<PAGE> 1
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
(AMENDMENT NO. 1)
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) April 18, 1996
PHYSICIANS RESOURCE GROUP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 1-13778 76-0456864
(STATE OR OTHER JURISDICTION (COMMISSION (I.R.S. EMPLOYER
OF INCORPORATION) FILE NUMBER) IDENTIFICATION NO.)
</TABLE>
Three Lincoln Centre, Suite 1540, 5430 LBJ Freeway, Dallas, TX 75240
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code (214) 982-8200
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
<PAGE> 2
Reference is made to the Current Report on Form 8-K (the "Form 8-K") filed
by Physicians Resource Group, Inc. on May 3, 1996. The Form 8-K is hereby
amended to read in its entirety as follows:
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
Physicians Resource Group, Inc., a Delaware corporation (the "Company") and
a wholly-owned subsidiary of the Company ("Merger Sub"), entered into Agreements
and Plans of Reorganization (the "W/K Acquisition Agreements") with the
following ophthalmological practices (the "W/K Practices") and physician: Key
Eye Center, P.A., Key Cataract Surgery Center, P.A., Whitman Optical, Inc. and
Jeffrey Whitman, M.D.
Pursuant to such agreements, Merger Sub would acquire (the "W/K
Acquisitions"), with certain limited exceptions, all of the assets and
properties, real and personal, tangible and intangible, and certain liabilities
of the W/K Practices.
The W/K Acquisitions were consummated on April 18, 1996.
As a result of the W/K Acquisitions, the Company became the indirect holder
(through a wholly-owned subsidiary) of, with certain limited exceptions, all of
the assets and properties, real and personal, tangible and intangible, and
certain liabilities of the W/K Practices. Merger Sub intends to provide the use
of such assets to the respective ophthalmological practices from which they were
acquired pursuant to the terms of the management services agreements entered
into at the time of the W/K Acquisitions.
To the best knowledge of the Company, at the time of the W/K Acquisitions
there was no material relationship between (i) the W/K Practices and Jeffrey
Whitman, M.D., on the one hand, and (ii) the Company, or any of its affiliates,
any director or officer of the Company, or any associate of such director or
officer on the other.
The aggregate consideration paid by the Company as a result of the W/K
Acquisitions was 270,321 shares of the common stock, par value $.01 per share,
of the Company. The acquisition consideration for such acquisitions was
determined by arms-length negotiations between the parties to the applicable
acquisition agreements.
ITEM 5. OTHER EVENTS.
The Company and various wholly-owned subsidiaries of the Company (each a
"PRG Sub"), entered into Agreements and Plans of Reorganization or Asset
Purchase Agreements (the "Additional Acquisition Agreements") with the following
ophthalmological practices (the "Additional Practices") and physicians (the
"Additional Physicians"): John M. Haley, M.D., P.A., John M. Haley, M.D.; Shelby
A. Wyll, M.D., P.A., Shelby A. Wyll, M.D.; Rudolph Churner, M.D., Professional
Association, Rudolph Churner, M.D.; Medical & Surgical Eye Associates, P.A.,
Robert G. Burlingame, M.D.; Associates in Ophthalmology, P.A., Thomas A.
Whitaker, M.D., Reuben R. Tipton, III; WVR, P.A., Jeffrey Whitsett, M.D., Lieven
Van Riet, M.D.; and William H. Marr, M.D., P.A., William H. Marr, M.D.
Pursuant to such agreements, the respective PRG Subs would acquire (the
"Additional Acquisitions"), with certain limited exceptions, all of the assets
and properties, real and personal, tangible and intangible, and certain
liabilities of the Additional Practices.
The Additional Acquisitions were consummated between April 9, 1996 and
April 24, 1996.
As a result of the Additional Acquisitions, the Company became the indirect
holder (through its wholly-owned subsidiaries) of, with certain limited
exceptions, all of the assets and properties, real and personal, tangible and
intangible, and certain liabilities of the Additional Practices. The respective
PRG Subs intend to provide the use of such assets to the respective
ophthalmological practices from which they were acquired pursuant to the terms
of management services agreements entered into at the time of the Additional
Acquisitions.
To the best knowledge of the Company, at the time of the Additional
Acquisitions there was no material relationship between (i) the Additional
Practices and the Additional Physicians, on the one hand, and (ii) the
2
<PAGE> 3
Company, or any of its affiliates, any director or officer of the Company, or
any associate of such director or officer on the other.
The aggregate consideration paid by the Company as a result of the
Additional Acquisitions was 422,155 shares of the common stock, par value $.01
per share, of the Company and $390,000 cash. The acquisition consideration for
such acquisitions was determined by arms-length negotiations between the parties
to the applicable acquisition agreements.
The primary source of funds used in the Additional Acquisitions was cash
from the Company's working capital.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) The otherwise required financial statements of the businesses acquired
in the W/K Acquisitions (consisting of the combined financial statements
relating to the W/K Acquisitions combined with certain of the Additional
Acquisitions) were previously filed with the Securities and Exchange Commission
(the "SEC") and appear on pages F-83 through F-93 of the Company's Registration
Statement on Form S-1 (No. 333-3852) and are not required herein in reliance on
General Instruction B.3. to Form 8-K.
(b) Pro Forma Financial Information
The unaudited pro forma combined balance sheet of the Company attached
hereto as Annex A has been adjusted to give effect to the W/K Acquisitions and
other transactions described more fully therein, as though such transactions had
occurred on December 31, 1995. The unaudited pro forma combined statement of
operations of the Company for the year ended December 31, 1995 also attached
hereto as Annex A present the historical results of the Company as if the
Company had consummated the W/K Acquisitions and such other transactions on
January 1, 1995. Such pro forma information is not necessarily indicative of
operating results that would have been achieved had such transactions been
consummated at the beginning of the respective periods presented and should not
be construed as representative of future operations.
(c) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- - -------------------- ------------------------------------------------------------------------
<C> <S>
4.1 -- Restated Certificate of Incorporation of Physicians Resource Group,
Inc.(1)
4.2 -- Certificate of Designations, Preferences, Rights and Limitations of
Class A Preferred Stock of Physicians Resource Group, Inc.(1)
4.3 -- Third Amended and Restated Bylaws of Physicians Resource Group,
Inc.(2)
4.4 -- Form of Warrant Certificate(1)
4.5 -- Rights Agreement dated as of April 19, 1996 between Physicians
Resource Group, Inc. and Chemical Mellon Shareholder Services(3)
4.6 -- Form of certificate evidencing ownership of Common Stock of
Physicians Resource Group, Inc.(1)
</TABLE>
- - ---------------
(1) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (No. 33-91440) and incorporated herein by reference.
(2) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995, and incorporated herein by reference.
(3) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (No. 333-3852) and incorporated herein by reference.
3
<PAGE> 4
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 hereunto duly authorized.
PHYSICIANS RESOURCE GROUP, INC.
By: /s/ RICHARD J. D'AMICO
----------------------------
Richard J. D'Amico
Senior Vice President and General Counsel
Date: May 10, 1996
4
<PAGE> 5
ANNEX A
PHYSICIANS RESOURCE GROUP, INC.
UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements include the
unaudited pro forma combined balance sheet as of December 31, 1995 as if the
acquisition of the Key Eye Center, Key Cataract Surgery Center, Whitman Optical
and certain other practices acquired in the second quarter of 1996 (the 2nd
Quarter Acquisitions) and certain other transactions described below had
occurred on that date, and include the unaudited pro forma combined statement of
operations for the year ended December 31, 1995 as if the Merger and certain
other transactions as described below had occurred as of January 1, 1995. In the
Merger, shares of common stock of Physicians Resource Group, Inc. (PRG) were
exchanged for shares of stock of EyeCorp. The Merger will be accounted for as a
pooling of interests, and accordingly the historical operations and balance
sheets of PRG and EyeCorp have been combined in these financial statements.
The unaudited pro forma statements of operations for the year ended
December 31, 1995 also give effect to (i) the consummated PRG initial public
offering (IPO) and simultaneous exchange of cash, shares of its common stock and
note payable for certain assets of and liabilities (the Reorganization)
associated with ten eye care practices; (ii) the issuance of 3,553,000 shares of
PRG common stock in the IPO and the application of the net proceeds therefrom;
(iii) the acquisition of certain assets from and consummation of service
agreements with 21 eye care practices (including one practice as to which the
acquisition is probable but has not yet occurred) by PRG during the first and
second quarter of 1996 (the 1996 PRG Acquisitions); (iv) acquisition of certain
assets from and consummation by EyeCorp of service agreements with eye care
practices during 1995 (the 1995 EyeCorp Acquisitions); and (v) the PRG and
EyeCorp Credit Facilities and the application of the proceeds from borrowings
thereunder all as if such transactions or events had occurred on January 1,
1995. The pro forma balance sheet as of December 31, 1995 also gives effect to
(i) consummation of the 1996 PRG Acquisitions; and (ii) the PRG and EyeCorp
Credit Facilities and the proceeds from borrowings thereunder, all as if such
transactions or events had occurred on December 31, 1995.
The unaudited merger/significant transactions pro forma combined financial
statements have been prepared by PRG based on the supplemental combined
financial statements of PRG and EyeCorp included in PRG's registration statement
on Form S-1 (No. 333-3852), the unaudited financial statements of practices
acquired by PRG in the 1996 PRG Acquisitions and the practices acquired or to be
acquired by EyeCorp in the 1995 EyeCorp Acquisitions and other assumptions
deemed appropriate by PRG. These unaudited pro forma combined financial
statements may not be indicative of the actual results had the above events and
transactions occurred on the dates indicated or of actual results which may be
realized in the future. Neither expected benefits and cost reductions
anticipated by PRG or EyeCorp nor future corporate costs and expenses related to
the Merger have been reflected in the accompanying unaudited pro forma combined
financial statements.
A-1
<PAGE> 6
PHYSICIANS RESOURCE GROUP, INC.
UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA COMBINED BALANCE SHEET
AS OF DECEMBER 31, 1995
(000'S)
<TABLE>
<CAPTION>
ADJUSTMENTS
------------------------------------------------
PRG AND 1995
EYECORP FIRST SECOND EYECORP
SUPPLEMENTAL QUARTER QUARTER ACQUISITIONS TOTAL
COMBINED ACQUISITIONS ACQUISITIONS AND OTHER PRO FORMA
------------ ------------ ------------ ------------ ---------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................... $ 17,451 $ (7,670)(A-1) $ (390)(A-1) $ -- 9,391
Accounts receivable, net..................... 16,169 4,959(A-1) 1,539(A-1) -- 22,667
Inventories.................................. 2,045 471(A-1) 149(A-1) -- 2,665
Prepaid expenses and other current assets.... 6,633 800(A-1) 211(A-1) -- 7,644
-------- -------- -------- -------- --------
Total current assets................. 42,298 (1,440) 1,504 -- 42,367
PROPERTY AND EQUIPMENT, net:................... 27,519 5,222(A-1) 1,538(A-1) -- 34,279
INTANGIBLE ASSETS, net:
Work force................................... 3,285 4,300(A-1) 755(A-1) -- 8,340
Service Agreements........................... 36,392 23,032(A-1) 19,450(A-1) -- 81,339
2,465(A-2)
Goodwill..................................... 12,580 4,868(A-1) 2,662(A-1) -- 20,545
435(A-2)
-------- -------- -------- -------- --------
52,257 35,100 22,807 110,224
OTHER NONCURRENT ASSETS, net................... 1,538 858(A-1) 1,672(A-1) -- 4,062
-------- -------- -------- -------- --------
Total assets......................... $123,612 $ 39,740 $ 27,586 $ -- $ 190,938
======== ======== ======== ======== ========
LIABILITIES AND OWNERS' EQUITY
CURRENT LIABILITIES:
Obligation to former owners of affiliated
practices................................. $ 1,086 $ 119(A-1) $ 247(A-1) $ -- $ 1,452
Notes payable and current portion of
long-term debt............................ 1,531 1,050(A-1) 561(A-1) -- 3,142
Accounts payable and accrued expenses........ 10,397 2,879(A-1) 482(A-1) -- 13,758
Accrued salaries and benefits................ 3,075 1,105(A-1) 184(A-1) -- 4,364
Current portion of ASC obligation............ 3,100 -- -- -- 3,100
-------- -------- -------- -------- --------
Total current liabilities............ 19,189 5,153 1,474 -- 25,816
LONG-TERM DEBT, net of current portion......... 27,815 2,890(A-1) 3,050(A-1) 8,000(B) 44,655
2,900(A-2)
DEFERRED TAXES................................. 14,013 5,665(A-1) 8,415(A-1) -- 28,093
OTHER LONG-TERM LIABILITIES.................... 272 -- -- -- 272
-------- -------- -------- -------- --------
Total liabilities.................... 61,289 16,608 31,917 8,000 98,836
OWNER'S EQUITY:
Common stock................................. 157 14(A-1) 6(A-1) -- 177
Additional paid-in capital................... 60,374 23,118(A-1) 14,641(A-1) -- 98,133
Deficit...................................... 1,792 -- -- (8,000)(B) (6,208)
-------- -------- -------- -------- --------
Total owners' equity................. 62,323 23,132 14,641 (8,000) 92,102
-------- -------- -------- -------- --------
Total liabilities and owners'
equity............................. $123,612 $ 39,740 27,596 $ -- $ 190,938
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to unaudited merger/significant transactions pro forma
combined balance sheet.
A-2
<PAGE> 7
PHYSICIANS RESOURCE GROUP, INC.
UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(000'S, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
ADJUSTMENTS
--------------------------------------------------------------------------
PRG AND 1995
EYECORP FIRST SECOND EYECORP
SUPPLEMENTAL IPO QUARTER QUARTER ACQUISITIONS TOTAL
COMBINED REORGANIZATION ACQUISITIONS ACQUISITIONS AND OTHER PRO FORMA
------------ -------------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Management service
revenues................... $ 39,129 $ 22,085(C) $ 40,933(J) $ 11,433(J) $ 40,424(O) $ 154,004
Surgery center revenue....... 9,317 2,821(C) 4,825(J) 1,412(J) 4,749(O) 23,124
Other revenues............... 79 5(D) 322(K) -- -- 406
---------- ------- ------- ------- ------- -----------
Total revenues......... 48,525 24,911 46,080 12,845 45,173 177,534
COSTS AND EXPENSES:
Salaries, wages and
benefits................... 19,768 10,199(D) 20,115(K) 4,653(K) 15,455(P) 70,190
Pharmaceuticals and
supplies................... 6,687 3,494(D) 5,260(K) 738(K) 7,659(P) 23,838
General and administrative
expenses................... 16,022 6,115(D) 13,046(K) 3,798(K) 13,653(P) 51,110
(334)(G) (54)(M) (676)(Q)
(460)(N)
Depreciation and
amortization............... 2,609 1,217(D) 2,024(K) 475(K) 1,264(P) 10,977
(194)(F) (20)(H) 660(L) 1,448(R)
159(G) 1,312(L)
23(M)
Executive resignation
expenses................... 1,117 -- -- -- 1,117
Interest expense............. 1,157 233(D) 376(K) 169(K) 379(P) 2,851
(82)(E) (22)(H) (207)(S)
-- (24)(F) -- 872(T) --
---------- ------- ------- ------- ------- -----------
Total costs and
expenses............. 47,360 20,783 41,600 10,493 39,847 160,083
---------- ------- ------- ------- ------- -----------
INCOME BEFORE INCOME TAXES..... 1,165 4,128 4,480 2,352 5,326 17,451
PROVISION FOR INCOME TAXES..... (501) (1,610)(I) (1,747)(I) (917)(I) (2,130)(I) (6,905)(I)
---------- ------- ------- ------- ------- -----------
NET INCOME..................... $ 664 $ 2,518 $ 2,733 $ 1,435 $ 3,196 $ 10,546(U)(V)
========== ======= ======= ======= ======= ===========
NET INCOME PER SHARE........... $ .07 $ .58
========== ===========
NUMBER OF SHARES USED IN NET
INCOME PER SHARE
CALCULATION.................. 9,086,417 18,286,554(W)
========== ===========
</TABLE>
See accompanying notes to unaudited merger/significant transactions pro forma
statement of operations.
A-3
<PAGE> 8
PHYSICIANS RESOURCE GROUP, INC.
NOTES TO UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA COMBINED FINANCIAL STATEMENTS
(000'S, EXCEPT SHARE AMOUNTS)
PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS
The accompanying combined pro forma balance sheet as of December 31, 1995
gives effect to the Second Quarter Acquisitions, the First Quarter Acquisitions,
the Merger, certain other acquisitions and other significant transactions as if
such transactions or events had occurred on December 31, 1995. Excess cash on a
pro forma basis is assumed to be used for working capital purposes. The
estimated fair market values reflected below are based on preliminary estimates
and assumptions and are subject to revision. In management's opinion, the
preliminary allocation is not expected to be materially different than the final
allocation.
(A-1) Reflects the First Quarter and Second Quarter Acquisitions. Pursuant
to the First Quarter and Second Quarter Acquisitions, PRG acquired certain
practice assets and liabilities, excluding cash, in exchange for (1) the
issuance of 1,446,437 and 639,566 shares, respectively, of PRG common stock and
(2) the payment of approximately $7,670 and $1,684, respectively, in cash upon
closing. Simultaneously, with the purchase of the eye care practices' assets and
liabilities, the Company enters into a 40 year service agreement with the
practices. The estimated fair market value of the assets and liabilities of the
PRG Acquisition Practices are as follows:
<TABLE>
<CAPTION>
FIRST SECOND
DESCRIPTION QUARTER QUARTER
---------------------------------------------------------- ------- -------
(000'S)
<S> <C> <C>
Net assets acquired --
Accounts receivable, net................................ $ 4,959 $ 1,539
Inventories............................................. 471 149
Prepaid expenses and other current assets............... 800 211
Property and equipment, net............................. 5,222 1,538
Intangible assets --
Work force........................................... 4,300 755
Service Agreements................................... 23,032 19,450
Goodwill............................................. 4,868 2,662
Other noncurrent assets, net............................ 858 1,672
Obligations to former owners of affiliated practices.... (119) (247)
Notes payable and current portion of long-term debt..... (1,050) (561)
Accounts payable and accrued expenses................... (2,879) (482)
Accrued salaries and benefits........................... (1,105) (184)
Long-term debt, net..................................... (2,890) (3,050)
Deferred taxes.......................................... (5,665) (8,415)
-------- --------
$30,802 $15,037
======== ========
Consideration paid --
Cash.................................................... $ 7,670 $ 390
Common stock............................................ 23,132 14,647
-------- --------
$30,802 $15,037
======== ========
</TABLE>
The value of the shares issued in the First Quarter and Second Quarter
Acquisitions was based on the average trading price prior to the closing of the
individual transactions and is discounted, as appropriate, for trading
restrictions. Identifiable intangible assets consist of the nonphysician
employee work force, the service agreements and goodwill related to ASCs. The
estimated fair value of the nonphysician employee work force is based on the
estimated cost to replace the work force. The estimated fair value of the
service agreement for clinics is the excess of the purchase price over the
estimated fair value of the tangible assets and work force acquired and
liabilities assumed. Goodwill associated with ASCs is the purchase price in
excess of net tangible assets acquired.
A-4
<PAGE> 9
PHYSICIANS RESOURCE GROUP, INC.
NOTES TO UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(000'S, EXCEPT SHARE AMOUNTS)
In connection with the allocation of the purchase price to identifiable
intangible assets, PRG analyzed the nature of each practice including the number
of physicians in each group, number of clinics and their ability to recruit and
develop additional physicians; value of the nonphysician employee work force;
length of service agreement and ability to enforce the agreement; existence of
an ambulatory surgery center (ASC) and the trend in health care delivery methods
to an ASC-type facility. Management's analysis indicated that the work force in
place to be acquired represents an intangible asset. The typical replacement
cost of the work force has been estimated and will be amortized over the
expected average seven-year worklife of the existing work force. The physician
groups have the ability to extend their existence indefinitely; however, the
length of the service agreement, typically 40 years with additional renewal
options, effectively establishes a finite life for the amortization of
intangibles. Because PRG does not practice medicine, hire physicians, enter into
employment contracts with the physicians, directly contract with payors, etc.,
the intangible asset created in the purchase allocation process is associated
with the service agreement with the physician group. These practices typically
break into two categories:
(1) Physician practices and larger optometric practices are
characterized by multiple clinics, large staffs and multiple practitioners
and are composed of a mixture of surgery and complex vision service
providers with high-volume optometric providers. These practice groups
typically operate in a partnership manner and actively recruit physicians
for fellowship programs, or as employee physicians and, if appropriate,
subsequently admit qualified physicians into various levels of group
practice ownership. This manner of operations allows a practice to
perpetuate itself as individual physicians retire or are otherwise
replaced. Management of PRG estimates that the average major practice group
has practiced as a group for more than 15 years. The service agreements
with these groups are typically 40 years and, because the practice group
has an indefinite life, the Company has chosen to amortize the intangible
created over the shorter of 40 years or the life of the related service
agreement.
(2) The second practice category, optometric practices, can be
characterized as being composed of a single provider, smaller staffs and
one clinic and are typically limited to optometric services and primary eye
care. These practices do not normally have the same indefinite life
characteristics as the larger practices, and the intangible created in the
purchase transaction will be amortized over a 15-year period representing
the expected life of the related practice although the related service
agreement may extend well beyond that period.
The final intangible is the goodwill associated with the ASCs acquired. PRG
believes that outpatient surgery is rapidly becoming the preferred method of
delivery of many surgical procedures, replacing in-patient delivery in hospitals
and other extended-stay facilities. Benefits of ASCs include (1) lower cost of
service, (2) more efficient staffing and space utilization and (3) improved
physician productivity because of improved scheduling and faster turnaround. In
addition, an increasing number of surgeries are being performed in ASCs by
various medical specialists because of improved technology, treatment protocols
and anesthesiology. Because of these considerations, management believes that
goodwill arising from ASC purchases has an indefinite life and, therefore, a
40-year amortization period is being utilized for this asset.
The carrying value of the intangible assets will be reviewed at each
reporting period on a practice-by-practice basis to determine if facts and
circumstances exist which would suggest that the intangible assets may be
impaired or that the amortization period needs to be modified. Among the factors
PRG will consider in making the evaluation are changes in the market position,
reputation, profitability and geographical penetration of the practices or ASCs.
If indicators are present which indicate impairment is probable, PRG will
prepare a projection of the undiscounted cash flows of the specific practice and
determine if the intangible assets are recoverable based on these undiscounted
cash flows. If impairment is indicated, then an adjustment
A-5
<PAGE> 10
PHYSICIANS RESOURCE GROUP, INC.
NOTES TO UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(000'S, EXCEPT SHARE AMOUNTS)
will be made to reduce the carrying amounts of the intangible assets to their
values. PRG does not expect the adoption of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-lived Assets and for
Long-Lived Assets to Be Disposed Of," to have a material impact on its financial
condition or results of operations.
(A-2) Reflects $2,900 of transaction costs for the 1996 PRG Acquisitions
and related borrowing to pay for those costs.
(B) Reflects transaction costs related to the Merger of $8,000 which will
be charged to expense in the first quarter of 1996. These transaction costs will
be paid with proceeds from borrowings under PRG's Credit Facility.
PRO FORMA COMBINED STATEMENT OF OPERATIONS ADJUSTMENTS
The accompanying unaudited pro forma consolidated statements of operations
for the year ended December 31, 1995 assume that as of January 1, 1995, PRG had
completed the First Quarter and Second Quarter Acquisitions, the Merger, the IPO
and Reorganization, the 1995 EyeCorp Acquisitions and the financing under the
new PRG and EyeCorp Credit Facilities.
NOTES (C) - (G) REPRESENT ADJUSTMENTS RELATING TO THE IPO AND REORGANIZATION
(C) Represents calculated management service revenues of PRG, determined in
accordance with the management service agreements applied to the historical
operating results of the Founding Affiliated Practices for the first six months
of 1995.
<TABLE>
<CAPTION>
DESCRIPTION
-------------------------------------------------------------- YEAR ENDED
DECEMBER 31,
1995
------------
(000'S)
<S> <C>
Management service revenues(1)................................ $ 22,085
========
Revenues from ACSs(2)......................................... $ 2,821
========
</TABLE>
PRG receives, with respect to each of the Founding Affiliated Practices,
revenues based on the following components:
(1) Under the terms of its service agreements, PRG receives service
revenues based on certain operating and nonoperating expenses incurred on
behalf of the practice and a percentage of revenues relating to physician
and certain other medical services.
(2) With respect to several of the Practices, PRG owns or operates
ASCs and receives the related revenues for certain nonphysician services.
Various of these services fees are subject to certain negotiated
performance and other adjustments. The negotiated adjustments vary on a
practice-by-practice basis and include adjustments that cap or otherwise align
the fees based on percentages of revenues at specified levels related to the
profitability of the practice. Additionally, certain of the service fees based
on percentages of revenues are adjusted based on the actual results of the
practices, resulting in lower service fee ratios for incremental practice
results over specified base levels.
A-6
<PAGE> 11
PHYSICIANS RESOURCE GROUP, INC.
NOTES TO UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(000'S, EXCEPT SHARE AMOUNTS)
(D) Represents an adjustment to reflect historical costs of the Founding
Affiliated Practices which have been subsequently assumed by PRG in order to
fulfill PRG's obligations under the Service Agreements with such Practices. The
components of the adjustment for the first half of the year ended December 31,
1995, include costs of the Founding Affiliated Practices and a management
services organization (MSO) purchased by PRG in the Reorganization which are
included in the historical financial statements of the Founding Affiliated
Practices.
<TABLE>
<CAPTION>
DESCRIPTION
-------------------------------------------------------------- YEAR ENDED
DECEMBER 31,
1995
------------
(000'S)
<S> <C>
Other revenue, net............................................ $ (5)
Salaries, wages and benefits.................................. 10,199
Pharmaceuticals and supplies.................................. 3,494
General and administrative expenses........................... 6,115
Depreciation and amortization................................. 1,217
Interest expense.............................................. 233
</TABLE>
(E) Reflects the elimination of interest expense related to debt
extinguished with proceeds of the IPO.
(F) Reflects adjustments to the historical costs and expenses as follows:
<TABLE>
<CAPTION>
DESCRIPTION
------------------------------------------------------------------------ YEAR ENDED
DECEMBER 31,
1995
------------
(000'S)
<S> <C>
Change in depreciation method --
Pro forma depreciation(1)............................................. $ 916
Depreciation recorded in entry (D).................................... (1,148)
-------
Net depreciation adjustment................................... $ (232)
=======
Additional amortization --
Pro forma amortization(2)............................................. $ 107
Amortization recorded in entry (D).................................... (69)
-------
Net amortization adjustment................................... $ 38
=======
Reduction of interest expense --
Interest expense on capital leases that will not be incurred on a pro
forma basis(3)..................................................... $ (24)
=======
</TABLE>
Further explanation of the components of these calculations is as follows:
(1) The depreciation adjustment results from a change from an
accelerated method to a straight-line method and, where PRG has determined
that it is appropriate, a revision in the estimated useful lives of those
assets. The calculated pro forma amount is based on property and equipment
acquired of $11,305 with composite average useful lives of six years as of
January 1, 1995.
(2) Pro forma amortization of intangibles relates to $4,293 of
intangible assets resulting from the purchase of an MSO, which is being
amortized on a straight-line basis over a period of 40 years. This portion
of the amortization of the intangible asset has been included in entry (D).
A-7
<PAGE> 12
PHYSICIANS RESOURCE GROUP, INC.
NOTES TO UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(000'S, EXCEPT SHARE AMOUNTS)
(3) Certain capital leases recorded by the Founding Affiliated
Practices were not assumed by PRG because the underlying assets have been
acquired by PRG from their owners.
(G) Reflects reversal of operating lease expense for previously leased
assets with a net book value of approximately $3,736 acquired from owners of the
Founding Affiliated Practices and the recording of depreciation expense on a
straightline basis over a composite average useful life of 12 years. Debt
obligations relating to the underlying assets under operating leases of $2,401
as of December 31, 1995 have been extinguished with the proceeds of the IPO.
Accordingly, interest expense on such debt has not been reflected in the
accompanying pro forma statement of operations.
<TABLE>
<CAPTION>
DESCRIPTION
-------------------------------------------------------------- YEAR ENDED
DECEMBER 31,
1995
------------
(000'S)
<S> <C>
Reduction of lease expense.................................... $ (353)
Property tax on acquired assets............................... 19
------
Total general and administrative.................... $ (334)
======
Depreciation of acquired assets............................... $ 159
======
</TABLE>
NOTE (H) REFERS TO EXCLUDED ASSETS FROM THE FIRST QUARTER ACQUISITION PRACTICES
(H) Reflects the elimination of expenses related to certain assets which
have been included within the historical costs and expenses of the First Quarter
Acquisition Practices but will not be associated with PRG on an ongoing basis.
NOTE (I) REFERS TO INCOME TAXES
(I) Reflects federal and state income taxes that PRG would have incurred on
pro forma income before taxes.
NOTES (J) - (N) REFER TO ADJUSTMENTS RELATING TO FIRST QUARTER AND SECOND
QUARTER ACQUISITION PRACTICES
(J) Represents calculated management service revenues of PRG, determined in
accordance with the applicable service agreement applied to the historical
operating results of the First Quarter and Second Quarter Acquisition Practices.
<TABLE>
<CAPTION>
FIRST SECOND
QUARTER QUARTER
DESCRIPTION ACQUISITIONS ACQUISITIONS
------------------------------------------- ----------- -----------
(000'S)
<S> <C> <C>
Management service revenues(1)............. $40,933 $11,433
======= =======
Revenues from ASCs(2)...................... $ 4,825 $ 1,412
======= =======
</TABLE>
PRG will receive, with respect to each of the Acquisition Practices, revenues
based on the following components:
(1) Under the terms of its service agreements, the Company receives
service revenues based on certain operating and nonoperating expenses
incurred on behalf of the practice and a percentage of revenues relating to
physician and certain other medical services.
A-8
<PAGE> 13
PHYSICIANS RESOURCE GROUP, INC.
NOTES TO UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(000'S, EXCEPT SHARE AMOUNTS)
(2) With respect to several of the practices, PRG owns or operates
ASCs and receives related revenues for certain nonphysician services.
(K) Represents an adjustment to reflect historical costs of the First
Quarter and Second Quarter Acquisition Practices which will be assumed by PRG in
order to fulfill PRG's obligation under the applicable service agreements. The
components of the adjustment include costs of the acquisition practices being
purchased by PRG.
<TABLE>
<CAPTION>
FIRST SECOND
QUARTER QUARTER
DESCRIPTION ACQUISITIONS ACQUISITIONS
---------------------------------------------- ------------ ------------
(000'S)
<S> <C> <C>
Other revenue, net............................ $ (322) $ --
Salaries, wages and benefits.................. 20,115 4,653
Pharmaceuticals and supplies.................. 5,260 738
General and administrative expenses........... 13,046 3,798
Depreciation and amortization................. 2,024 475
Interest expense.............................. 376 169
</TABLE>
(L) Reflects adjustments to historical costs and expenses of $614, $122 and
$576 for the First Quarter Acquisitions and $108, $6, and $486 for the Second
Quarter Acquisitions, for (1) amortization of work force, (2) amortization of
goodwill related to the ASCs and (3) amortization of intangibles related to the
service agreements. This pro forma amortization is on $32,200 and $22,867,
respectively, of intangible assets as reflected on the pro forma balance sheet
amortized over periods of seven, 40 and 40 years, respectively.
(M) Reflects reversal of operating lease expense for previously leased
assets which will be acquired from owners of the PRG Acquisition Practices and
the recording of depreciation expense on a straight-line basis.
<TABLE>
<CAPTION>
DESCRIPTION
--------------------------------------------------------- YEAR ENDED
DECEMBER 31,
1995
------------
(000'S)
<S> <C>
Reduction of lease expense............................... $(54)
Depreciation of acquired assets.......................... 23
</TABLE>
(N) Includes the elimination of nonrecurring professional fees related to a
reorganization of one of the practices and nonrecurring professional fees
related to the First Quarter Acquisitions which are included in the historical
financials of the 1996 PRG Acquisition Practices.
NOTES (O) - (S) REFER TO 1995 EYECORP ACQUISITIONS
(O) Represents calculated EyeCorp management service revenues determined in
accordance with the applicable service agreements applied to the historical
operating results of the 1995 EyeCorp Acquisitions.
<TABLE>
<CAPTION>
DESCRIPTION
-------------------------------------------------------- YEAR ENDED
DECEMBER 31,
1995
------------
(000'S)
<S> <C>
Management service revenues(1).......................... $ 40,424
========
Revenues from ASCs(2)................................... $ 4,749
========
</TABLE>
A-9
<PAGE> 14
PHYSICIANS RESOURCE GROUP, INC.
NOTES TO UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(000'S, EXCEPT SHARE AMOUNTS)
EyeCorp will receive, with respect to each of the 1995 EyeCorp
Acquisitions, revenues based on the following primary components:
(1) Under the terms of its service agreements (which have terms
similar to PRG's service agreements), EyeCorp receives service revenues
based on certain operating and nonoperating expenses incurred on behalf of
the practice and a percentage of each practice's revenues or pretax
earnings relating to physician and certain other medical services.
(2) EyeCorp owns or operates ASCs and receives the related revenues
for certain nonphysician services.
(P) Represents an adjustment to reflect historical costs of the 1995
EyeCorp Acquisitions which will be assumed by EyeCorp in order to fulfill
EyeCorp's obligations under the applicable Service Agreements.
<TABLE>
<CAPTION>
DESCRIPTION
--------------------------------------------------------- YEAR ENDED
DECEMBER 31,
1995
------------
(000'S)
<S> <C>
Salaries, wages and benefits............................. $ 15,455
Pharmaceuticals and supplies............................. 7,659
General and administrative expenses...................... 13,653
Depreciation and amortization............................ 1,264
Interest expense......................................... 379
</TABLE>
(Q) Represents an adjustment to remove the nonrecurring unsuccessful
financing costs included in the EyeCorp historical financials.
(R) Represents additional amortization of intangible assets established in
the 1995 EyeCorp Acquisitions which occurred in late December 1995. If the 1995
EyeCorp Acquisitions had occurred on January 1, 1995, intangible assets would
have aggregated approximately $36,566 and additional amortization would have
aggregated $1,359 for the year ended December 31, 1995. Also includes $89
amortization of capitalized transaction and other fees for the year ended
December 31, 1995.
(S) Reflects a reduction in interest expense due to a reduction in interest
rates associated with repaying EyeCorp's existing debt borrowed under the Prior
Credit Facility with a portion of the proceeds from the borrowings under the
EyeCorp Credit Facility. This interest reduction was partially offset by an
overall increase in debt due to additional borrowings to fund the purchase price
of the 1995 EyeCorp Acquisitions. The reduction in interest expenses is
calculated as follows:
<TABLE>
<CAPTION>
DESCRIPTION
----------------------------------------------------------- YEAR ENDED
DECEMBER 31,
1995
------------
(000'S)
<S> <C>
Interest expense --
Prior Credit Facility.................................... $1,393
EyeCorp Credit Facility.................................. 1,186
------
Reduction in interest expense.................... $ (207)
======
</TABLE>
The Prior Credit Facility's weighted average principal balance outstanding
for the year ended December 31, 1995, was approximately $14,287 and the
applicable interest rate was 9.75%. The EyeCorp Credit Facility pro forma
weighted average principal balance outstanding (assuming additional borrowings
to fund
A-10
<PAGE> 15
PHYSICIANS RESOURCE GROUP, INC.
NOTES TO UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(000'S, EXCEPT SHARE AMOUNTS)
the cash portion of the purchase price of the 1995 EyeCorp Acquisitions and
related transactions) for the year ended December 31, 1995 was approximately
$14,825 and the applicable interest rate was 8.0%.
(T) Reflects interest expense related to additional borrowings under the
PRG and EyeCorp Credit Facilities of approximately $10,900 to pay transaction
costs and provide working capital associated with the Merger and the 1996 PRG
Acquisitions. The applicable interest rate was 8.0%.
NOTES (U) - (W) REFER TO THE PRO FORMA TOTALS
(U) The Company has decided to continue to apply the provisions of APB
Opinion 25 to its stock-based employee compensation arrangements.
(V) Direct transactions costs of approximately $8,000 associated with the
Merger are not included in the accompanying pro forma income statement. These
costs are anticipated to be recorded in the first quarter of 1996.
(W) Weighted average shares outstanding is summarized below:
<TABLE>
<CAPTION>
DESCRIPTION
- - --------------------------------------------------------------------- YEAR ENDED
DECEMBER 31,
1995
------------
(000'S)
<S> <C>
Outstanding PRG shares after IPO and additional shares purchased
by underwriters.................................................... 9,558,244
PRG stock options impact, using the treasury stock method............ 344,684
PRG shares issued in the 1996 PRG Acquisitions....................... 2,086,003
PRG shares issued to EyeCorp shareholders in connection with the
Merger............................................................. 6,089,506
PRG stock options impact, EyeCorp options assumed using the treasury
stock method....................................................... 208,117
----------
18,286,554
==========
</TABLE>
A-11
