per share
Income available to common stockholders $14,115 40,462 $0.35
Effect of Dilutive Securities
Stock options -- 550 (0.01)
------- ------ -----
Diluted earnings per share
$14,115 41,012 $0.34
======= ====== =====
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1996 --
PER-SHARE
INCOME SHARES AMOUNT
------ ------ ------
<S> <C> <C> <C>
Basic earnings per share
Income available to common stockholders $20,496 46,643 $0.44
Effect of dilutive securities
Stock option -- 790 (0.01)
------ ------ ------
Diluted earnings per share $20,496 47,433 $0.43
======= ====== =====
</TABLE>
37
<PAGE> 38
PHYSICIAN RELIANCE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
For the year ended December 31, 1996, 823 shares related to stock options
were not included in the computation of diluted earnings per share because the
option exercise price was greater than the average market price of the common
shares.
Year Ended December 31, 1997 --
<TABLE>
<CAPTION>
PER-SHARE
LOSS SHARES AMOUNT
---- ------ ------
<S> <C> <C> <C>
Basic and diluted earnings per share
Income available to common stockholders $(7,232) 50,635 $(0.14)
</TABLE>
Because the Company reported a loss for the year ended December 31, 1997, no
additional securities or related adjustments to income were made for the common
stock equivalents related to stock options or the subordinated convertible
promissory notes since the effect would be antidilutive. If stock options had
been included in the computation of diluted earnings per share, the number of
shares would have increased by 379. If the subordinated convertible promissory
notes had been included in the computation of diluted earnings per share, the
number of shares would have increased by 1,218 and the net loss would have been
reduced by $394.
10. PROFIT SHARING PLAN:
Employees of the Company and of the Affiliated Physician Groups participate
in an affiliated service group 401-K and profit sharing and savings plan (the
"Plan"). All employees are eligible to participate in the Plan at the time of
employment if they have reached the age of 20 and 1/2 years. Employees vest
in the employer contribution portion of their account at the rate of 20% for
each year that they meet the Plan's service requirements.
The Plan allows for an employer match of contributions made by plan
participants. For the years ended December 31, 1995, 1996, and 1997, the
Company elected to match 50% of employee contributions the total match not to
exceed 6% of the participant's salary subject to the salary ceiling rules
imposed by the Internal Revenue Service. The employer contribution amounted to
$304, $744, and $1,835 for the years ended December 31, 1995, 1996, and 1997,
respectively.
11. STOCK OPTION PLANS:
In November 1993, the Company established a stock option plan for employees
("Employee Option Plan") whereby the Company may issue to officers and key
employees options to purchase up to 3,274 shares of the Company's common stock.
Substantially all of the options that were issued in 1994 vested in May
1996 and expire in May 1999. Substantially all subsequent issuances of options
vest over four or five years beginning one year from the date of grant and
expire in ten years. Prior to the Company's initial public offering the Board
of Directors considered, among other things, available operating results of the
Company, comparable public companies' price/earnings ratios, the illiquidity of
the underlying security, and prior transactions in the common stock in
establishing the fair market value of the common stock at the dates of grant.
On November 13, 1996, the Compensation Committee of the Board of Directors
repriced all options outstanding under the Employee Option Plan granted after
the date of the Company's initial public offering, other than options held by
the Chief Executive Officer and President and the Executive Vice
President-Medical Director. Options issued at that date under the Employee
Option Plan totaled 1,114 shares and had exercise prices ranging between $9.125
and $26.125 per share. The option exercise prices were amended to be equal to
the fair market value of the Common Stock at the close of business on November
13, 1996, or $6.5625 per share.
38
<PAGE> 39
PHYSICIAN RELIANCE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In April 1994, the Company established a stock option plan for outside
directors (the "Director Option Plan") whereby the Company may issue to outside
directors options to purchase up to 637 shares of the Company's common stock.
On September 22, 1994, the Company granted options to purchase an aggregate of
115 shares of common stock to three outside directors, at an exercise price of
$4.315 per share. In May 1995, the Company granted options to purchase 5
shares of common stock to one outside director at an exercise price of $9.38
per share. In May 1996, the Company granted options to purchase an aggregate
of 20 shares of common stock to four outside directors at an exercise price of
$22.31 per share. In May 1997, the Company granted options to purchase an
aggregate of 15 shares of common stock to three outside directors at an
exercise price of $8.25 per share. Options issued under the Director Option
Plan vest and are exercisable one year from the date of grant.
The Company also granted in April 1994 options ("1994 Director Options") to
purchase an aggregate of 76 shares of common stock to three directors at an
exercise price of $2.355 per share, which options vested one year following the
date of grant. These options were not granted pursuant to the Director Option
Plan.
The following table summarizes the combined activity under the Employee
Option Plan, the Director Option Plan, and the 1994 Director Options.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------------------------------------------------------------------
1995 1996 1997
-------------------------- --------------------------- ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ -------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of period 547 $ 2.99 1,338 $ 8.75 1,535 $ 6.79
Granted:
Price is equal to fair value 800 12.61 1,288 10.43 1,694 10.48
Price is less than fair value -- - - 297 7.93
Option exercised -- - (136) 3.11 (210) 3.63
Options canceled (9) 2.36 (955) 14.97 (297) 5.45
------ ------- ------
Outstanding, end of period 1,338 $ 8.75 1,535 $ 6.79 3,019 $ 9.32
====== ======= ======
Exercisable, end of period 236 480 490
Available for grant, end of period 517 1,228 113
Weighted average fair value of
options granted $ 7.08 $ 4.62 $ 6.30
</TABLE>
39
<PAGE> 40
PHYSICIAN RELIANCE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Significant option groups outstanding at December 31, 1997, and related
weighted average price and life are as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------- -----------------------------------
SHARES NUMBER
RANGE OF OUTSTANDING AT REMAINING WEIGHTED EXERCISABLE AT WEIGHTED-
EXERCISE DECEMBER 31, CONTRACTUAL AVERAGE DECEMBER 31, AVERAGE
PRICES 1997 LIFE EXERCISE PRICE 1997 EXERCISE PRICE
- ----------- -------------- ----------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$2.36-5.94 190 7.06 $4.07 137 $3.45
6.56 646 8.24 6.56 199 6.56
6.94-8.50 361 9.37 7.87 19 7.00
9.63-10.05 1,372 9.43 10.41 75 9.72
11.81 350 9.76 11.81 -- --
17.75-22.31 100 8.00 18.68 60 19.29
- --------------------------------------------------------------------------------------------------------------------
$2.36-22.31 3,019 9.01 $9.32 490 $7.76
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions for grants in the years ended December 31, 1995, 1996, and 1997:
expected volatility of 57 percent for the years ended December 31, 1995 and
1996, and 67 percent for the year ended December 31, 1997; risk-free interest
rates ranging from 4.64 to 7.60 percent; and expected lives of 2.8, 5.0, and
6.0 years for immediate, 4-year, and 5-year vesting options, respectively.
The Company continues to account for stock based compensation under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," as allowed by SFAS No. 123. Had compensation cost for those plans
been determined consistent with SFAS No. 123, the Company's net income (loss)
and per share amounts would have been reduced (increased) to the following pro
forma amounts:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net income (loss):
As reported $ 14,115 $ 20,496 $ (7,232)
Pro forma 13,781 19,257 (8,995)
Earnings per common share
Basic:
As reported $ 0.35 $ 0.44 $ (0.14)
Pro forma 0.34 0.41 (0.18)
Diluted:
As reported $ 0.34 $ 0.43 $ (0.14)
Pro forma 0.34 0.41 (0.18)
</TABLE>
40
<PAGE> 41
PHYSICIAN RELIANCE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
12. STOCKHOLDERS' EQUITY:
In April 1996, the Company consummated a public offering of 5,380 shares.
Baylor University Medical Center, one of the Company's existing shareholders,
also sold 600 shares of common stock in the public offering and received net
proceeds of $11,460. Proceeds to the Company from this offering were $102,470,
which was net of commissions and expenses of $5,236. The net proceeds were
used to repay amounts outstanding under the Revolver, in connection with
executing Service Agreements, for capital expenditures, and for working capital
purposes.
Effective May 21, 1996, the Company's Articles of Incorporation were
amended to increase the authorized shares of common stock from 50,000 to
150,000.
On June 10, 1996, the Company effected a two-for-one stock split in the
form of a 100% stock dividend to shareholders of record on May 31, 1996.
In June 1997, the Company adopted a Shareholders Rights Plan. Holders of
the Company's common stock as of June 16, 1997, received preferred stock
purchase rights (the "Rights") as a dividend at the rate of one Right for each
share of common stock. The Rights expire on June 2, 2007. Each Right entitles
the holder to purchase one one-hundredth of a share of a new Series One Junior
Preferred Stock at an exercise price of $60.00 per Right, subject to
adjustment. Each Right becomes exercisable only upon a person's or group's
acquisition of, or commencement of a tender or exchange offer for, 18% or more
of the Company's common stock or in the event that the Company's board of
directors determines that a shareholder of the Company holding at least 10% of
the Company's outstanding common stock is an "adverse person," as defined, or
in the event of certain mergers or asset sales involving more than 50% of the
Company's assets or earning power. If exercisable, each Right allows the
holder to purchase either securities of the Company or securities of the
acquiring company, depending upon the form of the transaction, having a value
of twice the exercise price of the Rights. The Rights are redeemable by the
Company's board of directors at $0.001 per Right for a period of ten business
days following the time that the Rights become exercisable. The Rights also
are generally exchangeable by the board of directors at an exchange ratio of
one share of common stock per Right at any time after the Rights have become
exercisable and prior to the acquisition by any person or group of 50% or more
of the Company's common stock.
In connection with entering into Service Agreements and purchasing the
assets of Affiliated Physician Groups, the Company has committed to issue
shares of common stock at specified future dates. Common stock to be issued is
shown as a separate component in stockholders' equity.
The Company has reserved 5,106 shares of common stock for issuance upon
exercise of stock options. The terms of the Revolver restrict the Company's
ability to declare, pay, or issue dividends or other distributions with respect
to its capital stock, except for stock dividends.
13. SUBSEQUENT EVENT (UNAUDITED)
In March 1998, the Company, TOPA, and Methodist reached a preliminary
agreement to settle the lawsuit filed by Methodist. Under the terms of the
agreement, Methodist has agreed to release the Company and TOPA from any
liability, and the lawsuit, including all claims related thereto, will be
dismissed with prejudice. As part of the settlement, the Company and TOPA have
agreed to limit the expansion of certain facilities and the number of physicians
in Dallas County. The Company believes that such limitations will not
materially adversely affect the Company's results of operations or growth plans.
Although the essential terms of the settlement have been agreed to, final
documents have not been signed and there is no guarantee that final documents
will be signed.
41
<PAGE> 42
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Proxy Statement issued in connection with the Annual Meeting of
Shareholders to be held on May 12, 1998, to be filed with the Securities and
Exchange Commission pursuant to Rule 14a-6(b), contains under the caption
"Election of Directors" information required by Item 10 of Form 10-K as to
directors and certain executive officers of the Company and is incorporated
herein by reference. Pursuant to General Instruction G(3), certain information
concerning the executive officers of the Company is included in Part I of this
Form 10-K under the caption "Executive Officers."
ITEM 11. EXECUTIVE COMPENSATION
The Proxy Statement issued in connection with the Annual Meeting of
Shareholders to be held on May 12, 1998, to be filed with the Securities and
Exchange Commission pursuant to Rule 14a-6(b), contains under the caption
"Executive Compensation" information required by Item 11 of Form 10-K and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Proxy Statement issued in connection with the Annual Meeting of
Shareholders to be held on May 12, 1998, to be filed with the Securities and
Exchange Commission pursuant to Rule 14a-6(b), contains under the caption
"Security Ownership of Management and Certain Beneficial Owners" information
required by Item 12 of Form 10-K and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Proxy Statement issued in connection with the Annual Meeting of
Shareholders to be held on May 12, 1998, to be filed with the Securities and
Exchange Commission pursuant to Rule 14a-6(b), contains under the caption
"Certain Transactions" information required by Item 13 of Form 10-K and is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K
(a) 1. Financial Statements: See Item 8.
2. Financial Statement Schedules: See Item 8.
3. Exhibits: See Index to Exhibits, pages 46 through 47.
(b) During the quarter ended December 31, 1997, the Registrant filed no
Current Reports on Form 8-K.
42
<PAGE> 43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 30, 1998 By: /s/ John T. Casey
-----------------------------------
John T. Casey, Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ John T. Casey Chairman of the Board, March 30, 1998
- ------------------------------------ President, Chief Executive Officer
John T. Casey (Principal Executive Officer)
/s/ Merrick H. Reese Vice Chairman of the Board March 30, 1998
- ------------------------------------
Merrick H. Reese
/s/ Joseph S. Bailes Director March 30, 1998
- ------------------------------------
Joseph S. Bailes
/s/ Nancy G. Brinker Director March 30, 1998
- ------------------------------------
Nancy G. Brinker
Director March 30, 1998
- ------------------------------------
Robert W. Daly
/s/ Boone Powell, Jr. Director March 30, 1998
- ------------------------------------
Boone Powell, Jr.
/s/ Michael N. Murdock Executive Vice President and Chief March 30, 1998
- ------------------------------------ Financial Officer (Principal
Michael N. Murdock Financial and Accounting Officer)
</TABLE>
43
<PAGE> 44
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Physician Reliance Network, Inc.:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of Physician Reliance Network, Inc. and
subsidiaries included in this Form 10-K and have issued our report thereon
dated February 6, 1998. Our audit was made for the purpose of forming an
opinion on the basic financial statements taken as a whole. The schedule
listed in the index to financial statement schedule is presented for purposes
of complying with the Securities and Exchange Commission's rules and is not
part of the basic financial statements. This schedule has been subjected to
the auditing procedures applied in the audit of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Dallas, Texas
February 6, 1998
44
<PAGE> 45
SCHEDULE II
PHYSICIAN RELIANCE NETWORK, INC. AND SUBSIDIARY
RESERVES FOR UNCOMPENSATED CARE
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS REDUCTIONS, BALANCE AT
BEGINNING CHARGED TO NET OF END OF
OF PERIOD INCOME RECOVERIES OTHER PERIOD
------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997 $19,797 $ 62,426 $(32,405) $ - $ 49,818
------- -------- --------- ---------- --------
Year ended December 31, 1996 $13,321 $ 18,370 $(11,894) $ - $ 19,797
------- -------- --------- ---------- --------
Year ended December 31, 1995 $ 6,304 $ 13,286 $ (6,606) $ 337(1) $ 13,321
------- -------- --------- ---------- --------
</TABLE>
(1) Represents reserves for uncompensated care related to accounts
receivable purchased from affiliated physician groups at the time of
the execution of a management service agreement.
45
<PAGE> 46
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ---------- --------------------------------------------------------------
<S> <C>
3.1 -- Articles of Incorporation of Registrant. (1)
3.2 -- Bylaws of the Registrant. (2)
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.
(2)
4.3 -- Rights Agreement, dated as of June 2, 1997, between Physician
Reliance Network, Inc. and Harris Trust and Savings Bank, as Rights
Agent, which includes as exhibits the Form of Rights Certificate and
the Summary of Rights Agreements. (3)
10.1 -- Restated Security Agreement, dated as of October 1, 1993, by Texas
Oncology, P.A. in favor of Registrant. (2)
10.2 -- Amended and Restated Credit Agreement, dated as of June 30, 1997,
among Physician Reliance Network, Inc., as Borrower, Bank One, Texas,
N.A., NationsBank of Texas, N.A., Banque Paribas, Cooperatieve Centrale
Raiffeisen-Boerenteenbank B.A., The Fuji Bank Limited, Mellon Bank,
N.A., PNC Bank, National Association and Suntrust Bank, Central
Florida, N.A. (and the other Lenders, If any, from time to time party
hereto) as Lenders. (4)
10.3 -- Stockholders' Agreement, dated October 8, 1993, by and among the
Registrant, Texas Oncology, P.A., and certain investors. (2)
10.4 -- Registration Rights Agreement, dated as of October 8, 1993, by and
among the Registrant, Texas Oncology, P.A., and certain investors. (2)
10.5 -- Stockholders' Agreement, dated as of September 16, 1994, by and
among the Registrant, Texas Oncology, P.A., and Baylor University
Medical Center. (2)
10.6 -- Registration Rights Agreement, dated as of September 16, 1994, by
and among the Registrant, Texas Oncology, P.A., and Baylor University
Medical Center. (2)
10.7 -- Lease Agreement, dated as of August 1, 1994, by and between Baylor
Health Care System, as landlord, and the Registrant, as tenant. (2)
10.8 -- Lease, dated as of September 1, 1992, by and between Mother Frances
Hospital of Tyler, Texas, as landlord, and the Registrant, as tenant.
(2)
10.9 -- 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. (2)
10.10 -- 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. (2)
10.11 -- Lease Agreement, dated as of April 2, 1995, by and between Midland
County Hospital District, as landlord, and the Registrant, as tenant.
(5)
10.12 -- Office Lease, dated as of November 20, 1995, by and between
Northcreek Business Park, Ltd., as lessor, and the Registrant, as
lessee. (6)
</TABLE>
46
<PAGE> 47
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ---------- --------------------------------------------------------------
<S> <C>
10.13 -- First Amendment to Lease, dated as of February 29, 1996, by and
between Northcreek Business Park, Ltd., as lessor, and the Registrant,
as lessee. (6)
10.14 -- Lease Agreement, dated June 16, 1995, between Medical City Dallas
Limited, as lessor, and the Registrant, as lessee. (6)
10.15 -- First Amendment to Lease Agreement, dated November 9, 1995, by and
between Medical City Dallas Limited, as lessor, and the Registrant,
as lessee. (6)
10.16 -- Lease Agreement, dated as of June 1, 1995, by and between Galen
Hospitals of Texas, Inc., as lessor, and the Registrant, as lessee. (6)
10.17 -- Lease Agreement, dated as of June 1, 1995, by and between Galen
Hospitals of Texas, Inc., as lessor, and the Registrant, as lessee. (7)
10.18 -- Office Sublease Agreement, dated April 23, 1996, between Santa Fe
International Corporation, as Landlord, and the Registrant, as Tenant.
(7)
10.19 -- Amended and Restated Service Agreement, dated as of January 1, 1996,
by and between the Registrant and Texas Oncology, P.A. (7)
10.20 -- Amendment No. 1 to the Amended and Restated Service Agreement, dated
as of December 18, 1996, by and between the Registrant and Texas
Oncology, P.A. (8)
10.21 -- Service Agreement, dated June 30, 1997, by and between Ilex
Oncology, Inc. and PRN Research, Inc. (incorporated by reference to
Exhibit 10.4 to Ilex Oncology, Inc.'s Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997). (9)
EXECUTIVE COMPENSATION PLANS AND MANAGEMENT CONTRACTS
10.22 -- 1993 Stock Option Plan. (2)
10.23 -- 1994 Stock Option Plan for Outside Directors. (2)
10.24 -- Form of Employment Agreement entered into by the Registrant with
Messrs. Casey, French, Murdock, and McGinn and with Dr. Bailes. (10)
10.25 -- Form of Stock Option Agreement entered into by the Registrant with
Drs. Reese and Bailes and Mr. Daly. (5)
10.26 -- First Amendment to the 1993 Stock Option Plan. (11)
21 -- Subsidiaries of the Registrant.
23 -- Consent of Arthur Andersen LLP
27.1 -- Financial Data Schedule, Year Ended December 31, 1997
27.2 -- Financial Data Schedule, Year Ended December 31, 1996
</TABLE>
- --------------
(1) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1996
(2) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (Registration No. 33-84436).
(3) Incorporated by reference to the Registrant's Current Report on Form
8-K, dated June 5, 1997.
(4) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997.
47
<PAGE> 48
(5) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (Registration No. 33- 90996).
(6) Incorporated by reference to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1995.
(7) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1996.
(8) Incorporated by reference to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1996.
(9) Confidential treatment has been requested by Ilex Oncology, Inc. with
respect to certain portions of the Exhibit.
(10) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1997.
(11) Incorporated by reference to the Registrant's Proxy Statement issued in
connection with its Annual Meeting of Shareholders held on May 8, 1996,
filed with the Securities and Exchange Commission Pursuant to Rule
14a-6(b).
48
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
TOPS Pharmacy Services, Inc.
PRN Research, Inc.
Innovative Medical Communications, Inc.
Hematology Oncology Associates, S.C.
Northwest Cancer Center, Inc.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report included in this Form 10-K, into the Company's previously filed
Registration Statements File No. 33-80955 and 33-06983.
ARTHUR ANDERSEN LLP
Dallas, Texas,
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,772
<SECURITIES> 2,301
<RECEIVABLES> 155,145
<ALLOWANCES> 49,818
<INVENTORY> 8,078
<CURRENT-ASSETS> 129,827
<PP&E> 199,159
<DEPRECIATION> 46,676
<TOTAL-ASSETS> 400,634
<CURRENT-LIABILITIES> 51,106
<BONDS> 0
0
0
<COMMON> 490
<OTHER-SE> 289,814
<TOTAL-LIABILITY-AND-EQUITY> 400,634
<SALES> 291,208
<TOTAL-REVENUES> 317,435
<CGS> 265,340
<TOTAL-COSTS> 265,340
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 57,606
<INTEREST-EXPENSE> 4,107
<INCOME-PRETAX> (9,618)
<INCOME-TAX> (2,386)
<INCOME-CONTINUING> (7,232)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,232)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> (.14)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 7,679
<SECURITIES> 0
<RECEIVABLES> 124,223
<ALLOWANCES> 19,797
<INVENTORY> 4,481
<CURRENT-ASSETS> 118,817
<PP&E> 171,064
<DEPRECIATION> 29,394
<TOTAL-ASSETS> 355,341
<CURRENT-LIABILITIES> 40,048
<BONDS> 0
0
0
<COMMON> 476
<OTHER-SE> 294,300
<TOTAL-LIABILITY-AND-EQUITY> 355,341
<SALES> 224,493
<TOTAL-REVENUES> 238,319
<CGS> 191,583
<TOTAL-COSTS> 191,583
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 11,030
<INTEREST-EXPENSE> 1,939
<INCOME-PRETAX> 33,767
<INCOME-TAX> 13,271
<INCOME-CONTINUING> 20,496
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,496
<EPS-PRIMARY> .44
<EPS-DILUTED> .43
</TABLE>
