<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) August 30, 1996
---------------
Physicians Resource Group, Inc.
-------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 1-13778 76-0456864
----------------- ------------ --------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
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 dated August 30,
1996, (the "Form 8-K") filed by Physicians Resource Group, Inc. on
September 6, 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 various wholly-owned subsidiaries of the Company (each an
"Acquisition Sub"), entered into acquisition agreements (the "Acquisition
Agreements") with the following ophthalmological practices (the "Practices")
and physicians (the "Physicians"):
(i) (a) Cincinnati Eye Institute, Inc., John S. Cohen, M.D., James D.
Faulkner, M.D., William J. Faulker, M.D., Robert C. Kersten, M.D.,
Richard S. Kerstine, M.D., Robert H. Osher, M.D., Robert W. Nash,
M.D., Michael R. Petersen, M.D., Gary A. Varley, M.D., Linda J. Greff,
M.D., Robert J. Cionni, M.D., Kevin T. Corcoran, O.D., Corwin M.
Smith, M.D. and (b) CEI Realty Associates, Ltd., (the "Cincinnati Eye
Acquisition");
(ii) Houston Eye Associates, P.A., Malcom L. Mazow, M.D., Robert H.
Stewart, M.D., Robert B. Wilkins, M.D., Jeffrey D. Lanier, M.D.,
Michael A. Bloome, M.D., Paul C. Salmonsen, M.D., Richard L.
Kimbrough, M.D., Jack T. Holladay, M.D., Jeffrey B. Arnoult, M.D.,
William H. Quayle, M.D., John D. Goosey, M.D., John M. Lim, M.D.,
Kathryn H. Musgrove, M.D., Marsha F. Soechting, M.D., Marc N. Longo,
M.D., (the "Houston Eye Acquisition");
(iii) Gregory L. Henderson, M.D., P.A., Gregory L. Henderson, M.D.,
(the "Henderson Acquisition"); and
(iv) (a) William Reynolds, M.D., P.A., William Reynolds, M.D., (b)
Tampa Eye Clinic, P.A., J. Burns Creighton, M.D., Ronald Seeley, M.D.,
Lewis Lauring, M.D., William Reynolds, M.D., David Leach, M.D., P.A.,
Timothy Lorenzen, M.D., P.A.; (c) Timothy Lorenzen, M.D., P.A.,
Timothy Lorenzen, M.D.; (d) Ronald Seeley, M.D., P.A., Ronald Seeley,
M.D.; (e) J. Burns Creighton, M.D., P.A., J. Burns Creighton, M.D.;
(f) David Leach, M.D., P.A., David Leach, M.D.; and (g) Lewis Lauring,
M.D., P.A., Lewis Lauring, M.D., (the "Tampa Acquisition").
Pursuant to the Acquisition Agreements, the respective Acquisition
Subs would acquire (the "Acquisitions"), with certain limited exceptions, all
of the assets and properties, real and personal, tangible and intangible, and
certain liabilities of the Practices.
The Acquisitions were consummated on August 30, 1996.
As a result of the Acquisitions, the Company became the indirect
holder (through the respective Acquisition Subs) of, with certain limited
exceptions, all of the assets and properties, real and personal, tangible and
intangible, and certain liabilities of the Practices. The respective
Acquisition Subs intend 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
Acquisitions.
<PAGE> 3
To the best knowledge of the Company, at the time of the Acquisitions
there was no material relationship between (i) the Practices and the
Physicians, 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
Acquisitions was approximately 3,360,000 shares of the common stock, par value
$.01 per share, of the Company ("Common Stock") and approximately $210,000 cash,
of which (i) approximately 1,540,000 shares of Common Stock were issued in
connection with the Cincinnati Eye Acquisition, (ii) approximately 840,000
shares of Common Stock were issued, and approximately $210,000 was paid, in
connection with the Houston Eye Acquisition, (iii) approximately 510,000 shares
were issued in connection with the Henderson Acquisition, and (iv) approximately
470,000 shares were issued in connection with the Tampa Acquisition. The
various acquisition considerations for such acquisitions were determined by
arms-length negotiations between the parties to the applicable acquisition
agreements.
The primary source of funds used in the Acquisitions was cash from the
Company's working capital.
ITEM 5. OTHER EVENTS.
The Company and various wholly-owned subsidiaries of the Company (each
an "Additional Acquisition Sub"), entered into acquisition agreements (the
"Additional Acquisition Agreements") with the following ophthalmological
practices (the "Additional Practices") and physicians (the "Additional
Physicians"):
(i) Eye Consultants of Cincinnati, Inc., Donald S. Jacobs, M.D. (the
"Jacobs Acquisition"); (ii) Middletown Ophthalmology, Inc., Tom F.
Straus, M.D. (the "Straus Acquisition"); (iii) Stuart J. Kaufman, M.D.,
P.A., Stuart J. Kaufman, M.D. (the "Kaufman Acquisition"); (iv)
Frederick Hauber, M.D., P.A., Frederick Hauber, M.D. (the "Hauber
Acquisition"); (v) Adolph A. Schonder, M.D., Ltd., Adolph A. Schonder,
M.D. (the "Schonder Acquisition"), and (vi) The Eye Institute of West
Florida, P.A., Stephen M. Weinstock, M.D., Jeffrey S. Schwartz, M.D.,
Leonard S. Kirsch, M.D. (the "West Florida Acquisition")
Pursuant to the Additional Acquisition Agreements, the respective
Additional Acquisition 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 on August 30, 1996.
As a result of the Additional Acquisitions, the Company became the
indirect holder (through the respective Additional Acquisition Subs) 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 Additional Acquisition Subs intend 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 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,
3
<PAGE> 4
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
Additional Acquisitions was approximately 820,000 shares of Common Stock. The
various acquisition considerations for such acquisitions were determined by
arms- length negotiations between the parties to the applicable acquisition
agreements.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) The audited combined balance sheet of Cincinnati Eye
Institute, Inc. and affiliate as of December 31, 1994 and
1995, and the related combined statements of earnings,
owners' equity and cash flows for each of the two years in
the period ended December 31, 1995, are attached hereto as
Annex A.
(b) The audited balance sheets of Houston Eye Associates as of
December 31, 1995 and 1994, and the related statements of
excess (deficiency) of revenues over expenses, changes in
stockholders' equity and cash flows for the years then ended
are attached hereto as Annex B.
(c) The audited balance sheets of Gregory L. Henderson, M.D.,
P.A., as of December 31, 1995, and the related statements of
earnings, owner's equity and cash flows for the year then
ended are attached hereto as Annex C.
(d) The audited balance sheet of Tampa Eye Clinic, P.A., as of
December 31, 1995, and the related statements of earnings,
owners' equity and cash flows for the year then ended are
attached hereto as Annex D.
(e) The unaudited pro forma combined balance sheet of the Company
as of June 30, 1996 attached hereto as Annex E has been
adjusted to give effect to the Cincinnati Eye Acquisition, the
Houston Eye Acquisition, the Henderson Acquisition, the Tampa
Acquisition, the West Florida Acquisition, the Kaufman
Acquisition, and the Hauber Acquisition as though such
transactions had occurred on June 30, 1996. The unaudited pro
forma consolidated statements of income of the Company attached
hereto as Annex E present the historical results of the Company
as if the Company had consummated the Cincinnati Eye
Acquisition, the Henderson Acquisition, the Tampa Acquisition,
the West Florida Acquisition, the Kaufman Acquisition, and the
Hauber Acquisition all on January 1, 1993 and the Houston
Acquisition 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 periods
presented and should not be construed as representative of
future operations. Such unaudited pro forma financial
statements should be read in conjunction with the historical
financial statements of the Company and of such acquired
practices.
(f) The audited combined balance sheet of The Eye Institute of
West Florida, P.A. and Douglas G. Johnson, O.D., P.A. as of
December 31, 1995, and the related combined statements of
earnings, owners' equity and cash flows for the year then
ended, which are attached hereto as Annex F, are voluntarily
being filed herewith in order to permit their incorporation by
reference.
(g) The unaudited supplemental combined balance sheets of the
Company as of December 31, 1994 and 1995 and June 30, 1996
(unaudited) and the related statements of income of the Company
for the years ended December 31, 1993, 1994 and 1995 and for
the six-months ended June 30, 1995 and 1996 (unaudited)
attached hereto as Annex G, give effect to the consummation of
the Cincinnati Eye Acquisition, the Henderson Acquisition, the
Tampa Acquisition, the West Florida Acquisition, the Kaufman
Acquisition, and the Hauber Acquisition, which acquisitions
were accounted for as pooling of interests.
4
<PAGE> 5
(h) Exhibits.
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C> <C>
2.1 - Agreement and Plan of Merger, dated August 13, 1996, between PRG Ohio III, Inc., Physicians
Resource Group, Inc., Cincinnati Eye Institute, Inc., John S. Cohen, M.D., James D. Faulkner,
M.D., William J. Faulker, M.D., Robert C. Kersten, M.D., Richard S. Kerstine, M.D., Robert H.
Osher, M.D., Robert W. Nash, M.D., Michael R. Petersen, M.D., Gary A. Varley, M.D., Linda J.
Greff, M.D., Robert J. Cionni, M.D., Kevin T. Corcoran, O.D. and Corwin M. Smith, M.D. (1)
2.2 - Agreement and Plan of Reorganization, dated August 13, 1996, between PRG HEA Acq. Corp.,
Physicians Resource Group, Inc., Houston Eye Associates, P.A., Malcom L. Mazow, M.D., Robert H.
Stewart, M.D., Robert B. Wilkins, M.D., Jeffrey D. Lanier, M.D., Michael A. Bloome, M.D., Paul
C. Salmonsen, M.D., Richard L. Kimbrough, M.D., Jack T. Holladay, M.D., Jeffrey B. Arnoult,
M.D., William H. Quayle, M.D., John D. Goosey, M.D., John M. Lim, M.D., Kathryn H. Musgrove,
M.D., Marsha F. Soechting, M.D. and Marc N. Longo, M.D. (1)
2.3 - Asset Purchase Agreement, dated August 13, 1996, between PRG Ohio III, Inc., Physicians
Resource Group, Inc. and CEI Realty Associates, Ltd. (1)
2.4 - Agreement and Plan of Merger, dated August 13, 1996, between PRG IV Acq. Corp., Physicians
Resource Group, Inc., Gregory L. Henderson, M.D., P.A. and Gregory L. Henderson, M.D. (1)
2.5 - Agreement and Plan of Merger, dated August 13, 1996, between PRG IX Acq. Corp., Physicians
Resource Group, Inc., William Reynolds, M.D., P.A. and William Reynolds, M.D. (1)
2.6 - Agreement and Plan of Merger, dated August 12, 1996, between PRG II Acq. Corp., Physicians
Resource Group, Inc., Tampa Eye Clinic, P.A., J. Burns Creighton, M.D., Ronald Seeley, M.D.,
Lewis Lauring, M.D., William Reynolds, M.D., David Leach, M.D., P.A. and Timothy Lorenzen,
M.D., P.A. (1)
2.7 - Agreement and Plan of Merger, dated August 13, 1996, between PRG XI Acq. Corp., Physicians
Resource Group, Inc., Timothy Lorenzen, M.D., P.A. and Timothy Lorenzen, M.D. (1)
2.8 - Agreement and Plan of Merger, dated August 13, 1996, between PRG VII Acq. Corp., Physicians
Resource Group, Inc., Ronald Seeley, M.D., P.A. and Ronald Seeley, M.D. (1)
2.9 - Agreement and Plan of Merger, dated August 13, 1996, between PRG VI Acq. Corp., Physicians
Resource Group, Inc., J. Burns Creighton, M.D., P.A. and J. Burns Creighton, M.D. (1)
</TABLE>
5
<PAGE> 6
<TABLE>
<S> <C> <C>
2.10 - Agreement and Plan of Merger, dated August 13, 1996, between PRG X Acq. Corp., Physicians
Resource Group, Inc., David Leach, M.D., P.A. and David Leach, M.D. (1)
2.11 - Agreement and Plan of Merger, dated August 13, 1996, between PRG VIII Acq. Corp., Physicians
Resource Group, Inc., Lewis Lauring, M.D., P.A. and Lewis Lauring, M.D. (1)
2.12 - Asset Purchase Agreement, dated August 13, 1996, between PRG Ohio, L.P., CEI Realty Associates, Ltd., and
Physicians Resource Group, Inc. (1)
4.1 - Restated Certificate of Incorporation of Physicians Resource Group, Inc.(2)
4.2 - Certificate of Designations, Preferences, Rights and Limitations of Class A Preferred Stock of
Physicians Resource Group, Inc.(2)
4.3 - Third Amended and Restated Bylaws of Physicians Resource Group, Inc.(3)
4.4 - Form of Warrant Certificate(2)
4.5 - Rights Agreement dated as of April 19, 1996 between Physicians Resource Group, Inc. and
Chemical Mellon Shareholder Services(4)
4.6 - Form of certificate evidencing ownership of Common Stock of Physicians Resource Group, Inc.(2)
23.1 - Consent of Arthur Andersen LLP (5)
23.2 - Consent of Wallingford, McDonald, Fox & Co., P.C. (5)
</TABLE>
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(1) - Previously filed herewith.
(2) - Previously filed as an exhibit to the Company's
Registration Statement on Form S-1 (No. 33- 91440)
and incorporated herein by reference.
(3) - 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.
(4) - Previously filed as an exhibit to the Company's
Registration Statement on Form S-1 (No. 333- 3852)
and incorporated herein by reference.
(5) - Filed herewith.
6
<PAGE> 7
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.
Date: September 24, 1996 By: /s/ Richard J. D'Amico
----------------------------
Richard J. D'Amico
Senior Vice President and
General Counsel
7
<PAGE> 8
ANNEX A
<PAGE> 9
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Physicians Resource Group, Inc.:
We have audited the accompanying combined balance sheet of Cincinnati Eye
Institute, Inc. and affiliate as of December 31, 1994 and 1995, and the
related combined statements of earnings, owners' equity, and cash flows for
each of the two years in the period ended December 31, 1995. These combined
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cincinnati Eye Institute,
Inc. and affiliate as of December 31, 1994 and 1995, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1995, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
September 4, 1996
A-1
<PAGE> 10
CINCINNATI EYE INSTITUTE, INC. AND AFFILIATE
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
----------------------- ----------
ASSETS 1994 1995 1996
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 138,971 $ 360,186 $1,370,905
Accounts receivable, less allowance for bad debts
of approximately $335,000, $719,000, and $549,000 at
December 31, 1994 and 1995, and June 30,1996
(unaudited), respectively 2,132,393 2,480,355 2,660,228
Inventory 114,831 118,429 109,297
Prepaid expenses and other current assets 94,184 94,167 39,656
---------- ---------- ----------
Total current assets 2,480,379 3,053,137 4,180,086
PROPERTY AND EQUIPMENT, net 4,552,582 4,497,105 4,695,902
OTHER NONCURRENT ASSETS 72,588 68,817 66,931
---------- ---------- ----------
Total assets $7,105,549 $7,619,059 $8,942,919
========== ========== ==========
LIABILITIES AND OWNERS' EQUITY
CURRENT LIABILITIES:
Current portion - long-term debt $ 58,667 $ 208,667 $ 208,667
Related-party debt 700,000 300,000 300,000
Accounts payable and accrued expenses 830,442 353,472 338,469
Accrued salaries and benefits 479,669 845,289 1,484,325
---------- ---------- ----------
Total current liabilities 2,068,778 1,707,428 2,331,461
LONG-TERM DEBT, net of current portion 2,362,701 2,389,636 2,360,738
OWNERS' EQUITY 2,674,070 3,521,995 4,250,720
---------- ---------- ----------
Total liabilities and owners' equity $7,105,549 $7,619,059 $8,942,919
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
A-2
<PAGE> 11
CINCINNATI EYE INSTITUTE, INC. AND AFFILIATE
COMBINED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------- -------------------------
1994 1995 1995 1996
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Medical service revenues, net $14,246,919 $16,827,449 $ 8,704,368 $ 8,210,641
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Compensation to physician owners 5,803,394 6,650,473 3,306,667 3,249,569
Salaries, wages, and benefits 5,057,353 5,255,468 2,290,895 2,667,941
Pharmaceuticals and supplies 1,568,486 1,567,245 719,683 739,059
General and administrative expenses 1,086,923 2,236,127 1,135,405 496,582
Depreciation and amortization 383,178 535,848 236,599 216,031
Interest expense 41,302 126,363 89,590 46,487
----------- ----------- ----------- -----------
Total costs and expenses 13,940,636 16,371,524 7,778,839 7,415,669
----------- ----------- ----------- -----------
Net earnings $ 306,283 $ 455,925 $ 925,529 $ 794,972
=========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURE:
Combined compensation to and net earnings
of physician owners $ 6,109,677 $ 7,106,398 $ 4,232,196 $ 4,044,541
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
A-3
<PAGE> 12
CINCINNATI EYE INSTITUTE, INC. AND AFFILIATE
COMBINED STATEMENTS OF OWNERS' EQUITY
<TABLE>
<S> <C>
BALANCE, December 31, 1993 $ 2,375,787
Net earnings 306,283
Distributions to owners (8,000)
-----------
BALANCE, December 31, 1994 2,674,070
Net earnings 455,925
Distributions to owners (8,000)
Contributions by owners 400,000
-----------
BALANCE, December 31, 1995 3,521,995
Net earnings (unaudited) 794,972
Distribution to owners (unaudited) (66,247)
-----------
BALANCE, June 30, 1996 (unaudited) $ 4,250,720
===========
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
A-4
<PAGE> 13
CINCINNATI EYE INSTITUTE, INC. AND AFFILIATE
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------------- --------------------------
1994 1995 1995 1996
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 306,283 $ 455,925 $ 925,529 $ 794,972
Adjustments to reconcile net earnings to net cash
provided by operating activities-
Depreciation and amortization 383,178 535,848 236,599 216,031
Changes in assets and liabilities-
(Increase) decrease in-
Accounts receivable, net (409,242) (347,962) (724,162) (179,873)
Inventory (33,870) (3,598) 7,264 9,132
Prepaid expenses and other current
assets (50) 17 34,185 54,511
Increase (decrease) in-
Accounts payable and accrued expenses 573,961 (476,970) (443,743) (15,003)
Accrued salaries and benefits 127,442 365,620 837,638 639,036
----------- ----------- ----------- -----------
Net cash provided by operating activities 947,702 528,880 873,310 1,518,806
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (3,104,920) (476,600) (280,992) (412,942)
----------- ----------- ----------- -----------
Net cash used in investing activities (3,104,920) (476,600) (280,992) (412,942)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Owner distribution, net (8,000) (8,000) -- (66,247)
Proceeds from long-term debt 522,368 235,601 235,061 --
Repayment of long-term debt (51,000) (58,666) (28,460) (28,898)
Proceeds of related-party loan 700,000 100,000 100,000 --
Repayment of related-party loan (122,775) (500,000) -- --
Owner contributions -- 400,000 250,000 --
----------- ----------- ----------- -----------
Net cash provided by (used in)
financing activities 1,040,593 168,935 556,601 (95,145)
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (1,116,625) 221,215 1,148,919 1,010,719
CASH AND CASH EQUIVALENTS, beginning of period 1,255,596 138,971 138,971 360,186
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 138,971 $ 360,186 $ 1,287,890 $ 1,370,905
=========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURE:
Cash Interest Paid $ 41,264 $ 227,730 $ 86,556 $ 78,998
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
A-5
<PAGE> 14
CINCINNATI EYE INSTITUTE, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION:
The accompanying combined financial statements include Cincinnati Eye
Institute, Inc. ("CEI") and C.E.I. Realty Associates, Ltd. ("CEI Realty"). CEI
is an Ohio professional services corporation that is engaged in the practice of
medicine, specializing in ophthalmology in Ohio. CEI Realty is an Ohio limited
liability company that owns facilities and medical equipment that are leased to
CEI. CEI and CEI Realty (collectively, the "Company") are affiliated through
common ownership.
The accompanying combined financial statements have been prepared on the
accrual basis of accounting. The supplemental caption on the statements of
earnings, "Combined compensation to and net earnings of physician owners,"
reflects the total earnings available to the physician owners for each period.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ACCOUNTS RECEIVABLE
Accounts receivable primarily consist of receivables from patients,
insurers, government programs, and other third-party payors for medical
services provided by physicians. Such amounts are reduced by an allowance for
contractual adjustments and other uncollectible amounts. Contractual
adjustments result from the differences between the rates charged by the
physicians for services performed and the amounts allowed by the Medicare and
Medicaid programs and other public and private insurers.
INVENTORY
Inventory consists primarily of surgical and medical supplies which are
valued at the lower of cost or market with cost determined using the first-in,
first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation of property and
equipment is calculated using accelerated methods over the estimated useful
lives of the assets. Routine maintenance and repairs are charged to expense as
incurred, while costs of betterments and renewals are capitalized.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." Adoption of this standard
is required for financial statements for fiscal years beginning after December
15, 1995. Earlier application is encouraged. The Company does not expect the
new standard to have a material effect on the Company's results of operations.
INCOME TAXES
CEI is a taxable corporation for federal and state income tax purposes.
Historically, CEI has not incurred significant tax liabilities for federal or
state income taxes. Compensation to physician owners has traditionally reduced
taxable income to nominal levels. This relationship would be expected to
continue in the absence of the PRG transaction (See Note 8--Subsequent
Events). Because of this practice, provisions for income taxes and deferred
tax assets and liabilities of CEI have not been reflected in these combined
financial statements. The
A-6
<PAGE> 15
CINCINNATI EYE INSTITUTE, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
consistent presentation of the financial statements on a pretax basis also
provides comparability that would not otherwise be the case when presenting a
combination of various taxable and nontaxable entities.
CEI Realty is a limited liability company which is taxed similarly to a
partnership under sections of the federal and state income tax laws;
therefore, income tax liabilities are the responsibility of the respective
owners or members. Accordingly, the accompanying combined financial statements
do not include any provision for income taxes or deferred tax assets and
liabilities for CEI Realty.
REVENUES
Medical service revenues are accounted for in the period in which the
services are provided. The revenues are reported at the estimated realizable
amounts from patients, third-party payors, and others. Provisions for
estimated third-party payor adjustments are estimated and recorded in the
period the related services are provided. Any adjustment to the amounts is
recorded in the period in which the revised amount is determined. A
significant portion of CEI medical service revenues are related to Medicare
and other governmental programs. Medicare and other governmental programs
reimburse physicians based on fee schedules which are determined by the
related governmental agency. Additionally, CEI participates in agreements with
managed care organizations to provide services at negotiated rates.
CONCENTRATION OF CREDIT RISK
CEI extends credit to patients covered by programs such as Medicare and
Medicaid and private insurers. CEI manages credit risk with the various public
and private insurance providers, as appropriate. Allowances for bad debts have
been made for potential losses, where appropriate.
USE OF ESTIMATES
The preparation of combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the combined
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
UNAUDITED FINANCIAL INFORMATION
The unaudited interim financial statements as of June 30, 1996, and for
the six-months ended June 30, 1996 and 1995, have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission. The
accompanying unaudited combined financial statements reflect, in the opinion
of management, all adjustments necessary for a fair presentation of the
unaudited combined financial statements. All such adjustments are of a normal
and recurring nature.
A-7
<PAGE> 16
CINCINNATI EYE INSTITUTE, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIVES -------------------------
(YEARS) 1994 1995
------------ ----------- -----------
<S> <C> <C> <C>
Building 39 $4,219,175 $4,219,175
Equipment 3-10 1,679,675 1,921,755
Autos 5 - 17,723
Leasehold improvements 3-10 139,378 158,983
Furniture and fixtures 7-10 1,052,451 1,161,384
----------- -----------
Total 7,090,679 7,479,020
Less- Accumulated depreciation and amortization (2,538,097) (2,981,915)
----------- -----------
Net property and equipment $4,552,582 $4,497,105
========== ==========
</TABLE>
4. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1994 1995
----------- -----------
<S> <C> <C>
Revenue bonds payable, bearing variable interest, 4.0% at
December 31, 1995, and 3.75% at December 31, 1994, maturing
on August 1, 2015 with varying semi-annual principal
installments, collateralized by the building $ 1,905,000 $ 1,855,000
Note payable to Alcon Surgical, Inc., bearing interest at
6% at December 31, 1995 and 1994, maturing on March 11,
2000 with varying monthly principal installments
collateralized by equipment 42,000 33,334
Note payable to a bank, line of credit of $1,000,000,
bearing interest at prime, 8.5% at December 31, 1995 and
1994, maturing on July 28, 1999, with varying annual
principal installments, collateralized by equipment 474,368 709,969
----------- -----------
Total long-term debt 2,421,368 2,598,303
Less- Current portion (58,667) (208,667)
----------- -----------
Long-term debt, excluding current portion $ 2,362,701 $ 2,389,636
=========== ===========
</TABLE>
A-8
<PAGE> 17
CINCINNATI EYE INSTITUTE, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
As of December 31, 1995, the aggregate amounts of annual principal
maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1996 $ 208,667
1997 208,667
1998 213,667
1999 325,857
2000 61,445
Thereafter 1,580,000
----------
Total $2,598,303
==========
</TABLE>
CEI leases office space as well as certain equipment under noncancelable
operating lease agreements which expire at various dates. At December 31,
1995, minimum annual rental commitments under noncancelable operating leases
with terms in excess of one year are as follows:
<TABLE>
<S> <C>
1996 $ 87,655
1997 90,196
1998 90,196
1999 62,116
2000 7,000
--------
Total future minimum lease payments $337,163
========
</TABLE>
Rent expense related to operating leases amounted to $76,107, and $74,515
for the years ended December 31, 1994, and 1995, respectively.
5. EMPLOYEE BENEFIT PLAN:
CEI has a 401(k) profit-sharing plan which provides for CEI to make
discretionary contributions. CEI pays all general and administrative expenses
of the plan. Contributions of approximately $4,600, and $6,200 were made to
this plan in 1994, and 1995, respectively.
CEI has a qualified defined contribution plan which provides for CEI to
contribute between 4% and 20% of qualified employees aggregate compensation,
as defined. CEI pays all general and administrative expenses of the plan.
Contributions of approximately $228,000, and $245,600 were made in 1994, and
1995, respectively.
6. RELATED PARTY TRANSACTIONS:
Related Party Debt
The Company periodically receives advances from its physician owners. At
December 31, 1994 and 1995, the Company has various notes outstanding with one
of the physician owners. These notes are payable on demand with an interest
rate at prime, paid quarterly. The Company had notes payable (excluding
accrued interest) to a related party of $700,000 and $300,000 as of December
31, 1994 and 1995, respectively.
A-9
<PAGE> 18
CINCINNATI EYE INSTITUTE, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
Interest expense for these notes was approximately $13,000 and $62,200 for
the year ended December 31, 1994 and 1995, respectively.
Related Party Leases
CEI leases a building and certain equipment from CEI Realty. The building
lease terminates on February 28, 2000, with 7 renewal terms of 5 years each.
The equipment lease is renewable on a yearly basis.
The following is a summary of CEI rent expense and CEI Realty rent income
for the lease agreements:
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Building $ 360,000 $ 600,000
Equipment 269,826 478,978
</TABLE>
These amounts of rental expense and rental income between CEI and CEI
Realty, respectively, have been eliminated, as part of the combined financial
statements.
7. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107 requires all entities
to disclose the fair value of certain financial instruments in their financial
statements. Accordingly, the carrying amounts of accounts receivable, accounts
payable, and accrued expenses approximate fair value due to the short maturity
of these instruments.
The carrying amount of the Company's long-term debt approximates fair
value due to the Company's ability to obtain such borrowings on comparable
terms and the floating nature of the interest rates.
8. SUBSEQUENT EVENT:
On August 30, 1996, the Company closed a stock-for-stock merger
transaction with Physicians Resource Group, Inc. ("PRG"), in exchange for
1,565,197 shares of PRG common stock.
The combined financial statements of the Company have been prepared as
supplemental information about the entities which PRG acquired. The Company
previously operated as a separate independent entity. The historical financial
position, results of operations and cash flows do not reflect any adjustments
relating to acquisition.
A-10
<PAGE> 19
ANNEX B
<PAGE> 20
To the Board of Directors
Houston Eye Associates
Houston, Texas
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying balance sheets of Houston Eye Associates as
of December 31, 1995 and 1994, and the related statements of excess
(deficiency) of revenues over expenses, changes in stockholders' equity and
cash flows for the years then ended. These financial statements are the
responsibility of the Association's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
The accompanying financial statements were prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission as described in Note 1 to the financial statements and are not
intended to be a complete presentation of Houston Eye Associates.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Houston Eye Associates as of
December 31, 1995 and 1994, and the excess (deficiency) of revenues over
expenses and cash flows for the years then ended, as described in Note 1, in
conformity with generally accepted accounting principles.
WALLINGFORD, McDONALD, FOX & CO., P.C.
Houston, Texas
September 5, 1996
B-1
<PAGE> 21
HOUSTON EYE ASSOCIATES
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31, June 30, June 30,
ASSETS 1995 1994 1996 1995
------------ ------------ ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 186,061 $ 262,927 $ 667,112 $ 268,078
Patient accounts receivable, less allowance
for uncollectable accounts of $402,144
at December 31, 1995, $320,183 at
December 31, 1994, $381,776
at June 30, 1996 (unaudited) and $376,893
at June 30, 1995 (unaudited) 1,461,277 1,428,607 1,234,224 1,476,081
Receivables from affiliates (Note 6) 24,326 24,399 64,603 80,454
Inventories 176,359 171,285 202,984 164,520
Prepaid expenses and other current
assets 15,700 37,271 15,700 --
---------- ---------- ---------- ----------
Total current assets 1,863,723 1,924,489 2,184,623 1,989,133
---------- ---------- ---------- ----------
Property and equipment, net (Note 2) 1,048,284 1,112,078 1,002,217 1,145,024
---------- ---------- ---------- ----------
OTHER ASSETS
Deferred charges and other assets
(Notes 1 and 4) 448,453 620,559 429,699 591,428
---------- ---------- ---------- ----------
Total assets $3,360,460 $3,657,126 $3,616,539 $3,725,585
========== ========== ========== ==========
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
B-2
<PAGE> 22
HOUSTON EYE ASSOCIATES
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31, June 30, June 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994 1996 1995
------------ ------------ ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 364,764 $ 397,410 $ 464,176 $ 644,950
Accrued salaries and benefits 602,954 181,183 466,201 226,677
Accrued profit sharing and salary deferral
plan contributions 208,835 223,997 311,497 341,566
Current maturities of long-term debt (Note 3) 252,857 1,406,021 202,857 927,857
---------- ---------- ---------- ----------
Total current liabilities 1,429,410 2,208,611 1,444,731 2,141,050
---------- ---------- ---------- ----------
LONG-TERM DEBT, net of current maturities
(Note 3) 560,952 763,810 459,524 662,381
---------- ---------- ---------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 5, 7 and 8)
STOCKHOLDERS' EQUITY 1,370,098 684,705 1,712,284 922,154
---------- ---------- ---------- ----------
Total liabilities and
stockholders' equity $3,360,460 $3,657,126 $3,616,539 $3,725,585
========== ========== ========== ==========
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
B-3
<PAGE> 23
HOUSTON EYE ASSOCIATES
STATEMENTS OF EXCESS (DEFICIENCY) OF REVENUES OVER EXPENSES
<TABLE>
<CAPTION>
Year ended Six months ended
December 31, December 31, June 30, June 30,
1995 1994 1996 1995
------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C>
Revenue
Net patient revenue $ 15,197,012 $ 15,355,965 $ 7,153,904 $ 7,448,946
Optical and pharmacy sales 2,977,127 2,853,055 1,454,879 1,498,753
Other revenue (Note 4) 449,886 492,202 181,404 230,934
------------ ------------ ------------ ------------
Total revenue 18,624,025 18,701,222 8,790,187 9,178,633
------------ ------------ ------------ ------------
Costs and expenses
Compensation and benefits to physician owners 5,641,348 6,843,040 2,860,464 3,066,430
Salaries, wages and benefits - other 5,744,751 6,116,943 2,275,868 2,598,296
Pharmaceuticals and medical supplies 336,833 366,260 146,088 166,572
Cost of goods sold - optical and pharmacy 1,238,620 1,050,811 648,123 599,665
General and administrative expenses 4,553,116 4,372,458 2,350,321 2,279,152
Depreciation and amortization 267,997 254,549 126,360 138,068
Interest expense (income), net 159,074 102,839 38,192 95,531
------------ ------------ ------------ ------------
Total costs and expenses 17,941,739 19,106,900 8,445,416 8,943,714
------------ ------------ ------------ ------------
Excess (deficiency) of revenues
over expenses $ 682,286 $ (405,678) $ 344,771 $ 234,919
============ ============ ============ ============
Supplemental disclosure:
Combined compensation and
benefits to physician owners
and excess (deficiency) of
revenues over expenses $ 6,323,634 $ 6,437,362 $ 3,205,235 $ 3,301,349
============ ============ ============ ============
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
B-4
<PAGE> 24
HOUSTON EYE ASSOCIATES
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Paid-In
Capital Retained Total
Common In Excess Earnings Stockholders'
Stock of Par (Deficit) Equity
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1993 $ 29,186 $ 916,822 $ 162,901 $1,108,909
Issuance of common stock, 1,121 shares 1,121 3,990 5,111
Retirement of 2,000 shares (2,000) (21,637) (23,637)
(Deficiency) of revenues over expenses for
the year ended December 31, 1994 (405,678) (405,678)
---------- ---------- ---------- ----------
Balance, December 31, 1994 28,307 899,175 (242,777) 684,705
Issuance of common stock, 1,154 shares 1,154 1,953 3,107
Excess of revenues over expenses for the
year ended December 31, 1995 682,286 682,286
---------- ---------- ---------- ----------
Balance, December 31, 1995 29,461 901,128 439,509 1,370,098
Issuance of common stock (unaudited) 266 266
Retirement of 1,351 shares (unaudited) (1,351) (1,500) (2,851)
Excess of revenues over expenses for the
six months ended June 30, 1996 (unaudited) 344,771 344,771
---------- ---------- ---------- ----------
Balance, June 30, 1996 (unaudited) $ 28,376 $ 899,628 $ 784,280 $1,712,284
========== ========== ========== ==========
</TABLE>
Common stock; $1.00 par value; 200,000 shares authorized;
29,461 and 28,307 shares issued and outstanding at December 31,
1995 and 1994, respectively.
The Notes to Financial Statements are an integral part of these statements.
B-5
<PAGE> 25
HOUSTON EYE ASSOCIATES
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended Six months ended
December 31 December 31, June 30, June 30,
1995 1994 1996 1995
----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Excess (deficiency) of revenues over expenses $ 682,286 $ (405,678) $ 344,771 $ 234,919
Adjustment to reconcile excess of revenues
over expenses to net cash provided by (used in)
operating activities:
Depreciation and amortization 267,997 254,549 126,360 138,068
(Gain) loss on retirement of assets (36,947) 1,349 33,055 -
----------- ----------- ----------- -----------
Total 913,336 (149,780) 504,186 372,987
Changes in working capital assets:
Patient accounts receivable (32,670) 150,536 227,053 (47,474)
Inventories (5,074) 10,695 (26,625) 6,765
Prepaid expenses and other current assets 21,571 (22,271) - 37,271
Changes in working capital liabilities:
Accounts payable and accrued expenses (32,646) 126,488 99,412 247,540
Accrued salaries and benefits 421,771 8,310 (136,753) 45,494
Accrued profit sharing and salary
deferral plan contributions (15,162) (101,971) 102,662 117,569
----------- ----------- ----------- -----------
Cash provided by operating activities 1,271,126 22,007 769,935 780,152
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of fixed assets (136,841) (307,232) (88,912) (100,378)
Proceeds from sale of assets 75,000 - 10,150 -
Decrease in other assets 66,690 108,032 (15,832) (41,506)
Payments received from (made to) affiliates 73 (4,202) (40,277) (56,055)
----------- ----------- ----------- -----------
Cash provided by (used in) investing activities 4,922 (203,402) (134,871) (197,939)
----------- ----------- ----------- -----------
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
B-6
<PAGE> 26
HOUSTON EYE ASSOCIATES
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended Six months ended
December 31, December 31, June 30, June 30,
1995 1994 1996 1995
----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt $(4,931,021) $(3,302,953) $ (551,428) $(2,204,592)
Proceeds from bank loans 3,575,000 3,650,000 400,000 1,625,000
Proceeds from issuance of common stock 3,107 5,111 266 2,530
Payments to retire common stock - (23,637) (2,851) -
----------- ----------- ----------- -----------
Cash provided by (used in) financing activities (1,352,914) 328,521 (154,013) (577,062)
----------- ----------- ----------- -----------
INCREASE (DECREASE) IN CASH (76,866) 147,126 481,051 5,151
Cash and cash equivalents, beginning of year 262,927 115,801 186,061 262,927
----------- ----------- ----------- -----------
Cash and cash equivalents, end of year $ 186,061 $ 262,927 $ 667,112 $ 268,078
=========== =========== =========== ===========
</TABLE>
Supplemental disclosures of cash flow information:
Cash paid during the period for:
<TABLE>
<CAPTION>
Six months ended
December 31, December 31, June 30, June 30,
1995 1994 1996 1995
------------ ------------ --------- ---------
(Unaudited)
<S> <C> <C> <C> <C>
Interest $159,204 $102,979 $ 38,200 $ 95,639
Income taxes 64,000 - - -
</TABLE>
Disclosure of accounting policy:
For purposes of the statements of cash flows, the Association considers demand
deposits in banks as cash and cash equivalents.
The Notes to Financial Statements are an integral part of these statements.
B-7
<PAGE> 27
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Nature of Business and Significant Accounting Policies
Houston Eye Associates (the "Association") is a professional
association of ophthalmologists which was incorporated on November 15,
1971. The Association operates three divisions. The Medical Division
provides total eye care services including examinations,
treatment of eye disease and surgery. The Optical Division operates
four retail stores selling glasses and contact lenses. The Pharmacy
Division operates one pharmacy at the main treatment facility.
From April 1993 through December 1995, the Association leased all its
staff and physicians from an employee leasing company. The employee
leasing expense and related overhead charges are included in the
various compensation and benefits expense accounts. The leasing
contract was not renewed in January 1996.
The Association maintained its books and records primarily on the cash
basis of accounting used for income tax reporting. The accompanying
financial statements have been prepared on the accrual basis of
accounting. These financial statements have been prepared for the
purpose of complying with the rules and regulations of the Securities
and Exchange Commission in connection with the Association's business
combination with Physicians Resource Group, Inc., and are not
intended to be a complete presentation of the Association. In
connection therewith, these financial statements have been prepared on
a pretax basis. The supplemental caption on the statement of excess
(deficiency) of revenues over expenses, combined compensation to the
physician/owners and excess of revenues over expenses, reflects the
total earnings available to the physician/owners.
Accounts Receivable:
Accounts receivable consist primarily of receivables from patients,
insurers, government programs and other third-party payors for
medical services provided by physicians. Such amounts are reduced by an
allowance for contractual adjustments and other uncollectible amounts.
Contractual adjustments result from the differences between the rates
charged by the physicians for services performed and the amounts
allowed by Medicare and Medicaid programs and other public and private
insurers.
Inventories:
Inventories consist primarily of glasses and contact lenses and is
valued at the lower of cost or market, cost being determined using
primarily the specific identification method.
Property:
Assets are recorded at cost. Expenditures for maintenance and repairs
are charged to expense as incurred. Improvements or betterments of a
permanent nature are capitalized. The cost of assets retired or
otherwise disposed of and the related accumulated depreciation are
eliminated from the accounts in the year of disposal. Gains or losses
resulting from property disposals are credited or charged to operations
currently.
The Association computes depreciation using the straight-line and
accelerated methods over estimated useful lives as follows:
<TABLE>
<S> <C>
Medical equipment 5 - 10 years
Office furniture and fixtures 5 - 10 years
Automobiles 3 years
Computer software 5 years
Leasehold improvements 7 - 10 years
</TABLE>
B-8
<PAGE> 28
Management Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates.
Revenues:
Patient service revenues are accounted for in the period in which the
services are provided. The revenues are reported at the estimated
realizable amounts from patients, third-party payors and others.
Provisions for estimated third-party payor adjustments are estimated
and recorded in the period the related services are provided. Any
adjustment to the amounts recorded are recorded in the period in which
amount is determined. A significant portion of the Association's
medical service revenues are related to Medicare and other governmental
programs. Medicare and other governmental programs reimburse
physicians based on fee schedules which are determined by the related
governmental agency. Additionally, the Association participates in
agreements with managed care organizations to provide service at
negotiated rates or for capitated payments.
New Accounting Pronouncement:
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of."
Adoption of this standard is required for financial statements for
fiscal years beginning after December 15, 1995. The Association does
not expect the new standard to have a material effect on the
Association's results of operations or financial position.
Fair Value of Financial Instruments:
Statement of Financial Accounting Standards No. 107 requires all
entities to disclose the fair value of certain financial instruments in
their financial statements. Accordingly, the carrying amount of
accounts receivable, accounts payable and accrued expenses approximates
fair value due to the short maturity of these instruments. In
addition, the carrying amount of the Association's notes payable
approximates fair value due to the Association's ability to obtain such
borrowings on comparable terms and the floating nature of the
interest rates.
B-9
<PAGE> 29
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes:
The Association is a Personal Service Corporation for federal and state
income tax purposes which historically has not incurred significant tax
liabilities for federal and state income taxes. Compensation to the
owners has traditionally reduced taxable income to nominal levels.
This relationship would be expected to continue in the absence of the
PRG transaction (See Note 9 -- Subsequent Events). Because of this
practice, provisions for income taxes and deferred tax assets and
liabilities of the taxable entity have not been reflected in
these financial statements.
Concentration of Credit Risk:
The Association provides services to patients primarily in the Harris
County area. The Association extends credit to patients covered by
programs such as Medicare and Medicaid and private insurers. The
Association manages credit risk with the various public and private
insurance providers, as appropriate. Allowances for doubtful accounts
are recognized for potential losses, where appropriate.
NOTE 2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1995 1994
------------ ------------
<S> <C> <C>
Medical equipment $2,013,375 $1,991,824
Office furniture and fixtures 1,896,394 1,860,842
Automobile - 12,573
Computer software 143,826 120,011
Leasehold improvements 344,140 455,901
---------- ----------
4,397,735 4,441,151
Less accumulated depreciation and amortization 3,349,451 3,329,073
---------- ----------
Property and equipment, net $1,048,284 $1,112,078
========== ==========
</TABLE>
B-10
<PAGE> 30
NOTES TO FINANCIAL STATEMENTS
NOTE 3. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1995 1994
------------ ------------
<S> <C> <C>
Bank line-of-credit, interest at prime (8.5% at December 31, 1995
and 1994), principal due at maturity in July 1996; collateralized
by accounts receivable, inventory, furniture, fixtures and
equipment and personally guaranteed by shareholders $ 50,000 $1,200,000
Installment note for purchase of medical practice, monthly installments
$1,440 through March 1995, unsecured - 3,164
Installment note due in monthly installments of $5,000 plus
interest at prime (8.5% at December 31, 1995 and 1994); any
unpaid principal and interest due at maturity in December 1997;
collateralized by accounts receivable, inventory, furniture, fixtures
and equipment and personally guaranteed by shareholders 240,000 300,000
Installment note due in monthly installments of $11,905 plus
interest at prime (8.5% at December 31, 1995 and 1994); any
unpaid principal and interest due at maturity in August, 1999;
collateralized by accounts receivable, inventory, furniture, fixtures
and equipment and personally guaranteed by shareholders 523,809 666,667
---------- ----------
Total 813,809 2,169,831
Less current maturities 252,857 1,406,021
---------- ----------
Long-term debt $ 560,952 $ 763,810
========== ==========
</TABLE>
As of December 31, 1995, future maturities of long-term debt are as
follows:
<TABLE>
<CAPTION>
Fiscal Year Ending December 31:
<S> <C>
1997 $322,860
1998 142,860
1999 95,232
--------
$560,952
========
</TABLE>
The Association is subject to various operating and financial covenants
as part of their debt agreements with the bank. At December 31, 1995,
the Association was in compliance with the covenants.
B-11
<PAGE> 31
NOTES TO FINANCIAL STATEMENTS
NOTE 4. OTHER ASSETS
The Association owns a 21 percent interest in an outpatient surgery
center limited partnership. The Association does not have the ability
to exercise significant influence over operating and financial policies
of the partnership, nor has it been able to obtain the financial
information necessary to apply the equity method. Consequently, the
interest in the partnership has been accounted for primarily on the
cost method. Management of the Association does not believe the
carrying value of the interest would be materially different had the
equity method been applied. The Association's carrying value of the
partnership interest totals $206,876 and $270,116 at December 31, 1995
and 1994, and is included in other assets. Included in the other
revenue at December 31, 1995 and 1994 is $367,607 and $413,127 related
to the limited partnership's distributed income.
Also included in other assets are patient charts acquired in the
purchase of a local medical practice and optical shop in June 1993 for
$275,430. The charts are being amortized over a period of sixty
months, and the net amortized basis included in other assets at
December 31, 1995 totals $133,125.
Other items included in other assets at December 31, 1995 are
professional liability insurance deposits totaling $80,454, net
amortized pharmacy start-up costs totaling $7,515, investments in
managed care organizations totaling $17,562, and other miscellaneous
assets totaling $2,921.
NOTE 5. OPERATING LEASES
The Association leases various buildings, office facilities and
equipment under operating leases ranging from one to twelve years. The
main treatment center and offices are leased from related parties.
Total rental expense under operating leases amounted to approximately
$2,194,190 in 1995 and $2,064,950 in 1994 including amounts paid to
related parties of approximately $2,040,316 in 1995 and $1,879,671 in
1994.
Total minimum future lease payments under noncancelable operating
leases having an initial term of one year or more are as follows:
<TABLE>
<CAPTION>
Operating
-----------------------------------------------
Related
Party Other Total
------------ ---------- ------------
<S> <C> <C> <C>
Year Ending December 31:
1996 $ 2,014,872 $ 125,146 $ 2,140,018
1997 2,014,872 66,173 2,081,045
1998 2,014,872 60,207 2,075,079
1999 2,014,872 60,207 2,075,079
2000 2,014,872 36,351 2,051,223
Later years 12,592,950 12,211 12,605,161
------------ ---------- ------------
Total minimum lease payments $ 22,667,310 $ 360,295 $ 23,027,605
============ ========== ============
</TABLE>
B-12
<PAGE> 32
NOTES TO FINANCIAL STATEMENTS
NOTE 6. RELATED PARTY TRANSACTIONS
In addition to the related party operating lease transactions as
described in Note 5, the Association had the following related party
balances at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
December 31, December 31,
1995 1994
------------ ------------
<S> <C> <C>
Receivable from a foundation set up by the Association to be used
for indigent patient care, arising from payments of payroll and
miscellaneous charges made by the Association on behalf of the foundation $ 16,961 $ 13,388
Receivable from a building corporation owned by certain common
shareholders, arising from payment of administrative salaries and
miscellaneous charges paid by the Association 437 11,011
Receivable from the Salary Deferral Plan & Trust arising from trust expenses
paid by the Association and not yet reimbursed by the Trust administrator 4,590 -
Miscellaneous employee receivables 2,338 -
------------ ------------
$ 24,326 $ 24,399
============ ============
</TABLE>
NOTE 7. EMPLOYEES' PROFIT SHARING PLAN AND EMPLOYEES' SALARY DEFERRAL PLAN
There is an established employees' profit sharing plan covering
substantially all employees. The Association's contribution to the plan
is limited to the amount deductible for federal income tax purposes.
Total contributions were $208,835 and $219,144 for the years ended
December 31, 1995 and 1994, respectively and are included in general
and administrative expense.
The Association also has an established employees' salary deferral plan
covering substantially all employees. The plan qualifies as a defined
contribution plan under Sections 401(a), (k) and 501(a) of the Internal
Revenue Code of 1954, as amended, including the Employee Retirement
Income Security Act of 1974. Each employee elects the percentage of
salary to defer, and the Association matches that amount up to a
maximum of 2% of the employee's annual compensation. The Association
may, at its sole discretion, also make a contribution in addition to
the above amount, however no discretionary contributions were made in
1994 or 1995. The contributions for the years ended December#31, 1995
and 1994 were $92,718 and $88,343, respectively and are included in
general and administrative expense.
B-13
<PAGE> 33
NOTES TO FINANCIAL STATEMENTS
NOTE 8. COMMITMENTS AND CONTINGENCIES
Buy-In/Buy-Out Agreement
The Association has a buy-in/buy-out agreement with its shareholders
whereby the Association is required to purchase shares from a
shareholder in the event of a defined Terminating Event. A terminating
shareholder is required to sell such stock to the Association. The
value of the stock shall be the sum of the following: (a) the greater
of $1.00 per share of stock or the amount paid by the shareholder for
such shareholder's stock, plus (b) the amount determined as the
shareholder's portion of the paid-in-capital for the Optical Division.
From 1992 through 1994, the Board of Directors invited three
shareholders to each purchase 2,000 shares of the Association's common
stock at a selling price of $1.00 per share. Subsequent to December
31, 1995, one of the shareholders purchasing stock has resigned from
the Association. As a result, the remaining shares to be purchased are
as follows:
<TABLE>
<CAPTION>
Year ending Number
December 31, Of Shares
------------ ---------
<S> <C>
1996 639
1997 815
1998 436
---------
1,890
=========
</TABLE>
The shareholders buying into the Association will pay $100,000 each
towards overhead expenses of the Association during the period of their
respective buy-in. Additionally, the physicians buying in contribute
towards paid-in-capital for participation in the Optical Division in
the amount of $10,000 each. Outstanding contributions at December 31,
1995 total $5,227.
Employment Agreement
The Association also has employment agreements with its shareholders
containing termination provisions for retirement, resignation, death or
disability. Included in the agreement is remuneration relating to the
doctor's Individual Corporate Value, which is paid over five annual
installments with interest at bank prime plus 1%. Subsequent to
December 31, 1995, a physician resigned. Remuneration expected to be
paid in 1996 for his Individual Corporate Value is approximately
$40,000.
Litigation
The Association is involved in legal actions arising in the ordinary
course of their business. Management of the Association anticipates the
ultimate liability, if any, to the Association would not be material.
B-14
<PAGE> 34
NOTES TO FINANCIAL STATEMENTS
NOTE 9. SUBSEQUENT EVENTS
Subsequent to December 31, 1995, the Association retained an investment
advisor to assist in evaluating alternative business structures such as
physician practice management companies. On August 30, 1996, the
Association entered into an Agreement and Plan of Reorganization with
Physicians Resource Group (PRG) whereby stock in the Association held
by owner physicians was exchanged for PRG stock. Under the agreement
and Plan of Reorganization, the physicians established HEA (Clinic),
P.A. for the purpose of practicing medicine. HEA (Clinic), P.A. then
entered into a long-term management agreement with PRG to lease general
administrative services, facilities, supplies, personnel, and other
non-physician services necessary for providing medical assistance to
patients.
In May 1996, the Association discontinued operations of the Pharmacy
Division by selling this segment to a shareholder for approximately
$20,000.
In August 1996, the Association acquired a new office location and
terminated the lease on a previous location in Houston, Texas. The
$150,000 cost of the new location included certain equipment and other
assets and was financed from current cash.
NOTE 10. UNAUDITED FINANCIAL INFORMATION
The unaudited financial statements for the periods ended June 30, 1995
and June 30, 1996 are prepared pursuant to the rules and regulations of
the Securities and Exchange Commission. The accompanying unaudited
financial statements reflect, in the opinion of management, all
adjustments necessary for the fair presentation of the unaudited
combined financial statements. All such adjustments are of a normal and
recurring nature.
B-15
<PAGE> 35
ANNEX C
<PAGE> 36
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Physicians Resource Group, Inc.:
We have audited the accompanying balance sheet of Gregory L. Henderson, M.D.,
P.A. as of December 31, 1995, and the related statements of earnings, owner's
equity and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Gregory L. Henderson, M.D.,
P.A. as of December 31, 1995, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
September 3, 1996
C-1
<PAGE> 37
GREGORY L. HENDERSON, M.D., P.A.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
ASSETS 1995 1996
------------ ----------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 225,725 $ 267,298
Accounts receivable, less allowance for doubtful accounts
of approximately $153,000 and $145,000 at
December 31, 1995, and June 30, 1996 (unaudited), respectively 697,718 660,563
Prepaid expenses and other current assets 53,431 21,188
---------- ----------
Total current assets 976,874 949,049
FURNITURE, FIXTURE, AND EQUIPMENT, net 109,308 100,330
---------- ----------
Total assets $1,086,182 $1,049,379
========== ==========
LIABILITIES AND OWNER'S EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 8,967 $ 10,491
Accrued salaries and benefits 270,523 220,612
---------- ----------
Total current liabilities 279,490 231,103
OWNER'S EQUITY 806,692 818,276
---------- ----------
Total liabilities and owner's equity $1,086,182 $1,049,379
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
C-2
<PAGE> 38
GREGORY L. HENDERSON, M.D., P.A.
STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
FOR THE YEAR ENDED JUNE 30,
DECEMBER 31, --------------------------
1995 1995 1996
------------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
MEDICAL SERVICE REVENUES, net $ 4,281,632 $ 2,017,657 $ 2,583,507
COSTS AND EXPENSES:
Compensation to the physician owner 2,780,642 1,500,400 1,730,228
Salaries, wages, and benefits 1,333,163 680,252 629,443
Pharmaceuticals and supplies 77,147 37,649 35,554
General and administrative expenses 355,698 104,930 163,497
Depreciation and amortization 53,817 18,197 13,201
----------- ----------- -----------
Total costs and expenses 4,600,467 2,341,428 2,571,923
----------- ----------- -----------
Net earnings (loss) $ (318,835) $ (323,771) $ 11,584
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE:
Combined compensation to and net earnings
of the physician owner $ 2,461,807 $ 1,176,629 $ 1,741,812
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
C-3
<PAGE> 39
GREGORY L. HENDERSON, M.D., P.A.
STATEMENTS OF OWNER'S EQUITY
<TABLE>
<S> <C>
BALANCE, December 31, 1994 $ 1,125,527
Net loss (318,835)
-----------
BALANCE, December 31, 1995 806,692
Net earnings (unaudited) 11,584
-----------
BALANCE, June 30, 1996 (unaudited) $ 818,276
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
C-4
<PAGE> 40
GREGORY L. HENDERSON, M.D., P.A.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
FOR THE YEAR ENDED JUNE 30,
DECEMBER 31, -------------------------
1995 1995 1996
------------------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $(318,835) $(323,771) $ 11,584
Adjustments to reconcile net earnings to net cash
provided by operating activities-
Depreciation and amortization 53,817 18,197 13,201
Changes in assets and liabilities-
(Increase) decrease in-
Accounts receivable, net 258,599 409,396 37,155
Prepaid expenses and other current
assets (14,540) 25,241 32,244
Increase (decrease) in-
Accounts payable and accrued expenses 1,304 5,250 1,524
Accrued salaries and benefits 235,139 (25,907) (49,911)
--------- --------- ---------
Net cash provided by operating activities 215,484 108,406 45,797
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment, net (10,325) (15,663) (4,224)
--------- --------- ---------
Net cash used in investing activities (10,325) (15,663) (4,224)
--------- --------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 205,159 92,743 41,573
CASH AND CASH EQUIVALENTS, beginning of period 20,566 20,566 225,725
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 225,725 $ 113,309 $ 267,298
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
C-5
<PAGE> 41
GREGORY L. HENDERSON, M.D., P.A.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION:
Gregory L. Henderson, M.D., P.A. (the "Company") is a Florida professional
services corporation that is engaged in the practice of medicine, specializing
in ophthalmology in Brandon, Florida, and surrounding areas. The Company
conducts business as Brandon Cataract Center and Eye Clinic.
The accompanying financial statements have been prepared on the accrual
basis of accounting. The supplemental caption on the statements of earnings,
"Combined compensation to and net earnings of the physician owner," reflects
the total earnings available to the physician owner for each period.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ACCOUNTS RECEIVABLE
Accounts receivable primarily consist of receivables from patients,
insurers, government programs, and other third-party payors for medical
services provided by physicians. Such amounts are reduced by an allowance for
contractual adjustments and other uncollectible amounts. Contractual
adjustments result from the differences between the rates charged by the
physicians for services performed and the amounts allowed by Medicare and
Medicaid programs and other public and private insurers.
FURNITURE, FIXTURE, AND EQUIPMENT
Furniture, fixture, and equipment is stated at cost. Depreciation of
furniture, fixture, and equipment is calculated using straight-line and
accelerated methods over the estimated useful lives of the assets ranging from
3 to 10 years. Routine maintenance and repairs are charged to expense as
incurred, while costs of betterments and renewals are capitalized.
INCOME TAXES
The Company is an S corporation, therefore, income tax liabilities are the
responsibility of the physician owner. Accordingly, the accompanying financial
statements do not include a provision for income taxes or any deferred tax
assets or liabilities.
REVENUES
Medical service revenues are accounted for in the period in which the
services are provided. The revenues are reported at the estimated realizable
amounts from patients, third-party payors, and others. Provisions for
estimated third-party payor adjustments are estimated and recorded in the
period the related services are provided. Any adjustment to the amounts
recorded are recorded in the period in which the revised amount is determined.
A significant portion of the Company's medical service revenues are related to
Medicare and other governmental programs. Medicare and other governmental
programs reimburse physicians based on fee schedules which are determined by
the related governmental agency. Additionally, the Company participates in
agreements with managed care organizations to provide service at negotiated
rates or for capitated payments.
C-6
<PAGE> 42
GREGORY L. HENDERSON, M.D., P.A.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENT
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." Adoption of this standard
is required for financial statements for fiscal years beginning after December
15, 1995. Earlier application is encouraged. The Company does not expect the
new standard to have a material effect on the Company's results of operations.
CONCENTRATION OF CREDIT RISK
The Company extends credit to patients covered by programs such as
Medicare and Medicaid and private insurers. The Company manages credit risk
with the various public and private insurance providers, as appropriate.
Allowances for doubtful accounts have been made for potential losses, where
appropriate.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
UNAUDITED FINANCIAL STATEMENTS
The unaudited financial statements for the periods ended June 30, 1995,
and June 30, 1996, are prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. The accompanying unaudited financial
statements reflect, in the opinion of management, all adjustments necessary
for a fair presentation of the unaudited financial statements. All such
adjustments are of a normal and recurring nature.
3. FURNITURE, FIXTURE, AND EQUIPMENT:
Furniture, fixture, and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
Equipment $224,446
Furniture and fixtures 179,546
Leasehold improvements 90,318
--------
Total furniture, fixture, and equipment 494,310
Less- Accumulated depreciation and amortization (385,002)
--------
Furniture, fixture, and equipment, net $109,308
========
</TABLE>
C-7
<PAGE> 43
GREGORY L. HENDERSON, M.D., P.A.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
4. RELATED-PARTY TRANSACTIONS:
The Company leases office space from an entity controlled by the physician
owner under a noncancelable operating lease agreement which expires on
September 30, 2015.
At December 31, 1995, minimum annual rental commitments under the
noncancelable operating lease are as follows:
<TABLE>
<S> <C>
1996 $ 128,544
1997 128,544
1998 128,544
1999 128,544
2000 128,544
Thereafter 1,896,024
----------
Total minimum lease payments $2,538,744
==========
</TABLE>
Rent expense related to the operating lease amounted to $157,226 for the
year ended December 31, 1995.
The Company also leases certain medical equipment to a related party
controlled by the physician owner. Rent income amounted to $44,796 for the
year ended December 31, 1995, and is included in medical service revenues in
the accompanying financial statements.
5. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107 requires all entities
to disclose the fair value of certain financial instruments in their financial
statements. Accordingly, the carrying amount of accounts receivable, accounts
payable, and accrued expenses, approximates fair value due to the short
maturity of these instruments.
6. SUBSEQUENT EVENTS:
On August 30, 1996, substantially all assets and liabilities of the
Company were acquired by Physicians Resource Group, Inc. (PRG), in exchange
for 505,670 shares of PRG common stock.
The financial statements of the Company have been prepared as supplemental
information about the entity which PRG acquired. The Company previously
operated as a separate independent entity. The historical financial position,
results of operations and cash flows do not reflect any adjustments relating
to the acquisition.
C-8
<PAGE> 44
ANNEX D
<PAGE> 45
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Physicians Resource Group, Inc.:
We have audited the accompanying balance sheet of Tampa Eye Clinic, P.A.
as of December 31, 1995, and the related statements of earnings, owners'
equity, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Tampa Eye Clinic, P.A. as
of December 31, 1995, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
September 6, 1996
D-1
<PAGE> 46
TAMPA EYE CLINIC, P.A.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
ASSETS 1995 1996
------------ ----------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 12,437 $ 141,926
Accounts receivable, net of allowance for doubtful accounts
of $130,000 and $96,000, at December 31, 1995
and June 30, 1996 (unaudited), respectively 530,950 501,034
Inventories 202,153 212,260
Prepaid expenses and other current assets 78,102 68,852
---------- ----------
Total current assets 823,642 924,072
PROPERTY AND EQUIPMENT, net 163,290 107,936
OTHER NONCURRENT ASSETS, net 75,567 72,540
---------- ----------
Total assets $1,062,499 $1,104,548
========== ==========
LIABILITIES AND OWNERS' EQUITY
CURRENT LIABILITIES:
Short-term notes $ 42,546 $ -
Current portion of long-term debt 82,136 93,030
Accounts payable and accrued expenses 93,451 78,621
Accrued salaries and benefits 232,843 360,271
---------- ----------
Total current liabilities 450,976 531,922
LONG-TERM DEBT, net of current portion 99,583 57,198
---------- ----------
Total liabilities 550,559 589,120
OWNERS' EQUITY 511,940 515,428
---------- ----------
Total liabilities and owners' equity $1,062,499 $1,104,548
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
D-2
<PAGE> 47
TAMPA EYE CLINIC, P.A.
STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
DECEMBER 31, ---------------------------
1995 1995 1996
------------ ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES:
Medical service revenues, net $5,517,593 $2,804,325 $2,851,647
Other revenues 5,297 2,624 2,456
---------- ---------- -----------
Total revenues 5,522,890 2,806,949 2,854,103
---------- ---------- -----------
COSTS AND EXPENSES:
Compensation to physician owners' 2,498,280 1,225,039 1,320,101
Salaries, wages, and benefits 1,579,562 775,999 809,171
Pharmaceuticals and supplies 570,779 282,511 370,313
General and administrative expenses 734,187 328,417 279,482
Depreciation and amortization 135,649 67,825 62,088
Interest expense 17,016 5,509 9,460
---------- ---------- -----------
Total costs and expenses 5,535,473 2,685,300 2,850,615
---------- ---------- -----------
Net earnings (loss) $ (12,583) $ 121,649 $ 3,488
========== ========== ===========
SUPPLEMENTAL DISCLOSURE:
Combined compensation to and net
earnings of physician owners' $2,485,697 $1,346,688 $ 1,323,589
========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
D-3
<PAGE> 48
TAMPA EYE CLINIC, P.A.
STATEMENTS OF OWNERS' EQUITY
<TABLE>
<S> <C>
BALANCE, December 31, 1994 $524,523
Net loss (12,583)
--------
BALANCE, December 31, 1995 511,940
Net earnings (unaudited) 3,488
--------
BALANCE, June 30, 1996 (unaudited) $515,428
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
D-4
<PAGE> 49
TAMPA EYE CLINIC, P.A.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
DECEMBER 31, -------------------------
1995 1995 1996
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ (12,583) $121,649 $ 3,488
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities-
Depreciation and amortization 135,649 67,825 62,088
Changes in assets and liabilities-
(Increase) decrease in-
Accounts receivable, net (118,991) (38,532) 29,916
Inventories (11,444) (5,723) (10,107)
Prepaid expenses and other current assets (38,973) (29,423) 9,250
Other non-current assets 12,777 4,546 (1,731)
Increase (decrease) in-
Accounts payable and accrued expenses 18,885 (11,782) (14,830)
Accrued salaries and benefits 156,547 170,004 127,428
--------- -------- --------
Net cash provided by
operating activities 141,867 278,564 205,502
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (44,304) (10,560) (1,976)
--------- -------- --------
Net cash used in
investing activities (44,304) (10,560) (1,976)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt 125,605 70,000 -
Repayment of debt (223,020) (167,495) (74,037)
--------- -------- --------
Net cash used in
financing activities (97,415) (97,495) (74,037)
--------- -------- --------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 148 170,509 129,489
CASH AND CASH EQUIVALENTS, beginning of period 12,289 12,289 12,437
--------- -------- --------
CASH AND CASH EQUIVALENTS, end of period $ 12,437 $182,798 $141,926
========= ======== ========
SUPPLEMENTAL DISCLOSURE:
Cash interest paid $ 22,365 $ 14,001 $ 7,620
</TABLE>
The accompanying notes are an integral part of these financial statements.
D-5
<PAGE> 50
TAMPA EYE CLINIC, P.A.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION:
Tampa Eye Clinic, P.A. (TEC) is a professional services corporation that
is engaged in the practice of medicine, specializing in ophthalmology in
Tampa, Florida.
The accompanying financial statements have been prepared on the accrual
basis of accounting. The supplemental caption on the statements of earnings,
"Combined compensation to and net earnings of the physician owners'," reflects
the total earnings available to the physician owners' for each period.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ACCOUNTS RECEIVABLE
Accounts receivable primarily consist of receivables from patients,
insurers, government programs and other third-party payors for medical
services provided by physicians. Such amounts are reduced by an allowance for
contractual adjustments and other uncollectible amounts. Contractual
adjustments result from the differences between the rates charged by the
physicians for services performed and the amounts allowed by the Medicare and
Medicaid programs and other public and private insurers.
INVENTORIES
Inventories consist primarily of spectacle frames, lenses, and contact
lenses which are valued at the lower of cost or market with cost determined
using the first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation of property and
equipment is calculated using accelerated methods over the estimated useful
lives of the assets. Routine maintenance and repairs are charged to expense as
incurred, while costs of betterments and renewals are capitalized.
INCOME TAXES
TEC is a taxable corporation and historically has not incurred significant
tax liabilities for federal or state income taxes. Compensation to physician
owners' has traditionally reduced taxable income to nominal levels. This
relationship would be expected to continue in the absence of the acquisition
referred to in Note 11. Because of this practice, provisions for income taxes
and deferred tax assets and liabilities of the taxable entities have not been
reflected in these financial statements. The consistent presentation of the
financial statements on a pretax basis also provides comparability that would
not otherwise be the case when comparing various taxable and nontaxable
entities.
D-6
<PAGE> 51
TAMPA EYE CLINIC, P.A.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
REVENUES
Medical service revenues are accounted for in the period in which the
services are provided. The revenues are reported at the estimated realizable
amounts from patients, third-party payors and others. Provisions for estimated
third-party payor adjustments are estimated and recorded in the period the
related services are provided. Any adjustment to the amounts is recorded in
the period in which the revised amount is determined. A significant portion of
TEC medical service revenues are related to Medicare and other governmental
programs. Medicare and other governmental programs reimburse physicians based
on fee schedules which are determined by the related governmental agency.
Additionally, TEC participates in agreements with managed care organizations
to provide services at negotiated rates.
NEW ACCOUNTING PRONOUNCEMENT
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." Adoption of this standard
is required for financial statements for fiscal years beginning after December
15, 1995. Earlier application is encouraged. TEC does not expect the new
standard to have a material effect on TEC's results of operations.
CONCENTRATION OF CREDIT RISK
TEC extends credit to patients covered by programs such as Medicare and
Medicaid and private insurers. TEC manages credit risk with the various public
and private insurance providers, as appropriate. Allowances for doubtful
accounts have been made for potential losses when appropriate.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
UNAUDITED FINANCIAL INFORMATION
The unaudited interim financial statements as of June 30, 1996, and for
the six months ended June 30, 1996 and 1995, have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission. The
accompanying unaudited financial statements reflect, in the opinion of
management, all adjustments necessary for a fair presentation of the unaudited
financial statements. All such adjustments are of a normal and recurring
nature.
D-7
<PAGE> 52
TAMPA EYE CLINIC, P.A.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment at December 31, 1995, consists of the following:
<TABLE>
<CAPTION>
Estimated Useful December 31,
Lives (Years) 1995
---------------- -----------
<S> <C> <C>
Equipment 5-7 $1,147,413
Leasehold improvements 5-8 37,831
Property and fixtures 5-8 366,947
----------
$1,552,191
Less- Accumulated depreciation and amortization (1,388,901)
----------
Net property and equipment $ 163,290
==========
</TABLE>
4. SHORT-TERM NOTES PAYABLE:
Short-term notes payable consist of the following as of December 31, 1995:
<TABLE>
<CAPTION>
Related Parties Other
--------------- -----------
<S> <C> <C>
Notes payable to bank, bearing interest at the prime rate
plus 0.5% ( 9% at December 31, 1995), principal and interest
due in January 1996 $ - $22,546
Note payable to owner, bearing interest at the prime rate
(8.5% at December 31, 1995), principal and interest due in
February 1996 20,000 -
------- -------
Total $20,000 $22,546
======= =======
</TABLE>
D-8
<PAGE> 53
TAMPA EYE CLINIC, P.A.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
5. LONG-TERM DEBT:
Long-term debt consists of the following as of December 31, 1995:
<TABLE>
<S> <C>
Note payable to bank, bearing interest at the prime rate plus
1% (9.5% at December 31, 1995), due in 1997. Monthly
payments of $4,401 plus interest, collateralized by certain
property and equipment. $ 92,431
Note payable to bank, bearing interest at the prime rate plus 1%
(9.5% at December 31, 1995), due in 1999. Monthly payments of $1,333
plus interest, collateralized by property and equipment. 55,430
Note payable to bank, bearing interest at 10%, due in 1997. Monthly
payments of $147, collateralized by property and equipment. 2,914
Note payable to bank, bearing interest at 9.75%, due in 1998.
Monthly payments of $710, collateralized by property and equipment. 20,944
Note payable, bearing interest at 8.75%, due in 1997. Monthly
payments of $456, collateralized by property and equipment. 10,000
---------
Long-term debt $ 181,719
Less- Current portion (82,136)
---------
Long-term debt excluding current portion $ 99,583
=========
</TABLE>
As of December 31, 1995, the aggregate amounts of annual principal
maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1996 $ 82,136
1997 69,461
1998 22,692
1999 7,430
2000 -
Thereafter -
--------
Total $181,719
========
</TABLE>
D-9
<PAGE> 54
TAMPA EYE CLINIC, P.A.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
6. LEASES AND RELATED-PARTY TRANSACTIONS:
TEC leases office space from one of the physician owners under a
noncancelable operating lease agreement which expires in April 2003. At
December 31, 1995, minimum annual rental commitments under the noncancelable
operating lease are as follows:
<TABLE>
<CAPTION>
Related Parties Other
--------------- -------
<S> <C> <C>
1996 $ 344,895 $ 7,688
1997 347,184 3,680
1998 347,184 3,680
1999 347,184 2,760
2000 347,184 -
Thereafter 810,096 -
---------- -------
Total $2,543,727 $17,808
========== =======
</TABLE>
Rent expense on related-party operating lease was $335,000 for the year
ended December 31, 1995. Lease expense related to office equipment amounted to
approximately $15,000 for the year ended December 31, 1995.
In various instances, relatives of the owners' of TEC are employees of the
practice.
7. EMPLOYEE BENEFIT PLAN:
Prior to July of 1995, TEC had a profit-sharing plan which provided for
TEC to make contributions on a discretionary basis. In July of 1995, TEC
terminated the profit-sharing plan and rolled the balances into a 401(k)
profit-sharing plan (the "Plan"). Each participant's contribution is matched
in part by TEC up to a maximum of 6% of the participant's compensation. The
Plan pays all administrative expenses. Contributions made to the Plan in 1995
were approximately $15,000. A physician owner and his spouse are the trustees
of the Plan.
8. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107 requires all entities
to disclose the fair value of certain financial instruments in their financial
statements. Accordingly, the carrying amounts of accounts receivable, accounts
payable and accrued expenses approximate fair value due to the short maturity
of these instruments.
The carrying amount TEC's debt approximates fair value due to TEC's
ability to obtain such borrowings on comparable terms and the floating nature
of the interest rates.
9. SUBSEQUENT EVENT:
On August 30, 1996, the Company completed a stock-for-stock merger
transaction with Physician Resource Group, Inc. (PRG), in exchange for 450,916
shares of PRG common stock.
The financial statements of TEC have been prepared as supplemental
information about the entity which PRG acquired. TEC previously operated as a
separate independent entity. The historical financial position, results of
operations and cash flows do not reflect any adjustments relating to the
acquisition.
D-10
<PAGE> 55
ANNEX E
<PAGE> 56
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
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 June 30, 1996 as if the merger
with Cincinnati Eye Institute, Inc. and affiliate (Cincinnati Eye); Tampa Eye
Clinic, P.A. (Tampa Eye); Gregory L. Henderson, M.D., P.A. (Henderson); The Eye
Institute of West Florida, P.A. and Douglas G. Johnson, O.D., P.A. (West
Florida); Stuart J. Kaufman, M.D. and Associates, P.A. (Kaufman); F. A. Hauber,
M.D., P.A. (Hauber) (the Pooled Entities); and the acquisition of Houston Eye
Associates (Houston Eye) and South Texas Retina Consultants, P.A. (South Texas)
(the Purchased Entities) (collectively the Third Quarter Acquisitions) had
occurred on that date, and include the unaudited pro forma combined statement of
operations for the years ended December 31, 1993, 1994, and 1995 and for the six
months ended June 30, 1995 and 1996 as if the merger of the Pooled Entities had
occurred as of January 1, 1993 and the acquisition of Houston Eye and South
Texas and certain other transactions as described below had occurred as of
January 1, 1995. The merger with the Pooled Entities will be accounted for as
pooling of interests, and accordingly the historical operations and balance
sheets of PRG and the Pooled Entities have been combined in these financial
statements.
The unaudited pro forma statements of operations for the year ended
December 31, 1995 and the six months ended June 30, 1996 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 24 eye care practices by
PRG during the first, second, and third quarter-to-date of 1996 (the 1996
Acquisitions); (iv) the acquisition of certain assets from and consummation of
service agreements with eye care practices during 1995 (the 1995 EyeCorp
Acquisitions); and (v) the issuance of 4,250,000 shares of PRG in a public
offering during May, 1996 and the application of the net proceeds therefrom.
The unaudited merger/significant transactions pro forma combined financial
statements have been prepared by PRG based on the financial statements of PRG
and the Third Quarter Acquisitions included elsewhere in this Form 8-K/A or
previously filed Form 8-K's, the unaudited financial statements of practices
acquired by PRG in the 1996 Acquisitions and the practices acquired 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 nor future corporate
costs and expenses related to the Third Quarter Acquisitions, the 1996
Acquisitions and the 1995 EyeCorp Acquisitions have been reflected in the
accompanying unaudited pro forma combined financial statements.
E-1
<PAGE> 57
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 1996
(000'S)
<TABLE>
<CAPTION>
PURCHASE
POOLING ADJUSTMENTS
------------------------ -----------
POOLED PURCHASED TOTAL
PRG ENTITIES ADJUSTMENTS SUBTOTAL ENTITIES PRO FORMA
-------- -------- ----------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................. $ 80,164 $ 2,114 -- $ 82,278 $ -- $ 82,278
Accounts receivable, net................... 13,718 4,762 -- 18,480 1,652(A) 20,132
Receivables due from affiliated
practices................................ 14,670 14 -- 14,684 -- 14,684
Inventories................................ 3,198 440 -- 3,638 215(A) 3,853
Prepaid expenses and other current
assets................................... 4,937 167 -- 5,104 46(A) 5,150
-------- -------- -------- -------- -------- --------
Total current assets................. 116,687 7,497 -- 124,184 1,913 126,097
PROPERTY AND EQUIPMENT, net:................. 41,055 2,896 -- 43,951 1,088(A) 45,039
INTANGIBLE ASSETS, net:...................... 112,370 -- -- 112,370 31,914(A) 144,284
OTHER NONCURRENT ASSETS, net................. 3,752 143 -- 3,895 302(A) 4,197
-------- -------- -------- -------- -------- --------
Total assets......................... $273,864 $10,536 -- $284,400 $35,217 $319,617
======== ======== ======== ======== ======== ========
LIABILITIES AND OWNERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current portion of
long-term debt........................... $ 3,478 $ 151 -- $ 3,629 $ -- $ 3,629
Accounts payable and accrued expenses...... 10,926 465 -- 11,391 543(A) 11,934
Accrued salaries and benefits.............. 3,279 2,357 -- 5,636 563(A) 6,199
-------- -------- -------- -------- -------- --------
Total current liabilities............ 17,683 2,973 -- 20,656 1,106 21,762
LONG-TERM DEBT, net of current portion....... 12,951 235 -- 13,186 -- 13,186
DEFERRED TAXES and OTHER LONG-TERM
LIABILITIES................................ 28,924 1,200 -- 30,124 12,946(A) 43,070
-------- -------- -------- -------- -------- --------
Total liabilities.................... 59,558 4,408 -- 63,966 14,052 78,018
OWNER'S EQUITY:
Common stock............................... 226 527 (494) 259 10(A) 269
Additional paid-in capital................. 215,150 67 494 215,711 21,155(A) 236,866
Retained earnings (deficit)................ (1,070) 5,534 -- 4,464 -- 4,464
-------- -------- -------- -------- -------- --------
Total owners' equity................. 214,306 6,128 -- 220,434 21,165 241,599
-------- -------- -------- -------- -------- --------
Total liabilities and owners'
equity............................. $273,864 $10,536 -- $284,400 $35,217 $319,617
======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to unaudited merger/significant transactions pro forma
combined balance sheet.
E-2
<PAGE> 58
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1993
(000'S, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
POOLED POOLING TOTAL PRO
PRG ENTITIES ADJUSTMENTS FORMA
------- -------- ----------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Management service revenues.......... $ -- $ 26,717 $ -- $26,717
Surgery center revenue............... 7,133 2 -- 7,135
Other revenues....................... 419 63 -- 482
------- -------- --------- -------
Total revenues............... 7,552 26,782 -- 34,334
COSTS AND EXPENSES:
Salaries, wages and benefits......... 698 20,222 (12,254)(B) 8,666
Pharmaceuticals and supplies......... 2,246 2,097 -- 4,343
General and administrative expenses.. 1,265 3,801 8,101 (B) 13,167
Depreciation and amortization........ 382 593 -- 975
Interest expense..................... 250 93 -- 343
------- -------- --------- -------
Total costs and expenses..... 4,841 26,806 (4,153) 27,494
------- -------- --------- -------
INCOME (LOSS) BEFORE INCOME TAXES...... 2,711 (24) 4,153 6,840
PROVISION FOR INCOME TAXES............. (1,030)(I) -- (1,620)(I) (2,650)
------- -------- --------- -------
NET INCOME............................. $ 1,681 $ (24) $ 2,533 $ 4,190
======= ======== ========= =======
NET INCOME PER SHARE................... $ 0.56 $ 0.64
======= =======
NUMBER OF SHARES USED IN NET
INCOME PER SHARE CALCULATION.......... 2,982 6,574 (V)
======= =======
</TABLE>
See accompanying notes to unaudited merger/significant transactions pro forma
combined statement of operations.
E-3
<PAGE> 59
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994
(000'S, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
POOLED POOLING TOTAL PRO
PRG ENTITIES ADJUSTMENTS FORMA
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Management service revenues............... $ 12,747 $ 34,077 $ -- $ 46,824
Surgery center revenue.................... 6,695 2,921 -- 9,616
Other revenues............................ 142 591 -- 733
--------- --------- --------- ---------
Total revenues.................... 19,584 37,589 -- 57,173
COSTS AND EXPENSES:
Salaries, wages and benefits.............. 4,972 26,655 (15,950)(B) 15,677
Pharmaceuticals and supplies.............. 3,425 3,368 -- 6,793
General and administrative expenses....... 5,650 5,301 10,249(B) 21,200
Depreciation and amortization............. 1,383 978 -- 2,361
Interest expense.......................... 1,076 335 -- 1,411
--------- --------- --------- ---------
Total costs and expenses.......... 16,506 36,637 (5,701) 47,442
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES.................. 3,078 952 5,701 9,731
PROVISION FOR INCOME TAXES.................. (1,224)(I) -- (2,594)(I) (3,818)
--------- --------- --------- ---------
NET INCOME.................................. $ 1,854 $ 952 $ 3,107 $ 5,913
========= ========= ========= =========
NET INCOME PER SHARE........................ $ 0.44 $ 0.76
========= =========
NUMBER OF SHARES USED IN NET INCOME PER
SHARE CALCULATION......................... 4,196 7,788(V)
========= =========
</TABLE>
See accompanying notes to unaudited merger/significant transactions pro forma
combined statement of operations.
E-4
<PAGE> 60
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(000'S, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PURCHASE ADJUSTMENTS
-------------------------------------------------------------
1995
1996 EYECORP
POOLED POOLING IPO ACQUISITIONS ACQUISITIONS TOTAL
PRG ENTITIES ADJUSTMENTS SUBTOTAL REORGANIZATION AND OTHER AND OTHER PRO FORMA
------- -------- ----------- ------- -------------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Management
service
revenues... $39,129 $36,481 $ -- $75,610 $ 22,085 (C) $ 72,982 (J) $ 40,424 (O) $211,101
Surgery
center
revenue.... 9,317 3,618 -- 12,935 2,821 (C) 7,303 (J) 4,749 (O) 27,808
Other revenues. 79 1,343 -- 1,422 5 (D) 353 (K) -- 1,780
------- ------ ----- ------- ------- ------- ------- --------
Total
revenues... 48,525 41,442 -- 89,967 24,911 80,638 45,173 240,689
COSTS AND
EXPENSES:
Salaries,
wages and
benefits... 19,768 30,293 (18,803)(B) 31,258 10,199 (D) 33,588 (K) 15,455 (P) 90,500
Pharmaceuticals
and
supplies... 6,687 2,800 -- 9,487 3,494 (D) 6,990 (K) 7,659 (P) 27,630
General and
administrative
expenses... 16,022 6,456 12,693 (B) 35,171 6,115 (D) 24,563 (K) 13,653 (P) 77,978
(334)(G) (54)(M) (676)(Q)
(460)(N)
Depreciation
and
amortization... 2,609 889 -- 3,498 1,217 (D) 2,984 (K) 1,264 (P) 13,448
(194)(F) (20)(H) 1,448 (R)
159 (G) 3,069 (L)
23 (M)
Executive
resignation
expenses... 1,117 -- -- 1,117 -- -- -- 1,117
Interest
expense.... 1,157 359 -- 1,516 233 (D) 712 (K) 379 (P) (2,540)
(82)(E) (22)(H) (207)(S)
-- (24)(F) (5,045)(T)
------- ------ ----- ------- ------ ------- ------- --------
Total
costs
and
expenses... 47,360 40,797 (6,110) 82,047 20,783 66,328 38,975 208,133
------
--
------- ------ ----- ------- ------- ------- --------
INCOME BEFORE
INCOME
TAXES........ 1,165 645 6,110 7,920 4,128 14,310 6,198 32,556
PROVISION FOR
INCOME
TAXES........ (501) -- (2,634)(I) (3,135) (1,610)(I) (4,175)(I) (2,479)(I) (11,399)(I)
-------
--
------- ------ ----- ------- ------- ------- --------
NET INCOME..... $ 664 $ 645 $ 3,476 $ 4,785 $ 2,518 $ 10,135 $ 3,719 $ 21,157 (U)
======= ====== ===== ======= ======= ======= ======= ========
NET INCOME PER
SHARE........ $ 0.07 $ 0.38 $ 0.78
======= ======= ========
NUMBER OF
SHARES USED
IN NET INCOME
PER SHARE
CALCULATION... 9,086 12,678 27,299 (V)
======= ====== ======
</TABLE>
See accompanying notes to unaudited merger/significant transactions pro forma
combined statement of operations.
E-5
<PAGE> 61
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1995
(000'S, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
POOLED POOLING TOTAL PRO
PRG ENTITIES ADJUSTMENTS FORMA
------- -------- ----------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Management service revenues................. $14,302 $ 17,749 $ -- $32,051
Surgery center revenue...................... 3,885 -- -- 3,885
Other revenues.............................. 219 11 -- 230
------- -------- ------- -------
Total revenues...................... 18,406 17,760 -- 36,166
COSTS AND EXPENSES:
Salaries, wages and benefits................ 4,993 12,269 (8,468)(B) 8,794
Pharmaceuticals and supplies................ 1,797 1,212 -- 3,009
General and administrative
expenses................................. 8,142 2,593 6,879 (B) 17,614
Depreciation and amortization............... 818 337 -- 1,155
Interest expense............................ 850 40 -- 890
------- -------- ------- ------
Total costs and expenses............ 16,600 16,451 (1,589) 31,462
------- -------- ------- ------
INCOME BEFORE INCOME TAXES.................... 1,806 1,309 1,589 4,704
PROVISION FOR INCOME TAXES.................... (690) -- (1,129)(I) (1,819)
------- -------- ------- ------
NET INCOME.................................... $ 1,116 $ 1,309 $ 460 $ 2,885
======= ======== ======= =======
NET INCOME PER SHARE.......................... $ 0.22 $ 0.35
======= =======
NUMBER OF SHARES USED IN NET INCOME PER SHARE
CALCULATION................................. 4,986 8,296 (V)
======= =======
</TABLE>
See accompanying notes to unaudited merger/significant transactions pro forma
combined statement of operations.
E-6
<PAGE> 62
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(000'S, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PURCHASE
ADJUSTMENTS
------------
1996
POOLED POOLING ACQUISITIONS TOTAL
PRG ENTITIES ADJUSTMENTS SUBTOTAL AND OTHER PRO FORMA
------- -------- ----------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Management service revenues.... $70,482 $ 18,067 $ -- $ 88,549 $ 18,922(J) $ 107,471
Surgery center revenue......... 12,454 -- -- 12,454 1,894(J) 14,348
Other revenues................. 1,874 22 -- 1,896 58(K) 1,954
------- ------- -------- ------- ------- --------
Total revenues......... 84,810 18,089 -- 102,899 20,874 123,773
COSTS AND EXPENSES:
Salaries, wages and benefits... 38,202 13,566 (10,511)(B) 41,257 6,933(K) 48,190
Pharmaceuticals and supplies... 11,700 1,346 -- 13,046 3,202(K) 16,248
General and administrative
expenses.................... 21,919 1,985 7,515(B) 31,419 6,744(K) 38,163
Depreciation and
amortization................ 4,115 303 -- 4,418 320(K) 5,604
866(L)
Pooling merger transaction..... 9,000 -- -- 9,000 -- 9,000
Interest expense............... 310 31 -- 341 111(K) (1,756)
(2,208)(T)
-- --
------- ------- -------- ------- ------- --------
Total costs and
expenses............. 85,246 17,231 (2,996) 99,481 15,968 115,449
------- ------- -------- ------- ------- --------
INCOME (LOSS) BEFORE INCOME
TAXES.......................... (436) 858 2,996 3,418 4,906 8,324
PROVISION FOR INCOME TAXES....... (3,276) -- (1,503)(I) (4,779) (1,515)(I) (6,294)
------- ------- -------- ------- ------- --------
NET INCOME (LOSS)................ $(3,712) $ 858 $ 1,493 $ (1,361) $ 3,391 $ 2,030(U)
======= ======= ======== ======= ======= ========
NET INCOME (LOSS) PER SHARE...... $ (0.20) $ 0.07
======= ========
NUMBER OF SHARES USED IN NET
INCOME PER SHARE CALCULATION... 18,458 27,732(V)
======= ========
</TABLE>
See accompanying notes to unaudited merger/significant transactions pro forma
combined statement of operations.
E-7
<PAGE> 63
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
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 June 30, 1996 gives
effect to the merger of the Pooled Entities and the Third Quarter Acquisitions
as if such transactions or events had occurred on June 30, 1996. 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) Reflects the Houston Eye and South Texas acquisitions. Pursuant to the
Houston Eye and South Texas acquisitions which were consummated subsequent to
June 30, 1996, PRG acquired certain practice assets and liabilities, excluding
cash, in exchange for the issuance of 998,616 shares of PRG common stock.
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
Houston Eye and South Texas acquisitions are as follows:
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
----------- --------
(000'S)
<S> <C>
Net assets acquired --
Accounts receivable, net................................................ $ 1,652
Inventories............................................................. 215
Prepaid expenses and other current assets............................... 46
Property and equipment, net............................................. 1,088
Intangible assets....................................................... 31,914
Other noncurrent assets, net............................................ 302
Notes payable and current portion of long-term debt..................... --
Accounts payable and accrued expenses................................... (543)
Accrued salaries and benefits........................................... (563)
Long-term debt, net..................................................... --
Deferred taxes and other long-term liabilities.......................... (12,946)
--------
$ 21,165
========
Consideration paid --
Common stock............................................................ $ 21,165
========
</TABLE>
The value of the shares issued in the Houston Eye and South Texas
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, and the service agreements. 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.
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), if any, 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
E-8
<PAGE> 64
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(000'S, EXCEPT SHARE AMOUNTS)
the service agreement, typically 40 years with additional renewal options,
effectively establishes a finite life for the amortization of intangibles.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 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 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.
(B) Historical compensation to the owners has been reversed and future
professional service fees properly recorded. The previous owners of the Pooled
Entities will receive a professional service fee equal to 65% of income before
taxes as compensation for the services rendered by the physicians to the Clinic.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS ADJUSTMENTS
The accompanying unaudited pro forma consolidated statements of operations
assume that as of January 1, 1993, PRG and the Pooled Entities had completed the
Merger. In addition, the accompanying unaudited pro forma consolidated
statements of operations for the year ended December 31, 1995 and for the six
months ended June 30, 1996 assume that as of January 1, 1995, PRG had completed
the IPO and Reorganization, the 1996 Acquisitions, the 1995 EyeCorp
Acquisitions, and the May, 1996 issuance of shares in a public offering.
E-9
<PAGE> 65
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(000'S, EXCEPT SHARE AMOUNTS)
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 initial 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 initial 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.
(D) Represents an adjustment to reflect historical costs of the initial
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 initial affiliated practices and a management
services organization (MSO) purchased by PRG in the Reorganization which are
included in the historical financial statements of the initial 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.
E-10
<PAGE> 66
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(000'S, EXCEPT SHARE AMOUNTS)
(F) Reflects adjustments to the historical costs and expenses as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
DESCRIPTION 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).
(3) Certain capital leases recorded by the initial 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
initial 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>
YEAR ENDED
DECEMBER 31,
DESCRIPTION 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>
E-11
<PAGE> 67
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(000'S, EXCEPT SHARE AMOUNTS)
NOTE (H) REFERS TO EXCLUDED ASSETS FROM THE 1996 ACQUISITIONS
(H) Reflects the elimination of expenses related to certain assets which
have been included within the historical costs and expenses of the 1996
Acquisitions 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 1996 ACQUISITIONS
(J) Represents calculated management service revenues of PRG, determined in
accordance with the applicable service agreement applied to the historical
operating results of the 1996 Acquisitions.
<TABLE>
<CAPTION>
SIX
MONTHS
ENDED
DECEMBER 31, JUNE 30,
DESCRIPTION 1995 1996
----------- ------------ --------
(000'S)
<S> <C> <C>
Management service revenues(1).................................. $ 72,982 $ 18,922
======= =======
Revenues from ASCs(2)........................................... $ 7,303 $ 1,894
======= =======
</TABLE>
PRG will receive, with respect to each of the 1996 Acquisitions, 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.
(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 1996
Acquisitions 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>
SIX MONTHS
ENDED
DECEMBER 31, JUNE 30,
DESCRIPTION 1995 1996
----------- ------------ ----------
(000'S) (000'S)
<S> <C> <C>
Other revenue, net.......................................... $ (353) (58)
Salaries, wages and benefits................................ 33,588 6,933
Pharmaceuticals and supplies................................ 6,990 3,202
General and administrative expenses......................... 24,049 6,744
Depreciation and amortization............................... 3,882 1,185
Interest expense............................................ 712 111
</TABLE>
(L) Reflects adjustments to historical costs and expenses of $183, $33 and
$650 for the six months ended June 30, 1996 and $926, $202 and $1,941 for the
year ended December 31, 1995, for (1) amortization of work
E-12
<PAGE> 68
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(000'S, EXCEPT SHARE AMOUNTS)
force, (2) amortization of goodwill related to the ASCs and (3) amortization of
intangibles related to the service agreements.
(M) Reflects reversal of operating lease expense for previously leased
assets which will be acquired from owners of the 1996 Acquisitions and the
recording of depreciation expense on a straight-line basis.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
DESCRIPTION 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 1996 Acquisitions which are included in the historical financials
of the 1996 Acquisitions.
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>
YEAR ENDED
DECEMBER 31,
DESCRIPTION 1995
----------- ------------
(000'S)
<S> <C>
Management service revenues(1).......................................... $ 40,424
========
Revenues from ASCs(2)................................................... $ 4,749
========
</TABLE>
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>
YEAR ENDED
DECEMBER 31,
DESCRIPTION 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>
E-13
<PAGE> 69
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(000'S, EXCEPT SHARE AMOUNTS)
(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>
YEAR ENDED
DECEMBER 31,
DESCRIPTION 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 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 reduction of interest expense of $1,440 and $1,186 associated
with an $18,000 and $38,114 reduction in debt bearing interest at 8% during 1995
and the six months ended June 30, 1996, respectively, from the proceeds of the
May 1996 stock offering. In addition, the remaining proceeds from the stock
offering of $97,430 and $77,316 during 1995 and the six months ended June 30,
1996, has been invested in tax-free securities bearing interest at approximately
3.7%. Therefore interest income of $3,604 and $1,022 during 1995 and the six
months ended June 30, 1996, has also been included in income.
NOTES (U) - (V) 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.
E-14
<PAGE> 70
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(000'S, EXCEPT SHARE AMOUNTS)
(V) Weighted average shares outstanding is summarized below:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------ -----------------------
DESCRIPTION 1993 1994 1995 1996 1995
---------------------------- --------- --------- ---------- ---------- ---------
(000'S)
<S> <C> <C> <C> <C> <C>
Outstanding PRG shares...... 1,662,274 1,662,274 9,558,244 9,558,244 1,662,274
PRG stock options impact,
using the treasury stock
method.................... -- -- 344,684 595,339 --
PRG shares issued in the
1996 Acquisitions......... -- -- 3,256,772 3,256,772 --
Equivalent shares of EyeCorp
common stock equivalents
at the exchange ratio..... 1,319,976 2,534,028 6,089,506 6,089,506 3,042,049
PRG shares issued to Pooled
Entities shareholders..... 3,592,030 3,592,030 3,592,030 3,592,030 3,592,030
PRG shares issued in
connection with the public
offering during May,
1996...................... -- -- 4,250,000 4,250,000 --
PRG stock options impact,
EyeCorp options assumed
using the treasury stock
method.................... -- -- 208,117 253,922 --
PRG stock issued in
connection with stock
options
exercised................. -- -- -- 135,981 --
---------- ---------- ---------- ---------- ---------
6,574,280 7,788,332 27,299,353 27,731,794 8,296,353
========== ========== ========== ========== =========
</TABLE>
E-15
<PAGE> 71
ANNEX F
<PAGE> 72
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Physicians Resource Group, Inc.:
We have audited the accompanying combined balance sheet of The Eye
Institute of West Florida, P.A. and Douglas G. Johnson, O.D., P.A. as of
December 31, 1995, and the related combined statements of earnings, owners'
equity, and cash flows for the year then ended. These combined financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above
present fairly, in all material respects, the financial position of The Eye
Institute of West Florida, P.A. and Douglas G. Johnson, O.D., P.A. as of
December 31, 1995, and the results of their operations and their cash flows
for the year then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
September 6, 1996
F-1
<PAGE> 73
THE EYE INSTITUTE OF WEST FLORIDA, P.A. AND DOUGLAS G. JOHNSON, O.D., P.A.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
ASSETS 1995 1996
----------- ----------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 61,074 $ 201,790
Accounts receivable, net of allowance for
doubtful accounts of $92,000 and $93,000, at
December 31, 1995 and June 30, 1996 (unaudited),
respectively 420,214 393,302
Inventories 28,424 26,226
Prepaid expenses and other current assets 78,858 36,547
----------- ----------
Total current assets 588,570 657,865
PROPERTY AND EQUIPMENT, net 325,985 305,282
----------- ----------
Total assets $ 914,555 $ 963,147
=========== ==========
LIABILITIES AND OWNERS' EQUITY
CURRENT LIABILITIES:
Short-term notes $ 78,352 $ 2,923
Current portion of long-term debt 51,662 55,308
Accounts payable and accrued expenses 19,964 20,389
Accrued salaries and benefits 61,812 187,270
----------- ----------
Total current liabilities 211,790 265,890
LONG-TERM DEBT, net of current portion 24,540 18,572
----------- ----------
Total liabilities 236,330 284,462
OWNERS' EQUITY 678,225 678,685
----------- ----------
Total liabilities and owners' equity $ 914,555 $ 963,147
=========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-2
<PAGE> 74
THE EYE INSTITUTE OF WEST FLORIDA, P.A. AND DOUGLAS G. JOHNSON, O.D., P.A.
COMBINED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
DECEMBER 31, -----------------------------
1995 1995 1996
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES:
Medical service revenues, net $ 3,487,357 $ 1,861,068 $ 1,966,567
COSTS AND EXPENSES:
Compensation to physician owners 1,424,725 857,423 1,087,198
Salaries, wages, and benefits 706,938 342,063 389,655
Pharmaceuticals and supplies 224,870 114,131 119,228
General and administrative expenses 672,773 320,612 312,738
Depreciation and amortization 94,651 48,326 52,180
Interest expense 15,480 7,842 5,108
------------ ------------ ------------
Total costs and expenses 3,139,437 1,690,397 1,966,107
------------ ------------ ------------
Net earnings $ 347,920 $ 170,671 $ 460
============ ============ ===========
SUPPLEMENTAL DISCLOSURE:
Combined compensation to and net
earnings of physician owners $ 1,772,645 $ 1,028,094 $ 1,087,658
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of
these combined financial statements.
F-3
<PAGE> 75
THE EYE INSTITUTE OF WEST FLORIDA, P.A. AND DOUGLAS G. JOHNSON, O.D., P.A.
COMBINED STATEMENT OF OWNERS' EQUITY
<TABLE>
<S> <C>
BALANCE, December 31, 1994 $ 330,305
Net earnings 347,920
---------
BALANCE, December 31, 1995 678,225
Net earnings (unaudited) 460
---------
BALANCE, June 30, 1996 (unaudited) $ 678,685
=========
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
F-4
<PAGE> 76
THE EYE INSTITUTE OF WEST FLORIDA, P.A. AND DOUGLAS G. JOHNSON, O.D., P.A.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
DECEMBER 31, -------------------------
1995 1995 1996
----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 347,920 $ 170,671 $ 460
Adjustments to reconcile net earnings to net cash
provided by operating activities-
Depreciation and amortization 94,651 48,326 52,180
Changes in assets and liabilities-
(Increase) decrease in-
Accounts receivable, net (219,155) (46,644) 26,912
Inventories 1,522 769 2,198
Prepaid expenses and other assets (54,237) 3,258 42,311
Increase (decrease) in-
Accounts payable and accrued expenses 851 426 425
Accrued salaries and benefits 15,964 68,660 125,458
--------- --------- ---------
Net cash provided by operating activities 187,516 245,466 249,944
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (113,043) (61,099) (31,477)
--------- --------- ---------
Net cash used in investing activities (113,043) (61,099) (31,477)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt 101,485 - 29,516
Repayment of debt (195,979) (50,776) (107,267)
--------- --------- ---------
Net cash used in financing activities (94,494) (50,776) (77,751)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (20,021) 133,591 140,716
CASH AND CASH EQUIVALENTS, beginning of period 81,095 81,095 61,074
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 61,074 $ 214,686 $ 201,790
========= ========= =========
SUPPLEMENTAL DISCLOSURE:
Cash interest paid $15,480 $7,841 $4,331
</TABLE>
The accompanying notes are an integral part of
these combined financial statements.
F-5
<PAGE> 77
THE EYE INSTITUTE OF WEST FLORIDA, P.A. AND DOUGLAS G. JOHNSON, O.D., P.A.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION:
The Eye Institute of West Florida and Douglas G. Johnson, O.D., P.A.
(EIOWF), affiliated through common ownership, are professional service
corporations that are engaged in the practice of medicine specializing in
ophthalmology in Largo, Florida.
The accompanying financial statements reflect the combined operations of
the affiliated practices and have been prepared on the accrual basis of
accounting. The supplemental caption on the statements of earnings, "Combined
compensation to and net earnings of the physician owners'," reflects the total
earnings available to the physician owners for each period.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ACCOUNTS RECEIVABLE
Accounts receivable primarily consist of receivables from patients,
insurers, government programs and other third-party payors for medical
services provided by physicians. Such amounts are reduced by an allowance for
contractual adjustments and other uncollectible amounts. Contractual
adjustments result from the differences between the rates charged by the
physicians for services performed and the amounts allowed by the Medicare and
Medicaid programs and other public and private insurers.
INVENTORIES
Inventories consist primarily of spectacle frames, lenses, and contact
lenses which are valued at the lower of cost or market with cost determined
using the first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation of property and
equipment is calculated using accelerated methods over the estimated useful
lives of the assets. Routine maintenance and repairs are charged to expense as
incurred, while costs of betterments and renewals are capitalized.
INCOME TAXES
The accompanying combined financial statements reflect the operations of
an S corporation and a C corporation. In the S corporation the income tax
liabilities are the responsibility of the owner. The C corporation has
historically not incurred significant tax liabilities for federal or state
income taxes. Compensation to physician owners has traditionally reduced
taxable income to nominal levels. This relationship would be expected to
continue in the absence of the acquisition referred to in Note 9. Because of
this practice, a provision for income taxes and deferred tax assets and
liabilities of the taxable entities have not been reflected in these financial
statements. The consistent presentation of the financial statements on a
pretax basis also provides comparability that would not otherwise be the case
when presenting a combination of various taxable and nontaxable entities.
F-6
<PAGE> 78
THE EYE INSTITUTE OF WEST FLORIDA, P.A. AND DOUGLAS G. JOHNSON, O.D., P.A.
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
REVENUES
Medical service revenues are accounted for in the period in which the
services are provided. The revenues are reported at the estimated realizable
amounts from patients, third-party payors and others. Provisions for estimated
third-party payor adjustments are estimated and recorded in the period the
related services are provided. Any adjustment to the amounts is recorded in
the period in which the revised amount is determined. A significant portion of
EIOWF medical service revenues are related to Medicare and other governmental
programs. Medicare and other governmental programs reimburse physicians based
on fee schedules which are determined by the related governmental agency.
Additionally, EIOWF participates in agreements with managed care organizations
to provide services at negotiated rates.
NEW ACCOUNTING PRONOUNCEMENT
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." Adoption of this standard
is required for financial statements for fiscal years beginning after December
15, 1995. Earlier application is encouraged. EIOWF does not expect the new
standard to have a material effect on EIOWF 's results of operations.
CONCENTRATION OF CREDIT RISK
EIOWF extends credit to patients covered by programs such as Medicare,
Medicaid, and private insurers. EIOWF manages credit risk with the various
public and private insurance providers, as appropriate. Allowances for
doubtful accounts have been made for potential losses, when appropriate.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the combined
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
UNAUDITED FINANCIAL INFORMATION
The unaudited interim combined financial statements as of June 30, 1996,
and for the six months ended June 30, 1996 and 1995, have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission. The accompanying unaudited combined financial statements reflect,
in the opinion of management, all adjustments necessary for a fair
presentation of the unaudited combined financial statements. All such
adjustments are of a normal and recurring nature.
F-7
<PAGE> 79
THE EYE INSTITUTE OF WEST FLORIDA, P.A. AND DOUGLAS G. JOHNSON, O.D., P.A.
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment at December 31, 1995, consists of the following:
<TABLE>
<CAPTION>
Estimated Useful December 31,
Lives (Years) 1995
---------------- -----------
<S> <C> <C>
Equipment 5-7 $ 537,848
Autos 5 65,398
Leasehold improvements 5 39,095
Property and fixtures 5-7 14,089
---------
$ 656,430
Less- Accumulated depreciation and amortization (330,445)
---------
Net property and equipment $ 325,985
=========
</TABLE>
4. SHORT-TERM DEBT:
Short-term debt consists of the following as of December 31, 1995:
<TABLE>
<S> <C>
Line of credit payable to a bank, bearing interest at prime
(8.5% at December 31, 1995), due on demand $52,800
Line of credit payable to a bank, bearing interest at prime
plus 0.5% (9.0% at December 31, 1995), due on demand 25,552
-------
Total lines of credit $78,352
=======
</TABLE>
All outstanding balances are payable on demand. One line of credit is
unsecured, the other line of credit requires the Company keep inventory and
receivables free of liens. The unused portion of the lines of credit as of
December 31, 1995 is $421,648.
5. CAPITAL LEASES:
Capital leases for medical and office equipment consisted of the following
as of December 31, 1995:
<TABLE>
<S> <C>
Capital lease to financing company for medical equipment, due in 1996,
payable in monthly installments of $2,363 with interest at 8.8%,
collateralized by the equipment $28,355
Capital lease to financing company for office equipment, due in 1997,
payable in monthly installments of $2,330, with interest of 8.8%,
collateralized by the equipment 53,590
-------
Total capital lease payable $81,945
=======
</TABLE>
F-8
<PAGE> 80
THE EYE INSTITUTE OF WEST FLORIDA, P.A. AND DOUGLAS G. JOHNSON, O.D., P.A.
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
As of December 31, 1995, the minimum annual lease commitments under
capital lease are as follows:
<TABLE>
<S> <C>
Total minimum lease payments due $81,945
Less- Amounts representing interest (5,743)
------
Present value of minimum lease payments $76,202
Less- current portion (51,662)
-------
Long-Term obligation $24,540
=======
</TABLE>
6. LEASES:
EIOWF leases office space from an entity which is 50% owned by one of the
physician owners of EIOWF under a noncancelable operating lease agreement
which expires at April 2001. In addition, certain medical and office equipment
is leased under noncanceble operating leases. At December 31, 1995, minimum
annual lease commitments under noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
Related
Party Other
-------- --------
<S> <C> <C>
1996 $175,201 $ 33,701
1997 175,201 32,966
1998 175,201 33,225
1999 175,201 6,615
2000 175,201 -
Thereafter 43,800 -
-------- --------
Total $919,805 $106,507
======== ========
</TABLE>
Rent expense on related-party operating lease was $187,096 for the year
ended December 31, 1995. Lease expense related to office equipment and
non-related party rent amounted to $39,248 for the year ended December 31,
1995.
7. EMPLOYEE BENEFIT PLAN:
EIOWF has a 401(k) profit-sharing plan (the "Plan") which provides for
EIOWF to make discretionary contributions. EIOWF pays all general and
administrative expenses of the Plan. EIOWF made contributions related to the
Plan totaling $4,596 in 1995. A physician owner is the trustee of the Plan.
EIOWF does not provide postretirement or postemployment benefits to
employees.
8. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107 requires all entities
to disclose the fair value of certain financial instruments in their financial
statements. Accordingly, the carrying amounts of accounts receivable, accounts
payable and accrued expenses approximate fair value due to the short maturity
of these instruments.
F-9
<PAGE> 81
THE EYE INSTITUTE OF WEST FLORIDA, P.A. AND DOUGLAS G. JOHNSON, O.D., P.A.
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
The carrying amount of EIOWF's long-term debt approximates fair value due
to EIOWF's ability to obtain such borrowings on comparable terms and the
floating nature of the interest rates.
9. SUBSEQUENT EVENT:
On August 30, 1996, the EIOWF completed a stock-for-stock merger
transaction with Physicians Resource Group, Inc. (PRG), in exchange for
304,281 shares of PRG common stock.
The financial statements of EIOWF have been prepared as supplemental
information about the entities which PRG acquired. EIOWF previously operated
as a separate independent entities. The historical financial position, results
of operations and cash flows do not reflect any adjustments relating to the
acquisition.
F-10
<PAGE> 82
ANNEX G
<PAGE> 83
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Physicians Resource Group, Inc.:
We have audited the accompanying supplemental combined balance sheets of
Physicians Resource Group, Inc. (a Delaware corporation), and subsidiaries, and
the Acquisitions (as further described in Note 1) as of December 31, 1994 and
1995, and the related supplemental combined statements of operations, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1995. The supplemental combined historical statements
give retroactive effect to the merger with the Acquisitions, which subsequently
will be accounted for as pooling of interests as described in Note 1. These
supplemental financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these supplemental
financial statements based on our audits.
We did not audit the financial statements of EyeCorp, Inc., included in the
supplemental combined financial statements of Physicians Resource Group, Inc.,
which financial statements reflect total assets and revenues of 55 percent and
25 percent, respectively, in 1995, 70 percent and 34 percent, respectively, in
1994, and 22 percent of revenue in 1993, of the related supplemental combined
totals. These statements were audited by other auditors whose report thereon has
been furnished to us, and our opinion expressed herein, insofar as it relates to
the amounts included for EyeCorp, Inc., is based solely upon the report of the
other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based upon our audits and the report of the other auditors,
the supplemental combined financial statements referred to above present fairly,
in all material respects, the combined financial position of Physicians Resource
Group, Inc., and the Acquisitions, as of December 31, 1994 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995, after giving retroactive effect to
the merger with the Acquisitions, as described in Note 1, all in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
September 6, 1996
G-1
<PAGE> 84
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTAL COMBINED BALANCE SHEETS
(000'S, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1994 1995 1996
------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................... $ 3,395 $ 18,183 $ 82,278
Accounts receivable, net of allowance of $4,927, $5,968 and
$7,631 for 1994, 1995 and 1996, respectively............. 9,742 15,285 18,480
Receivables due from Affiliated Practices................... -- 6,265 14,684
Inventories................................................. 560 2,546 3,638
Prepaid expenses and other current assets................... 1,640 6,984 5,104
------- -------- --------
Total current assets................................ 15,337 49,263 124,184
PROPERTY AND EQUIPMENT, net................................... 13,702 35,550 43,951
INTANGIBLE ASSETS, net........................................ 15,789 52,257 112,370
OTHER NONCURRENT ASSETS, net.................................. 1,084 1,710 3,895
------- -------- --------
Total assets........................................ $45,912 $138,780 $284,400
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Obligation to affiliated physicians and physician groups.... $ 1,280 $ 1,086 $ --
Current portion of long-term debt........................... 2,573 2,209 3,629
Accounts payable and accrued expenses....................... 2,826 10,969 11,391
Accrued taxes, payroll and executive resignation costs...... 2,790 4,554 5,636
Amounts due to related parties and, in 1995, the ASC
Option................................................... 320 3,100 --
------- -------- --------
Total current liabilities........................... 9,789 21,918 20,656
LONG-TERM DEBT, net of current portion........................ 16,321 32,788 13,186
DEFERRED TAX LIABILITIES AND OTHER LONG-TERM LIABILITIES...... 4,697 15,479 30,124
------- -------- --------
Total liabilities................................... 30,807 70,185 63,966
------- -------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 30,000,000 shares authorized,
8,074,000, 19,240,000 and 25,874,000 (unaudited) shares
outstanding.............................................. 81 193 259
Additional paid-in capital.................................. 9,529 60,984 215,711
Retained earnings........................................... 5,495 7,418 4,464
------- -------- --------
Total stockholders' equity.......................... 15,105 68,595 220,434
------- -------- --------
Total liabilities and stockholders' equity.......... $45,912 $138,780 $284,400
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these supplemental combined
financial statements.
G-2
<PAGE> 85
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTAL COMBINED STATEMENTS OF OPERATIONS
(000'S, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED
FOR THE YEAR ENDED JUNE 30,
----------------------------- -------------------
1993 1994 1995 1995 1996
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
REVENUES:
Management service......................... $26,717 $46,824 $75,610 $32,051 $ 88,549
Surgery center............................. 7,135 9,616 12,935 3,885 12,454
Other...................................... 482 733 1,422 230 1,896
------- ------- ------- ------- -------
Total revenues..................... 34,334 57,173 89,967 36,166 102,899
------- ------- ------- ------- -------
COSTS AND EXPENSES:
Salaries, wages and benefits............... 20,920 31,627 50,061 17,262 51,768
Pharmaceuticals and supplies............... 4,343 6,793 9,487 3,009 13,046
General and administrative................. 5,066 10,951 22,478 10,735 23,904
Depreciation and amortization.............. 975 2,361 3,498 1,155 4,418
Interest expense........................... 343 1,411 1,516 890 341
Executive resignation expenses............. -- -- 1,117 -- --
Pooling merger transaction expenses........ -- -- -- -- 9,000
------- ------- ------- ------- -------
Total costs and expenses........... 31,647 53,143 88,157 33,051 102,477
------- ------- ------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM......................... 2,687 4,030 1,810 3,115 422
PROVISION FOR INCOME TAXES................... -- 1,162 501 690 3,276
------- ------- ------- ------- -------
INCOME BEFORE EXTRAORDINARY
ITEM....................................... 2,687 2,868 1,309 2,425 (2,854)
EXTRAORDINARY ITEM, loss on debt
extinguishment, net of income tax benefit
of $53..................................... -- -- (119) -- --
------- ------- ------- ------- -------
NET INCOME (LOSS)............................ 2,687 2,868 1,190 2,425 (2,854)
INCOME (LOSS) PER SHARE:
Income before extraordinary item........... $ 0.41 $ 0.37 $ 0.10 $ 0.29 $ (0.13)
Extraordinary item......................... -- -- (0.01) -- --
------- ------- ------- ------- -------
Net income................................. $ 0.41 $ 0.37 $ 0.09 $ 0.29 $ (0.13)
======= ======= ======= ======= =======
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING................................ 6,574 7,788 12,678 8,296 21,768
======= ======= ======= ======= =======
PRO FORMA ADJUSTMENTS --
Income tax expense (Unaudited)............. 1,045 432 252 510 349
------- ------- ------- ------- -------
PRO FORMA NET INCOME (LOSS) (Unaudited)...... $ 1,642 $ 2,436 $ 938 $ 1,915 $ (3,203)
======= ======= ======= ======= =======
PRO FORMA INCOME (LOSS) PER COMMON SHARE
(Unaudited)................................ $ 0.25 $ 0.31 $ 0.07 $ 0.23 $ (0.15)
======= ======= ======= ======= =======
PRO FORMA WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING (Unaudited)............. 6,574 7,788 12,678 8,296 21,768
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these supplemental combined
financial statements.
G-3
<PAGE> 86
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTAL COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1995
(000'S, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PARTNERS'
PREFERRED STOCK COMMON STOCK ADDITIONAL EQUITY/ TOTAL
------------------- --------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS EQUITY
-------- ------ ---------- ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1993............ -- $ -- 3,592,000 $ 36 $ 610 $ 5,891 $ 6,537
Issuance of common stock.......... -- -- 1,200,000 12 -- (12) --
Net income........................ -- -- -- -- -- 2,687 2,687
Distributions..................... -- -- -- -- -- (1,764) (1,764)
-------- ---- ---------- ---- -------- ------- --------
BALANCE, December 31, 1993.......... -- -- 4,792,000 48 610 6,802 7,460
Capital contribution in
conjunction with stock split.... -- -- -- -- -- 11 11
Issuance of common stock, dividend
paid and formation of EyeCorp... -- -- 1,320,000 13 100 (3,457) (3,344)
Issuance of common stock in
connection with acquisitions.... -- -- 1,962,000 20 8,819 -- 8,839
Net income........................ -- -- -- -- -- 2,868 2,868
Distributions..................... -- -- -- -- -- (729) (729)
-------- ---- ---------- ---- -------- ------- --------
BALANCE, December 31, 1994.......... -- -- 8,074,000 81 9,529 5,495 15,105
Issuance of common stock in
conjunction with the PRG
Reorganization and IPO, net of
offering costs.................. -- -- 7,941,000 80 37,149 -- 37,229
Cash dividends paid to physician
owners of PRG Founding
Affiliated Practices............ -- -- -- -- (13,362) -- (13,362)
Issuance of preferred stock....... 174,500 2 -- -- 1,743 -- 1,745
Retirement of preferred stock..... (174,500) (2) -- -- (1,743) -- (1,745)
Issuance of common stock in
conjunction with acquisitions... -- -- 3,225,000 32 27,668 -- 27,700
Net income........................ -- -- -- -- -- 1,190 1,190
Contributions, net................ -- -- -- -- -- 733 733
-------- ---- ---------- ---- -------- ------- --------
BALANCE, December 31, 1995.......... -- -- 19,240,000 193 60,984 7,418 68,595
-------- ---- ---------- ---- -------- ------- --------
Issuance of common stock in
conjunction with acquisitions... -- -- 2,248,000 22 38,860 -- 38,882
Issuance of common stock.......... -- -- 4,250,000 43 114,508 -- 114,551
Exercise of stock options......... -- -- 136,000 1 1,359 -- 1,360
Net income (loss)................. -- -- -- -- -- (2,854) (2,854)
Distributions..................... -- -- -- -- -- (100) (100)
-------- ---- ---------- ---- -------- ------- --------
BALANCE, June 30, 1996
(unaudited)....................... -- $ -- 25,874,000 $259 $215,711 $ 4,464 $ 220,434
======== ==== ========== ==== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these supplemental combined
financial statements.
G-4
<PAGE> 87
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTAL COMBINED STATEMENTS OF CASH FLOWS
(000'S)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED
FOR THE YEAR ENDED JUNE 30,
----------------------------- ------------------
1993 1994 1995 1995 1996
------- -------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................ $ 2,687 $ 2,868 $ 1,190 $ 2,425 $ (2,854)
Adjustments to reconcile net income to net
cash provided by operating activities --
Depreciation and amortization............. 975 2,361 3,498 1,155 4,418
Change in deferred taxes.................. -- (253) (358) -- (6,656)
Amortization of deferred loan cost........ -- -- 178 -- --
Changes in assets and liabilities, net of
effects of acquisitions --
Increase in accounts payable, accrued
expenses and accrued payroll......... 466 3,441 2,624 544 (1,894)
Change in accounts receivable, net, and
receivables due from affiliated
practices............................ (896) (896) 2,331 333 (4,488)
Increase in inventories................. (32) (96) (275) (25) (178)
Change in prepaid expenses and other
assets............................... 1,202 (1,408) (3,900) 335 1,038
------- -------- -------- -------- --------
Net cash provided by (used in)
operating activities.......... 4,402 6,017 5,288 4,767 (10,614)
------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash consideration paid to acquire a
management service organization, net of
cash acquired............................. -- -- (2,174) (2,174) --
Payments for clinic operating assets, net of
cash acquired............................. -- (8,936) (7,459) (3,336) (12,486)
Additions to property and equipment.......... (451) (3,703) (4,982) (1,063) (4,877)
------- -------- -------- -------- --------
Net cash used in investing
activities......................... (451) (12,639) (14,615) (6,573) (17,363)
------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash paid in connection with organization of
the Company and the initial public
offering.................................. -- (304) (5,509) (4,479) --
Proceeds from the issuance of common stock,
net of underwriting discounts............. -- 20 42,953 37,476 --
Proceeds from 1996 offering, net............. -- -- -- -- 114,550
Distributions to owners, net................. (1,764) (4,148) (12,629) (13,113) (100)
Proceeds from long-term debt................. 115 16,686 19,896 305 18,746
Payments of long-term debt................... (927) (4,583) (19,888) (3,197) (41,824)
Net advances (repayments) with related
party..................................... (1,005) 536 1,037 1,657 --
Proceeds from exercise of stock options...... -- -- -- -- 700
Retirement of preferred stock................ -- -- (1,745) -- --
------- -------- -------- -------- --------
Net cash provided by (used in)
financing activities............... (3,581) 8,207 24,115 18,649 92,072
------- -------- -------- -------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS...... 370 1,585 14,788 16,843 64,095
CASH AND CASH EQUIVALENTS, beginning of year... 1,440 1,810 3,395 3,395 18,183
------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS, end of year......... 1,810 3,395 18,183 20,238 82,278
======= ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these supplemental combined
financial statements.
G-5
<PAGE> 88
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION, BUSINESS AND ORGANIZATION:
The Merger
In June and August 1996, Physicians Resource Group, Inc. and subsidiaries
(PRG or the Company) merged with Cincinnati Eye Institute, Inc. and affiliate,
(Cincinnati Eye); Tampa Eye Clinic, P.A. (Tampa Eye); Gregory L. Henderson,
M.D., P.A. (Henderson); The Eye Institute of West Florida, P.A. and Douglas G.
Johnson, O.D., P.A. (West Florida); Stuart B. Kaufman, M. D. and Associates,
P.A. (Kaufman); F.A. Hauber, M.D., P.A. (Hauber); and Central Florida Eye
Associates, P.A. (Central Florida) (collectively, the Acquisitions) in
transactions to be accounted for as pooling of interests (the Merger). On or
about November 14, 1996, PRG will restate its historical financial statements to
reflect the pooling-of-interests transactions. Those restated financials will
resemble these supplemental combined financial statements in all material
aspects. These supplemental financial statements are presented to provide the
reader with an understanding of the combined historical results of PRG.
PRG Formation
PRG (a Delaware corporation) and subsidiaries was formed to provide
physician practice management services to ophthalmic and optometric practices in
November 1993. PRG earns revenues from its integrated eyecare network through
management service agreements with affiliated practices and by owning and
operating or providing management services to ambulatory surgery centers (ASCs)
and optical dispensaries. The Company currently has 97 affiliated practices
(Affiliated Practices or Practices) in 16 states.
On June 28, 1995, PRG consummated an initial public offering (the Offering)
and simultaneously exchanged cash, shares of its common stock and a note payable
for certain assets of and liabilities associated with 10 eye care practices (the
initial Affiliated Practices). The Offering of 3,553,000 shares of common stock
at $13 per share resulted in proceeds, net of underwriter commissions and
offering costs, of approximately $37,229,000. Upon closing of the Offering, the
Company exchanged 174,500 shares of its preferred stock with a related party for
payment of $1,745,000 which had been advanced to the Company to fund a portion
of its offering costs. In July of 1995, these shares were redeemed and a payment
was made in the amount of $1,745,000 to the related party in exchange for such
shares.
Simultaneously with the closing of the Offering, the Company acquired
certain assets and assumed certain liabilities associated with nine of the 10
initial Affiliated Practices (the Reorganization). This exchange was accounted
for using the historical cost basis with the stock being valued at the
historical cost of the net assets received by PRG. The owners of the initial
Affiliated Practices were issued 4,388,355 shares of common stock, a warrant to
purchase 40,000 shares of common stock and were paid $13,362,000 in cash.
As part of the Reorganization, the Company also entered into an option (ASC
Option) which was subsequently exercised by the stockholders of one of the
initial Affiliated Practices in which the Company acquired an ambulatory surgery
center (ASC). In late 1995, the stockholders exercised their option and in 1996
PRG paid the stockholders $3,100,000 in cash, issued a note for $3,500,000 and
assumed approximately $2,828,000 in construction indebtedness (see Note 8). The
$3,500,000 and $2,828,000 obligations are recorded on the accompanying balance
sheet as long-term debt, and the $3,100,000 is recorded as a current liability
as of December 31, 1995. In addition, the Company purchased from a third party a
management services organization (MSO) which provided services to one of the
initial Affiliated Practices. This transaction was accounted for under the
purchase method of accounting. The MSO was acquired for $2,498,000 in cash and a
note payable for $2,000,000 which was subsequently retired.
Concurrently with these transactions, the physicians associated with seven
of the initial Affiliated Practices created new entities for the practice of
medicine. These new entities and the three remaining initial Affiliated
Practices entered into 40-year service agreements with the Company. Under the
terms of the service
G-6
<PAGE> 89
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
agreements, the Company is providing management, marketing and administrative
services to the Practices in return for management service fees.
EyeCorp Acquisition
On March 18, 1996, PRG merged with EyeCorp, Inc. (EyeCorp) by issuing
6,089,506 shares of PRG common stock to the stockholders of EyeCorp in exchange
for all of its outstanding common stock. Each outstanding share of EyeCorp
common stock was converted into .582 shares of PRG common stock. This
transaction was accounted for as a pooling of interests. EyeCorp performs
management services to eye care practices and ambulatory surgery centers. On
December 28, 1995, EyeCorp acquired certain operating assets and assumed certain
liabilities of 49 eye care practices and four ambulatory surgery centers for
consideration of $1,400,000 in cash, approximately $1,800,000 in notes payable
and 3,224,280 shares of common stock. These acquisitions were accounted for as
purchases.
Merger Entities
Cincinnati Eye is a professional services corporation specializing in the
practice of ophthalmology in the greater Cincinnati, Ohio area.
Tampa Eye, Henderson, West Florida, Kaufman and Hauber are all independent
professional services corporations specializing in the practice of ophthalmology
in the greater Tampa, Florida area.
Central Florida is a professional services corporation specializing in the
practice of ophthalmology in the Lakeland, Florida area.
G-7
<PAGE> 90
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Separate Company Operating Results
PRG's merger with the Acquisitions will be accounted for as pooling of
interests and, accordingly, the accompanying supplemental combined financial
statements and notes thereto have been restated to include the accounts of PRG
and the Acquisitions as if they had been one entity for all periods presented.
Separate and combined results for PRG and the Acquisitions for the periods prior
to consummation of the Merger are as follows:
<TABLE>
<CAPTION>
DESCRIPTION 1994 1995
----------- ------- -------
(000'S)
<S> <C> <C>
Revenues:
PRG............................................................ $19,584 $48,525
Cincinnati Eye................................................. 14,247 16,827
Tampa Eye...................................................... 5,364 5,523
Henderson...................................................... 4,111 4,282
West Florida................................................... 3,109 3,487
Kaufman........................................................ 1,624 2,129
Hauber......................................................... 1,877 2,044
Central Florida................................................ 7,257 7,150
------- -------
Total revenues......................................... $57,173 $89,967
======= =======
Net income:
PRG............................................................ $ 1,916 $ 545
Cincinnati Eye................................................. 132 162
Tampa Eye...................................................... 50 (13)
Henderson...................................................... 785 (319)
West Florida................................................... 118 348
Kaufman........................................................ 85 29
Hauber......................................................... 168 (37)
Central Florida................................................ (386) 475
Conforming adjustments......................................... -- --
------- -------
Total net income....................................... $ 2,868 $ 1,190
======= =======
</TABLE>
Purchase Acquisitions Subsequent to December 31, 1995
During the first quarter of 1996, PRG acquired certain assets and
liabilities of, and entered into Service Agreements with, 11 eye care practices
and seven ASC's (the First Quarter Acquisitions). These acquisitions were
accounted for as purchases. The net assets acquired in the transactions were
approximately $31,300,000. As consideration for these acquisitions, PRG paid
approximately, $7,800,000 in cash and issued 1,446,437 shares of its common
stock. The PRG common stock issued in connection with the First Quarter
Acquisitions was valued from $20.75 to $22.00 per share. The accompanying
financial statements include the results of operations of the above acquisitions
subsequent to the date of acquisition.
During the second quarter of 1996, PRG acquired certain assets and
liabilities of, and entered into service agreements with, 12 eye care practices
and two ASC's (the Second Quarter Acquisitions). These acquisitions were
accounted for as purchases. The net assets acquired in these transactions were
approximately $20,400,000. As consideration for these acquisitions, PRG paid
approximately $2,300,000 in cash and issued 863,755 shares of its common stock.
The PRG common stock issued in connection with the Second Quarter Acquisitions
was valued from $26.24 to $30.41 per share. Additionally, during the second
quarter of 1996, PRG, through a wholly-owned subsidiary, merged, in a
transaction accounted for as a pooling of interests, with Central Florida Eye
Associates P.A. In connection therewith, PRG issued 281,832 shares of common
stock to the owners of the practice.
G-8
<PAGE> 91
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The supplemental combined financial statements include the financial
position and results of operations of PRG and all of its subsidiaries combined
with the financial position and results of operations of the Acquisitions. As
previously discussed, these supplemental combined financial statements reflect
how PRG's consolidated financial statements will look following the mid-November
1996 restatement for the Merger. For the purposes of these combined supplemental
financial statements, the Acquisitions' common stock have been converted into
PRG common stock based on the number of shares issued to consummate each
transaction. All significant intercompany transactions have been eliminated.
Fair Values of Financial Instruments
The Company believes the fair values of its financial instruments
approximates their carrying amounts.
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. The Company
primarily invests in overnight repurchase agreements, tax-free municipal bonds
and money market accounts. The interest rates vary from 3.5 percent to 5.75
percent. These investments are carried at fair value.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets primarily consist of deferred
acquisition costs and prepaid expenses. All incremental costs incurred in
connection with acquisitions in process at the balance sheet dates have been
capitalized and will be charged to expense or included in the purchase
consideration upon its successful completion. If any of the acquisitions are not
successfully completed, these deferred costs will be charged to expense.
Inventories
Inventories consist primarily of spectacle frames lenses and medical
supplies and are valued at the lower of cost or market with cost determined
using the first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated using a straight-line method over the estimated useful
lives of the assets. Routine maintenance and repairs are charged to expense as
incurred, while costs of betterments and renewals are capitalized.
Intangible Assets
Identifiable intangible assets consist of the non-physician employee
workforce, management service agreements and goodwill associated with ASC
acquisitions. The estimated fair value of the non-physician employee workforce
is based on the estimated cost to replace the workforce. The estimated fair
value of the management service agreement for acquired practices is the excess
of the purchase price over the estimated fair value of the tangible assets and
workforce acquired and liabilities assumed. Intangible assets associated with
management service agreement are generally amortized over 15 years for
single-practitioner practices and over 40 years for multiple-practitioner
practices. Amounts paid for ASC acquisitions in excess of the net assets
acquired is treated as goodwill.
The Company reviews the carrying value of the intangible assets at least
quarterly on a entity by entity 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 considers in
making
G-9
<PAGE> 92
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
the evaluation are changes in the practices' or ambulatory surgery center's
market position, reputation, profitability and geographical penetration. If
indicators are present which may 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 will be made to
reduce the carrying amount of the intangible assets to their fair value. The
Company does not expect the adoption of Statement of Financial Accounting
Standards (SFAS) 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.
Income Taxes
Income taxes are recorded under SFAS No. 109, "Accounting for Income
Taxes," which requires an asset and liability approach for financial accounting
and reporting. Deferred tax liabilities and assets are recorded for the
differences between the tax and financial reporting basis of the assets and
liabilities and are based on the enacted income tax rates which are expected to
be in effect in the period in which the difference is expected to be settled or
realized. A change in tax laws results in adjustments to the deferred tax
liabilities and assets.
Income (Loss) Per Share and Pro Forma Income (Loss) Per Share
Income per share has been computed by dividing net income by the weighted
average number of common shares and common share equivalents outstanding. Common
share equivalents included in determining income per share include shares
issuable upon exercise of warrants and stock options, if dilutive.
Pro forma income per common share has been computed by dividing pro forma
net income by the pro forma weighted average number of common shares outstanding
during the periods. The number of pro forma common shares outstanding during the
periods includes the weighted average number of common shares, including pro
forma PRG shares assumed to be outstanding for the Acquisitions (see Note 1),
and common share equivalents outstanding during the periods. Common share
equivalents included in determining pro forma income per share include shares
issuable upon exercise of warrants and stock options, if dilutive.
Use of Estimates
The preparation of these financial statements requires the use of certain
estimates by management in determining the entities' assets, liabilities,
revenues and expenses. Actual results could differ from those estimates.
Major Customers
The Company's major customers are the Affiliated Practices for which the
Company provides management services, along with Medicare and other governmental
programs.
Concentration of Credit Risk
The Company's accounts receivable primarily consist of management service
revenues due from affiliated physician groups and from medical services due from
patients funded through Medicare, Medicaid, commercial insurance and private
payment. The Company and its Affiliated Practices perform ongoing credit
evaluations of its patients and generally does not require collateral. The
Company and its Affiliated Practices maintain allowances for potential credit
losses, and such losses have been within management's expectation.
G-10
<PAGE> 93
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. REVENUE RECOGNITION AND RECEIVABLES:
A significant portion of the Practices medical service and ASC revenues are
received from Medicare and other governmental programs. Medicare and other
governmental programs reimburse providers based on fee schedules which are
determined by the related governmental agency. In the ordinary course of
business, providers receiving reimbursement from Medicare and other governmental
programs are potentially subject to a review by regulatory agencies concerning
the accuracy of billings and sufficiency of supporting documentation.
The individual Practices and ASC's gross medical service revenues are based
on established rates reduced by contractual allowances. Contractual adjustments
represent the difference between charges at established rates and estimated
recoverable amounts and are recognized in the period the services are rendered.
Any differences between estimated contractual adjustments and actual final
settlements are reported as contractual adjustments in the period final
settlements are made.
Revenues -- Management Services
The Company owns 7 Practices and manages the remaining Practices under
various types of service and management agreements. The management service
revenues are based on a percentage of the Practices revenue or a flat fee and
reimbursement of clinic expenses. The following table presents the amount of
medical service revenues included in the determination of the Company's
management service revenues for the years ended December 31, 1994 and 1995:
<TABLE>
<CAPTION>
DESCRIPTION 1994 1995
----------- -------- --------
(000'S)
<S> <C> <C>
Gross medical service revenues................................. $ 88,965 $147,190
Less -- Contractual adjustments and allowance for doubtful
accounts.................................................. (34,833) (59,962)
-------- --------
Net medical service revenues................................... 54,132 87,228
Less -- Amounts retained by the Practices owner physicians... (7,308) (11,618)
-------- --------
Management service revenues.......................... $ 46,824 $ 75,610
======== ========
</TABLE>
Revenues -- Surgery Centers
The Company owns and operates surgery centers through various arrangements.
Revenues derived from surgery centers are based on facility fees charged to
patients, third-party payors or other physician practices for use of the surgery
center as well as reimbursement of surgery center expenses. Surgery center
revenues are also net of adjustments for contractual allowances and allowances
for bad debts. The following table presents amounts included in determining the
Company surgery center revenues for the years ended December 31, 1994 and 1995:
<TABLE>
<CAPTION>
DESCRIPTION 1994 1995
----------- -------- --------
(000'S)
<S> <C> <C>
Surgery center revenues........................................ $ 22,173 $ 27,314
Less -- Contractual adjustments and allowances for doubtful
accounts.................................................. (12,557) (14,379)
-------- --------
Net surgery center revenues.................................... $ 9,616 $ 12,935
======== ========
</TABLE>
G-11
<PAGE> 94
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Receivables
Receivables due from the Affiliated Practices include management service
receivables, receivables from the practices for certain expenses being paid on
their behalf and certain other receivables. The receivables due from certain of
the Affiliated Practices are collateralized by a security interest in the
Affiliated Practices' receivables from third-party payors and patients.
Pursuant to the terms of certain of the Company's service agreements, the
Affiliated Practices' accounts receivable are purchased without recourse. The
purchase price is the face amount of the accounts receivable less any reserve
recorded by the Affiliated Practices for uncollectible amounts. Accounts
receivable are purchased daily and paid at the end of each month.
For the seven Practices owned by the Company, accounts receivable reflects
the receivables from patients and third party payors net of the recorded reserve
for uncollectible amounts.
4. ACQUISITIONS
The consideration paid and total net book value of the assets and
liabilities associated with the acquisition of the Affiliated Practices were as
follows:
<TABLE>
<CAPTION>
PURCHASED ENTITIES REORGANIZATION
------------------ --------------
DESCRIPTION 1994 1995 1995
----------- ------- -------- --------------
(000'S)
<S> <C> <C> <C>
Current assets....................................... $ 3,128 $ 8,653 $ 9,445
Property and equipment............................... 3,396 6,951 8,743
Intangible and other noncurrent assets............... 15,923 35,687 1,583
Liabilities assumed.................................. (4,446) (14,928) (19,682)
------- -------- --------
Net assets acquired........................ 18,001 36,363 89
Consideration for net assets acquired:
Debt Issued........................................ 160 3,770 --
Stock Issued....................................... 8,905 27,700 89
------- -------- --------
Cash Paid.......................................... $ 8,936 $ 4,893 $ --
======= ======== ========
</TABLE>
The PRG equivalent stock issued in connection with the acquisitions was
valued at $5.70 per share for the 1994 acquisitions as determined by the Board
of Directors based on a good faith determination of the relative fair market
values of the Predecessor Entities and at $8.59 per share for the 1995
acquisitions based on an independent valuation.
Subsequent to the Acquisitions the Company entered into management service
agreements with the related physician groups. Certain adjustments related to the
above estimated fair value of the assets acquired and liabilities assumed in the
1995 Company's acquisitions may be revised as additional information becomes
available.
G-12
<PAGE> 95
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. PREPAID EXPENSES AND OTHER CURRENT ASSETS:
Prepaid expenses and other current assets consist of the following as of
December 31, 1994 and 1995:
<TABLE>
<CAPTION>
DESCRIPTION 1994 1995
----------- ------ ------
(000'S)
<S> <C> <C>
Deferred acquisition costs --
EyeCorp.......................................................... $ -- $2,378
Other acquisitions............................................... -- 1,375
Deferred issuance costs............................................ 1,107 223
Other prepaid expenses............................................. 533 3,008
------ ------
Total.................................................... $1,640 $6,984
====== ======
</TABLE>
As discussed in Note 1, the merger with EyeCorp was completed in March
1996. Total deferred acquisition costs incurred in connection with the EyeCorp
merger are anticipated to be approximately $9,000,000, of which $2,378,000 has
been incurred and accrued as of December 31, 1995. Under pooling-of-interest
accounting, these costs will be expensed in the first quarter of 1996, which
corresponds with the closing of the transaction. PRG also closed transactions
with 22 other physician practices in the first part of 1996 which will be
accounted for as purchases. Total deferred acquisition costs of approximately
$900,000 are anticipated to be incurred in connection with those transactions,
$713,000 of which was deferred as of December 31, 1995. These costs will be
treated as part of total consideration paid for the acquisitions. Deferred
issuance costs were incurred in connection with the registration of Company
common stock and will be charged to additional paid-in capital as the stock is
issued.
6. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following as of December 31, 1994 and
1995:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
LIVES
DESCRIPTION (YEARS) 1994 1995
----------- --------- ------- --------
(000'S)
<S> <C> <C> <C>
Land................................................... -- $ 1,710 $ 2,305
Buildings and improvements............................. 5-40 5,614 12,747
Equipment, software and other.......................... 3-10 9,811 17,618
Leasehold improvements................................. 3-10 1,688 4,042
Furniture and fixtures................................. 7-10 3,649 9,831
------- --------
22,472 46,543
Less -- Accumulated depreciation and amortization...... (8,770) (10,993)
------- --------
Property and equipment, net.................. $13,702 $ 35,550
======= ========
</TABLE>
G-13
<PAGE> 96
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. INTANGIBLE ASSETS:
Intangible assets consist of the following as of December 31, 1994 and
1995:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
LIVES
DESCRIPTION (YEARS) 1994 1995
----------- --------- ------- -------
(000'S)
<S> <C> <C> <C>
Noncompete agreements................................... 3-5 $ -- $ 255
Work force in place..................................... 7 840 3,525
Management service agreements........................... 15-40 11,824 37,489
Goodwill................................................ 40 3,750 12,513
------- -------
16,414 53,782
Less -- Accumulated amortization........................ (625) (1,525)
------- -------
Intangible assets, net........................ $15,789 $52,257
======= =======
</TABLE>
8. LONG-TERM OBLIGATIONS:
Long-Term Debt
Long-term debt consists of the following as of December 31, 1994 and 1995:
<TABLE>
<CAPTION>
DESCRIPTION 1994 1995
----------- ------- -------
(000'S)
<S> <C> <C>
Revolving term loan...................................................... $ -- $18,882
Installment notes payable to physician practices (see Note 1), bearing
interest ranging from 8% to 10%, payable in monthly installments....... -- 1,770
Note payable to related party for ASC purchase, due in 2001, payable in
monthly installments, bearing interest at 7%........................... -- 3,500
Notes payable to bank, due through 2005, payable in installments, bearing
interest at LIBOR plus 1.5% (7.5% at December 31, 1995), collateralized
by assets of an ASC.................................................... -- 2,828
Term loans payable to insurance companies, due through 1999, bearing
interest from 5.96% to 10.17%, payable monthly, secured by the related
equipment.............................................................. -- 1,893
Term loans, bearing interest ranging from 9.5% to 10.0%, paid in 1995.... 12,296 --
Term loan, bearing interest at 9.5%, paid in 1995........................ 417 --
Mortgage notes payable, bearing interest, ranging from 7.85% to 8.50%
paid in 1995........................................................... 1,711 --
Other notes payable due from 1996 to 2000, bearing interest at rates from
7% to 12%.............................................................. 177 571
Notes payable to banks, due through 2011, bearing interest ranging from
6% to 10%, payable in installments, secured by real property and
equipment.............................................................. 3,505 4,786
Notes payable to banks, bearing interest at the prime rate plus amounts
ranging from 0.5% to 1.0% (9% to 9.5% at December 31, 1995), payable in
installments due through 1999.......................................... 635 688
Lines of credit payable to banks, due on demand, bearing interest at the
prime rate (8.5% at December 31, 1995) and prime rate plus 0.5% (9% at
December 31, 1995)..................................................... 153 79
------- -------
Total long-term debt........................................... 18,894 34,997
Less -- Current portion of long-term debt................................ (2,573) (2,209)
------- -------
Total.......................................................... $16,321 $32,788
======= =======
</TABLE>
G-14
<PAGE> 97
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
In December 1995, EyeCorp entered into a $20 million revolving credit
facility (the EyeCorp Credit Facility) with a bank which was used for the
acquisitions completed in 1995 (see Note 1), and for the repayment of amounts
outstanding under the prior credit facility. Advances to EyeCorp under the
credit facility bear interest at either LIBOR plus 2.0 percent to 2.5 percent or
the bank's prime rate plus 0.5 percent. EyeCorp has the option to convert from
LIBOR to the bank's prime rate and vice versa at certain times. Monthly interest
payments are due under the revolving term loan and quarterly principal
installments of 3.57 percent are to be paid commencing on March 1, 1997, with
the remainder due December 28, 1997. The EyeCorp Credit Facility is
collateralized by certain assets and common stock of EyeCorp.
The unused portion of the EyeCorp Credit Facility, based on eligible
collateral, was $1,118,000 at December 31, 1995. The EyeCorp Credit Facility
contains covenants, the most restrictive of which require that the Company: (a)
not incur any purchase money liens, borrowed funds under the credit facilities
excluded in excess of $600,000, (b) maintain a debt coverage ratio as defined in
the credit facility agreement of 1.5 to 1, (c) maintain a consolidated current
ratio of 1.5 to 1, (d) maintain net worth of at least $37.7 million and (e)
maintain a ratio of debt under the EyeCorp Credit Facility to debt plus
stockholders' equity not to exceed .5 to 1. The EyeCorp Credit Facility also
subjects the Company to repayment penalties on amounts outstanding under the
LIBOR rate as defined in the agreement. Additionally, the Company is obligated
to pay a fee of up to $300,000 in the event that the Company terminates the
EyeCorp Credit Facility prior to its maturity date.
EyeCorp was in violation of the net worth covenant at December 31, 1995. On
April 18, 1996, the violation was waived by the lender and the covenant was
amended, as of January 1, 1996, requiring EyeCorp to maintain net worth of at
least $37,677,000 as defined in the agreement.
In connection with the repayment of the prior credit facility, EyeCorp
recognized an extraordinary loss of $119,000 (net of income tax benefit of
$53,000) in connection with the early retirement of debt which consisted of
unamortized loan costs.
The Company paid $359,000, $1,319,000 and $1,981,000 in interest for the
years ended December 31, 1993, 1994 and 1995. As of December 31, 1995, the
aggregate amounts of annual principal maturities of long-term debt are as
follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- -------
(000'S)
<S> <C>
1996....................................................................... $ 2,209
1997....................................................................... 21,256
1998....................................................................... 4,048
1999....................................................................... 1,940
2000....................................................................... 1,546
Thereafter................................................................. 3,998
-------
Total............................................................ $34,997
=======
</TABLE>
On January 8, 1996, PRG entered into an additional credit facility (the PRG
Credit Facility) with the same bank that provided the EyeCorp Credit Facility,
in the amount of $35,000,000, to be used for acquisitions, capital expenditures
and working capital. Up to $10,000,000 may be borrowed under the PRG Credit
Facility for letters of credit. The PRG Credit Facility is secured by the stock
of the subsidiaries of PRG and guaranteed by the subsidiaries of PRG.
The Company may obtain advances under the PRG Credit Facility to the extent
of the lesser of the $35,000,000 or the borrowing base in effect from time to
time (the Borrowing Base). The Borrowing Base is generally defined as the
consolidated earnings before interest, taxes, depreciation and amortization,
less certain
G-15
<PAGE> 98
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
amounts described in the PRG Credit Facility and then multiplied by 2.5. The
initial Borrowing Base calculation indicated the Company could borrow up to the
$35,000,000 facility limit.
Supplemental Non-cash Transactions
EyeCorp purchased an airplane in 1994 by issuing a note payable for
approximately $475,000.
Long-Term Lease Obligations
PRG leases medical equipment and office space under noncancelable operating
lease agreements which expire at various dates. At December 31, 1995, minimum
annual rental commitments under noncancelable operating leases with terms in
excess of one year are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- -------
(000'S)
<S> <C>
1996....................................................................... $ 6,307
1997....................................................................... 5,655
1998....................................................................... 5,294
1999....................................................................... 4,297
2000....................................................................... 3,424
Thereafter................................................................. 10,750
-------
Total minimum lease payments..................................... $35,727
=======
</TABLE>
Rent expense related to operating leases amounted to $1,368 and $3,646 for
the years ended December 31, 1994 and 1995, respectively.
9. STOCKHOLDERS' EQUITY:
Common Stock
The financial statements have been restated to give retroactive recognition
to stock splits made by both PRG and EyeCorp in the past three years.
The Company has reserved (a) 2,000,000 shares of common stock for issuance
upon exercise of stock options under the Company's stock option plans and (b)
40,000 shares of common stock for issuance upon exercise of the warrants, which
are exercisable at $13.00 per share. The Company registered an additional
6,000,000 shares of common stock during the first half of 1996 to be used in
connection with additional acquisitions.
In May 1996 the Company completed the offering of 5,750,000 shares of
common stock. The Company issued 4,250,000 new shares of common stock and
stockholders of the Company sold 1,500,000 shares of common stock in the 1996
Offering. Proceeds to the Company, net of estimated offering expenses and
underwriting discounts, were approximately $114,550,000.
Preferred Stock
The Company has authorized the issuance of up to 10,000,000 shares of
preferred stock, $.01 par value. The Company issued 174,500 shares of preferred
stock on June 28, 1995, in conjunction with the Offering. These shares were
retired on July 10, 1995, in exchange for $1,745,000 in cash.
G-16
<PAGE> 99
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
10. INCOME TAX EXPENSE:
Income tax expense for the years ended December 31, 1994 and 1995, consists
of the following:
<TABLE>
<CAPTION>
DESCRIPTION 1994 1995
------------------------------------------------------------------ ------ -------
(000'S)
<S> <C> <C>
Current --
Federal......................................................... $1,205 $ 1,573
State........................................................... 207 322
------ -------
Total current........................................... 1,412 1,895
Deferred --
Federal......................................................... (225) (1,161)
State........................................................... (25) (233)
------ -------
Total deferred.......................................... (250) (1,394)
------ -------
Total income tax expense.......................................... $1,162 $ 501
====== =======
</TABLE>
Total income tax expense differed from the amount computed by applying the
statutory federal income tax rate of 34 percent to income before income taxes as
a result of the following:
<TABLE>
<CAPTION>
DESCRIPTION 1994 1995
------------------------------------------------------------------- ------ -----
(000'S)
<S> <C> <C>
Computed statutory tax expense..................................... $1,370 $ 615
Increase in income taxes resulting from --
State income taxes, net of federal income tax benefit............ 120 164
Non-taxable entities............................................. (323) (219)
Nondeductible expenses........................................... -- 32
Tax-exempt interest income....................................... -- (67)
Other............................................................ (5) (24)
------ -----
Total income tax expense................................. $1,162 $ 501
====== =====
</TABLE>
Deferred income taxes reflect the impact of temporary differences between
the amount of assets and liabilities for financial reporting and such amounts as
measured by tax laws and regulations. The components of the net deferred tax
liability are as follows:
<TABLE>
<CAPTION>
DESCRIPTION 1994 1995
------------------------------------------------------------------ ------ -------
(000'S)
<S> <C> <C>
Deferred tax assets --
Accrued expenses................................................ $1,052 $ 1,354
Allowance for doubtful accounts................................. 604 794
Accrued bonus................................................... -- 744
------ -------
Total deferred tax assets............................... 1,656 2,892
------ -------
Deferred tax liabilities --
Accounts receivable............................................. 2,926 3,951
Property and equipment.......................................... 77 217
Intangibles..................................................... 2,955 12,491
Other book/tax differences...................................... 395 1,446
------ -------
Total deferred tax liabilities.......................... 6,353 18,105
------ -------
Net deferred tax liabilities................................. $4,697 $15,213
====== =======
</TABLE>
G-17
<PAGE> 100
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred taxes related to intangibles result from acquisitions for which
there is no basis in the intangibles for tax purposes. The Company paid
approximately $1,947,000 for federal and state income taxes for the year ended
December 31, 1995.
11. COMMITMENTS AND CONTINGENCIES:
In the normal course of business, certain of the affiliated physician
groups have been named in lawsuits alleging medical malpractice. In the opinion
of the Company's management, the ultimate liability, if any, without considering
possible insurance recoveries, will not have a material impact on the Company's
financial position, results of operations or cash flows. Additionally, the
Company's affiliated physician groups and the Company are insured with respect
to medical malpractice risks on a claims-made basis.
12. EMPLOYEE BENEFIT PLANS:
Savings Plans
The Company maintains various defined contribution plans which permit
participants to make voluntary contributions. The Company pays all general and
administrative expenses of the plans, and, in some cases, makes matching
contributions on behalf of the employees. The Company incurred expenses of
$320,000 during the year ended December 31, 1995, related to these plans.
Stock Option Plans
In March 1995 and 1996, the board of directors adopted, and the
stockholders of the Company approved, the 1995 Stock Option Plan, and an
amendment and restatement thereof, respectively (as amended and restated the
Plan). The purpose of the Plan is to provide directors, key employees and
certain advisors with additional incentives by increasing their proprietary
interest in the Company. The aggregate amount of common stock with respect to
which options may be granted may not exceed 2,000,000 shares. The Plan provides
for the grant of incentive stock options (ISO) and nonqualified stock options.
The options vest over a five-year period and expire 10 years from the date of
grant.
In connection with the EyeCorp Merger, options outstanding under the
EyeCorp Plans were converted into options to purchase PRG common stock at the
conversion rate as specified in the merger agreement and included with existing
PRG options.
In March 1995, the board of directors adopted, and the stockholders of the
Company approved, the 1995 Health Care Professionals Stock Option Plan (the
Health Care Professionals Plan). The Health Care Professionals Plan permits the
Company to grant stock options to employees, advisors and consultants of the
Company, which the Company expects will generally be ophthalmologists and
optometrists, who both (a) provide advisory or consulting services to the
Company and (b) are employed by an Affiliated Practice. The aggregate amount of
common stock with respect to which options may be granted may not exceed
1,000,000 shares. Options granted under the Health Care Professionals Plan will
vest over a period of five years and expire 10 years from the date of grant.
Generally, such options will expire upon the termination of employment or the
advisory or consultant relationship with the Company or on the day prior to the
10th anniversary of the date of grant, whichever occurs first.
G-18
<PAGE> 101
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Transactions of the plans are summarized as follows:
<TABLE>
<CAPTION>
STOCK OPTIONS
----------------------------------------
DESCRIPTION ISOS NONQUALIFIED TOTAL
------------------------------------------------- --------- ------------ ---------
<S> <C> <C> <C>
Outstanding at December 31, 1994................. -- -- --
Granted in 1995................................ 1,014,937 616,386 1,631,323
Exercised in 1995.............................. -- -- --
Canceled in 1995............................... -- -- --
--------- ------- ---------
Outstanding at December 31, 1995................. 1,014,937 616,386 1,631,323
========= ======= =========
</TABLE>
The stock options were granted at prices ranging from $5.00 to $22.04 per
share including 8,730 additional ISOs granted to an employee in February 1996.
During 1995, the Financial Accounting Standards Board issued Statement No. 123
(SFAS No. 123), "Accounting for Stock-Based Compensation." As permitted by SFAS
No. 123, the Company will continue to follow the existing accounting
requirements for stock options contained in APB Opinion No. 25 (Accounting for
Stock Issued to Employees). Beginning in 1996, however, the Company will provide
the pro forma disclosures required by SFAS No. 123.
13. RELATED-PARTY TRANSACTIONS:
The Company leases facility space from various partnerships which include
affiliated physicians as partners and trusts in which relatives of the
affiliated physicians are named beneficiaries. Rent expense on related-party
operating leases amounted to $1,325,000 and $2,604,000 for the years ended
December 31, 1994 and 1995, respectively. In addition, the Company leases
facilities to affiliated physicians. Rent income on related-party operating
leases amounted to $245,000 for the year ended December 31, 1995.
All of the Company's management service revenue is received from physician
groups which have affiliated with the Company during the past two years. A
majority of the board of directors of the Company are practicing physicians who
are associated with affiliated practice groups.
G-19
<PAGE> 102
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Pro Forma
The summarized unaudited pro forma combined summary data for the year ended
December 31, 1995, presented below have been prepared as if (a) the
Reorganization and Offering had been completed; (b) the merger with EyeCorp,
Inc. (see Note 1), had been consummated; (c) the consummation of PRG's closed
and probable transactions and entry into service agreements with the 20 eye care
practices had occurred; (d) the acquisitions made by EyeCorp during 1995 were
completed; and (e) the consummation of the EyeCorp and PRG Credit Facilities had
occurred, all as if such transactions or events had occurred January 1, 1995.
These unaudited pro forma combined summary information may not be indicative of
the actual results if the above events and transactions had occurred on the date
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 data. The 1995 results
include increased expenses relative to (a) establishment and development of
corporate offices at PRG and EyeCorp, (b) the resignation of the Company's
former chief executive officer and (c) unsuccessful transaction costs at
EyeCorp.
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED DECEMBER 31
DESCRIPTION 1995
-------------------------------------------------------------------- ------------------
(000'S, EXCEPT PER
SHARE AMOUNTS)
<S> <C>
Revenues............................................................ $ 240,689
Net income.......................................................... $ 21,470
Net income per share................................................ $ 0.79
Number of shares used in net income per share calculation........... $ 27,254
</TABLE>
In connection with the EyeCorp merger the Company expects to incur
transaction costs of approximately $9.0 million which was recognized in the
first quarter of 1996.
G-20
<PAGE> 103
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C> <C>
2.1 - Agreement and Plan of Merger, dated August 13, 1996, between PRG Ohio III, Inc., Physicians
Resource Group, Inc., Cincinnati Eye Institute, Inc., John S. Cohen, M.D., James D. Faulkner,
M.D., William J. Faulker, M.D., Robert C. Kersten, M.D., Richard S. Kerstine, M.D., Robert H.
Osher, M.D., Robert W. Nash, M.D., Michael R. Petersen, M.D., Gary A. Varley, M.D., Linda J.
Greff, M.D., Robert J. Cionni, M.D., Kevin T. Corcoran, O.D. and Corwin M. Smith, M.D. (1)
2.2 - Agreement and Plan of Reorganization, dated August 13, 1996, between PRG HEA Acq. Corp.,
Physicians Resource Group, Inc., Houston Eye Associates, P.A., Malcom L. Mazow, M.D., Robert H.
Stewart, M.D., Robert B. Wilkins, M.D., Jeffrey D. Lanier, M.D., Michael A. Bloome, M.D., Paul
C. Salmonsen, M.D., Richard L. Kimbrough, M.D., Jack T. Holladay, M.D., Jeffrey B. Arnoult,
M.D., William H. Quayle, M.D., John D. Goosey, M.D., John M. Lim, M.D., Kathryn H. Musgrove,
M.D., Marsha F. Soechting, M.D. and Marc N. Longo, M.D. (1)
2.3 - Asset Purchase Agreement, dated August 13, 1996, between PRG Ohio III, Inc., Physicians
Resource Group, Inc. and CEI Realty Associates, Ltd. (1)
2.4 - Agreement and Plan of Merger, dated August 13, 1996, between PRG IV Acq. Corp., Physicians
Resource Group, Inc., Gregory L. Henderson, M.D., P.A. and Gregory L. Henderson, M.D. (1)
2.5 - Agreement and Plan of Merger, dated August 13, 1996, between PRG IX Acq. Corp., Physicians
Resource Group, Inc., William Reynolds, M.D., P.A. and William Reynolds, M.D. (1)
2.6 - Agreement and Plan of Merger, dated August 12, 1996, between PRG II Acq. Corp., Physicians
Resource Group, Inc., Tampa Eye Clinic, P.A., J. Burns Creighton, M.D., Ronald Seeley, M.D.,
Lewis Lauring, M.D., William Reynolds, M.D., David Leach, M.D., P.A. and Timothy Lorenzen,
M.D., P.A. (1)
2.7 - Agreement and Plan of Merger, dated August 13, 1996, between PRG XI Acq. Corp., Physicians
Resource Group, Inc., Timothy Lorenzen, M.D., P.A. and Timothy Lorenzen, M.D. (1)
2.8 - Agreement and Plan of Merger, dated August 13, 1996, between PRG VII Acq. Corp., Physicians
Resource Group, Inc., Ronald Seeley, M.D., P.A. and Ronald Seeley, M.D. (1)
2.9 - Agreement and Plan of Merger, dated August 13, 1996, between PRG VI Acq. Corp., Physicians
Resource Group, Inc., J. Burns Creighton, M.D., P.A. and J. Burns Creighton, M.D. (1)
</TABLE>
<PAGE> 104
<TABLE>
<S> <C> <C>
2.10 - Agreement and Plan of Merger, dated August 13, 1996, between PRG X Acq. Corp., Physicians
Resource Group, Inc., David Leach, M.D., P.A. and David Leach, M.D. (1)
2.11 - Agreement and Plan of Merger, dated August 13, 1996, between PRG VIII Acq. Corp., Physicians
Resource Group, Inc., Lewis Lauring, M.D., P.A. and Lewis Lauring, M.D. (1)
2.12 - Asset Purchase Agreement, dated August 13, 1996, between PRG Ohio, L.P., CEI Realty Associates, Ltd., and
Physicians Resource Group, Inc. (1)
4.1 - Restated Certificate of Incorporation of Physicians Resource Group, Inc.(2)
4.2 - Certificate of Designations, Preferences, Rights and Limitations of Class A Preferred Stock of
Physicians Resource Group, Inc.(2)
4.3 - Third Amended and Restated Bylaws of Physicians Resource Group, Inc.(3)
4.4 - Form of Warrant Certificate(2)
4.5 - Rights Agreement dated as of April 19, 1996 between Physicians Resource Group, Inc. and
Chemical Mellon Shareholder Services(4)
4.6 - Form of certificate evidencing ownership of Common Stock of Physicians Resource Group, Inc.(2)
23.1 - Consent of Arthur Andersen LLP(5)
23.2 - Consent of Wallingford, McDonald, Fox & Co., P.C.(5)
</TABLE>
___________________
(1) - Previously filed herewith.
(2) - Previously filed as an exhibit to the Company's
Registration Statement on Form S-1 (No. 33- 91440)
and incorporated herein by reference.
(3) - 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.
(4) - Previously filed as an exhibit to the Company's
Registration Statement on Form S-1 (No. 333- 3852)
and incorporated herein by reference.
(5) - Filed herewith.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports dated September 4, 1996, on our audit of the combined financial
statements of Cincinnati Eye Institute, Inc. and affiliate; dated September 6,
1996, on our audit of the financial statements of Tampa Eye Clinic, P.A.; dated
September 6, 1996, on our audit of the combined financial statements of The Eye
Institute of West Florida, P.A. and Douglas G. Johnson, O.D., P.A.; dated
September 3, 1996, on our audit of the financial statements of Gregory L.
Henderson, M.D., P.A. included in this Form 8-K/A, into the Company's
previously filed Form S-8 Registration Statement File No. 33-93712, Form S-8
Registration Statement File No. 33-93746, Form S-8 Registration Statement File
No. 333-03460, Form S-8 Registration Statement File No. 333-03478, Form S-4
Registration Statement File No. 333-00230, Form S-4 Registration Statement File
No. 333-4406, Form S-4 Registration Statement File No. 333-09905, Form S-3
Registration Statement File No. 333-10531, and Form S-3 Registration Statement
File No. 333-11607.
ARTHUR ANDERSEN LLP
Dallas, Texas,
September 20, 1996
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTS
As the independent public accountants for Houston Eye Associates, we hereby
consent to the incorporation of our report dated September 5, 1996 on our audit
of the financial statements of Houston Eye Associates for the years ended
December 31, 1995 and 1994, included in this Form 8-K/A, into the Company's
previously filed Form S-8 Registration Statement File No. 33-93712, Form S-8
Registration Statement File No. 33-93746, Form S-8 Registration Statement File
No. 333-03460, Form S-8 Registration Statement File No. 333-03478, Form S-4
Registration Statement File No. 333-00230, Form S-4 Registration Statement File
No. 333-4406, Form S-4 Registration Statement File No. 333-09905, Form S-3
Registration Statement File No. 333-10531, and Form S-3 Registration Statement
No. 333-11607.
Wallingford, McDonald, Fox & Co., P.C.
Houston, Texas
September 20, 1996
