<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
Physician Reliance Network, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials:
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE> 2
PHYSICIAN RELIANCE NETWORK, INC.
TWO LINCOLN CENTRE, SUITE 900
5420 LBJ FREEWAY
DALLAS, TEXAS 75240
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 21, 1997
As a shareholder of Physician Reliance Network, Inc. (the "Company"), you
are hereby given notice of and invited to attend in person or by proxy the
Annual Meeting of Shareholders of the Company to be held at the Embassy Suites
Hotel, 13131 North Central Expressway, Dallas, Texas, on May 21, 1997, at 1:00
p.m., for the following purposes:
1. To elect five directors for a one-year term and until their successors
are duly elected and qualified; and
2. To transact such other business as may properly come before the Annual
Meeting or any adjournment thereof.
The Board of Directors has fixed the close of business on March 28, 1997 as
the record date (the "Record Date") for the determination of shareholders
entitled to notice of and to vote at the Annual Meeting and any adjournment
thereof. Only shareholders of record at the close of business on the Record Date
are entitled to notice of and to vote at the Annual Meeting.
You are cordially invited to attend the Annual Meeting. WHETHER OR NOT YOU
EXPECT TO ATTEND THE ANNUAL MEETING, MANAGEMENT DESIRES TO HAVE THE MAXIMUM
REPRESENTATION AT THE ANNUAL MEETING AND RESPECTFULLY REQUESTS THAT YOU DATE,
EXECUTE, AND MAIL PROMPTLY THE ENCLOSED PROXY IN THE ENCLOSED STAMPED ENVELOPE
FOR WHICH NO ADDITIONAL POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES. A
proxy may be revoked by a shareholder at any time prior to its use as specified
in the enclosed proxy statement.
BY ORDER OF THE BOARD OF DIRECTORS,
GEORGE P. MCGINN, JR.
SECRETARY
Dallas, Texas
April 21, 1997
<PAGE> 3
PHYSICIAN RELIANCE NETWORK, INC.
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 21, 1997
To Our Shareholders:
This Proxy Statement is furnished to shareholders of Physician Reliance
Network, Inc. (the "Company") for use at the Annual Meeting of Shareholders (the
"Annual Meeting") to be held at the date, time, and place and for the purposes
set forth in the accompanying Notice of Annual Meeting of Shareholders, or at
any adjournment or adjournments thereof. The record of shareholders entitled to
vote at the Annual Meeting was taken at the close of business on March 28, 1997
(the "Record Date"). The approximate date on which this Proxy Statement and the
enclosed proxy are first being sent to shareholders is April 21, 1997. The
principal executive offices of the Company are located at Two Lincoln Centre,
Suite 900, 5420 LBJ Freeway, Dallas, Texas 75240.
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
As of April 16, 1997, there were 48,272,325 shares of common stock, no par
value per share (the "Common Stock"), outstanding and entitled to vote at the
Annual Meeting. Each share of Common Stock is entitled to one vote on the
matters to be voted on at the Annual Meeting. The following table sets forth, as
of the date hereof, the beneficial ownership of (i) each current director, all
of whom are nominated for re-election, (ii) each of the executive officers named
in the Summary Compensation Table on page 6 hereof (collectively, the "Named
Executive Officers"), (iii) the directors and executive officers as a group, and
(iv) each shareholder known by management to beneficially own in excess of 5% of
the outstanding Common Stock. Under the rules of the Securities and Exchange
Commission (the "SEC"), a person is deemed to be a "beneficial owner" of a
security if he or she has or shares the power to vote or direct the voting of
such security or the power to dispose of or to direct the disposition of such
security. Accordingly, more than one person may be deemed to be a beneficial
owner of the same security. Shares of Common Stock subject to options held by
directors and executive officers that are exercisable within 60 days of the date
hereof are deemed outstanding for the purpose of computing such director's or
executive officer's beneficial ownership and the beneficial ownership of all
directors and executive officers as a group. Unless otherwise indicated, the
Company believes that the beneficial owner set forth in the table has sole
voting and investment power.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Name of Amount and Nature of Percent
Beneficial Owner Beneficial Ownership of Class
- --------------------------------------------------------------------------------------
<S> <C> <C>
Merrick H. Reese, M.D.(1)(2) 1,047,485 (3) 2.2%
Joseph S. Bailes, M.D.(1)(2) 184,752 (4) *
George P. McGinn, Jr.(1) 77,976 (5) *
Pam J. Burgess(1) 14,475 (6) *
Nancy G. Brinker(2) 52,328 (7) *
Robert W. Daly(2) 37,274 (8) *
Boone Powell, Jr.(2) 44,096 (9) *
Randall D. Kurtz(1)(10) 92,208 (11) *
Putnam Investments, Inc.(12) 2,391,900 (13) 5.0%
Baylor University Medical Center(14) 2,458,568 (15) 5.1%
Texas Oncology, P.A.(16) 10,315,096 (17) 21.4%
Kaufmann Fund, Inc.(18) 3,000,000 (19) 6.2%
Directors and executive officers as a group 11,938,254 (20) 24.5%
(9 persons)
</TABLE>
1
<PAGE> 4
- -----------------------------------
* Less than one percent.
(1) Named Executive Officer.
(2) Director and nominated for re-election at the Annual Meeting.
(3) Includes 95,488 shares subject to options granted by the Company. Does
not include shares beneficially owned by Texas Oncology, P.A. ("TOPA"),
for whom Dr. Reese serves as president and a director.
(4) Includes 55,488 shares subject to options granted by the Company.
(5) Includes 55,000 shares subject to options granted by the Company.
(6) Includes 14,000 shares subject to options granted by the Company.
(7) Includes 43,328 shares subject to options granted by the Company.
(8) Includes 1,594 shares owned by Mr. Daly through TA Venture Investors
Limited Partnership and 35,680 shares subject to options granted by the
Company. Does not include an aggregate of 750,084 shares owned by an
affiliated group of investment partnerships as to which TA Associates,
Inc. ("TA Associates") exercises sole investment and voting power or
12,584 shares held by TA Venture Investors Limited Partnership.
Principals and employees of TA Associates (including Mr. Daly, a
managing director of TA Associates) comprise the general partners of TA
Venture Investors Limited Partnership. In such capacity, Mr. Daly may
be deemed to share voting and investment power with respect to the
12,584 shares held by TA Venture Investors Limited Partnership. Mr.
Daly disclaims beneficial ownership of such shares except to the extent
of the 1,594 shares as to which he holds a pecuniary interest. Based
solely upon information provided to the Company by TA Associates.
(9) Includes 29,096 shares subject to options granted by the Company. Does
not include shares beneficially owned by Baylor University Medical
Center ("BUMC"), for whom Mr. Powell serves as president and chief
executive officer, as to which Mr. Powell disclaims beneficial
ownership. See Note 16.
(10) Mr. Kurtz resigned as Executive Vice President, Chief Financial
Officer, and Treasurer of the Company effective January 3, 1997. See
"Executive Compensation -- Severance and Consulting Agreements."
(11) Includes 25,488 shares subject to options granted by TOPA.
(12) Address: One Post Office Square, Boston, MA 02109.
(13) Based solely upon information set forth in a Schedule 13G filed with
the SEC by Putnam Investments, Inc., a registered investment advisor
("Putnam"). Putnam reported that, through its subsidiaries, it had
shared voting power with respect to 56,600 shares of Common Stock and
shared dispositive power with respect to 2,391,900 shares of Common
Stock. Putnam is a wholly-owned subsidiary of Marsh & McLennan
Companies, Inc.
(14) Address: 3500 Gaston Avenue, Dallas, TX 75246.
(15) Based solely upon information set forth in a Schedule 13G filed with
the SEC by BUMC.
(16) Address: Two Lincoln Centre, Suite 900, 5420 LBJ Freeway, Dallas,
TX 75240.
(17) Does not include 3,478,104 shares of Common Stock owned by persons
currently and formerly employed by TOPA, which shares TOPA has options
to purchase upon the occurrence of certain events, including
termination of employment. These options expire with respect to 183,512
of such shares in 1997; 1,209,2960 of such shares in 1998; 903,862 of
such shares in 1999; and the balance of such shares in 2000. Includes
2,877,237 shares of Common Stock subject to options granted by TOPA to
certain persons.
(18) Address: 140 East 45th Street, 43rd Floor, New York, NY 10017.
(19) Based solely upon information provided to the Company by Kaufmann Fund,
Inc., a mutual fund.
(20) Does not include shares beneficially owned by the TA Investors or BUMC.
Includes shares beneficially owned by TOPA and 359,056 shares subject
to options granted by the Company.
2
<PAGE> 5
ELECTION OF DIRECTORS
Five directors are to be elected at the Annual Meeting for a term of one
year and until their successors are elected and qualified. Election of directors
requires a majority of the votes cast in such election. It is intended that
shares represented by the enclosed proxy will be voted FOR the election of the
nominees named below unless a contrary choice is indicated. All such nominees
are presently directors of the Company. Management believes that all the
nominees will be available and able to serve as directors. If for any reason any
of the director nominees named below should not be available or able to serve,
it is intended that such shares will be voted for such substitute nominees as
may be proposed by the Board of Directors of the Company. Certain information as
of the date hereof with respect to each nominee for election as director is set
forth below.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR EACH OF THE NOMINEES SET
FORTH HEREIN.
- --------------------------------------------------------------------------------
Merrick H. Reese, M.D. Director since 1993 Age 59
Dr. Reese has been Chairman of the Board, President, and Chief Executive Officer
of the Company since its formation in June 1993. Dr. Reese has been president
and a director of TOPA, a physician professional association and affiliate of
the Company, since 1983. See "Certain Transactions -- Service Agreements" and
"Certain Transactions -- TOPA Note." 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.
- --------------------------------------------------------------------------------
Joseph S. Bailes, M.D. Director since 1993 Age 40
Dr. Bailes 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. See "Certain Transactions --
Service Agreements" and "Certain Transactions -- TOPA Note." 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
an advisory director of Texas State Bank.
- --------------------------------------------------------------------------------
Nancy G. Brinker Director since 1994 Age 50
Ms. Brinker has been a Director of the Company since September 1994. Since
February 1995, Ms. Brinker has been chief executive officer of In Your Corner,
Inc., a provider of health and wellness products and services. Ms. Brinker is
the founder of the Susan G. Komen Breast Cancer Foundation, one of the leading
sponsors of breast cancer research and awareness programs in the nation. Ms.
Brinker served as an independent pharmaceutical consultant from 1992 to 1994.
- --------------------------------------------------------------------------------
Robert W. Daly Director since 1993 Age 45
Mr. Daly has been a Director of the Company since October 1993. Mr. Daly has
been a managing director of TA Associates, a venture capital firm, since January
1994. Mr. Daly was a general partner of TA Associates from July 1984 to December
1993. Mr. Daly is also a director of Sheridan Healthcare, Inc.
- --------------------------------------------------------------------------------
3
<PAGE> 6
- --------------------------------------------------------------------------------
Boone Powell, Jr. Director since 1994 Age 60
Mr. Powell has been a Director of the Company since September 1994. Mr. Powell
has been the president and chief executive officer of Baylor Health Care System
and BUMC since 1980. See "Certain Transactions -- BUMC Lease." Mr. Powell serves
as an active member of Voluntary Hospitals of America. He is also a director of
Abbott Laboratories and Comerica Bank - Texas and is a fellow of the American
College of Health Care Executives.
- --------------------------------------------------------------------------------
The Board of Directors holds regular quarterly meetings and meets on other
occasions when required by special circumstances. Certain directors also devote
their time and attention to the Board's principal standing committees. The Board
of Directors does not have a standing nominating committee. The standing
committees, their primary functions, and memberships are as follows:
Audit Committee -- This committee makes recommendations to the Board of
Directors with respect to the Company's financial statements and the
appointment of independent auditors, reviews significant audit and
accounting policies and practices, meets with the Company's independent
public accountants concerning, among other things, the scope of audits and
reports, and reviews the performance of the overall accounting and
financial controls of the Company. Members of the Audit Committee are
Messrs. Daly and Powell.
Compensation Committee -- This committee has the responsibility for
reviewing and approving the salaries, bonuses, and other compensation and
benefits of executive officers, advising management regarding benefits and
other terms and conditions of compensation, and administering the Company's
1993 Stock Option Plan (the "Employee Option Plan"). Members of the
Compensation Committee are Ms. Brinker and Messrs. Daly and Powell.
Mr. Powell was elected as a director of the Company in September 1994
pursuant to an agreement between BUMC and the Company. Under such agreement, the
Company is required to use its best efforts to cause Mr. Powell to be
recommended to the shareholders for election to the Board of Directors until
July 31, 1999, provided BUMC and its affiliates own at least 50% of the shares
of Common Stock initially issued to BUMC in 1994 (at least 1,529,284 shares of
Common Stock). During such period, TOPA has agreed to vote its shares in favor
of Mr. Powell in an election of directors.
The Board of Directors held four meetings during the fiscal year ended
December 31, 1996. The Compensation Committee and the Audit Committee held three
and two meetings, respectively, during the fiscal year ended December 31, 1996.
Each of the directors attended at least 75% of the meetings of the Board of
Directors and the committees on which he or she served.
4
<PAGE> 7
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the total compensation paid or accrued by
the Company on behalf of the Chief Executive Officer and the four other most
highly paid executive officers of the Company who were serving as executive
officers at December 31, 1996 (collectively referred to herein as the "Named
Executive Officers"). The Company has employment agreements with each of its
executive officers, including the Named Executive Officers. See "-- Employment
Agreements."
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
---------------------- ---------------------
Securities Underlying
Name and Principal Positions Year (1) Salary ($) Bonus ($) Options (#) All Other Compensation ($)
- ----------------------------- ------- --------- --------- --------------------- --------------------------
<S> <C> <C> <C> <C> <C>
Merrick H. Reese, M.D., 1996 275,000 68,750 -- --
President and Chief Executive 1995 258,333 -- 160,000 --
Officer 1994 75,000(2) -- 25,488 --
Joseph S. Bailes, M.D., 1996 224,900 25,000 -- --
Executive Vice President and 1995 220,000 125,000 80,000 --
National Medical Director 1994 33,575(2) -- 25,488 --
George P. McGinn, Jr., 1996 203,973 29,166 120,000(3) 4,750(4)
Executive Vice President, 1995 (5) 159,998 -- 120,000 15,000(6)
General Counsel, and Secretary
Pam J. Burgess, 1996 (7) 164,905 15,000 70,000(3) 4,750(4)
Executive Vice President and
Chief Operating Officer
Randall D. Kurtz, 1996 249,519 37,500 100,000(3) --
Executive Vice President, 1995 209,423 45,000 100,000 --
Chief Financial Officer, and 1994 118,041 -- 127,440 15,000(6)
Treasurer (8)
</TABLE>
- -----------------------------
(1) The information presented is for the calendar year. Effective December 31,
1994, the Company adopted a December 31 fiscal year end.
(2) Drs. Reese and Bailes did not begin to receive salaries from the Company
until September 1, 1994.
(3) Reflects the number of shares subject to options repriced during fiscal
1996. See "-- Report on Repricing of Options."
(4) Contribution by the Company under the profit sharing plan.
(5) Mr. McGinn commenced employment with the Company in May 1995.
(6) Amounts paid in connection with initial employment to cover transition and
related expenses.
(7) Ms. Burgess commenced employment with the Company in January 1996.
(8) Mr. Kurtz resigned as Executive Vice President, Chief Financial Officer,
and Treasurer effective January 3, 1997. See "-- Severance and Consulting
Agreements."
5
<PAGE> 8
OPTION GRANTS TABLE
The following table provides information as to options granted to the Named
Executive Officers by the Company during the fiscal year ended December 31,
1996. Drs. Reese and Bailes were not granted options by the Company during the
fiscal year ended December 31, 1996. No separate stock appreciation rights
("SARs") have ever been granted by the Company.
<TABLE>
<CAPTION>
Potential Realizable Value at
Securities Assumed Annual Rate of Stock
Number of Percent of Total Price Appreciation for
Underlying Options Exercise Option Term
Named Executive Options Granted to Price per Expiration -----------------------------
Officer Granted(#)(1) Employees(2) share($) Date 5%($) 10%($)
--------------- ------------- ---------------- --------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
George P. McGinn, Jr. 100,000 6.563 May 26, 2005 337,300 819,203
20,000 6.563 November 30, 2005 72,367 178,244
-------
120,000 10.8%
Pam J. Burgess 70,000(3) 6.3% 6.563 January 13, 2006 259,105 641,200
Randall D. Kurtz 40,000 6.563 January 27, 2005 128,508 309,225
40,000 6.563 May 11, 2005 134,920 327,681
20,000 6.563 November 30, 2005 72,367 178,244
-------
100,000 9.0%
</TABLE>
- ----------
(1) Options repriced in fiscal 1996. See "-- Report on Repricing of Options."
(2) Includes options initially granted and all options repriced in fiscal 1996.
See "-- Report on Repricing of Options."
(3) The option was initially granted in January 1996 at an exercise price of
$19.375 per share, but was repriced in November 1996. See "-- Report on
Repricing of Options."
AGGREGATED YEAR-END OPTION VALUE TABLE
The following table provides information as to options issued by the
Company that were held by the Named Executive Officers as of December 31, 1996.
No options granted by the Company were exercised by the Named Executive Officers
during 1996. None of the Named Executive Officers has held or exercised separate
SARs.
<TABLE>
<CAPTION>
Value of Unexercised
Number of Securities In-the-Money
Underlying Unexercised Options at Options at December 31,
December 31, 1996(#) 1996($)(1)
--------------------------------- ------------------------------
Named Executive Officer Exercisable Unexercisable Exercisable Unexercisable
- ------------------------- -------------- --------------- ------------ --------------
<S> <C> <C> <C> <C>
Merrick H. Reese 65,488 120,000 137,508 --
Joseph S. Bailes 45,488 60,000 137,508 --
George P. McGinn, Jr. 30,000 90,000 35,610 106,830
Pam J. Burgess -- 70,000 -- 83,090
Randall D. Kurtz 88,720 138,720 373,444 432,794
</TABLE>
- ----------
(1) The aggregate dollar value of the unexercised options held at fiscal year
end are calculated as the difference between the fair market value of the
Common Stock on December 31, 1996 ($7.75 per share as reported on The
Nasdaq Stock Market's National Market (the "Nasdaq National Market")) and
the exercise price of the stock options (ranging from $2.355 per share to
$17.75 per share). Such amounts reflect the repricing of options effected
in November 1996. See "-- Report on Repricing of Options."
6
<PAGE> 9
REPORT ON REPRICING OF OPTIONS
On November 13, 1996, the Compensation Committee approved an amendment to
all options then outstanding under the Employee Option Plan (other than options
held by Drs. Reese and Bailes) granted after the date of the Company's initial
public offering (the "IPO") in November 1994 (the "Amended Options") to reduce
the exercise price to $6.563 per share, the closing sale price of the Common
Stock on November 13, 1996 as reported on the Nasdaq National Market. No options
held by directors were repriced. The following table sets forth certain
information concerning the amendment, which has been the only repricing of
options held by an executive officer of the Company since the IPO.
TEN YEAR OPTIONS REPRICINGS
<TABLE>
<CAPTION>
Number of Length of
Securities Market Price Original Option
Underlying of Stock at Exercise Price Term Remaining
Options Time of at Time of New at Date of
Repriced or Repricing or Repricing or Exercise Repricing or
Name Date Amended(#) Amendment($) Amendment($) Price($) Amendment
- ----------------------------- -------- ------------ ------------ ------------ -------- -----------------
<S> <C> <C> <C> <C> <C> <C>
George P. McGinn, Jr., 11/13/96 100,000 6.563 9.125 6.563 8 years, 6 months
Executive Vice President, 11/13/96 20,000 6.563 17.75 6.563 9 years
General Counsel, and
Secretary
Pam J. Burgess, 11/13/96 70,000 6.563 19.375 6.563 9 years, 2 months
Executive Vice President
and Chief Operating
Officer
Randall D. Kurtz, 11/13/96 40,000 6.563 9.875 6.563 8 years, 2 months
Executive Vice President, 11/13/96 40,000 6.563 9.375 6.563 8 years, 6 months
Chief Financial Officer, 11/13/96 20,000 6.563 17.75 6.563 9 years
and Treasurer
</TABLE>
The Compensation Committee believes that repricing the Amended Options to
the current market price of the Common Stock was in the best interests of the
Company and its shareholders. In the view of the Compensation Committee, the
decline in the market price of the Common Stock substantially impaired the
effectiveness of the Amended Options as incentives to management's performance.
It was also determined by the Compensation Committee that repricing the Amended
Options would renew the incentive for employees of the Company to acquire an
equity interest in the Company, which the Compensation Committee believes better
aligns the long-term interests of management with those of the shareholders. The
Committee set the exercise price of the Amended Options at $6.563 per share, the
closing price of the Company's stock on the Nasdaq National Market at the time
of the repricing. The options, as amended, are exercisable in accordance with
the vesting schedules previously established for the Amended Options, expire on
the original expiration dates of the Amended Options, and otherwise are
identical in all material respects to the Amended Options. On April 16, 1997,
the closing sale price of the Common Stock on the Nasdaq Stock Market was $5.56
per share.
NANCY G. BRINKER ROBERT W. DALY BOONE POWELL, JR.
COMPENSATION OF DIRECTORS
Directors who are employees of the Company do not receive additional
compensation for serving as a director of the Company. Non-employee directors of
the Company are entitled to a retainer equal to $1,000 per quarter that the
director serves as a director of the Company; a fee of $1,000 for each board
meeting attended in person, $500 for each board meeting in which the director
participates by telephone; and a fee of $500 for each committee meeting attended
in person. All directors are entitled to reimbursement
7
<PAGE> 10
for their actual out-of-pocket expenses incurred in connection with attending
meetings. In addition, non-employee directors participate in the Company's 1994
Stock Option Plan for Outside Directors (the "Director Option Plan"). In
accordance with the terms of the Director Option Plan, each outside director
receives an option to purchase 38,232 shares of Common Stock upon his or her
initial election to the Board of Directors and annual grants of options to
purchase 5,096 shares upon his or her re-election to the Board of Directors.
Options issued under the Director Option Plan have an exercise price per share
equal to the average bid and asked price of the Common Stock on the Nasdaq
National Market on the date of grant and become exercisable in full on the first
anniversary of the date of grant.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with each of its
executive officers. Generally, the employment agreements establish the
executive's base salary and contain a noncompetition agreement for a period of
one year following termination. The employment agreement can be terminated at
any time by the Company for "cause," as defined in the employment agreement.
Each agreement can also be terminated if the employee is disabled or unable to
perform his or her assigned duties for a period of 90 consecutive days. In the
event the employee is terminated by the Company without cause, or in the event
that the employee terminates his or her employment within one year of a "change
in control," the Company will continue to pay the employee a salary for the
duration of the agreement. A "change in control" occurs for purposes of the
employment agreements if a person, entity, or group (as defined in Section
13(d)(3) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), other than the Company, a wholly owned subsidiary of the Company, any
employee benefit plan of the Company or any of its subsidiaries, or TOPA,
becomes the beneficial owner of the Company's securities having 25% or more of
the combined voting power of the then outstanding securities of the Company that
may be cast for the election of directors of the Company (other than as a result
of an issuance of securities initiated by the Company in the ordinary course of
business) or if a cash tender or exchange offer, merger, or other business
combination, sale of all or substantially all of the assets of the Company, or
other capital reorganization results in the transfer or exchange of more than
50% of the voting shares of the Company.
SEVERANCE AND CONSULTING AGREEMENTS
Effective as of January 3, 1997, Mr. Kurtz resigned as Executive Vice
President, Chief Financial Officer, and Treasurer of the Company. Pursuant to
the terms of a Severance Agreement between Mr. Kurtz and the Company, the
Company paid Mr. Kurtz $287,019 on January 3, 1997, and will pay Mr. Kurtz an
additional $70,000 on or before the earlier of January 3, 1998 or the occurrence
of a "change in control" (as defined in the Severance Agreement). The Severance
Agreement also provides for the continuation, at the Company's expense, of Mr.
Kurtz's health insurance benefits for a period of up to one year from the
effective date of Mr. Kurtz's resignation. The Company and Mr. Kurtz also
entered into a Consulting Agreement pursuant to which Mr. Kurtz will assist the
Company with various special projects, including the development of a
not-for-profit research foundation. Mr. Kurtz received a consulting fee of
$50,000 on January 31, 1997 for his services pursuant to the Consulting
Agreement, and will be entitled to an additional fee of $125 per hour for each
hour in excess of 400 hours worked pursuant to the terms of the Consulting
Agreement. The term of the Consulting Agreement expires December 31, 1997, and
may be terminated earlier by the Company, with or without cause, upon sixty
days' prior written notice.
8
<PAGE> 11
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The compensation of the Company's executive officers is reviewed and
approved annually by the Compensation Committee. The Compensation Committee is
currently composed of Ms. Brinker and Messrs. Daly and Powell, none of whom at
any time has been an officer or employee of the Company. In addition to
reviewing and approving executive officers' salary and bonus arrangements, the
Compensation Committee administers the awards of stock options pursuant to the
Employee Option Plan.
COMPENSATION POLICIES APPLICABLE TO EXECUTIVE OFFICERS FOR 1996
The objectives of the Company's executive compensation program are to (i)
attract, motivate, and retain key executives responsible for the success of the
Company, (ii) reward key executives based on corporate and individual
performance, and (iii) provide incentives designed to maximize shareholder
value. The three primary components of the executive officer compensation
program are base salaries, annual cash bonuses, and equity awards in the form of
stock options.
The base salary of each of the Company's executive officers is established
pursuant to an employment agreement that is approved by the Compensation
Committee. Base salaries are reviewed annually by the Compensation Committee and
may be increased, but not decreased, in the Committee's discretion. For 1996,
certain of the executive officers' base salaries were increased by amounts
ranging from 2% to 17% based upon the recommendations of the Chief Executive
Officer and on the substantive determination of the Committee as to the
executives' contributions to corporate performance in general.
Each executive is entitled to receive such bonuses or other incentive
compensation as the Compensation Committee determines in its sole discretion.
The Compensation Committee establishes a minimum earnings per share target for
purposes of establishing whether bonuses will be paid to certain of the
Company's executive officers, including the Chief Executive Officer. Upon
achievement of such targets, bonuses would be paid to such executives in amounts
determined in the subjective discretion of the Compensation Committee based, in
part, on such executives' leadership, teamwork, and relationships with
contracting physicians. Bonuses for other executives were determined without
reference to any specific objective performance factors in the subjective
determination of the Committee. Based on the achievement of the 1995 earnings
per share target established by the Compensation Committee, bonuses were paid to
the Company's executive officers in 1996 for services rendered in 1995. No
bonuses will be paid to the Company's executive officers in 1997 for services
rendered in 1996 because the Company did not meet the earnings per share target
established by the Compensation Committee.
In order to align long-term interests of executive officers with those of
shareholders, the Compensation Committee, in its subjective discretion, from
time to time considers the award of stock options. The terms of these options,
including the sizes of the grants, are determined by the Compensation Committee
based on its subjective judgment and without regard to any specific performance
criteria. Awards of stock options to executive officers have been historically
at then-current market prices and with periodic vesting over four or five years.
CEO COMPENSATION
In evaluating the compensation of Merrick H. Reese, the Company's Chief
Executive Officer, the Compensation Committee utilized the same compensation
policies applicable to executive officers in general. Based on the achievement
of the 1995 earnings per share target established by the Compensation Committee,
and based on the subjective assessment of Dr. Reese's individual performance and
the effects of Company growth on his responsibilities, the Compensation
Committee approved a cash bonus in 1996 for services rendered in 1995 to Dr.
Reese in the amount of $68,750. Dr. Reese will not receive a bonus in 1997 for
services rendered in 1996.
9
<PAGE> 12
FEDERAL INCOME TAX DEDUCTIBILITY LIMITATION
Section 162(m) of the Internal Revenue Code of 1986, as amended, enacted as
part of the Omnibus Budget Reconciliation Act of 1993, generally disallows a tax
deduction to public companies for compensation over $1.0 million paid to the
Company's Chief Executive Officer and four other most highly paid executive
officers. Under the regulations, certain "performance based" compensation is not
subject to the deduction limit. Grants of options pursuant to the Employee
Option Plan should be considered "performance based." Other forms of
compensation provided by the Company to its executives, however, are not
excluded from such limit. Because the Company does not believe it is in any
immediate danger of losing any deductions, no definitive determinations have
been made by the Compensation Committee as to whether it will approve any
compensation arrangements that will cause the $1.0 million limit to be exceeded
in the future.
NANCY G. BRINKER ROBERT W. DALY BOONE POWELL, JR.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board's Compensation Committee is composed of Ms. Brinker and Messrs.
Daly and Powell. None of these persons has at any time been an officer or
employee of the Company or any of its subsidiaries. No executive officer of the
Company served during 1996 as a member of a compensation committee or as a
director of any entity of which any of the Company's directors serves as an
executive officer, except for Dr. Reese who is an executive officer and director
of both the Company and TOPA.
CERTAIN TRANSACTIONS
SERVICE AGREEMENTS
The Company and TOPA entered into service agreements in 1993 (the "Service
Agreements"), whereby the Company provides 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. Effective December 31, 1996, the
Company and TOPA terminated the service agreement relating to pharmaceuticals.
The Company and TOPA entered into an Amended and Restated Service Agreement (the
"Amended Service Agreement"), effective January 1, 1996. In December 1996, the
term of the Amended Service Agreement was extended from December 31, 2023 to
December 31, 2033. The Company paid TOPA $1.0 million in connection with the
extension of the term of the Amended Service Agreement.
During the year ended December 31, 1996, TOPA paid the Company an aggregate
of approximately $200.1 million pursuant to the Service Agreements. Dr. Reese,
Chairman of the Board, President, and Chief Executive Officer of the Company is
president and a director of TOPA. Dr. Bailes, a Director and Executive Vice
President and National Medical Director of the Company, is employed by TOPA.
TOPA NOTE
In 1994, the Company sold 1,529,284 shares of Common Stock to TOPA for
consideration of $4.315 per share, or an aggregate of $6.6 million, in the form
of a promissory note from TOPA (the "TOPA Note"), $6.4 million of which was
repaid in 1995. During 1996, TOPA paid the Company approximately $16,000 in
interest under the TOPA Note and, in December 1996, TOPA repaid the remaining
$200,000 outstanding under the TOPA Note. The TOPA Note bore interest at the
prime rate established by Bank One, Texas, N.A., plus .625%. Interest only was
payable quarterly at the end of each calendar quarter until December 31, 1997.
10
<PAGE> 13
BUMC LEASE
The Company leases certain facilities on the BUMC hospital campus in
Dallas, Texas from an affiliate of BUMC (the "BUMC Lease"). Mr. Powell, a
Director of the Company, is president and chief executive officer of BUMC. Rent
is payable monthly on the basis of square footage subject to the BUMC Lease. The
primary term of the BUMC Lease expires December 31, 2005 and the Company has two
five-year renewal options. At December 31, 1996, the Company leased
approximately 105,000 square feet from BUMC pursuant to the BUMC Lease. Total
rental payments by the Company to BUMC pursuant to the BUMC Lease for the year
ended December 31, 1996 were approximately $1.6 million.
Effective January 15, 1996, Texas Surgery Center, Ltd. ("TSC"), a
partnership in which the Company owns an indirect 40% interest, leased
approximately 17,000 square feet from BUMC under the BUMC Lease. Total rental
payments by TSC to BUMC pursuant to the BUMC Lease for the year ended December
31, 1996 were approximately $295,400. In February 1997, the Company sold all of
its interest in TSC to an affiliate of BUMC for $1.95 million.
PERFORMANCE GRAPH
The following graph compares the cumulative returns of $100 invested on
November 23, 1994 (the date of the Company's initial public offering) in (a) the
Company, (b) the CRSP Index for the Nasdaq Stock Market (the "Nasdaq U.S.
Companies"), and (c) the CRSP Index for Nasdaq Health Stocks (the "Nasdaq Health
Services"), assuming reinvestment of all dividends.
<TABLE>
<CAPTION>
11/23/94* 12/94 12/95 12/96
--------- ----- ----- -----
<S> <C> <C> <C> <C>
Physician Reliance Network, Inc. $100 $118 $245 $ 95
Nasdaq U.S. Companies $100 $102 $145 $178
Nasdaq Health Services $100 $ 99 $126 $126
</TABLE>
_______________
* Initial public offering completed on November 23, 1994
11
<PAGE> 14
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors, the
Company's executive officers, and persons who beneficially own more than ten
percent of the Common Stock to file reports of ownership and changes in
ownership with the SEC. Such directors, officers, and greater than ten percent
shareholders are required by SEC regulation to furnish the Company with copies
of all Section 16(a) forms they file.
Based solely on the Company's review of the copies of such forms furnished
to the Company, or written representations from certain reporting persons, the
Company believes that during 1996 its officers, directors, and greater than ten
percent beneficial owners were in compliance with all applicable filing
requirements except: two reports, covering an aggregate of two transactions,
were filed late by each of Joseph S. Bailes and Randall D. Kurtz; three reports,
covering an aggregate of three transactions, were filed late by Nancy G.
Brinker; three reports, covering an aggregate of five transactions, were filed
late by Merrick H. Reese; four reports, covering an aggregate of five
transactions, were filed late by Robert J. Whren; two reports, covering an
aggregate of three transactions, were filed late by J. Ernest Sims; one report,
covering one transaction, was filed late by Boone Powell, Jr; and five reports,
covering an aggregate of eighty-two transactions, were filed late by TOPA.
PERSONS MAKING THE SOLICITATION
The enclosed form of proxy is solicited on behalf of the Board of Directors
of the Company. The cost of soliciting proxies in the accompanying form will be
borne by the Company. In addition to the use of mail, employees of the Company
may solicit proxies by telephone or telecopy. Upon request, the Company will
reimburse brokers, dealers, banks, and trustees, or their nominees, for
reasonable expenses incurred by them in forwarding proxy materials to beneficial
owners of the Common Stock.
REVOCABILITY OF PROXY
Shares represented by valid proxies will be voted in accordance with
instructions contained therein, or, in the absence of such instructions, in
accordance with the Board of Directors' recommendations. Any shareholder of the
Company has the unconditional right to revoke his or her proxy at any time prior
to the voting thereof by any action inconsistent with the proxy, including
notifying the Secretary of the Company in writing, executing a subsequent proxy,
or personally appearing at the Annual Meeting and casting a contrary vote.
However, no such revocation will be effective unless and until such notice of
revocation has been received by the Company at or prior to the Annual Meeting.
METHOD OF COUNTING VOTES
Unless a contrary choice is indicated, all duly executed proxies will be
voted in accordance with the instructions set forth on the back side of the
proxy card. Abstentions and broker non-votes will be counted as present for
purposes of determining a quorum. A broker non-vote occurs when a broker holding
shares registered in street name is permitted to vote, in the broker's
discretion, on routine matters without receiving instructions from the client,
but is not permitted to vote without instructions on non-routine matters, and
the broker returns a proxy card with no vote (the "non-vote") on the non-routine
matter. Because directors are elected by a majority of the votes cast,
abstentions and non-votes are not considered in the election.
12
<PAGE> 15
PROPOSALS OF SHAREHOLDERS
A proper proposal submitted by a shareholder in accordance with applicable
rules and regulations for presentation at the Company's Annual Meeting of
Shareholders in 1998 and received at the Company's executive offices no later
than December 22, 1997, will be included in the Company's Proxy Statement and
form of proxy relating to such Annual Meeting.
OTHER MATTERS
The Board of Directors is not aware of any matter to be presented for
action at the Annual Meeting other than the matters set forth herein. Should any
other matter requiring a vote of shareholders arise, the proxies in the enclosed
form confer upon the person or persons entitled to vote the shares represented
by such proxies discretionary authority to vote the same in accordance with
their best judgment in the interest of the Company.
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors has selected Arthur Andersen LLP to serve as
independent auditors for the current fiscal year. Such firm has served as the
independent auditors for the Company and its predecessor entities since January
1992. Representatives of Arthur Andersen LLP are expected to be present at the
Annual Meeting and will be given the opportunity to make a statement if they
desire to do so and to respond to appropriate questions.
FINANCIAL STATEMENTS
A copy of the Company's 1996 Annual Report containing audited financial
statements for the fiscal year ended December 31, 1996 accompanies this Proxy
Statement. The Annual Report does not constitute a part of the proxy
solicitation material.
BY ORDER OF THE BOARD OF DIRECTORS,
GEORGE P. MCGINN, JR.
SECRETARY
April 21, 1997
13
<PAGE> 16
Appendix A
PROXY PHYSICIAN RELIANCE NETWORK, INC. PROXY
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS FOR THE ANNUAL MEETING OF
SHAREHOLDERS OF PHYSICIAN RELIANCE NETWORK, INC. (THE "COMPANY") TO BE HELD ON
MAY 21, 1997
The undersigned hereby appoints Merrick H. Reese and George P. McGinn, Jr., and
each of them, as proxies, with full power of substitution, to vote all shares
of the undersigned as shown below on this proxy at the Annual Meeting of
Shareholders of Physician Reliance Network, Inc. to be held at the Embassy
Suites Hotel, 13131 North Central Expressway, Dallas, Texas, on Wednesday, May
21, 1997 at 1:00 p.m., local time, and any adjournments thereof.
YOUR SHARES WILL BE VOTED IN ACCORDANCE WITH YOUR INSTRUCTIONS. IF NO CHOICE IS
SPECIFIED, SHARES WILL BE VOTED FOR THE ELECTION OF ALL NOMINEES.
[ ] Check here for address change.
New Address: ________________________________
_____________________________________________
_____________________________________________
(Please date and sign this proxy on the reverse side.)
PHYSICIAN RELIANCE NETWORK, INC.
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY. [X]
1. Election of Directors--
Nominees: Merrick H. Reese, Joseph S. Bailes, Nancy G. Brinker, Robert W.
Daly and Boone Powell, Jr.
FOR ALL [ ] WITHHOLD ALL [ ] FOR ALL [ ]
(Except Nominee(s) written below)
_________________________________
2. In their discretion on any other matter that may properly come before said
meeting or any adjournments thereof.
PLEASE SIGN HERE AND RETURN PROMPTLY
Dated: ______________________, 1997
Signature(s) ___________________________
________________________________________
Please sign exactly as your name appears
at left. If registered in the names of two
or more persons, each should sign.
Executors, administrators, trustees,
guardians, attorneys, and corporate
officers should show their full titles.
FOLD AND DETACH HERE
YOUR VOTE IS IMPORTANT!
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY PROMPTLY
USING THE ENCLOSED ENVELOPE.
