Forget about acquisitions. For troubled Physicians Resource Group, the rest of 1998 will be devoted to getting rid of some doctors and renegotiating deals with others to raise badly needed cash.
The nation's largest physician practice management company focusing on ophthalmology now says it is trying to reposition itself primarily as an operator of ambulatory surgery centers focusing on eye care. To make that happen, the company is negotiating with its larger practices to make deals it hopes will provide cash in hand and will strengthen the rocky relationships it now has with many of its doctors.
The Dallas-based company's plans are revealed in PRG's 1997 year-end financial statement filed April 15 with the Securities and Exchange Commission; other details have been obtained from sources close to the negotiations.
Under the terms of the deals that PRG is attempting to negotiate, doctors would pay a smaller management fee and have more control over their business operations than they previously have had. In return, the doctors would buy back some of their practice assets from PRG and hand over $41 million (of a total of $52 million) in overdue management fees, which were unpaid in protest over PRG's unsatisfactory management and declining stock prices. (PRG has declared the other $11 million in fees uncollectable.) In the past, PRG management fees have totaled as much as 35% of practice revenue, its physicians say, which is high compared to other PPMs.
Sources close to the physician groups say not all of the specific terms have been settled, and there is no established deadline to agree on a deal. PRG, in its 1997 earnings statement, says it first approached physician groups in March.
Meanwhile, PRG already is in the process of selling or "disposing of," in the company's words, 44 of its 130 practices. Eighteen already are gone. PRG did not disclose the locations of those practices nor who might be buying them. But the company did tell analysts in an April 16 conference call that the affected practices were located in areas in which the company has a small market presence. PRG has 692 doctors in 22 states; 176 are in 11 states in which PRG has 20 doctors or fewer.
One major motivation for these deals is that PRG needs cash, fast. The company, which lost $41.3 million on $411.6 million of revenue in 1997, has until year's end to pay off $12 million owed to lender NationsBank, according to the company's April 15 SEC filing. Of that total, $9.5 million must be repaid by Sept. 30.
The company has not disclosed how much cash its physician deals would raise, though it did take $65.4 million in charges against 1997 earnings to account for dropping the 44 practices.
PRG, according to its SEC filing, has $15 million in cash on hand and $72.3 million in working capital, which is comparatively tiny in light of its $168.6 million of debt. Plus, it will be difficult to reduce that debt because 97% of the company's revenue -- compared to 89% in 1996 -- is being eaten by day-to-day costs, not including charge-offs.
Furthermore, PRG is spending time and money fighting numerous lawsuits, including six suits by shareholders. The most recent suit was filed March 19 in Pasco County, Fla., Circuit Court by Frederick Hauber, M.D., of New Port Richey, Fla. Hauber is seeking to end his affiliation with PRG, claiming his original agreement with the company was illegal under a recent Florida Board of Medicine ruling that is now under appeal. The ruling found certain PPM fee arrangements to be illegal under fee-splitting regulations.
At least four other PRG-affiliated groups have lawsuits pending (see chart). Physician group sources say many doctors have held off filing lawsuits because of the current negotiations for amended agreements with PRG, or because their contracts require that they first submit disputes to a Dallas-based arbitrator.
Peter Dorflinger, PRG's president and chief executive officer, who was hired in February to replace Emmett Moore, hosted an April 16 teleconference with investment analysts, which was the first time in months they had heard from the company. Information during the teleconference was strictly limited; PRG allowed analysts one question each and explained if they attempted to ask another their connection to the conference would be cut. Ellie Kerns, an analyst with BT Alex.
Brown in Boston, says such rules are not unusual for a company discussing turnaround plans.
"They probably have five plans on the table, and they don't want to say this is the way they're going, because then they would be tied to that" as far as analysts are concerned, Kerns says.
Dorflinger, along with chief financial officer Pamela Westbrook (hired March 30) and counsel Richard D'Amico, told analysts the company plans to concentrate more on developing ambulatory surgery centers rather than acquiring physician practices. The company currently has 48 surgery centers.
"It has the potential to be very profitable, relative to managing the practices of disaffected physicians," says Piper Jaffray managing director Brooks O'Neil, who listened in on the conference call.
PRG executives also said they would move away from what O'Neil characterized as "managing the practices from the corporate office." Under existing agreements, PRG handles all business matters, including setting budgets and approving supply orders for its practices, and hiring all but professional employees.
O'Neil says he sensed that PRG was stepping lightly when it came to relationships with its doctors, which Standard & Poor's had criticized in a February report downgrading PRG's debt. Even when it comes to collecting outstanding management fees, PRG may move with a light touch, he says.
"Contractually, physicians are obligated to pay," O'Neil says. "But some of the money may be not worth trying to collect. I don't think (PRG) wants to get into a lot of litigation with their doctors."
While analysts say it was clear PRG executives were feeling pressured financially, they agreed with the PRG executives' belief that the company will survive.
In a telephone conversation, a secretary for Dorflinger said on April 17 that Dorflinger would talk to Modern Physician in an April 21 phone interview.
However, the secretary later canceled the interview, saying Dorflinger was "busy."