<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________
Commission file number 0-24872
-------
Physician Reliance Network, Inc.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Texas 75-2495107
- ------------------------------------------------ -------------------
(State or Other Jurisdiction of Incorporation or (I.R.S. Employer
Organization) Identification No.)
5420 LBJ Freeway, Suite 900
Dallas, Texas 75240
- ---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (972) 392-8700
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
As of November 10, 1998, approximately 51,403,943 shares of Common
Stock were issued and outstanding.
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
The condensed consolidated financial statements include the accounts of
Physician Reliance Network, Inc. and its subsidiaries (collectively, the
"Company") and have been prepared by the Company, without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. It is
suggested that these condensed consolidated financial statements be read in
conjunction with the audited consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1997, as filed with the Securities and Exchange Commission. In the opinion
of the Company, all adjustments necessary to present fairly the information in
the following consolidated financial statements of the Company have been
included. Please be advised that the results of operations for interim periods
are not indicative of the results of the full year.
2
<PAGE> 3
PHYSICIAN RELIANCE NETWORK INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
UNAUDITED
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,552 $ 2,772
Investment in common stock, net 5,445 2,301
Accounts receivable, net 101,255 87,160
Due from related parties 11,722 15,312
Other receivables 7,047 2,855
Inventories 12,875 8,078
Prepaid expenses and other 1,285 1,445
Income tax receivable 254 8,815
Deferred income tax 1,112 1,089
------------- -------------
Total current assets 144,547 129,827
------------- -------------
Property and equipment:
Land 15,688 15,240
Buildings 63,806 62,084
Furniture and equipment 132,533 121,363
Construction-in-progress 4,567 472
------------- -------------
216,594 199,159
Less- Accumulated depreciation (61,475) (46,676)
------------- -------------
Net property and equipment 155,119 152,483
------------- -------------
Investments 7,214 4,717
Service agreements, net 121,196 104,773
Excess of purchase price over the fair value of net
assets acquired, net 9,853 7,793
Other assets, net 1,116 1,041
------------- -------------
Total assets $ 439,045 $ 400,634
============= =============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE> 4
PHYSICIAN RELIANCE NETWORK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
UNAUDITED
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
----------- -----------
<S> <C> <C>
Current liabilities:
Accounts payable $ 22,149 $ 24,380
Accrued liabilities
Salaries and benefits 8,478 7,969
Other 4,548 3,262
----------- -----------
13,026 11,231
Deferred revenue 2,330 1,904
Due to related party 2,314 4,908
Current maturities of long-term debt 10,418 8,683
----------- -----------
Total current liabilities 50,237 51,106
Long-term debt, net of current maturities 49,077 42,386
Subordinated convertible promissory notes 900 7,275
Construction and retainage payable 275 275
Deferred income taxes 12,156 9,042
Minority interest 384 246
----------- -----------
Total liabilities 113,029 110,330
----------- -----------
Commitments and contingencies
Stockholders' equity:
Series A and B preferred stock, 10,000 shares
authorized, no shares issued and outstanding -- --
Series One Junior preferred stock, 500 shares
authorized, no shares issued and outstanding -- --
Common stock, no par value, $.01 stated value per
share, 150,000 shares authorized, 51,215 and 48,999
shares issued at September 30, 1998, and December 31,
1997, respectively 512 490
Additional paid-in capital 253,179 240,543
Common stock to be issued, 1,680 shares 21,183 19,885
Valuation adjustment - investment in common stock (830) (696)
Retained earnings 51,972 30,082
----------- -----------
Total stockholders' equity 326,016 290,304
----------- -----------
Total liabilities and stockholders' equity $ 439,045 $ 400,634
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE> 5
PHYSICIAN RELIANCE NETWORK INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
UNAUDITED
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Management fees $ 94,570 $ 77,460 $266,437 $211,925
Other revenues 8,669 7,023 24,609 18,045
-------- -------- -------- --------
Total revenues 103,239 84,483 291,046 229,970
-------- -------- -------- --------
Costs and expenses:
Salaries and benefits 23,766 22,471 68,786 62,698
Pharmaceuticals and supplies 38,882 28,815 106,693 75,777
General and administrative 16,446 15,030 46,534 42,928
Provision for uncollectible accounts 4,585 3,532 12,574 48,015
Depreciation and amortization 6,626 5,550 18,512 15,627
Interest expense 853 1,253 3,034 2,896
-------- -------- -------- --------
Total costs and expenses 91,158 76,651 256,133 247,941
-------- -------- -------- --------
Income (loss) before taxes 12,081 7,832 34,913 (17,971)
-------- -------- -------- --------
Provision for income taxes:
Current 3,406 2,375 10,065 (7,019)
Deferred 1,078 549 2,921 1,425
-------- -------- -------- --------
Total provision for income taxes 4,484 2,924 12,986 (5,594)
======== ======== ======== ========
Net income (loss) $ 7,597 $ 4,908 $ 21,927 $(12,377)
======== ======== ======== ========
Net income (loss) per share
Basic $ 0.14 $ 0.10 $ 0.42 $ (0.24)
======== ======== ======== ========
Diluted $ 0.14 $ 0.10 $ 0.41 $ (0.24)
======== ======== ======== ========
Average number of shares outstanding
Basic 52,873 50,559 52,283 50,557
======== ======== ======== ========
Diluted 53,169 51,011 53,264 50,557
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE> 6
PHYSICIAN RELIANCE NETWORK INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
UNAUDITED
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------------
1998 1997
--------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 21,927 $ (12,377)
Adjustments to reconcile net income to net cash used in operating activities
Depreciation and amortization 18,512 15,627
Undistributed earnings of investments (637) --
Deferred income tax, net 2,921 1,425
Deferred revenues (2,493) (936)
Provision for uncollectible accounts 12,574 48,015
Gain on sale of the ambulatory surgery center -- (511)
Changes in operating assets and liabilities:
Increase in receivables, net (26,669) (33,543)
Increase in other receivables (4,192) (7,343)
Increase in income tax receivable 8,538 (12,526)
(Increase) decrease in inventories, prepaids and other (4,191) (3,422)
(Decrease)Increase in accounts payable and accrued liabilities (436) 3,927
Increase in deferred revenue 426 354
Increase (decrease) in due to related party (2,594) (2,146)
--------- -----------
Net cash provided by (used in) operating activities 23,686 (3,456)
--------- -----------
Cash flows from investing activities:
Capital expenditures (17,435) (25,016)
Construction and retainage -- (265)
Excess of purchase price over fair value of assets received (2,500) (4,007)
Service agreements (8,229) (8,543)
Capital contributions to limited partnership (1,860) --
Sale of the ambulatory surgery center -- 1,950
Other 2,509 125
--------- -----------
Net cash used in investing activities (27,515) (35,756)
--------- -----------
Cash flows from financing activities:
Net proceeds from borrowings under the Revolver 8,000 32,000
Payments on long-term borrowings (4,366) (2,390)
Minority interest -- 3,481
Issuance of common stock 975 602
--------- -----------
Net cash provided by financing activities 4,609 33,693
--------- -----------
Net increase (decrease) in cash and cash equivalents 780 (5,519)
Cash and cash equivalents, beginning of period 2,772 7,679
--------- -----------
Cash and cash equivalents, end of period $ 3,552 $ 2,160
========= ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
<PAGE> 7
PHYSICIAN RELIANCE NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. BASIS OF PRESENTATION:
The condensed consolidated financial statements include the accounts of
Physician Reliance Network, Inc. and its subsidiaries for the three months and
nine months ended September 30, 1998, and 1997, respectively. All significant
intercompany transactions have been eliminated. Certain reclassifications of
prior year amounts have been made to conform to the current year presentation.
Effective July 1, 1998, the Company changed its amortization period of
current and future Service Agreements to 25 years on a prospective basis. This
change was made to be consistent with other companies in the Company's industry
which have made this change and to address opinions expressed by certain
financial regulatory bodies. Historically, the Company has amortized its Service
Agreements over the initial term of the agreements, which range from 30 to 40
years.
2. SUPPLEMENTAL CASH FLOW INFORMATION:
Supplemental schedule of noncash investing and financing activities are
as follows:
During the nine months ended September 30, 1998, the Company acquired
assets in exchange for $6,916 of notes payable, assumption of liabilities of
$236, and has issued or agreed to issue approximately $4,421 of common stock in
connection with the execution of certain Service Agreements. On April 1, 1998,
$8,500 of the outstanding subordinated convertible promissory notes were
converted to common stock.
During the nine months ended September 30, 1997, the Company acquired
assets in exchange for $1,890 of notes payable, $9,400 of subordinated
convertible promissory notes, and has issued or agreed to issue approximately
$2,449 of common stock in connection with the execution of certain Service
Agreements.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-----------------------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash paid during the period:
Interest, net of amount capitalized $ 2,757 $ 2,193
Income taxes $ 5,427 $ 5,335
</TABLE>
3. MANAGEMENT FEES:
The following table summarizes the derivation of Management Fees for
the three and nine months ended September 30, 1998.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ---------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Medical practice revenues $124,782 $100,277 $354,393 $283,952
Amounts retained by physicians (30,212) (22,817) (87,956) (72,027)
-------- -------- -------- --------
Management fees $ 94,570 $ 77,460 $266,437 $211,925
======== ======== ======== ========
</TABLE>
7
<PAGE> 8
4. EARNINGS PER SHARE:
The following is a reconciliation of the components of earnings per share
for the three and nine months ended September 30, 1998 and 1997.
<TABLE>
<CAPTION>
Three Months Ended September 30, 1998 --
PER-SHARE
INCOME SHARES AMOUNT
-------- ------ ------
<S> <C> <C> <C>
Basic earnings per share, September 30, 1998
Income available to common stockholders $7,597 52,873 $0.14
Effect of Dilutive Securities
Stock options -- 229 --
Subordinated convertible promissory notes 8 67 --
-------- ------ ------
Diluted earnings per share, September 30, 1998 $7,605 53,169 $0.14
======== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended September 30, 1997 --
PER-SHARE
INCOME SHARES AMOUNT
-------- ------ ------
<S> <C> <C> <C>
Basic earnings per share, September 30, 1997
Income available to common stockholders $4,908 50,559 $0.10
Effect of Dilutive Securities
Stock options -- 452 --
Subordinated convertible promissory notes -- -- --
-------- ------ ------
Diluted earnings per share, September 30, 1997 $4,908 51,011 $0.10
======== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1998 --
PER-SHARE
INCOME SHARES AMOUNT
-------- ------ ------
<S> <C> <C> <C>
Basic earnings per share, September 30,1998
Income available to common stockholders $21,927 52,283 $0.42
Effect of dilutive securities
Stock options -- 388 --
Subordinated convertible promissory notes 151 593 (0.01)
-------- ------ ------
Diluted earnings per share, September 30, 1998 $22,078 53,264 $0.41
======== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1997 --
PER-SHARE
INCOME SHARES AMOUNT
-------- ------ ------
<S> <C> <C> <C>
Basic and diluted (loss) earnings per share, September
30, 1997 $(12,377) 50,557 $(0.24)
Income available to common stockholders
======== ====== ======
</TABLE>
Because the Company reported a loss for the nine months ended September
30, 1997, no additional securities or related adjustments to income were made
for the common stock equivalents related to stock options since the effect would
be antidilutive. If stock options had been included in the computation of
diluted earnings per
8
<PAGE> 9
share, the number of shares would have increased by 452 and 309, for the three
and nine months ended September 30, 1997, respectively.
5. COMMITMENTS:
The service agreement with the Minnesota physician group provides for a
reduction of the Company's management fee under certain circumstances. For the
three and nine months ended September 30, 1998, the Company's management fee was
reduced by $149 and $580, respectively.
6. STOCK BASED COMPENSATION:
Effective December 31, 1996, the Company adopted Statement of Financial
Accounting Standard ("SFAS") No. 123, "Accounting for Stock Based Compensation;"
however, 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 the Company's
stock option plans been determined consistent with SFAS No. 123, the Company's
net income and earnings per share would have been reduced to the following pro
forma amounts:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ----------------------------
1998 1997 1998 1997
------ -------- ------- -----------
<S> <C> <C> <C> <C>
Net income (loss):
As reported $7,597 $ 4,908 $21,927 $ (12,377)
Pro forma $6,953 $ 4,573 $20,367 $ (13,395)
</TABLE>
Proforma basic earnings (loss) per share and diluted earnings per share
would have been as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- --------------------------
1998 1997 1998 1997
----- ----- ----- ------
<S> <C> <C> <C> <C>
Basic earnings (loss) per share $0.13 $0.09 $0.39 $(0.26)
Diluted earnings (loss) per share $0.13 $0.09 $0.38 $(0.26)
</TABLE>
9
<PAGE> 10
7. NEW ACCOUNTING STANDARDS:
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income," which requires the presentation of total
nonowner changes in equity for all periods displayed. The Company holds shares
of common stock which are accounted for under SFAS No. 115 as
available-for-sale. The unrealized gains and losses on these securities are
treated as a component of comprehensive income under SFAS No. 130. The Company
has no other transactions that affect comprehensive income. The following is a
reconciliation of the Company's net income and comprehensive income for the
three and nine months ended September 30, 1998, and 1997, respectively.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
1998 1997 1998 1997
------ ------ ------- --------
<S> <C> <C> <C> <C>
Net income (loss): $7,597 $4,908 $21,927 $(12,377)
Unrealized gain (loss)on common
stock, net of tax (443) -- 24 --
------ ------ ------- --------
Comprehensive income (loss) $7,154 $4,908 $21,951 $(12,377)
====== ====== ======= ========
</TABLE>
In June 1997, the Financial Accounting Standards Board 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.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- --------------------------------------------------------------------------------
The following discussion of the results of operations and financial
condition of the Company should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto included in its Annual
Report on Form 10-K for the year ended December 31, 1997, and with the Condensed
Consolidated Financial Statements included in this Form 10-Q.
OVERVIEW
The Company provides the management, facilities and equipment,
administrative and technical support, and other services necessary to establish
and maintain a fully-integrated network of outpatient oncology care. The
physician groups with whom the Company contracts ("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 for services provided
under its service agreements ("Service Agreements") with the Affiliated
Physician Groups. Under the Service Agreements, the Company receives a
management fee ("Management Fees") for services rendered, and the method of
determining the fee varies by each physician group.
The Company's most significant service agreement is with Texas
Oncology, P.A. ("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 non-physician expenses of the
related practice locations. The Texas Service Agreement represented
approximately 71.6% and 72.5% of the Company's Management Fee revenue for the
three months and nine months ended September 30, 1998, respectively, compared
with 75% for each of the three and nine months ended September 30, 1997,
respectively. Approximately 92% of the Company's Management Fees earned for both
the three and nine months ended September 30, 1998, were derived from Service
Agreements in which the Management Fee is calculated based on Earnings and
approximately 8% were derived from Service Agreements in which the Management
Fee is calculated based on a fixed fee or a percentage of medical practice
revenues.
The following table summarizes the derivation of Management Fees for
the three and nine months ended September 30, 1998, and 1997 (in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- ---------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Medical practice revenues $124,782 $100,277 $354,393 $283,952
Amounts retained by physicians (30,212) (22,817) (87,956) (72,027)
-------- -------- -------- --------
Management fees $ 94,570 $ 77,460 $266,437 $211,925
======== ======== ======== ========
</TABLE>
11
<PAGE> 12
The following table sets forth the percentages of total revenues
represented by certain items reflected in the income statement. The information
that follows should be read in conjunction with the Condensed Consolidated
Financial Statements and Notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1998 1997 1998 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenues:
Management fees 91.6% 91.7% 91.5% 92.2%
Other revenues 8.4 8.3 8.5 7.8
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
Costs and expenses:
Salaries and benefits 23.0 26.6 23.6 27.3
Pharmaceutical and supplies 37.7 34.1 36.7 32.9
General and administrative 15.9 17.7 16.0 18.7
Provision for uncollectible accounts 4.5 4.2 4.3 20.9
Depreciation and amortization 6.4 6.6 6.4 6.8
----- ----- ----- -----
Income before interest expense and taxes 12.5 10.8 13.0 (6.6)
Interest expense .8 1.5 1.0 1.2
----- ----- ----- -----
Income before income taxes 11.7 9.3 12.0 (7.8)
Income taxes 4.3 3.5 4.5 (2.4)
----- ----- ----- -----
Net income 7.4% 5.8% 7.5% (5.4)%
===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1998, COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1997
MANAGEMENT FEES. Management Fees were $94,570,000 for the three months
ended September 30, 1998, compared to $77,460,000 for the three months ended
September 30, 1997, representing an increase of $17,110,000 or 22.1%. The growth
in Management Fees is attributable to a $24,505,000 increase in Medical Practice
Revenues generated by the Affiliated Physician Groups offset by an increase in
Amounts Retained by Physicians pursuant to the Service Agreements of $7,395,000.
The growth in Medical Practice Revenues during the three months ended September
30, 1998 is attributable to an increase in the number of physicians by 11 from
340 to 351; an increase in the number of service locations; and expansion of
services provided at existing locations. Amounts Retained by Physicians were
29.3% of total revenues for the three months ended September 30, 1998, compared
to 27.0% of total revenues for the comparable period in 1997.
The Company assumed operations of existing radiation therapy facilities
in Eugene, Oregon in June 1997 and Beaumont, Texas in November 1997 through a
joint venture with a hospital in these markets. In January 1998, the Company
assumed the operations of an existing full-service cancer center in Chicago,
Illinois in connection with the execution of a new Service Agreement with a
physician group. In June 1998, the Company opened a full-service cancer center
in Denison, Texas.
Medical Practice Revenues, used in part to determine the Company's
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 1998. Approximately 35% of the Medical Practice Revenues generated by the
Affiliated Physician Groups during 1998, were from government agencies,
primarily Medicare and Medicaid.
12
<PAGE> 13
OTHER REVENUES. Other revenues for the three months ended September 30,
1998, were $8,669,000 compared to $7,023,000 for the three months ended
September 30, 1997, representing an increase of $1,646,000, or 23.4%. Other
revenues are primarily derived from retail pharmacy operations located in
certain of the Company's cancer centers and larger physician offices, research
activities performed by the Company's affiliated physicians that are sponsored
by pharmaceutical companies, and the Company's interest in Ilex(TM) Oncology,
Inc. ("ILEX"). The increase of $1,646,000 in other revenues is the result of the
development and expansion of the Company's retail pharmacy and research lines of
business as well as the receipt of ILEX common stock in connection with the
execution of a service agreement in June 1997.
SALARIES AND BENEFITS. Salaries and benefits for the three months ended
September 30, 1998, were $23,766,000 compared to $22,471,000 for the three
months ended September 30, 1997, representing an increase of $1,295,000 or 5.8%.
Salaries and benefits include costs of nonphysician clinical employees of
Affiliated Physician Groups paid by the Company pursuant to the terms of the
Service Agreements. The dollar increase in the salaries and benefits was due to
the addition of clinical and nonclinical personnel required to support the
increase in the number of Affiliated Physician Groups managed by the Company
offset, in part, by reductions of personnel through the restructuring of
corporate and field office operations. The percentage of salaries and benefits
to total revenues was 23.0% for the three months ended September 30, 1998,
compared to 26.6% for the comparable period in 1997. This decrease is
attributable to the streamlining of both clinical and corporate operations,
restructuring of the Company's benefits program provided to employees, and
increases in Medical Practice Revenues and Other Revenues where the increased
revenues were greater than the incremental increase in salary and benefits.
PHARMACEUTICALS AND SUPPLIES. Pharmaceuticals and supplies for the
three months ended September 30, 1998, were $38,882,000 compared to $28,815,000
for the three months ended September 30, 1997, representing an increase of
$10,067,000 or 34.9%. The percentage of pharmacy and supplies to total revenues
was 37.7% for the three months ended September 30, 1998, compared to 34.1% for
the three months ended September 30, 1997. Both the dollar and percentage
increases in pharmaceuticals and supplies is primarily attributable to (i) an
increase in infusion services generated by the Affiliated Physician Groups, both
through the increased number of physicians managed by the Company and the
enhancement of services provided in physician offices, cancer centers, and
retail pharmacies and (ii) an increase in the usage of higher cost
pharmaceuticals.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
three months ended September 30, 1998, were $16,446,000 compared to $15,030,000
for the three months ended September 30, 1997, representing a increase of
$1,416,000 or 9.4%. The percentage of general and administrative expenses to
total revenues was 15.9% for the three months ended September 30, 1998, compared
to 17.8% for the three months ended September 30, 1997. The incremental increase
in total revenues were at a higher rate than the corresponding expenses.
PROVISION FOR UNCOLLECTIBLE ACCOUNTS. The provision for uncollectible
accounts for the three months ended September 30, 1998, was $4,585,000 compared
to $3,532,000 for the three months ended September 30, 1997, representing a
increase of $1,053,000.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the
three months ended September 30, 1998, was $6,626,000 compared to $5,550,000 for
the three months ended September 30, 1997, representing an increase of
$1,076,000 or 19.4%. Depreciation increased $609,000 as a result of the
additional office and cancer center locations that were opened by the Company
since September 30, 1997. Amortization increased (i) $300,000 as a result of the
change (effective July 1, 1998) in the amortization period of the Service
Agreements to 25 years on a prospective basis and (ii) $467,000 as a result of
the increase in costs incurred by the Company for physician groups entering into
new Service Agreements.
INTEREST. Interest expense for the three months ended September 30,
1998, was $853,000 compared to $1,253,000 for the three months ended September
30, 1997, representing a decrease of $400,000 or 31.9%. Interest expense arises
as a result of borrowings under the Company's revolving credit facility (the
"Revolver") and amounts owed to Affiliated Physician Groups as consideration, in
part, for entering into Service Agreements.
13
<PAGE> 14
INCOME TAXES. The income tax provision was $4,484,000 for the three
months ended September 30, 1998, compared to $2,924,000 for the three months
ended September 30, 1997, representing an increase of $1,560,000. 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 recorded in 1997 was provided at
the applicable federal rate.
NINE MONTHS ENDED SEPTEMBER 30, 1998, COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1997
MANAGEMENT FEES. Management Fees were $266,437,000 for the nine months
ended September 30, 1998, compared to $211,925,000 for the nine months ended
September 30, 1997, representing an increase of $54,512,000 or 25.7%. The growth
in Management Fees is attributable to a $70,441,000 increase in Medical Practice
Revenues generated by the Affiliated Physician Groups offset by an increase in
Amounts Retained by Physicians pursuant to the Service Agreements of
$15,929,000. The growth in Medical Practice Revenues during the nine months
ended September 30, 1998 is due to an increase in the number of physicians by 32
from 319 to 351; an increase in the number of service locations; and growth of
the revenue base from expansion of services provided at existing locations.
Amounts Retained by Physicians were 30.2% of total revenues for the nine months
ended September 30, 1998, compared to 31.3% of total revenues for the comparable
period in 1997.
Medical Practice Revenues, used in part to determine the Company's
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 1998. Approximately 35% of the Medical Practice Revenues generated by the
Affiliated Physician Groups during September 30, 1998, were from government
agencies, primarily Medicare and Medicaid.
OTHER REVENUES. Other revenues for the nine months ended September 30,
1998, were $24,609,000 compared to $18,045,000 for the nine months ended
September 30, 1997, representing an increase of $6,564,000, or 36.4%. 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 the Company's equity interest in ILEX. The
increase in other revenues was primarily attributable to the development and
expansion of the Company's retail pharmacy and research lines of business. Other
revenues for the nine months ended September 30, 1997 includes $511,000 gain on
the sale of the Company's interest in an ambulatory surgery center as well as
the receipt of ILEX common stock in connection with the execution of a service
agreement in June 1997.
SALARIES AND BENEFITS. Salaries and benefits for the nine months ended
September 30, 1998, were $68,786,000 compared to $62,698,000 for the nine months
ended September 30, 1997, representing an increase of $6,088,000 or 9.7%.
Salaries and benefits include costs of clinical nonphysician personnel of
Affiliated Physician Groups managed by the Company. The dollar increase in the
salaries and benefits was due to the addition of clinical and nonclinical
personnel required to support the increase in the number of Affiliated Physician
Groups managed by the Company offset, in part, by reductions of personnel
through the restructuring of corporate and field office operations. The
percentage of salaries and benefits to total revenues was 23.6% for the nine
months ended September 30, 1998, compared to 27.3% for the comparable period in
1997. This decrease is attributable to the streamlining of both clinical and
corporate operations, restructuring of the Company's benefits program provided
to employees, and increases in Medical Practice Revenues and Other Revenues
where the increased revenues were greater than the incremental increase in
salary and benefits.
PHARMACEUTICALS AND SUPPLIES. Pharmaceuticals and supplies for the nine
months ended September 30, 1998, were $106,693,000 compared to $75,777,000 for
the nine months ended September 30, 1997, representing an increase of
$30,916,000 or 40.8%. The percentage of pharmacy and supplies to total revenues
was 36.7% for the nine months ended September 30, 1998, compared to 32.9% for
the nine months ended September 30, 1997. Both the dollar and percentage
increases in pharmaceutical and supplies is primarily attributable to (i) an
increase in infusion services generated by the Affiliated Physician Groups, both
through the increased number of physicians and the enhancement of services
provided in physician offices, cancer centers, and retail pharmacies and (ii) an
increase in the usage of higher cost pharmaceuticals.
14
<PAGE> 15
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
nine months ended September 30, 1998, were $46,534,000 compared to $42,928,000
for the nine months ended September 30, 1997, representing an increase of
$3,606,000 or 8.4%. The percentage of general and administrative expenses to
total revenues was 16.0% for the nine months ended September 30, 1998, compared
to 18.7% for the nine months ended September 30, 1997. For the nine months ended
September 30, 1997, a $3,133,000 nonrecurring charge was recorded for costs for
legal and other expenses related to pending shareholder and other litigation and
the write-off of certain deferred costs. After considering the nonrecurring
charge recorded in 1997, general and administrative expenses increased
$6,739,000. The incremental increase in total revenues were at a higher rate
than the corresponding expenses.
PROVISION FOR UNCOLLECTIBLE ACCOUNTS. The provision for uncollectible
accounts for the nine months ended September 30, 1998, was $12,574,000 compared
to $48,015,000 for the nine months ended September 30, 1997, representing a
decrease of $35,441,000. For the year ended September 30, 1997, the Company
provided approximately $37,841,000 in additional provision for uncollectible
accounts receivable outstanding at September 30, 1997. The additional provision
was for accounts receivable that the Company deemed uncollectible as a result of
an extensive review of its outstanding accounts receivable and collection
experience utilizing reports and analyses not previously available to the
Company.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the
nine months ended September 30, 1998, was $18,512,000 compared to $15,627,000
for the nine months ended September 30, 1997, representing an increase of
$2,885,000 or 18.5%. Depreciation increased $2,043,000 as a result of the
additional office and cancer center locations that were opened or assumed by the
Company since September 30, 1997. Amortization increased (i) $300,000 as a
result of the change (effective July 1, 1998) in the amortization period of the
current Service Agreements to 25 years and (ii) $842,000 as a result of the
increase in costs incurred by the Company for physician groups entering into new
Service Agreements.
INTEREST. Interest expense for the nine months ended September 30,
1998, was $3,034,000 compared to $2,896,000 for the nine months ended September
30, 1997, representing an increase of $138,000 or 47.7%. Interest expense arises
as a result of borrowings under the Company's revolving credit facility and
amounts owed to Affiliated Physician Groups as consideration, in part, for
entering into Service Agreements.
INCOME TAXES. The income tax provision was $12,986,000 for the nine
months ended September 30, 1998, compared to an income tax benefit of $5,594,000
for the nine months ended September 30, 1997. 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 recorded in 1997 was provided at the applicable federal
rate.
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 nine months ended September 30,
1998, was $23,686,000. Collections of the Company's accounts receivable are an
integral part of the Company's liquidity from operating activities. Under the
terms of most of the Company's Service Agreements, the Company purchases from
the Affiliated Physician Groups the accounts receivable arising from Medical
Practice Revenues at their estimated fair value at the end of each month. An
increase of $14,095,000 in outstanding accounts receivable decreased the net
cash provided by operations. The increase in accounts receivable is attributable
to the increase in Medical Practice Revenues since December 31, 1997. The
reduction of $8,561,000 in the income tax receivable contributed to a
15
<PAGE> 16
respective increase in net cash provided by operations. In March 1998, the
Company received a $3,850,000 refund on income taxes that were paid in 1997,
prior to a writedown of its accounts receivable and other nonrecurring expenses
that were incurred during 1997. This writedown resulted in a tax loss for the
year ended December 31, 1997, which is being carried forward to offset taxable
income for 1998 and to reduce the related income tax receivable. The Company has
advanced to its Affiliated Physician Groups, primarily TOPA, amounts needed for
working capital purposes primarily to assist with the development of new
markets. These advances bear interest at the prime rate (8.25% at September 30,
1998). These advances decreased $3,590,000 since December 31, 1997, to
$11,722,000.
Net cash used in investing activities for the nine months ended
September 30, 1998, was $27,515,000. During the nine months ended September 30,
1998, the Company expended $8,229,000 in partial consideration to enter into
Service Agreements. In August 1998 we acquired radiology technical services in
Beaumont, Texas. Capital expenditures during the nine months ended September 30,
1998, were $17,435,000. The Company continued and completed the construction of
cancer centers in Columbia, Missouri and Denison, Texas. Construction of a
cancer center in Maplewood, Minnesota continued and was completed in July 1998.
These expenditures were funded through cash flow provided by operations and
through borrowings under the Revolver. Contributions to a limited partnership
were $1,860,000. The limited partnership, in which the Company is the general
partner, continued and completed construction of a cancer center in Eugene,
Oregon.
Net cash flows from financing activities for the nine months ended
September 30, 1998, were $4,609,000. At September 30, 1998, borrowings under the
Revolver were $40,000,000, an increase of $8,000,000 since December 31, 1997.
Payments to Affiliated Physician Groups on long-term notes issued as partial
consideration for entering into Service Agreements were $4,366,000.
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 September 30, 1998) or at Bank One Texas,
N.A.'s prime rate (8.25% at September 30, 1998). 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 September 30,
1998, $100,000,000 was available for borrowing under the Revolver.
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 cash flows provided by operations and 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 1999, 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.
16
<PAGE> 17
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 expected to deliver an
update to the software during the third quarter of 1998 to make the system
operational for the year 2000. The Company does not believe that the costs to
make the current practice management systems and other ancillary computer
systems operational for the year 2000 will be material. 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 is also currently assessing a new practice management system that is
year 2000 compatible, and the installation is expected to be fully installed and
operational before January 2000. The total cost of the new practice management
system, exclusive of internal costs, is anticipated to be between $4-5 million.
Such costs will be funded through operations or working capital advances under
the Revolver. A committee has also been formed to address the Year 2000
implications throughout the Company, particularly as it relates to its medical
equipment used in its cancer centers and office locations. The Company does not
anticipate that material costs will be incurred to make equipment affected by
the Year 2000 operational.
17
<PAGE> 18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
- --------------------------------------------------------------------------------
Inapplicable.
ITEM 2. CHANGES IN SECURITIES.
- --------------------------------------------------------------------------------
Except as described below in response to this item, no securities of
the Company have been sold by the Company during the three-month period ended
September 30, 1998, without registration under the Securities Act of 1933. The
issuance of securities described below have been, or will be, made in reliance
on Section 4(2) of the Securities Act of 1933.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
- --------------------------------------------------------------------------------
Inapplicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- --------------------------------------------------------------------------------
Inapplicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
- --------------------------------------------------------------------------------
(a) Exhibits. See index to Exhibits following signatures.
(b) The Company filed no reports on Form 8-K for the three months ended
September 30, 1998.
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHYSICIAN RELIANCE NETWORK, INC.
Date: November 13, 1998 By: /s/ John T. Casey
------------------------------------
John T. Casey, Chairman and
Chief Executive Officer
By: /s/ Michael N. Murdock
------------------------------------
Michael N. Murdock, Executive Vice
President and Chief Financial Officer
19
<PAGE> 20
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
INDEX
TO EXHIBITS DESCRIPTION
EXHIBIT NUMBER
- --------------------- -----------------------------------------------------------------------------------
<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 -- Amended and Restated Credit Agreement dated as of June 30, 1998, among
Physician Reliance Network, Inc., as Borrower, Bank One, Texas, N.A.,
NationsBank of Texas, N.A., Banque Paribus, Cooperative Centrale Raiffeisen
Boerenteenbank B.A., The Fuji Bank Limited, Mellon Bank, N.A., PNC Bank
National Association and SuntrustBank, Central Florida, N.A. (and the other
Lenders, if any from time to time party hereto) as Lenders.
10.2 -- Amended and Restated Credit Agreement dated as of August 26, 1998, among
Physician Reliance Network, Inc., as Borrower, Bank One, Texas, N.A.,
NationsBank of Texas, N.A., Banque Paribus, Cooperative Centrale Raiffeisen
Boerenteenbank B.A., The Fuji Bank Limited, Mellon Bank, N.A., PNC Bank
National Association and SuntrustBank, Central Florida, N.A. (and the other
Lenders, if any from time to time party hereto) as Lenders.
27.1 -- Financial Data Schedule, Nine Months Ended September 30, 1998
27.2 -- Financial Data Schedule, Nine Months Ended September 30, 1997
</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.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 3,552
<SECURITIES> 5,445
<RECEIVABLES> 101,255
<ALLOWANCES> 0
<INVENTORY> 12,875
<CURRENT-ASSETS> 144,547
<PP&E> 216,594
<DEPRECIATION> 61,475
<TOTAL-ASSETS> 439,045
<CURRENT-LIABILITIES> 50,237
<BONDS> 0
0
0
<COMMON> 512
<OTHER-SE> 325,504
<TOTAL-LIABILITY-AND-EQUITY> 439,045
<SALES> 266,437
<TOTAL-REVENUES> 291,046
<CGS> 240,525
<TOTAL-COSTS> 240,525
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 12,574
<INTEREST-EXPENSE> 3,034
<INCOME-PRETAX> 34,913
<INCOME-TAX> 12,986
<INCOME-CONTINUING> 21,927
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,927
<EPS-PRIMARY> .42
<EPS-DILUTED> .41
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,160
<SECURITIES> 0
<RECEIVABLES> 80,127
<ALLOWANCES> 0
<INVENTORY> 7,941
<CURRENT-ASSETS> 125,920
<PP&E> 195,939
<DEPRECIATION> 42,094
<TOTAL-ASSETS> 396,558
<CURRENT-LIABILITIES> 48,235
<BONDS> 0
0
0
<COMMON> 483
<OTHER-SE> 284,467
<TOTAL-LIABILITY-AND-EQUITY> 396,558
<SALES> 211,925
<TOTAL-REVENUES> 229,970
<CGS> 197,030
<TOTAL-COSTS> 197,030
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 48,015
<INTEREST-EXPENSE> 2,896
<INCOME-PRETAX> (17,971)
<INCOME-TAX> (5,594)
<INCOME-CONTINUING> (12,377)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,377)
<EPS-PRIMARY> .24
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