<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) October 7, 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 October 7,
1996 (the "Form 8-K") filed by Physicians Resource Group, Inc. on October 7,
1996. The Form 8-K is hereby amended to read in its entirety as follows:
ITEM 5. OTHER EVENTS.
EQUIMED ACQUISITION
On October 7, 1996, Physicians Resource Group, Inc., a Delaware
corporation ("PRG") entered into an Asset Purchase Agreement (herein so called)
among PRG, PRG Georgia, Inc., a Delaware corporation ("PRG Sub") and EquiMed,
Inc., a Delaware corporation ("EquiMed"), pursuant to which PRG will acquire
(the "EquiMed Acquisition") (through PRG Sub, a wholly owned subsidiary of PRG)
substantially all of the assets and properties and certain liabilities related
to EquiMed's ophthalmological physician practice management business operating
through its Ophthalmology Division (the "Division").
As a result of the EquiMed Acquisition, PRG will become the indirect
holder (through PRG Sub) of substantially all of the assets and properties and
certain liabilities related to the business of the Division. PRG intends to
provide the use of such assets to the various ophthalmological practices
serviced by the Division. The transaction contemplated by the Asset Purchase
Agreement is expected to be consummated following the satisfaction of certain
conditions precedent contained in the Asset Purchase Agreement.
The aggregate consideration to be paid in the EquiMed Acquisition is
approximately $54,563,400 plus a multiple of the amount of change that any
additional acquisitions of ophthalmological practices by EquiMed that are
closed or are the subject of binding purchase agreements on or before March 31,
1997, would have had on EquiMed's net income for the year ended December 31,
1996, had such additional acquisitions been consummated by EquiMed on
January 1, 1996. The consideration for the EquiMed Acquisition was
determined by arms-length negotiations between the parties.
To the best knowledge of PRG, at the time of the execution of the
Asset Purchase Agreement there was no material relationship between (i) EquiMed
and its stockholders, on the one hand and (ii) PRG, or any of its affiliates,
any director or officer of PRG, or any associate of such director or officer on
the other.
AMERICAN OPHTHALMIC ACQUISITION
On October 7, 1996, PRG also entered into an Agreement and Plan of
Merger (the "Merger Agreement") among PRG, PRG Acquisition Corporation, a
Delaware corporation ("Merger Sub") and American Ophthalmic Inc., a
Florida corporation ("AOI"), pursuant to which Merger Sub, a wholly owned
subsidiary of PRG, will merge with and into AOI (the "AOI Merger").
As a result of the AOI Merger, AOI will become a wholly-owned
subsidiary of PRG and PRG will become the indirect owner of all of the assets
and properties, real and personal, tangible and intangible, and liabilities
2
<PAGE> 3
of AOI, a management services organization that is in the business of acquiring
the assets of ophthalmological and optometric practices and providing such
practices with the use of the assets it acquires as well as other management
services under the terms of service agreements entered into with such practices.
PRG intends to continue to provide the use of the assets acquired through the
AOI Merger to such practices.
To the best knowledge of PRG, at the time of the execution of the
Merger Agreement there was no material relationship between (i) AOI and its
stockholders on the one hand and (ii) PRG, or any of its affiliates, any
director or officer of PRG, or any associate of such director or officer on the
other.
The aggregate consideration to be paid by PRG in connection with the
AOI Merger (the "Merger Consideration") is expected to be approximately $70
million. Up to $10 million of the Merger Consideration may be placed into
escrow for a period of 135 days following the closing of such transaction
pending the provision by AOI of binding letters of intent meeting certain
specific acquisition criteria. Half of the Merger Consideration will be
payable in cash and the remaining half of the Merger Consideration will be
payable in shares of the common stock, par value $.01 per share, of PRG. The
acquisition consideration for the AOI Merger was determined by arms-length
negotiations between the parties to the Merger Agreement.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) The audited consolidated balance sheets of EquiVision, Inc., a
predecessor of the Division, as of December 31, 1994 and 1995, and the related
consolidated statements of operations, owners' equity and cash flows for each
of the three years in the period ended December 31, 1995, are attached hereto
as Annex A. Also attached hereto as Annex A are the unaudited consolidated
balance sheet of the Division as of June 30, 1996 and the related unaudited
statements of income and cash flows for each of the six months ended June 30,
1995, one month ended January 31, 1996, and five months ended June 30, 1996,
respectively.
(b) The audited consolidated balance sheets of AOI and
subsidiaries as of December 31, 1994 and 1995, and the related consolidated
statements of operations, changes in redeemable convertible preferred stock and
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1995, are attached hereto as Annex B. Also attached hereto
as Annex B are the unaudited consolidated balance sheet of AOI and subsidiaries
as of June 30, 1996, the related unaudited statements of operations and cash
flows for each of the six months ended June 30, 1995 and 1996 and the related
statement of changes in redeemable convertible preferred stock and
shareholders' equity for the six months ended June 30, 1996, respectively.
(c) The unaudited pro forma combined balance sheet of PRG as of
June 30, 1996 attached hereto as Annex C assumes the consummation of the
EquiMed Acquisition and the AOI Merger as of that date. The unaudited pro
forma consolidated statements of income of PRG also attached hereto as Annex C
present the historical results of PRG as if PRG had consummated the EquiMed
Acquisition and the AOI Merger 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 on the dates presented and
should not be construed as representative of future operations.
3
<PAGE> 4
(d) Exhibits.
Exhibit No. Description
----------- -----------
2.1 - Asset Purchase Agreement by and among EquiMed, Inc.,
PRG Georgia and Physicians Resource Group, Inc. dated
October 7, 1996.(4)
2.2 - Agreement and Plan of Merger by and among American
Ophthalmic Incorporated, PRG Acquisition Corporation
and Physicians Resource Group, Inc. dated October 7,
1996.(4)
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 (n/k/a ChaseMellon Shareholder
Services, L.L.C.). (5)
4.6 - Form of certificate evidencing ownership of Common
Stock of Physicians Resource Group, Inc. (2)
23.1 - Consent of Ernst & Young LLP (Atlanta). (6)
23.2 - Consent of Ernst & Young LLP (Orlando). (6)
- ----------------------
(1) - Previously filed as an exhibit to the Registrant's
Registration Statement on Form S-4 (No. 333- 00230)
and incorporated herein by reference.
(2) - Previously filed as an exhibit to the Registrant's
Registration Statement on Form S-1 (No. 33- 91440)
and incorporated herein by reference.
(3) - Previously filed as an exhibit to the Registrant's
Annual Report on Form 10-K for the year ended
December 31, 1995, and incorporated herein by
reference.
(4) - Previously filed herewith.
4
<PAGE> 5
(5) - Previously filed as an exhibit to the Company's
Registration Statement on Form S-1 (No. 333- 3852)
and incorporated herein by reference.
(6) - Filed herewith.
5
<PAGE> 6
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: October 30, 1996 By:/s/ Richard J. D'Amico
--------------------------------
Richard J. D'Amico
Senior Vice President and
General Counsel
6
<PAGE> 7
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders
EquiVision, Inc.
We have audited the accompanying consolidated balance sheets of EquiVision,
Inc. as of December 31, 1994 and 1995, and the related consolidated statements
of operations, shareholders' equity, and cash flows for each of the three years
in the period ended December 31, 1995. 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 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 consolidated financial position of EquiVision,
Inc. at December 31, 1994 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Atlanta, Georgia
March 1, 1996
A-1
<PAGE> 8
EQUIVISION, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1994 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents.............................................. $ 1,784 $ --
Accounts receivable, less allowance for doubtful accounts of $225 in
1994 and $376 in 1995............................................... 4,064 6,350
Inventories............................................................ 263 755
Prepaid expenses and other current assets.............................. 606 1,929
Income tax receivable.................................................. -- 296
Deferred income taxes.................................................. 123 133
------- -------
Total current assets........................................... 6,840 9,463
Property and equipment:
Medical equipment...................................................... 3,587 6,300
Furniture, fixtures and office equipment............................... 1,684 2,840
Leasehold improvements................................................. 848 1,014
Construction-in-progress............................................... 29 28
------- -------
6,148 10,182
Less accumulated depreciation and amortization......................... (1,330) (2,682)
------- -------
4,818 7,500
Other assets:
Services agreements.................................................... 12,534 22,004
Non-compete agreements................................................. 1,524 2,231
Patient records........................................................ 1,032 1,668
Other.................................................................. 922 3,061
------- -------
$27,670 $45,927
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................................... $ 381 $ 1,656
Accrued salaries and professional fees................................. 850 977
Other accrued expenses................................................. 1,134 1,936
Income taxes payable................................................... 321 --
Accrued acquisition costs.............................................. 205 327
Capital lease obligations due within one year.......................... 334 122
Long-term debt due within one year..................................... 518 621
------- -------
Total current liabilities...................................... 3,743 5,639
Capital lease obligations................................................ 859 35
Long-term debt........................................................... 10,161 23,035
Deferred income taxes.................................................... 449 933
Commitments and contingencies
Minority interest........................................................ 107 110
Shareholders' equity:
Preferred stock, 1,000,000 authorized shares, none issued.............. -- --
Common stock, no par value, authorized 20,000,000 shares, issued and
outstanding 3,951,169 in 1994 and 4,338,846 in 1995................. 9,734 12,783
Additional paid-in capital............................................. 2,068 2,328
Retained earnings...................................................... 549 1,064
------- -------
12,351 16,175
------- -------
$27,670 $45,927
======= =======
</TABLE>
See accompanying notes.
A-2
<PAGE> 9
EQUIVISION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1993 1994 1995
------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net revenues................................................ $12,971 $25,165 $41,259
Center operating expenses:
Medical support and administrative costs.................. 6,640 12,885 21,421
Professional fees and expenses............................ 4,095 6,720 11,565
------- ------- -------
Center contribution margin.................................. 2,236 5,560 8,273
General corporate expenses.................................. 1,033 1,636 2,746
Depreciation and amortization............................... 809 1,531 2,617
Interest expense............................................ 543 825 1,683
------- ------- -------
Income (loss) before minority interest, extraordinary item
and income taxes.......................................... (149) 1,568 1,227
------- ------- -------
Minority interest in net earnings of partnerships........... -- 40 92
------- ------- -------
Income(loss) before income taxes and extraordinary item..... (149) 1,528 1,135
Provision for income taxes:
Income tax expense (benefit).............................. (6) 611 454
Cumulative adjustment to establish deferred income taxes
for change in tax status............................... 176 -- --
------- ------- -------
170 611 454
------- ------- -------
Income (loss) before extraordinary loss..................... (319) 917 681
Extraordinary charge from refinancing of debt, net of income
taxes of $(111)........................................... -- -- (166)
------- ------- -------
Net income (loss)........................................... $ (319) $ 917 $ 515
======= ======= =======
Net income (loss) per share before extraordinary item....... $ (0.14) $ 0.24 $ 0.16
Extraordinary item.......................................... -- -- (0.04)
------- ------- -------
Net income (loss) per share................................. $ (0.14) $ 0.24 $ 0.12
======= ======= =======
Weighted average common and common equivalent shares........ 2,284 3,762 4,331
======= ======= =======
</TABLE>
See accompanying notes.
A-3
<PAGE> 10
EQUIVISION, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED TOTAL
-------------------- PAID-IN EARNINGS SHAREHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
--------- ------- ---------- -------- -------------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1992............... 1,989,239 $ 388 $2,068 $ (49) $ 2,407
Issuance of common stock in connection
with acquisitions...................... 143,245 609 -- -- 609
Issuance of common stock in connection
with initial public offering, net of
issuance cost.......................... 1,150,000 6,336 6,336
Issuance of common stock................. 54,623 250 -- -- 250
Conversion of debt to common stock....... 140,274 499 -- -- 499
Net loss................................. -- -- -- (319) (319)
--------- ------- ------ ------ -------
Balance, December 31, 1993............... 3,477,381 8,082 2,068 (368) 9,782
Issuance of common stock in connection
with acquisitions...................... 469,532 1,640 -- -- 1,640
Issuance of common stock................. 4,256 12 -- -- 12
Net income............................... -- -- -- 917 917
--------- ------- ------ ------ -------
Balance, December 31, 1994............... 3,951,169 9,734 2,068 549 12,351
Issuance of common stock in connection
with acquisitions...................... 234,272 1,988 -- -- 1,988
Issuance of common stock................. 3,810 18 -- -- 18
Issuance of common stock in connection
with warrants.......................... 149,595 1,043 -- -- 1,043
Warrants issued in connection with Credit
Agreement.............................. -- -- 260 -- 260
Net income............................... -- -- -- 515 515
--------- ------- ------ ------ -------
Balance, December 31, 1995............... 4,338,846 $12,783 $2,328 $1,064 $16,175
========= ======= ====== ====== =======
</TABLE>
See accompanying notes.
A-4
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EQUIVISION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................... $ (319) $ 917 $ 515
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................... 809 1,531 2,617
Deferred income taxes....................................... 170 156 236
Minority interest in net earnings of partnership............ -- 40 92
Amortization of loan origination costs...................... -- -- 139
Increase (decrease) in cash, net of effects of practice
acquisitions,
due to changes in:
Accounts receivable......................................... (387) (2,489) (2,135)
Inventory................................................... 3 (52) 48
Prepaid expenses and other current assets................... (186) (248) (1,323)
Income tax receivable....................................... -- -- (296)
Accounts payable............................................ (114) 261 1,184
Accrued salaries and professional fees...................... 135 161 123
Income tax payable.......................................... -- 321 (321)
Other accrued expenses...................................... 81 360 792
------- ------- -------
Net cash provided by operating activities..................... 192 958 1,671
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for practices acquired............................... (1,687) (4,842) (8,390)
Purchase of property and equipment............................ (463) (1,371) (1,783)
Decrease (increase) in other assets........................... 35 (721) (2,056)
------- ------- -------
Net cash used by investing activities......................... (2,115) (6,934) (12,229)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term borrowings............................ -- 3,800 19,298
Repayment of long-term borrowings............................. (605) (798) (10,450)
Repayment of obligations under capital leases................. (152) (280) (1,046)
Repayment of note payable..................................... -- (133) --
Proceeds from issuance of common stock........................ 6,586 12 1,061
Contributions from limited partners........................... -- 100 --
Distributions to limited partners............................. -- (33) (89)
------- ------- -------
Net cash provided by financing activities..................... 5,829 2,668 8,774
------- ------- -------
Net (decrease) increase in cash and cash equivalents.......... 3,906 (3,308) (1,784)
Cash and cash equivalents at beginning of year................ 1,186 5,092 1,784
------- ------- -------
Cash and cash equivalents at end of year...................... $ 5,092 $ 1,784 $ --
======= ======= =======
</TABLE>
See accompanying notes.
A-5
<PAGE> 12
EQUIVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
1. DESCRIPTION OF BUSINESS
EquiVision, Inc. ("the Company") is an outpatient care physician practice
management company delivering procedure-oriented patient services through its
managed specialty care physician groups and owned ambulatory surgery centers.
The Company's initial focus is ophthalmology.
The Company acquires certain assets and operates ophthalmic centers under
long-term services agreements with affiliated professional corporations ("PCs").
The PCs, through employment agreements, employ ophthalmologists and optometrists
("the Professionals") who provide professional eye care to patients.
The services agreements are for an initial forty-year term and provide for
successive automatic renewals into perpetuity. Pursuant to the terms of the
services agreements, the Company manages all aspects of the PCs other than the
provision of medical services which is controlled by the PCs. While the Company
can terminate the services agreement without cause, the PCs can terminate the
services agreements only in the event of non-payment by the Company of certain
obligations of the PC. The Company has the unilateral right to not extend the
renewal provisions of the services agreements. Although the PC has legal title
to all receivables and revenues, the Company is an agent of the PC.
The Chairman of the Company, Dr. Douglas Colkitt, a physician, owns the
common stock of certain PCs and has an irrevocable option to acquire for a
nominal amount the common stock of any remaining PCs. The Company's Chairman has
granted the Company, or its designee, an irrevocable option to acquire for a
nominal amount the common stock of PCs that he owns and an assignment of the
stock option agreements with respect to the PCs that he does not own. The term
of these option agreements coincide with the term of the related services
agreements.
At December 31, 1995 and 1994, the Company had entered into services
agreements with 18 and 12 PCs, respectively. At December 31, 1995 and 1994, the
Chairman of the Company owned the common stock of 6 and 3 of these PCs,
respectively, and held an option to acquire the common stock of the remaining
PCs.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the financial statements of
the Company, its wholly owned subsidiary and limited partnerships in which the
Company has greater than a 50% ownership interest. Through the services
agreements between the Company and the various PCs, the Company has assumed full
responsibility for the operating expenses in return for the assignment of the
revenue of the PCs. The Company, as opposed to the affiliates of the Company,
has perpetual and unilateral control over the assets and operations of the
various PCs, and notwithstanding the lack of technical majority ownership of the
common stock of such entities, consolidation of the various PCs is necessary to
present fairly the financial position and results of operations of the Company
because of control by means other than ownership of stock. Control by the
Company is perpetual rather than temporary because of (i) the length of the
original terms of the services agreements, (ii) the Company's unilateral ability
to extend the services agreements for successive terms, (iii) the Company's
ability to effect control over the ownership of the common stock of the PCs,
(iv) limitations on Dr. Colkitt's ability to amend or terminate any services
agreements or options to acquire the common stock of PCs without the approval of
the majority of the Company's independent members of the board of directors, (v)
the employment by the Company of the majority of non-physician personnel, and
(vi) the nature of the services provided to the PCs by the Company. Accordingly,
receivables, revenues and professional services of the PCs are included in the
accompanying financial statements. All significant intercompany transactions
have been eliminated.
A-6
<PAGE> 13
EQUIVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include investments in highly liquid debt
instruments with a maturity of three months or less at the date of purchase.
ACCOUNTS RECEIVABLE
Accounts receivable principally represent receivables from patients for
medical services provided. Such amounts are recorded net of contractual
allowances and estimated bad debts.
INVENTORIES
Inventories are stated at the lower of cost, determined on a first-in
first-out basis, or market.
CONCENTRATION OF CREDIT RISK
The Company's principal financial instrument subject to potential
concentration of credit risk is trade accounts receivable for which the Company
does not generally require collateral. The concentration of credit risk with
respect to trade accounts receivable is limited due to the large number of
payors and their dispersion across many different insurance companies,
individuals and geographic locations. Substantially all accounts receivable at
December 31, 1995 and 1994 are due from third party payors.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost (fair value for assets purchased
in acquisitions). Equipment held under capital leases is stated at the present
value of minimum lease payments at the inception of the related leases.
Depreciation of property and equipment is calculated using the straight-line
method over the estimated useful lives of the assets or, for leasehold
improvements, over the terms of related leases, if shorter. The estimated useful
life of medical equipment and furniture, fixtures and office equipment is 5 to 6
years.
INTANGIBLE ASSETS
Costs of obtaining services agreements are amortized on the straight-line
method over the noncancelable term of the agreements, forty years for the
Company's current services agreements. Non-compete agreements are amortized on
the straight-line method over the five year term of the agreements. Patient
records are amortized on the straight-line method over ten years. The carrying
value of intangible assets and other long-lived assets is reviewed whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. If this review indicates that the asset will not be
recoverable, as determined based on the undiscounted cash flows of the operating
entity or asset over the remaining amortization period, the carrying value of
the asset will be reduced to its fair value.
Accumulated amortization was $2,522,000 and $1,258,000 at December 31, 1995
and 1994, respectively.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes".
DEFERRED FINANCING COSTS
The costs incurred in connection with negotiating and closing financing
agreements are capitalized and amortized over the terms of the related
agreements. At December 31, 1995, accumulated amortization of deferred financing
costs was $139,000.
A-7
<PAGE> 14
EQUIVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PER SHARE DATA
Net income (loss) per common share is calculated using the weighted average
number of common and common equivalent shares, when dilutive, outstanding during
the period. Retroactive restatement has been made to share and per share amounts
for reverse stock splits (see Notes 8 and 12). In addition, for periods prior to
July 1, 1993, pursuant to the requirements of the Securities and Exchange
Commission, common stock issued at prices lower than the initial public offering
price and options to purchase common stock granted during the 12 months
immediately preceding the initial public offering (see Note 8) have been
included in the calculation of the shares used in computing per share
information as if they were outstanding for all periods presented (using the
treasury stock method at the initial public offering price).
RECLASSIFICATIONS
Certain previously reported amounts have been reclassified to conform with
the current period presentation.
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 amounts reported in the financial statements and
accompanying notes. Although these estimates are based on management's knowledge
of current events and actions it may undertake in the future, they may
ultimately differ from actual results.
LONG-LIVED ASSETS
In 1995, the Financial Accounting Standards Boards (FASB) 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" (SFAS 121). The
Company's required adoption date is January 1, 1996. SFAS 121 standardizes the
accounting practices for the recognition and measurement of impairment losses on
certain long-lived assets. The Company anticipates the adoption of SFAS 121 will
not have a material impact on its results of operations or financial position.
STOCK-BASED COMPENSATION
The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. The Company accounts for stock option grants in accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and, accordingly,
recognizes no compensation expense for the stock option grants.
In October 1995, the FASB issued Statement of Financial Accounting
Standards. No. 123, "Accounting for Stock-Based Compensation," which provides an
alternative to APB Opinion No. 25 in accounting for stock-based compensation
issued to employees. However, the Company plans to continue to account for
stock-based compensation in accordance with APB Opinion No. 25.
3. NET REVENUES
Net revenues are recorded at established rates reduced by allowances for
contractual adjustments. Contractual adjustments arise due to the difference
between the Company's established rates for services and the amounts allowed for
such services by government sponsored healthcare programs and by others.
A-8
<PAGE> 15
EQUIVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following represents amounts included in the determination of net
revenues for the year ended December 31, 1995, 1994 and 1993 (in thousands):
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Gross revenues........................................ $22,362 $41,603 $67,131
Less provision for contractual adjustments............ 9,391 16,438 25,872
------- ------- -------
Net revenues.......................................... $12,971 $25,165 $41,259
======= ======= =======
</TABLE>
The Company derived approximately 55%, 52% and 50% of its gross revenues
from services provided under the Medicare program for the years ended December
31, 1993, 1994 and 1995, respectively. The Company has insignificant amounts of
services that are identified as charity care to patients who are financially
unable to pay for services.
4. BUSINESS COMBINATIONS
During 1995, the Company acquired nine ophthalmic centers and two
ambulatory surgery centers. During 1994, the Company acquired eight ophthalmic
centers and two ambulatory surgery centers, and during 1993, the Company
acquired four ophthalmic centers and one ambulatory surgery center. The terms of
the transactions generally provided for the acquisition of certain operating
assets of the centers and the execution of non-compete agreements between the
Company, the selling physicians and their centers. Where necessary, concurrent
with the acquisitions, the selling physicians created a new medical professional
corporation which entered into a services agreement with the Company. Dr.
Colkitt, the Company's Chairman, owns the common stock of certain PCs and has an
option to acquire the common stock of the remaining PCs for an exercise price of
$1.00. The term of the option agreements coincide with the term of the related
services agreements. The Company's President and Chief Executive Officer has the
authority to exercise this right on behalf of the Company without prior approval
of the Company's board of directors. The Company has the right to designate a
new holder of the common stock of each of the affiliated PCs. The exercise of
the option by Dr. Colkitt to purchase the PC would not have an impact on the
terms of the related services agreement and would not give rise to change in the
carrying value assigned to the services agreement by the Company or the period
over which the underlying services agreement is amoritized.
In addition, during 1994 the Company acquired Ocupro, Incorporated, a St.
Louis-based management services organization. Ocupro manages optical shops and
provides management services to a network of ophthalmologists.
The acquisition of the center operating assets, execution of non-compete
agreements and related services agreements were accounted for using the purchase
method. The results of operations of the acquired centers and Ocupro have been
included in the Company's statement of operations from the date of acquisition.
A summary of these acquisition transactions during the year ended December
31, 1995 is:
<TABLE>
<CAPTION>
BATON
ROUGE, CLINTON, DAVENPORT, MOLINE, STERLING,
LOUISIANA IOWA IOWA ILLINOIS ILLINOIS
---------- ---------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C>
September September
Acquisition date................. March 1 March 1 July 1 1 1
Cash paid........................ $2,481,000 $ 757,000 $ 15,000 $232,000 $ 765,000
Debt assumed and notes issued.... 2,599,000 600,000 255,000 -- --
Common stock issued.............. -- 300,000 60,000 88,000 135,000
Other liabilities assumed........ -- -- 135,000 -- --
---------- ---------- ---------- -------- ---------
Total purchase
cost........................... $5,080,000 $1,657,000 $ 465,000 $320,000 $ 900,000
========== ========== ========== ======== =========
</TABLE>
A-9
<PAGE> 16
EQUIVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
ROCHESTER, NIAGARA FALLS, BUFFALO, AKRON,
NEW YORK NEW YORK NEW YORK OHIO
---------- -------------- -------- ----------
<S> <C> <C> <C> <C>
September September September
Acquisition date.................... 1 September 1 1 1
Cash paid........................... $1,655,000 $1,325,000 $804,000 $ 356,000
Debt assumed and notes issued....... -- 57,000 -- 627,000
Common stock issued................. 1,116,000 169,000 -- 120,000
Other liabilities assumed........... -- -- -- 94,000
---------- ---------- -------- ----------
Total purchase cost................. $2,771,000 $1,551,000 $804,000 $1,197,000
========== ========== ======== ==========
</TABLE>
A summary of these acquisition transactions during the year ended December
31, 1994 is:
<TABLE>
<CAPTION>
STOCKTON, NACHITOCHES, TOPEKA, SACRAMENTO, DECATUR,
CALIFORNIA LOUISIANA KANSAS CALIFORNIA ILLINOIS
---------- ------------ -------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Acquisition date............... January 31 February 1 April 1 May 1 July 1
Cash paid...................... $1,295,000 $234,000 $464,000 $ 255,000 $1,587,000
Debt assumed and notes
issued....................... 300,000 150,000 475,000 300,000 1,000,000
Common stock issued............ 540,000 15,000 45,000 -- 257,000
---------- -------- -------- -------- ----------
Total purchase cost............ $2,135,000 $399,000 $984,000 $ 555,000 $2,844,000
========== ======== ======== ======== ==========
</TABLE>
<TABLE>
<CAPTION>
METAIRIE, CLEVELAND, NACHITOCHES, ST. LOUIS,
LOUISIANA OHIO LOUISIANA MISSOURI
--------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
Acquisition date....................... July 1 August 1 September 1 December 1
Cash paid.............................. $ 313,000 $ 660,000 $ 19,000 $ 15,000
Debt assumed and notes issued.......... 125,000 400,000 -- --
Common stock issued.................... -- 177,000 -- 225,000
Other liabilities assumed.............. -- 94,000 277,000 60,000
--------- ---------- -------- ---------
Total purchase cost.................... $ 438,000 $1,331,000 $296,000 $ 300,000
========= ========== ======== =========
</TABLE>
A summary of these acquisition transactions during the year ended December
31, 1993 is:
<TABLE>
<CAPTION>
SACRAMENTO, FAIR OAKS, NEW ORLEANS, FORT SMITH,
CALIFORNIA CALIFORNIA LOUISIANA ARKANSAS
----------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Acquisition date...................... February 1 November 1 December 31 December 31
Cash paid............................. $ 277,000 $ 235,000 $ 626,000 $ 549,000
Debt assumed and notes issued......... 150,000 50,000 -- --
Common stock issued................... 176,000 55,000 -- 408,000
Other liabilities assumed............. -- -- 487,000 --
--------- --------- ---------- ---------
Total purchase cost................... $ 603,000 $ 340,000 $1,113,000 $ 957,000
========= ========= ========== =========
</TABLE>
A summary of assets acquired in the business combinations for each of the
three years in the period ended December 31, 1995 is (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1993 1994 1995
------ ------ -------
<S> <C> <C> <C>
Accounts receivable..................................... $ -- $ 45 $ 148
Prepaid expenses and other current assets............... -- 189 540
Property and equipment.................................. 619 578 2,255
Services agreements..................................... 1,749 7,750 9,657
Non-compete agreements.................................. 499 758 1,350
Patient records......................................... 146 534 795
------ ------ -------
$3,013 $9,854 $14,745
====== ====== =======
</TABLE>
A-10
<PAGE> 17
EQUIVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At one location, a physician has an option to acquire a 50% interest in the
practice for a specified amount. In connection therewith, the physician would
forego professional compensation derived from the PC in exchange for 50% of the
net income of the related practice.
In connection with the Fair Oaks, New Orleans and Fort Smith acquisitions
in 1993 and the Stockton and Natchitoches acquisitions in 1994, the Company paid
$208,000 to a director of the Company for services performed related to the
planning, evaluation and implementation of the acquisitions. These payments have
been included as part of the cost of the acquisitions.
As part of the consideration for certain of these acquisitions, the Company
issued 234,272, 469,532 and 143,245 shares of stock in 1995, 1994 and 1993,
respectively. For acquisitions completed prior to the Company's initial public
offering, the value of the shares issued was determined based on appraisals of
the centers acquired. For acquisitions completed after the initial public
offering, the value of the shares, which are unregistered, was determined based
on the market value of the Company's common stock.
In connection with the acquisition of certain ophthalmic centers during
1993, the selling physicians had a right to receive additional shares of the
Company's common stock under certain circumstances. In December 1994, the
Company entered into amendments to its agreements with these physicians pursuant
to which the physicians were issued an additional 95,424 shares of common stock.
Of these shares, 31,808 shares were issued by the Company and the remainder by
three of the Company's principal shareholders.
The unaudited pro forma results of operations assuming 1) all purchase
acquisitions completed in 1995 and 1994 had been consummated as of January 1,
1994, and 2) an effective tax rate as if the Company had not been treated as an
S Corporation for income tax purposes throughout all periods are (in thousands,
except per share data):
<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Net revenue...................................................... $52,079 $50,567
Income before extraordinary loss................................. 2,396 847
Net income....................................................... 2,396 681
Net income per share before extraordinary loss................... .55 .19
Net income per share............................................. .55 .15
</TABLE>
5. NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1995 and 1994 (in
thousands):
<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Revolving credit and term loan agreement......................... $ -- $16,318
Notes payable to institutional lenders........................... 6,296 --
Notes payable to physicians...................................... 3,125 5,774
Convertible note payable to a physician.......................... 1,000 1,000
Other notes payable.............................................. 258 564
------- -------
10,679 23,656
Less amounts due within one year................................. 518 621
------- -------
$10,161 $23,035
======= =======
</TABLE>
On February 24, 1995, the Company entered into a $20,000,000 Revolving
Credit Agreement (the "Agreement") with a bank. The outstanding balance on the
Agreement at February 24, 1997 will convert to a term loan payable in eleven
quarterly installments equal to 5% of the original term loan amount beginning
March 1997. The remaining 45% of the original term loan is due December 1999.
Borrowings outstanding under the Agreement bear interest, at the Company's
option, at either the bank's prime rate plus 1.5% or LIBOR plus 3%. Commitment
fees of .5% are payable quarterly on the unused portion. In connection with the
A-11
<PAGE> 18
EQUIVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Agreement, the Company refinanced approximately $7,600,000 in borrowings with
its previous institutional lender and various other capital lease obligations.
As a result of the refinancing, the Company incurred approximately $277,000 in
prepayment fees which have been reflected as a $166,000 extraordinary charge,
net of income taxes.
In connection with the Agreement, the Company paid a $300,000 facility fee
and issued to the bank a stock purchase warrant to purchase 150,000 shares of
its common stock at an exercise price of $4.31 per share. The warrant expires in
February 2005 and may be exercised at any time at the option of the warrant
holder. Under the terms of the warrant agreement, the warrant holder has certain
registration rights and antidilution protection from future equity securities
issued at below fair market value, and can restrict the payment of dividends to
any class of capital stock.
The Agreement contains numerous restrictive covenants, which limit, among
other things, future borrowings; certain types of acquisitions; investments in
joint ventures or partnership interests; payments of dividends on the Company's
common stock; loans to affiliates and certain investments. The Agreement also
requires the maintenance of specified levels of current assets to current
liabilities, cash flows, interest coverage, consolidated debt and net worth.
Borrowings under this Agreement are secured by substantially all of the
Company's assets except for those centers which are security for physician
notes.
The notes payable to the institutional lender (the "Institutional notes"),
bearing interest at rates from 10.3% to 11.5%, were payable in monthly
installments of $127,000 through August 2001. The institutional notes were
secured by all of the Company's accounts receivable and the property and
equipment of certain of the Company's centers. The Company's chairman had
guaranteed $1,200,000 of the indebtedness. The Institutional notes were
subsequently paid off on February 24, 1995 with funds from the Agreement.
The notes payable to physicians, bearing interest at rates from 3.9% to 7%,
and due 1995 through 1999, were issued in connection with certain of the
Company's acquisitions. These notes are secured by substantially all the assets
of the acquired centers for which the notes were issued. The convertible note
payable may be converted into shares of the Company's common stock based on the
stock's market value at the time of conversion. This note is secured by certain
of the assets of the Company's New Orleans center, bears interest at 7.5% and is
due September 2002.
The following table represents aggregate annual maturities of long-term
debt at December 31, 1995 (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ------------
<S> <C> <C>
1996............................................... $ 621
1997............................................... 4,007
1998............................................... 4,100
1999............................................... 11,939
2000............................................... 1,751
Thereafter......................................... 1,238
-------
$23,656
=======
</TABLE>
Interest paid during the years ending December 31, 1995, 1994 and 1993 was
$1,387,000, $852,000 and $547,000, respectively.
In January 1993, a note payable to the Company's chairman and related
accrued interest of $453,000 and $46,000, respectively, were converted into
140,274 shares of the Company's common stock.
A-12
<PAGE> 19
EQUIVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. LEASES
The Company leases office space and equipment under operating leases.
Rental expense under all operating leases was $2,997,000, $1,579,000 and
$648,000 for the years ended December 31, 1995, 1994, and 1993, respectively.
Certain of these operating leases are with physicians who are employees of the
PCs or shareholders of the Company. Rental expense under these leases was
$1,838,000, $987,000 and $388,000 in 1995, 1994 and 1993, respectively.
In February 1993, the Company entered into a capital lease facility with an
institutional lender and a partnership in which the Company's chairman is a
partner. In connection with this facility, the Company has guaranteed the
obligations of the partnership to an institutional lender which has provided the
funding for the capital lease facility. The Company's chairman has also
guaranteed all advances made by the lender under the facility. At December 31,
1994, capital lease obligations under this facility were $857,000. In addition,
capital leases for medical equipment at a cost of $411,000 at December 31, 1995
and 1994 are with a shareholder and director of the Company. During 1994, the
Company entered into capital lease obligations in the original principal amounts
of approximately $838,000. Amortization of assets held under capital leases is
included in depreciation expense.
At December 31, 1995 and 1994, equipment held under capital leases is:
<TABLE>
<CAPTION>
1994 1995
---------- ---------
<S> <C> <C>
Medical equipment........................................... $1,249,000 $ 505,000
Furniture, fixtures and office equipment.................... 399,000 --
---------- ---------
1,648,000 505,000
Accumulated amortization.................................... (426,000) (271,000)
---------- ---------
$1,222,000 $ 234,000
========== =========
</TABLE>
The future minimum lease payments under noncancellable operating leases and
the present value of future minimum capital lease obligations at December 31,
1995 are (in thousands):
<TABLE>
<CAPTION>
CAPITAL LEASES OPERATING LEASES
----------------- ------------------
YEAR ENDING RELATED RELATED
DECEMBER 31, PARTIES OTHER PARTIES OTHER
- ------------ ------- ----- ------- ------
<S> <C> <C> <C> <C> <C>
1996.............................................. $95 $39 $ 2,183 $1,112
1997.............................................. -- 30 1,977 883
1998.............................................. -- 8 1,722 602
1999.............................................. -- -- 1,250 580
2000.............................................. -- -- 431 438
Thereafter........................................ -- -- 250 1,015
--- --- ------- ------
Total minimum lease payments...................... 95 77 $ 7,813 $4,630
======= ======
Less amounts representing interest................ 5 10
--- ---
Present value of minimum capital lease payments... 90 67
Less amounts due within one year.................. 90 32
--- ---
$-- $35
=== ===
</TABLE>
7. INCOME TAXES
Upon completion of its initial public offering on November 12, 1993, the
Company ceased to qualify under Subchapter S of the IRC and became subject to
corporate income taxes. As a result, the Company was
A-13
<PAGE> 20
EQUIVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
required to record deferred income taxes. The Company recorded the cumulative
effect of deferred taxes attributable to the change in tax status in the amount
of $176,000 as a charge to operations in 1993.
The provision for income taxes includes the following components (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Current:
Federal..................................................... $ -- $381 $ 93
State....................................................... -- 74 14
Deferred...................................................... 170 156 236
---- ---- ----
$170 $611 $343
==== ==== ====
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts for income tax purposes. Significant components of the
Company's deferred tax liabilities and assets as of December 31, 1995 and 1994
are as follows (in thousands):
<TABLE>
<CAPTION>
1994 1995
---- ----
<S> <C> <C>
Deferred tax liabilities:
Depreciation differences.......................................... $420 $612
Deductible prepaid expenses....................................... 61 148
Amortization of intangibles....................................... 29 321
---- ----
Total deferred tax liabilities............................ 510 1,081
==== ====
Deferred tax assets:
Allowance for doubtful accounts................................... 90 150
Nondeductible accrued liabilities................................. 94 131
Other............................................................. -- --
---- ----
Total deferred tax assets................................. 184 281
---- ----
Net deferred tax liabilities.............................. $326 $800
==== ====
</TABLE>
A reconciliation of the statutory federal income tax rate and the effective
tax rate for 1995, 1994 and 1993 is:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Statutory rate.................................................. 34 % 34% 34%
State income taxes, net of federal tax benefit.................. 5 % 4% 5%
Other........................................................... (6)% 2% 1%
--- --- ---
Effective tax rate.............................................. 33% 40% 40%
=== === ===
</TABLE>
Income taxes paid in 1995 and 1994 were $721,000 and $134,000,
respectively. No income taxes were paid in 1993.
8. SHAREHOLDERS' EQUITY
On July 21, 1993, the Company's board of directors authorized a
1-for-.7025585 reverse stock split. All share and per share data have been
adjusted to give retroactive effect to this reverse stock split.
A-14
<PAGE> 21
EQUIVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On July 21, 1993, the Board of Directors authorized the filing of a
registration statement for a public offering (the "Offering") of 1,150,000
units, including an underwriter's overallotment option for 150,000 units, at a
price of $7 per unit. Each unit consisted of two shares of the Company's common
stock and one redeemable warrant to purchase one share of the Company's common
stock at a price of $4.375. The warrants were redeemable at $.05 per warrant
with the written consent of the underwriter of the Offering and 30-day written
notice to the holders of warrants. On November 22, 1993, the sale of 1,000,000
units was consummated. On December 16, 1993, the Company consummated the sale of
an additional 150,000 units in connection with the exercise of the underwriter's
overallotment option. Net proceeds from the Offering were approximately
$6,336,000.
In connection with the Offering, the Company issued to the underwriter a
warrant (the "Underwriter's Warrant") to purchase 50,000 units, each unit
consisting of two shares of common stock and one warrant to purchase one share
of common stock at a price of $9.45. The Underwriter's Warrant is exercisable
for a four-year period commencing November 12, 1994 at an exercise price of
$19.60 per unit. The Underwriter's Warrant includes certain registration rights.
On January 25, 1995, the Company called for the redemption of all of the
575,000 warrants issued in connection with the Offering. On February 23, 1995
the Company completed the redemption of these warrants. Net proceeds from the
exercise of approximately 150,000 warrants, after reduction for payments to
redeem unexercised warrants, were $1,043,000.
During 1993, the Company granted a non-qualified stock option to the
Company's chairman to purchase 500,000 shares of the Company's common stock at
$50 per share. The option became exercisable in June 1995 and expires in 10
years. During 1993, the Company granted a non-qualified stock option to a
director to purchase 40,000 shares of the Company's common stock at $7.70 per
share. The option became exercisable in May 1994 and expires in 7 years. In
addition, the Company granted non-qualified stock options to purchase 30,737
shares of the Company's common stock at prices ranging from $2.84 to $5.68 per
share to employees. These options vest ratably over a five year period.
In July 1993, the Company adopted a Stock Option Plan (the "Plan"). The
Plan permits the Company to grant up to 106,250 options to employees, directors
and consultants at the fair value of shares on the effective date of grant. In
June 1995, the Board of Directors approved) an increase in options available for
grant under the plan to 350,000 shares. Options granted to employees vest
ratably over a five year period and expire in eight years. Options granted to
directors typically vest in a one year period and expire in seven years. At
December 31, 1995, there were 252,860 options outstanding to employees and
directors, respectively, under the Plan. At December 31, 1995, 63,140 shares of
common stock were available for future grants, under the Plan.
A-15
<PAGE> 22
EQUIVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of option transactions for the three years ended December 31,
1995 is:
<TABLE>
<CAPTION>
OPTION PRICE
SHARES PER SHARE
--------- ------------
<S> <C> <C>
Balance, December 31, 1992.................................. -- --
Granted................................................... 580,737 $ 2.84-50.00
--------- ------------
Balance, December 31, 1993.................................. 580,737 $ 2.84-50.00
Granted................................................... 113,500 7.00-11.00
Exercised................................................. (4,257) 2.84
Cancelled................................................. (26,064) 2.84- 7.00
--------- ------------
Balance, December 31, 1994.................................. 663,916 2.84-50.00
Granted................................................... 925,860 8.00-15.10
Exercised................................................. (3,810) 2.84- 7.00
Cancelled................................................. (500) 7.00
--------- ------------
Balance, December 31, 1995.................................. 1,585,466 $ 2.84-50.00
========= ============
</TABLE>
At December 31, 1995, options to purchase 814,270 shares, of common stock
were exercisable.
9. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) plan that covers substantially all of it
employees. Upon meeting certain eligibility requirements, employees can make
specified contributions to the plan, a percentage of which are matched by the
Company. The Company's contributions to the plan were $40,000, $18,000 and
$9,000 in 1995, 1994 and 1993, respectively.
10. AGREEMENTS WITH OPERATING UNITS OF RELATED PARTIES
On September 1, 1992, EquiVision acquired certain assets of The Eye Surgery
Center of Louisiana, a professional medical corporation wholly owned by Stephen
F. Brint, M.D., a Director of EquiVision, for $3,403,000, consisting of
$2,216,000 in cash, a $1,000,000 note payable, assumption of liabilities of
$42,000 and $145,000 in EquiVision common stock. The note payable bears interest
at an annual rate of 7.5% and matures in September 2002. On December 1, 1994,
Dr. Brint was issued 35,749 additional shares in connection with EquiVision's
acquisition of his practice. The Company leases the equipment centers from Dr.
Brint for approximately $11,000 per month. Dr. Brint is employed by the Eye
Surgery Center of Louisiana and serves as its Medical Director. During the years
ended December 31, 1993, 1994 and 1995, Dr. Brint received compensation of
approximately $597,000, $615,000 and $550,000, respectively. Dr. Brint is also a
limited partner of the Ambulatory Eye Surgery Center of Louisiana, an ASC in
which the Company is a general partner. The ASC began operations in March 1994.
During the years ended December 31, 1994 and 1995, Dr. Brint received
partnership distributions of approximately $33,000 and $61,000, respectively.
On November 1, 1994 the Company entered into a 40 year services agreement
with an ambulatory surgery center in Chevy Chase, Maryland which is 50% owned by
the Company's chairman. Under the services agreement, the Company will manage
the operations of the center for a monthly fee of $4,000, plus reimbursement of
direct costs. In addition, the services agreement provides that the Company
would receive the first $1 million of the center's operating income and 50% of
its net income in excess of $1 million. The Company issued 176,744 shares of
common stock to its chairman in consideration for the services agreement. The
Company assigned a value of approximately $350,000 to the services agreement and
the common stock issued, which approximates the chairman's equity in the center.
During the year ended December 31, 1994, the Company performed consulting
and management services for two entities in which the Company's chairman is an
equity owner. One agreement provided $100,000 in
A-16
<PAGE> 23
EQUIVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
fees relating to the development of the ambulatory surgery center in Chevy
Chase, Maryland prior to entering into the above service agreement. The second
agreement dated August 1, 1994, provides for the Company to manage an
ophthalmology practice for a five-year period ending July 1999, for $40,000 per
month for the five-month period ending December 31, 1994. The Company will
receive $16,667 per month, plus reimbursement of certain direct expenses
incurred in operating the practice beginning in January 1995. During the year
ended December 31, 1994 the Company recognized $200,000 in revenues from the
management of the practice. At December 31, 1994, approximately $500,000 in
management fees and working capital advances were owed to the Company by the
practice and center. In March 1995, the Company terminated the management
agreement. The Company recognized approximately $50,000 in management fees in
1995 prior to termination.
In 1994, the Company loaned $50,000 to Pharmaceutical Development
Associates ("PDA"). The note bore interest at 7% per annum and was due in 2004.
The Company also received a warrant allowing it, under certain conditions, to
convert the note to approximately 25% of the common stock of PDA. In addition,
the Company and PDA signed a services agreement under which PDA received 20% of
the gross sponsor payments and fees paid to the Company as a result of clinical
trials performed by the Company. In September 1995, the Company terminated this
agreement, the subordinated promissory note was repaid and the warrant was
cancelled.
The Company pays approximately $95,000 per year to lease its corporate
offices from a partnership in which Mr. Pearson is a general partner. During the
year ended December 31, 1995 the Company paid $87,000 in lease expense to the
partnership. No payments were made in the year ended December 31, 1994.
11. PROFESSIONAL AND LIABILITY RISKS
The Company is insured with respect to medical malpractice risks on a
claims-made basis. The insurance contracts specify that coverage is available
only during the term of each insurance contract. Management of the Company
intends to review its existing claims-made policies annually and expects to be
able to obtain such coverage.
The Company has been named in two actions relating to professional
liability claims at one of its ophthalmology centers. The claims pertain to a
period when the Company was partially self insured for that center. The Company
intends to defend these actions vigorously and believes it has meritorious
defenses. In the event the Company should not prevail, management believes that
its maximum loss exposure will be $200,000.
12. SUBSEQUENT EVENTS
On October 26, 1995, EquiVision, Colkitt Oncology Group, Inc. (the
"Oncology Group") and EquiMed, Inc. ("EquiMed") entered into an Agreement and
Plan of Merger (the "Merger Agreement") pursuant to which, on February 2, 1996,
the Oncology Group merged with and into EquiVision and, immediately thereafter,
EquiVision merged with and into EquiMed. The Oncology Group was formed in order
to facilitate the acquisition by EquiVision and the subsequent acquisition by
the Company of the stock or assets of various corporations, partnerships and
joint ventures which own or control 30 radiation oncology centers. Pursuant to
the Merger Agreement, the principal shareholders of the Oncology Group received
20,783,633 shares of the common stock of EquiVision as consideration for this
merger.
The merger of EquiVision with and into EquiMed, which immediately followed
the merger of Oncology Group with and into EquiVision, was consummated for the
purpose of reincorporating EquiVision from Pennsylvania to Delaware and to
effect a 1-for-2 reverse stock split. All share and per share data have been
adjusted to give retroactive effect to this reverse stock split. Pursuant to the
Merger Agreement, each outstanding share of EquiVision common stock was
converted into onehalf of one share of EquiMed Common Stock. Prior to the
Reincorporation Merger, EquiMed was a wholly-owned subsidiary of EquiVision with
no
A-17
<PAGE> 24
EQUIVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
material assets or liabilities and no operating history. Pursuant to the Merger
Agreement, EquiMed succeeded to all of the assets, liabilities and contractural
obligations of EquiVision and the Oncology Group. As a result of the Merger, the
Company owns or controls 18 ophthalmology centers, seven ASCs and 30 radiation
oncology centers, and manages four additional radiation oncology centers and one
ASC.
In order to effect the COG Merger and in connection therewith, the Board of
Directors authorized the increase of the authorized shares of Common Stock of
the Company from 20,000,000 shares to 100,000,000 shares.
The proforma data related to this merger is included elsewhere in this
form.
On February 14, 1996, EquiMed consummated the sale of 2,000,000 shares of
common stock in connection with a public offering at $14 per share. Net proceeds
from the offering were approximately $23,200,000.
On October 7, 1996, EquiMed entered into an agreement with Physicians
Resource Group, Inc. ("PRG") pursuant to which PRG will acquire substantially
all of the assets and properties and certain liabilities of EquiVision.
A-18
<PAGE> 25
EQUIMED, INC. -- OPHTHALMOLOGY BUSINESS
CONDENSED BALANCE SHEET (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS JUNE 30,
1996
-------
<S> <C>
Current assets:
Cash and cash equivalents...................................................... $ --
Accounts receivable, net....................................................... 10,346
Prepaid expenses and other current assets...................................... 1,372
-------
Total current assets............................................................. 11,718
Property and equipment........................................................... 7,551
Services agreements.............................................................. 31,459
Goodwill......................................................................... 37,674
Non-compete agreements........................................................... 1,605
Patient records.................................................................. 1,756
Other............................................................................ 742
-------
$92,505
=======
LIABILITIES AND OWNER'S INVESTMENT
Current liabilities:
Accounts payable............................................................... $ 166
Accrued salaries and professional fees......................................... 1,826
Other accrued expenses......................................................... 2,504
Long-term debt and capital lease obligations due within one year............... 900
-------
Total current liabilities........................................................ 5,396
Long-term debt and capital lease obligations..................................... 8,793
Minority interests............................................................... 120
Owner's investment............................................................... 78,196
-------
$92,505
=======
</TABLE>
See notes to condensed financial statements.
A-19
<PAGE> 26
EQUIVISION, INC. AND
EQUIMED, INC. -- OPHTHALMOLOGY BUSINESS
CONDENSED INCOME STATEMENTS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
EQUIVISION, INC. OPHTHALMOLOGY
------------------------- BUSINESS
ONE MONTH -------------
SIX MONTHS ENDED FIVE MONTHS
ENDED JUNE JANUARY 31, ENDED JUNE
30, 1995 1996 30, 1996
---------- ----------- -------------
<S> <C> <C> <C>
Net revenues............................................. $ 18,859 $ 3,502 $22,755
Costs and expenses:
Professional fees and expenses........................... 5,363 955 6,582
Treatment and support services........................... 9,367 2,065 10,019
General and administrative expenses...................... 1,174 255 2,546
Depreciation and amortization............................ 1,129 284 1,418
Interest expenses, net................................... 730 180 266
--------- ---------- -------
Total costs and expenses................................. 17,763 3,740 20,831
Income (loss) before income taxes and extraordinary
item................................................... 1,096 (237) 1,924
Provision (benefit) for income taxes..................... 438 (95) 770
--------- ---------- -------
Income (loss) before extraordinary item.................. 658 (142) 1,154
Extraordinary charge from refinancing of debt, net of
income taxes of $(111)................................. (166 ) -- --
--------- ---------- -------
Net income (loss)........................................ $ 492 $ (142) $ 1,154
========= ========== =======
Net income per share before extraordinary item........... $ 0.16 $ (0.03) N/A
Extraordinary item....................................... $ (0.04 ) $ -- N/A
--------- ----------
Net income per share..................................... $ 0.12 $ (0.03) N/A
========= ==========
Weighted average common shares and equivalents
outstanding............................................ 4,131,000 4,339,000 N/A
========= ==========
</TABLE>
See notes to condensed financial statements.
A-20
<PAGE> 27
EQUIVISION, INC. AND
EQUIMED, INC. -- OPHTHALMOLOGY BUSINESS
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
OPHTHALMOLOGY
EQUIVISION, INC. BUSINESS
-------------------------- -------------
SIX MONTHS ONE MONTH FIVE MONTHS
ENDED ENDED ENDED
JUNE 30, JANUARY 31, JUNE 30,
1995 1996 1996
---------- ----------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)....................................... $ 492 $ (142) $ 1,154
Adjustments to reconcile net income to net cash used by
operating activities:
Depreciation and amortization......................... 1,129 284 1,418
Minority interests in earnings of partnership......... 45 2 33
Increase (decrease) in cash, net of effects of
practice acquisitions, due to changes in:
Accounts receivable................................ (1,855) 102 (3,255)
Prepaid expenses and other current assets.......... (80) 309 1,158
Account payable.................................... 304 38 (1,598)
Accrued salaries and professional fees............. 626 414 70
Income taxes payable............................... (50) -- (421)
Other accrued expenses............................. 103 237 (721)
------- ------- ---------
Net cash provided (used) by operating activities........ 714 1,244 (2,302)
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for practices acquired......................... (3,238) -- (1,547)
Purchase of property and equipment...................... (787) (45) (204)
Increase in other assets................................ (729) (384) (20)
------- ------- ---------
Net cash used by investing activities................... (4,754) (429) (1,771)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term borrowings...................... 11,066 650 11,915
Repayment of long-term debt and capital lease
obligations........................................... (8,492) (19) (9,263)
Proceeds from issuance of common stock.................. 1,054 -- --
Repayment of note payable............................... -- -- --
Distributions to minority owners........................ (63) -- (25)
------- ------- ---------
Net cash provided by financing activities............... 3,565 631 2,627
Net decrease in cash.................................... (475) 1,446 (1,446)
Cash at beginning of period............................. 1,784 -- 1,446
------- ------- ---------
Cash at end of period................................... $ 1,309 $ 1,446 $ --
======= ======= =========
</TABLE>
See notes to condensed financial statements.
A-21
<PAGE> 28
EQUIMED, INC. -- OPHTHALMOLOGY BUSINESS
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1996
1. BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION
On February 2, 1996, Colkitt Oncology Group, Inc. (the "Oncology Group")
merged with and into EquiVision, Inc. ("EquiVision") and, immediately
thereafter, EquiVision effected an immediate reincorporation in Delaware and a
1-for-2 reverse stock split through a merger (the "Reincorporation Merger") with
and into EquiMed, Inc. ("EquiMed" or the "Company") a newly-formed Delaware
subsidiary of EquiVision, formed for the purpose of effecting the
Reincorporation Merger and reverse stock split. The merger between the Oncology
Group and EquiVision and the Reincorporation Merger are referred to collectively
herein as the "Merger". The Oncology Group was formed prior to consummation of
the Merger to acquire all of the stock or assets of various corporations,
partnerships and joint ventures which owned or controlled 30 radiation oncology
centers. All share and per share amounts reflect the 1-for-2 reverse stock split
that was effected upon consummation of the Reincorporation Merger.
The stockholders of the Oncology Group received 20,783,633 shares of the
common stock of EquiVision as consideration for the Merger. The business
combination was accounted for as a reverse purchase. As a result, the Oncology
Group is considered the acquirer.
The purchase price of EquiVision was $45,600,000 and has been allocated to
the assets purchased and the liabilities assumed based upon fair market value at
the date of acquisition. The excess or purchase price over the fair market value
of the net assets was $38,000,000 and has been recorded as goodwill.
The accompanying financial data for the periods prior to February 1, 1996
represent the operations of EquiVision as a stand alone entity. Subsequent to
the Merger on February 2, 1996, the accompanying financial data represents the
financial position and results of operations or the ophthalmology business
("Ophthalmology Business") (formerly EquiVision) of EquiMed. Accordingly, for
1996, income statements and statements of cash flows have been presented for the
one month period ended January 31, 1996 prior to the Merger and the five month
period ended June 30, 1996 subsequent to the Merger.
These financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments, consisting only of normal recurring adjustments,
considered necessary for a fair presentation have been included. Operating
results for the periods presented are not necessarily indicative of the results
that may be expected for the year ending December 31, 1996. For further
information, refer to the financial statements and footnotes included herein of
EquiVision for the year ended December 31, 1995.
2. BUSINESS ACQUISITIONS RELATED TO THE OPHTHALMOLOGY BUSINESS
On March 1, 1996, the Company acquired the primary operating assets of two
ophthalmology practices for $3,115,000, consisting of $1,541,000 in cash
(including acquisition costs), notes payable in the amount of $1,250,000 and
$324,000 in common stock. Effective April 1, 1996, the Company acquired the
primary operating assets of three ophthalmology practices for the aggregate
consideration of $12,352,000, consisting of $1,503,000 in cash (including
acquisition costs), $9,115,000 in common stock, a note payable issued and debt
assumed in the amount of $1,475,000 and assumption of liabilities of $259,000.
All of the above mentioned acquisitions have been accounted for as purchases.
On March 18, 1996, the Company acquired an ophthalmology practice for
approximately 403,000 shares of the Company's common stock valued at
approximately $5,000,000. The business combination has been accounted for by the
pooling of interests method. Because this acquisition was not material, the
Company's
A-22
<PAGE> 29
EQUIMED, INC. -- OPHTHALMOLOGY BUSINESS
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
financial statements have not been restated to include the accounts and
operations for any periods prior to January 1, 1996.
3. COMMITMENTS AND CONTINGENCIES
The Company is insured with respect to medical malpractice risks on a
claims-made basis. Should these claims-made policies not be renewed or replaced
with equivalent insurance, claims based on occurrences during the term of the
respective policies, but asserted subsequently, would be uninsured.
At June 30, 1996, the Company has several malpractice claims outstanding
which have arisen in the normal course of business. In addition, it is possible
that certain incidents may have occurred which have not been reported as of this
date. The Company has policies and procedures in place to track and monitor
incidents of significance.
4. SUBSEQUENT EVENT
On October 7, 1996, EquiMed entered into an Asset Purchase Agreement (the
"Purchase Agreement") with Physicians Resource Group, Inc., a Delaware
corporation ("PRG"), and PRG's wholly-owned subsidiary, PRG Georgia, Inc., a
Delaware corporation ("PRG Georgia"), providing for the sale by the Company and
the purchase by PRG Georgia of the Ophthalmology Business, including all items
of personal property and other assets used in connection with such business and
the Company's ownership interest in certain subsidiaries involved in the
Ophthalmology Business (the "Transaction"). The consideration to be provided by
PRG Georgia to the Company at closing is $54,563,000 in cash plus the assumption
of an estimated $14,300,000 of the Company's liabilities related to the
Ophthalmology Business, and a further contingent cash amount to be provided no
later than May 15, 1997 based upon additional acquisitions of medical practices
or centers related to the Ophthalmology Business by the Company, PRG Georgia or
another wholly-owned subsidiary of PRG, which acquisitions are consummated by
April 30, 1997 and satisfy certain conditions as provided in the Purchase
Agreement (the "Contingent Consideration"). The consummation of the Transaction
is subject to receipt of all necessary regulatory and other third party
approvals and other customary conditions. Each of the parties has certain rights
to terminate the Transaction under certain circumstances, including among
others, the right of PRG Georgia to terminate at any time prior to November 6,
1996 if, in its sole discretion, its due diligence reveals certain material
adverse conditions with respect to the Ophthalmology Business, and the right of
either PRG Georgia or the Company to terminate the Transaction if it is not
consummated by November 30, 1996, as provided in the Purchase Agreement.
If the Company were to receive only the minimum consideration of
$54,563,000 in cash and elimination of an estimated $14,300,000 in liabilities
related to the probable disposition of the Ophthalmology Business, then an
after-tax loss of approximately $34,142,000 would be incurred. This loss
however, will be reduced by any Contingent Consideration received by the
consummation of additional acquisitions of medical practices and centers by
April 30, 1997. The Company will recognize any such Contingent Consideration
when realized.
A-23
<PAGE> 30
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
American Ophthalmic, Inc.
We have audited the accompanying consolidated balance sheets of American
Ophthalmic, Inc. and subsidiaries (the Company) as of December 31, 1994 and
1995, and the related consolidated statements of operations, changes in
redeemable convertible preferred stock and shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 1995. 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 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.
Since the date of completion of our audit of the accompanying financial
statements and initial issuance of our report thereon dated March 22, 1996, the
Company, as discussed in Note 7, has not complied with certain covenants of loan
agreements with a bank, however, the bank has agreed to waive its right to
demand repayment until January 1, 1997. Note 15 describes management's plans to
complete the Agreement and Plan of Merger to address these issues.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of American
Ophthalmic, Inc. and subsidiaries at December 31, 1994 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Orlando, Florida
March 22, 1996, except for the
third paragraph of Note 7 and Note 15,
as to which the date is October 24, 1996
B-1
<PAGE> 31
AMERICAN OPHTHALMIC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31
------------------- JUNE 30
ASSET 1994 1995 1996
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents...................................................... $ 6,307 $ 2,132 $ 538
Accounts receivable, less allowances of $1,995 and $6,072 at December 31, 1994
and 1995, respectively, and $8,281 at June 30, 1996.......................... 2,511 7,637 9,032
Inventories.................................................................... 312 707 762
Notes receivable -- related parties............................................ 227 324 135
Prepaid expenses............................................................... 156 572 1,141
Other current assets........................................................... 204 89 504
Deferred income taxes.......................................................... 98 -- --
------- ------- -------
Total current assets..................................................... 9,815 11,461 12,112
Investments in joint ventures and limited partnerships........................... 566 259 420
Notes receivable -- related parties, less current portion........................ 1,226 274 175
Property and equipment, net...................................................... 3,201 9,126 9,758
Other assets..................................................................... 54 506 592
Intangible assets resulting from acquisitions:
Goodwill, net of accumulated amortization of $430 and $1,362 at December 31,
1994 and 1995, respectively, and $2,081 at June 30, 1996..................... 13,885 54,297 57,184
Noncompete agreements, net of accumulated amortization of $145 and $104 at
December 31, 1994 and 1995 and $133 at June 30, 1996......................... 708 449 420
Tradename and other, net of accumulated amortization of $181 in 1994........... 1,269 -- --
------- ------- -------
15,862 54,746 57,604
------- ------- -------
$30,724 $76,372 $80,661
======= ======= =======
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................... $ 175 $ 554 $ 759
Accrued liabilities............................................................ 2,072 6,184 5,756
Current portion of long-term debt -- related parties........................... 1,416 4,707 3,323
Current portion of long-term debt.............................................. 135 408 337
------- ------- -------
Total current liabilities................................................ 3,798 11,853 10,175
Long-term debt, less current portion -- related parties.......................... 11,902 43,080 47,963
Long-term debt, less current portion............................................. 273 748 617
Deferred income taxes............................................................ 424 -- --
Other long-term liabilities...................................................... -- 235 113
Minority interest................................................................ 80 1,060 1,365
Redeemable convertible preferred stock of a subsidiary -- Series A, par value
$0.01 per share -- authorized 1,000 shares; issued and outstanding 500 shares
at December 31, 1994 and 1995, and June 30, 1996............................... 1,405 1,330 1,367
Redeemable convertible preferred stock -- Series A, par value $0.01 per
share -- authorized 150,000 shares; issued and outstanding 114,000 and 150,000
shares at December 31, 1994 and 1995, respectively, and 150,000 shares at June
30, 1996....................................................................... 12,357 17,110 17,710
Shareholders' equity:
Preferred stock, par value $0.01 per share -- authorized 1,850,000 shares; none
outstanding.................................................................. -- -- --
Common stock, par value $0.01 per share -- authorized 10,000,000 shares; issued
and outstanding 1,285,909 and 2,115,573 shares at December 31, 1994 and 1995,
respectively and 2,275,443 shares at June 30, 1996........................... 13 21 23
Capital in excess of par value................................................. 1,422 6,146 7,103
Accumulated deficit............................................................ (950) (5,211) (5,775)
------- ------- -------
485 956 1,351
Commitments and contingencies (Notes 4, 10 and 11)
------- ------- -------
$30,724 $76,372 $80,661
======= ======= =======
</TABLE>
See accompanying notes.
B-2
<PAGE> 32
AMERICAN OPHTHALMIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31 30
----------------------------------- ----------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenue........................... $ 12,655 $ 20,659 $ 44,011 $ 14,871 $ 33,025
Costs and expenses:
Operating expenses.................. 11,098 16,592 34,191 11,542 26,048
General and administrative
expenses......................... 956 1,913 3,343 1,380 2,281
Depreciation and amortization....... 931 1,332 2,651 1,101 1,835
Write-off of intangible assets...... 245 172 4,126 -- --
--------- --------- --------- --------- ---------
Total operating expenses.... 13,230 20,009 44,311 14,023 30,164
--------- --------- --------- --------- ---------
Total operating income
(loss).................... (575) 650 (300) 848 2,861
Other income (expense):
Interest expense.................... (611) (1,147) (3,232) (1,004) (2,548)
Interest income..................... 87 178 159 128 72
Minority interest expense........... (4) (54) (463) (71) (511)
Income from joint ventures and
limited partnerships............. 264 207 391 240 215
Gain on sale of surgery center...... -- 918 -- -- --
Other, net.......................... 333 410 180 62 33
--------- --------- --------- --------- ---------
Total other income
(expense)................. 69 512 (2,965) (645) (2,739)
--------- --------- --------- --------- ---------
Net income (loss) before income
taxes............................... (506) 1,162 (3,265) 203 122
Income tax benefit (expense).......... -- (482) 232 (82) (49)
--------- --------- --------- --------- ---------
Net income (loss)..................... $ (506) $ 680 $ (3,033) $ 121 $ 73
========= ========= ========= ======== =========
Net (loss) attributable to common
shares.............................. $ (816) $ (122) $ (4,261) $ (469) $ (564)
========= ========= ========= ======== =========
Net (loss) per share.................. $ (.75) $ (.10) $ (2.69) $ (.35) $ (.25)
========= ========= ========= ======== =========
Weighted average shares outstanding... 1,085,044 1,231,585 1,583,409 1,341,232 2,211,991
========= ========= ========= ========= =========
</TABLE>
See accompanying notes.
B-3
<PAGE> 33
AMERICAN OPHTHALMIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARES)
<TABLE>
<CAPTION>
SHAREHOLDERS' EQUITY
REDEEMABLE --------------------------------------------
CONVERTIBLE REDEEMABLE
PREFERRED CONVERTIBLE COMMON STOCK CAPITAL IN TOTAL
STOCK OF PREFERRED ------------------ EXCESS OF ACCUMULATED SHAREHOLDERS'
SUBSIDIARY STOCK SHARES PAR VALUE PAR VALUE DEFICIT EQUITY
---------- ---------- ------ --------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1993........ $1,250 $ -- 10 $-- $ 1 $ (12) $ (11)
Conversion of limited
partnership interest to common
stock......................... -- -- 969 10 626 -- 636
Issuance of shares of common
stock in connection with
acquisitions.................. -- -- 47 -- 186 -- 186
Issuance of shares of common
stock......................... -- -- 171 2 343 -- 345
Issuance of shares of redeemable
convertible preferred stock... -- 7,500 -- -- -- -- --
Redeemable convertible preferred
stock dividends in arrears.... 75 235 -- -- -- (310) (310)
Net loss........................ -- -- -- -- -- (506) (506)
------ ------- ----- --- ------- ------- -------
Balance at December 31, 1993...... 1,325 7,735 1,197 12 1,156 (828) 340
Issuance of shares of common
stock......................... -- -- 89 1 266 -- 267
Issuance of shares of redeemable
convertible preferred stock... -- 3,900 -- -- -- -- --
Redeemable convertible preferred
stock dividends in arrears.... 80 722 -- -- -- (802) (802)
Net income...................... -- -- -- -- -- 680 680
------ ------- ----- --- ------- ------- -------
Balance at December 31, 1994...... 1,405 12,357 1,286 13 1,422 (950) 485
Issuance of shares of common
stock......................... -- -- 830 8 4,724 -- 4,732
Issuance of shares of redeemable
convertible preferred stock... -- 3,600 -- -- -- -- --
Redeemable convertible preferred
stock dividends in arrears.... 75 1,153 -- -- -- (1,228) (1,228)
Dividends paid on redeemable
convertible preferred stock... (150) -- -- -- -- -- --
Net loss........................ -- -- -- -- -- (3,033) (3,033)
------ ------- ----- --- ------- ------- -------
Balance at December 31, 1995...... 1,330 17,110 2,116 21 6,146 (5,211) 956
Redeemable convertible preferred
stock dividends in arrears
(unaudited)..................... 37 600 -- -- -- (637) (637)
Issuance of shares of common
stock (unaudited)............. -- -- 159 2 957 -- 959
Net income (unaudited).......... -- -- -- -- -- 73 73
------ -------- ----- --- ------- ------- -------
Balance at June 30, 1996
(unaudited)..................... $1,367 $ 17,710 2,275 $23 $ 7,103 $(5,775) $ 1,351
====== ======== ===== === ======= ======= =======
</TABLE>
See accompanying notes.
B-4
<PAGE> 34
AMERICAN OPHTHALMIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31 JUNE 30
----------------------------- ------------------
1993 1994 1995 1995 1996
-------- ------- -------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).................................................... $ (506) $ 680 $ (3,033) $ 121 $ 73
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization...................................... 931 1,332 2,651 1,101 1,835
Write-off of intangible assets..................................... 245 172 4,126 -- --
Gain on sale of surgery center..................................... -- (918) -- -- --
Provision for deferred income taxes................................ -- 346 (326) -- --
Equity (income) loss in joint ventures and limited partnerships,
net of distributions received.................................... (139) 46 (70) (83) (51)
Minority interest expense, net of distributions paid............... 83 -- 191 -- --
Loss on sale of fixed assets....................................... -- 69 -- -- --
Amortization of debt issuance costs................................ 10 51 143 48 88
Changes in operating assets and liabilities net of effects from
acquisitions:
Accounts receivable.............................................. 75 (136) (1,460) (139) (1,172)
Inventories...................................................... 43 (86) (120) (47) (55)
Prepaid expenses................................................. (31) 7 (341) (197) (489)
Other current assets............................................. 53 (180) 80 (591) (415)
Other assets..................................................... (12) (72) (66) 9 32
Accounts payable................................................. 110 (215) 36 126 135
Accrued liabilities and other long-term liabilities.............. 872 735 2,266 769 17
-------- ------- -------- -------- -------
Net cash provided by operating activities.................... 1,734 1,831 4,077 1,117 (2)
-------- ------- -------- -------- -------
INVESTING ACTIVITIES
Payments for business acquisitions, net of cash received............. (10,585) (2,533) (27,888) (13,943) (4,364)
Purchases of property and equipment.................................. (314) (1,223) (1,668) (666) (828)
Proceeds from sale of surgery center................................. 750 1,028 -- -- --
Proceeds from sale of equipment...................................... -- 18 -- -- --
Issuance of notes receivable -- related parties...................... -- (340) (125) (50) (145)
Payments on notes receivable -- related parties...................... -- 158 230 154 283
Decrease in assets held in escrow.................................... 4 183 30 -- --
-------- ------- -------- -------- -------
Net cash used for investing activities....................... (10,145) (2,709) (29,421) (14,505) (5,054)
-------- ------- -------- -------- -------
FINANCING ACTIVITIES
Proceeds from long-term borrowings -- related parties................ 4,518 2,333 24,450 8,354 8,019
Proceeds from long-term borrowings................................... 10 -- 400 -- --
Proceeds from sales of common stock.................................. 345 267 546 246 --
Payments for debt issuance and financing costs....................... (227) -- (471) (378) (92)
Dividends paid on redeemable convertible preferred stock............. -- -- (150) (150) --
Proceeds from sale of redeemable convertible preferred stock......... 7,500 3,900 3,600 3,600 --
Payments on long-term borrowings -- related parties.................. (275) (1,058) (6,540) (3,209) (4,520)
Payments on long-term borrowings..................................... (1,554) (271) (666) (77) (202)
Equity contributed by limited partners............................... -- -- -- -- 318
Equity offering costs................................................ -- -- -- -- (61)
-------- ------- -------- -------- -------
Net cash provided by financing activities.................... 10,317 5,171 21,169 8,386 3,462
-------- ------- -------- -------- -------
Increase (decrease) in cash and cash equivalents..................... 1,906 4,293 (4,175) (5,002) (1,594)
Cash and cash equivalents at beginning of period..................... 108 2,014 6,307 6,307 2,132
-------- ------- -------- -------- -------
Cash and cash equivalents at end of period................... $ 2,014 $ 6,307 $ 2,132 $ 1,305 $ 538
======== ======= ======== ======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest........................................................... $ 265 $ 1,290 $ 2,247 $ 896 $ 2,903
Income taxes, net of refunds....................................... -- 129 75 58 235
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Property and equipment purchased in connection with acquisitions..... 862 618 5,731 2,009 881
Long-term debt assumed in acquisitions............................... -- -- 2,548 1,636 --
Long-term debt issued in connection with acquisitions................ 3,974 2,100 14,937 9,042 --
Notes receivable in connection with sale of fixed assets............. -- 255 -- -- 150
Notes receivable plus accrued interest forgiven as part of an
acquisition........................................................ -- -- 793 793 --
Common stock issued in connection with acquisitions.................. -- -- 4,185 -- 959
Capital lease obligations incurred in business acquisitions.......... 99 -- -- -- --
Building purchased with note payable................................. 150 -- -- -- --
Note receivable -- related party from sale of surgery center......... 750 -- -- -- --
Equity in joint venture purchased in conjunction with acquisition.... -- -- -- -- 123
</TABLE>
See accompanying notes.
B-5
<PAGE> 35
AMERICAN OPHTHALMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995
JUNE 30, 1996 (UNAUDITED)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
American Ophthalmic, Ltd. was formed in February 1991, as a limited
partnership organized in the State of Florida. Effective January 1, 1993,
American Ophthalmic, Ltd. reorganized, converting partnership interests in
American Ophthalmic, Ltd. to common stock in American Ophthalmic, Inc. (AO or
the Company), a Florida corporation formed in September 1990. AO was the sole
general partner of American Ophthalmic, Ltd. prior to the reorganization. In
connection with the exchange of limited partnership interests for stock, AO
acquired all of the assets, and assumed all debts, obligations and liabilities
of American Ophthalmic, Ltd. Net assets have been recorded based on the net book
value at December 31, 1992, of American Ophthalmic, Ltd. AO was a Subchapter S
prior to January 1, 1993. Upon reorganization, AO became a Subchapter C
Corporation.
The Company and its wholly-owned subsidiaries and limited partnerships
manage and operate ophthalmic practices and ambulatory and laser surgery centers
located principally in the Southeastern, Southwestern and Western United States.
In its facilities, the Company provides principally procedure oriented patient
services in conjunction with its employee physicians and affiliated physician
groups.
Certain of the Company's facilities are operated under long-term services
agreements with affiliated professional medical associations (PAs) ranging from
30 to 50 years. The Company or the PAs, through employment agreements or
exclusive medical services agreements, employ ophthalmologists and optometrists
who provide professional eye care to patients in Company owned or managed
facilities. Each of the services agreements is terminable by mutual agreement or
failure of the affiliated professional association to fulfill contractual
obligations. Management believes that in the event an agreement is terminated,
the Company could enter into similar agreements with other independent
contractor physicians and professional associations. Because of the related
business activities and mutual dependence of the Company and affiliated PAs and
the Company's control over the nonmedical operations of those entities, the
affiliated PAs are consolidated for reporting purposes.
Certain clinic and administrative employees are leased by the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of the
subsidiaries and affiliated physician groups. All significant intercompany
accounts and transactions have been eliminated in the consolidated financial
statements.
Unaudited Consolidated Financial Statements
In the opinion of the Company, the accompanying consolidated unaudited
financial statements contain all adjustments necessary to represent fairly their
financial position as of June 30, 1996, and the results of their operations and
cash flows for the six months ended June 30, 1995 and 1996. These adjustments
present only normal recurring items.
The accompanying unaudited financial statements have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to these rules and regulations, although
the company believes that the disclosures made are adequate to make the
information presented not misleading.
B-6
<PAGE> 36
AMERICAN OPHTHALMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less at date of purchase to be cash equivalents.
Accounts Receivable
Accounts receivable represent principally receivables from patients for
medical services provided. Amounts are recorded net of contractual allowances.
Inventories
Inventories are stated at the lower of cost or market with cost determined
using the first-in, first-out method. Inventories are comprised primarily of
surgical supplies, optical lenses and frames.
Property and Equipment
Purchases of property and equipment are stated at cost. Property and
equipment procured through acquisitions are recorded at their estimated fair
value as of the dates of acquisition. Equipment held under capital lease
obligations is stated at the present value of minimum lease payments at the
inception of the related leases. Depreciation of property and equipment is
calculated using the straight-line method over the estimated useful lives of the
assets. Equipment held under capital lease obligations and leasehold
improvements are amortized on a straight-line basis over the shorter of the
estimated useful life of the asset or the lease term.
Other Assets
Other assets consist primarily of debt issuance costs, net of accumulated
amortization of $-0-, $416,000 and $463,000 (unaudited) at December 31, 1994 and
1995 and June 30, 1996, respectively. These costs are amortized to interest
expense on the straight-line method over the term of the related debt.
Intangible Assets Resulting from Acquisitions
Goodwill is amortized on the straight-line method over 40 years. The
Company's management continually reviews actual operating results compared to
expected operating results to ascertain if the estimation of value and future
benefits of goodwill has been impaired. In 1995, management determined
approximately $2,798,000 in goodwill recorded in 1995 is not recoverable due to
operations, and wrote-off the balance at December 31, 1995.
Other intangibles are amortized on the straight-line method over 10 to 16
years. These assets are reviewed by management for future value on an annual
basis. Based on this review, $1,178,000 assigned to a trade name was written-off
at December 31, 1995. This was the result of the retirement of the named
physician in December 1995, and the planned merger of the practice with a
practice acquired in January 1996.
Noncompete agreements are amortized on the straight-line method over the
terms of the agreements ranging from 7 to 13 years. These assets are reviewed by
management for future benefits on an annual basis. Based on this review,
$245,000, $172,000 and $150,000 were written off at December 31, 1993, 1994 and
1995, respectively.
Investments in Joint Ventures and Limited Partnerships
The Company accounts for its investments in joint ventures and partnerships
in which the Company owns at least a 20% and less than 50% voting interest at
cost plus equity in undistributed earnings since date of
B-7
<PAGE> 37
AMERICAN OPHTHALMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
acquisition. These amounts are not material to the financial position and
results of operations included in the accompanying consolidated financial
statements.
Minority Interest
Minority interest represents the limited partner's equity interest in
certain ambulatory surgery centers and ventures owning and operating excimer
lasers in which the Company owns at least a 50% voting interest.
Income Taxes
The Company follows the liability method of accounting for income taxes.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Redeemable Convertible Preferred Stock
In accordance with financial reporting requirements of the Securities and
Exchange Commission, the preferred stock of each company has been classified
outside of shareholders' equity as redeemable convertible preferred stock in the
accompanying consolidated financial statements.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Statement of Operations
For purposes of display, transactions deemed by management to be ongoing,
major, or central to the operations of the Company are reflected in operating
revenue or expense. Gains and losses resulting from peripheral or incidental
transactions are reported as nonoperating.
Net Loss Per Share
The computation of fully diluted net loss per common share was antidilutive
in each of the periods presented; therefore, primary and fully diluted loss per
common share are the same.
Net loss per common share was determined by dividing net loss attributable
to common shares by the weighted average shares outstanding. The net income
(loss) was adjusted by the aggregate amount of dividends on the Company's
redeemable convertible preferred stock to calculate net loss attributable to
common shares. Preferred dividends for the years ended December 31, 1993, 1994
and 1995 and for the six months ended June 30, 1995 and 1996 (unaudited) were
$310,000, $802,000, $1,228,000, $590,000 and $637,000, respectively.
Common share equivalents are antidilutive in all periods presented and,
therefore, have not been included in the calculation of weighted average shares
outstanding.
Impact of Recently Issued Accounting Standards
In March 1995, the Financial Accounting Standards Board (FASB), issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" (Statement 121), which requires impairment
losses to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amounts. Statement 121 also
addresses the accounting for long-lived
B-8
<PAGE> 38
AMERICAN OPHTHALMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
assets that are expected to be disposed of. The Company will adopt Statement 121
in 1996 and, based on current circumstances, does not believe the effect of
adoption will be material.
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("Statement 123"),
which provides an alternative to APB No. 25. Statement 123 allows for a fair
value based method of accounting for stock options and similar equity
instruments. However, for companies that continue to account for stock-based
compensation arrangements under APB 25, Statement 123 requires disclosure of the
pro forma effect on net income and earnings per share of its fair value based
accounting for those arrangements. These disclosure requirements are effective
for fiscal years beginning after December 15, 1995, or upon initial adoption of
the statement, if earlier. The Company has concluded that it will continue to
account for stock-based compensation arrangements under APB 25.
Reclassifications
Certain items in the 1993 and 1994 financial statements have been
reclassified to conform to the 1995 financial statement presentation.
3. NET REVENUE
The Company derives a substantial portion of its net revenue from services
provided under the federal Medicare program, various state Medicaid programs and
various managed care agreements, including certain capitation arrangements.
Revenue for all facilities is recorded at established rates reduced by
contractual adjustments. Contractual adjustments arise due to the differences
between the Company's established rates for services and the amounts allowed by
government sponsored health care programs and other insurers.
The following represents amounts included in the determination of net
revenue (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31 JUNE 30
------------------------------- -------------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Gross revenue.................... $21,262 $34,847 $75,965 $26,547 $57,735
Less provision for contractual
adjustments.................... 8,607 14,188 31,954 11,676 24,710
------- ------- ------- ------- -------
Net revenue...................... $12,655 $20,659 $44,011 $14,871 $33,025
======= ======= ======= ======= =======
</TABLE>
4. BUSINESS COMBINATIONS
The acquisitions detailed below have been accounted for using the purchase
method of accounting. Accordingly, the purchase price was allocated to the
assets acquired (including all identifiable intangible assets) and liabilities
assumed based upon their estimated fair values at the dates of acquisition in
accordance with APB No. 16. The results of operations of the acquired businesses
are included in the financial statements from the respective dates of
acquisition. The excess of costs over the fair value of assets acquired was
approximately $10,609,000, $3,290,000 and $43,447,000 for the years ended
December 31, 1993, 1994 and 1995, respectively.
In connection with the acquisitions detailed below the Company issued
26,000 and 697,587 shares of the Company's common stock during the years ended
December 31, 1993 and 1995, respectively. No shares of the Company's common
stock were issued in connection with the acquisitions during the year ended
December 31, 1994. Because there is no public market for the Company's common
stock, the value assigned to the common stock, when applicable, was equal to the
fair value of the assets less the cash consideration paid.
B-9
<PAGE> 39
AMERICAN OPHTHALMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1993 Acquisitions
On April 15, 1993, the Company acquired certain operating assets of Eye
Center of Central Texas, P.A., an ophthalmic practice located in Temple, Texas
in exchange for $250,000 in cash and the issuance of 26,000 shares of the
Company's common stock.
Also effective April 15, 1993, the Company acquired certain assets of
Central Texas Day Surgery Center, Limited Partnership (the Surgery Center) an
ambulatory surgery center located in Temple, Texas in exchange for $250,000 in
cash and the issuance of a $1,750,000 promissory note payable in 32 equal
quarterly installments beginning six months after the closing and bearing
interest at 8% per year. Immediately after this purchase, the Company
transferred a 75% interest in the Surgery Center in exchange for $750,000 in
cash and a note receivable of $750,000.
On August 11, 1993, the Company acquired certain operating assets of Eye
Center South, P.C., Van Leasing, Inc. and Eye Network Associates II, P.C., which
are engaged in the practice of ophthalmic medicine and/or own assets useful to
an ophthalmological medical practice located in Dothan, Alabama, in exchange for
$1,940,740 in cash.
Also effective August 11, 1993, the Company acquired certain operating
assets of Eye Surgery Center, Inc., an ambulatory surgery center located in
Dothan, Alabama in exchange for $8,144,291 in cash and the issuance of a
$2,223,537 promissory note with a term of five years bearing interest at the
prime rate, not to exceed 8% per year.
1994 Acquisitions
On February 1, 1994, the Company acquired certain operating assets of
Douglas A. Freeley, M.D., P.A., an ophthalmic practice located in Dothan,
Alabama in exchange for $578,334 in cash and the issuance of a $200,000
non-interest bearing promissory note payable, due in full in January 1996.
On June 1, 1994, the Company acquired certain operating assets of Robert H.
Poirier, M.D., P.A., an ophthalmic practice located in San Antonio, Texas in
exchange for $309,628 in cash.
Also effective June 1, 1994, the Company acquired certain operating assets
of South Texas Institute of Eye Surgery, Inc., an ophthalmic surgery center
located in San Antonio, Texas, in exchange for $632,647 in cash and the issuance
of a $900,000 promissory note with a term of five years bearing interest at
6.43% per year. The asset purchase agreement provides that if the selling
physician is in violation of any covenants against competition during the first
five years of the employment agreement, liquidated damages as defined in the
agreement are due to the Company for years one through three and the balance of
the promissory note is forgiven.
On September 1, 1994, the Company acquired certain operating assets of Dr.
Cottingham & Associates, P.A. (d/b/a Eye Institute of San Antonio), an
ophthalmic practice located in San Antonio, Texas, in exchange for $1,012,335 in
cash and the issuance of a $1,000,000 promissory note with a term of five years
bearing interest at the prime rate plus 1% per year. The asset purchase
agreement provides that if the selling physician provides notice of intent to
leave or is in violation of any covenants against competition during the first
five years of the employment agreement, liquidated damages as defined in the
agreement are due to the Company for years one through three and the balance of
the promissory note is forgiven.
1995 Acquisitions
On February 8, 1995, the Company acquired the outstanding common stock of
Dothan Eye Clinic, P.C. (d/b/a Southern Eye Institute), an ophthalmic practice
located in Dothan, Alabama in exchange for $3,500,000 in cash and the issuance
of a $1,000,000 promissory note with a term of one year bearing interest at the
prime rate, not to exceed 8% per year.
B-10
<PAGE> 40
AMERICAN OPHTHALMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On March 31, 1995, the Company acquired all of the assets of Professional
Surgery Corporation of Florida, consisting solely of an 80% general partnership
interest in the Center for Advanced Eye Surgery, Limited Partnership, an
ambulatory surgery center located in Sarasota, Florida in exchange for
$2,000,000 in cash and a $1,116,717 promissory note with a term of three months
bearing interest at the prime rate, not to exceed 10% per year.
Also effective March 31, 1995, the Company acquired all of the assets of
Professional Surgery Corporation of Texas, consisting solely of a 75% general
partnership interest in the Central Texas Day Surgery Center, Limited
Partnership, an ambulatory surgery center located in Temple, Texas, in exchange
for $1,050,000 in cash and the forgiveness of a $750,000 promissory note due
from Professional Surgery Corporation of Texas and related accrued interest of
$42,500.
On April 1, 1995, the Company entered into a limited partnership agreement
whereby the partnership operates an ambulatory surgery center in Sunrise,
Florida. The Company's initial investment for its 85% general partner interest
was $1,435,000 in cash. Also effective April 1, 1995, the limited partnership
acquired certain assets of the Center for Eye Surgery, Inc. (d/b/a Foundation
for Advanced Eye Care) in exchange for $1,920,000 in cash and the issuance of a
$1,480,000 promissory note with a term of five years bearing interest at the
prime rate, not to exceed 9% per year. For a period of two years after the
closing date all or part of the promissory note may be converted into an
aggregate of up to 100,000 shares of the Company's common stock at the rate of
$6 per share during the first year and $8 per share during the second year.
Also effective April 1, 1995, the Company acquired the outstanding common
stock of Fort Lauderdale Eye Institute, Inc., an ophthalmic practice located in
Ft. Lauderdale, Florida, in exchange for $1,715,600 in cash and the issuance of
five $343,120 promissory notes payable in twenty equal quarterly installments
bearing interest at the prime rate, not to exceed 9% per year. For a period of
two years after the closing date, all or part of the promissory notes may be
converted into an aggregate of up to 100,000 shares of the Company's common
stock at the rate of $6 per share during the first year and $8 per share during
the second year. This option is available to the sellers on a pro rata basis
only such that each of the five sellers is entitled to acquire up to 20,000
shares of the Company's common stock.
On June 23, 1995, the Company entered into a limited partnership agreement
whereby the partnership operates an ambulatory surgery center in Las Vegas,
Nevada. The Company's initial investment for its 80% general partner interest
was $3,000,000 in cash. On June 30, 1995 the limited partnership acquired
certain assets of Sahara-Lindell Surgery Center, Inc. in exchange for $3,000,000
in cash and the issuance of a $3,400,000 promissory note with a term of five
years bearing interest at the greater of the prime rate (to a cap of 10%) or 7%.
For a period of two years after the closing, a portion of the promissory note
may be converted into an aggregate of up to 10,000 shares of the Company's
common stock at the rate of $13 per share.
Also effective June 30, 1995, the Company acquired certain operating assets
of The Gables Eye Surgical Center, Inc., The Gables Eye Surgical Center
Associates, Inc., William I. Sabates, M.D., P.A., The Gables Eye Network, Inc.
and Gables Eye Institute Associates, which are engaged in the practice of
ophthalmic medicine and the operation of an ambulatory surgery center in Coral
Gables, Florida and other satellite facilities located in and around South
Florida. The purchase price for these assets was $7,500,000 in cash and
additional cash of 25% of dividends declared by the Company during the twelve
month period ending June 30, 1996 and paid within three years after the end of
such period. No such dividends have been declared by the Company. An additional
purchase payment may be required based upon a multiple or percentage of earnings
in excess of certain minimum operating thresholds, however, the Company
estimates that no such payment will be required.
On August 1, 1995, the Company acquired the outstanding common stock of
Glendale Eye Medical Group, Inc., an ophthalmic practice and an ambulatory
surgery center in Glendale, California, in exchange for $2,455,000 in cash, the
issuance of a $2,455,000 promissory note with a term of five years bearing
interest at
B-11
<PAGE> 41
AMERICAN OPHTHALMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
prime plus 1%, not to exceed 8% per year, and a 40% interest in the new limited
partnership formed by the Company to operate the surgery center business
acquired. Effective August 1, 1995, the Company entered into a limited
partnership agreement in which its initial investment for its 60% general
partner interest was the surgery center assets acquired from Glendale Eye
Medical Group, Inc. valued at $426,145.
On September 1, 1995, the Company acquired the outstanding common stock of
Central Florida Eye Surgery Associates, P.A., an ophthalmic practice located in
Orlando, Florida, in exchange for 626,273 shares of the Company's common stock.
In connection with this acquisition, the Company entered into a Stock Redemption
Agreement, under which the Company agreed to redeem common stock from the
sellers in the event the share exchange entered into for the acquisition is
deemed to be taxable (see Note 12).
On October 1, 1995, the Company acquired certain operating assets of Donald
M. Guber, M.D., P.A., an ophthalmic practice located in Orlando, Florida and
other satellite locations in Central Florida, in exchange for $100,000 in cash
and the issuance of a $2,400,000 promissory note with a term of five years
bearing interest at the prime rate, not to exceed 8% per year. For a period of
one year after the effective date of October 1, 1995, a portion of the
outstanding principal balance of the note up to a maximum of $1,250,000 may be
converted into shares of the Company's common stock at the rate of $13 per
share.
Also effective October 1, 1995, the Company acquired certain operating
assets of Ophthalmic Associates, a Las Vegas, Nevada general partnership, in
exchange for $770,000 in cash and the issuance of a $770,000 promissory note
with a term of five years bearing interest at the rate of 8% per year. For a
period of one year after closing a portion of the promissory note may be
converted into an aggregate of up to 40,000 shares of the Company's common stock
at the rate of $13 per share.
The Company also had several other acquisitions during the year ended
December 31, 1995. In the aggregate, the Company paid approximately $2,074,000
in cash and notes payable and 71,314 shares of the Company's common stock for
these practices.
1996 Acquisitions (Unaudited)
On January 1, 1996, the Company acquired certain operating assets of Eye
Care Austin, P.A., an ophthalmic practice in Austin, Texas in exchange for
$1,500,000 in cash.
On January 31, 1996, the Company acquired the common stock of Brian Den
Beste, O.D., P.A. (d/b/a The Eye Foundation of Orlando), an ophthalmic practice
in Orlando, Florida in exchange for $1,375,000 in cash and 105,769 shares of the
Company's common stock. Simultaneously, a stock redemption agreement was made in
which Brian Den Beste may sell, transfer, assign and deliver to the Company up
to 52,885 of his shares of the Company's common stock for $13 per share, by
providing written notice prior to the earlier of the effective date of an
initial public offering of any class of common stock by the Company or any of
its affiliates or by December 4, 1996.
Pro Forma Information (Unaudited)
The following unaudited pro forma information presents a summary of
consolidated results of operations as if the acquisitions had occurred at the
beginning of 1994 and 1995, with pro forma adjustments to give effect to
amortization of goodwill, interest expense on acquisition debt and certain other
adjustments, together with related income tax effects. The pro forma results are
not necessarily indicative of what would have occurred if the acquisitions had
been in effect for the entire periods presented.
B-12
<PAGE> 42
AMERICAN OPHTHALMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pro forma (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
-------------------
1994 1995
------- -------
<S> <C> <C>
Net revenue...................................................... $59,228 $62,492
Net income (loss) attributable to common shares.................. $ 75 $(4,230)
Net income (loss) per common share............................... $ 0.04 $ (2.04)
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1994 1995 1996
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Building.......................................... $ 101 $ 101 $ 101
Furniture and fixtures............................ 1,074 2,815 3,078
Medical equipment................................. 2,523 6,967 8,297
Vehicles.......................................... 115 201 219
Leasehold improvements............................ 418 1,554 1,636
------- ------- ---------
4,231 11,638 13,331
Less accumulated depreciation..................... (1,030) (2,512) (3,573)
------- ------- ---------
Net property and equipment........................ $ 3,201 $ 9,126 $ 9,758
======= ======= =========
</TABLE>
All property and equipment are pledged as collateral under various
financings (see Note 7).
6. ACCRUED LIABILITIES
The Company's current accrued liabilities, consisting principally of
amounts accrued and owed to affiliated ophthalmologists and related P.A.'s
include the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- JUNE 30,
1994 1995 1996
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Accrued salaries and benefits....................... $1,688 $4,589 $ 4,431
Accrued interest.................................... 180 922 567
Other............................................... 204 673 758
------ ------ -------
$2,072 $6,184 $ 5,756
====== ====== =======
</TABLE>
B-13
<PAGE> 43
AMERICAN OPHTHALMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. LONG-TERM DEBT -- RELATED PARTIES
Long-term debt -- related parties consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1994 1995 1996
------- ------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Revolving credit facility with a bank which is a
shareholder...................................... $ -- $21,946 $ 28,739
Subordinated debt with shareholders, with quarterly
interest payments, bearing interest at the rate
of 10%, with an effective rate of 12.5%, (net of
unamortized discount of approximately $731,000
and $905,000 at December 31, 1994 and 1995,
respectively), due August 2002................... 6,869 9,095 9,137
Notes payable to various sellers in connection with
acquisitions, at rates ranging from 6.4% to prime
(8.5% at December 31, 1995) plus 1% payable
through October 2001............................. 5,839 7,614 6,592
Convertible notes payable to sellers in connection
with acquisitions, at rates ranging from 8% to
prime (8.5% at December 31, 1995) payable through
October 2000..................................... -- 9,132 6,818
Notes payable to a corporation and a shareholder,
repaid in 1995................................... 610 -- --
------- ------- --------
Total long-term debt -- related parties............ 13,318 47,787 51,286
Less current portion............................... 1,416 4,707 3,323
------- ------- --------
Total long-term debt, less current portion--related
parties.......................................... $11,902 $43,080 $ 47,963
======= ======= ========
</TABLE>
In June 1995, the Company entered into a revolving credit facility with a
bank, whereby the Company can receive up to $25,000,000 in borrowings. Effective
January 22, 1996, the Company amended the revolving credit agreement increasing
the amount of available borrowings under the agreement from $25,000,000 to
$30,000,000. The revolving credit facility provides for the borrowings, at the
option of the borrower, to be either base rate loans, adjusted daily, bearing
interest at rates ranging from prime (8.5% at December 31, 1995) plus .25% to
1.5%, or LIBOR loans fixed for periods of one, two or three months, bearing
interest at rates ranging from LIBOR (5.4% at December 31, 1995) plus 1.5% to
3.0%. The credit facility, as amended, provides that on June 15, 1997, the
borrowings under the facility convert to a three year term loan with eleven
quarterly installments equal to five percent of the total borrowings then
outstanding, with the remaining unpaid principal payable June 15, 2000. The
Company, at its option, may extend the conversion into the term loan by one
year. Borrowings under the credit facility are secured by essentially all the
assets of the Company, as well as the common stock of all of the Company's
subsidiaries. The loan prohibits the payment of dividends on any common or
preferred stock of the Company with the exception of the $75,000 payable
annually to the preferred shareholders of a subsidiary. An annual fee of .375%
exists on any unused portion of the commitment. At December 31, 1995 $3,054,000
of the $25,000,000 is unused.
At June 30, 1996, the Company was in default on certain financial covenants
of the credit facility, however, the bank has agreed to waive the right to
demand repayment through January 1, 1997 (see Note 15).
In August 1993, as further described in Note 10, the Company entered into a
securities purchase agreement providing for the issuance of $10,000,000 in 10%
senior subordinated notes. As of December 31,
B-14
<PAGE> 44
AMERICAN OPHTHALMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1995, the entire $10,000,000 in senior subordinated notes, which are unsecured,
are outstanding and are due in August 2002.
During 1995, in conjunction with certain acquisitions, the Company issued
indebtedness allowing for the conversion of certain portions of unpaid principal
into shares of the Company's common stock at prices ranging from $6.00 to $13.00
per share over varying periods through June 1997.
Principal maturity requirements on long-term debt -- related parties (net
of unamortized discount of $905,000 are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31
- ------------
<S> <C> <C>
1996........................................................ $ 4,707
1997........................................................ 5,795
1998........................................................ 7,828
1999........................................................ 7,180
2000........................................................ 13,018
Thereafter.................................................. 9,259
-------
$47,787
=======
</TABLE>
8. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
--------------- JUNE 30
1994 1995 1996
---- ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Installment notes payable, rates ranging from 7.25% to
prime payable through December 1997.................. $372 $ 423 $ 371
Capital lease obligations.............................. 36 733 583
---- ------ -----
Total long-term debt................................... 408 1,156 954
Less current portion................................... 135 408 337
---- ------ -----
Total long-term debt, less current portion... $273 $ 748 $ 617
==== ====== =====
</TABLE>
Principal maturity requirements on long-term debt and capital lease
obligations are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31
- ------------
<S> <C> <C>
1996......................................................... $ 408
1997......................................................... 265
1998......................................................... 345
1999......................................................... 121
2000......................................................... 17
------
$1,156
======
</TABLE>
9. INCOME TAXES
The Company accounts for income tax using the liability method as required
by FASB Statement No. 109, Accounting for Income Taxes. Deferred tax assets and
liabilities are recognized for the future tax
B-15
<PAGE> 45
AMERICAN OPHTHALMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis and unused tax operating loss carryforwards.
The provisions for income taxes are comprised of the following amounts (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------
1993 1994 1995
----- ---- -------
<S> <C> <C> <C>
Current tax expense:
Federal................................................. $ -- $100 $ --
State and local......................................... 20 36 94
----- ---- -------
Total current expense..................................... $ 20 $136 $ 94
===== ==== =======
Deferred tax (benefit) expense:
Federal................................................. $ 26 $315 $ (131)
State and local......................................... (46) 31 (195)
----- ---- -------
Total deferred (benefit) expense.......................... (20) 346 (326)
----- ---- -------
Income tax (benefit) expense.............................. $ -- $482 $ (232)
===== ==== =======
</TABLE>
Income taxes are different from the amount computed by applying the United
States statutory rate of 34% to income before income taxes for the following
reasons:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------
1993 1994 1995
----- ---- -------
<S> <C> <C> <C>
Income tax (benefit) expense at the statutory rate........ $(171) $396 $(1,088)
Nondeductible goodwill amortization....................... 2 2 91
State taxes, net of federal benefit....................... (17) 45 (67)
Other (net)............................................... 6 19 48
Increase in valuation allowance........................... 180 20 784
----- ---- -------
$ -- $482 $ (232)
===== ==== =======
</TABLE>
B-16
<PAGE> 46
AMERICAN OPHTHALMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences that give rise to the deferred tax
assets and liabilities are presented below (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
----------------
1994 1995
----- ------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards and tax credit.................. $ 189 $ 778
Accrued liabilities.............................................. 33 125
Allowances for accounts receivables.............................. 32 96
Investments...................................................... 44 54
Goodwill, principally due to differences in amortization
periods....................................................... -- 431
----- ------
Total deferred tax assets................................ 298 1,484
Valuation allowance for deferred tax assets........................ (200) (984)
----- ------
Net deferred tax assets............................................ 98 500
Deferred tax liabilities:
Goodwill, principally due to differences in amortization
periods....................................................... (201) --
Property and equipment, principally due to differences in
depreciation.................................................. (191) (383)
Investments...................................................... (32) (117)
----- ------
Total deferred tax liabilities........................... (424) (500)
----- ------
Net deferred tax (liability)............................. $(326) $ --
===== ======
</TABLE>
At December 31, 1993, 1994, 1995, the Company had net operating loss
carryforwards of approximately $1,071,000, $224,000 and $1,750,000,
respectively, for income tax purposes that expire in years 2008 through 2010.
Due to the limited operating history of the Company and lack of historical
earnings, a valuation allowance of approximately $180,000, $200,000 and $984,000
has been recognized for the years ended December 31, 1993, 1994 and 1995,
respectively, to offset the deferred tax assets related to those carryforwards
and other deferred tax assets.
10. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY
In August 1993, the Company entered into a securities purchase agreement
providing for the sale of 150,000 shares of the Company's Series A convertible
preferred stock for $15,000,000 in cash, the issuance of $10,000,000 of 10%
senior subordinated notes and the issuance of 341,986 shares of the Company's
common stock. As of December 31, 1995 and June 30, 1996 (unaudited), 150,000
shares of the Company's Series A convertible preferred stock were outstanding.
The preferred shares are convertible into 3,762,014 shares of the Company's
common stock, subject to dilution protection as defined, preference in
liquidation and maintain voting rights similar to the common shares. The
Company, at its option, may redeem any or all of the outstanding preferred
shares at any time with a mandatory redemption in June 2003 at $100 per share
plus all unpaid cumulative dividends. Dividends are cumulative and payable at an
annual rate of $8 per share. As of December 31, 1994 and 1995 and June 30, 1996,
none of the $957,000, $2,110,000 and $2,710,000 (unaudited) in accumulated
dividends have been paid. Additionally, the shares are mandatorily convertible
should the Company effect a firm commitment from an underwriter for a public
offering of shares of its common stock in which the aggregate price for such
shares is at least $10,000,000. Upon any such conversion, the Company is
required to pay out of the proceeds from the offering any accrued and unpaid
dividends.
As of December 31, 1995 and June 30, 1996 (unaudited), American Ophthalmic
of Texas, Inc. (AOT), a wholly-owned subsidiary of the Company, has 1,000 shares
of $0.01 par value preferred stock authorized, of which 500 shares were
authorized and outstanding as Series A Preferred Stock. The preferred
shareholders are entitled to receive dividends at an annual rate of 6% per
share. These dividends are cumulative from the date
B-17
<PAGE> 47
AMERICAN OPHTHALMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the shares are issued and the shares maintain no voting rights. Cumulative
dividends of $150,000 were paid in 1995 and no dividends were paid in 1993, 1994
and for the six months ended June 30, 1996. The Company may redeem any or all of
the outstanding preferred shares at any time. After December 31, 1997, the AOT
preferred shareholders have the right to convert any outstanding shares of
preferred stock into common stock of AOT at a rate providing the preferred
shareholders with an 80% equity ownership in AOT immediately following the
conversion.
During the year ended December 31, 1993, the Company issued 170,993 shares
of common stock at $3.00 per share, pursuant to the securities purchase
agreement of August 1993. During February 1995 and August 1994, the company sold
82,077 and 88,916 shares, respectively, at $3.00 per share, as part of this
agreement. During August 1995, the Company sold 50,000 of its common shares at a
price of $6.00 per share.
During 1995, 697,587 shares of the Company's common stock were issued in
conjunction with acquisitions. For the six month period ended June 30, 1996,
105,769 shares of the Company's common stock were issued in connections with
acquisitions (unaudited).
In September 1993, a Stock Option Plan (Plan) for officers and key
employees was adopted. As of December 31, 1995 and June 30, 1996 (unaudited),
the Company has reserved 796,800 shares of its common stock for issuance
pursuant to options to be granted under its Plan.
The following table sets forth amounts issued and exercisable under the
Plan.
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------- JUNE 30
1993 1994 1995 1996
------- ------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Outstanding at beginning of year............ -- 161,000 293,500 613,850
Granted at $3.00............................ 161,000 132,500 20,000 --
Granted at $6.00............................ -- -- 300,350 76,950
Exercised................................... -- -- -- --
Canceled.................................... -- -- -- (29,200)
------- ------- ------- -------
Outstanding at end of year.................. 161,000 293,500 613,850 661,600
======= ======= ======= =======
Exercisable at end of year.................. -- 32,200 90,900 145,880
======= ======= ======= =======
</TABLE>
The options vest ratably over a five year period and expire 10 years after
the date on which they were granted. As of June 30, 1996, no options have been
exercised relative to the Plan.
In addition, the Company has entered into agreements to grant options to
purchase 111,700 shares of the Company's common stock upon consummation of an
initial public offering at a price equivalent to the price at which such
offering is consummated at June 30, 1996 (unaudited).
B-18
<PAGE> 48
AMERICAN OPHTHALMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES
Leases
Rent expense under operating leases was approximately $1,072,000,
$1,425,000 and $2,919,000 for the years ended December 31, 1993, 1994 and 1995.
The Company is obligated under several long-term noncancellable operating leases
for the rent of certain buildings and equipment. Payments under these agreements
are generally based upon a fixed monthly charge. Certain of these leases are
with shareholders and physicians who are employees of the Company. Rent expense
under these leases was approximately $789,000, $978,000 and $1,917,000 for the
years ended December 31, 1993, 1994 and 1995. The following is a summary by year
of future minimum lease payments for noncancellable operating leases (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDING RELATED
DECEMBER 31 PARTY RENT OTHER RENT TOTAL RENT
- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1996............................................... $ 2,448 $1,399 $ 3,847
1997............................................... 2,455 1,262 3,717
1998............................................... 1,781 1,050 2,831
1999............................................... 1,280 702 1,982
2000............................................... 910 564 1,474
Thereafter......................................... 2,372 1,520 3,892
-------- ------ --------
Total future minimum lease payments........... $ 11,246 $6,497 $ 17,743
======== ====== ========
</TABLE>
Malpractice
The Company and affiliated physician groups are insured with respect to
medical malpractice risks on a claims made basis with commercial insurers.
Management is not aware of any claims against it or its affiliated physician
groups which might have a material impact on the Company's financial position.
Losses resulting from unreported claims cannot be estimated by management and
therefore, an accrual has not been included in the accompanying consolidated
financial statements.
B-19
<PAGE> 49
AMERICAN OPHTHALMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. OTHER RELATED PARTY TRANSACTIONS
Notes receivable -- related parties consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31
--------------- JUNE 30
1994 1995 1996
------ ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Unsecured notes receivable from physicians, with payments
through April 1999, at rates ranging from prime to 10%....... $ 329 $310 $ 58
Secured note receivable from a joint venture, with monthly
payments through July 1999, bearing interest at 12%,
collateralized by equipment.................................. 254 213 189
Unsecured note receivable from a joint venture, with monthly
payments through April 1999, bearing interest at 6.58%....... -- -- 63
Unsecured note receivable from a corporation, due on demand,
bearing interest at 8%....................................... -- 75 --
Unsecured note receivable from a general partner of a surgery
center, bearing interest at 8% (see Note 4).................. 750 -- --
Unsecured note receivable and due from shareholder,
non interest bearing......................................... 120 -- --
------ ---- -----
Total notes receivable -- related parties...................... 1,453 598 310
Less current portion........................................... 227 324 135
------ ---- -----
Total notes receivable -- related parties, less current
portion...................................................... $1,226 $274 $ 175
====== ==== =====
</TABLE>
In August 1995, the Company sold 50,000 shares of common stock to a bank
with which the Company has a revolving credit agreement.
On September 1, 1995, the Company acquired certain specified assets and
liabilities of a practice in Orlando, Florida owned by the chairman of the
Company in exchange for 626,273 shares of the Company's common stock (Note 4).
The Company has several notes payable to common shareholders, preferred
shareholders and physicians who are employees or shareholders (Note 7). Interest
expense on these notes approximated $530,000, $1,083,000 and $1,989,000 and
interest paid approximates $185,000, $1,228,000 and $1,683,000 for the years
ended December 31, 1993, 1994 and 1995, respectively. Accrued interest payable
on these notes of approximately $180,000 and $446,000 at December 31, 1994 and
1995, respectively, is included in the accompanying consolidated balance sheets.
In January 1994, AO sold its 25% limited partnership interest in a surgery
center in Bradenton, Florida to a preferred shareholder of a subsidiary of the
Company for cash of approximately $1,030,000. The Company realized a gain on the
sale of approximately $918,000.
Management fees of $60,000 paid to a shareholder are included in general
and administrative expenses in the accompanying consolidated statements of
operations for the years ended December 31, 1993, 1994 and 1995.
The Company has several notes receivable with physicians who are employees
of the Company, a joint venture in which the Company is a Venture partner, and a
general partner of a partnership in which the Company was a 25% limited partner
at December 31, 1993 and 1994. Interest income on these notes approximates
$42,000, $60,000 and $45,000 for the years ended December 31, 1993, 1994 and
1995, respectively.
B-20
<PAGE> 50
AMERICAN OPHTHALMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Certain operating leases are with common shareholders and physicians who
are employees of the Company (Note 11).
13. FINANCIAL INSTRUMENTS
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash investments and trade
accounts receivable.
The Company maintains cash and cash equivalents with various financial
institutions. These financial institutions are located throughout the country
and Company policy is designed to limit exposure to any one institution. The
Company performs periodic evaluations of the relative credit standing of those
financial institutions that are considered in the Company's investment strategy.
Concentrations of credit risk with respect to accounts receivable are
limited due to the diversity of patients and payors. The Company does not
require collateral or other security.
Fair Value of Financial Instruments
Cash and cash equivalents
The carrying amount reported in the balance sheet for cash and cash
equivalents approximates its fair value.
Notes receivable -- related parties
The carrying amount reported in the balance sheet for current notes
receivable -- related parties approximates their fair values. The fair values of
the notes receivable related parties were calculated based on discounted cash
flows using the current rates at which similar loans would be made to borrowers
with similar credit ratings.
Long-term debt and long-term debt -- related parties
The carrying amount of the Company's revolving credit facility with a bank
approximates its fair value because of the frequency with which the interest
rates are adjusted. The fair values of the Company's other long-term debt and
long-term debt -- related parties are estimated using discounted cash flow
analyses, based on the Company's current incremental borrowing rates for similar
types of borrowing arrangements.
The carrying amounts and fair values of the Company's financial instruments
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------------
1994 1995 1996
------------------- ------------------- -------------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents.......... $ 6,307 $ 6,307 $ 2,132 $ 2,132 $ 538 $ 538
Notes receivable -- related
parties -- less current
portion.......................... 1,226 1,156 274 327 175 143
Long-term debt..................... (408) (347) (1,156) (685) (954) (682)
Long-term debt -- related
parties.......................... (13,318) (10,261) (47,787) (44,177) (51,286) (47,841)
</TABLE>
14. SUBSEQUENT EVENTS (UNAUDITED)
During July 1996, the Company entered into two separate note and warrant
purchase agreements with a shareholder, providing for the issuance of $4,000,000
of 10.25% senior subordinated notes and warrants to purchase up to an aggregate
of 160,000 shares of the Company's common stock at a price of $6 per share. The
B-21
<PAGE> 51
AMERICAN OPHTHALMIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
notes required quarterly interest payments and are due on August 11, 2002.
80,000 of the warrants are immediately exercisable, while the remaining 80,000
vest and become exercisable November 1, 1996 should the associated notes remain
unpaid as of October 31, 1996.
During September 1996, the Company entered into a note and warrant purchase
agreement with a shareholder providing for the issuance of $2,000,000 of 10.25%
senior subordinated notes and warrants to purchase up to an aggregate of 240,000
shares of the Company's common stock at a price of $6 per share. The note
requires quarterly interest payments and is due on August 11, 2002. 120,000 of
the warrants are immediately exercisable, while the remaining 120,000 vest and
become exercisable December 1, 1996 should the associated notes remain unpaid as
of November 30, 1996.
Effective September 5, 1996, the Company entered into an agreement whereby
it would acquire the stock of Aran & Holbrook Eye Associates, Inc., an
ophthalmic practice located in Miami, Florida in exchange for $2,500,000 cash,
$2,400,000 in common stock, $650,000 in future payments to be paid to the
seller, as well as a 12% interest in a Company-owned surgery center in Coral
Gables, Florida. The stock component of the purchase price consisted of 240,000
shares of the Company's common stock. The agreement provides that at any time in
the future should the Company complete a public offering of its common stock,
the number of shares issued under this agreement will be adjusted so as to
adjust the number of shares issued to be equivalent to $2,400,000 divided by the
price at the time of offering.
15. AGREEMENT AND PLAN OF MERGER
On October 7, 1996, the Company entered into an Agreement and Plan of
Merger with Physicians Resource Group, Inc. (PRG) and PRG Acquisition
Corporation (Merger Sub) whereby the Company will merge with and into Merger
Sub. As a result of the merger, the Company will become a wholly-owned
subsidiary of PRG and PRG will become the indirect owner of all of the assets
and properties, real and personal, tangible and intangible, and liabilities of
the Company. A change of control of the Company constitutes an event of default
under the terms of the revolving credit facility described in Note 7. Therefore,
upon the closing of the transaction with PRG, the outstanding balance under the
credit facility will become immediately due and payable. In addition, upon the
acceleration of the revolving credit facility, the subordinated debt with
shareholders, also described in Note 7 will become due and payable. Furthermore,
the holders of approximately $2.7 million of the notes payable to sellers
outstanding at December 31, 1995, also described in Note 7, can demand payment
upon the closing of the transaction with PRG.
Management believes that the consummation of this transaction is likely,
however, in the event it is not consummated the Company will have to obtain
further waivers on the debt covenants or renegotiate the terms of the covenants
or the terms of the Credit Agreement.
B-22
<PAGE> 52
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA FINANCIAL STATEMENTS
The following unaudited pro forma financial statements include the
unaudited pro forma balance sheet as of June 30, 1996 as if the acquisition of
Houston Eye Associates (Houston Eye); South Texas Retina Consultants, P.A.
(South Texas); Melbourne Eye Associates of Brevard, Inc. and Melbourne Eye
Associates, Inc., P.A. (Melbourne), Equimed, Inc. - Ophthamology Business
(Equimed); and American Ophthalmic, Inc. and Subsidiaries (AOI) (the Purchased
Entities) (collectively the Third Quarter Acquisitions) had occurred on that
date, and include the unaudited pro forma statement of operations for the years
ended December 31, 1995 and for the six months ended 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) had occurred as of January 1, 1993 and
the acquisition of Houston Eye, South Texas, Melbourne, Equimed and AOI and
certain other transactions as described below had occurred as of January 1,
1995.
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 25 eye care practices by
PRG during the first, second, third and fourth quarter-to-date of 1996 and the
acquisition of Equimed and AOI (the 1996 Acquisitions); (iv) the acquisition of
certain assets from and consummation of service agreements with eye care
practices during 1995 and 1996 made by EyeCorp, Equimed and AOI prior to their
respective transactions with PRG (the 1995 EyeCorp Acquisitions, Equimed
Acquisitions, and AOI 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 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, the Equimed Acquisitions, and the AOI Acquisitions and
other assumptions deemed appropriate by PRG. These unaudited pro forma 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 1996
Acquisitions, the 1995 EyeCorp Acquisitions, the Equimed Acquisitions, and the
AOI Acquisitions have been reflected in the accompanying unaudited pro forma
financial statements.
C-1
<PAGE> 53
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA BALANCE SHEET
AS OF JUNE 30, 1996
(000'S)
<TABLE>
<CAPTION>
PURCHASE
ADJUSTMENTS
PRG -----------
AND POOLED PURCHASED TOTAL
ENTITIES ENTITIES PRO FORMA
-------- ----------- ---------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................. $ 82,278 $(79,001)(A) $ 3,277
Accounts receivable, net................... 18,480 22,069 (A) 40,549
Receivables due from affiliated
practices................................ 14,684 135 (A) 14,819
Inventories................................ 3,638 1,003 (A) 4,641
Prepaid expenses and other current
assets................................... 5,104 3,196 (A) 8,300
-------- -------- --------
Total current assets................. 124,184 (52,598) 71,586
PROPERTY AND EQUIPMENT, net:................. 43,951 19,028 (A) 62,979
INTANGIBLE ASSETS, net:...................... 112,370 236,200 (A) 348,570
OTHER NONCURRENT ASSETS, net................. 3,895 1,919 (A) 5,814
-------- -------- --------
Total assets......................... $284,400 204,549 $488,949
======== ======== ========
LIABILITIES AND OWNERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current portion of
long-term debt........................... $ 3,629 $ 926 (A) $ 4,555
Accounts payable and accrued expenses...... 11,391 1,769 (A) 13,160
Accrued salaries and benefits.............. 5,636 10,864 (A) 16,500
-------- -------- --------
Total current liabilities............ 20,656 13,559 34,215
LONG-TERM DEBT, net of current portion....... 13,186 76,100 (A) 89,286
DEFERRED TAXES and OTHER LONG-TERM
LIABILITIES................................ 30,124 50,028 (A) 80,152
-------- -------- --------
Total liabilities.................... 63,966 139,687 203,653
OWNERS' EQUITY:
Common stock............................... 259 29 (A) 288
Additional paid-in capital................. 215,711 64,833 (A) 280,544
Retained earnings (deficit)................ 4,464 -- 4,464
-------- -------- --------
Total owners' equity................. 220,434 64,862 285,296
-------- -------- --------
Total liabilities and owners'
equity............................. $284,400 $204,549 $488,949
======== ======== ========
</TABLE>
See accompanying notes to unaudited merger/significant transactions pro forma
balance sheet.
C-2
<PAGE> 54
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(000'S, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PURCHASE ADJUSTMENTS
--------------------------------------------------
PRG 1995
and 1996 EYECORP
Pooled POOLING IPO ACQUISITIONS ACQUISITIONS TOTAL
Entities ADJUSTMENTS REORGANIZATION AND OTHER AND OTHER PRO FORMA
-------- ----------- -------------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Management
service
revenues... $75,610 $ -- $ 22,085 (C) $ 170,317 (J) $ 40,424 (R) $308,436
Surgery
center
revenue.... 12,935 -- 2,821 (C) 25,967 (J) 4,749 (R) 46,472
Other
revenues... 1,422 -- 5 (D) 961 (K) -- 2,388
------- ------- -------- ---------- -------- --------
Total
revenues... 89,967 -- 24,911 197,245 45,173 357,296
COSTS AND
EXPENSES:
Salaries,
wages and
benefits... 50,061 (18,803)(B) 10,199 (D) 75,978 (K) 15,455 (S) 132,890
Pharmaceuticals
and
supplies... 9,487 -- 3,494 (D) 18,181 (K) 7,659 (S) 38,821
General and
administrative
expenses... 22,478 12,693 (B) 6,115 (D) 63,545 (K) 13,653 (S) 116,960
(334)(G) (54)(M) (676)(T)
(460)(N)
Depreciation
and
amortization... 3,498 -- 1,217 (D) 7,756 (K) 1,264 (S) 26,090
(194)(F) (20)(H) 1,448 (U)
159 (G) 10,939 (L)
23 (M)
Write-off of
intangible
assets..... -- -- -- 4,126 (P) -- 4,126
Executive
resignation
expenses... 1,117 -- -- -- -- 1,117
Interest
expense.... 1,516 -- 233 (D) 7,893 (K) 379 (S) 8,641
(82)(E) (22)(H) (207)(V)
(24)(F) (5,045)(Q)
4,000 (O)
------- ------- -------- ---------- --------- --------
Total
costs
and
expenses... 88,157 (6,110) 20,783 186,840 38,975 328,645
------- ------- -------- ---------- --------- --------
INCOME BEFORE
INCOME
TAXES........ 1,810 6,110 4,128 10,405 6,198 28,651
PROVISION FOR
INCOME
TAXES........ (501) (2,634)(I) (1,610)(I) (3,873)(I) (2,479)(I) (11,097)(I)
------- ------- -------- ---------- -------- --------
NET INCOME..... $ 1,309 $ 3,476 $ 2,518 $ 6,532 $ 3,719 $ 17,554 (W)
======= ======= ======== ========== ======== ========
NET INCOME PER
SHARE........ $ 0.10 $ 0.60
======= ========
NUMBER OF
SHARES USED
IN NET INCOME
PER SHARE
CALCULATION... 12,678 29,240 (X)
======= ========
</TABLE>
See accompanying notes to unaudited merger/significant transactions pro forma
statement of operations.
C-3
<PAGE> 55
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(000'S, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PURCHASE
ADJUSTMENTS
------------
PRG 1996
and POOLED POOLING ACQUISITIONS TOTAL
ENTITIES ADJUSTMENTS AND OTHER PRO FORMA
-------- ----------- ------------ ---------
<S> <C> <C> <C> <C>
REVENUES:
Management service revenues.... $ 88,549 $ -- $ 64,587 (J) $ 153,136
Surgery center revenue......... 12,454 -- 11,089 (J) 23,543
Other revenues................. 1,896 -- 323 (K) 2,219
-------- ----------- --------- ----------
Total revenues......... 102,899 -- 75,999 178,898
COSTS AND EXPENSES:
Salaries, wages and benefits... 51,768 (10,511)(B) 26,887 (K) 68,144
Pharmaceuticals and supplies... 13,046 -- 8,793 (K) 21,839
General and administrative
expenses.................... 23,904 7,515 (B) 25,633 (K) 57,052
Depreciation and
amortization................ 4,418 -- 2,568 (K) 11,786
4,800 (L)
Pooling merger transaction..... 9,000 -- -- 9,000
Interest expense............... 341 -- 3,177 (K) 3,310
(2,208)(Q)
2,000 (O)
-------- ----------- --------- ---------
Total costs and
expenses............. 102,477 (2,996) 71,650 171,131
-------- ----------- --------- ---------
INCOME (LOSS) BEFORE INCOME
TAXES.......................... 422 2,996 4,349 7,767
PROVISION FOR INCOME TAXES....... (3,276) (1,503)(I) (1,152)(I) (5,931)(I)
-------- ----------- --------- ---------
NET INCOME (LOSS)................ $ (2,854) $ 1,493 $ 3,197 $ 1,836 (W)
======== =========== ========= =========
NET INCOME (LOSS) PER SHARE...... $ (0.13) $ 0.06
======== =========
NUMBER OF SHARES USED IN NET
INCOME PER SHARE CALCULATION... 21,768 29,673 (X)
======== =========
</TABLE>
See accompanying notes to unaudited merger/significant transactions pro forma
statement of operations.
C-4
<PAGE> 56
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA FINANCIAL STATEMENTS
(000'S, EXCEPT SHARE AMOUNTS)
PRO FORMA BALANCE SHEET ADJUSTMENTS
The accompanying pro forma balance sheet as of June 30, 1996 gives effect
to 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 Third Quarter Acquisitions which include Melbourne,
Equimed, and AOI. Pursuant to the Third Quarter Acquisitions, PRG acquired
certain assets and assumed certain liabilities, excluding cash, in exchange for
the issuance of 2,939,432 shares of PRG common stock and $89,000 in cash. The
$89,000 cash payment was funded through $79,000 in available cash and $10,000
draw on the PRG Credit Facility. 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 Third Quarter Acquisitions are as follows:
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
----------- --------
(000'S)
<S> <C>
Net assets acquired --
Accounts receivable, net................................................ $ 22,069
Receivables due from affiliated practices............................... 135
Inventories............................................................. 1,003
Prepaid expenses and other current assets............................... 3,196
Property and equipment, net............................................. 19,028
Intangible assets....................................................... 236,200
Other noncurrent assets, net............................................ 1,919
Notes payable and current portion of long-term debt..................... (926)
Accounts payable and accrued expenses................................... (1,769)
Accrued salaries and benefits........................................... (10,864)
Long-term debt, net..................................................... (66,101)
Deferred taxes and other long-term liabilities.......................... (50,028)
--------
$153,862
========
Consideration paid --
Common stock............................................................ $ 64,862
Cash.................................................................... 89,000
--------
$153,862
========
</TABLE>
The value of the shares issued in the Third Quarter Acquisitions was based
on the average trading price prior to the closing of the individual transactions
and is discounted, as appropriate, for trading restrictions. Identifiable
intangible assets consist of the nonphysician employee work force, 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
C-5
<PAGE> 57
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA 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 STATEMENT OF OPERATIONS ADJUSTMENTS
The accompanying unaudited pro forma 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 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, the Equimed Acquisitions, the
AOI Acquisitions and the May, 1996 issuance of shares in a public offering.
C-6
<PAGE> 58
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA 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.
C-7
<PAGE> 59
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA 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>
C-8
<PAGE> 60
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA 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) - (Q) REFER TO ADJUSTMENTS RELATING TO 1996 ACQUISITIONS AND OTHER
(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, Equimed Acquisitions and AOI
Acquisitions.
<TABLE>
<CAPTION>
SIX
MONTHS
ENDED
DECEMBER 31, JUNE 30,
DESCRIPTION 1995 1996
----------- ------------ --------
(000'S)
<S> <C> <C>
Management service revenues(1)..................... $170,317 $ 64,587
======== ========
Revenues from ASCs(2).............................. $ 25,967 $ 11,089
======== ========
</TABLE>
PRG will receive revenues, with respect to each of the 1996 Acquisitions,
Equimed Acquisitions and AOI Acquisitions 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, Equimed Acquisitions and AOI 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 the historical operating
costs of the acquisitions.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
DECEMBER 31, JUNE 30,
DESCRIPTION 1995 1996
----------- ------------ ----------
(000'S) (000'S)
<S> <C> <C>
Other revenue, net............................. $ (961) (323)
Salaries, wages and benefits................... 75,978 26,887
Pharmaceuticals and supplies................... 18,181 8,793
General and administrative expenses............ 63,545 25,633
Depreciation and amortization.................. 7,756 2,568
Interest expense............................... 7,893 3,177
</TABLE>
(L) Reflects adjustments to historical costs and expenses of $669, $1,008
and $3,123 for the six months ended June 30, 1996 and $1,897, $2,155 and $6,887
for the year ended December 31, 1995, for (1) amortization of work
C-9
<PAGE> 61
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA 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.
(O) Reflects a reduction in interest income due to a $79,000 reduction in
cash available for investment in tax-free securities and an increase in interest
expense due to incremental borrowings required of $10,000 to fund the purchase
of Equimed and AOI and $5,000 to pay acquisition related costs.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
INTEREST DECEMBER 31, JUNE 30,
DESCRIPTION RATE 1995 1996
----------- ---- ------------ ----------
<S> <C> <C> <C>
Reduction of Interest Income .............. 3.6% $2,875 $1,437
Increase in Interest Expense .............. 7.5% 1,125 563
------ ------
Net decrease in Interest Income ........... $4,000 $2,000
====== ======
</TABLE>
(P) Represents AOI management decision to write off approximately $2,798 in
goodwill, $1,178 assigned to trade name and $150 of non-compete agreements
determined to be not recoverable in 1995.
(Q) Reflects reduction in 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 $3,605 and $1,022 during 1995 and the six
months ended June 30, 1996, has also been included in income.
NOTES (R) - (U) REFER TO 1995 EYECORP ACQUISITIONS AND OTHER
(R) 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.
(S) 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>
C-10
<PAGE> 62
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
(000'S, EXCEPT SHARE AMOUNTS)
(T) Represents an adjustment to remove the nonrecurring unsuccessful
financing costs included in the EyeCorp historical financials.
(U) 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.
(V) 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%.
NOTES (W) - (X) REFER TO THE PRO FORMA TOTALS
(W) The Company has decided to continue to apply the provisions of APB
Opinion 25 to its stock-based employee compensation arrangements.
C-11
<PAGE> 63
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
(000'S, EXCEPT SHARE AMOUNTS)
(X) Weighted average shares outstanding is summarized below:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
------------ ----------
DESCRIPTION 1995 1996
---------------------------- ---------- ----------
(000'S)
<S> <C> <C>
Outstanding PRG shares......................... 9,558,244 9,558,244
PRG stock options impact, using the treasury
stock method................................. 344,684 595,339
PRG shares issued in the 1996 Acquisitions..... 5,197,648 5,197,648
Equivalent shares of EyeCorp common stock
equivalents at the exchange ratio............ 6,089,506 6,089,506
PRG shares issued to Pooled Entities
shareholders................................. 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
---------- ----------
29,240,229 29,672,670
========== ==========
</TABLE>
C-12
<PAGE> 64
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
2.1 - Asset Purchase Agreement by and among EquiMed, Inc.,
PRG Georgia and Physicians Resource Group, Inc. dated
October 7, 1996.(4)
2.2 - Agreement and Plan of Merger by and among American
Ophthalmic Incorporated, PRG Acquisition Corporation
and Physicians Resource Group, Inc. dated October 7,
1996.(4)
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 (n/k/a ChaseMellon Shareholder
Services, L.L.C.). (5)
4.6 - Form of certificate evidencing ownership of Common
Stock of Physicians Resource Group, Inc. (2)
23.1 - Consent of Ernst & Young LLP (Atlanta). (6)
23.2 - Consent of Ernst & Young LLP (Orlando). (6)
</TABLE>
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(1) - Previously filed as an exhibit to the Registrant's
Registration Statement on Form S-4 (No. 333- 00230)
and incorporated herein by reference.
(2) - Previously filed as an exhibit to the Registrant's
Registration Statement on Form S-1 (No. 33- 91440)
and incorporated herein by reference.
(3) - Previously filed as an exhibit to the Registrant's
Annual Report on Form 10-K for the year ended
December 31, 1995, and incorporated herein by
reference.
(4) - Previously filed herewith.
(5) - Previously filed as an exhibit to the Company's
Registration Statement on Form S-1 (No. 333- 3852)
and incorporated herein by reference.
(6) - Filed herewith.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statements (Form S-8 No. 33-93712, Form S-8 No. 33-93746, Form S-8 No.
333-03460, Form S-8 No. 333-03478, Form S-4 No. 333-00230, Form S-4 No.
333-4406, Form S-4 No. 333-09905, Form S-3 No. 333-10531 and Form S-3 No.
333-11607) of Physicians Resource Group, Inc. and the related Prospectuses of
our report dated March 1, 1996, with respect to the consolidated financial
statements of EquiVision, Inc. included in Physicians Resource Group, Inc.'s
Current Report on Form 8-K/A dated October 7, 1996 filed with the Securities
and Exchange Commission.
ERNST & YOUNG LLP
Atlanta, Georgia
October 25, 1996
<PAGE> 1
EXHIBIT 23.2
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration
Statements (Form S-8 No. 33-93712, Form S-8 No. 33-93746, Form S-8 No.
333-03460, Form S-8 No. 333-03478, Form S-4 No. 333-00230, Form S-4 No.
333-4406, Form S-4 No. 333-09905, Form S-3 No. 333-10531 and Form S-3 No.
333-11607) of Physicians Resource Group, Inc. and the related Prospectuses of
our report dated March 22, 1996, except for the third paragraph of Note 7 and
Note 15, as to which the date is October 24, 1996, with respect to the
consolidated financial statements of American Ophthalmic, Inc. included in
Physicians Resource Group Inc.'s Current Report on Form 8-K/A dated October 7,
1996 filed with the Securities and Exchange Commission.
Ernst & Young LLP
Orlando, Florida
October 24, 1996
