<PAGE> 1
Filed Pursuant to Rule 424(b)(1)
Registration No. 333-3852
PROSPECTUS
5,000,000 SHARES
(LOGO)
COMMON STOCK
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Of the 5,000,000 shares of Common Stock offered hereby, 3,500,000 shares
are being sold by Physicians Resource Group, Inc. ("PRG" or the "Company") and
1,500,000 shares are being sold by the Selling Stockholders named under
"Principal and Selling Stockholders." The Company will not receive any proceeds
from the sale of shares by the Selling Stockholders.
The Common Stock of the Company is traded on the New York Stock Exchange
under the symbol "PRG." On May 14, 1996, the last reported sale price of the
Common Stock was $29 1/8 per share.
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COM-
MISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
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<S> <C> <C> <C> <C>
Per Share $28.50 $1.34 $27.16 $27.16
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Total(3) $142,500,000 $6,700,000 $95,060,000 $40,740,000
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</TABLE>
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting offering expenses estimated at $1,700,000, payable by the
Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
750,000 additional shares of Common Stock on the same terms as set forth
above solely to cover over-allotments, if any. If such option is exercised
in full, the total Price to Public, Underwriting Discounts and Commissions
and Proceeds to Company will be $163,875,000, $7,705,000 and $115,430,000,
respectively. See "Underwriting."
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The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain conditions. It is expected that certificates for the shares
of Common Stock offered hereby will be available for delivery on or about May
20, 1996, at the offices of Smith Barney Inc., 333 West 34th Street, New York,
New York 10001.
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SMITH BARNEY INC.
ALEX. BROWN & SONS
INCORPORATED
VOLPE, WELTY & COMPANY
May 14, 1996
<PAGE> 2
Physicians Resource Group, Inc.
232 Locations in 14 States
(MAP)
Company Headquarters
Dallas, Texas
Regional Offices:
Houston, Texas
Memphis, Tennessee
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT
OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE
OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK
STOCK EXCHANGE, OR OTHERWISE. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE> 3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. See "Risk Factors" for information that should be
carefully considered by prospective investors.
THE COMPANY
Physicians Resource Group, Inc. is the nation's leading provider of
physician practice management services to ophthalmic and optometric practices.
PRG develops integrated eye care delivery systems through affiliations with
locally prominent eye care practices in selected geographic markets across the
United States. PRG acquires the operating assets of these practices and develops
the practices into comprehensive eye care networks by providing management
expertise, marketing, information systems, capital resources and ancillary
services such as surgery centers and optical dispensaries. As of April 24, 1996,
PRG provided management services to 79 practices with 173 ophthalmologists and
117 optometrists at 232 locations in 14 states, owned or operated 18 ambulatory
(outpatient) surgery centers ("ASCs") and 104 optical dispensaries and owned or
leased 13 excimer lasers.
Eye care services in the United States are delivered through a fragmented
system of local providers, including individual or small groups of
ophthalmologists, optometrists and opticians. Unlike most medical specialists,
eye care professionals generally do not depend on primary care physicians for
referrals; rather, referrals originate from other eye care professionals since
the optometrist or the ophthalmologist represents the primary patient contact
for the vast majority of eye care services. Based on a market study conducted by
Arthur D. Little (the "ADL Study"), PRG believes that the revenues generated by
eye care providers (ophthalmologists and optometrists) were in excess of $20
billion in 1994. According to the ADL Study, approximately 15,600
ophthalmologists and 28,200 optometrists were actively involved in patient care
in the United States in 1993. The ADL Study estimates that there are
approximately 1,500 ophthalmic groups of five or more practitioners.
Cost-containment pressure on providers in health care generally, and eye
care specifically, has placed small to mid-size provider groups at a competitive
disadvantage because these practices typically have high operating costs
relative to revenue and lack the capital, information resources and management
expertise necessary to provide both high quality and cost-effective medical
care. To remain competitive, eye care providers are increasingly seeking to
affiliate with larger organizations that manage the non-medical aspects of eye
care practices and that can provide access to greater capital resources, more
efficient cost structures and access to payors. PRG seeks to address these
demands for the practices to which it provides management services (the
"Affiliated Practices") through the implementation of its business strategy.
PRG's business strategy is focused on (i) developing comprehensive eye care
service networks in each of its markets, both in terms of service mix and
geographic coverage, primarily through acquisitions, (ii) enabling its
Affiliated Practices to provide efficient and cost-effective eye care services
resulting from economies of scale, purchasing discounts, facility consolidation
and improved personnel and information management and (iii) marketing the
capabilities of the Affiliated Practices and networks to both payors and
employers, particularly in the developing and expanding managed care
marketplace. PRG believes that by establishing integrated delivery networks,
Affiliated Practices are afforded significant opportunities for cross-referrals,
expanded service capabilities and volume contracting with payors.
Consistent with its strategic objectives, PRG recently completed certain
transactions that resulted in the acquisition of the assets of 69 eye care
practices and 13 ASCs. In March 1996, PRG acquired by merger (the "EyeCorp
Merger") EyeCorp, Inc. ("EyeCorp"), a privately held physician practice
management company devoted solely to eye care, in exchange for Common Stock
having a market value, at closing, of approximately $152 million. The
acquisition of EyeCorp, which provides management services to 50 ophthalmic and
optometric practices and five ASCs, increased PRG's penetration in existing
markets (Arkansas, California, Ohio, Tennessee and Texas) and afforded entry
into five new states (Illinois, Kentucky, Massachusetts, Mississippi and
Missouri). During the period from January 1 through April 24, 1996, PRG also
consummated
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<PAGE> 4
the acquisition of the assets of 19 practices and eight ASCs (the "1996
Acquisitions") for approximately $60 million, valued at closing, in cash and
Common Stock. These acquisitions strengthened PRG's position in Houston (five
additional practices), Las Vegas (two additional practices) and Ohio (two
additional practices) and represented entries into new markets in Dallas,
Phoenix, Oklahoma and South Carolina. In addition, PRG has entered into a
definitive agreement to provide management services to, and acquire the assets
of, one additional practice located in California (the "Probable Acquisition")
for approximately $3.3 million in cash and Common Stock.
THE OFFERING
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<S> <C>
Common Stock being offered by:
The Company...................................... 3,500,000 shares(1)
The Selling Stockholders......................... 1,500,000 shares
Common Stock to be outstanding after the offering..... 21,380,795 shares(1)(2)
Use of Proceeds....................................... To repay indebtedness and for
acquisitions, capital expenditures
and other general corporate purposes
New York Stock Exchange Symbol........................ PRG
</TABLE>
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(1) Does not include up to 750,000 shares that may be sold by the Company
pursuant to the Underwriters' over-allotment option. See "Underwriting."
(2) Does not include 2,603,958 shares issuable upon the exercise of outstanding
stock options or an additional 133,127 shares issuable upon the exercise of
stock options that are not currently outstanding, but are reserved for
issuance upon the designation of optionees by certain third parties.
Assumes the issuance of shares of Common Stock in connection with the
closing of the Probable Acquisition. See "Management -- Stock Option
Plans," "Shares Eligible for Future Sale" and Note 12 of Notes to
Supplemental Combined Financial Statements of the Company.
---------------------
Unless otherwise indicated, the information in this Prospectus assumes no
exercise of the Underwriters' option to purchase from the Company up to 750,000
additional shares of Common Stock solely to cover over-allotments, if any.
4
<PAGE> 5
SUMMARY FINANCIAL DATA(1)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
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UNAUDITED
PRG PRG PRO FORMA
HISTORICAL PRO FORMA(2) COMBINED(2)(3)
---------- ------------ --------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.............................................. $26,395 $51,306 $183,008
------- ------- --------
Costs and expenses:
Salaries, wages and benefits........................ 12,161 22,360 72,786
Pharmaceuticals and supplies........................ 3,380 6,874 24,430
General and administrative.......................... 6,547 12,328 52,440
Depreciation and amortization....................... 779 1,961 11,362
Interest (income) expense........................... (236) (109) 2,939
Executive resignation expenses...................... 1,117 1,117 1,117
------- ------- --------
Total costs and expenses.................... 23,748 44,531 165,074
------- ------- --------
Income before income taxes............................ 2,647 6,775 17,934
Provision for income taxes............................ 975 2,585 7,093
------- ------- --------
Net income............................................ $ 1,672 $ 4,190 $ 10,841
======= ======= ========
Net income per share.................................. $ .28 $ .49 $ .59
======= ======= ========
Number of shares used in net income per share
calculation......................................... 5,977 8,601 18,414
======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
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UNAUDITED
UNAUDITED PRO FORMA
PRG PRO FORMA COMBINED, AS
HISTORICAL COMBINED(4) ADJUSTED(4)(5)
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<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital....................................... $ 16,244 $ 15,635 $ 71,312
Total assets.......................................... 46,435 196,010 250,698
Long-term debt, net of current portion................ 7,360 45,705 8,022
Stockholders' equity.................................. 25,532 93,804 187,164
</TABLE>
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(1) PRG was incorporated in 1993 but did not conduct any significant operations
prior to PRG's initial public offering (the "IPO") and concurrent
acquisition of the assets of ten ophthalmic and optometric practices (the
"Reorganization") in June 1995.
(2) Gives effect to the IPO and the Reorganization as if such transactions had
been completed as of January 1, 1995.
(3) Gives effect to the EyeCorp Merger, certain acquisitions (the "EyeCorp
Acquisitions") effected by EyeCorp prior to the EyeCorp Merger, the entering
into and borrowings under credit facilities by PRG and EyeCorp (the "Debt
Financings"), the 1996 Acquisitions and the Probable Acquisition as if such
transactions had been completed as of January 1, 1995. See "The Company" and
Physicians Resource Group, Inc. and EyeCorp, Inc. Unaudited
Merger/Significant Transactions -- Pro Forma Combined Financial Statements.
(4) Gives effect to the EyeCorp Merger and the payment of $9.0 million of
transaction costs related thereto, PRG's portion of the Debt Financing, the
1996 Acquisitions and the Probable Acquisition as if such transactions had
been completed as of December 31, 1995. See "The Company" and Physicians
Resource Group, Inc. and EyeCorp, Inc. Unaudited Merger/Significant
Transactions -- Pro Forma Combined Financial Statements.
(5) Adjusted to reflect the sale of the 3,500,000 shares of Common Stock offered
by the Company hereby and the application of the estimated net proceeds
therefrom as described under "Use of Proceeds."
5
<PAGE> 6
THE COMPANY
PRG was formed to provide physician practice management services to
ophthalmic and optometric practices and to develop integrated eye care networks.
PRG was incorporated on November 2, 1993 and until June 1995 had not conducted
any significant operations. On June 28, 1995, PRG consummated its IPO and
simultaneously exchanged cash, shares of Common Stock and a note payable for
certain assets and liabilities of, and entered into service agreements ("Service
Agreements") with ten ophthalmic and optometric practices (the "Founding
Affiliated Practices"), which are located in Arizona, Arkansas, California,
Nevada, Ohio, Tennessee and Texas. During the period from January 1 through
April 24, 1996, PRG consummated the 1996 Acquisitions and the EyeCorp Merger and
entered into definitive agreements with respect to the Probable Acquisition. See
"Recent Developments." PRG's principal offices are located at Three Lincoln
Centre, Suite 1540, 5430 LBJ Freeway, Dallas, Texas 75240 and its telephone
number at that address is (214) 982-8200.
RISK FACTORS
In addition to the other information contained in this Prospectus,
prospective investors should consider carefully the factors listed below in
evaluating an investment in the shares of Common Stock offered hereby. This
Prospectus, other than the historical financial information, includes
forward-looking statements that involve risks and uncertainties, including the
Company's ability to successfully acquire the assets of, service and integrate
eye care providers, regulatory developments, the ability to adapt to the managed
care environment and the other risks detailed below.
LIMITED OPERATING HISTORY AND INTEGRATION OF OPERATIONS
PRG was incorporated in November 1993 and conducted no significant
operations prior to the Reorganization. Since its formation, PRG has grown
principally through acquisitions and is pursuing an aggressive growth strategy.
If PRG is to realize the anticipated benefits of acquisitions, including the
EyeCorp Merger, the 1996 Acquisitions and any future acquisitions, the
operations of these entities must be integrated and combined efficiently. The
process of integrating management services, administrative organizations,
facilities, management information systems and other aspects of operations,
while managing a larger and geographically expanded entity, presents a
significant challenge to the management of PRG. There can be no assurance that
the integration process will be successful or that the anticipated benefits of
its business combinations will be realized. The dedication of management
resources to such integration may detract attention from the day-to-day
operations of PRG. The difficulties of integration may be increased by the
necessity of coordinating geographically separated organizations, integrating
personnel with disparate business backgrounds and combining different corporate
cultures. There can be no assurance that there will not be substantial
unanticipated costs associated with such activities or that there will not be
other material adverse effects of these integration efforts. Such effects could
materially reduce the earnings of PRG. PRG has incurred and is incurring certain
transaction costs estimated at approximately $9 million in connection with the
EyeCorp Merger, which will be recognized as an expense in the first quarter of
1996. Additionally, PRG has incurred and is incurring significant expenses in
connection with the 1996 Acquisitions and the Probable Acquisition, the majority
of which will be capitalized and amortized in the future. These amounts are
preliminary estimates of legal, accounting, financial advisory and other costs
directly attributable to negotiating and closing the EyeCorp Merger and the 1996
Acquisitions and do not reflect integration costs. There can be no assurance
that PRG will not incur additional charges in subsequent quarters to reflect
costs associated with the EyeCorp Merger and the 1996 Acquisitions.
ACQUISITION STRATEGY AND LIMITATION ON GROWTH
An integral part of PRG's business strategy is to increase its revenues,
earnings and market share through the acquisition of the assets of eye care
physician practice groups, management services organizations ("MSOs"), ASCs and
related businesses and the entry into management services relationships with
such groups. There can be no assurance that PRG will be able to acquire and
retain the assets of, or profitably
6
<PAGE> 7
provide management services to, additional eye care practices or successfully
integrate such additional management services relationships. In addition, there
can be no assurance that the assets of eye care practices acquired in the
future, or the management services relationships entered into in the future,
will be beneficial to the successful implementation of PRG's overall strategy,
or that such assets and relationships will ultimately produce returns that
justify their related investment or implementation by PRG.
PRG's ability to expand is also dependent upon factors such as its ability
to (i) identify attractive and willing candidates for acquisition, (ii) adapt or
amend PRG's structure to comply with present or future state legal requirements
affecting PRG's arrangements with physician practice groups, including state
prohibitions on fee-splitting, corporate practice of medicine and referrals to
facilities in which physicians have a financial interest, (iii) obtain
regulatory approval and certificates of need, where necessary, and comply with
licensing requirements applicable to physicians and facilities operated, and
services offered, by physicians and (iv) expand PRG's infrastructure and
management to accommodate expansion. There can be no assurance that PRG will be
able to achieve these objectives or its planned growth, that the assets of eye
care practice groups will continue to be available for acquisition by PRG, or
that the addition of such practice groups will be profitable.
PRG's expansion strategy also requires substantial capital investment.
Capital is needed not only for the acquisition of the assets of physician
practices, but also for their effective integration, operation and expansion and
for the addition of medical equipment and technology. PRG may finance future
acquisitions by using shares of Common Stock for all or a portion of the
consideration to be paid. In the event that the Common Stock does not maintain a
sufficient valuation, or potential acquisition candidates are unwilling to
accept Common Stock as part of the consideration for the sale of the assets of
their businesses, PRG may be required to utilize more of its cash resources, if
available, in order to pursue its acquisition program. If PRG does not have
sufficient cash resources, its growth could be limited and its existing
operations impaired, unless it is able to obtain additional capital through
subsequent debt or equity financings. There can be no assurance that PRG will be
able to obtain such financing or that, if available, such financing will be on
terms acceptable to PRG. The Company's credit facilities require, under certain
circumstances, the consent of the Company's primary lender prior to the
consummation of acquisitions and there can be no assurance the Company's primary
lender will grant its consent each time the solicitation of such consent is
required. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources." As a result, there
can be no assurance that PRG will be able to continue to implement its
acquisition strategy successfully.
RISKS RELATED TO INTANGIBLE ASSETS
As of December 31, 1995, PRG had approximately $3.8 million of intangible
assets that arose primarily in a purchase transaction completed in connection
with the Reorganization and IPO. These intangibles were created by the excess of
the purchase price over the fair value of the net assets of the acquired
businesses. These intangibles are being amortized over a 40-year period, which
will result in approximately $95,000 of amortization expense annually.
As a result of PRG's and EyeCorp's various acquisition transactions,
intangibles of approximately $111.0 million have been added to PRG's balance
sheet as a result of purchase accounting, resulting in total intangibles on
PRG's balance sheet of approximately $115.0 million. Using an amortization
period ranging from seven to 40 years for intangibles acquired by PRG as a
result of the EyeCorp Merger and the 1996 Acquisitions, amortization of
intangibles will be approximately $4.2 million per year. Purchases of additional
businesses that result in the recognition of additional intangible assets would
cause amortization expense to further increase. A substantial portion of the
amortization generated by the total intangible assets is not deductible for tax
purposes.
As practice asset acquisitions are made, PRG evaluates each acquisition
considering the practice's market position, reputation, profitability, and
geographical penetration, its position in the PRG provider network, the
collective experience of its executives and employees, its relationships with
its customers and affiliated physicians, the relationships between its
affiliated physicians and their patients and the specific service agreements
entered into with the Affiliated Practices. All of these factors contribute to
the purchase
7
<PAGE> 8
price paid for the acquisition and to the intangible created in the purchase
transaction. Generally, PRG management believes that these intangibles will have
a life of indefinite length.
At the time of or following each acquisition, PRG will evaluate each
acquisition and establish an appropriate amortization period based on the
underlying facts and circumstances. Subsequent to such initial evaluation, PRG
will periodically reevaluate such facts and circumstances to determine if the
related intangible asset continues to be realizable and if the amortization
period continues to be appropriate. As the underlying facts and circumstances
subsequent to the date of acquisition can change, there can be no assurance that
the value of such intangible assets will be realized by PRG. Although at
December 31, 1995, the net unamortized balance of intangible assets acquired and
anticipated to be acquired was not considered to be impaired, any future
determination that a significant impairment has occurred would require the
write-off of the impaired portion of unamortized intangible assets, which could
have a material adverse effect on the Company's results of operations. See
Physicians Resource Group, Inc. and EyeCorp, Inc. Consolidated
Merger/Significant Transactions Pro Forma Combined Financial Statements.
GOVERNMENT REGULATION
Various state and federal laws regulate the relationships between providers
of health care services, physicians and other clinicians. See
"Business -- Government Regulation and Supervision."
These laws include the fraud and abuse provisions of the Social Security
Act, which include the "anti-kickback" and "anti-referral" laws. The
"anti-kickback" laws prohibit the offering, payment, solicitation or receipt of
any direct or indirect remuneration for the referral of Medicare or Medicaid
patients or for the ordering or providing of Medicare or Medicaid covered
services, items or equipment. The "anti-referral" laws impose restrictions on
physicians' referrals for designated health services to entities with which they
have financial relationships. Violations of these laws may result in substantial
civil or criminal penalties for individuals or entities, including large civil
monetary penalties and exclusion from participation in the Medicare and Medicaid
programs. Such exclusion, if applied to the Affiliated Practices, could result
in significant loss of reimbursement. A determination of liability under any
such laws could have a material adverse effect on the Company's operations.
Several states, including states in which some Affiliated Practices are
located, have adopted laws similar to the "anti-kickback" and "anti-referral"
laws that cover patients in private programs as well as government programs. The
laws of many states also prohibit physicians from splitting fees with
non-physicians and prohibit non-physician entities from practicing medicine.
These laws vary from state to state and are enforced by the courts and by
regulatory authorities with material discretion. A determination of liability
under any such laws could have a material adverse effect on PRG.
Although PRG believes that its operations as described in this Prospectus
are in substantial compliance with existing applicable laws, PRG's business
operations have not been the subject of judicial or regulatory interpretation.
There can be no assurance that review of PRG's business by courts or regulatory
authorities will not result in determinations that could adversely affect the
operations of PRG or that the health care regulatory environment will not change
so as to restrict PRG's existing operations or their expansion. In addition, the
regulatory framework of certain jurisdictions may limit PRG's expansion into, or
ability to continue operations within, such jurisdictions if PRG is unable to
modify its operational structure to conform with such regulatory framework. Any
limitation on PRG's ability to expand could have a material adverse effect on
the Company's operations.
In addition to extensive existing government health care regulation, there
have been numerous initiatives on the federal and state levels for comprehensive
reforms affecting the payment for and availability of health care services. PRG
believes that such initiatives will continue during the foreseeable future.
Aspects of certain of these reforms as proposed in the past, such as further
reductions in Medicare and Medicaid payments and additional prohibitions on
physician ownership, directly or indirectly, of facilities to which they refer
patients, if adopted, could adversely affect PRG.
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<PAGE> 9
REIMBURSEMENT; TRENDS AND COST CONTAINMENT
PRG's revenues are derived principally from service fees paid to PRG by the
Affiliated Practices. A substantial portion of the revenues of the Affiliated
Practices are derived from government sponsored health care programs
(principally, the Medicare and Medicaid programs). Since the amount of service
fees payable to the Company is generally determined with reference to the
revenues or earnings of the Affiliated Practices, any reduction in the revenues
of Affiliated Practices could adversely affect the Company. The health care
industry is experiencing a trend toward cost containment as government and
private third-party payors seek to impose lower reimbursement and utilization
rates and negotiate reduced payment schedules with service providers. PRG
believes that these trends will continue to result in a reduction from
historical levels in per-patient revenue for such medical practices. Further
reductions in payments to physicians or other changes in reimbursement for
health care services would have an adverse effect on PRG's operations unless PRG
is otherwise able to offset such payment reductions.
Rates paid by private third-party payors are based on established
physician, ASC and hospital charges and are generally higher than Medicare
reimbursement rates. Any decrease in the relative number of patients covered by
private insurance could have a material adverse effect on PRG's results of
operations.
The federal government has implemented, through the Medicare program, a
resource-based relative value scale ("RBRVS") payment methodology for physician
services. This methodology went into effect in 1992 and was implemented during a
transition period in annual increments through December 31, 1995. RBRVS is a fee
schedule that, except for certain geographical and other adjustments, pays
similarly situated physicians the same amount for the same services. The RBRVS
is adjusted each year, and is subject to increases or decreases at the
discretion of Congress. To date, the implementation of RBRVS has reduced payment
rates for certain of the procedures historically provided by the Affiliated
Practices. RBRVS-type of payment systems have also been adopted by certain
private third-party payors and may become a predominant payment methodology.
Wider-spread implementation of such programs would reduce payments by private
third-party payors, and could indirectly reduce PRG's operating margins to the
extent that costs of providing management services related to such procedures
could not be proportionately reduced.
There can be no assurance that any or all of these reduced revenues and
operating margins could be offset by PRG through cost reductions, increased
volume, introduction of new procedures or otherwise. See "Business -- Government
Regulation and Supervision."
RISKS ASSOCIATED WITH MANAGED CARE CONTRACTS
As an increasing percentage of patients are coming under the control of
managed care entities, PRG believes that its success will, in part, be dependent
upon PRG's ability to negotiate, on behalf of the Affiliated Practices,
contracts with health maintenance organizations ("HMOs"), employer groups and
other private third-party payors pursuant to which services will be provided on
a risk-sharing or capitated basis by some or all Affiliated Practices. Under
some of such agreements, the healthcare provider accepts a pre-determined amount
per patient per month in exchange for providing all necessary covered services
to the patients covered under the agreement. Such contracts pass much of the
financial risk of providing care, such as over-utilization, from the payor to
the provider. The proliferation of such contracts in markets served by PRG could
result in greater predictability of revenues, but greater unpredictability of
expenses. There can be no assurance that PRG will be able to negotiate, on
behalf of its Affiliated Practices, satisfactory arrangements on a risk-sharing
or capitated basis. In addition, to the extent that patients or enrollees
covered by such contracts require more frequent or extensive care than is
anticipated, operating margins may be reduced, or in the worst case, the
revenues derived from such contracts may be insufficient to cover the costs of
the services provided. As a result, Affiliated Practices may incur additional
costs, which would reduce or eliminate anticipated earnings under such
contracts. Any such reduction or elimination of earnings could have a material
adverse affect on PRG's results of operations.
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COMPETITION
PRG experiences competitive pressures for the acquisition of the assets of,
and the provision of management services to, additional practices and the
acquisition of MSOs. PRG knows of one public and two private practice management
company focused on eye care services. Several other practice management
companies, both publicly and privately held, that have established operating
histories and, in some instances, greater resources than PRG are pursuing the
acquisition of the assets of other general and specialty medical, including eye
care, practices and the management of such practices. Additionally, some
hospitals, clinics, health care companies, HMOs and insurance companies engage
in activities similar to the activities of these other practice management
companies. There can be no assurance that PRG will be able to compete
effectively with such competitors for the acquisition of, or affiliation with,
eye care practices, that additional competitors will not enter the market, that
such competition will not make it more difficult or expensive to acquire the
assets of, and provide management services to, eye care practices on terms
beneficial to PRG or that competitive pressures will not otherwise adversely
affect the Company.
Affiliated Practices compete with numerous local eye care service
providers. PRG believes that changes in governmental and private reimbursement
policies and other factors have resulted in increased competition among
providers for the provision of medical services to consumers. There can be no
assurance that the Affiliated Practices will be able to compete effectively in
the markets that they serve. PRG believes that the cost, accessibility and
quality of services provided are the principal factors that affect competition.
There can be no assurance that the Affiliated Practices will be able to compete
effectively in the markets that they serve, which inability to compete could
adversely affect PRG.
Further, the Affiliated Practices will compete with other providers for
managed care contracts. PRG believes that trends toward managed care have
resulted, and will continue to result, in increased competition for such
contracts. Other practices and MSOs may have more experience than the Affiliated
Practices and PRG in obtaining such contracts. There can be no assurance that
PRG and the Affiliated Practices will be able to successfully acquire sufficient
managed care contracts to compete effectively in the markets they serve, which
inability to compete could adversely affect PRG.
POTENTIAL LIABILITY AND INSURANCE; LEGAL PROCEEDINGS
The provision of medical services entails an inherent risk of professional
malpractice and other similar claims. In connection with the provision of its
management services, PRG provides only facilities and non-medical administrative
services, does not control or direct the practice of medicine by physicians and
does not assume responsibility for compliance with certain regulatory and other
requirements directly applicable to physicians and physician groups; however,
there can be no assurance that claims, suits or complaints relating to services
and products provided by Affiliated Practices will not be asserted against PRG
in the future. Additionally, PRG owns and operates ASCs. PRG maintains insurance
coverage that it believes is adequate both as to risks and amounts. Such
insurance extends to professional liability claims that may be asserted against
employees of PRG that work on site at Affiliated Practice locations. In
addition, pursuant to the Service Agreements, the Affiliated Practices are
required to maintain professional liability insurance. Nevertheless, there can
be no assurance that successful malpractice or other claims will not be asserted
against the Affiliated Practices or PRG that exceed applicable policy limits,
which could have a material adverse effect on PRG.
PRG, in connection with the acquisition of the assets of certain of the
Affiliated Practices, typically succeeds to some or all of the liabilities of
the Affiliated Practices. Therefore, claims may be asserted against PRG for
events that occurred prior to the acquisition of the assets of certain of the
Affiliated Practices. PRG maintains insurance coverage related to those risks
that it believes is adequate both as to risks and amounts, although no assurance
can be provided that any successful claims will not exceed applicable policy
limits.
The availability and cost of professional liability insurance has been
affected by various factors, many of which are beyond the control of PRG and the
Affiliated Practices. There can be no assurance that liability insurance will be
available to PRG in the future at acceptable costs or that the future cost of
such insurance to
10
<PAGE> 11
PRG and the Affiliated Practices will not have an adverse effect on PRG's
operations. See "Business -- Corporate Liability and Insurance."
SHARES ELIGIBLE FOR FUTURE SALES
PRG has a significant number of shares of Common Stock outstanding that
were not registered under the Securities Act upon issuance, but the holders of
which have certain registration rights. In addition, the Company has a
significant number of shares of Common Stock outstanding that were registered
under the Securities Act upon issuance, the resale of which is contractually
restricted. Prior to the IPO there had been no market for the Common Stock and
no prediction can be made as to the effect, if any, that the sale of shares or
the availability of shares for sale will have on the market price prevailing
from time to time. Nevertheless, sales of substantial amounts of the Common
Stock in the public market could adversely affect prevailing market prices and
the ability of PRG to raise equity capital in the future. See "Shares Eligible
for Future Sale."
ANTI-TAKEOVER CONSIDERATIONS
Certain provisions of the Company's Restated Certificate of Incorporation,
the Company's Bylaws and Delaware law could discourage potential acquisition
proposals, delay or prevent a change in control of the Company and,
consequently, limit the price that investors might be willing to pay in the
future for shares of the Common Stock. These provisions include a classified
Board of Directors, the inability to remove directors except for cause and the
ability to issue, without further stockholder approval, shares of preferred
stock with rights and privileges senior to the Common Stock. In addition, in
April 1996 the Company adopted a stockholder rights plan, which can have a
significant anti-takeover effect. The Company also is subject to Section 203 of
the Delaware General Corporation Law which, subject to certain exceptions,
prohibits a Delaware corporation from engaging in any of a broad range of
business combinations with an "interested stockholder" for a period of three
years following the date that such stockholder became an interested stockholder.
The Company's principal credit facilities require the Company to obtain the
consent of the lender following a change in PRG's senior management personnel,
and a "Change of Control" (as defined therein) constitutes an event of default
under each of the credit facilities. These provisions of the Company's credit
facilities could serve to impede or prevent a change of control or have a
depressive effect on the price of the Common Stock. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and "Description of Capital Stock."
POSSIBLE VOLATILITY OF STOCK PRICE
The Company's initial public offering of Common Stock was completed in June
1995, and there can be no assurance that a viable public market for the Common
Stock will be sustained. The trading price of the Common Stock could be subject
to significant fluctuations in response to variations in the Company's quarterly
operating results, general trends in the Company's industry and other factors.
See "Price Range of Common Stock."
11
<PAGE> 12
RECENT DEVELOPMENTS
For the three months ended March 31, 1996, the Company reported total
revenues of $36.2 million and a net loss of $6.8 million, or $0.42 per share on
approximately 16.4 million shares. Exclusive of the non-recurring merger
expenses of $9.0 million incurred in connection with the EyeCorp Merger, net
income would have been $2.2 million, or $0.13 per share on approximately 17.2
million shares. The foregoing amounts represent the financial results of the
combined operations of the Company and EyeCorp for the three months ended March
31, 1996, the first period that ended after consummation of the EyeCorp Merger.
Although the Company conducted no significant operations from its inception
through June 30, 1995, because results from the combined operations of the
Company and EyeCorp now constitute the historical financial statements of the
Company, total revenues were $7.1 million and net income was $227,000, or $0.05
per share on 4.6 million shares, for the three months ended March 31, 1995.
Since the Reorganization, the Company has added by acquisition a total of
69 new practices, 13 ASCs, 116 ophthalmologists, 97 optometrists and eight
excimer lasers in seven new states in the acquisitions described below. In
addition, PRG has entered into a definitive agreement in connection with the
Probable Acquisition.
1996 ACQUISITIONS AND PROBABLE ACQUISITION
During the period from January 1 through April 24, 1996, PRG consummated
the acquisition of the assets of 19 practices located in six states and eight
ASCs for an aggregate consideration of approximately $8.2 million in cash and
approximately 2.1 million shares of Common Stock. In connection with these
acquisitions the Company entered into new markets in Dallas, Phoenix, Oklahoma
and South Carolina and further penetrated existing markets in Houston, Las Vegas
and Ohio. In addition, the Company has entered into a definitive agreement to
acquire the assets of a practice located in California for an estimated $1.3
million in cash and approximately 74,000 shares of Common Stock.
EYECORP MERGER
In March 1996, PRG closed the EyeCorp Merger for consideration of 6,089,506
shares of Common Stock in a pooling of interests transaction. EyeCorp was a
privately held physician practice management company devoted solely to eye care
and provided management services to 50 ophthalmic and optometric practices
located in 10 states and owned and operated, or provided management services to,
five ASCs.
PRG pursued the EyeCorp Merger because PRG believed that the combination
with EyeCorp would provide PRG with a substantial presence in the southeastern
region of the United States and would result in greater operating leverage and a
substantial increase in its future acquisition opportunities. In addition, the
EyeCorp Merger resulted in a significant addition to the number of optometrists
affiliated with PRG, which PRG believes enhances its overall strategy of
efficient utilization of eye care professionals. Further, EyeCorp had
established, and PRG intends to promote and replicate in other markets the
Retinal Center of Excellence, which substantially strengthens PRG's subspecialty
retina capabilities. Finally, the combination with EyeCorp resulted in the
acquisition of The EyePA, Inc., an independent practice association, which was
formed by EyeCorp to establish preferred provider networks composed of eye care
professionals offering quality controlled, comprehensive vision care services to
enrollees in various health insurance plans. See "Business -- Development and
Operations."
12
<PAGE> 13
The following table sets forth certain information as of April 24, 1996
regarding the Affiliated Practices. The "Eye Care Professionals" caption in the
table consists of ophthalmologists and optometrists.
<TABLE>
<CAPTION>
AFFILIATED PRACTICES AT
IPO 1996 ACQUISITIONS EYECORP MERGER TOTAL
------------------------- ---------------------- ---------------------- ----------------------
NUMBER NUMBER NUMBER NUMBER
OF EYE CARE OF EYE CARE OF EYE CARE OF EYE CARE
STATE OFFICES PROFESSIONALS OFFICES PROFESSIONALS OFFICES PROFESSIONALS OFFICES PROFESSIONALS
- ---------------- ------ ------------- ------ ------------- ------ ------------- ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Arizona......... 3 -- 14 17 -- -- 17 17
Arkansas........ 3 3 -- -- 1 1 4 4
California...... 17 39 -- -- 1 3 18 42
Illinois........ -- -- -- -- 9 12 9 12
Kentucky........ -- -- -- -- 3 3 3 3
Massachusetts... -- -- -- -- 3 5 3 5
Mississippi..... -- -- -- -- 34 29 34 29
Missouri........ -- -- -- -- 8 14 8 14
Nevada.......... 4 3 6 9 -- -- 10 12
Ohio............ 5 8 4 7 3 6 12 21
Oklahoma........ -- -- 3 7 -- -- 3 7
South
Carolina...... -- -- 1 2 -- -- 1 2
Tennessee....... 4 8 -- -- 53 59 57 67
Texas........... 12 16 29 34 12 5 53 55
-- -- -- -- --- --- --- ---
Total....... 48 77 57 76 127 137 232 290
== == == == === === === ===
</TABLE>
13
<PAGE> 14
USE OF PROCEEDS
The estimated proceeds to the Company from the sale of the 3,500,000 shares
of Common Stock offered by the Company hereby, after deducting the estimated
offering expenses payable by the Company and the underwriting discount ("Net
Proceeds"), are approximately $93.4 million ($113.7 million if the Underwriters'
over-allotment option is fully exercised). Of this amount, approximately $38.7
million of the proceeds are anticipated to be used by PRG to repay indebtedness
previously incurred. The indebtedness to be repaid from the Net Proceeds bears
interest at annual rates ranging from 7% to 8% with a weighted average interest
rate of 7.82%. Such indebtedness would otherwise mature at various dates through
2005. The indebtedness incurred within the last year that is to be repaid with
portions of the Net Proceeds was incurred for capital expenditures, acquisitions
and working capital. The remainder of the Net Proceeds will be used by the
Company for acquisitions, capital expenditures and other general corporate
purposes. Pending such uses, the net proceeds will be invested in short-term,
interest bearing, investment grade securities. The Company will not receive any
of the proceeds from the sale of shares by the Selling Stockholders.
An integral part of the Company's business strategy is to grow through
acquisitions and expansion of provider groups. The Company is currently in
discussions with several such potential acquisition candidates; however, the
Company has not entered into a binding agreement with respect to any such
acquisitions (other than the Probable Acquisition). No assurance can be provided
that any such acquisitions will be consummated.
PRICE RANGE OF COMMON STOCK
The Common Stock was initially offered to the public on June 23, 1995 at a
price of $13.00 per share and is listed on the New York Stock Exchange (the
"NYSE") under the symbol "PRG." The following table sets forth the high and low
sales prices by quarter as reported by the NYSE.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
Fiscal year ended December 31, 1995:
2nd Quarter (from June 23, 1995)................................ $14 3/8 $13 1/8
3rd Quarter..................................................... 24 1/8 12 1/4
4th Quarter..................................................... 24 17 3/4
Fiscal year ended December 31, 1996:
1st Quarter..................................................... 28 3/4 16 1/4
2nd Quarter (through May 14, 1996).............................. 34 3/8 26 3/4
</TABLE>
On May 14, 1996, the last sale price for the Common Stock as reported by
the NYSE was $29 1/8 per share. On March 31, 1996, there were 146 holders of
record of Common Stock.
DIVIDEND POLICY
PRG has not paid any cash dividends since its inception and does not intend
to pay cash dividends in the foreseeable future. Any payment of such dividends
in the future will depend upon the earnings and financial position of PRG, its
capital needs and such other factors as the Board of Directors may deem
appropriate. The Company's credit agreements contain certain restrictions that
could be interpreted as requiring lender approval prior to the payment of
dividends. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
14
<PAGE> 15
CAPITALIZATION
The following table sets forth as of December 31, 1995 PRG's historical
capitalization, its unaudited pro forma combined capitalization and its
unaudited pro forma combined capitalization, as adjusted.
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------------------------
(IN THOUSANDS)
UNAUDITED
UNAUDITED PRO FORMA
PRG PRO FORMA COMBINED, AS
HISTORICAL COMBINED(2) ADJUSTED(2)(3)
---------- ----------- --------------
<S> <C> <C> <C>
Current portion of long-term debt......................... $ 1,334 $ 3,167 $ 2,178
======== ========= ==========
Long-term debt, net of current portion.................... $ 7,360 $ 45,705 $ 8,022
-------- --------- ----------
Stockholders' equity:
Common Stock, $0.01 par value, 30,000,000 shares
authorized; 9,558,244 shares issued and
outstanding,
PRG historical; 17,880,795 shares issued and
outstanding, pro forma combined; and 21,380,795
shares issued and outstanding, pro forma combined,
as adjusted(1)..................................... 96 179 214
Additional paid-in capital........................... 23,787 100,833 194,158
Retained earnings (deficit).......................... 1,649 (7,208) (7,208)
-------- --------- ----------
Total stockholders' equity...................... 25,532 93,804 187,164
-------- --------- ----------
Total capitalization...................................... $ 32,892 $ 139,509 $ 195,186
======== ========= ==========
</TABLE>
- ---------------
(1) The Board of Directors of the Company has approved, subject to stockholder
approval, an amendment to the Company's Restated Certificate of
Incorporation to increase the number of authorized shares of Common Stock
to 100,000,000 shares. See "Description of Capital Stock."
(2) Gives effect to the EyeCorp Merger and the payment of $9 million of
transaction costs related thereto, the PRG portion of the Debt Financings,
the 1996 Acquisitions and the Probable Acquisition as if such transactions
had been completed as of December 31, 1995. See "The Company" and
Physicians Resource Group, Inc. and EyeCorp, Inc. Unaudited
Merger/Significant Transactions Pro Forma Combined Financial Statements.
(3) Adjusted to reflect the sale of the 3,500,000 shares of Common Stock offered
by the Company hereby and the application of the estimated net proceeds
therefrom as described under "Use of Proceeds."
15
<PAGE> 16
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements include the
unaudited pro forma combined balance sheet as of December 31, 1995 as if the
EyeCorp Merger and certain other transactions described below had occurred on
that date, and include the unaudited pro forma combined statement of operations
for the year ended December 31, 1995 as if the EyeCorp Merger and certain other
transactions as described below had occurred as of January 1, 1995. In the
EyeCorp Merger, shares of Common Stock were exchanged for shares of common stock
of EyeCorp. The EyeCorp Merger will be accounted for as a pooling of interests,
and accordingly the historical operations and balance sheets of PRG and EyeCorp
have been combined in these financial statements.
The unaudited pro forma statements of operations for the year ended
December 31, 1995 also give effect to (i) the Reorganization; (ii) the issuance
of 3,553,000 shares of Common Stock in the IPO and the application of the net
proceeds therefrom; (iii) the 1996 Acquisitions and the Probable Acquisition and
the Service Agreements entered into with the Affiliated Practices in connection
with such acquisitions; (iv) the EyeCorp Acquisitions and the Service Agreements
entered into with the Affiliated Practices in connection with such acquisitions;
(v) the Debt Financings and the application of the proceeds from borrowings
thereunder, all as if such transactions or events had occurred on January 1,
1995. The pro forma balance sheet as of December 31, 1995 also gives effect to
(i) the 1996 Acquisitions and the Probable Acquisition; and (ii) PRG's portion
of the Debt Financings and application of the proceeds from borrowings
thereunder, all as if such transactions or events had occurred on December 31,
1995.
The unaudited pro forma combined financial statements have been prepared by
PRG based on the supplemental combined financial statements of PRG and EyeCorp
included elsewhere in this Prospectus, the unaudited financial statements of
practices acquired by PRG in the 1996 Acquisitions or to be acquired in the
Probable Acquisition and the practices acquired by EyeCorp in the 1995 EyeCorp
Acquisitions and other assumptions deemed appropriate by PRG. These unaudited
pro forma combined financial statements may not be indicative of the actual
results had the above events and transactions occurred on the dates indicated or
of actual results which may be realized in the future. Neither expected benefits
and cost reductions anticipated by PRG and EyeCorp nor future corporate costs
and expenses have been reflected in the accompanying unaudited pro forma
combined financial statements. See Unaudited Merger/Significant Transactions Pro
Forma Combined Financial Statements.
16
<PAGE> 17
PHYSICIANS RESOURCE GROUP, INC. AND EYECORP, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADJUSTMENTS
--------------------------------------------
PRG AND 1995
EYECORP EYECORP
SUPPLEMENTAL 1996 PRG ACQUISITIONS TOTAL
COMBINED ACQUISITIONS AND OTHER PRO FORMA
------------- ------------ ------------ ---------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............................. $ 17,451 $ (9,354)(A-1) $ -- $ 8,097
Accounts receivable, net............................... 16,169 7,139(A-1) -- 23,308
Inventories............................................ 2,045 731(A-1) -- 2,776
Prepaid expenses and other current assets.............. 6,633 1,048(A-1) -- 7,681
-------- -------- -------- --------
Total current assets........................... 42,298 (436) -- 41,862
PROPERTY AND EQUIPMENT, net:............................. 27,519 7,130(A-1) -- 34,649
INTANGIBLE ASSETS, net:
Work force............................................. 3,285 5,612(A-1) -- 8,897
Service Agreements..................................... 36,392 46,587(A-1) -- 85,444
2,465(A-2)
Goodwill............................................... 12,580 8,068(A-1) -- 21,083
435(A-2)
-------- -------- -------- --------
52,257 63,167 -- 115,424
OTHER NONCURRENT ASSETS, net............................. 1,538 2,537(A-1) -- 4,075
-------- -------- -------- --------
Total assets................................... $123,612 $ 72,398 $ - $196,010
======== ======== ======== ========
LIABILITIES AND OWNERS' EQUITY
CURRENT LIABILITIES:
Obligation to former owners of affiliated practices.... $ 1,086 $ 386(A-1) $ -- $ 1,472
Notes payable and current portion of long-term debt.... 1,531 1,636(A-1) -- 3,167
Accounts payable and accrued expenses.................. 10,397 3,626(A-1) -- 14,023
Accrued salaries and benefits.......................... 3,075 1,390(A-1) -- 4,465
Current portion of ASC obligation...................... 3,100 -- -- 3,100
-------- -------- -------- --------
Total current liabilities...................... 19,189 7,038 -- 26,227
LONG-TERM DEBT, net of current portion................... 27,815 5,990(A-1) 9,000(B) 45,705
2,900(A-2)
DEFERRED TAXES........................................... 14,013 15,989(A-1) -- 30,002
OTHER LONG-TERM LIABILITIES.............................. 272 -- -- 272
-------- -------- -------- --------
Total liabilities.............................. 61,289 31,917 9,000 102,206
OWNERS' EQUITY:
Common stock........................................... 157 22(A-1) -- 179
Additional paid-in capital............................. 60,374 40,459(A-1) -- 100,833
Deficit................................................ 1,792 -- (9,000)(B) (7,208)
-------- -------- -------- --------
Total owners' equity........................... 62,323 40,481 (9,000) 93,804
-------- -------- -------- --------
Total liabilities and owners' equity........... $123,612 $ 72,398 $ -- $196,010
======== ======== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES (A-1) TO (B) TO UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA COMBINED BALANCE SHEET.
17
<PAGE> 18
PHYSICIANS RESOURCE GROUP, INC. AND EYECORP, INC.
UNAUDITED
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
ADJUSTMENTS
-----------------------------------------------------------------
PRG AND 1995
EYECORP EYECORP
SUPPLEMENTAL IPO 1996 PRG ACQUISITIONS TOTAL
COMBINED REORGANIZATION ACQUISITIONS AND OTHER PRO FORMA
--------------- -------------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
REVENUES:
Management service revenues... $ 39,129 $22,085(C) $56,774(J) $40,424(O) $ 158,412
Surgery center revenues....... 9,317 2,821(C) 7,303(J) 4,749(O) 24,190
Other revenues................ 79 5(D) 322(K) -- 406
---------- ------- ------- ------- -----------
Total revenues........ 48,525 24,911 64,399 45,173 183,008
COSTS AND EXPENSES:
Salaries, wages and
benefits................... 19,768 10,199(D) 27,364(K) 15,455(P) 72,786
Pharmaceuticals and
supplies................... 6,687 3,494(D) 6,590(K) 7,659(P) 24,430
General and administrative
expenses................... 16,022 6,115(D) 18,174(K) 13,653(P) 52,440
(334)(G) (54)(M) (676)(Q)
(460)(N)
Depreciation and
amortization............... 2,609 1,217(D) 2,688(K) 1,264(P) 11,362
(194)(F) (20)(H) 1,448(R)
159(G) 2,168(L)
23(M)
Executive resignation
expenses................... 1,117 -- -- -- 1,117
Interest expense.............. 1,157 233(D) 553(K) 379(P) 2,939
(82)(E) (22)(H) (207)(S)
-- (24)(F) -- 952(T) --
---------- ------- ------- ------- -----------
Total costs and
expenses............ 47,360 20,783 57,004 39,927 165,074
---------- ------- ------- ------- -----------
INCOME BEFORE INCOME TAXES...... 1,165 4,128 7,395 5,246 17,934
PROVISION FOR INCOME TAXES...... (501) (1,610)(I) (2,884)(I) (2,098)(I) (7,093)(I)
---------- ------- ------- ------- -----------
NET INCOME...................... $ 664 $ 2,518 $ 4,511 $ 3,148 $ 10,841(U)(V)
========== ======= ======= ======= ===========
NET INCOME PER SHARE............ $ .07 $ .59
========== ===========
NUMBER OF SHARES USED IN NET
INCOME PER SHARE
CALCULATION................... 9,086,417 18,413,596(W)
========== ===========
</TABLE>
SEE ACCOMPANYING NOTES (C) TO (W) TO UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA COMBINED STATEMENT OF OPERATIONS.
18
<PAGE> 19
SELECTED FINANCIAL DATA
PRG was incorporated in 1993, but did not conduct any significant
operations prior to the IPO in June of 1995. The PRG Historical financial data
for the years ended December 31, 1994 and 1995 presented below reflects actual
results of operations and financial position and has been derived from and
should be read in connection with the PRG consolidated financial statements and
notes thereto included elsewhere herein. The PRG/EyeCorp Combined statement of
operations and balance sheet data presented below as of and for the years ended
December 31, 1994 and 1995 reflect the actual historical results of operations
and balance sheets of PRG and EyeCorp as if they had been combined as of and for
the years then ended. See Physicians Resource Group, Inc. -- Supplemental
Combined Financial Statements. The Unaudited Pro Forma Combined statement of
operations data for the year ended December 31, 1995 presented below gives
effect to (i) the issuance of 3,553,000 shares of Common Stock in the IPO and
the application of the net proceeds therefrom, (ii) the Reorganization,
(iii) the EyeCorp Merger, (iv) the EyeCorp Acquisitions and the Service
Agreements entered into with the Affiliated Practices in connection with such
acquisitions, (v) the Debt Financings and the application of the proceeds from
borrowings thereunder by PRG and EyeCorp and (vi) the 1996 Acquisitions and the
Probable Acquisition and the Service Agreements entered into with the Affiliated
Practices in connection with such acquisitions, all as if such transactions or
events had occurred on January 1, 1995. The Unaudited Pro Forma Combined balance
sheet data as of December 31, 1995 gives effect to (i) the EyeCorp Merger and
the payment of $9 million in transaction costs related thereto, (ii) PRG's
portion of the Debt Financings and the application of the proceeds from
borrowings thereunder and (iii) the 1996 Acquisitions and the Probable
Acquisition, all as if such transactions or events had occurred on December 31,
1995. See Physicians Resource Group, Inc. and EyeCorp, Inc. Unaudited
Merger/Significant Transactions -- Pro Forma Combined Financial Statements for
additional information. These pro forma financial statements may not be
indicative of actual results if the transactions had occurred on the dates
indicated or of future results. Neither expected benefits or cost reductions
anticipated by PRG and EyeCorp nor certain general and administrative costs that
might have been incurred have been reflected in such data.
<TABLE>
<CAPTION>
UNAUDITED
PRG/EYECORP PRO FORMA
PRG HISTORICAL COMBINED COMBINED
------------------- --------------------- ------------
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
------------------- --------------------- ------------
STATEMENT OF OPERATIONS DATA: 1994 1995 1994 1995 1995
----- ------- ------- ------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues............................................. $ -- $26,395 $19,584 $48,525 $183,008
----- ------- ------- ------- -------
Costs and expenses:
Salaries, wages and benefits..................... -- 12,161 4,972 19,768 72,786
Pharmaceuticals and supplies..................... -- 3,380 3,425 6,687 24,430
General and administrative....................... 19 6,547 5,650 16,022 52,440
Depreciation and amortization.................... 3 779 1,383 2,609 11,362
Interest (income) expense........................ -- (236) 1,076 1,157 2,939
Executive resignation expenses................... -- 1,117 -- 1,117 1,117
----- ------- ------- ------- -------
Total costs and expenses..................... 22 23,748 16,506 47,360 165,074
----- ------- ------- ------- -------
Income (loss) before income taxes and extraordinary
item............................................... (22) 2,647 3,078 1,165 17,934
Provision for income taxes........................... -- 975 1,162 501 7,093
Provision for income taxes -- pro forma.............. -- -- 62 -- --
----- ------- ------- ------- -------
Income (loss) before extraordinary item.............. (22) 1,672 1,854 664 10,841
Extraordinary item................................... -- -- -- (119) --
----- ------- ------- ------- -------
Net income (loss).................................... $ (22) $ 1,672 $ 1,854 $ 545 $ 10,841
===== ======= ======= ======= =======
Income (loss) per share:
Income (loss) before extraordinary item............ $(.01) $ .28 $ .44 $ .07 $ .59
Extraordinary item................................. -- -- -- (.01) --
----- ------- ------- ------- -------
Net income (loss).................................. $(.01) $ .28 $ .44 $ .06 $ .59
===== ======= ======= ======= =======
Number of shares used in net income (loss) per share
calculation........................................ 1,662 5,977 4,196 9,086 18,414
===== ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
UNAUDITED
PRO FORMA
COMBINED
------------
PRG/EYECORP
PRG HISTORICAL COMBINED AS OF
AS OF DECEMBER 31, AS OF DECEMBER 31, DECEMBER 31,
--------------------- ----------------------- ------------
BALANCE SHEET DATA: 1994 1995 1994 1995 1995
------ ------- ------- -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Working capital (deficit)...................... $ (16) $16,244 $ 2,353 $ 23,109 $ 15,635
Total assets................................... 1,116 46,435 33,247 123,612 196,010
Long-term debt, net of current portion......... -- 7,360 12,631 27,815 45,705
Stockholders' equity (deficit)................. (7) 25,532 10,211 62,323 93,804
</TABLE>
19
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
PRG was incorporated in 1993 but did not conduct any significant operations
prior to PRG's initial public offering and concurrent acquisition of the assets
of ten ophthalmic and optometric practices in June 1995. As part of the
Reorganization and subsequent acquisitions, PRG has acquired tangible and
intangible assets and liabilities of, and entered into Service Agreements with,
the Affiliated Practices and earns fees ("Service Fees") thereunder. For a
description of the Affiliated Practices, see "Business -- The Practices." The
Service Fees payable to PRG by the Affiliated Practices under the Service
Agreements vary based on the nature and amount of services provided. Such fees
are payable monthly and consist of various combinations of the following: (i)
percentages (ranging from 12% to 16%) of the revenues or percentages (ranging
from 10% to 40%) of the earnings of the Affiliated Practices, relating to
professional services and certain other non-medical services, depending on the
scope and breadth of the services provided, (ii) all revenues, or a substantial
portion of revenues, relating to facility and other non-physician fees with
respect to certain assets owned by PRG, (iii) operating and non-operating
expenses of the Affiliated Practices paid by PRG pursuant to the Service
Agreements and (iv) certain negotiated performance and other adjustments. In
addition, with respect to several of the Affiliated Practices, the Service Fees
are based on flat rates that are either subject to renegotiation on an annual
basis or that transition over time to a variable fee.
The expenses incurred by PRG on behalf of the Affiliated Practices in
fulfilling its obligations under the Service Agreements are generally the same
as the operating costs and expenses that would have otherwise been incurred by
the Affiliated Practices, including the salaries, wages, and benefits of
practice personnel, pharmaceutical and supplies expenses involved in
administering their clinical practices, the office (general and administrative)
expenses of the practices, depreciation and amortization of assets acquired from
(or as a result of the purchase of the assets of) the Affiliated Practices and
eye care professionals, as well as certain other expense items. In addition to
the operating costs and expenses discussed above, PRG also incurs personnel and
administrative expenses in connection with establishing and maintaining a
corporate office function, which provides management, administrative, marketing
and acquisition services to the Affiliated Practices.
Management believes the revenues of eye care providers in the first quarter
of the year generally have been lower than the quarterly average for the
remainder of the year. For Affiliated Practices with variable management service
fees, this will have a seasonal effect on PRG's revenues. Management also
believes that industry trends toward cost containment and lower reimbursement
rates will continue to result in a reduction from historical levels in
per-patient revenues. Further reductions in payments to physicians or other
changes in reimbursement rates would have an adverse effect on PRG's operations
unless PRG is otherwise able to offset such payment reductions.
In June 1995, PRG completed its IPO of 3,553,000 shares of Common Stock at
$13 a share for proceeds, net of underwriter commissions and offering costs, of
approximately $37,229,000. Simultaneously with the closing of the IPO, PRG
acquired certain assets and assumed certain liabilities associated with the
Founding Affiliated Practices and their owners in the Reorganization. At the
same time, PRG issued 4,388,355 shares of Common Stock, a warrant to purchase
40,000 shares of Common Stock and paid $13,362,000 in cash to the owners of the
Founding Affiliated Practices. Also, $2,508,000 was used to retire certain
indebtedness and leases of the Founding Affiliated Practices. In addition, PRG
purchased an MSO, which provided services to one of the Founding Affiliated
Practices for approximately $4,498,000.
Since the Reorganization, the Company has added by acquisition a total of
69 new practices, 13 ASCs, 116 ophthalmologists, 97 optometrists and eight
excimer lasers in seven new states. In addition, PRG has entered into a
definitive agreement in connection with the Probable Acquisition.
During the period from January 1 through April 24, 1996, PRG consummated
the acquisition of the assets of 19 practices located in six states and eight
ASCs for an aggregate consideration of approximately $8.2 million in cash and
approximately 2.1 million shares of Common Stock. In addition, the Company has
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entered into a definitive agreement to acquire the assets of a practice located
in California for an estimated $1.3 million in cash and approximately 74,000
shares of Common Stock.
In March 1996, PRG closed the EyeCorp Merger for consideration of 6,089,506
shares of Common Stock in a transaction accounted for as a pooling of interests.
EyeCorp was a privately held physician practice management company devoted
solely to eye care and provided management services to 50 ophthalmic and
optometric practices located in 10 states and owned and operated, or provided
management services to five ASCs.
PRG anticipates ultimately incurring approximately $9,000,000 in
transaction expenses in connection with the EyeCorp Merger and will recognize
these expenses in its statement of operations for the quarter ended March 31,
1996.
RESULTS OF OPERATIONS -- PRG HISTORICAL
As described above in "Overview," PRG had conducted no significant
operations from its inception through June 30, 1995. Accordingly, no revenues
and only nominal general and administrative expenses were incurred during the
six-month period ended June 30, 1995. However, PRG did incur various legal,
accounting, travel and marketing costs in connection with the IPO and
Reorganization during this period, $1,745,000 of which was funded by a related
party. Effective July 1, 1995, PRG commenced substantial operations and began
earning revenues and incurring costs and expenses in connection with fulfilling
its obligations under the Service Agreements with the Founding Affiliated
Practices.
Year Ended December 31, 1995
Revenues. As indicated above, the six months ended December 31, 1995
represented the first period of substantial operations of PRG. Accordingly,
there are no comparable revenues or expenses for prior periods. Revenues of
$26,395,000 represent management services revenues earned by PRG under its
Service Agreements during the six months ended December 31, 1995.
Costs and Expenses. The costs and expenses incurred during this period
include the salaries and benefits of personnel working at the corporate office
and at the practice locations ($12,161,000 or 46% of revenues), pharmaceuticals
and supplies incurred by PRG for the benefit of the Founding Affiliated
Practices ($3,380,000 or 13% of revenues), general and administrative expenses
incurred both at the practice locations and at the corporate offices ($6,547,000
or 25% of revenues) and depreciation and amortization on all owned assets
($779,000 or 3% of revenues). The $1,117,000 of executive resignation expenses
represent amounts paid to PRG's former chairman and chief executive officer in
connection with the terms of his separation agreement which was effective in
September 1995. The $236,000 of interest income represents amounts earned on
unused proceeds from the IPO.
Income Taxes. The provision for income taxes is higher than the U.S.
statutory federal rate of 34% due primarily to state income taxes and the
non-deductibility of a portion of the executive resignation expenses.
RESULTS OF OPERATIONS -- COMBINED
As described in "Selected Financial Data" the PRG/EyeCorp Combined
statements of operations data contained therein presents PRG and EyeCorp as if
their historical statements of operations had been combined for such periods.
Reference should also be made to the financial statements and related footnotes
contained in "Physicians Resource Group, Inc. -- Supplemental Combined Financial
Statements."
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Revenues. Revenues increased 148% from $19,584,000 for the year ended
December 31, 1994 to $48,525,000 for the year ended December 31, 1995. The
primary reason for the $28,941,000 increase in revenues was the fact that PRG
had not conducted any significant operations until the second half of 1995.
PRG's revenues for this period were $26,395,000 or 91% of the increase.
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Costs and Expenses. Total costs and expenses increased from $16,506,000 or
84% of revenues during 1994 to $47,360,000 or 98% of revenues during 1995. These
significant increases, which manifested themselves in higher levels of salaries,
wages and benefits, pharmaceuticals and supplies, general and administrative,
and depreciation and amortization expenses, were attributable primarily to (i)
PRG incurring operating expenses for the first time during 1995 (see above) and
(ii) a significant increase in the amount of EyeCorp corporate office expenses
during 1995. EyeCorp's corporate expenses increased as a result of the
additional personnel and legal and accounting expenses incurred during 1995 in
connection with a significant number of completed and unconsummated acquisitions
during the year, a portion of which is not expected to reoccur during 1996.
Interest expense did not increase significantly between 1994 and 1995 as a
result of a slight increase in EyeCorp's interest expense offset by $236,000 of
PRG interest income during 1995 relating to unused IPO proceeds. The higher
EyeCorp interest expense was the result of higher levels of indebtedness
necessary to support the increased corporate office expense discussed above. The
$1,117,000 of 1995 executive resignation expenses were the result of payments
made to PRG's former chief executive officer in connection with the terms of his
separation agreement in September 1995.
Extraordinary Item. The $119,000 extraordinary item in 1995 is attributable
to a loss on early extinguishment of debt on EyeCorp's prior loan with a finance
company lender.
Income Taxes. Total income tax expense during 1994 was $1,224,000
(including pro forma effects) or 40% of income before income taxes compared to
$448,000 or 45% of income before income taxes (including extraordinary items)
during 1995. The increase as a percentage of income before income taxes is
attributable to a reduced tax benefit percentage recognized on EyeCorp's 1995
pre-tax loss, as discussed above. EyeCorp's 1995 pre-tax loss was caused
primarily by significantly increased 1995 corporate office expenses incurred in
connection with EyeCorp's consolidation, a portion which is non-recurring in
nature.
RESULTS OF OPERATIONS -- UNAUDITED PRO FORMA COMBINED
See Physicians Resource Group, Inc. and EyeCorp Inc. -- Unaudited
Merger/Significant Transactions Pro Forma Combined Financial Statements for a
discussion of the assumptions contained in the Unaudited Pro Forma Combined
Financial Statements. Because of the significant differences in time period and
size of the pro forma entity, any comparisons to PRG's results of operations for
the year ended December 31, 1995 would not be meaningful.
Revenues. Total pro forma revenues were $183,008,000 for the year ended
December 31, 1995, representing management services revenues earned by PRG under
its Service Agreements during that time period as if operations had begun under
such agreements on January 1, 1995.
Costs and Expenses. Total costs and expenses incurred during this period on
a pro forma basis amounted to approximately $165,074,000 or approximately 90% of
pro forma revenues. These costs and expenses consisted of salaries, wages and
benefits ($72,786,000 or 40% of revenues) of both practice and corporate level
personnel, pharmaceuticals and supplies incurred by PRG on behalf of the
Affiliated Practices ($24,430,000 or 13% of revenues), general and
administrative expenses incurred both at the practice locations and at the
corporate offices of PRG and EyeCorp ($52,440,000 or 29% of revenues),
depreciation and amortization of all owned and intangible assets both at the
practices and at the corporate level ($11,362,000 or 6% of revenues), interest
expense on indebtedness incurred by EyeCorp and PRG and incurred in the
acquisition of the assets of various practices ($2,939,000 or 2% of revenues)
and the expenses associated with the resignation of the Company's former chief
executive officer ($1,117,000).
Income Taxes. The pro-forma provision for income taxes for the year ended
December 31, 1995 was $7,093,000 or 40% of pre-tax income. This income tax rate
is higher than the U.S. statutory federal rate of 34% due primarily to various
state income taxes and the non-deductibility of certain intangible amortization
and certain executive resignation expenses.
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LIQUIDITY AND CAPITAL RESOURCES
General
PRG generates cash through its collection of Service Fees. PRG has the
ability through certain of its Service Agreements to act as the agent of the
Affiliated Practices that are parties to such Service Agreements in managing
collections and handling payables and has the contractual right to withhold
Service Fees that are payable to it from the cash of such Affiliated Practices.
Owners of such Affiliated Practices are generally contractually restricted from
withdrawing cash flow from the Affiliated Practices to the extent that
insufficient funds would be available to pay service fees. Additionally, PRG
maintains a security interest in the receivables of each such Affiliated
Practice to secure payment of Service Fees.
Under the terms of certain other Service Agreements, (principally those
acquired or entered into as a result of the EyeCorp Merger), PRG purchases the
receivables of the Affiliated Practices that are parties to such Service
Agreements and has the power to assign and factor the purchased receivables. The
purchase price for the receivables is the face amount of the accounts receivable
less any third-party contractual adjustments and net of any reserve for
uncollectible accounts receivable. Such Service Agreements contain a
representation that the purchased accounts receivable are payable in an amount
not less than their face value.
Cash, Working Capital and Debt
During the year ended December 31, 1995 (PRG's first year of significant
operations), cash and working capital had been increased significantly by the
net proceeds from the IPO ($37,229,000), and had been reduced for significant
payments to the physician owners of the Founding Affiliated Practices, for
capital expenditures and for the retirement of indebtedness and redemption of
preferred stock incurred in connection with the Reorganization. Accordingly, as
of December 31, 1995, PRG had approximately $15,963,000 of cash, approximately
$16,244,000 of working capital and approximately $7,360,000 of long-term debt
(exclusive of current maturities).
Subsequent to December 31, 1995, PRG has made significant cash expenditures
and is continuing to incur significant obligations with respect to (i) the 1996
Acquisitions, (ii) the EyeCorp Merger, (iii) capital additions for corporate
headquarters relocation and information systems, (iv) the closing of the
acquisition of an ASC (the "ASC Option") related to an acquisition consummated
as part of the Reorganization and (v) miscellaneous other cash expenditures,
including the final pay-off of certain obligations due to the physician owners
of the Founding Affiliated Practices. The cash expenditures made to date with
respect to the 1996 Acquisitions are estimated to be approximately $14,000,000
(including debt retirement and transaction expenses) and the ultimate
expenditures made or to be made with respect to the EyeCorp Merger by both PRG
and EyeCorp are estimated to be approximately $9,000,000, a substantial portion
of which is being paid in the post December 31, 1995 period and all of which
will be recorded as an expense during early 1996. In addition, long-term debt
assumed in connection with the 1996 Acquisitions and the EyeCorp Merger was
approximately $25,300,000. The closing of the ASC Option required approximately
$3,100,000 of cash, estimated cash expenditures for the headquarters relocation
and capital expenditures are approximately $500,000 and the final working
capital payments to the owners of the Founding Affiliated Practices amounted to
approximately $900,000.
To finance these post December 31, 1995 expenditures, PRG has utilized its
existing cash balances, cash generated from operations and a portion of its
$35,000,000 bank line of credit that was entered into on January 8, 1996. As of
April 18, 1996, PRG's cash balance was approximately $5,000,000 and its overall
bank indebtedness had risen to approximately $45,000,000, of which $15,000,000
has been drawn under the $35,000,000 line of credit. A description of the line
of credit follows below.
Credit Facilities
On January 8, 1996, PRG entered into a $35,000,000 credit facility (the
"Credit Facility") with NationsBank of Tennessee, N.A., to be used for
acquisitions, capital expenditures and working capital. The
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Credit Facility is secured by the stock of the subsidiaries of PRG and
guaranteed by the subsidiaries of PRG. As of April 18, 1996, PRG had drawn
approximately $15,000,000 on the Credit Facility.
PRG may obtain advances under the Credit Facility to the extent of the
lower of the $35,000,000 or a borrowing base to be in effect from time to time
(the "Borrowing Base"). The Borrowing Base is generally defined as the
consolidated earnings before interest, taxes, depreciation and amortization of
PRG ("EBITDA"), less certain amounts described in the Credit Facility and then
multiplied by 2.5. The initial Borrowing Base calculation under the Credit
Facility indicated that the Company could borrow up to the $35,000,000 facility
limit. Advances to PRG under the Credit Facility bear interest at either LIBOR
or the lender's prime rate, as PRG may elect, plus, in the case of a LIBOR
advance, a spread between 1.25% and 2.00% or, in the case of a prime rate
advance, up to a .5% spread, depending on the ratio of senior debt outstanding
to consolidated EBITDA.
The lender has the right to approve any proposed acquisition (i) providing
for the payment of cash consideration together with seller debt in excess of
five percent of PRG's consolidated assets, (ii) for which the total purchase
price is greater than five times the total EBITDA of the target practice for the
most recent four fiscal quarters, as adjusted to calculate EBITDA on a pro forma
basis as though the practice had been owned by PRG throughout the period, (iii)
that would result in the acquisition of or is acquired following the acquisition
of twenty or more practices in a calendar year, and (iv) that had negative
EBITDA within either of the previous two to twelve month periods preceding the
date of a definitive agreement or the closing of the purchase.
On January 8, 1998, the outstanding principal balance of the Credit
Facility will be converted from a revolving credit facility to a term loan (the
"Term Loan"). Principal payments under the Term Loan shall be due quarterly in
the amount of 1/28 of the principal balance of the Term Loan as of January 8,
1998. All remaining unpaid principal amounts under the Term Loan will be payable
on January 8, 2001.
The Credit Facility contains restrictions on the incurrence of additional
indebtedness, encumbrances, change in senior management, funded debt to
consolidated EBITDA, funded debt to capital, fixed charge coverage, current
ratio, net worth, tangible net worth, capital expenditures and the approval of
certain proposed acquisitions, as defined.
In December 1995, EyeCorp entered into a $20,000,000 credit facility (the
"EyeCorp Credit Facility") with NationsBank of Tennessee, which was used in
connection with EyeCorp's acquisition program and to repay the approximately
$12,800,000 owed under Eyecorp's prior credit facility. As of April 19, 1996,
substantially all amounts available under the EyeCorp Credit Facility had been
borrowed. The EyeCorp Credit Facility is secured by (i) a first lien deed of
trust, security agreement and assignment of rents on the real property owned by
EyeCorp, (ii) a collateral assignment of a promissory note dated April 8, 1994
payable to EyeCorp by Vitreoretinal Foundation in the original principal amount
of approximately $1,000,000, and all collateral therefor, (iii) a collateral
assignment of life insurance policies on David Meyer, M.D. (in the amount of
$6,000,000) and G. Bruce Charles (in the amount of $1,000,000), (iv) a pledge by
Dr. Meyer of all shares of Common Stock currently beneficially owned by him and
(v) a security interest in all furniture, fixtures, equipment, aircraft,
inventory, accounts receivable and other assets and properties of EyeCorp.
EyeCorp may procure loans under the EyeCorp Credit Facility to the extent
of the lesser of the $20,000,000 or the borrowing base in effect from time to
time (the "EyeCorp Borrowing Base"). The EyeCorp Borrowing Base from time to
time shall be the consolidated earnings before interest, taxes, depreciation and
amortization of EyeCorp, ("EyeCorp EBITDA"), less revenues from practices
acquired by EyeCorp whose assets are pledged to secure notes given by EyeCorp as
consideration in the acquisition, or whose assets are subject to purchase money
security interests exceeding, in the aggregate, 20% of the total consideration
paid in the acquisition of such practice), times 2.5.
Advances to EyeCorp under the EyeCorp Credit Facility bear interest at
either LIBOR or the lender's prime rate, as EyeCorp may elect, plus, in the case
of a LIBOR advance, a spread of between 2.0% and 2.5%, or in the case of a prime
rate advance, up to a .5% spread, depending on the ratio of senior debt
outstanding to
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consolidated EyeCorp EBITDA; provided that no more than three LIBOR advances may
be outstanding at any one time.
On the first anniversary of the date of the loan agreement entered into in
connection with the EyeCorp Credit Facility (the "Loan Agreement"), up to the
greater of (i) $5,000,000 or (ii) the outstanding principal balance of the
EyeCorp Credit Facility will convert from a revolving credit facility to a term
loan (the "EyeCorp Term Loan"). The balance of the Committed Amount (subject to
the EyeCorp Borrowing Base limitation) above the amount converted to the EyeCorp
Term Loan, if any, shall remain available for borrowing for the remaining term
of the Loan Agreement. Principal payments on the EyeCorp Term Loan following
conversion will be due quarterly in an amount equal to 3/84 of the initial
principal amount of the EyeCorp Term Loan. All remaining unpaid principal
amounts under the Loan Agreement will be payable on the second anniversary of
the Loan Agreement.
Liquidity
PRG management believes that its existing cash resources and cash generated
from operations will be sufficient to fund PRG's planned capital expenditures
and ongoing operations through the remainder of 1996. The $20,000,000 unused
portion of the $35,000,000 Credit Facility discussed above, PRG's existing cash
resources, cash flow from PRG operations and potential net proceeds from this
offering and any other new debt or equity offerings will be utilized to execute
PRG's acquisition program, pay the merger and transaction expenses and the other
significant cash expenditures discussed in " -- Cash, Working Capital and Debt"
above.
Inflation
Inflation has not had a material effect on the combined results of
operations of the Affiliated Practices and no change is currently expected in
this trend for several years. The recent national focus on healthcare costs has
had the impact of lowering the rate of cost increases that prevailed during the
1980s.
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BUSINESS
OVERVIEW
PRG is the nation's leading provider of physician practice management
services to ophthalmic and optometric practices. PRG develops integrated eye
care delivery systems through affiliations with locally prominent eye care
practices in selected geographic markets across the United States. PRG acquires
the operating assets of these practices and develops the practices into
comprehensive eye care networks by providing management expertise, marketing,
information systems, capital resources and ancillary services such as surgery
centers and optical dispensaries. As of April 24, 1996, PRG provided management
services to 79 practices with 173 ophthalmologists and 117 optometrists at 232
locations in 14 states, owned or operated 18 ASCs, 104 optical dispensaries and
owned or leased 13 excimer lasers.
In March 1996, PRG acquired EyeCorp, a privately held physician practice
management company devoted solely to eye care, in exchange for Common Stock
having a market value, at closing, of approximately $152 million. The
acquisition of EyeCorp, which provided management services to 50 ophthalmic and
optometric practices and five ASCs increased PRG's penetration in existing
markets (Arkansas, California, Ohio, Tennessee and Texas) and afforded entry
into five new states (Illinois, Kentucky, Massachusetts, Mississippi and
Missouri). During the period from January 1 through April 24, 1996, PRG also
consummated the acquisition of the assets of 19 practices and eight ASCs, for
approximately $60 million, at closing, in cash and stock. These acquisitions
substantially strengthened PRG's position in Houston (five additional
practices), Las Vegas (two additional practices) and Ohio (two additional
practices) and represented entries into new markets in Dallas, Phoenix, Oklahoma
and South Carolina. In addition, the Company has entered into a definitive
agreement to provide management services to, and acquire the assets of, one
additional practice located in California for approximately $3.3 million in cash
and Common Stock.
INDUSTRY BACKGROUND
Market Overview. The Health Care Financing Administration estimates that
national health care spending in 1995 was approximately $1 trillion with
approximately $200 billion attributable to physician services. Unlike most
medical specialists, eye care professionals generally do not depend on primary
care physicians for referrals; rather, referrals originate from other eye care
professionals since the optometrist or the ophthalmologist represents the
primary patient contact for the vast majority of eye care services. Based on a
market survey conducted by Arthur D. Little (the "ADL Study"), PRG believes that
the revenues generated by eye care professionals (ophthalmologists and
optometrists) were in excess of $20 billion in 1994. According to the ADL Study,
in 1994 ophthalmic surgeons in the United States performed in excess of 2.4
million major surgical procedures.
Eye care services in the United States are delivered through a fragmented
system of local providers, including individual or small groups of
ophthalmologists, optometrists and opticians. According to the ADL Study,
approximately 15,600 ophthalmologists and 28,200 optometrists were actively
involved in patient care in the United States in 1993. The ADL Study estimates
that there are approximately 1,500 ophthalmic groups of five or more
practitioners.
Trends in Physician Organization. Physicians have traditionally provided
medical services on a fee-for-service basis. The fee-for-service model provides
few incentives for the efficient utilization of resources and has contributed to
increases in health care costs at rates significantly higher than inflation.
Concerns over the accelerating cost of health care have resulted in the
increasing prominence of managed care and a decline in fee-for-service medicine.
Managed care typically involves a third-party (frequently the payor) assuming
responsibility for ensuring that health care is provided in a high quality,
cost-effective manner.
Cost-containment pressure on providers in health care generally, and eye
care specifically, has placed small to mid-size provider groups at a competitive
disadvantage because these practices typically have high operating costs
relative to revenue and lack the capital, information resources and management
expertise necessary to provide both high quality and cost-effective medical
care. To remain competitive, eye care
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providers are increasingly seeking to affiliate with larger organizations that
manage the non-medical aspects of eye care practices and that can provide access
to greater capital resources, more efficient cost structures and access to
payors. PRG seeks to address these demands for Affiliated Practices through the
implementation of its business strategy.
COMPANY STRATEGY
PRG's business strategy is focused on (i) developing comprehensive eye care
service networks in each of its markets, both in terms of service mix and
geographic coverage, primarily through acquisition, (ii) enabling its Affiliated
Practices to provide efficient and cost-effective eye care services resulting
from economies of scale, purchasing discounts, facility consolidation and
improved personnel and information management and (iii) marketing the
capabilities of the Affiliated Practices and networks to both payors and
employers, particularly in the developing and expanding managed care
marketplace. PRG believes that by establishing integrated delivery networks,
Affiliated Practices are afforded significant opportunities for cross-referrals,
expanded service capabilities and volume contracting with payors.
Develop Comprehensive Eye Care Services
PRG believes that third-party payors increasingly will prefer to contract
with a single provider for comprehensive eye care services within selected
geographic areas, particularly as managed care proliferates. Accordingly, PRG
intends to continue to broaden the service mix and geographic coverage of
Affiliated Practices and networks within the markets in which they operate.
Complete Range of Services. Building service mix capabilities may involve
expanding the types of services provided by a particular Affiliated Practice to
include (i) additional primary care capabilities, (ii) expanded specialty or
subspecialty care, such as corneal, retinal, glaucoma, pediatric or
neuro-ophthalmology expertise, and (iii) refractive, reconstructive or
oculoplastic surgery capabilities. Comprehensive eye care may also warrant the
addition of an ASC or optical dispensary in a given market. An ASC is a facility
in which physicians generally perform non-emergency procedures that typically do
not require overnight hospitalization. Surgical procedures generally can be
performed in ASCs on a more cost-effective basis than in hospitals, principally
because ASCs typically have lower operating costs and provide physicians with
greater scheduling flexibility than hospitals. Optical dispensaries allow
patients with glasses or frame prescriptions to fill such prescriptions in the
convenience of the Affiliated Practice's facility.
Broad Geographic Coverage. PRG believes it is important not only to provide
a comprehensive service mix within the immediate market in which an Affiliated
Practice operates, but also to provide such services within the entire geography
of that defined market. PRG believes this is particularly important in the era
of managed care, where payors may have enrollees, participants or employees
living throughout a large market area, such as a city, a county or a more
broadly defined region. The Company believes that location and convenience are
important selection factors when choosing eye care, particularly for managed
care payors. Therefore, PRG seeks to expand its geographic coverage within a
defined market where it already has established operations by opening or
acquiring new practices, surgery centers, optical dispensaries or satellite
locations.
Acquisition Objectives. The Company's objective is to utilize acquisitions
as the primary vehicle to develop a full spectrum of services and broad
geographic coverage within existing markets and to enter new markets.
Accordingly, PRG has implemented an acquisition program to acquire the assets
of, and provide management services to, selected ophthalmic and optometric
practices and their related ancillary businesses, such as ASCs and optical
dispensaries. The Company targets acquisitions in existing markets that enable
it to expand the range of services provided and absorb the acquired patient base
without a proportionate increase in administrative costs. The Company seeks to
acquire in attractive new markets practices that are well positioned to become
regional leaders in their markets. The Company typically targets larger
acquisitions in new markets that can serve as platforms from which the Company
can consolidate a given service area by making and integrating additional
in-market acquisitions.
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Since its IPO, the Company has acquired the assets of 69 new practices and
entered into a definitive agreement to acquire the assets of one additional
practice. These acquisitions represent additions within existing markets as well
as entries into new markets. PRG intends to continue to pursue both in-market
and new market acquisitions.
Provide Efficient and Cost Effective Services
PRG believes that to be competitive in the present health care environment,
providers, such as the Affiliated Practices, need to achieve operating
efficiencies and reduce the cost of providing services. The Company believes
that the physicians at the Affiliated Practices benefit from having the
management and administrative support provided by PRG. This support reduces the
amount of time the physicians are required to spend on administrative matters
and enables them to dedicate their time and efforts toward the growth of their
professional practices and the further development of their specialties.
PRG believes that there are significant local and national scale economies
to be realized in the development of comprehensive eye care networks. At a local
level, cost efficiencies can be achieved from the consolidation of clinic
administrative activities, the sharing of facilities such as surgery centers and
satellite locations and the reduction or more efficient utilization of
duplicative personnel. At a national level, economies are derived from
discounted purchasing of pharmaceutical, optical and medical supplies, as well
as more efficient purchasing of medical and surgical equipment, information
systems and insurance.
The Company believes that increased managed care and other forms of
risk-sharing are requiring health care providers to become more sophisticated in
gathering, processing and evaluating clinical outcomes and basic financial
information. In order to process the information necessary to track costs and to
effectively negotiate managed care contracts, the Company believes that
providers will need to develop and implement more sophisticated information
systems. The Company has installed at certain of its Affiliated Practices, and
intends to install at most of its larger Affiliated Practices, a client server
based, standard financial reporting and general ledger information management
system to facilitate the timely reporting of periodic financial data. The
Company also is evaluating both the feasibility of interfacing this system with
existing practice management systems as well as the general effectiveness of
such systems, with the intent of improving integration of patient data and
expense/cost data. See "-- Development and Operations -- Information Management
Systems."
Market to Payors and Managed Care
The Company intends to market the services provided by its eye care
networks to payors, with a focus on the managed care community. PRG believes
that by providing the full spectrum of eye care services within a geographic
area at a competitive price, its Affiliated Practices will be positioned as
attractive providers to HMOs, insurance companies, employers, hospitals,
physician hospital organizations ("PHOs"), and possibly other physician practice
management companies. The Company believes that the cost structure and
comprehensive service mix of its Affiliated Practices will appeal to both
managed care and non-managed care organizations.
PRG believes that its marketing resources and comprehensive eye care
networks will allow its Affiliated Practices to participate in certain
contractual managed care relationships in which they would not otherwise have
been able to participate. The Company believes that the financial and clinical
data generated by PRG's information management systems should enable the Company
to negotiate managed care arrangements under favorable terms to the Company and
its Affiliated Practices.
DEVELOPMENT AND OPERATIONS
Acquisition Criteria
PRG's acquisition strategy is directed at acquiring the assets of, and
providing management services to, ophthalmic and optometric practices that are
financially and operationally strong and either strategically complement other
Affiliated Practices or represent an entrance into new markets. Acquisition
candidates must demonstrate potential for revenue growth or continued
profitability. PRG also evaluates qualitative issues such
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as the medical professionals' training, licensure and experience, the medical
professionals' reputations in the local and national marketplace, Medicare and
Medicaid compliance, billing practices and operating history. PRG believes that
a substantial number of ophthalmological and optometric practices meet these
acquisition criteria. Prior to entering any market, PRG considers such factors
as the local level of networking and consolidation activity, the regulatory
environment, patient-provider ratios and the economic condition of the local
market. PRG also considers the acquisition of ASCs, optical dispensaries and
other complementary practices and services that are consistent with its
objective of providing management services to providers of integrated eye care.
PRG believes that it is an attractive acquiror relative to other
alternatives available to eye care providers. Currently, physicians have several
alternatives, such as affiliating with an HMO, an independent physician
association, a physician hospital organization or a physician practice
management company such as PRG. PRG believes that it is attractive to
acquisition candidates because of its (i) governance structure, which promotes
physician control and participation, (ii) fee structure under its Service
Agreements, which allows physicians to participate in the cost efficiencies and
revenue growth realized by the Affiliated Practices and (iii) transaction
structure, which permits physicians to become stockholders of PRG, thus further
aligning the interests of the Affiliated Practices and PRG.
PRG generally uses combinations of Common Stock and cash to fund
acquisitions. The consideration for each practice will vary on a case by case
basis, with the major factors being historical operating results, the future
prospects of the practice, and the ability of such practice to complement the
services offered by the other Affiliated Practices.
Practice Management Services Provided
PRG provides management expertise, marketing, information systems, capital
resources and acquisition services to its Affiliated Practices. See "-- Service
Agreements." As a result, PRG is involved in the daily on-site financial and
administrative management of the Affiliated Practices and provides various other
services to the Affiliated Practices from time to time, including legal,
financial reporting, treasury, human resources and insurance assistance. PRG's
goals in providing such services are to (i) improve the performance of
Affiliated Practices in these non-medical activities, (ii) allow the physicians
associated with Affiliated Practices to more fully dedicate their time and
efforts toward their professional practice activities and (iii) enhance the
financial return to PRG.
Affiliated Practices are solely responsible for all aspects of the practice
of medicine, and PRG has the primary responsibility for the business and
administrative aspects of the practices. To facilitate the execution of these
separate responsibilities and the communication between the parties, PRG
establishes Joint Planning Boards comprised of representatives of Affiliated
Practices and PRG. The respective Joint Planning Boards are the primary vehicle
through which PRG and its Affiliated Practices communicate, develop long-term
strategic objectives and make recommendations regarding significant capital
expenditures, budgets and acquisitions.
Network Development
Concurrent with entering into a given market, PRG and the Affiliated
Practices evaluate the range of eye care services presently being provided in
that market for the purpose of determining what additions and acquisitions need
to be made to develop a fully comprehensive eye care product. In addition to
utilizing its acquisition strategy to achieve this objective, PRG also seeks to
establish networks within these markets and to develop a referral base among
Affiliated Practices and, possibly, providers not affiliated with PRG. One of
the vehicles PRG uses to establish these networks is The EyePA, Inc.
The EyePA, Inc., an independent practice association and a wholly owned
subsidiary of PRG, intends to establish preferred provider networks that will
contract with various forms of managed care to provide quality controlled
comprehensive eye care services. This strategy will be to offer the services of
the Company's network of Affiliated Practices, and possibly eye care providers
not affiliated with PRG, to HMOs, preferred provider organizations ("PPOs"),
insurers, employers, unions, and other payors at a competitive price. In
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some cases, contracting may be performed on a city-wide basis, while in other
cases, contracting could be more regional (or national) in scope. The EyePA,
Inc. therefore not only establishes and monitors relationships with various
payor organizations, but also is charged with establishing relationships with
eye care providers not affiliated with PRG.
EyeCorp, together with one of the Affiliated Practices, has established the
Retinal Center of Excellence, through which physicians from this Affiliated
Practice periodically visit eye care practices throughout certain areas in the
middle South to provide retinal services. Many eye care providers in small
communities cannot sustain a full-time retinal specialist. The Retinal Center of
Excellence, therefore, provides eye care providers in these areas the ability to
expand the range of service provided at the local level. PRG intends to work
with its Affiliated Practices to replicate this concept in other geographic
areas.
Information Management Systems
The emergence of managed care has increased the need for specific and
extensive information collection, analysis and management throughout the entire
health care industry so that providers can better demonstrate outcomes and
quantify the revenues and expenses associated with managed care contracting.
Thus, information management systems in the health care industry are moving
beyond traditional systems that focused primarily on billing, insurance,
accounting and basic financial management, and are moving towards computerized
cost management, medical charting, quality measurements and clinical outcomes
analysis, with a particular emphasis on evaluating the risks and profitability
of managed care contracts.
PRG has installed a client server based, information management system
designed (i) to enable the Company to compare financial performance of
Affiliated Practices and to track and control costs and (ii) to facilitate the
accounting and financial reporting process between the Affiliated Practices and
corporate headquarters. PRG is evaluating the feasibility of interfacing this
system with existing practice management systems at the Affiliated Practices.
This would enable PRG to consolidate billing and patient data with cost and
expense data, which would provide the Company with additional critical
information that the Company believes it can use to beneficially structure the
managed care relationships it arranges for the Affiliated Practices. In
addition, PRG analyzes the capabilities of the existing practice management
systems within new Affiliated Practices and determines the extent to which such
systems can be successfully applied to PRG and throughout the Affiliated
Practices and what, if any, additional hardware and software investments might
be necessary to facilitate the improvement of Company-wide practice management
systems.
Governance and Quality Assurance
PRG provides Affiliated Practices with assistance in strengthening their
performance in the medical quality area. One of the primary means by which PRG
intends to provide this assistance is through PRG's Corporate Medical Advisory
Board, which, among other things, has been formed to identify and communicate
the best practices and protocols in the medical area. PRG's governance structure
also promotes physician participation through representation on PRG's board of
directors.
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THE PRACTICES
As of April 24, 1996, PRG provided management services to 79 practices with
173 ophthalmologists and 117 optometrists at 232 locations in 14 states, owned
or operated 18 ambulatory (outpatient) surgery centers ("ASCs") and 104 optical
dispensaries and owned or leased 13 excimer lasers.
<TABLE>
<CAPTION>
NUMBER
OF EXCIMER OPTICAL
STATE/CITY OFFICES OPHTHALMOLOGISTS OPTOMETRISTS ASCS LASERS DISPENSARIES
- ----------------------------------------------- ------ ---------------- ------------ ---- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
ARIZONA
Phoenix...................................... 17 8 9 3 1 0
ARKANSAS
Fayetteville................................. 3 2 1 0 0 3
Manila....................................... 1 0 1 0 0 1
CALIFORNIA
Bakersfield.................................. 3 8 4 1 0 3
Colton....................................... 14 22 5 1 2 4
San Diego.................................... 1 2 1 0 1 1
ILLINOIS
Addison...................................... 1 0 3 0 0 1
Chicago...................................... 3 3 0 0 1 1
Franklin Park................................ 2 0 2 0 0 1
Libertyville................................. 1 1 0 0 0 1
Naperville................................... 1 0 2 0 0 1
Villa Park................................... 1 0 1 0 0 1
KENTUCKY
Benton....................................... 2 0 2 0 0 1
Hopkinsville................................. 1 0 1 0 0 1
MASSACHUSETTS
Plymouth..................................... 3 4 1 1 1 0
MISSISSIPPI
Amory........................................ 2 0 1 0 0 2
Canton....................................... 2 0 2 0 0 2
Coldwater.................................... 2 0 1 0 0 2
Corinth...................................... 1 1 0 0 0 1
Greenwood.................................... 5 2 1 0 0 1
Hattiesburg.................................. 3 4 1 1 0 0
Indianola.................................... 2 0 1 0 0 2
Iuka......................................... 2 0 1 0 0 2
Jackson...................................... 2 3 0 0 0 0
Mendenhall................................... 2 0 1 0 0 2
Oxford....................................... 4 4 0 0 0 0
Sardis....................................... 2 0 1 0 0 2
Starkville................................... 3 0 3 0 0 3
Tupelo....................................... 2 1 1 0 0 1
MISSOURI
Florissant................................... 5 6 4 0 0 1
St. Louis.................................... 3 1 3 1 0 1
NEVADA
Las Vegas.................................... 10 12 0 2 1 5
OHIO
Alliance..................................... 3 4 2 0 0 0
Cincinnati................................... 4 2 5 1 1 1
Medina....................................... 2 2 1 0 0 1
Sandusky..................................... 3 2 3 0 0 1
OKLAHOMA
Oklahoma City................................ 2 2 2 0 0 1
Tulsa........................................ 1 1 2 0 0 0
SOUTH CAROLINA
Myrtle Beach................................. 1 2 0 0 0 1
</TABLE>
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<PAGE> 32
<TABLE>
<CAPTION>
NUMBER
OF EXCIMER OPTICAL
STATE/CITY OFFICES OPHTHALMOLOGISTS OPTOMETRISTS ASCS LASERS DISPENSARIES
- ----------------------------------------------- ------ ---------------- ------------ ---- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
TENNESSEE
Clarksville.................................. 2 0 4 0 0 2
Dickson...................................... 2 0 6 0 0 2
Germantown................................... 1 0 1 0 0 1
Jackson...................................... 4 6 2 1 0 3
Kingsport.................................... 1 3 1 0 0 1
LaFollette................................... 1 0 2 0 0 1
Lawrenceburg................................. 3 2 4 0 0 3
Madison...................................... 2 1 1 1 1 0
Memphis...................................... 39 22 10 1 0 9
Milan........................................ 1 0 1 0 0 1
Somerville................................... 1 0 1 0 0 1
TEXAS
Bryan........................................ 1 1 0 0 0 0
Dallas....................................... 1 2 1 1 1 1
Garland...................................... 4 4 0 0 0 0
Galveston.................................... 3 3 1 0 1 2
Houston...................................... 25 21 13 3 2 14
McKinney..................................... 2 4 0 0 0 0
Mt. Pleasant................................. 4 2 0 0 0 1
Sherman...................................... 3 1 0 0 0 0
Texarkana.................................... 10 2 0 0 0 10
-- --- --- -- -- ---
Total.................................. 232 173 117 18 13 104
=== === === == == ===
</TABLE>
In the aggregate, PRG's Affiliated Practices provide primary, secondary and
tertiary eye care. Primary eye care involves diagnosing and treating routine
vision impairments through non-surgical correction. Patients requiring routine
eye examinations can be treated by optometrists or ophthalmologists. PRG seeks
to enable ophthalmologists associated with the Affiliated Practices to
concentrate on providing secondary and tertiary care. Secondary eye care
involves the diagnosis and treatment of eye diseases and disorders through
medical regimens, laser and/or routine surgical intervention. Secondary eye care
includes the treatment of cataracts, glaucoma, simple corneal problems, and
various refractive surgical procedures such as Radial Keratotomy (RK), Automated
Lamellar Keratoplasty (ALK) and Photo Refractive Keratotomy (PRK). Secondary eye
care is provided by ophthalmologists. Tertiary eye care involves medical and
surgical treatment for vitreoretinal disease, severe glaucoma and corneal
diseases and is provided by ophthalmologists who often have subspecialty
training in these areas. Several of the Affiliated Practices provide refractive
surgical services.
SERVICE AGREEMENTS
PRG has entered into a service agreement with each of its Affiliated
Practices, under which PRG is the exclusive manager and administrator of
non-physician services relating to the operation of such Affiliated Practice.
The following summary of the Service Agreements briefly describes the terms
generally contained in the Company's Service Agreements with Affiliated
Practices. The actual terms of the various Service Agreements vary from the
description below, on a case by case basis, depending on negotiations with the
individual Affiliated Practice and the requirements of local regulations.
The Service Fees payable to PRG by the Affiliated Practices under the
Service Agreements vary based on the fair market value, as determined in
arms-length negotiations, for the nature and amount of services provided. Such
fees are payable monthly and consist of various combinations of the following:
(i) percentages (ranging from 12% to 16%) of the revenues or percentages
(ranging from 10% to 40%) of the earnings of the Affiliated Practices, depending
on the scope and breadth of the services provided, relating to physician
services and certain other non-medical services, (ii) all revenues, or a
substantial portion of revenues, relating to facility and other non-physician
fees with respect to certain assets owned by PRG, (iii) operating and non-
operating expenses of the Affiliated Practices paid by PRG pursuant to the
Service Agreements and (iv) certain negotiated performance and other
adjustments. In addition, with respect to a few of the Affiliated
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<PAGE> 33
Practices, the service fees are based on flat fees that are subject to
renegotiation on an annual basis or transition, over time, to a variable fee.
Receivables due from certain Affiliated Practices are collateralized by a
security interest in the Affiliated Practices receivables from third-party
payors and patients. Under other Service Agreements, PRG purchases the
receivables of the Affiliated Practices that are parties to such Service
Agreements and has the power to assign and factor the purchased receivables. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview" and Notes 1 and 2 of Notes to Consolidated Financial
Statements of the Company.
Pursuant to the Service Agreements, PRG, among other things, (i) acts as
the exclusive manager and administrator of non-physician services relating to
the operation of the Affiliated Practice, subject to matters reserved to the
Affiliated Practice or referred to the Joint Planning Board, (ii) bills
patients, insurance companies and other third-party payors and collects on
behalf of the Affiliated Practice the fees for professional medical services and
other services and products rendered or sold by the Affiliated Practice, (iii)
provides, as necessary, clerical, accounting, purchasing, payroll, legal,
bookkeeping and computer services and personnel, information management,
preparation of certain tax returns, printing, postage and duplication services
and medical transcribing services, (iv) supervises and maintains custody of
substantially all files and records, (v) provides facilities for the Affiliated
Practice, (vi) prepares, in consultation with the Joint Planning Board and the
Affiliated Practice, all annual and capital operating budgets, (vii) orders and
purchases inventory and supplies as reasonably requested by the Affiliated
Practice, (viii) implements, in consultation with the Joint Planning Board and
the Affiliated Practice, national and local public relations or advertising
programs and (ix) provides financial and business assistance in the negotiation,
establishment, supervision and maintenance of contracts and relationships with
managed care and other similar providers and payors. With regard to certain of
the Service Agreements acquired in the EyeCorp Merger, PRG provides the
foregoing enumerated services, except the Affiliated Practice is responsible for
(i) billing patients, insurance companies and other third-party payors and
collecting the fees for all services and products rendered or sold by the
Affiliated Practice and (ii) employing all personnel of the Affiliated Practice
except for an office administrator to be employed by PRG.
Under the Service Agreements, the respective Affiliated Practices retain
the responsibility for, among other things, (i) hiring and compensating
physician employees and other medical professionals, (ii) ensuring that
physicians have the required licenses, credentials, approvals and other
certifications needed to perform their duties and (iii) complying with certain
federal and state laws and regulations applicable to the practice of medicine.
In addition, the Affiliated Practices are exclusively in control of all aspects
of the practice of medicine and the delivery of medical services.
The Service Agreements are, generally, for initial terms of 40 years, with
automatic extensions (unless specified notice is given) of five years. Certain
of the Service Agreements acquired in the EyeCorp Merger have initial terms of
25 years. The Service Agreements may be terminated by either party if the other
party (i) files a petition in bankruptcy or other similar events occur or (ii)
defaults on the performance of a material duty or obligation, which default
continues for a specified term after notice.
In addition, certain Service Agreements may also be terminated by PRG if
the Affiliated Practice or a physician employee engages in conduct or is
formally accused of conduct for which the physician employee's license to
practice medicine reasonably would be expected to be subject to revocation or
suspension or is otherwise disciplined by any licensing, regulatory or
professional entity or institution, the result of any of which does or
reasonably would be expected to materially adversely affect the Affiliated
Practice.
During the term of the Service Agreements, the Affiliated Practice and, in
certain instances, each physician owner of the Affiliated Practice, agrees not
to compete with PRG and the other practices for which PRG provides management
services within a specified geographic area. The Affiliated Practice and, in
certain instances, each physician owner of the Affiliated Practice, also agrees
not to disclose certain confidential and proprietary information relating to PRG
and the Affiliated Practices.
With regard to the Founding Affiliated Practices, the Service Agreements
require the Founding Affiliated Practice to enforce the restrictive covenants
contained in the employment agreements (the "Physician Employment Agreements")
between the Affiliated Practice and the physicians associated with the
Affiliated
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Practice who received more than a de minimis amount of Common Stock or cash in
connection with the Reorganization. In addition, the Physician Employment
Agreements provide that if such physician's employment is terminated during the
initial five-year term for any reason other than the physician's death or
disability or the occurrence of certain events outside the physician's control,
the physician will be required to pay liquidated damages to the Founding
Affiliated Practice. The Service Agreement generally requires the Founding
Affiliated Practice to pay to PRG any such liquidated damages received (and
assign to PRG the right to collect such liquidated damages). Under certain
circumstances, if the Founding Affiliated Practice fails to pursue a claim for
liquidated damages, the Founding Affiliated Practice becomes obligated to pay
PRG an amount equal to the liquidated damages that would be the subject of the
claim.
With regard to the Affiliated Practices that the Company entered into
Service Agreements with in 1996, the physician owners of the Affiliated
Practices are parties to the Service Agreements and, typically, not parties to
an employment agreement with the associated practice entity. These Service
Agreements contain restrictive covenants and in some cases provide for
liquidated damages in the event of a breach of those restrictive covenants.
Each Affiliated Practice is responsible for obtaining professional
liability insurance for the employees of the Affiliated Practice and PRG is
responsible for obtaining general liability and property insurance for the
Affiliated Practice.
Upon termination of the Service Agreements, the Affiliated Practice
generally has the option (or, in certain cases, the obligation) to purchase and
assume, and PRG has the option to require the Affiliated Practice to purchase
and assume, the assets and liabilities related to the Affiliated Practice at the
fair market value (or, in certain circumstances, the book value) thereof, except
in certain circumstances where the Affiliated Practice or PRG, as applicable,
was in breach of such Service Agreement.
GOVERNMENT REGULATION AND SUPERVISION
General
The health care industry is highly regulated, and there can be no assurance
that the regulatory environment in which PRG operates will not change
significantly in the future. PRG believes its operations as described herein are
in substantial compliance with applicable law. The ability of PRG to operate
profitably will depend in part upon PRG, the Affiliated Practices and their
affiliated physicians obtaining and maintaining all necessary licenses,
certificates of need and other approvals and operating in compliance with
applicable health care regulations.
Fee-Splitting; Corporate Practice of Medicine
The laws of many states prohibit physicians from splitting fees with
non-physicians and prohibit non-physician entities from practicing medicine.
These laws vary from state to state and are enforced by the courts and by
regulatory authorities with broad discretion. The laws in most states regarding
fee splitting and the corporate practice of medicine have been subjected to
limited judicial and regulatory interpretation. Although PRG believes its
operations as described herein are in substantial compliance with existing
applicable laws, PRG's business operations have not been the subject of judicial
or regulatory interpretation. There can be no assurance that review of PRG's
business by courts or regulatory authorities will not result in determinations
that could adversely affect the operations of PRG or that the health care
regulatory environment will not change so as to restrict PRG's existing
operations or their expansion. In addition, the regulatory framework of certain
jurisdictions may limit PRG's expansion into such jurisdictions if PRG is unable
to modify its operational structure to conform with such regulatory framework.
PRG has adjusted its Service Fee methodology in states where it was deemed
necessary to comply with such laws.
Medicare Physician Payment System
PRG believes that regulatory trends in cost containment will continue to
result in a reduction from historical levels in per-patient revenue for medical
practices. The federal government has implemented,
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<PAGE> 35
through the Medicare program, the RBRVS payment methodology for physician
services. This methodology went into effect in 1992 and was implemented during a
transition period in annual increments through December 31, 1995. RBRVS is a fee
schedule that, except for certain geographical and other adjustments, pays
similarly situated physicians the same amount for the same services. The RBRVS
is adjusted each year, and is subject to increases or decreases at the
discretion of Congress. To date, the implementation of RBRVS has reduced payment
rates for certain of the procedures historically provided by the Founding
Affiliated Practices. There can be no assurance that any reduced operating
margins could be offset by PRG through cost reductions, increased volume,
introduction of additional procedures or otherwise.
Rates paid by nongovernmental insurers, including those that provide
Medicare supplemental insurance, are based on established physician, ASC and
hospital charges, and are generally higher than Medicare payment rates. Any
decrease in the relative number of patients covered by private insurance could
adversely affect PRG's revenues and income.
Medicare and Medicaid Fraud and Abuse
Federal law prohibits the offer, payment, solicitation or receipt of any
form of remuneration in return for, or in order to induce, (i) the referral of a
person, (ii) the furnishing or arranging for the furnishing of items or services
reimbursable under Medicare or Medicaid programs or (iii) the purchase, lease or
order or arranging or recommending purchasing, leasing or ordering of any item
or service reimbursable under Medicare or Medicaid. Pursuant to this
anti-kickback law, the federal government has recently announced a policy of
increased scrutiny of joint ventures and other transactions among health care
providers in an effort to reduce potential fraud and abuse relating to Medicare
and Medicaid costs. The applicability of these provisions to many business
transactions in the health care industry has been subject to only limited
judicial and regulatory interpretation. Noncompliance with the federal
anti-kickback legislation can result in exclusion from Medicare and Medicaid
programs and civil and criminal penalties.
PRG believes that although it receives fees under the Service Agreements
for management services, the Service Agreements do not place PRG in a position
to make or influence referrals of patients for services reimbursed under
Medicare or Medicaid programs to Affiliated Practices or their affiliated
physicians, or to receive such referrals. Such Service Fees are intended by PRG
to be consistent with fair market value in arm's-length transactions for the
nature and amount of management services rendered and therefore would not
constitute unlawful remuneration under anti-kickback laws and regulations.
Further, PRG, with regard to the management services provided under the Service
Agreements, is not a provider of services under the Medicare or Medicaid
programs. For these reasons, PRG does not believe that fees payable to it would
be viewed as remuneration for referring or influencing referrals of patients or
services covered by such programs as prohibited by statute. If PRG is deemed to
be in a position to make, influence or receive referrals from or to physicians,
or PRG is deemed to be a provider under the Medicare or Medicaid programs, and
if fees paid or received are not commensurate with fair market value, the
operations of PRG could be subject to scrutiny under federal and state
anti-kickback and anti-referral laws.
Significant prohibitions against physician referrals have been enacted by
Congress. These prohibitions, commonly known as "Stark II," amended prior
physician self-referral legislation known as "Stark I" by dramatically enlarging
the field of physician-owned or physician-interested entities to which the
referral prohibitions apply. Stark II prohibits a physician from referring
Medicare or Medicaid patients to an entity providing "designated health
services" in which the physician has an ownership or investment interest, or
with which the physicians has entered into a compensation arrangement. The
designated health services include prosthetic devices, which under applicable
regulations and interpretations include one pair of eyeglasses or contact lenses
furnished after cataract surgery and intraocular lenses provided at ASCs. The
penalties for violating Stark II include a prohibition on payment by these
government programs and civil penalties of as much as $15,000 for each violative
referral and $100,000 for participation in a "circumvention scheme." In August
1995, the Secretary of Health and Human Services published final regulations
interpreting Stark I. Although those regulations for the most part do not apply
to designated health services under Stark II, they do provide an exception to
the referral prohibition for clinical laboratory services furnished in an ASC.
Health and Human Services officials have unofficially confirmed that the ASC
exception also will be contained in
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Stark II regulations when they are published. To the extent that PRG or any
Affiliated Practice is deemed to be subject to the prohibitions contained in
Stark II for services, PRG believes its activities fall within the permissible
activities defined in Stark II, including, but not limited to, the provision of
in-office ancillary services.
In addition, PRG also believes that the methods it uses to acquire the
assets of existing practices do not violate anti-kickback and anti-referral laws
and regulations. Specifically, PRG believes the consideration paid by PRG to
physicians to acquire the tangible and intangible assets associated with their
practices is consistent with fair market value in arm's length transactions and
not intended to induce the referral of patients. Should this practice be deemed
to constitute an arrangement designed to induce the referral of Medicare or
Medicaid patients, then such could be viewed as possibly violating anti-kickback
or anti-referral laws and regulations. A determination of liability under any
such laws could have a material adverse effect on PRG's revenue.
Certain legislation passed by Congress in 1995, but vetoed by the Executive
Branch, would have amended substantially Stark II and the anti-kickback statute.
Most of the proposed changes would have reduced the regulatory risks encountered
by PRG, but other provisions would increase those risks in certain particulars.
PRG will continue to monitor the progress of such legislation, but its prospects
for reintroduction and passage as well as its final provisions are uncertain.
COMPETITION
PRG experiences competitive pressures for the acquisition of the assets of,
and the provision of management services to, additional practices and the
acquisition of MSOs. PRG knows of one public and two private practice management
company focused on eye care services. Several other practice management
companies, both publicly and privately held, that have established operating
histories and, in some instances, greater resources than PRG are pursuing the
acquisition of the assets of other general and specialty medical practices,
including eye care practices, and the management of such practices.
Additionally, some hospitals, clinics, health care companies, HMOs and insurance
companies engage in activities similar to the activities of these other practice
management companies. There can be no assurance that PRG will be able to compete
effectively with such competitors for the acquisition of, or affiliation with,
eye care practices, that additional competitors will not enter the market, that
such competition will not make it more difficult or expensive to acquire the
assets of, and provide management services to, eye care practices on terms
beneficial to PRG or that competitive pressures will not otherwise adversely
affect the Company.
Affiliated Practices compete with numerous local eye care service
providers. PRG believes that changes in governmental and private reimbursement
policies and other factors have resulted in increased competition among
providers for the provision of medical services to consumers. PRG believes that
the cost, accessibility and quality of services provided are the principal
factors that affect competition. There can be no assurance that the Affiliated
Practices will be able to compete effectively in the markets that they serve,
which inability to compete could adversely affect PRG.
Further, the Affiliated Practices will compete with other providers for
managed care contracts. PRG believes that trends toward managed care have
resulted, and will continue to result, in increased competition for such
contracts. Other practices and MSOs may have more experience than the Affiliated
Practices and PRG in obtaining such contracts. There can be no assurance that
PRG and the Affiliated Practices will be able to successfully acquire sufficient
managed care contracts to compete effectively in the markets they serve, which
inability to compete could adversely affect PRG.
CORPORATE LIABILITY AND INSURANCE
The provision of medical services entails an inherent risk of professional
malpractice and other similar claims. PRG does not influence or control the
practice of medicine by physicians or have responsibility for compliance with
certain regulatory and other requirements directly applicable to physicians and
physician groups. However, as a result of the relationship between PRG and the
Affiliated Practices, PRG may become subject to medical malpractice actions
under various theories, including agency and successor liability. There can be
no assurance that claims, suits or complaints relating to services and products
provided by Affiliated
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Practices will not be asserted against PRG in the future. PRG maintains
insurance coverage that it believes is adequate both as to risks and amounts.
Such insurance extends to professional liability claims that may be asserted
against employees of PRG that work on site at Affiliated Practice locations. In
addition, pursuant to the Service Agreements, the Affiliated Practices are
required to maintain comprehensive professional liability insurance. The
availability and cost of such insurance has been affected by various factors,
many of which are beyond the control of PRG and the Affiliated Practices. The
cost of such insurance to PRG and the Affiliated Practices may have an adverse
effect on PRG's operations. Although PRG believes it will be able to negotiate
and acquire malpractice insurance on behalf of the Affiliated Practices at a
cost below that otherwise available to them, based on the Affiliated Practices'
historical insurance expenditures, there can be no assurances to that effect. In
addition, successful malpractice or other claims asserted against Affiliated
Practices or PRG that exceed applicable policy limits could have a material
adverse effect on PRG.
EMPLOYEES
As of April 19, 1996, PRG had approximately 1,500 full-time and part-time
employees, of which approximately 52 were employed at PRG's corporate offices
and the remainder of which were employed at the Affiliated Practices. PRG
believes that its relationship with its employees is good.
PROPERTIES
In addition to its various practice facilities, PRG operates and leases
corporate offices in Dallas, Houston and Memphis. Its corporate headquarters
were relocated to Dallas in January 1996. All development, legal, administrative
and certain operational activities are performed in Dallas. The Houston office
performs all financial, accounting and information systems activities as well as
certain regional operations. The Memphis office functions as a regional
operational and development operation.
LEGAL PROCEEDINGS
PRG is not a party to any claims, suits or complaints relating to services
and products provided by PRG or the Affiliated Practices that PRG expects to
have a material adverse effect on its business or operations.
37
<PAGE> 38
MANAGEMENT
DIRECTORS AND OFFICERS
The following table sets forth certain information with respect to
directors and executive officers of the Company.
<TABLE>
<CAPTION>
TERM AS
DIRECTOR
NAME AGE POSITION EXPIRES
- ----------------------------------- --- ---------------------------------------- --------
<S> <C> <C> <C>
Emmett E. Moore.................... 54 Chairman of the Board, Chief Executive 1997
Officer, President and Director
Richard M. Owen.................... 42 Senior Vice President, Chief Financial 1996
Officer and Director
Richard J. D'Amico................. 37 Senior Vice President, General Counsel
and Secretary
Mark P. Kingston................... 34 Senior Vice President and Chief
Development Officer
John N. Bingham.................... 42 Vice President, Controller and Chief
Accounting Officer
Alan C. Baum, M.D. ................ 54 Director 1998
Lucius E. Burch, III............... 54 Director 1998
Charles D. Fritch, M.D. ........... 55 Director 1997
Richard A. Gilleland............... 51 Director 1998
Bruce E. Herron, M.D. ............. 52 Director 1997
James E. McDonald, II, M.D. ....... 51 Director 1996
David Meyer, M.D. ................. 58 Director 1998
Joseph C. Noreika, M.D. ........... 45 Director 1996
James W. Rayner, M.D. ............. 56 Director 1997
David M. Schneider, M.D. .......... 49 Director 1998
Paul M. Shimoff.................... 48 Director 1996
Ronald L. Stanfa................... 48 Director 1996
P. Harold Wallar, M.D. ............ 52 Director 1998
Kenneth C. Westfield, M.D. ........ 51 Director 1997
</TABLE>
Directors whose terms expire in 1996 have been nominated for re-election as
directors at the Company's annual meeting of stockholders to be held May 21,
1996. Executive officers' terms expire upon the first to occur of the following:
the election and qualification of such officer's successor, such officer's
resignation, termination of such officer's employment agreement, if any, or his
death.
Emmett E. Moore has served as the Chairman of the Board and Chief Executive
Officer of PRG since September 17, 1995 and as President and a director of PRG
since April 20, 1995. From March 1995 to April 20, 1995, he served as a
consultant to PRG. From August 1983 to December 1994, Mr. Moore served in
various capacities with Medical Care America, Inc. ("Medical Care"), a publicly
traded company that was acquired in September 1994 by Columbia/HCA Healthcare
Corporation and was an owner and operator of outpatient surgery centers. Medical
Care also owned and managed numerous ophthalmic physician practices, dedicated
eye surgery centers and optical networks as well as imaging and physical therapy
businesses. Mr. Moore was responsible for Medical Care's acquisition and
development activities, most recently serving as its Senior Vice President and
had previously served as its Executive Vice President and Chief Financial
Officer since joining Medical Care. From 1981 to 1983, Mr. Moore was engaged in
consulting and private investments. From 1972 through 1981, Mr. Moore served as
Senior Vice President and Chief Financial Officer for Hycel, Inc., a publicly
traded company that manufactured and marketed clinical products used in the
healthcare industry. Additionally, Mr. Moore was employed with Arthur Andersen,
received his J.D., M.P.A. and B.B.S. degrees from the University of Texas, and
is a C.P.A.
38
<PAGE> 39
Richard M. Owen has served as Senior Vice President of PRG since January 1,
1996 and as Chief Financial Officer and a director of PRG since April 20, 1995.
Mr. Owen served as Executive Vice President of PRG from April 20 through
December 31, 1995. From September 1994 to April 20, 1995, Mr. Owen served as a
consultant to PRG on financial and accounting matters. From June 1976 through
August 1994, Mr. Owen held various positions in the accounting and business
advisory division of Arthur Andersen where he had been a partner since 1988. Mr.
Owen is a C.P.A. and graduated from Baylor University in 1976.
Richard J. D'Amico has served as Senior Vice President of PRG since January
1, 1996 and as General Counsel and Secretary of PRG since April 20, 1995. From
March 1995 to April 1995, he served as a consultant to PRG. From December 1994
through March 1995, Mr. D'Amico served as President and General Counsel and from
March 1993 through December 1994, Mr. D'Amico served as Vice President and
General Counsel for Radiation Care, Inc., a corporation that operated radiation
therapy and diagnostic imaging centers in ten states. From June 1991 through
March 1993, Mr. D'Amico served as Assistant Vice President and in-house counsel
for U.S. Healthcare, Inc., a company that operates HMOs in eight states. Mr.
D'Amico received his J.D. from Rutgers University School of Law -- Camden in
1985 and his B.S. in electrical engineering from Villanova University in 1981.
Mark P. Kingston has served as Senior Vice President of PRG since January
1, 1996 and as Chief Development Officer of PRG since April 20, 1995. From
September 1994 to April 20, 1995, Mr. Kingston served as a consultant to PRG on
practice asset acquisitions and operations. From July 1990 through September
1994, he served as a Manager for Iolab-Johnson & Johnson, Inc., a company that
provides ophthalmic devices, equipment and pharmaceuticals to ophthalmologists,
optometrists, and surgery facilities. Responsibilities included the development
of physician consulting services, national contracting with purchasing entities
and division sales management. From 1988 through 1990, he served as President of
Masters Medical Practice Planning, a strategic planning and management firm
providing services to physicians nationwide. Mr. Kingston received his M.B.A.
from the University of Indianapolis in 1988 and a B.S. from Mt. Union College in
1983.
John N. Bingham has served as Vice President, Controller and Chief
Accounting Officer of PRG since April 20, 1995. From June 1994 to April 1995,
Mr. Bingham was a financial consultant to various medical and biotechnology
companies. From 1986 to May 1994, Mr. Bingham was the Controller and Treasurer
(and from 1989, Vice President) of Houston Biotechnology Incorporated, a
publicly traded company specializing in the research and development of
ophthalmic pharmaceutical products. Mr. Bingham was previously associated with
other publicly traded companies as well as Arthur Andersen. Mr. Bingham is a
C.P.A. and a graduate of the University of Houston at Clear Lake City.
Alan C. Baum, M.D. has served as a director of PRG since June 28, 1995. Dr.
Baum served as Vice President of Texas Eye Institute Assoc. from 1973 to date,
where he has been in the practice of general ophthalmology with an emphasis on
oculoplastic surgery. Dr. Baum is the chairman of the Board of Trustees of the
Texas Medical Association and Past President of the Texas Ophthalmological
Association. He has served as President of the Southwest Branch of the Harris
County Medical Society. Dr. Baum has acted as chief of staff for Memorial
Southeast Hospital, as well as chairman of Ophthalmology sections at both
Memorial SE and SW hospitals in Houston. Dr. Baum received his medical degree in
1964 from the University of Texas Medical Branch at Galveston, and completed his
residency in 1972 from the University of Texas Medical School, Houston.
Lucius E. Burch, III has served as a director of PRG since March 18, 1996.
Mr. Burch is Chairman of the Board of Directors of Massey Burch Investment
Group, Inc., Nashville, Tennessee, a large Southeast venture capital firm. He
has been with Massey Burch since 1968, served as President from 1981 to 1990,
and has an extensive background in management consulting and corporate finance.
Charles D. Fritch, M.D., F.A.C.S. has served as a director of PRG since
June 28, 1995. Dr. Fritch has been the President of the Fritch Eye Care Center
since 1974. Dr. Fritch has been a director of Benson Eyecare Corporation since
May 1993 and Chairman of the Board of Superior Vision Services, Inc. since
October 1994. Dr. Fritch serves on the teaching staffs of University of Southern
California, University of California, Los Angeles and University of California,
Irvine. He is an invited lecturer for domestic and international seminars
39
<PAGE> 40
and is the author of research and instructional publications as well as
ophthalmic textbooks. Dr. Fritch is on the research and development committees
for several ophthalmic manufacturing companies and is a developer of intraocular
lenses, ophthalmic instruments, and holds a patent on an ophthalmic endoscopic
laser. Dr. Fritch received his medical degree from the University of Nebraska in
1968 and is certified by the American Board of Ophthalmology and the American
Board of Eye Surgery.
Richard A. Gilleland has served as a director of PRG since June 28, 1995.
Mr. Gilleland has served as Chairman, President and Chief Executive Officer of
Kendall International Inc., a manufacturer and distributor of disposable medical
supplies and devices and home health care products since July 1990. From January
to November 1989, he was president, chief executive officer and chairman of the
board of American Medical International, Inc., which owns and operates acute
care hospitals. Mr. Gilleland also has served as a director of OrNda HealthCorp,
a provider of acute medical, surgical and hospital operation and management
services, since 1991, and since 1994, as a director of Bird Medical
Technologies, Inc., a manufacturer of inhalation therapy equipment, and Tyco
International, Ltd., a manufacturer of bioprotection and flow control equipment.
Mr. Gilleland received his B.A. from the University of Minnesota in 1967.
Bruce E. Herron, M.D. has served as a director of PRG since June 28, 1995.
Dr. Herron has been in the practice of general ophthalmology at the Skyline Eye
Clinic, P.C. in Jackson, Tennessee since 1995 and was in practice at its
predecessor entity, the EyeClinic, P.C., from 1976 to 1995. Dr. Herron has
served on the Board of Directors of the Tennessee Academy of Ophthalmology for
the past fifteen years and was president in 1989. He served as Tennessee's
representative to the Council of the American Academy of Ophthalmology from 1990
to 1992, and served on the Executive Committee of the Council in 1992. Currently
he is in active practice as one of six ophthalmologists at the Skyline Eye
Clinic, P.C. He received his medical degree from Vanderbilt Medical School in
1969. His residency in ophthalmology was completed at the University of Iowa
Hospitals and Clinics in 1974.
James E. McDonald, II, M.D. has served as a director of PRG since June 28,
1995. Dr. McDonald has practiced general ophthalmology at McDonald Eye
Associates in Fayetteville, Arkansas since 1978. Dr. McDonald has been a member
of the Board of Governors for the Washington Regional Medical Center since 1987
and chairman of its board since 1993. In addition, Dr. McDonald has served as
medical director for the World Eye Foundation since 1981, and as an assistant
clinical professor in the Department of Ophthalmology at the University of
Arkansas since 1976. Dr. McDonald received his medical degree in 1969 from the
University of Arkansas Medical Center in Little Rock, Arkansas. He completed his
internship at the University of Alabama in 1970 and performed his residency at
the University of Arkansas School of Medical Sciences from 1970 to 1974.
David Meyer, M.D. has served as a director of PRG since March 18, 1996. Dr.
Meyer has been Chairman of EyeCorp, Inc., a Tennessee based management services
organization, from February 1994 until its acquisition by PRG in March 1996. Dr.
Meyer has served since 1968 as the director of the retinoblastoma service within
the Solid Tumor Division of St. Jude's Children's Research Hospital. The
Vitreoretinal Foundation, which he founded in 1968, serves as director of the
Retina Service of the Department of Ophthalmology within the University of
Tennessee College of Health Sciences. In 1970, he founded the Vitreoretinal
Research Foundation in support of basic science research in retina and
fellowship training. Dr. Meyer received his medical degree in 1962 from the
University of Tennessee, College of Medicine, completed his internship the
following year, completed his graduate studies at the University of Pennsylvania
Graduate School of Ophthalmology in 1964 and completed his residency training in
ophthalmology in 1967 at the Wills Eye Hospital in Philadelphia, Pennsylvania.
Joseph C. Noreika, M.D. has served as a director of PRG since June 28,
1995. Dr. Noreika began practicing ophthalmology in August 1981. Since 1984 he
has headed Eye Care of Medina. He practices general ophthalmology with an
emphasis on small-incision cataract surgery. He is fellowship trained in
oculoplastic surgery and received his board certificate in ophthalmology in
1981. His special interests include areas of practice management, health care
policy and negotiation theory. Dr. Noreika received his M.D. degree from
Jefferson Medical College in Philadelphia in 1976. Between 1976 and 1981, he
completed postgraduate medical training at Dartmouth, the University of
Pittsburgh, and the University of California,
40
<PAGE> 41
San Francisco. In 1988, he received his M.B.A. at the Weatherhead School of
Management at Case Western Reserve University in Cleveland. He has completed
post-graduate business studies at the Weatherhead School and the Sloan School of
Management at M.I.T.
James W. Rayner, M.D. has served as a director of PRG since March 18, 1996.
Dr. Rayner currently serves as the Chairman of the Eyecare Providers of
Mississippi and is a member of the Advisory Council of the University of
Tennessee Department of Ophthalmology Foundation. Dr. Rayner practices at the
Rayner Eye Clinic in Oxford, Mississippi, which was one of the founding
practices of EyeCorp. He has served on the Advisory Committee to the American
Academy of Ophthalmology and on the boards of directors of Medical Marketing and
the University of Mississippi Foundation. He is past Chairman of the Board of
the Oxford University School. Dr. Rayner received his medical degree from the
University of Mississippi School of Medicine in 1966 and served his internship
and residency at the University of Tennessee City of Memphis Hospitals. He
served fellowships at both Johns Hopkins Medical School and the Smith-Kettlewell
Institute.
David M. Schneider, M.D. has served as a director of PRG since June 28,
1995. Dr. Schneider has been the President of the Midwest Eye Center since 1985,
serving as Surgeon and Director. He has been in practice since 1981 specializing
in refractive surgery. He is an American Board of Ophthalmology Diplomate and an
Active Fellow of the American Academy of Ophthalmology. Dr. Schneider received
his M.D. degree from the University of Cincinnati. He completed his residency at
the University of Cincinnati, with post residency fellowship training at the
Mary Shiels Eye Hospital in Dallas, Texas and the University of Cincinnati.
Paul M. Shimoff has served as a director of PRG since June 28, 1995. Mr.
Shimoff has been engaged in the private practice of law since 1972 and currently
practices with McPeters McAlearney Shimoff & Hatt. Mr. Shimoff has served as a
director of San Bernardino Community Hospital since 1992 and San Bernardino
Community Hospital Foundation since 1990. He is also a Fellow of The American
College of Trust and Estate Counsel, a California Board of Legal Specialization
Certified Specialist in Taxation Law and a former President of the San
Bernardino County Bar Association. Mr. Shimoff received his J.D. from the
University of California, Hastings College of Law in 1972 and received his B.A.
in Economics from U.C.L.A. in 1969.
Ronald L. Stanfa has served as a director of PRG since June 28, 1995. Mr.
Stanfa has served as a Managing Director of Notre Capital Ventures II, L.L.C.
since July 1995. From June 1993 to July 1995, Mr. Stanfa was an independent
business consultant and investor. Mr. Stanfa was a founder and has served as a
director of Allwaste, Inc., an environmental services company, since 1986. From
October 1988 to June 1993, Mr. Stanfa was the Vice President -- Corporate
Development of Allwaste, Inc. Mr. Stanfa also served as a director of U.S.
Delivery Systems, Inc., a same day delivery company, from 1994 until its sale in
February 1996. Mr. Stanfa received his B.S. in Economics from Northern Illinois
University in 1969.
P. Harold Wallar, M.D. has served as a director of PRG since June 28, 1995.
Dr. Wallar has served as President of the Inland Eye Institute and of the Loma
Linda Ophthalmology Medical Group since January 1, 1993. Dr. Wallar currently
serves as a Clinical Associate Professor of Ophthalmology at Loma Linda
University. Dr. Wallar has also served as President of the Tri-County Eye
Society. Dr. Wallar received his M.D. degree from Loma Linda University,
performed his internship at the University of California, Davis' Sacramento
Medical Center and completed his residency at Loma Linda University. Dr. Wallar
furthered his training with a fellowship in Strabismus and Pediatric
Ophthalmology at the University of Pittsburgh Eye and Ear Hospital, where he
also held a university faculty appointment.
Kenneth C. Westfield, M.D. has served as a director of PRG since June 28,
1995. Dr. Westfield has served since 1995 as Director and President of Westfield
Eye Center, Kenneth C. Westfield, M.D., Ltd. and has served since 1981 as
Director and President of the Mojave Eye Surgery Center and as Director for the
Rudy Manthei, D.O. and Kenneth C. Westfield, M.D. Nevada Eye Care Network, Ltd.
Dr. Westfield served from 1981 to 1995 as Director and President of the Southern
Nevada Eye Clinic, Kenneth C. Westfield, M.D., Ltd. and as Vice President and
Treasurer of the Nevada Institute of Ambulatory Surgery. Dr. Westfield has been
in private practice since 1980. Dr. Westfield received his M.B.A. from the
University of California, Irvine, in 1991 and his medical degree from Wayne
State University in 1976.
41
<PAGE> 42
BOARD OF DIRECTORS
The Board of Directors is divided into three classes with five or six
directors in each class. Each class serving for a term of three years. At each
annual meeting of stockholders, directors of the class the term of which then
expires will be elected by the holders of the Common Stock to succeed those
directors whose terms are expiring. PRG's bylaws provide that a majority of the
Board of Directors must be licensed to practice medicine.
Drs. Baum, Fritch, Herron, McDonald, Noreika, Schneider, Wallar and
Westfield and Messrs. Gilleland, Shimoff and Stanfa agreed with PRG and Notre
Capital Ventures, Ltd. ("Notre") (PRG's founding stockholder) to serve as a
director of PRG upon the consummation of the IPO.
Mr. Burch and Drs. Meyer and Rayner agreed with PRG and EyeCorp to serve as
a director of PRG upon the consummation of the EyeCorp Merger.
Directors who are employees of PRG or of an Affiliated Practice do not
receive additional compensation for serving as directors. Each director who is
neither an employee of PRG nor of an Affiliated Practice receives a fee of
$2,000 for attendance at each Board of Directors meeting (whether the meeting is
in person or telephonic) and $1,500 (if in person; $500 if telephonic) for each
committee meeting (unless held on the same day as a Board of Directors meeting)
and an initial grant of nonqualified options to purchase 10,000 shares of Common
Stock. Nonemployee directors (whether or not employed by an Affiliated Practice)
receive annual grants of nonqualified options to purchase 5,000 shares of Common
Stock. All directors of PRG are reimbursed for out-of-pocket expenses incurred
in attending meetings of the Board of Directors or committees thereof, and for
other expenses incurred in their capacity as directors of PRG.
SUMMARY COMPENSATION TABLE
The following table sets forth a summary of the compensation paid by PRG
for services rendered in all capacities to PRG during 1995 to the chief
executive officer and former chief executive officer (the "Named Executive
Officers"). Other than the Named Executive Officers, there were no officers of
PRG whose total annual compensation for 1995 exceeded $100,000.
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
--------------------------------
AWARDS
ANNUAL COMPENSATION ---------------------- PAYOUTS
---------------------------------- SECURITIES -------
OTHER ANNUAL RESTRICTED UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL COMPENSATION STOCK OPTIONS PAYOUTS COMPENSATION
POSITION SALARY($) BONUS($) ($) AWARDS($) (#) ($) ($)
- --------------------------------- -------- -------- ------------ --------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Emmett E. Moore.................. $100,885 -- -- -- 200,000 -- --
Chairman of the Board, Chief
Executive Officer and President
Gregory L. Solomon............... $ 49,326 -- -- -- -- -- $750,000(1)
Former Chairman of the Board
and Chief Executive Officer
</TABLE>
- ---------------
(1) Represents amount paid pursuant to Separation and Mutual Release Agreement
upon Mr. Solomon's departure from PRG. See "Employment, Termination and
Change of Control Agreements."
42
<PAGE> 43
OPTION GRANTS DURING 1995
The following table presents information regarding 1995 grants of options
to purchase shares of Common Stock for each of the Named Executive Officers:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
---------------------------------------------------------- ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE
SECURITIES OPTIONS APPRECIATION
UNDERLYING GRANTED TO EXERCISE OR FOR OPTION TERM(1)
OPTIONS EMPLOYEES IN BASE EXPIRATION ------------------------
NAME GRANTED(#) FISCAL YEAR PRICE($/SH)(2) DATE 5%($) 10%($)
- ----------------------------------- ---------- ------------ -------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Emmett E. Moore.................... 50,000(3)(5) 4.2% $ 5.00 3/30/05 $ 157,224 $ 398,436
150,000(4)(5) 12.6 13.00 4/20/05 1,226,345 3,107,798
Gregory L. Solomon(6).............. -- -- -- -- -- --
</TABLE>
- ---------------
(1) The dollar amounts in these columns represent the potential realizable value
that might be realized upon exercise of the options immediately prior to
the expiration of their term, assuming that the market price of Common
Stock appreciates in value from the date of grant at the 5% and 10% annual
rates prescribed by regulation and therefore are not intended to forecast
possible future appreciation, if any, of the price of Common Stock. These
numbers do not take into account provisions of certain options providing
for termination of the option following termination of employment,
nontransferability or vesting over periods.
(2) The option exercise price may be paid in shares of Common Stock owned by the
executive officer, in cash, or in any other form of valid consideration as
determined by the Compensation Committee in its discretion. The exercise
price of each option was equal to the fair market value of the Common Stock
on the date of grant.
(3) Option becomes exercisable with respect to 20% of the shares covered thereby
on March 31 of each of 1996, 1997, 1998, 1999 and 2000.
(4) Option becomes exercisable with respect to 20% of the shares covered thereby
on April 21 of each of 1996, 1997, 1998, 1999 and 2000.
(5) Option becomes immediately exercisable in the event of a change or
threatened "change in control" (each as defined in PRG's 1995 Stock Option
Plan, as amended) of PRG and in the event of certain mergers and
reorganizations of PRG.
(6) Excludes grant of options to purchase 100,000 shares of Common Stock, which
was cancelled pursuant to Separation and Mutual Release Agreement upon Mr.
Solomon's departure from PRG. See "-- Employment, Termination and Change of
Control Agreements."
AGGREGATED OPTION EXERCISES DURING 1995 AND YEAR-END OPTION VALUES
The following table presents information regarding options exercised in
1995 and the value of options outstanding at December 31, 1995 for each of the
Named Executive Officers:
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY
UNDERLYING UNEXERCISED OPTIONS AT
OPTIONS AT FY-END(#) FY-END($)(1)
SHARES ACQUIRED VALUE ------------------------------- -------------------------------
NAME ON EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------ --------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Emmett E. Moore......... -- -- -- 200,000 -- $ 1,775,000
Gregory L. Solomon...... -- -- -- -- -- --
</TABLE>
- ---------------
(1) The closing price for the Common Stock as listed on the New York Stock
Exchange on December 29, 1995, the last trading day of 1995, was $19.875.
Value is calculated on the basis of the difference between the option
exercise price and $19.875 multiplied by the number of shares of Common
Stock underlying the option.
43
<PAGE> 44
EMPLOYMENT, TERMINATION AND CHANGE OF CONTROL AGREEMENTS
Mr. Moore has entered into an employment agreement with PRG providing for
an annual salary of $315,000 in 1996. Such employment agreement provides that in
the event of a termination of employment by PRG other than (i) for cause, (ii)
upon death or disability or (iii) upon notice 30 days prior to an automatic
renewal date occurring after five years from the date of first employment, Mr.
Moore shall be entitled to receive from PRG a payment equal to the amount of Mr.
Moore's then current annual salary, to be paid in twelve monthly installments,
plus a payment for accrued but unpaid wages and expense reimbursements. Such
employment agreement provides that in the event Mr. Moore's employment
terminates within twelve months following a change in control (as defined in
such employment agreement) of PRG, PRG shall pay Mr. Moore 2.99 times the sum of
Mr. Moore's (i) base salary, (ii) maximum potential bonus for the year of the
change of control and (iii) certain other compensation, with certain
adjustments. The employment agreement provides that PRG will pay an amount
necessary to reimburse such employee, on an after tax basis, for any excise tax
due under Section 4999 of the Code, as a result of such payment being treated as
a "parachute payment" under Section 280G of the Code. The employment agreement
contains a covenant-not-to-compete with PRG for a period of two years following
termination of employment.
In addition to base salary, Mr. Moore through his employment agreement is
eligible for a bonus based on earnings per share growth. Bonuses are capped at
50% of base salary. His agreement began in April 1996 and is for a term of five
years.
Prior to his departure from PRG, Mr. Solomon was a party to an employment
agreement on terms similar to those of Mr. Moore's described above, except that
it provided for an annual base salary of $225,000. Upon Mr. Solomon's departure,
PRG and Mr. Solomon entered into a Separation and Mutual Release Agreement (the
"Separation Agreement"). Pursuant to the Separation Agreement, and in exchange
for Mr. Solomon's release of any claims and liabilities against PRG and certain
restrictions on Mr. Solomon's ability to compete with PRG, he received a
lump-sum payment of $750,000 in September of 1995 and a lump-sum payment of
$350,000 in January of 1996. In consideration of the above payments, the
Separation Agreement provides for the cancellation of all agreements between PRG
and Mr. Solomon relating to options to purchase PRG Common Stock.
CERTAIN TRANSACTIONS
ORGANIZATION OF PRG
In connection with the formation of PRG, PRG issued to Notre 100 shares of
Common Stock at an aggregate purchase price of $100.00, in connection with a
10,999 for one stock dividend an additional 1,099,900 shares of Common Stock for
an additional contribution of capital of $10,900 and in connection with a
1.090632 for one stock split an additional 99,695 shares for an additional
contribution of capital of $997. Further, PRG issued to each of Mark P. Kingston
and Richard M. Owen 93,750 shares of Common Stock for an aggregate contribution
of capital of $1,875 and in connection with a 1.090632 for one stock split an
additional 8,496 shares for an aggregate additional contribution of capital of
$170. Additionally, Notre advanced to PRG $1,745,000 to fund transaction costs
in exchange for the right to receive 174,500 shares of Class A Preferred, which
Class A Preferred was redeemed on July 7, 1995 by PRG upon the payment to Notre
of $1,745,000 plus any accrued dividends.
In connection with the Reorganization, certain directors, or entities in
which they (or a member of their immediate family) had an ownership interest,
received cash and shares of Common Stock as follows: Alan C. Baum, M.D.: 224,842
shares and $730,737; Charles D. Fritch, M.D.: 76,923 shares and warrants to
purchase 40,000 shares at $13.00 per share; Bruce E. Herron, M.D.: 133,000
shares; James E. McDonald, M.D.: 125,869 shares and $409,071; Joseph C. Noreika,
M.D.: 115,400 shares and $375,050; David M. Schneider, M.D.: 323,520 shares and
$1,051,440; P. Harold Wallar, M.D.: 208,662 shares and $678,113; and Kenneth C.
Westfield, M.D.: 301,830 shares and $574,860.
On June 28, 1995, PRG entered into the ASC Option with the stockholders of
one of the Founding Affiliated Practices of which Bruce E. Herron, M.D. is a
stockholder, pursuant to which such stockholders had the right to require PRG to
purchase from such stockholders their stock in the entity owning such ASC. The
44
<PAGE> 45
ASC Option was exercised and the acquisition of the stock of such entity by PRG
was consummated on March 18, 1996. The purchase price paid by PRG consisted of
$3,100,000 in cash and $3,500,000 in debt in the form of 7% unsecured notes
generally payable in equal quarterly installments of principal and interest over
a term of five years. Prior to consummation of such acquisition, Eye Clinic,
P.C., the entity acquired in the acquisition assumed $2,828,000 in indebtedness
owed by a partnership (the "Partnership") in which Dr. Herron is a partner. Such
$2,828,000 in indebtedness bore interest at the rate of LIBOR plus 1.5% per
annum, was due in 2005, was secured by real estate and improvements that were
transferred to the Partnership and was paid in full by PRG concurrently with the
Eye Clinic, P.C. acquisition.
REAL ESTATE TRANSACTIONS
On June 28, 1995, PRG became the lessee under a variety of leases. PRG
assumed an office lease for which a partnership, in which Bruce E. Herron, M.D.
is a partner, is the lessor; the annual expenditures under the lease are
anticipated to be approximately $170,880 ($85,440 was paid by PRG under such
lease in 1995). PRG assumed one office lease for which James E. McDonald, II,
M.D. is the lessor; the aggregate annual expenditures under the lease are
anticipated to be $185,760 ($92,880 was paid by PRG under such lease in 1995).
PRG assumed five office leases for which various partnerships, in which P.
Harold Wallar, M.D. is a partner, are the lessors; the aggregate annual
expenditures under these leases are anticipated to be approximately $501,572
($272,859 was paid by PRG under such leases in 1995). PRG assumed four office
leases for which a partnership, in which Kenneth C. Westfield, M.D. is a
partner, is the lessor; the aggregate annual expenditures under these leases are
anticipated to be $160,188 per year ($80,094 was paid by PRG under such leases
in 1995).
CERTAIN INDEBTEDNESS
As part of the Reorganization, PRG assumed various obligations of Dr.
McDonald totaling $166,871 as of June 30, 1995 with interest rates ranging from
7.50% to 9.75%.
On April 8, 1994, the Vitreoretinal Foundation, of which Dr. Meyer is a
general partner, borrowed approximately $1,000,000 from EyeCorp at an annual
interest rate of 10.25% pursuant to a promissory note that matures on April 10,
1999. On December 31, 1995, approximately $840,000 principal amount of such note
was outstanding.
SERVICE AGREEMENTS
In connection with the Reorganization, PRG entered into Service Agreements
with the Founding Affiliated Practices in which certain directors have an
ownership interest. Service fees paid to PRG by such Founding Affiliated
Practices in which certain directors had an ownership interest were as follows:
Alan C. Baum, M.D. (TEI & Assoc.) $3,245,635; Charles D. Fritch, M.D. (Fritch
Eye Care Center) $3,928,171; Bruce E. Herron, M.D. (Eye Clinic, P.C.)
$2,985,102; James E. McDonald, M.D. (McDonald Eye Associates, P.A.) $1,034,556;
Joseph C. Noreika, M.D. (TPZ, Inc.) $697,746; David M. Schneider, M.D. (David M.
Schneider, M.D., Inc.) $2,005,045; P. Harold Wallar, M.D. (Inland Eye Institute
Medical Group, Inc.) $8,670,925; and Kenneth C. Westfield, M.D. (Westfield Eye
Center) $2,074,921.
EYECORP TRANSACTION
Certain individuals that became directors of PRG upon consummation of the
EyeCorp Merger previously owned securities of EyeCorp. In connection with the
EyeCorp Merger, such individuals received securities of PRG as follows: Lucius
E. Burch, III (options to acquire 5,820 shares of Common Stock); David Meyer,
M.D. (1,727,249 shares of Common Stock); and James W. Rayner, M.D. (485,376
shares of Common Stock).
In connection with the EyeCorp Merger, PRG became the sole stockholder of
EyeCorp, which is a party to Service Agreements with certain entities that the
following individuals, who are now directors of PRG, have ownership interests
in: David Meyers, M.D. and James W. Rayner, M.D. As the EyeCorp Merger was
consummated in 1996, no fees were paid to PRG in 1995 under such Service
Agreements.
45
<PAGE> 46
COMPANY POLICY
It is anticipated that future transactions with affiliates of PRG will be
minimal, will be approved by a majority of the disinterested members of the
Board of Directors and will be made on terms no less favorable to PRG than could
be obtained from unaffiliated third parties. PRG does not intend to make any
further loans to, or incur any indebtedness to, any of its executive officers or
directors.
46
<PAGE> 47
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information with respect to beneficial
ownership of Common Stock as of April 19, 1996 by (i) all persons known to PRG
to be the beneficial owner of 5% or more of the Common Stock, (ii) each director
of PRG, (iii) each Named Executive Officer, (iv) all PRG directors and executive
officers as a group and (v) each Selling Stockholder. This table does not
include shares of Common Stock that may be purchased pursuant to options not
exercisable within 60 days of April 19, 1996. All persons listed have sole
voting and investment power with respect to their shares unless otherwise
indicated.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO THE OWNED AFTER THE
OFFERING OFFERING
---------------------- SHARES ----------------------
NAME NUMBER PERCENT TO BE SOLD NUMBER PERCENT
- ----------------------------------------- --------- ------- ---------- --------- -------
<S> <C> <C> <C> <C> <C>
Directors and Executive Officers
Emmett E. Moore.......................... 50,500(1) * -- 50,500(1) *
Richard M. Owen.......................... 117,247(2) * -- 117,247(2) *
Alan C. Baum, M.D........................ 238,670(3) 1.3% -- 238,670(3) 1.1%
Lucius E. Burch, III..................... -- * -- -- *
Charles D. Fritch, M.D................... 125,923(4) * -- 125,923(4) *
Richard A. Gilleland..................... -- * -- -- *
Bruce E. Herron, M.D..................... 144,985(5) * -- 144,985(5) *
James E. McDonald, II, M.D............... 125,869(6) * -- 125,869(6) *
David Meyer, M.D......................... 1,727,249(7) 9.7 -- 1,727,249(7) 8.1
Joseph C. Noreika, M.D................... 118,314(8) * -- 118,314(8) *
James W. Rayner, M.D..................... 485,376 2.7 -- 485,376 2.3
David M. Schneider, M.D.................. 328,520 1.9 -- 328,520 1.5
Paul M. Shimoff.......................... 1,000 * -- 1,000 *
Ronald L. Stanfa......................... 25,590 * -- 25,590 *
P. Harold Wallar, M.D.................... 208,650(9) 1.2 -- 208,650(9) *
Kenneth C. Westfield, M.D................ 301,830 1.7 -- 301,830 1.4
All directors and executive officers as a
group (19 persons)..................... 4,137,361(10) 23.1 4,137,361(10) 19.5
Selling Stockholders
William Aden, M.D........................ 150,724 * 55,736 94,988 *
Robert Alongi, O.D....................... 2,819 * 446 2,373 *
Robert Alpert(11)........................ 100,590 * 25,590 75,000 *
John D. Armstrong, M.D................... 158,219 * 10,000 148,219 *
Perry S. Binder, M.D..................... 41,007 * 2,973 38,034 *
Paul A. Blacharski, M.D.................. 208,360 1.2 5,202 203,158 *
Basil Bourque(11)........................ 8,530 * 2,973 5,557 *
Earl R. Bryant(11)....................... 25,590 * 9,289 16,301 *
James E. Burnes, M.D..................... 59,781 * 8,229 51,552 *
Edmund L. Burnett, M.D................... 17,887 * 6,317 11,570 *
William K. Chow.......................... 5,190 * 743 4,447 *
Chrismatt Capital Corporation(12)........ 42,918 * 31,894 11,024 *
Gregory T. Clariday, M.D................. 64,774 * 18,579 46,195 *
Boyce Craig, M.D......................... 10,054 * 743 9,311 *
William L. Decker, M.D................... 294,014 1.7 52,020 241,994 1.1
Craig M. DeClark, O.D.................... 13,337 * 743 12,594 *
Loren L. Denler, M.D..................... 208,360 1.2 77,417 130,943 *
David D. Dulaney, M.D.................... 161,645 * 8,918 152,727 *
John L. Elfervig, M.D.................... 149,143 * 10,000 139,143 *
Fairfield Management, L.L.C.(13)......... 42,918 * 34,315 8,603 *
Allan H. Fradkin, M.D.................... 44,964 * 14,863 30,101 *
Lawrence A. Gans, M.D.................... 58,909 * 8,918 49,991 *
John Gilbert............................. 51,123 * 19,413 31,710 *
Barbara A. Gold Charitable Remainder
Trust.................................. 9,290 * 9,290 -- *
Daniel H. Gold Charitable Remainder
Trust.................................. 9,289 * 9,289 -- *
Daniel I. Goldman, M.D................... 84,687 * 52,020 32,667 *
</TABLE>
47
<PAGE> 48
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO THE OWNED AFTER THE
OFFERING OFFERING
---------------------- SHARES ----------------------
NAME NUMBER PERCENT TO BE SOLD NUMBER PERCENT
- ----------------------------------------- --------- ------- ---------- --------- -------
<S> <C> <C> <C> <C> <C>
James M. Gordon, M.D..................... 117,785 *% 37,157 80,628 *%
Michael Gordon, M.D...................... 41,007 * 2,973 38,034 *
Henry T. Grizzard, M.D................... 31,446 * 20,065 11,381 *
Charles P. Haddad, O.D................... 4,262 * 743 3,519 *
1996 Harter Charitable Trust............. 37,157 1.1 37,157 -- *
John R. and Nancy Shepherd Family
Trust.................................. 125,999 * 40,526 85,473 *
Lowell Jones, Jr., O.D................... 43,695 * 8,175 35,520 *
Jeffrey Klein(11)........................ 17,955 * 13,343 4,612 *
Lacy A. Koonce, M.D...................... 88,046 * 7,431 80,615 *
BHN-1 Intervivos Standard Charitable
Remainder Trust........................ 74,314 1.2 74,314 -- *
Mann Berkeley Eye Center................. 264,053 1.5 22,294 241,759 1.1
Lynn B. McMahan, M.D..................... 478,797 2.7 185,786 293,011 1.4
Fred L. McMillan, M.D.................... 68,893 * 17,092 51,801 *
Sean F. McNamara(11)..................... 8,530 * 3,716 4,814 *
Bernard A. Milstein, M.D................. 44,964 * 7,431 37,533 *
Michael Minadeo, M.D..................... 192,000 1.1 41,823 150,177 *
Charles R. Moore, M.D.................... 27,671 * 13,835 13,836 *
Norris L. Newton, Jr., M.D............... 35,369 * 17,684 17,685 *
Norris L. Newton, Sr., M.D............... 70,562 * 35,281 35,281 *
Daniel J. O'Connor, M.D.................. 56,811 * 16,956 39,855 *
Patrick O'Shaughnessy(11)................ 3,732 * 2,773 959 *
Alan Osofsky(11)......................... 14,299 * 2,973 11,326 *
John Pinto............................... 15,705 * 557 15,148 *
The Charles T. Post, Jr. Charitable
Remainder Trust........................ 76,680 * 56,984 19,696 *
Charles Post, Jr., M.D................... 223,200 1.3 28,492 194,708 *
The Post Children's Trust................ 69,840 * 51,901 17,939 *
James A. Price, M.D...................... 137,111 * 14,863 122,248 *
Mark Pytosh(11).......................... 13,291 * 9,877 3,414 *
Oscar Ramos, O.D......................... 6,601 * 1,784 4,817 *
Ned M. Reinstein, M.D.................... 34,966 * 2,085 32,881 *
Joseph Remke, III, O.D................... 17,024 * 1,263 15,761 *
Philip Roholt, M.D....................... 54,543 * 4,013 50,530 *
Charles A. Sargent, M.D.................. 104,284 * 8,175 96,109 *
Carl Shibata, M.D........................ 18,388 * 4,747 13,641 *
Gregory L. Solomon(14)................... 113,785 * 18,579 95,206 *
Steven O. Hansen Separate Property Trust,
dated August 28, 1995.................. 31,500 * 6,688 24,812 *
Mark Sulam(11)........................... 6,995 * 5,198 1,797 *
Rick Talbot(15).......................... 21,813 * 1,347 20,466 *
The Tooma Family Trust................... 208,360 1.2 115,931 92,429 *
Wasatch Capital Corporation c/o Michael
Baker(16).............................. 214,480 1.2 37,157 177,323 *
Bert Wollen(17).......................... 5,769 * 4,287 1,482 *
Art Woods, M.D........................... 84,115 * 37,158 46,957 *
Dominick Zarcone(11)..................... 4,665 * 3,466 1,199 *
</TABLE>
- ---------------
* Less than one percent.
(1) Includes 500 shares held by Mr. Moore's spouse and 40,000 shares which may
be purchased upon the exercise of options exercisable within 60 days of
April 19, 1996.
(2) Includes 15,000 shares which may be purchased upon the exercise of options
exercisable within 60 days of April 19, 1996.
48
<PAGE> 49
(3) Includes 14,192 shares of Common Stock held by affiliated general
partnerships in which Dr. Baum is a general partner.
(4) Includes a currently exercisable warrant to purchase 40,000 shares of
Common Stock held by a trust for which Dr. Fritch is a trustee and includes
76,923 shares of Common Stock held by such trust.
(5) Includes 7,935 shares of Common Stock held by a general partnership in
which Dr. Herron is a partner.
(6) Includes 3,443 shares of Common Stock held by a general partnership in
which Dr. McDonald's children are partners and 17,109 shares of Common
Stock held by Dr. McDonald's spouse.
(7) Includes 62,877 shares of Common Stock held by a general partnership in
which Dr. Meyer is a partner. Dr. Meyer's address is 813 Ridge Lake Blvd.,
Suite 400, Memphis, Tennessee 38120.
(8) Includes 13,192 shares of Common Stock held by Dr. Noreika's spouse and by
trusts for which Dr. Noreika's spouse is trustee.
(9) All such shares are held by a trust of which Dr. Wallar is a trustee.
(10) Includes a currently exercisable warrant to purchase 40,000 shares of
Common Stock and 90,000 shares which may be purchased upon the exercise of
options exercisable within 60 days of April 19, 1996.
(11) Member of Notre, the founding stockholder of PRG.
(12) Bert Wollen is president of such corporation.
(13) Bert Wollen is a managing director of such limited liability company.
(14) Mr. Solomon is the former Chairman of the Board and Chief Executive Officer
of PRG.
(15) Mr. Talbot is a vice president of PRG.
(16) Michael Baker is a member and managing director of Notre, the founding
stockholder of PRG.
(17) Member and managing director of Notre, the founding stockholder of PRG.
49
<PAGE> 50
DESCRIPTION OF CAPITAL STOCK
GENERAL
PRG's authorized capital stock consists of 30,000,000 shares of Common
Stock, par value $.01 per share, and 10,000,000 shares of preferred stock, par
value $.01 per share (the "Preferred Stock").
As of April 24, 1996, PRG had outstanding 17,806,663 shares of Common Stock
and no shares of Preferred Stock. At the annual meeting of PRG stockholders to
be held May 21, 1996, the Company's stockholders will consider and vote upon a
proposed amendment to the Company's Restated Certificate of Incorporation to
increase the number of authorized shares of Common Stock to 100,000,000 shares.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share on all
matters voted upon by stockholders, including the election of directors.
The Board of Directors is classified into three classes of directors, with
each class of directors consisting of a number of directors as equal in number
as possible, with the term of each class of directors expiring on a staggered
basis. See "Management -- Board of Directors." The classification of the Board
of Directors may make it more difficult to change the composition of the Board
of Directors and thereby may discourage or make more difficult an attempt by a
person or group to obtain control of PRG.
Subject to the rights of any then outstanding shares of Preferred Stock,
the holders of the Common Stock are entitled to such dividends as may be
declared in the discretion of the Board of Directors out of funds legally
available therefor. Holders of the Common Stock are entitled to share ratably in
the net assets of PRG upon liquidation after payment or provision for all
liabilities and any preferential liquidation rights of any Preferred Stock then
outstanding. The holders of Common Stock have no preemptive rights to purchase
shares of stock of PRG. Shares of Common Stock are not subject to any redemption
provisions and are not convertible into any other securities of PRG. All
outstanding shares of Common Stock are, and the shares of Common Stock being
offered hereby will be, upon payment of consideration therefor, fully paid and
nonassessable.
PREFERRED STOCK
Preferred Stock may be issued from time to time by the Board of Directors
as shares of one or more classes or series. Subject to the provisions of PRG's
certificate of incorporation and limitations prescribed by law, the Board of
Directors is expressly authorized to adopt resolutions to issue the shares, to
fix the number of shares and to change the number of shares constituting any
series, and to provide for or change the voting powers, designations,
preferences and relative, participating, optional or other special rights,
qualifications, limitations or restrictions thereof, including dividend rights
(including whether dividends are cumulative), dividend rates, terms of
redemption (including sinking fund provisions), redemption prices, conversion
rights and liquidation preferences of the shares constituting any class or
series of Preferred Stock, in each case without any further action or vote by
the stockholders.
PRG has designated 200,000 shares of Preferred Stock as Class A Preferred,
of which 174,500 shares were previously issued and redeemed. No shares of the
Class A Preferred are currently being registered with the Commission and PRG
does not currently intend to seek listing of the Class A Preferred on any stock
exchange. The Class A Preferred is non-voting and provides for cumulative
dividends that accrue at $0.70 per share per annum and are payable in cash
quarterly. PRG has the option to call all or any portion of the Class A
Preferred that is from time to time outstanding by payment to the holder of
$10.00 per share.
Except to the extent described under "-- Rights Plan" below, PRG has no
current plans to issue any shares of Preferred Stock of any class or series and
no shares of Preferred Stock are outstanding as of the date of this Prospectus.
50
<PAGE> 51
One of the effects of undesignated Preferred Stock may be to enable the
Board of Directors to render more difficult or to discourage an attempt to
obtain control of PRG by means of a tender offer, proxy contest, merger or
otherwise, and thereby to protect the continuity of PRG's management. The
issuance of shares of Preferred Stock pursuant to the Board of Directors'
authority described above may adversely affect the rights of the holders of
Common Stock. For example, Preferred Stock issued by PRG may rank prior to the
Common Stock as to dividend rights, liquidation preference or both, may have
full or limited voting rights and may be convertible into shares of Common
Stock. Accordingly, the issuance of shares of Preferred Stock may discourage
bids for the Common Stock at a premium to, or may otherwise adversely affect,
the market price of the Common Stock.
RIGHTS PLAN
On April 18, 1996, the Board of Directors of PRG declared a dividend of one
right to purchase preferred stock ("Right") for each outstanding share of Common
Stock to stockholders of record at the close of business on May 3, 1996. Each
Right entitles the registered holder to purchase from PRG a unit consisting of
one one-hundredth of a share (a "Unit") of Series A Junior Participating
Preferred Stock, par value $.01 per share (the "Preferred Stock"), at a purchase
price of $110.00 per Unit, subject to adjustment (the "Purchase Price"). The
description and terms of the Rights are set forth in a Rights Agreement dated as
of April 18, 1996 (the "Rights Agreement") between PRG and Chemical Mellon
Shareholder Services, L.L.C., as Rights Agent.
Initially, the Rights will be attached to all certificates representing
outstanding shares of Common Stock, and no separate certificates for the Rights
("Rights Certificates") will be distributed. The Rights will separate from the
Common Stock and a "Distribution Date" will occur upon the earlier of (i) ten
business days following a public announcement that a person or group of
affiliated or associated persons (an "Acquiring Person") has acquired, or
obtained the right to acquire, beneficial ownership of 15% or more of the
outstanding shares of Common Stock (the date of the announcement being the
"Stock Acquisition Date"), or (ii) ten business days (or such later date as may
be determined by PRG's Board of Directors before the Distribution Date occurs)
following the commencement of a tender offer or exchange offer that would result
in a person's becoming an Acquiring Person. Until the Distribution Date, (a) the
Rights will be evidenced by the Common Stock certificates (together with a copy
of a Summary of Rights or bearing the notation referred to below) and will be
transferred with and only with such Common Stock certificates, (b) new Common
Stock certificates issued after May 3, 1996 will contain a notation
incorporating the Rights Agreement by reference and (c) the surrender for
transfer of any certificate for Common Stock (with or without a copy of such
Summary of Rights) will also constitute the transfer of the Rights associated
with the Common Stock represented by such certificate. The Rights are not
exercisable until the Distribution Date and will expire at the close of business
on May 3, 2006, unless earlier redeemed or exchanged by PRG as described below.
As soon as practicable after the Distribution Date, Rights Certificates
will be mailed to holders of record of Common Stock as of the close of business
on the Distribution Date and, from and after the Distribution Date, the separate
Rights Certificates alone will represent the Rights. All shares of Common Stock
issued prior to the Distribution Date will be issued with Rights. Shares of
Common Stock issued after the Distribution Date in connection with certain
employee benefit plans or upon conversion of certain securities will be issued
with Rights. Except as otherwise determined by the Board of Directors, no other
shares of Common Stock issued after the Distribution Date will be issued with
Rights.
In the event (a "Flip-In Event") that a person becomes an Acquiring Person
(except pursuant to a tender or exchange offer for all outstanding shares of
Common Stock at a price and on terms that a majority of the independent
Continuing Directors (as hereinafter defined) determines to be fair to and
otherwise in the best interests of PRG and its stockholders (a "Permitted
Offer")), each holder of a Right will thereafter have the right to receive, upon
exercise of such Right, a number of shares of Common Stock (or, in certain
circumstances, cash, property or other securities of PRG) having a Current
Market Price (as defined in the Rights Agreement) equal to two times the
exercise price of the Right. Notwithstanding the foregoing, following the
occurrence of any Flip-In Event, all Rights that are, or (under certain
circumstances specified in the Rights Agreement) were, beneficially owned by any
Acquiring Person (or by certain related parties) will
51
<PAGE> 52
be null and void in the circumstances set forth in the Rights Agreement.
However, Rights are not exercisable following the occurrence of any Flip-In
Event until such time as the Rights are no longer redeemable by PRG as set forth
below.
In the event (a "Flip-Over Event") that, at any time from and after the
time an Acquiring Person becomes such, (i) PRG is acquired in a merger or other
business combination transaction (other than certain mergers that follow a
Permitted Offer), or (ii) 50% or more of PRG's assets or earning power is sold
or transferred, each holder of a Right (except Rights that previously have been
voided as set forth above) shall thereafter have the right to receive, upon
exercise, a number of shares of common stock of the acquiring company having a
Current Market Price equal to two times the exercise price of the Right. Flip-In
Events and Flip-Over Events are collectively referred to as "Triggering Events."
The Purchase Price payable, and the number of Units of Preferred Stock or
other securities or property issuable, upon exercise of the Rights are subject
to adjustment from time to time to prevent dilution (i) in the event of a stock
dividend on, or a subdivision, combination or reclassification of, the Preferred
Stock, (ii) if holders of the Preferred Stock are granted certain rights or
warrants to subscribe for Preferred Stock or convertible securities at less than
the current market price of the Preferred Stock, or (iii) upon the distribution
to holders of the Preferred Stock of evidences of indebtedness or assets
(excluding regular quarterly cash dividends) or of subscription rights or
warrants (other than those referred to above). With certain exceptions, no
adjustment in the Purchase Price will be required until cumulative adjustments
amount to at least 1% of the Purchase Price. No fractional Units are required to
be issued and, in lieu thereof, an adjustment in cash may be made based on the
market price of the Preferred Stock on the last trading date prior to the date
of exercise. Pursuant to the Rights Agreement, PRG reserves the right to require
prior to the occurrence of a Triggering Event that, upon any exercise of Rights,
a number of Rights be exercised so that only whole shares of Preferred Stock
will be issued.
At any time until ten days following the Stock Acquisition Date, PRG may
redeem the Rights in whole, but not in part, at a price of $.01 per Right,
payable, at the option of PRG, in cash, shares of Common Stock or such other
consideration as the Board of Directors may determine. Under certain
circumstances set forth in the Rights Agreement, the decision to redeem shall
require the concurrence of a majority of the Continuing Directors. After the
redemption period has expired, PRG's right of redemption may be reinstated prior
to the occurrence of any Triggering Event if (i) an Acquiring Person reduces its
beneficial ownership to 10% or less of the outstanding shares of Common Stock in
a transaction or series of transactions not involving PRG and (ii) there are no
other Acquiring Persons. Immediately upon the effectiveness of the action of the
Board of Directors ordering redemption of the Rights, with, where required, the
concurrence of the Continuing Directors, the Rights will terminate and the only
right of the holders of Rights will be to receive the $.01 redemption price. The
term "Continuing Director" means any member of the Board of Directors of PRG who
was a member of the Board prior to the time a Person becomes an Acquiring
Person, and any person who is subsequently elected to the Board if such person
is recommended or approved by a majority of the Continuing Directors, but shall
not include an Acquiring Person, or an affiliate or associate of an Acquiring
Person, or any representative or nominee of the foregoing entities.
At any time after the occurrence of a Flip-In Event and prior to a person's
becoming the beneficial owner of 50% or more of the shares of Common Stock then
outstanding, PRG (with the concurrence of a majority of the Continuing
Directors) may exchange the Rights (other than Rights owned by an Acquiring
Person or an affiliate or an associate of an Acquiring Person, which will have
become void), in whole or in part, at an exchange ratio of one share of Common
Stock, and/or other equity securities deemed to have the same value as one share
of Common Stock, per Right, subject to adjustment.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of PRG, including, without limitation, the right to vote
or to receive dividends. While the distribution of the Rights should not be
taxable to stockholders or to PRG, stockholders may, depending upon the
circumstances, recognize taxable income in the event that the Rights become
exercisable for Common Stock (or other consideration) of PRG or for the common
stock of the acquiring company as set forth above or are exchanged as provided
in the preceding paragraph.
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<PAGE> 53
Other than the redemption price, any of the provisions of the Rights
Agreement may be amended by the Board of Directors of PRG (in certain
circumstances, with the concurrence of the Continuing Directors) as long as the
Rights are redeemable. Thereafter, the provisions of the Rights Agreement may be
amended by the Board of Directors (in certain circumstances, with the
concurrence of the Continuing Directors) in order to cure any ambiguity, defect
or inconsistency, to make changes that do not materially adversely affect the
interests of holders of Rights (excluding the interests of any Acquiring
Person), or to shorten or lengthen any time period under the Rights Agreement;
provided, however, that no amendment to lengthen the time period governing
redemption shall be made at such time as the Rights are not redeemable.
A copy of the Rights Agreement has been filed as an Exhibit to the
Registration Statement of which this Prospectus forms a part, and this summary
description of the Rights is qualified in its entirety by reference to the
Rights Agreement.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire PRG on terms
not approved by the Board of Directors of the Company. As a result, the Rights
could add substantially to the cost of acquiring PRG, and consequently could
delay or prevent a change in control of the Company. These effects could
adversely affect the market price for the Common Stock.
STATUTORY BUSINESS COMBINATION PROVISION
PRG is subject to the provisions of Section 203 ("Section 203") of the
Delaware General Corporation Law (the "DGCL"). Section 203 provides, with
certain exceptions, that a Delaware corporation may not engage in any of a broad
range of business combinations with a person or an affiliate, or associate of
such person, who is an "interested stockholder" for a period of three years from
the date that such person became an interested stockholder unless: (i) the
transaction resulting in a person becoming an interested stockholder, or the
business combination, is approved by the Board of Directors of the corporation
before the person becomes an interested stockholder, (ii) the interested
stockholder acquired 85% or more of the outstanding voting stock of the
corporation in the same transaction that makes such person an interested
stockholder (excluding shares owned by the persons who are both officers and
directors of the corporation, and shares held by certain employee stock
ownership plans) or (iii) on or after the date the person becomes an interested
stockholder, the business combination is approved by the corporation's board of
directors and by the holders of at least 66% of the corporation's outstanding
voting stock at an annual or special meeting, excluding the shares owned by the
interested stockholder. Under Section 203, an "interested stockholder" is
defined as any person who is (i) the owner of 15% or more of the outstanding
voting stock of the corporation or (ii) an affiliate or associate of the
corporation and who was the owner of 15% or more of the outstanding voting stock
of the corporation at any time within the three-year period immediately prior to
the date on which it is sought to be determined whether such person is an
interested stockholder.
A corporation may, at its option, exclude itself from the coverage of
Section 203 by amending its certificate of incorporation or bylaws by action of
its stockholders to exempt itself from coverage. PRG has not adopted such an
amendment to the PRG's certificate of incorporation or bylaws. The applicability
of Section 203 to the Company could delay or prevent a change in control of the
Company and, consequently, could adversely affect the market price for the
Common Stock.
LIMITATION ON DIRECTORS' LIABILITIES
Pursuant to the PRG's certificate of incorporation and under the DGCL,
directors of PRG are not liable to PRG or its stockholders for monetary damages
for breach of fiduciary duty, except for liability in connection with a breach
of duty of loyalty, for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, for dividend payments or
stock repurchases illegal under Delaware law or any transaction in which a
director has derived an improper personal benefit.
53
<PAGE> 54
REGISTRATION RIGHTS
In connection with consummation of the EyeCorp Merger, EyeCorp's former
shareholders entered into a Registration Rights Agreement (the "EyeCorp
Registration Rights Agreement") pursuant to which the holders of the shares of
Common Stock issued in the EyeCorp Merger (the "EyeCorp Merger Shares") will,
prior to March 18, 1998, have certain "incidental" or "piggyback" registration
rights and, from March 18, 1997 through March 18, 1998, the holders of 20% or
more of the EyeCorp Merger Shares may demand that PRG file a registration
statement under the Securities Act covering the registration of up to 50% of the
EyeCorp Merger Shares. This demand registration right may be exercised only once
by the holders of EyeCorp Merger Shares. The number of shares registered
pursuant to the foregoing piggyback registration rights may be limited in some
cases by the offering's lead managing underwriter (or, if the offering is not
underwritten, by a financial advisor to PRG). PRG may, under certain
circumstances, defer the foregoing demand registration rights for 120 days if
PRG has determined that an earlier registration would be seriously detrimental
to PRG and its stockholders; in addition, if PRG is contemplating filing a
registration statement within 90 days relating to a public offering of PRG's
securities, PRG may delay such demand registration rights until 90 days
following the effectiveness of such previously contemplated offering.
In addition to the EyeCorp Registration Rights Agreement, PRG is a party to
a Registration Rights Agreement (the "Conversion Registration Rights Agreement")
with the holders of approximately 323,000 shares of Common Stock, under which
the holders of a majority of such shares (the "Conversion Shares") may elect
(the "Conversion Demand Registration") once to cause PRG to file a registration
statement registering up to 50% of the Conversion Shares.
Contemporaneously with the Reorganization, PRG entered into registration
rights agreements (the "Reorganization Registration Rights Agreements") with
each of the parties that received shares of Common Stock pursuant to the
Reorganization as well as Notre and certain management and other founding
stockholders of PRG (the "Reorganization Stockholders"), under which PRG granted
the Reorganization Stockholders piggyback registration rights for the shares of
Common Stock received by such Reorganization Stockholders in the Reorganization
(the "Registrable Common Stock"), which rights extend through June 23, 2001. The
number of shares registered pursuant to such piggyback registration rights may
be limited in some cases by the offering's lead managing underwriter (or, if the
offering is not underwritten, by a financial advisor to PRG) or by PRG. The
exercise of the Conversion Demand Registration rights will not trigger the
Reorganization Stockholders' piggyback registration rights or piggyback
registration rights pursuant to the EyeCorp Registration Rights Agreement.
In addition, under the Reorganization Registration Rights Agreements, the
holders of 25% of the Registrable Common Stock may elect (the "Reorganization
Demand Registration") once (with certain exceptions for withdrawn elections), at
any time after March 28, 1997 to cause PRG to file a registration statement
registering the resale of all or a portion of the Registrable Common Stock.
PRG may, under certain circumstances, defer such Conversion Demand
Registration and such Reorganization Demand Registration for up to 90 days if
PRG has determined that an earlier registration would be seriously detrimental
to PRG and its stockholders; in addition, if PRG is then contemplating filing a
registration statement within 90 days relating to a public offering of PRG's
securities, PRG may delay such Reorganization Demand Registration for up to 90
days following the effectiveness of such previously contemplated registration.
In connection with the consummation of certain of the 1996 Acquisitions,
PRG entered into registration rights agreements (the "1996 Registration Rights
Agreements") with each of the parties that received shares of Common Stock
pursuant to such 1996 Acquisitions (the "1996 Acquisition Stockholders"), under
which PRG granted the 1996 Acquisition Stockholders piggyback registration
rights for certain of the shares of Common Stock received by such 1996
Acquisition Stockholders in the 1996 Acquisitions, which rights extend for a
period of five years commencing on April 15, 1996. The number of shares
registered pursuant to such piggyback registration rights may be limited in some
cases by the offering's lead managing underwriter (or, if the offering is not
underwritten, by a financial advisor to PRG). The exercise of the Conversion
Demand Registration rights will not trigger the 1996 Acquisition Stockholders'
piggyback registration rights.
54
<PAGE> 55
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is Chemical Mellon
Shareholder Services, L.L.C.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of this offering and the Probable Acquisition, PRG will
have outstanding 21,380,795 shares of Common Stock. The 5,000,000 shares of
Common Stock to be sold in this offering will be freely tradable without
restriction under the Securities Act unless acquired by affiliates of PRG or
contractually restricted. In addition, the 3,553,000 shares of Common Stock
issued by PRG in the IPO are freely tradable without restriction except to the
extent held or acquired by affiliates of PRG. Further, an issuance of 755,894
shares of Common Stock by PRG was registered under the Securities Act; the
resale of 529,126 of such shares has been contractually restricted (subject to
such holders' rights to exercise certain registration rights) such that shares
may only be sold at such time and in such amounts as would be permissible under
Rule 144 as in effect from time to time as if such shares had been acquired on
June 28, 1995, and the remaining 226,768 of such shares are freely tradeable
except to the extent held or acquired by affiliates. In connection with certain
acquisitions, PRG issued 1,365,104 shares of Common Stock in transactions that
were not registered under the Securities Act, but the resale of such shares has
been registered under the Securities Act (some of such shares have already been
resold pursuant to such registration or are being sold in this offering by
certain Selling Stockholders pursuant to the exercise of certain registration
rights); with the exception of 23,518 shares, the resale of such shares is
contractually restricted (subject to such holders' rights to exercise certain
registration rights) as follows: 1,056,274 shares may be sold at such time and
in such amounts as would be permissible under Rule 144 as in effect from time to
time for shares acquired in February 1996; 69,102 shares are released from
contractual resale restrictions in four equal amounts on a quarterly basis, the
first group of which were released on April 1, 1996; 145,005 shares may only be
sold before January 1, 1997, pursuant to managed sales, which are offered on a
periodic basis or ratably each quarter; and 71,205 shares may be sold subject
only to a limitation of selling 10,000 shares per week. See "Description of
Capital Stock -- Registration Rights."
In connection with certain other acquisitions, PRG registered under the
Securities Act the issuance of an additional 692,476 shares of Common Stock; the
resale of 364,910 of such shares is restricted contractually to sales at such
times and in such amounts as would be permissible under Rule 144 as in effect
from time to time for shares acquired in April 1996 and 12,957 shares may only
be sold ratably each quarter (beginning June 30, 1996).
None of the remaining 10,067,231 outstanding shares of Common Stock
(collectively, the "Restricted Shares") have been issued in transactions
registered under the Securities Act, which means that they may be resold
publicly only in future transactions registered under the Securities Act or in
compliance with an exemption from the registration requirements of the
Securities Act, including the exemption provided by Rule 144 thereunder. The
holders of a substantial portion of such shares have certain registration
rights. See "Description of Capital Stock -- Registration Rights." In addition,
the resale of 3,049,674 of such shares of Common Stock issued prior to the IPO
or in connection with the Reorganization is contractually restricted through
June 28, 1997, subject to the exercise of certain registration rights (of which,
approximately 454,926 shares are being resold pursuant to such registration
rights by the Selling Stockholders in connection with this offering).
Further, 186,526 shares of Common Stock have been registered under the
Securities Act for issuance from time to time in connection with future
acquisitions. Such shares have, however, not been issued.
As of April 19, 1996, PRG had outstanding options to purchase up to
2,603,958 shares of Common Stock (and has reserved for issuance options to
purchase an additional 133,127 shares of Common Stock upon the designation of
optionees by certain third parties) under the Amended and Restated 1995 Stock
Option Plan, the 1995 Health Care Professionals Stock Option Plan and the
EyeCorp, Inc. 1995 Incentive and Non-Qualified Stock Option Plan, collectively.
PRG has registered the shares issuable upon exercise of options
55
<PAGE> 56
granted under such option plans and such shares will be eligible for resale in
the public market upon exercise. PRG also has a warrant outstanding for the
purchase of 40,000 shares of Common Stock at $13.00 per share. Upon issuance and
satisfaction of the applicable holding period, such shares will be eligible for
resale subject to the volume and certain other limitations of Rule 144
promulgated under the Securities Act.
In general, under Rule 144 as currently in effect, if two years have
elapsed since the later of the date of the acquisition of restricted shares of
Common Stock from PRG or any affiliate of PRG, the acquiror or subsequent holder
thereof may sell, within any three-month period, a number of shares that does
not exceed the greater of 1% of the then-outstanding shares of Common Stock or
the average weekly trading volume of the Common Stock on all exchanges and/or
reported through the automated quotation system of a registered securities
association during the four calendar weeks preceding the date on which notice of
the sale is filed with the Securities and Exchange Commission (the
"Commission"). Sales under Rule 144 are also subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about PRG. If three years have elapsed since the later of the date
of acquisition of restricted shares of Common Stock from PRG or any affiliate of
PRG and the acquiror or subsequent holder thereof is deemed not to have been an
affiliate of PRG at any time during the 90 days preceding a sale, such person
will be entitled to sell such shares under Rule 144(k) without regard to the
limitations described above.
The Commission has proposed certain amendments to Rule 144 that would
reduce to one year the holding period required prior to restricted securities
becoming eligible for resale in the public market under Rule 144 and would
reduce to two years the holding period required prior to a person becoming
eligible to effect sales under Rule 144(k). This proposal, if adopted, would
result in a substantial number of shares of Common Stock becoming eligible for
resale in the public markets significantly sooner than would otherwise be the
case, which could adversely affect the market price for the Common Stock. No
assurance can be given concerning whether or when such proposal will be adopted
by the Commission.
The Company has registered an additional 3,000,000 shares of its Common
Stock under the Securities Act for use by the Company in connection with future
acquisitions. These shares will generally be freely tradeable by non-affiliates
after their issuance, unless the sale thereof is contractually restricted. The
issuance of such shares is subject to certain limitations during the 90-day
period following the date of this Prospectus pursuant to the Company's lock-up
agreement with the Underwriters. See "Underwriting."
Prior to the IPO there had been no market for the Common Stock, and no
prediction can be made as to the effect, if any, that the sale of shares or the
availability of shares for sale will have on the market price prevailing from
time to time. Nevertheless, sales of substantial amounts of the Common Stock in
the public market could adversely affect prevailing market prices and the
ability of the Company to raise equity capital in the future.
56
<PAGE> 57
UNDERWRITING
Under the terms and subject to the conditions contained in the Underwriting
Agreement dated the date hereof, each Underwriter named below has severally
agreed to purchase, and the Company and the Selling Stockholders have agreed to
sell to such Underwriter, shares of Common Stock which equal the number of
shares set forth opposite the name of such Underwriter below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ------------------------------------------- ---------
<S> <C>
Smith Barney Inc........................... 1,201,700
Alex. Brown & Sons Incorporated............ 1,201,650
Volpe, Welty & Company..................... 1,201,650
J.C. Bradford & Co. ....................... 55,000
Cowen & Company............................ 55,000
Dean Witter Reynolds Inc. ................. 90,000
Donaldson, Lufkin & Jenrette
Securities Corporation................... 90,000
First Albany Corporation................... 55,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated............................. 90,000
Montgomery Securities...................... 90,000
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ------------------------------------------- ---------
<S> <C>
Morgan Keegan & Company, Inc. ............. 55,000
Morgan Stanley & Co. Incorporated.......... 90,000
Needham & Company, Inc. ................... 55,000
Oppenheimer & Co., Inc. ................... 90,000
PaineWebber Incorporated................... 90,000
Piper Jaffray Inc. ........................ 55,000
Rauscher Pierce Refsnes, Inc. ............. 55,000
Robertson, Stephens & Company, LLC......... 90,000
The Robinson-Humphrey Company, Inc. ....... 55,000
Salomon Brothers Inc ...................... 90,000
Sanders Morris Mundy Inc. ................. 90,000
Southcoast Capital Corp. .................. 55,000
---------
Total.......... 5,000,000
=========
</TABLE>
The Underwriters are obligated to take and pay for all shares of Common
Stock offered hereby (other than those covered by the over-allotment option
described below) if any such shares are taken.
The Underwriters, for whom Smith Barney Inc., Alex. Brown & Sons
Incorporated and Volpe, Welty & Company are acting as Representatives, propose
initially to offer part of the shares of Common Stock directly to the public at
the public offering price set forth on the cover page hereof and part to certain
dealers at a price that represents a concession not in excess of $.80 per share
under the public offering price. The Underwriters may allow, and such dealers
may reallow, a concession not in excess of $.10 per share to other Underwriters
or to certain other dealers. After the initial public offering, the public
offering price and such concessions may be changed by the Underwriters.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to an aggregate of 750,000
additional shares of Common Stock at the public offering price set forth on the
cover page hereof less underwriting discounts and commissions. The Underwriters
may exercise such option to purchase additional shares solely for the purpose of
covering over-allotments, if any, incurred in connection with the sale of the
shares offered hereby. To the extent such option is exercised, each Underwriter
will become obligated, subject to certain conditions, to purchase pro rata from
the Company, approximately the same percentage of such additional shares as the
number set forth next to such Underwriter's name in the preceding table bears to
the total number of shares in such table.
The Company, the Selling Stockholders and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act.
The Company, each of its officers and directors and the Selling
Stockholders, who will hold in the aggregate 7,914,168 shares of Common Stock
after this offering, have agreed that, for a period of 90 days after the date of
this Prospectus (the "90-Day Lock-Up Period"), they will not, without the prior
written consent of Smith Barney Inc., offer, sell, contract to sell or otherwise
dispose of any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for any shares of Common Stock except that during
the 90-Day Lock-Up Period the Company may issue up to 3,000,000 shares in
acquisitions so long as no more than 10 percent of the shares issued in such
acquisitions are freely tradeable during the 90-Day Lock-Up Period.
On May 11, 1995, PRG entered into a letter agreement with Smith Barney Inc.
pursuant to which the Company agreed to use Smith Barney Inc. as its exclusive
financial advisor for certain specified transactions.
57
<PAGE> 58
The letter agreement further provides Smith Barney Inc. with a first right of
refusal until March 1998 to act as exclusive agent or lead manager in connection
with certain financings of PRG. Smith Barney subsequently served as the lead
managing underwriter in the IPO. Pursuant to its letter agreement, Smith Barney
provided financial advisory services to the Company in connection with the
EyeCorp Merger and is entitled to receive customary compensation therefor.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for PRG
by Jackson & Walker, L.L.P., Dallas, Texas and for the Underwriters by Dewey
Ballantine, New York, New York.
EXPERTS
The audited financial statements of Physicians Resource Group, Inc. as of
December 31, 1994 and 1995 and for the period from inception, November 2, 1993,
through December 31, 1993 and for the two years ended December 31, 1995; the
audited supplemental combined financial statements of Physicians Resource Group,
Inc. as of December 31, 1994 and 1995, and for each of the three years in the
period ended December 31, 1995; the audited combined financial statements for
Physicians Resource Group, Inc. -- Founding Affiliated Practices as of December
31, 1993 and 1994 and for each of the three years in the period ended December
31, 1994; the audited financial statements for Physicians Resource
Group -- Barnet Dulaney Eye Center as of December 31, 1994 and 1995 and for each
of the two years in the period ended December 31, 1995; the audited combined
financial statements of Physicians Resource Group, Inc. -- Selected Acquisition
Practices as of December 31, 1994 and for the year ended December 31, 1994; and
the audited combined financial statements of Physicians Resource Group,
Inc. -- Certain Acquisition Practices as of December 31, 1995 and for the year
ended December 31, 1995 included in this Prospectus and elsewhere in the
Registration Statement to the extent and for the periods indicated in their
reports have been audited by Arthur Andersen LLP, independent public accountants
and are included herein in reliance upon the authority of said firm as experts
in giving said reports.
The financial statements of EyeCorp, Inc. (and Predecessor Entities) as of
December 31, 1994 and 1995 and for each of the three years in the period ended
December 31, 1995; the financial statements of EyeCorp, Inc. -- Baker
Acquisition Practice as of December 31, 1994 and for the year ended December 31,
1994; the financial statements of EyeCorp, Inc. -- Coleman Acquisition Practice
as of December 31, 1994 and for the year ended December 31, 1994; the combined
financial statements of EyeCorp, Inc. -- Eggleston Acquisition Practice as of
December 31, 1994 and for the year ended December 31, 1994; the combined
financial statements of EyeCorp, Inc. -- Gordon Acquisition Practice as of
December 31, 1994 and for the year ended December 31, 1994; the combined
financial statements of EyeCorp, Inc. -- Post Acquisition Practice as of
December 31, 1993 and 1994 and for the two years ended December 31, 1994; the
financial statements of EyeCorp, Inc. -- Southern Eye Center Acquisition
Practice as of December 31, 1993 and 1994 and for each of the three years in the
period ended December 31, 1994; and the combined financial statements of the
EyeCorp, Inc. -- Selected Acquisition Practices as of December 31, 1994 and for
the year ended December 31, 1994 included in this Registration Statement on Form
S-1 have been included herein in reliance on the reports Coopers & Lybrand
L.L.P., independent accountants, given on their authority as experts in
accounting and auditing.
58
<PAGE> 59
AVAILABLE INFORMATION
PRG is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended, and in accordance therewith files reports, proxy
statements and other information with the Commission. These materials can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at
the Commission's regional offices at Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, New York, New York
10048. Copies of these materials can also be obtained from the Commission at
prescribed rates by writing to the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549. In addition, shares of the
Common Stock, par value $.01 per share, of the Company are traded on the NYSE,
and such reports, proxy statements and other information may be inspected at the
offices of the New York Stock Exchange, Inc., 20 Broad Street, New York, New
York 10005.
PRG has filed with the Commission a Registration Statement on Form S-1 with
respect to the Common Stock offered hereby. This Prospectus constitutes part of
the Registration Statement and does not contain all the information contained in
the Registration Statement and exhibits and schedules thereto, certain portions
of which have been omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company and the Common
Stock offered hereby, reference is made to the Registration Statement including
the exhibits and schedules thereto. Statements contained in this Prospectus as
to the contents of any contract or any other document are not necessarily
complete, and in each instance, reference is made to the copy of such contract
or other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. All of these
documents may be inspected without charge at the addresses set forth in the
preceding paragraph.
59
<PAGE> 60
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
I. PHYSICIANS RESOURCE GROUP, INC.
PHYSICIANS RESOURCE GROUP, INC.:
Report of Independent Public Accountants........................................ F-4
Consolidated Balance Sheets as of December 31, 1994 and 1995.................... F-5
Consolidated Statements of Operations for the period from inception, November 2,
1993, through December 31, 1993, and for the two years ended December 31,
1995........................................................................... F-6
Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the
period from inception, November 2, 1993, through December 31, 1993 and for the
two years ended December 31, 1995.............................................. F-7
Consolidated Statements of Cash Flows for the period from inception, November 2,
1993, through December 31, 1993, and for the two years ended December 31,
1995........................................................................... F-8
Notes to Consolidated Financial Statements...................................... F-9
PHYSICIANS RESOURCE GROUP, INC. -- SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS
Report of Independent Public Accountants........................................ F-19
Supplemental Combined Balance Sheets as of December 31, 1994 and 1995........... F-20
Supplemental Combined Statements of Operations for the three years ended
December 31, 1995.............................................................. F-21
Supplemental Combined Statements of Changes in Stockholders' Equity for the
three years ended December 31, 1995............................................ F-22
Supplemental Combined Statements of Cash Flows for the three years ended
December 31, 1995.............................................................. F-23
Notes to Supplemental Combined Financial Statements............................. F-24
II. PHYSICIANS RESOURCE GROUP, INC. -- PRO FORMA
PHYSICIANS RESOURCE GROUP, INC. AND EYECORP, INC. -- UNAUDITED MERGER/SIGNIFICANT
TRANSACTIONS PRO FORMA COMBINED FINANCIAL STATEMENTS:
Unaudited Merger/Significant Transactions Pro Forma Financial Statements
Headnote....................................................................... F-37
Unaudited Merger/Significant Transactions Pro Forma Combined Balance Sheet as of
December 31, 1995............................................................. F-38
Unaudited Merger/Significant Transactions Pro Forma Combined Statement of
Operations for the year ended December, 1995................................... F-39
Notes to Unaudited Merger/Significant Transactions Pro Forma Combined Financial
Statements..................................................................... F-40
III. PHYSICIANS RESOURCE GROUP, INC. -- ACQUISITIONS
PHYSICIANS RESOURCE GROUP, INC. -- FOUNDING AFFILIATED PRACTICES
Report of Independent Public Accountants........................................ F-48
Combined Balance Sheets as of December 31, 1993 and 1994 (audited), and June 30,
1995 (unaudited)............................................................... F-49
Combined Statements of Operations for the three years ended December 31, 1994
(audited), and for the six months ended June 30, 1994 and 1995 (unaudited)..... F-50
Combined Statements of Owners' Equity for the three years ended December 31,
1994 (audited), and for the six months ended June 30, 1995 (unaudited)......... F-51
Combined Statements of Cash Flows for the three years ended December 31, 1994
(audited), and for the six months ended June 30, 1994 and 1995 (unaudited)..... F-52
Notes to Combined Financial Statements.......................................... F-53
PHYSICIANS RESOURCE GROUP, INC. -- BARNET DULANEY EYE CENTER:
Report of Independent Public Accountants........................................ F-61
Balance Sheets as of December 31, 1994 and 1995................................. F-62
Statements of Earnings for the two years ended December 31, 1995................ F-63
Statements of Owners' Equity for the two years ended December 31, 1995.......... F-64
</TABLE>
F-1
<PAGE> 61
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Statements of Cash Flows for the two years ended December 31, 1995.............. F-65
Notes to Financial Statements................................................... F-66
PHYSICIANS RESOURCE GROUP, INC. -- SELECTED ACQUISITION PRACTICES:
Report of Independent Public Accountants........................................ F-71
Combined Balance Sheets as of December 31, 1994 (audited) and 1995
(unaudited).................................................................... F-72
Combined Statements of Earnings for the years ended December 31, 1994 (audited)
and 1995 (unaudited)........................................................... F-73
Combined Statements of Owners' Equity for the years ended December 31, 1994
(audited) and 1995 (unaudited)................................................. F-74
Combined Statements of Cash Flows for the years ended December 31, 1994
(audited) and 1995 (unaudited)................................................. F-75
Notes to Combined Financial Statements.......................................... F-76
PHYSICIANS RESOURCE GROUP, INC. -- CERTAIN ACQUISITION PRACTICES:
Report of Independent Public Accountants........................................ F-83
Combined Balance Sheet as of December 31, 1995.................................. F-84
Combined Statement of Operations and Owners' Equity for the year ended
December 31, 1995............................................................. F-85
Combined Statement of Cash Flows for the year ended December 31, 1995........... F-86
Notes to Combined Financial Statements.......................................... F-87
IV. EYECORP, INC.
EYECORP, INC. (AND PREDECESSOR ENTITIES):
Report of Independent Public Accountants........................................ F-94
Balance Sheets at December 31, 1994 and 1995.................................... F-95
Statements of Operations for each of the three years in the period ended
December 31, 1995............................................................. F-96
Statements of Shareholders' Equity for each of the three years in the period
ended December 31, 1995........................................................ F-97
Statements of Cash Flows for each of the three years in the period ended
December 31, 1995............................................................. F-98
Notes to the Financial Statements............................................... F-99
V. EYECORP, INC. 1995 ACQUISITIONS
EYECORP, INC. -- BAKER ACQUISITION PRACTICE
Report of Independent Public Accountants........................................ F-111
Balance Sheet at December 31, 1994.............................................. F-112
Statements of Excess of Revenues Over Expenses for the years ended December 31,
1994 (audited) and 1995 (unaudited)............................................ F-113
Statements of Equity for the years ended December 31, 1994 (audited) and 1995
(unaudited).................................................................... F-114
Statements of Cash Flows for the years ended December 31, 1994 (audited) and
1995 (unaudited)............................................................... F-115
Notes to the Financial Statements............................................... F-116
EYECORP, INC. -- COLEMAN ACQUISITION PRACTICE:
Report of Independent Public Accountants........................................ F-119
Balance Sheet at December 31, 1994.............................................. F-120
Statements of Excess of Revenues Over Expenses for the years ended December 31,
1994 (audited) and 1995 (unaudited)............................................ F-121
Statements of Equity for the years ended December 31, 1994 (audited) and 1995
(unaudited).................................................................... F-122
Statements of Cash Flows for the years ended December 31, 1994 (audited) and
1995 (unaudited)............................................................... F-123
Notes to the Financial Statements............................................... F-124
</TABLE>
F-2
<PAGE> 62
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
EYECORP, INC. -- EGGLESTON ACQUISITION PRACTICE:
Report of Independent Public Accountants........................................ F-127
Combined Balance Sheet at December 31, 1994..................................... F-128
Combined Statements of Excess of Revenues Over Expenses for the years ended
December 31, 1994 (audited) and 1995 (unaudited)............................... F-129
Combined Statements of Equity for the years ended December 31, 1994 (audited)
and 1995 (unaudited)........................................................... F-130
Combined Statements of Cash Flows for the years ended December 31, 1994
(audited) and 1995 (unaudited)................................................. F-131
Notes to the Combined Financial Statements...................................... F-132
EYECORP, INC. -- GORDON ACQUISITION PRACTICE:
Report of Independent Public Accountants........................................ F-135
Combined Balance Sheet at December 31, 1994..................................... F-136
Combined Statements of Excess of Revenues Over Expenses for the years ended
December 31, 1994 (audited) and 1995 (unaudited)............................... F-137
Combined Statements of Equity for the years ended December 31, 1994 (audited)
and 1995 (unaudited)........................................................... F-138
Combined Statements of Cash Flows for the years ended December 31, 1994
(audited) and 1995 (unaudited)................................................. F-139
Notes to the Combined Financial Statements...................................... F-140
EYECORP, INC. -- POST ACQUISITION PRACTICE:
Report of Independent Public Accountants........................................ F-144
Combined Balance Sheet at December 31, 1993 and 1994............................ F-145
Combined Statements of Excess of Revenues Over Expenses for each of the two
years in the period ended December 31, 1994 (audited) and for the year ended
December 31, 1995 (unaudited).................................................. F-146
Combined Statements of Equity for each of the two years in the period ended
December 31, 1994 (audited) and for the year ended December 31, 1995
(unaudited).................................................................... F-147
Combined Statements of Cash Flows for each of the two years in the period ended
December 31, 1994 (audited) and for the year ended December 31, 1995
(unaudited).................................................................... F-148
Notes to the Combined Financial Statements...................................... F-149
EYECORP, INC. -- SOUTHERN EYE CENTER ACQUISITION PRACTICE:
Report of Independent Public Accountants........................................ F-153
Balance Sheets at December 31, 1993 and 1994.................................... F-154
Statements of Excess of Revenues Over Expenses for each of the two years in the
period ended December 31, 1994 (audited) and for the year ended December 31,
1995
(unaudited)................................................................... F-155
Statements of Equity for each of the two years in the period ended December 31,
1994 (audited) and for the year ended December 31, 1995 (unaudited)............ F-156
Statements of Cash Flows for each of the two years in the period ended December
31, 1994 (audited) and for the year ended December 31, 1995 (unaudited)........ F-157
Notes to the Combined Financial Statements...................................... F-158
EYECORP, INC. -- SELECTED ACQUISITION PRACTICES:
Report of Independent Public Accountants........................................ F-162
Combined Balance Sheet at December 31, 1994..................................... F-163
Combined Statements of Excess of Revenues Over Expenses for the years ended
December 31, 1994 (audited) and 1995 (unaudited)............................... F-164
Combined Statements of Equity for the years ended December 31, 1994 (audited)
and 1995 (unaudited)........................................................... F-165
Combined Statements of Cash Flows for the years ended December 31, 1994
(audited) and 1995 (unaudited)................................................. F-166
Notes to the Combined Financial Statements...................................... F-167
</TABLE>
F-3
<PAGE> 63
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Physicians Resource Group, Inc.:
We have audited the accompanying consolidated balance sheets of Physicians
Resource Group, Inc. (a Delaware Corporation) and subsidiaries as of December
31, 1994 and 1995 and the related consolidated statements of operations, changes
in stockholders' equity (deficit) and cash flows for the period from inception
(November 2, 1993) through December 31, 1993 and each of the two 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Physicians
Resource Group, Inc. and subsidiaries as of December 31, 1994 and 1995, and the
results of their operations and their cash flows for the period from inception
(November 2, 1993) through December 31, 1993 and each of the two years in the
period ended December 31, 1995, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 18, 1996
F-4
<PAGE> 64
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -- DECEMBER 31, 1994 AND 1995
(000'S, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
1994 1995
------ -------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................................... $ -- $15,963
Accounts receivable, net of allowance of $143........................... -- 640
Receivables due from Affiliated Practices............................... -- 6,265
Inventories............................................................. -- 909
Prepaid expenses and other current assets............................... 1,107 3,534
------ -------
Total current assets............................................ 1,107 27,311
PROPERTY AND EQUIPMENT, net............................................... -- 14,786
OTHER NONCURRENT ASSETS, net.............................................. 9 4,338
------ -------
Total assets.................................................... $1,116 $46,435
====== =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Obligation to former owners of Founding Affiliated Practices............ $ -- $ 933
Notes payable and current portion of long-term debt..................... -- 1,334
Accounts payable and accrued expenses................................... 803 4,248
Accrued taxes, payroll and executive resignation costs.................. -- 1,452
Amounts due to related parties and in 1995, the ASC Option.............. 320 3,100
------ -------
Total current liabilities....................................... 1,123 11,067
LONG-TERM DEBT, net of current portion.................................... -- 7,360
DEFERRED TAX LIABILITIES.................................................. -- 2,204
OTHER LONG-TERM LIABILITIES............................................... -- 272
------ -------
Total liabilities............................................... 1,123 20,903
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.01 par value, 30,000,000 shares authorized, 1,616,889
and 9,558,244 outstanding............................................ 16 96
Preferred stock, $.01 par value, 10,000,000 shares authorized, none
outstanding.......................................................... -- --
Additional paid-in capital.............................................. -- 23,787
Retained earnings (deficit)............................................. (23) 1,649
------ -------
Total stockholders' equity (deficit)............................ (7) 25,532
------ -------
Total liabilities and stockholders' equity (deficit)............ $1,116 $46,435
====== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 65
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (NOVEMBER 2, 1993) THROUGH DECEMBER 31, 1993
AND
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
(000'S, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1993 1994 1995
------ ------ -------
<S> <C> <C> <C>
REVENUES.......................................................... $ -- $ -- $26,395
------ ------ -------
COSTS AND EXPENSES:
Salaries, wages and benefits.................................... -- -- 12,161
Pharmaceuticals and supplies.................................... -- -- 3,380
General and administrative...................................... -- 19 6,547
Depreciation and amortization................................... -- 3 779
Interest (income) expense....................................... -- -- (236)
Executive resignation expenses.................................. -- -- 1,117
------ ------ -------
Total costs and expenses................................ -- 22 23,748
------ ------ -------
INCOME (LOSS) BEFORE INCOME TAXES................................. -- (22) 2,647
PROVISION FOR INCOME TAXES........................................ -- -- 975
------ ------ -------
NET INCOME (LOSS)................................................. $ -- $ (22) $ 1,672
====== ====== =======
NET INCOME (LOSS) PER SHARE....................................... $ -- $ (.01) $ .28
====== ====== =======
NUMBER OF SHARES USED IN NET INCOME (LOSS) PER SHARE
CALCULATION..................................................... 1,662 1,662 5,977
====== ====== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 66
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM INCEPTION (NOVEMBER 2, 1993) THROUGH DECEMBER 31, 1993
AND
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
(IN 000'S, EXCEPT SHARES)
<TABLE>
<CAPTION>
TOTAL
PREFERRED STOCK COMMON STOCK ADDITIONAL RETAINED STOCKHOLDERS'
------------------ ------------------- PAID-IN EARNINGS EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) (DEFICIT)
-------- ------ --------- ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, November 2, 1993............ -- $-- -- $-- $ -- $ -- $ --
Issuance of common stock........... -- -- 1,199,695 12 -- (12) --
Net income (loss).................. -- -- -- -- -- -- --
-------- --- --------- --- ------- ------ -------
BALANCE, December 31, 1993........... -- -- 1,199,695 12 -- (12) --
Capital contribution in conjunction
with stock split................ -- -- -- -- -- 11 11
Issuance of common stock........... -- -- 417,194 4 -- -- 4
Net income (loss).................. -- -- -- -- -- (22) (22)
-------- --- --------- --- ------- ------ -------
BALANCE, December 31, 1994........... -- -- 1,616,889 16 -- (23) (7)
Issuance of common stock in
conjunction with the
Reorganization and IPO.......... -- -- 7,941,355 80 37,149 -- 37,229
Cash dividends paid to owners of
Founding Affiliated Practices... -- -- -- -- (13,362) -- (13,362)
Issuance of preferred stock........ 174,500 2 -- -- 1,743 -- 1,745
Retirement of preferred stock...... (174,500) (2) -- -- (1,743) -- (1,745)
Net income......................... -- -- -- -- -- 1,672 1,672
-------- --- --------- --- ------- ------ -------
BALANCE, December 31, 1995........... -- $-- 9,558,244 $96 $23,787 $1,649 $25,532
======== === ========= === ======= ====== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 67
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (NOVEMBER 2, 1993) THROUGH DECEMBER 31, 1993
AND
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
(000'S)
<TABLE>
<CAPTION>
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................ $ -- $ (22) $ 1,672
Adjustments to reconcile net income (loss) to net cash
provided from operating activities:
Depreciation and amortization......................... -- 3 779
Change in deferred taxes.............................. -- -- 172
Changes in assets and liabilities:
Increase in accounts payable, accrued expenses and
accrued payroll.................................. -- -- 1,323
Decrease in accounts receivable, net and receivables
due from affiliates.............................. -- -- 2,257
Increase in inventories............................. -- -- (163)
Increase in prepaid expenses and other assets....... -- -- (3,134)
-------- -------- --------
Net cash (used) provided by operating
activities..................................... -- (19) 2,906
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash consideration paid to acquire a management service
organization, net of cash acquired.................... -- -- (2,174)
Cash paid to former owners of Founding Affiliated
Practices............................................. -- -- (2,218)
Additions to property and equipment...................... -- -- (1,297)
-------- -------- --------
Net cash used by investing activities............ -- -- (5,689)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash paid in connection with organization of the Company
and the initial public offering....................... -- (304) (5,509)
Proceeds from issuance of common stock................... -- 15 --
Proceeds from the initial public offering, net of
underwriting discounts................................ -- -- 42,953
Cash dividend paid to physician owners of Founding
Affiliated Practices.................................. -- -- (13,362)
Advances from related party.............................. -- 308 1,437
Retirement of indebtedness and leases.................... -- -- (2,538)
Payments of long-term debt and capital lease
obligations........................................... -- -- (2,490)
Retirement of preferred stock............................ -- -- (1,745)
-------- -------- --------
Net cash provided by financing activities........ -- 19 18,746
-------- -------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS.................. -- -- 15,963
CASH AND CASH EQUIVALENTS, beginning of period............. -- -- --
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of period................... $ -- $ -- $ 15,963
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE> 68
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION:
On June 28, 1995, Physicians Resource Group, Inc. (a Delaware Corporation),
and subsidiaries (PRG or the Company) consummated an initial public offering
(the Offering) and simultaneously exchanged cash, shares of its common stock and
a note payable for certain assets of and liabilities (the Reorganization)
associated with ten eye care practices (the Founding Affiliated Practices) in
Arizona, Arkansas, California, Nevada, Ohio, Tennessee and Texas. With respect
to nine of the ten practices, the exchange was accounted for using the
historical cost basis with the stock being valued at the historical cost of the
net assets received by PRG. Cash consideration given in these exchanges was
treated for accounting purposes as a dividend from the Company. Additionally,
the Company acquired certain assets and liabilities associated with one Founding
Affiliated Practice from a third party in exchange for cash and a note payable
in a transaction accounted for under the purchase method of accounting. For
purposes of the presentation of the financial statements herein, June 30, 1995,
has been used as the effective date of the Offering and Reorganization.
Concurrently with these transactions, the physicians associated with seven
of the Founding Affiliated Practices created new entities for the practice of
medicine. These new entities and the three remaining Founding Affiliated
Practices (collectively, with the subsequent acquisitions discussed below, the
Affiliated Practices or the Practices) entered into 40-year service agreements
with the Company. Under the terms of the service agreements, the Company is
providing management, marketing and administrative services to the Practices in
return for management service fees. As one component, the Company is receiving
service fees based on certain operating and non-operating expenses incurred
pursuant to the service agreements. An additional component of the service fees
for seven of the ten Practices consists of a percentage of revenues (ranging
from 12% to 16%), relating to physician and certain other medical services. With
respect to two of the Practices, this service fee component consists of flat fee
arrangements that are subject to renegotiation on an annual basis. The tenth
Practice's service fee is based on a flat fee arrangement for the second half of
1995 and will subsequently transition to a variable fee. Additionally, with
respect to several of the Practices, the Company is receiving fees relative to
all, or a substantial portion, of the revenues relating to certain non-physician
services. Various of these service 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 a percentage of revenues at specified levels related to the
profitability of the practice. Certain of the service fees based on percentages
of revenues are adjusted based on the actual revenue of the Practices, resulting
in lower service fee ratios for incremental practice revenues over specified
base levels. Additionally, the Company owns and operates surgery centers through
various arrangements. Revenues derived from surgery centers are based on
facility fees charged to patients, third-party payors or other physician
practices for use of surgery center as well as reimbursement of surgery center
expenses. Surgery center revenues aggregated $3,132,000 and are included in
revenues in the accompanying consolidated statements of operations for the year
ended December 31, 1995.
During the first quarter of 1996, PRG completed the acquisition of 61 eye
care practices. The service agreements with these additional 61 eye care
practices are substantially similar to those that PRG has entered into with the
Founding Affiliated Practices, except for certain provisions with respect to
incremental revenue adjustments. See Note 12 for discussion and pro forma
results from the acquisition of these practices.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements include the financial position and
results of operations of PRG and all of its subsidiaries. All significant
intercompany transactions have been eliminated.
F-9
<PAGE> 69
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Fair Values of Financial Instruments
The Company believes the fair value of its financial instruments
approximates their carrying amount.
Cash and Cash Equivalents -- The Company considers all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents. The Company primarily invests in overnight repurchase
agreements, tax-free municipal bonds and money market accounts. The interest
rates vary from 3.5% to 5.75%. These investments are carried at fair value.
Long-Term Debt -- The Company believes the value of its long-term debt
approximates fair value.
Receivables Due From Affiliated Practices
The amounts due from the Affiliated Practices include management service
receivables, receivables from the practices for certain expenses being paid on
their behalf and certain other receivables. The receivables due from the
Affiliated Practices are collateralized by a security interest in the Affiliated
Practices receivables from third-party payers and patients.
The following is unaudited information related to revenues generated by the
Affiliated Practices associated with the Company and is provided to show trends
in such medical service revenues and related patient accounts receivable which
will ultimately affect the management service revenues the Company collects from
the Affiliated Practices.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------
1994 1995
------- -------
(000'S)
<S> <C> <C>
Patient accounts receivable, net................................. $ 7,261 $ 7,186
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-------------------
1994 1995
------- -------
(000'S)
<S> <C> <C>
Medical service revenues......................................... $57,389 $59,953
</TABLE>
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets primarily consist of deferred
acquisition costs and prepaid expenses. All incremental costs incurred in
connection with current acquisitions have been capitalized and will be charged
to expense or included in the purchase consideration upon its successful
completion. If any of the acquisitions are not successfully completed, these
deferred costs will be charged to expense.
Inventories
Inventories consist primarily of spectacle frames and lenses and are valued
at the lower of cost or market with cost determined using the first-in,
first-out (FIFO) method.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated using straight-line methods over the estimated useful
lives of the assets. Routine maintenance and repairs are charged to expense as
incurred, while costs of betterments and renewals are capitalized.
F-10
<PAGE> 70
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other Noncurrent Assets
Other noncurrent assets consist primarily of the excess of cost of acquired
assets over their fair value of the tangible and identifiable intangible assets
(goodwill) and noncompete agreements. Goodwill is amortized on a straight-line
basis over 40 years. Noncompete agreements are amortized on the straight-line
basis over periods ranging from three to five years, which represent the shorter
of the economic life or the term of the respective agreements.
The Company reviews the carrying value of the intangible assets at least
quarterly 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 considers in making the evaluation are changes in the practices' or
ambulatory surgery center's market position, reputation, profitability and
geographical penetration. If indicators are present which may indicate
impairment is probable, PRG will prepare a projection of the undiscounted cash
flows of the specific practice and determine if the intangible assets are
recoverable based on these undiscounted cash flows. If impairment is indicated,
then an adjustment will be made to reduce the carrying amount of the intangible
assets to their fair value. The Company does not expect the adoption of
Statement of Financial Accounting Standards (SFAS) No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" to
have a material impact on its financial condition or results of operations.
Income Taxes
Income taxes are recorded under SFAS No. 109 "Accounting for Income Taxes",
which requires an asset and liability approach for financial accounting and
reporting. Deferred tax liabilities and assets are recorded for the differences
between the tax and financial reporting basis of the assets and liabilities and
are based on the enacted income tax rates which are expected to be in effect in
the period in which the difference is expected to be settled or realized. A
change in tax laws results in adjustments to the deferred tax liabilities and
assets.
Earnings Per Share
Primary earnings per share have been computed by dividing net earnings by
the weighted average number of common shares and common share equivalents
outstanding during the periods. Common share equivalents included in determining
earnings per share include shares issuable upon exercise of warrant and stock
options, if dilutive.
Use of Estimates
The preparation of these financial statements require the use of certain
estimates by management in determining the entities assets, liabilities,
revenues and expenses. Actual results could differ from those estimates.
3. INITIAL PUBLIC OFFERING OF COMMON STOCK AND REORGANIZATION:
Initial Public Offering
On June 28, 1995, the Company completed the Offering of 3,100,000 shares of
common stock at $13 a share for proceeds, net of underwriter commissions and
offering costs, of approximately $31,786,000. Of these net proceeds, $13,362,000
was used to pay a portion of the consideration for assets of certain Affiliated
Practices, $2,508,000 was used to retire certain indebtedness and leases of the
Affiliated Practices and $2,498,000 was used to pay the cash portion for the
assets associated with the Affiliated Practice acquired under the purchase
method of accounting. On July 26, 1995, the underwriters for the Offering
exercised an option to purchase an additional 453,000 shares of common stock at
$13 a share resulting in proceeds to the Company, net of underwriter commissions
and offering costs, of $5,443,000.
F-11
<PAGE> 71
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Upon closing of the Offering, the Company exchanged 174,500 shares of its
preferred stock to a related party as payment of $1,745,000 which had been
advanced to the Company to fund a portion of its offering costs. On July 7,
1995, the board of directors approved the redemption of the 174,500 shares of
preferred stock and subsequently a payment was made in the amount of $1,745,000
to the related party in exchange for such shares.
The Reorganization
Simultaneously with the closing of the Offering discussed above, the
Company acquired certain assets and assumed certain liabilities associated with
the Affiliated Practices and their owners in the Reorganization. The Company
issued 4,388,355 shares of common stock and a warrant to purchase 40,000 shares
of common stock and paid $13,362,000 in cash to the owners of the Affiliated
Practices to pay a portion of the consideration for certain acquired assets.
Total net book value of the assets and liabilities associated with nine of the
Affiliated Practices was $89,000. Certain adjustments have been made subsequent
to the Reorganization, as additional information has become available, to
reflect the changes in the book value of the assets and liabilities acquired. In
conjunction with Reorganization, the Company also purchased the non-cash working
capital from the Affiliated Practices for approximately $3,200,000. Immediately
after the Reorganization, PRG advanced the $3,200,000 to the new entities formed
by the Affiliated Practices in order to provide those practices with initial
working capital.
In addition, the Company purchased a management services organization (MSO)
which provided services to one of the Affiliated Practices. The MSO was acquired
from a third party for $2,498,000 in cash and a note payable for $2,000,000
which was subsequently retired. The Company also entered into an option
agreement (ASC Option) with stockholders of one of the Affiliated Practices in
which the stockholders had the right to require the Company to acquire an
ambulatory surgery center (ASC) owned by them. This ASC Option was exercised by
the optionholders in December 1995 and in early 1996, PRG paid the optionholders
$3,100,000 in cash, issued a note to the stockholders for approximately
$3,500,000 and assumed approximately $2,828,000 in construction indebtedness
(see Note 7). The $3,500,000 and $2,828,000 obligations are recorded on the
accompanying consolidated balance sheet as long-term debt and the $3,100,000 is
recorded as a current liability as of December 31, 1995.
4. PREPAID EXPENSES AND OTHER CURRENT ASSETS:
Prepaid expenses and other current assets consist of following as of
December 31, 1995:
<TABLE>
<CAPTION>
DESCRIPTION 1994 1995
---------------------------------------------------------------- ---------- ----------
(000'S)
<S> <C> <C>
Deferred acquisition costs -- EyeCorp Inc....................... $ -- $1,252
Deferred acquisition costs -- other acquisitions................ -- 1,375
Deferred issuance costs......................................... 1,107 223
Other prepaid expenses.......................................... -- 684
------ ------
Total................................................. $1,107 $3,534
====== ======
</TABLE>
As discussed in Note 12, the merger with EyeCorp, Inc. closed on March 18,
1996. Total deferred acquisition costs incurred in connection with the EyeCorp
merger are anticipated to be approximately $5,900,000. Under pooling-of-interest
accounting, these costs will be expensed in the first quarter of 1996, which
corresponds with the closing of the transaction. PRG also closed transactions
with 11 other physician practices in the first quarter of 1996 which will be
accounted for as purchases. Total deferred acquisition costs of approximately
$900,000 are anticipated to be incurred in connection with those transactions,
$713,000 of which was deferred as of December 31, 1995. These costs will be
treated as part of total consideration in the
F-12
<PAGE> 72
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
first quarter of 1996. Deferred issuance costs were incurred in connection with
the registration of Company common stock and will be charged to additional
paid-in-capital as the stock is issued.
5. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following as of December 31, 1995:
<TABLE>
<CAPTION>
ESTIMATED AMOUNT
USEFUL -------
LIVES
DESCRIPTION (YEARS) (000'S)
---------------------------------------------------------------- ---------
<S> <C> <C>
Land............................................................ -- $ 433
Buildings....................................................... 40 5,099
Equipment, software and other................................... 3-10 5,178
Leasehold improvements.......................................... 3-10 1,571
Furniture and fixtures.......................................... 7-10 3,149
-------
15,430
Less -- Accumulated depreciation................................ 644
-------
Property and equipment, net........................... $14,786
=======
</TABLE>
6. OTHER NONCURRENT ASSETS:
Other noncurrent assets consist of the following as of December 31, 1995:
<TABLE>
<CAPTION>
DESCRIPTION
---------------------------------------------------------------------------- AMOUNT
------
(000'S)
<S> <C>
Intangible assets........................................................... $3,671
Noncompete agreements....................................................... 255
Other....................................................................... 547
------
4,473
Less -- Accumulated amortization............................................ 135
------
Other noncurrent assets, net...................................... $4,338
======
</TABLE>
7. LONG-TERM OBLIGATIONS:
Long-Term Debt
Long-term debt consists of the following as of December 31, 1995:
<TABLE>
<CAPTION>
DESCRIPTION
---------------------------------------------------------------------------- AMOUNT
------
(000'S)
<S> <C>
Note payable to related party for ASC purchase, due in 2001, payable in
installments, bearing interest at 7%...................................... $3,500
Notes payable to bank, due through 2005, payable in installments, bearing
interest at LIBOR plus 1.5% (7.5% at December 31, 1995), collateralized by
assets of an
ASC....................................................................... 2,828
Term loans payable to insurance companies, due through 1999, bearing
interest from 5.96% to 10.17%, payable monthly, secured by the related
equipment................................................................. 1,893
Other notes payable due from 1996 to 2000, bearing interest at rates from 7%
to 12%.................................................................... 473
------
Total debt........................................................ 8,694
Less -- Current portion..................................................... 1,334
------
Long-term debt, excluding current portion......................... $7,360
======
</TABLE>
F-13
<PAGE> 73
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PRG paid $134,000 in interest for the year ended December 31, 1995. As of
December 31, 1995, the aggregate amounts of annual principal maturities of
long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
--------------------------------------------------------------------------- ------
(000'S)
<S> <C>
1996....................................................................... $1,334
1997....................................................................... 1,181
1998....................................................................... 1,418
1999....................................................................... 1,550
2000....................................................................... 1,289
Thereafter................................................................. 1,922
------
Total............................................................ $8,694
======
</TABLE>
On January 8, 1996, PRG entered into a $35,000,000 credit facility (the
Credit Facility) with a bank, to be used for acquisitions, capital expenditures
and working capital. Additionally, up to $10,000,000 may be borrowed under the
Credit Facility for letters of credit. The Credit Facility is secured by the
stock of the subsidiaries of PRG and guaranteed by the subsidiaries of PRG.
PRG may obtain advances under the Credit Facility to the extent of the
lesser of the $35,000,000 or the borrowing base in effect from time to time (the
Borrowing Base). The Borrowing Base is generally defined as the consolidated
earnings before interest, taxes, depreciation and amortization of PRG, less
certain amounts described in the Credit Facility and then multiplied by 2.5. The
initial Borrowing Base calculation under the Credit Facility indicated that the
Company could borrow up to the $35,000,000 facility limit.
Long-Term Lease Obligations
PRG leases office space under noncancelable operating lease agreements
which expire at various dates. At December 31, 1995, minimum annual rental
commitments under noncancelable operating leases with terms in excess of one
year are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
--------------------------------------------------------------------------- -------
(000'S)
<S> <C>
1996....................................................................... $ 2,691
1997....................................................................... 2,477
1998....................................................................... 2,257
1999....................................................................... 1,912
2000....................................................................... 1,236
Thereafter................................................................. 4,362
-------
Total minimum lease payments..................................... $14,935
=======
</TABLE>
Rent expense related to operating leases amounted to $1,892,000 for the
year ended December 31, 1995.
8. STOCKHOLDERS' EQUITY:
Common Stock
The Company is authorized to issue up to 30,000,000 shares of common stock,
$.01 par value. In November 1994, the Company effected a 10,999-for-one stock
split for an additional capital contribution of $10,900. Additionally, in
conjunction with the Offering (see Note 3), the Company effected a 1.090632-for-
one stock split for an additional contribution of capital of $1,344.
Stockholders' equity has been restated to give retroactive recognition to both
stock splits for all periods presented by reclassifying from retained earnings
F-14
<PAGE> 74
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to common stock the par value of the additional shares arising from the splits.
On June 28, 1995, the Company completed the Offering issuing 3,100,000 shares of
common stock, in addition to exchanging an additional 4,388,355 shares in
conjunction with the Reorganization (see Note 3). An additional 453,000 shares
were issued on July 26, 1995 in conjunction with the exercise of the
underwriters option. An additional 7,535,943 shares were issued in the first
quarter of 1996, in connection with subsequent acquisitions (see Note 12).
The Company has reserved (i) 2,000,000 shares of common stock for issuance
upon exercise of stock options under the Company's stock option plans and (ii)
40,000 shares of common stock for issuance upon exercise of the warrant. The
Company also registered an additional 3,000,000 shares of common stock during
the first quarter of 1996 to be used in connection with additional acquisitions.
Preferred Stock
The Company has authorized the issuance of up to 10,000,000 shares of
preferred stock, $.01 par value. The Company issued 174,500 shares of preferred
stock on June 28, 1995 in conjunction with the Offering. These shares were
retired on July 10, 1995 in exchange for $1,745,000 in cash.
9. INCOME TAX EXPENSE:
Income tax expense for year ended December 31, 1995, consists of the
following:
<TABLE>
<CAPTION>
AMOUNT
------
(000'S)
<S> <C>
Current:
Federal................................................................. $1,636
State................................................................... 338
------
1,974
------
Deferred:
Federal................................................................. (824)
State................................................................... (175)
------
(999)
------
Total income tax expense........................................ $ 975
======
</TABLE>
Total income tax expense differed from the amount computed by applying the
statutory federal income tax rate of 34% to income before income taxes as a
result of the following:
<TABLE>
<CAPTION>
AMOUNT
------
(000'S)
<S> <C>
Computed statutory tax expense............................................ $900
Increase in income taxes resulting from:
State income taxes, net of federal income tax benefit................... 110
Nondeductible expenses.................................................. 32
Tax exempt interest income.............................................. (67)
----
Total income tax expense........................................ $975
====
</TABLE>
F-15
<PAGE> 75
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes in 1995 reflect the impact of temporary differences
between the amount of assets and liabilities for financial reporting and such
amounts as measured by tax laws and regulations. In 1994, there were not any
significant differences in the tax and book basis of the Company's assets or
liabilities that would give rise to deferred tax balances and a valuation
allowance has been recorded to fully reserve the deferred tax benefits generated
by net operating losses. The components of the net deferred tax liability as of
December 31, 1995, are as follows:
<TABLE>
<CAPTION>
AMOUNT
----------
(000'S)
<S> <C>
Deferred tax assets:
Accrued expenses....................................................... $ 302
Property and equipment basis difference................................ 180
------
Total.......................................................... 482
------
Deferred tax liabilities:
Intangibles............................................................ 1,409
Temporary differences relating to cash-to-accrual conversions.......... 1,277
------
Total.......................................................... 2,686
------
Net deferred tax liabilities................................... $2,204
======
</TABLE>
The Company paid approximately $535,000 for federal and state income taxes
for the year ended December 31, 1995.
10. EMPLOYEE BENEFIT PLANS:
Savings Plans
The Company maintains various defined contribution plans which permit
participants to make voluntary contributions. The Company pays all general and
administrative expenses of the plans and, in some cases, makes matching
contributions on behalf of the employees. The Company incurred expenses of
$117,000 related to these plans.
Stock Option Plans
In March 1995 and March 1996, the board of directors adopted, and the
stockholders of the Company approved, the 1995 Stock Option Plan, and an
amendment and restatement thereof, respectively, (as amended and restated the
Plan). The purpose of the Plan is to provide directors, key employees and
certain advisors with additional incentives by increasing their proprietary
interest in the Company. The aggregate amount of common stock with respect to
which options may be granted may not exceed 2,000,000 shares. The Plan provides
for the grant of incentive stock options (ISO) and non-qualified stock options.
The options vest over a five-year period and expire ten years from the date of
grant.
In March 1995, the board of directors adopted, and the stockholders of the
Company approved, the 1995 Health Care Professionals Stock Option Plan (the
Health Care Professionals Plan). The Health Care Professionals Plan permits the
Company to grant stock options to employees, advisors and consultants of the
Company, which the Company expects will generally be ophthalmologists and
optometrists, who both (i) provide advisory or consulting services to the
Company and (ii) are employed by an Affiliated Practice. The aggregate amount of
common stock with respect to which options may be granted may not exceed
1,000,000 shares. Options granted under the Health Care Professionals Plan will
vest over a period of five years and expire ten years from the date of grant.
Generally, such options will expire upon the termination of employment or the
advisory or consultant relationship with the Company or on the day prior to the
tenth anniversary of the date of grant, whichever occurs first.
F-16
<PAGE> 76
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Transactions of the plans are summarized as follows:
<TABLE>
<CAPTION>
STOCK OPTIONS
-------------------------
ISO'S NON-QUALIFIED TOTAL
------- ------------- ---------
<S> <C> <C> <C>
Outstanding at December 31, 1994................. -- -- --
Granted in 1995................................ 584,750 603,649 1,188,399
Exercised in 1995.............................. -- -- --
Cancelled in 1995.............................. -- -- --
------- ------- ---------
Outstanding at December 31, 1995................. 584,750 603,649 1,188,399
======= ======= =========
</TABLE>
Of the stock option grants outstanding, 73,750 were issued at $5.00 per
share, 906,149 were issued at the Offering price of $13.00 per share, 40,000
were issued at $13.75 per share and 168,500 were issued at $20.25 per share.
During 1995, the Financial Accounting Standards Board issued Statement No. 123
(SFAS No. 123) Accounting for Stock-Based Compensation. As permitted by SFAS No.
123, the Company will continue to follow the existing accounting requirements
for stock options contained in APB Opinion No. 25 (Accounting for Stock Issued
to Employees). Beginning in 1996, however, the Company will provide the pro
forma disclosures required by SFAS No. 123.
11. RELATED-PARTY TRANSACTIONS:
The Company leases facility space from various partnerships which include
affiliated physicians as partners and trusts in which relatives of the
affiliated physicians are named beneficiaries. Rent expense on related-party
operating leases amounted to $768,000 for the year ended December 31, 1995. In
addition, the Company leases facilities to affiliated physicians. Rent income on
related-party operating leases amounted to $200,000 for the year ended December
31, 1995.
In 1995, four of the Company Affiliated Practices individually provided
more than 10% of the Company's revenues and eight of the 15 Company's directors
are practicing physicians associated with the Affiliated Practices.
12. SUBSEQUENT EVENTS AND PRO FORMA INFORMATION:
EyeCorp, Inc. Acquisition
On September 18, 1995, PRG announced the signing of a definitive agreement
to merge, in a pooling of interests transaction, with EyeCorp, Inc. (EyeCorp), a
privately held physician practice management company based in Memphis, Tennessee
and devoted solely to eye care. In March of 1996, the shareholders of both PRG
and EyeCorp approved the merger and the merger was closed. In connection
therewith, PRG issued 6,089,506 shares of common stock to the shareholders of
EyeCorp. EyeCorp provides management services to 50 eye care practices and five
ASC's.
Other Acquisitions
From late January to mid-April 1996, PRG completed the acquisition of and
entered into service agreements with 18 eye care practices and eight ASC's. As
consideration for these acquisitions, PRG paid approximately, $8,200,000 in cash
and issued approximately 2,086,003 shares of its common stock.
In addition to the acquisitions discussed above, the Company is currently
in various stages of negotiations with a number of other ophthalmic and
optometric groups regarding the acquisition of their assets and the provision of
management services. Management of PRG believes certain of these negotiations,
if finalized, will result in additional closings in the future.
F-17
<PAGE> 77
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pro Forma
The summarized unaudited pro forma consolidated statement of operations
data for the year ended December 31, 1995 presented below have been prepared as
if (a) the Reorganization and Offering had been completed; (b) the merger with
EyeCorp Inc. had been consummated; (c) the consummation of PRG's 18 closed and 2
probable transactions and entry into Service Agreements with the 20 eye care
practices had occurred; (d) the acquisitions made by EyeCorp during 1995 were
completed; and (e) the consummation of the EyeCorp and PRG Credit Facilities had
occurred, all as if such transactions or events had occurred January 1, 1995.
The 1995 results include increased expenses relative to (1) establishment and
development of corporate offices at PRG and EyeCorp (2) the resignation of the
Company's former chief executive officer, and (3) unsuccessful transaction costs
at EyeCorp.
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED DECEMBER 31
-----------------
1995
-----------------
(IN 000'S EXCEPT
PER SHARE
AMOUNTS)
<S> <C>
Revenues............................................................ $ 183,008
Net income.......................................................... $ 10,841
Net income per share................................................ $ .59
Number of shares used in net income per share calculation........... 18,414
</TABLE>
In connection with the EyeCorp merger, the Company expects to incur
transaction costs of approximately $9.0 million which will be recognized in the
first quarter of 1996.
13. CONSOLIDATED QUARTERLY DATA (UNAUDITED):
Summarized below are the condensed results of operations of the Company for
the years ended December 31, 1995 and 1994:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
----------------------------------------
FOURTH THIRD SECOND FIRST
DESCRIPTION QUARTER QUARTER QUARTER QUARTER
------------------------------------------------- ------- ------- ------- -------
(IN 000'S EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Management service revenues...................... $13,124 $13,271 $ -- $ --
Net income (loss) before taxes................... 2,009 680 (25) (17)
Net income (loss)................................ 1,295 419 (25) (17)
Net income (loss) per share...................... .13 .04 (.02) (.01)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
----------------------------------------
FOURTH THIRD SECOND FIRST
DESCRIPTION QUARTER QUARTER QUARTER QUARTER
---------------------------------------------------- ------- ------- ------- -------
(IN 000'S EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Management service revenues......................... $ -- $-- $-- $--
Net income (loss) before taxes...................... (19) (1) (1) (1)
Net income (loss)................................... (19) (1) (1) (1)
Net income (loss) per share......................... (.01) -- -- --
</TABLE>
F-18
<PAGE> 78
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Physicians Resource Group, Inc.:
We have audited the accompanying supplemental combined balance sheets of
Physicians Resource Group, Inc. (a Delaware corporation), and subsidiaries,
described in Note 1, and EyeCorp, Inc., and subsidiaries as of December 31, 1994
and 1995, and the related supplemental combined statements of operations,
changes in stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1995. The supplemental combined historical
statements give retroactive effect to the merger with EyeCorp, Inc., on March
18, 1996, which subsequently will be accounted for as a pooling of interests as
described in Note 1. These supplemental financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these supplemental financial statements based on our audits.
We did not audit the financial statements of EyeCorp, Inc., included in the
supplemental combined financial statements of Physicians Resource Group, Inc.,
which financial statements reflect total assets and revenues of 62 percent and
46 percent, respectively, in 1995, 97 percent and 100 percent, respectively, in
1994, and 100 percent of revenue in 1993, of the related supplemental combined
totals. These statements were audited by other auditors whose report thereon has
been furnished to us, and our opinion expressed herein, insofar as it relates to
the amounts included for EyeCorp, Inc., is based solely upon the report of the
other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based upon our audits and the report of the other auditors,
the supplemental combined financial statements referred to above present fairly,
in all material respects, the combined financial position of Physicians Resource
Group, Inc., and EyeCorp, Inc., as of December 31, 1994 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995, after giving retroactive effect to
the merger with EyeCorp, Inc., as described in Note 1, all in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
April 5, 1996, except as to paragraph 4
of Note 8, for which the
date is April 18, 1996
F-19
<PAGE> 79
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTAL COMBINED BALANCE SHEETS -- DECEMBER 31, 1994 AND 1995
(000'S, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1994 1995
------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................. $ 2,848 $ 17,451
Accounts receivable, net of allowance of $3,090 and $3,700 for 1994
and 1995, respectively............................................. 4,933 9,904
Receivables due from Affiliated Practices............................. -- 6,265
Inventories........................................................... 158 2,045
Prepaid expenses and other current assets............................. 1,322 6,633
------- --------
Total current assets.......................................... 9,261 42,298
PROPERTY AND EQUIPMENT, net............................................. 7,335 27,519
INTANGIBLE ASSETS, net.................................................. 15,789 52,257
OTHER NONCURRENT ASSETS, net............................................ 862 1,538
------- --------
Total assets.................................................. $33,247 $123,612
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Obligation to affiliated physicians and physician groups.............. $ 1,280 $ 1,086
Current portion of long-term debt..................................... 1,793 1,531
Accounts payable and accrued expenses................................. 1,725 10,397
Accrued taxes, payroll and executive resignation costs................ 1,790 3,075
Amounts due to related parties and, in 1995, the ASC Option........... 320 3,100
------- --------
Total current liabilities..................................... 6,908 19,189
LONG-TERM DEBT, net of current portion.................................. 12,631 27,815
DEFERRED TAX LIABILITIES................................................ 3,497 14,013
OTHER LONG-TERM LIABILITIES............................................. -- 272
------- --------
Total liabilities............................................. 23,036 61,289
------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 30,000,000 shares authorized, 4,482,134
and 15,647,769 shares outstanding.................................. 45 157
Additional paid-in capital............................................ 8,919 60,374
Retained earnings..................................................... 1,247 1,792
------- --------
Total stockholders' equity.................................... 10,211 62,323
------- --------
Total liabilities and stockholders' equity.................... $33,247 $123,612
======= ========
</TABLE>
The accompanying notes are an integral part of these supplemental combined
financial statements.
F-20
<PAGE> 80
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTAL COMBINED STATEMENTS OF OPERATIONS
FOR THE THREE YEARS ENDED DECEMBER 31, 1995
(000'S, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1993 1994 1995
------ ------- -------
<S> <C> <C> <C>
REVENUES:
Management service........................................... $ -- $12,747 $39,129
Surgery center............................................... 7,133 6,695 9,317
Other........................................................ 419 142 79
------ ------- -------
Total revenues....................................... 7,552 19,584 48,525
------ ------- -------
COSTS AND EXPENSES:
Salaries, wages and benefits................................. 698 4,972 19,768
Pharmaceuticals and supplies................................. 2,246 3,425 6,687
General and administrative................................... 1,265 5,650 16,022
Depreciation and amortization................................ 382 1,383 2,609
Interest (income) expense.................................... 250 1,076 1,157
Executive resignation expenses............................... -- -- 1,117
------ ------- -------
Total costs and expenses............................. 4,841 16,506 47,360
------ ------- -------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM.............. 2,711 3,078 1,165
PROVISION FOR INCOME TAXES..................................... -- 1,162 501
------ ------- -------
INCOME BEFORE EXTRAORDINARY ITEM............................... 2,711 1,916 664
EXTRAORDINARY ITEM, loss on debt extinguishment, net of
income tax benefit of $53.................................... -- -- (119)
------ ------- -------
NET INCOME..................................................... 2,711 1,916 $ 545
=======
INCOME (LOSS) PER SHARE:
Income before extraordinary item............................. $ .07
Extraordinary item........................................... (.01)
-------
Net income................................................... $ .06
=======
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING........... 9,086
=======
PRO FORMA ADJUSTMENTS --
Income tax expense (Unaudited)............................... 1,030 62
------ -------
PRO FORMA NET INCOME (Unaudited)............................... $1,681 $ 1,854
====== =======
PRO FORMA INCOME PER COMMON SHARE (Unaudited).................. $ 0.56 $ 0.44
====== =======
PRO FORMA WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
(Unaudited).................................................. 2,982 4,196
====== =======
</TABLE>
The accompanying notes are an integral part of these supplemental combined
financial statements.
F-21
<PAGE> 81
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTAL COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1995
(000'S, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PARTNERS'
PREFERRED STOCK COMMON STOCK ADDITIONAL EQUITY/ TOTAL
------------------- --------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS EQUITY
-------- ------ ---------- ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1993............ -- $ -- -- $ -- $ -- $ 1,822 $ 1,822
Issuance of common stock.......... -- -- 1,199,695 12 -- (12 ) --
Net income........................ -- -- -- -- -- 2,711 2,711
Distributions..................... -- -- -- -- -- (1,744 ) (1,744)
-------- ---- ---------- ---- -------- ------- --------
BALANCE, December 31, 1993.......... -- -- 1,199,695 12 -- 2,777 2,789
Capital contribution in
conjunction with stock split.... -- -- -- -- -- 11 11
Issuance of common stock, dividend
paid and formation of EyeCorp... -- -- 1,320,130 13 100 (3,457 ) (3,344)
Issuance of common stock in
connection with acquisitions.... -- -- 1,962,309 20 8,819 -- 8,839
Net income........................ -- -- -- -- -- 1,916 1,916
-------- ---- ---------- ---- -------- ------- --------
BALANCE, December 31, 1994.......... -- -- 4,482,134 45 8,919 1,247 10,211
Issuance of common stock in
conjunction with the PRG
Reorganization and IPO, net of
offering costs.................. -- -- 7,941,355 80 37,149 -- 37,229
Cash dividends paid to physician
owners of PRG Founding
Affiliated Practices............ -- -- -- -- (13,362) -- (13,362)
Issuance of preferred stock....... 174,500 2 -- -- 1,743 -- 1,745
Retirement of preferred stock..... (174,500) (2) -- -- (1,743) -- (1,745)
Issuance of common stock in
conjunction with acquisitions... -- -- 3,224,280 32 27,668 -- 27,700
Net income........................ -- -- -- -- -- 545 545
-------- ---- ---------- ---- -------- ------- --------
BALANCE, December 31, 1995.......... -- $ -- 15,647,769 $157 $ 60,374 $ 1,792 $ 62,323
======== ==== ========== ==== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these supplemental combined
financial statements.
F-22
<PAGE> 82
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTAL COMBINED STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS ENDED DECEMBER 31, 1995
(000'S)
<TABLE>
<CAPTION>
1993 1994 1995
------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 2,711 $ 1,916 $ 545
Adjustments to reconcile net income to net cash provided
by operating activities --
Depreciation and amortization.......................... 382 1,383 2,609
Change in deferred taxes............................... -- (253) (358)
Amortization of deferred loan cost..................... -- -- 178
Changes in assets and liabilities, net of effects of
acquisitions --
Increase in accounts payable, accrued expenses and
accrued payroll...................................... 24 2,592 2,631
Change in accounts receivable, net, and receivables due
from affiliated practices............................ (947) 84 2,903
Increase in inventories................................ (23) -- (176)
Change in prepaid expenses and other assets............ 50 (1,245) (3,863)
------- -------- --------
Net cash provided by operating activities......... 2,197 4,477 4,469
------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash consideration paid to acquire a management service
organization, net of cash acquired..................... -- -- (2,174)
Payments for clinic operating assets, net of cash
acquired............................................... -- (8,936) (7,459)
Additions to property and equipment....................... (107) (1,227) (2,694)
------- -------- --------
Net cash used in investing activities............. (107) (10,163) (12,327)
------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash paid in connection with organization of the Company
and the initial public offering........................ -- (304) (5,509)
Proceeds from the issuance of common stock, net of
underwriting discounts................................. -- 20 42,953
Distributions to owners................................... (1,744) (3,419) (13,362)
Proceeds from long-term debt.............................. -- 15,322 17,346
Payments of long-term debt................................ (306) (3,529) (18,659)
Advances from related party............................... -- 308 1,437
Retirement of preferred stock............................. -- -- (1,745)
------- -------- --------
Net cash (used in) provided by financing
activities...................................... (2,050) 8,398 22,461
------- -------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 40 2,712 14,603
CASH AND CASH EQUIVALENTS, beginning of year................ 96 136 2,848
------- -------- --------
CASH AND CASH EQUIVALENTS, end of year...................... $ 136 $ 2,848 $ 17,451
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these supplemental combined
financial statements.
F-23
<PAGE> 83
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION, BUSINESS AND ORGANIZATION:
The Merger
In March 1996, Physicians Resource Group, Inc. and subsidiaries (PRG or the
Company) merged with EyeCorp, Inc. (EyeCorp), in a transaction to be accounted
for as a pooling of interests (the Merger). On or about May 15, 1996, PRG will
restate its historical financial statements to reflect the pooling-of-interests
transaction. Those restated financials will resemble these supplemental combined
financial statements in all material aspects. These supplemental financial
statements are presented to provide the reader with an understanding of the
combined historical results of PRG.
PRG Formation
PRG (a Delaware corporation) and subsidiaries was formed to provide
physician practice management services to ophthalmic and optometric practices in
November 1993. PRG earns revenues by providing management, marketing and
administrative services and by owning and operating or providing management
services to ambulatory surgery centers (ASCs) and optical dispensaries. The
Company currently provides such services to 78 practices (Affiliated Practices
or Practices) in 13 states.
On June 28, 1995, PRG consummated an initial public offering (the Offering)
and simultaneously exchanged cash, shares of its common stock and a note payable
for certain assets of and liabilities associated with 10 eye care practices (the
Founding Affiliated Practices). The Offering of 3,553,000 shares of common stock
at $13 per share resulted in proceeds, net of underwriter commissions and
offering costs, of approximately $37,229,000. Upon closing of the Offering, the
Company exchanged 174,500 shares of its preferred stock with a related party for
payment of $1,745,000 which had been advanced to the Company to fund a portion
of its offering costs. In July of 1995, these shares were redeemed and a payment
was made in the amount of $1,745,000 to the related party in exchange for such
shares.
Simultaneously with the closing of the Offering, the Company acquired
certain assets and assumed certain liabilities associated with nine of the 10
Founding Affiliated Practices (the Reorganization). This exchange was accounted
for using the historical cost basis with the stock being valued at the
historical cost of the net assets received by PRG. The owners of the Founding
Affiliated Practices were issued 4,388,355 shares of common stock, a warrant to
purchase 40,000 shares of common stock and were paid $13,362,000 in cash.
As part of the Reorganization, the Company also entered into an option (ASC
Option) which was subsequently exercised by the stockholders of one of the
Founding Affiliated Practices in which the Company acquired an ambulatory
surgery center (ASC). In late 1995, the stockholders exercised their option and
in 1996 PRG paid the stockholders $3,100,000 in cash, issued a note for
$3,500,000 and assumed approximately $2,828,000 in construction indebtedness
(see Note 8). The $3,500,000 and $2,828,000 obligations are recorded on the
accompanying balance sheet as long-term debt, and the $3,100,000 is recorded as
a current liability as of December 31, 1995. In addition, the Company purchased
from a third party a management services organization (MSO) from a third party
which provided services to one of the Founding Affiliated Practices. This
transaction was accounted for under the purchase method of accounting. The MSO
was acquired for $2,498,000 in cash and a note payable for $2,000,000 which was
subsequently retired.
Concurrently with these transactions, the physicians associated with seven
of the Founding Affiliated Practices created new entities for the practice of
medicine. These new entities and the three remaining Founding Affiliated
Practices entered into 40-year service agreements with the Company. Under the
terms of the service agreements, the Company is providing management, marketing
and administrative services to the Practices in return for management service
fees.
F-24
<PAGE> 84
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
EyeCorp Formation
On March 18, 1996, PRG merged with EyeCorp by issuing 6,089,506 shares of
PRG common stock to the stockholders of EyeCorp in exchange for all of its
outstanding common stock. Each outstanding share of EyeCorp common stock was
converted into .582 shares of PRG common stock.
EyeCorp provides management services to 50 eye care practices and five
ambulatory surgery centers. On February 1, 1994, EyeCorp merged with two
entities (Predecessor Entities) controlled by the same individual who also owned
a controlling interest in EyeCorp. These mergers were accounted for in a manner
similar to a pooling of interests since the mergers were considered a
combination of entities under common control. Aggregate distributions of
$3,457,000 were made to the owners of the Predecessor Entities just prior to the
formation transactions. The accompanying supplemental combined statements of
operations reflect pro forma adjustments for additional income tax expenses that
would have been reported had the Predecessor Entities been taxable corporations
for the year ended December 31, 1993, and the one month ended January 31, 1994.
During the rest of 1994, EyeCorp acquired certain operating assets and
assumed certain liabilities of four ophthalmic practices for total consideration
of $8,890,000 in cash and 1,545,115 shares of common stock. These acquisitions
(the 1994 EyeCorp Acquisitions) were accounted for as purchases. On December 28,
1995, EyeCorp acquired certain operating assets and assumed certain liabilities
of 49 eye care practices and four ambulatory surgery centers for consideration
of $1,400,000 cash, approximately $1,800,000 in notes payable and 3,224,280
shares of common stock. These acquisitions (the 1995 EyeCorp Acquisitions) were
also accounted for as purchases.
Separate Company Operating Results
PRG's merger with EyeCorp will be accounted for as a pooling of interests
and, accordingly, the accompanying supplemental combined financial statements
and notes thereto have been restated to include the accounts of PRG and EyeCorp
as if they had been one entity for all periods presented. Separate and combined
results for PRG and EyeCorp for the periods prior to consummation of the merger
are as follows:
<TABLE>
<CAPTION>
DESCRIPTION 1994 1995
----------------------------------------------------------------- ------- -------
<S> <C> <C>
Revenues:
PRG............................................................ $ -- $26,395
EyeCorp........................................................ 19,584 22,130
------- -------
Total revenues......................................... $19,584 $48,525
======= =======
Net income:
PRG............................................................ $ (22) $ 1,672
EyeCorp........................................................ 1,884 (1,187)
Conforming adjustments......................................... 54 60
------- -------
Total net income....................................... $ 1,916 $ 545
======= =======
</TABLE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The supplemental combined financial statements include the financial
position and results of operations of PRG and all of its subsidiaries combined
with the financial position and results of operations of EyeCorp and all of its
subsidiaries. As previously discussed, these supplemental combined financial
statements reflect how PRG's consolidated financial statements will look
following the mid-May 1996 restatement for the merger with EyeCorp. For the
purposes of these combined supplemental financial statements, EyeCorp
F-25
<PAGE> 85
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
common stock has been converted into PRG common stock based on the conversion
factor at the merger date. All significant intercompany transactions have been
eliminated.
Fair Values of Financial Instruments
The Company believes the fair values of its financial instruments
approximates their carrying amounts.
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. The Company
primarily invests in overnight repurchase agreements, tax-free municipal bonds
and money market accounts. The interest rates vary from 3.5 percent to 5.75
percent. These investments are carried at fair value.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets primarily consist of deferred
acquisition costs and prepaid expenses. All incremental costs incurred in
connection with current acquisitions have been capitalized and will be charged
to expense or included in the purchase consideration upon its successful
completion. If any of the acquisitions are not successfully completed, these
deferred costs will be charged to expense.
Inventories
Inventories consist primarily of spectacle frames lenses and medical
supplies and are valued at the lower of cost or market with cost determined
using the first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated using a straight-line method over the estimated useful
lives of the assets. Routine maintenance and repairs are charged to expense as
incurred, while costs of betterments and renewals are capitalized.
Intangible Assets
Identifiable intangible assets consist of the non-physician employee
workforce, management service agreements and goodwill associated with ASC
acquisitions. The estimated fair value of the non-physician employee workforce
is based on the estimated cost to replace the workforce. The estimated fair
value of the management service agreement for acquired practices is the excess
of the purchase price over the estimated fair value of the tangible assets and
workforce acquired and liabilities assumed. Intangible assets associated with
management service agreement are generally amortized over 15 years for
single-practitioner practices and over 40 years for multiple-practitioner
practices. Amounts paid for ASC acquisitions in excess of the net assets
acquired is treated as goodwill.
The Company reviews the carrying value of the intangible assets at least
quarterly on a entity by entity basis to determine if facts and circumstances
exist which would suggest that the intangible assets may be impaired or that the
amortization period needs to be modified. Among the factors PRG considers in
making the evaluation are changes in the practices' or ambulatory surgery
center's market position, reputation, profitability and geographical
penetration. If indicators are present which may indicate impairment is
probable, PRG will prepare a projection of the undiscounted cash flows of the
specific practice and determine if the intangible assets are recoverable based
on these undiscounted cash flows. If impairment is indicated, then an adjustment
will be made to reduce the carrying amount of the intangible assets to their
fair value. The Company does not expect the adoption of Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," to have a
material impact on its financial condition or results of operations.
F-26
<PAGE> 86
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
Income taxes are recorded under SFAS No. 109, "Accounting for Income
Taxes," which requires an asset and liability approach for financial accounting
and reporting. Deferred tax liabilities and assets are recorded for the
differences between the tax and financial reporting basis of the assets and
liabilities and are based on the enacted income tax rates which are expected to
be in effect in the period in which the difference is expected to be settled or
realized. A change in tax laws results in adjustments to the deferred tax
liabilities and assets.
Income Per Share and Pro Forma Income Per Share
Income per share has been computed by dividing net income by the weighted
average number of common shares and common share equivalents outstanding. Common
share equivalents included in determining income per share include shares
issuable upon exercise of warrants and stock options, if dilutive.
Pro forma income per common share has been computed by dividing pro forma
net income by the pro forma weighted average number of common shares outstanding
during the periods. The number of pro forma common shares outstanding during the
periods includes the weighted average number of common shares, including pro
forma PRG shares assumed to be outstanding for EyeCorp and its Predecessor
Entities (see Note 1), and common share equivalents outstanding during the
periods. Common share equivalents included in determining pro forma income per
share include shares issuable upon exercise of warrants and stock options, if
dilutive.
Use of Estimates
The preparation of these financial statements requires the use of certain
estimates by management in determining the entities' assets, liabilities,
revenues and expenses. Actual results could differ from those estimates.
Major Customers
The Company's major customers are the Affiliated Practices for which the
Company provides management services, along with Medicare and other governmental
programs.
Concentration of Credit Risk
The Company's accounts receivable primarily consist of management service
revenues due from affiliated physician groups and from medical services due from
patients funded through Medicare, Medicaid, commercial insurance and private
payment. The Company and its Affiliated Practices perform ongoing credit
evaluations of its patients and generally does not require collateral. The
Company and its Affiliated Practices maintain allowances for potential credit
losses, and such losses have been within management's expectation.
3. REVENUE RECOGNITION AND RECEIVABLES:
A significant portion of the Practices medical service and ASC revenues are
received from Medicare and other governmental programs. Medicare and other
governmental programs reimburse providers based on fee schedules which are
determined by the related governmental agency. In the ordinary course of
business, providers receiving reimbursement from Medicare and other governmental
programs are potentially subject to a review by regulatory agencies concerning
the accuracy of billings and sufficiency of supporting documentation.
The individual Practices and ASC's gross medical service revenues are based
on established rates reduced by contractual allowances. Contractual adjustments
represent the difference between charges at established
F-27
<PAGE> 87
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
rates and estimated recoverable amounts and are recognized in the period the
services are rendered. Any differences between estimated contractual adjustments
and actual final settlements are reported as contractual adjustments in the
period final settlements are made.
Revenues -- Management Services
The Company provides management services to the Practices under various
types of service and management agreements. The management service revenues are
based on a percentage of the Practices revenue or a flat fee and reimbursement
of clinic expenses. The following table presents the amount of medical service
revenues included in the determination of the Company's management service
revenues for the years ended December 31, 1994 and 1995:
<TABLE>
<CAPTION>
DESCRIPTION 1994 1995
--------------------------------------------------------------- -------- --------
(000'S)
<S> <C> <C>
Gross medical service revenues................................. $ 33,110 $ 87,292
Less -- Contractual adjustments and allowance for doubtful
accounts.................................................. (13,055) (36,545)
-------- --------
Net medical service revenues................................... 20,055 50,747
Less -- Amounts retained by the Practices owner physicians... (7,308) (11,618)
-------- --------
Management service revenues.......................... $ 12,747 $ 39,129
======== ========
</TABLE>
Revenues -- Surgery Centers
The Company owns and operates surgery centers through various arrangements.
Revenues derived from surgery centers are based on facility fees charged to
patients, third-party payors or other physician practices for use of the surgery
center as well as reimbursement of surgery center expenses. Surgery center
revenues are also net of adjustments for contractual allowances and allowances
for bad debts. The following table presents amounts included in determining the
Company surgery center revenues for the years ended December 31, 1994 and 1995:
<TABLE>
<CAPTION>
DESCRIPTION 1994 1995
--------------------------------------------------------------- -------- --------
(000'S)
<S> <C> <C>
Surgery center revenues........................................ $ 17,385 $ 21,076
Less -- Contractual adjustments and allowances for doubtful
accounts.................................................. (10,690) (11,759)
-------- --------
Net surgery center revenues.................................... $ 6,695 $ 9,317
======== ========
</TABLE>
Receivables
Receivables due from the Affiliated Practices include management service
receivables, receivables from the practices for certain expenses being paid and
certain other receivables. The receivables due from the Affiliated Practices are
collateralized by a security interest in the Affiliated Practices' receivables
from third-party payors and patients.
Pursuant to the terms of certain of the EyeCorp service agreements, the
Affiliated Practices' accounts receivable are purchased without recourse. The
purchase price is the face amount of the accounts receivable less any reserve
recorded by the Affiliated Practices for uncollectible amounts. Accounts
receivable are purchased daily and paid at the end of each month.
F-28
<PAGE> 88
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. ACQUISITIONS
The consideration paid and total net book value of the assets and
liabilities associated with the acquisition of the Affiliated Practices were as
follows:
<TABLE>
<CAPTION>
PURCHASED ENTITIES REORGANIZATION
------------------ --------------
DESCRIPTION 1994 1995 1995
----------------------------------------------------- ------- -------- --------------
(000'S)
<S> <C> <C> <C>
Current assets....................................... $ 3,128 $ 8,653 $ 9,445
Property and equipment............................... 3,345 6,951 8,743
Intangible and other noncurrent assets............... 15,814 35,687 1,583
Liabilities assumed.................................. (4,446) (14,928) (19,682)
------- -------- --------
Net assets acquired........................ 17,841 36,363 89
Consideration for net assets acquired:
Debt Issued........................................ -- 3,770 --
Stock Issued....................................... 8,905 27,700 (89)
------- -------- --------
Cash Paid.......................................... $ 8,936 $ 4,893 $ --
======= ======== ========
</TABLE>
The PRG equivalent stock issued in connection with the acquisitions was
valued at $5.70 per share for the 1994 acquisitions as determined by the Board
of Directors based on a good faith determination of the relative fair market
values of the Predecessor Entities and at $8.59 per share for the 1995
acquisitions based on an independent valuation.
Subsequent to the Acquisitions the Company entered into management service
agreements with the related physician groups. Certain adjustments related to the
above estimated fair value of the assets acquired and liabilities assumed in the
1995 Company's acquisitions may be revised as additional information becomes
available.
5. PREPAID EXPENSES AND OTHER CURRENT ASSETS:
Prepaid expenses and other current assets consist of the following as of
December 31, 1994 and 1995:
<TABLE>
<CAPTION>
DESCRIPTION 1994 1995
------------------------------------------------------------------- ------ ------
(000'S)
<S> <C> <C>
Deferred acquisition costs --
EyeCorp.......................................................... $ -- $2,378
Other acquisitions............................................... -- 1,375
Deferred issuance costs............................................ 1,107 223
Other prepaid expenses............................................. 215 2,657
------ ------
Total.................................................... $1,322 $6,633
====== ======
</TABLE>
As discussed in Note 1, the merger with EyeCorp was completed in March
1996. Total deferred acquisition costs incurred in connection with the EyeCorp
merger are anticipated to be approximately $9,000,000, of which $2,378,000 has
been incurred and accrued as of December 31, 1995. Under pooling-of-interest
accounting, these costs will be expensed in the first quarter of 1996, which
corresponds with the closing of the transaction. PRG also closed transactions
with 18 other physician practices in the first part of 1996 which will be
accounted for as purchases. Total deferred acquisition costs of approximately
$900,000 are anticipated to be incurred in connection with those transactions,
$713,000 of which was deferred as of December 31, 1995. These costs will be
treated as part of total consideration paid for the acquisitions. Deferred
issuance costs were incurred in connection with the registration of Company
common stock and will be charged to additional paid-in capital as the stock is
issued.
F-29
<PAGE> 89
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
6. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following as of December 31, 1994 and
1995:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
LIVES
DESCRIPTION (YEARS) 1994 1995
-------------------------------------------------------- --------- ------- -------
(000'S)
<S> <C> <C> <C>
Land.................................................... -- $ 100 $ 605
Buildings and improvements.............................. 5-40 3,316 8,750
Equipment, software and other........................... 3-10 4,789 12,212
Leasehold improvements.................................. 3-10 1,205 3,530
Furniture and fixtures.................................. 7-10 742 6,845
------- -------
10,152 31,942
Less -- Accumulated depreciation and amortization....... 2,817 4,423
------- -------
Property and equipment, net................... $ 7,335 $27,519
======= =======
</TABLE>
7. INTANGIBLE ASSETS:
Intangible assets consist of the following as of December 31, 1994 and
1995:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
LIVES
DESCRIPTION (YEARS) 1994 1995
-------------------------------------------------------- --------- ------- -------
(000'S)
<S> <C> <C> <C>
Noncompete agreements................................... 3-5 $ -- $ 255
Work force in place..................................... 7 840 3,525
Management service agreements........................... 15-40 11,824 37,489
Goodwill................................................ 40 3,750 12,513
------- -------
16,414 53,782
Less -- Accumulated amortization........................ 625 1,525
------- -------
Intangible assets, net........................ $15,789 $52,257
======= =======
</TABLE>
F-30
<PAGE> 90
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
8. LONG-TERM OBLIGATIONS:
Long-Term Debt
Long-term debt consists of the following as of December 31, 1994 and 1995:
<TABLE>
<CAPTION>
DESCRIPTION 1994 1995
- ------------------------------------------------------------------------- ------- -------
(000'S)
<S> <C> <C>
Revolving term loan...................................................... $ -- $18,882
Installment notes payable to physician practices (see Note 1), bearing
interest ranging from 8% to 10%, payable in monthly installments....... -- 1,770
Note payable to related party for ASC purchase, due in 2001, payable in
monthly installments, bearing interest at 7%........................... -- 3,500
Notes payable to bank, due through 2005, payable in installments, bearing
interest at LIBOR plus 1.5% (7.5% at December 31, 1995), collateralized
by assets of an ASC.................................................... -- 2,828
Term loans payable to insurance companies, due through 1999, bearing
interest from 5.96% to 10.17%, payable monthly, secured by the related
equipment.............................................................. -- 1,893
Term loans, bearing interest ranging from 9.5% to 10.0%, paid in 1995.... 12,296 --
Term loan, bearing interest at 9.5%, paid in 1995........................ 417 --
Mortgage notes payable, bearing interest, ranging from 7.85% to 8.50%
paid in 1995........................................................... 1,711 --
Other notes payable due from 1996 to 2000, bearing interest at rates from
7% to 12%.............................................................. -- 473
------- -------
Total long-term debt........................................... 14,424 29,346
Less -- Current portion of long-term debt................................ (1,793) (1,531)
------- -------
Total $12,631 $27,815
======= =======
</TABLE>
In December 1995, EyeCorp entered into a $20 million revolving credit
facility (the EyeCorp Credit Facility) with a bank which was used for the
acquisitions completed in 1995 (see Note 1), and for the repayment of amounts
outstanding under the prior credit facility. Advances to EyeCorp under the
credit facility bear interest at either LIBOR plus 2.0 percent to 2.5 percent or
the bank's prime rate plus 0.5 percent. EyeCorp has the option to convert from
LIBOR to the bank's prime rate and vice versa at certain times. Monthly interest
payments are due under the revolving term loan and quarterly principal
installments of 3.57 percent are to be paid commencing on March 1, 1997, with
the remainder due December 28, 1997. The EyeCorp Credit Facility is
collateralized by certain assets and common stock of EyeCorp.
The unused portion of the EyeCorp Credit Facility, based on eligible
collateral, was $1,118,000 at December 31, 1995. The EyeCorp Credit Facility
contains covenants, the most restrictive of which require that the Company: (a)
not incur any purchase money liens, borrowed funds under the credit facilities
excluded in excess of $600,000, (b) maintain a debt coverage ratio as defined in
the credit facility agreement of 1.5 to 1, (c) maintain a consolidated current
ratio of 1.5 to 1, (d) maintain net worth of at least $37.7 million and (e)
maintain a ratio of debt under the EyeCorp Credit Facility to debt plus
stockholders' equity not to exceed .5 to 1. The EyeCorp Credit Facility also
subjects the Company to repayment penalties on amounts outstanding under the
LIBOR rate as defined in the agreement. Additionally, the Company is obligated
to pay a fee of up to $300,000 in the event that the Company terminates the
EyeCorp Credit Facility prior to its maturity date.
EyeCorp was in violation of the net worth covenant at December 31, 1995. On
April 18, 1996, the violation was waived by the lender and the covenant was
amended, as of January 1, 1996, requiring EyeCorp to maintain net worth of at
least $37,677,000 as defined in the agreement.
F-31
<PAGE> 91
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the repayment of the prior credit facility, EyeCorp
recognized an extraordinary loss of $119,000 (net of income tax benefit of
$53,000) in connection with the early retirement of debt which consisted of
unamortized loan costs.
The Company paid $250,000, $1,157,000 and $1,602,000 in interest for the
years ended December 31, 1993, 1994 and 1995. As of December 31, 1995, the
aggregate amounts of annual principal maturities of long-term debt are as
follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
--------------------------------------------------------------------------- -------
(000'S)
<S> <C>
1996....................................................................... $ 1,531
1997....................................................................... 20,313
1998....................................................................... 1,687
1999....................................................................... 1,843
2000....................................................................... 1,450
Thereafter................................................................. 2,522
-------
Total............................................................ $29,346
=======
</TABLE>
On January 8, 1996, PRG entered into an additional credit facility (the PRG
Credit Facility) with the same bank that provided the EyeCorp Credit Facility,
in the amount of $35,000,000, to be used for acquisitions, capital expenditures
and working capital. Up to $10,000,000 may be borrowed under the PRG Credit
Facility for letters of credit. The PRG Credit Facility is secured by the stock
of the subsidiaries of PRG and guaranteed by the subsidiaries of PRG.
The Company may obtain advances under the PRG Credit Facility to the extent
of the lesser of the $35,000,000 or the borrowing base in effect from time to
time (the Borrowing Base). The Borrowing Base is generally defined as the
consolidated earnings before interest, taxes, depreciation and amortization,
less certain amounts described in the PRG Credit Facility and then multiplied by
2.5. The initial Borrowing Base calculation indicated the Company could borrow
up to the $35,000,000 facility limit.
Supplemental Non-cash Transactions
EyeCorp purchased an airplane in 1994 by issuing a note payable for
approximately $475,000.
Long-Term Lease Obligations
PRG leases medical equipment and office space under noncancelable operating
lease agreements which expire at various dates. At December 31, 1995, minimum
annual rental commitments under noncancelable operating leases with terms in
excess of one year are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
--------------------------------------------------------------------------- -------
(000'S)
<S> <C>
1996....................................................................... $ 5,352
1997....................................................................... 4,833
1998....................................................................... 4,488
1999....................................................................... 3,568
2000....................................................................... 2,764
Thereafter................................................................. 8,002
-------
Total minimum lease payments..................................... $29,007
=======
</TABLE>
F-32
<PAGE> 92
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Rent expense related to operating leases amounted to $273,000 and
$2,465,000 for the years ended December 31, 1994 and 1995, respectively.
9. STOCKHOLDERS' EQUITY:
Common Stock
The financial statements have been restated to give retroactive recognition
to stock splits made by both PRG and EyeCorp in the past three years.
The Company has reserved (a) 2,000,000 shares of common stock for issuance
upon exercise of stock options under the Company's stock option plans and (b)
40,000 shares of common stock for issuance upon exercise of the warrant, which
are exercisable at $13.00 per share. The Company registered an additional
3,000,000 shares of common stock during the first quarter of 1996 to be used in
connection with additional acquisitions.
Preferred Stock
The Company has authorized the issuance of up to 10,000,000 shares of
preferred stock, $.01 par value. The Company issued 174,500 shares of preferred
stock on June 28, 1995, in conjunction with the Offering. These shares were
retired on July 10, 1995, in exchange for $1,745,000 in cash.
10. INCOME TAX EXPENSE:
Income tax expense for the years ended December 31, 1994 and 1995, consists
of the following:
<TABLE>
<CAPTION>
DESCRIPTION 1994 1995
------------------------------------------------------------------ ------ -------
(000'S)
<S> <C> <C>
Current --
Federal......................................................... $1,205 $ 1,573
State........................................................... 207 322
------ -------
Total current........................................... 1,412 1,895
Deferred --
Federal......................................................... (225) (1,161)
State........................................................... (25) (233)
------ -------
Total deferred.......................................... (250) (1,394)
------ -------
Total income tax expense.......................................... $1,162 $ 501
====== =======
</TABLE>
Total income tax expense differed from the amount computed by applying the
statutory federal income tax rate of 34 percent to income before income taxes as
a result of the following:
<TABLE>
<CAPTION>
DESCRIPTION 1994 1995
-------------------------------------------------------------------- ------ ----
(000'S)
<S> <C> <C>
Computed statutory tax expense...................................... $1,047 $396
Increase in income taxes resulting from --
State income taxes, net of federal income tax benefit............. 120 164
Nondeductible expenses............................................ -- 32
Tax-exempt interest income........................................ -- (67)
Other............................................................. (5) (24)
------ ----
Total income tax expense.................................. $1,162 $501
====== ====
</TABLE>
F-33
<PAGE> 93
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes reflect the impact of temporary differences between
the amount of assets and liabilities for financial reporting and such amounts as
measured by tax laws and regulations. The components of the net deferred tax
liability are as follows:
<TABLE>
<CAPTION>
DESCRIPTION 1994 1995
------------------------------------------------------------------ ------ -------
(000'S)
<S> <C> <C>
Deferred tax assets --
Accrued expenses................................................ $ -- $ 302
Allowance for doubtful accounts................................. -- 190
Accrued bonus................................................... -- 744
------ -------
Total deferred tax assets............................... -- 1,236
------ -------
Deferred tax liabilities --
Accounts receivable............................................. 465 1,490
Property and equipment.......................................... 77 217
Intangibles..................................................... 2,955 12,491
Other book/tax differences...................................... -- 1,051
------ -------
Total deferred tax liabilities.......................... 3,497 15,249
------ -------
Net deferred tax liabilities................................. $3,497 $14,013
====== =======
</TABLE>
Deferred taxes related to intangibles result from acquisitions for which
there is no basis in the intangibles for tax purposes. The Company paid
approximately $1,947,000 for federal and state income taxes for the year ended
December 31, 1995.
11. COMMITMENTS AND CONTINGENCIES:
In the normal course of business, certain of the affiliated physician
groups have been named in a lawsuit alleging medical malpractice. In the opinion
of the Company's management, the ultimate liability, if any, without considering
possible insurance recoveries, will not have a material impact on the Company's
financial position, results of operations or cash flows. Additionally, the
Company's affiliated physician groups and the Company are insured with respect
to medical malpractice risks on a claims-made basis.
12. EMPLOYEE BENEFIT PLANS:
Savings Plans
The Company maintains various defined contribution plans which permit
participants to make voluntary contributions. The Company pays all general and
administrative expenses of the plans, and, in some cases, makes matching
contributions on behalf of the employees. The Company incurred expenses of
$117,000 during the year ended December 31, 1995, related to these plans.
Stock Option Plans
In March 1995 and 1996, the board of directors adopted, and the
stockholders of the Company approved, the 1995 Stock Option Plan, and an
amendment and restatement thereof, respectively (as amended and restated the
Plan). The purpose of the Plan is to provide directors, key employees and
certain advisors with additional incentives by increasing their proprietary
interest in the Company. The aggregate amount of common stock with respect to
which options may be granted may not exceed 2,000,000 shares. The Plan provides
for the grant of incentive stock options (ISO) and nonqualified stock options.
The options vest over a five-year period and expire 10 years from the date of
grant.
F-34
<PAGE> 94
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the EyeCorp Merger, options outstanding under the
EyeCorp Plans were converted into options to purchase PRG common stock have been
exchanged at the conversion rate as specified in the merger agreement and
included with existing PRG options.
In March 1995, the board of directors adopted, and the stockholders of the
Company approved, the 1995 Health Care Professionals Stock Option Plan (the
Health Care Professionals Plan). The Health Care Professionals Plan permits the
Company to grant stock options to employees, advisors and consultants of the
Company, which the Company expects will generally be ophthalmologists and
optometrists, who both (a) provide advisory or consulting services to the
Company and (b) are employed by an Affiliated Practice. The aggregate amount of
common stock with respect to which options may be granted may not exceed
1,000,000 shares. Options granted under the Health Care Professionals Plan will
vest over a period of five years and expire 10 years from the date of grant.
Generally, such options will expire upon the termination of employment or the
advisory or consultant relationship with the Company or on the day prior to the
10th anniversary of the date of grant, whichever occurs first.
Transactions of the plans are summarized as follows:
<TABLE>
<CAPTION>
STOCK OPTIONS
----------------------------------------
DESCRIPTION ISOS NONQUALIFIED TOTAL
------------------------------------------------- --------- ------------ ---------
<S> <C> <C> <C>
Outstanding at December 31, 1994................. -- -- --
Granted in 1995................................ 1,014,937 616,386 1,631,323
Exercised in 1995.............................. -- -- --
Canceled in 1995............................... -- -- --
--------- ------- ---------
Outstanding at December 31, 1995................. 1,014,937 616,386 1,631,323
========= ======= =========
</TABLE>
The stock options were granted at prices ranging from $5.00 to $22.04 per
share including 8,730 additional ISOs granted to an employee in February 1996.
During 1995, the Financial Accounting Standards Board issued Statement No. 123
(SFAS No. 123), "Accounting for Stock-Based Compensation." As permitted by SFAS
No. 123, the Company will continue to follow the existing accounting
requirements for stock options contained in APB Opinion No. 25 (Accounting for
Stock Issued to Employees). Beginning in 1996, however, the Company will provide
the pro forma disclosures required by SFAS No. 123.
13. RELATED-PARTY TRANSACTIONS:
The Company leases facility space from various partnerships which include
affiliated physicians as partners and trusts in which relatives of the
affiliated physicians are named beneficiaries. Rent expense on related-party
operating leases amounted to $39,000 and $846,000 for the years ended December
31, 1994 and 1995, respectively. In addition, the Company leases facilities to
affiliated physicians. Rent income on related-party operating leases amounted to
$200,000 for the year ended December 31, 1995.
All of the Company's management service revenue is received from physician
groups which have affiliated with the Company during the past two years. A
majority of the board of directors of the Company are practicing physicians who
are associated with affiliated practice groups.
14. SUBSEQUENT EVENTS AND PRO FORMA INFORMATION:
Acquisitions
From January through mid April of 1996, PRG completed the acquisition of
and entered into service agreements with 18 eye care practices and eight ASCs.
As consideration for these acquisitions, PRG paid approximately $8,200,000 in
cash and issued approximately 2,079,177 shares of its common stock.
F-35
<PAGE> 95
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
In addition to the acquisitions discussed above, the Company is currently
in various stages of negotiations with a number of other ophthalmic and
optometric groups regarding the acquisition of their assets and the provision of
management services. Management of PRG believes certain of these negotiations,
if finalized, will result in additional acquisitions in the future.
Pro Forma
The summarized unaudited pro forma combined summary data for the year ended
December 31, 1995, presented below have been prepared as if (a) the
Reorganization and Offering had been completed; (b) the merger with EyeCorp,
Inc. (see Note 1), had been consummated; (c) the consummation of PRG's closed
and probable transactions and entry into service agreements with the 20 eye care
practices had occurred; (d) the acquisitions made by EyeCorp during 1995 were
completed; and (e) the consummation of the EyeCorp and PRG Credit Facilities had
occurred, all as if such transactions or events had occurred January 1, 1995.
These unaudited pro forma combined summary information may not be indicative of
the actual results if the above events and transactions had occurred on the date
indicated or of actual results which may be realized in the future. Neither
expected benefits and cost reductions anticipated by PRG or EyeCorp nor future
corporate costs and expenses related to the Merger have been reflected in the
accompanying unaudited pro forma combined financial data. The 1995 results
include increased expenses relative to (a) establishment and development of
corporate offices at PRG and EyeCorp, (b) the resignation of the Company's
former chief executive officer and (c) unsuccessful transaction costs at
EyeCorp.
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED DECEMBER 31
DESCRIPTION 1995
-------------------------------------------------------------------- -----------------
(000'S, EXCEPT
PER SHARE
AMOUNTS)
<S> <C>
Revenues............................................................ $ 183,008
Net income.......................................................... $ 10,841
Net income per share................................................ $ .59
Number of shares used in net income per share calculation........... 18,414
</TABLE>
In connection with the EyeCorp merger the Company expects to incur
transaction costs of approximately $9.0 million which will be recognized in the
first quarter of 1996.
F-36
<PAGE> 96
PHYSICIANS RESOURCE GROUP, INC. AND EYECORP, INC.
UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements include the
unaudited pro forma combined balance sheet as of December 31, 1995 as if the
merger with EyeCorp (Merger) and certain other transactions described below had
occurred on that date, and include the unaudited pro forma combined statement of
operations for the year ended December 31, 1995 as if the Merger and certain
other transactions as described below had occurred as of January 1, 1995. In the
Merger, shares of common stock of Physicians Resource Group, Inc. (PRG) were
exchanged for shares of stock of EyeCorp. The Merger will be accounted for as a
pooling of interests, and accordingly the historical operations and balance
sheets of PRG and EyeCorp have been combined in these financial statements.
The unaudited pro forma statements of operations for the year ended
December 31, 1995 also give effect to (i) the consummated PRG initial public
offering (IPO) and simultaneous exchange of cash, shares of its common stock and
note payable for certain assets of and liabilities (the Reorganization)
associated with ten eye care practices; (ii) the issuance of 3,553,000 shares of
PRG common stock in the IPO and the application of the net proceeds therefrom;
(iii) the acquisition of certain assets from and consummation of service
agreements with 20 eye care practices (including one practice as to which the
acquisition is probable but has not yet occurred) by PRG during the first and
second quarter of 1996 (the 1996 PRG Acquisitions); (iv) acquisition of certain
assets from and consummation by EyeCorp of service agreements with eye care
practices during 1995 (the 1995 EyeCorp Acquisitions); and (v) the PRG and
EyeCorp Credit Facilities and the application of the proceeds from borrowings
thereunder all as if such transactions or events had occurred on January 1,
1995. The pro forma balance sheet as of December 31, 1995 also gives effect to
(i) consummation of the 1996 PRG Acquisitions; and (ii) the PRG and EyeCorp
Credit Facilities and the proceeds from borrowings thereunder, all as if such
transactions or events had occurred on December 31, 1995.
The unaudited merger/significant transactions pro forma combined financial
statements have been prepared by PRG based on the supplemental combined
financial statements of PRG and EyeCorp included elsewhere in this Prospectus,
the unaudited financial statements of practices acquired by PRG in the 1996 PRG
Acquisitions and the practices acquired by EyeCorp in the 1995 EyeCorp
Acquisitions and other assumptions deemed appropriate by PRG. These unaudited
pro forma combined financial statements may not be indicative of the actual
results had the above events and transactions occurred on the dates indicated or
of actual results which may be realized in the future. Neither expected benefits
and cost reductions anticipated by PRG or EyeCorp nor future corporate costs and
expenses related to the Merger have been reflected in the accompanying unaudited
pro forma combined financial statements.
F-37
<PAGE> 97
PHYSICIANS RESOURCE GROUP, INC. AND EYECORP, INC.
UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA COMBINED BALANCE SHEET
AS OF DECEMBER 31, 1995
(000'S)
<TABLE>
<CAPTION>
ADJUSTMENTS
------------------------------
PRG AND 1995
EYECORP EYECORP
SUPPLEMENTAL 1996 PRG ACQUISITIONS TOTAL
COMBINED ACQUISITIONS AND OTHER PRO FORMA
------------ ------------ ------------ ---------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............................. $ 17,451 $ (9,354)(A-1) $ -- $ 8,097
Accounts receivable, net............................... 16,169 7,139(A-1) -- 23,308
Inventories............................................ 2,045 731(A-1) -- 2,776
Prepaid expenses and other current assets.............. 6,633 1,048(A-1) -- 7,681
-------- -------- -------- --------
Total current assets........................... 42,298 (436) -- 41,862
PROPERTY AND EQUIPMENT, net:............................. 27,519 7,130(A-1) -- 34,649
INTANGIBLE ASSETS, net:
Work force............................................. 3,285 5,612(A-1) -- 8,897
Service Agreements..................................... 36,392 46,587(A-1) -- 85,444
2,465(A-2)
Goodwill............................................... 12,580 8,068(A-1) -- 21,083
435(A-2)
-------- -------- -------- --------
52,257 63,167 115,424
OTHER NONCURRENT ASSETS, net............................. 1,538 2,537(A-1) -- 4,075
-------- -------- -------- --------
Total assets................................... $123,612 $ 72,398 $ -- $196,010
======== ======== ======== ========
LIABILITIES AND OWNERS' EQUITY
CURRENT LIABILITIES:
Obligation to former owners of affiliated practices.... $ 1,086 $ 386(A-1) $ -- $ 1,472
Notes payable and current portion of long-term debt.... 1,531 1,636(A-1) -- 3,167
Accounts payable and accrued expenses.................. 10,397 3,626(A-1) -- 14,023
Accrued salaries and benefits.......................... 3,075 1,390(A-1) -- 4,465
Current portion of ASC obligation...................... 3,100 -- -- 3,100
-------- -------- -------- --------
Total current liabilities...................... 19,189 7,038 -- 26,227
LONG-TERM DEBT, net of current portion................... 27,815 5,990(A-1) 9,000(B) 45,705
2,900(A-2)
DEFERRED TAXES........................................... 14,013 15,989(A-1) -- 30,002
OTHER LONG-TERM LIABILITIES.............................. 272 -- -- 272
-------- -------- -------- --------
Total liabilities.............................. 61,289 31,917 9,000 102,206
OWNER'S EQUITY:
Common stock........................................... 157 22(A-1) -- 179
Additional paid-in capital............................. 60,374 40,459(A-1) -- 100,833
Deficit................................................ 1,792 -- (9,000)(B) (7,208)
-------- -------- -------- --------
Total owners' equity........................... 62,323 40,481 (9,000) 93,804
-------- -------- -------- --------
Total liabilities and owners' equity........... $123,612 $ 72,398 $ -- $196,010
======== ======== ======== ========
</TABLE>
See accompanying notes to unaudited merger/significant transactions pro forma
combined balance sheet.
F-38
<PAGE> 98
PHYSICIANS RESOURCE GROUP, INC. AND EYECORP, INC.
UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(000'S, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
ADJUSTMENTS
-----------------------------------------------------------------
PRG AND 1995
EYECORP EYECORP
SUPPLEMENTAL IPO 1996 PRG ACQUISITIONS TOTAL
COMBINED REORGANIZATION ACQUISITIONS AND OTHER PRO FORMA
------------ -------------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
REVENUES:
Management service revenues..... $ 39,129 $22,085(C) $56,774(J) $40,424(O) $ 158,412
Surgery center revenue.......... 9,317 2,821(C) 7,303(J) 4,749(O) 24,190
Other revenues.................. 79 5(D) 322(K) -- 406
---------- ------- ------- ------- -----------
Total revenues.......... 48,525 24,911 64,399 45,173 183,008
COSTS AND EXPENSES:
Salaries, wages and benefits.... 19,768 10,199(D) 27,364(K) 15,455(P) 72,786
Pharmaceuticals and supplies.... 6,687 3,494(D) 6,590(K) 7,659(P) 24,430
General and administrative
expenses..................... 16,022 6,115(D) 18,174(K) 13,653(P) 52,440
(334)(G) (54)(M) (676)(Q)
(460)(N)
Depreciation and amortization... 2,609 1,217(D) 2,688(K) 1,264(P) 11,362
(194)(F) (20)(H) 1,448(R)
159(G) 2,168(L)
23(M)
Executive resignation
expenses..................... 1,117 -- -- -- 1,117
Interest expense................ 1,157 233(D) 553(K) 379(P) 2,939
(82)(E) (22)(H) (207)(S)
-- (24)(F) -- 952(T) --
---------- ------- ------- ------- -----------
Total costs and
expenses.............. 47,360 20,783 57,004 39,927 165,074
---------- ------- ------- ------- -----------
INCOME BEFORE INCOME TAXES........ 1,165 4,128 7,395 5,246 17,934
PROVISION FOR INCOME TAXES........ (501) (1,610)(I) (2,884)(I) (2,098)(I) (7,093)(I)
---------- ------- ------- ------- -----------
NET INCOME........................ $ 664 $ 2,518 $ 4,511 $ 3,148 $ 10,841(U)(V)
========== ======= ======= ======= ===========
NET INCOME PER SHARE.............. $ .07 $ .59
========== ===========
NUMBER OF SHARES USED IN NET
INCOME PER SHARE CALCULATION.... 9,086,417 18,413,596(W)
========== ===========
</TABLE>
See accompanying notes to unaudited merger/significant transactions pro forma
statement of operations.
F-39
<PAGE> 99
PHYSICIANS RESOURCE GROUP, INC. AND EYECORP, INC.
NOTES TO UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA COMBINED FINANCIAL STATEMENTS
(000'S, EXCEPT SHARE AMOUNTS)
PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS
The accompanying combined pro forma balance sheet as of December 31, 1995
gives effect to the Merger, certain acquisitions and other significant
transactions as if such transactions or events had occurred on December 31,
1995. Excess cash on a pro forma basis is assumed to be used for working capital
purposes. The estimated fair market values reflected below are based on
preliminary estimates and assumptions and are subject to revision. In
management's opinion, the preliminary allocation is not expected to be
materially different than the final allocation.
(A-1) Reflects the 1996 PRG Acquisitions. Pursuant to the 1996 PRG
Acquisitions, PRG acquired certain practice assets and liabilities, excluding
cash, in exchange for (1) the issuance of 2,206,219 shares of PRG common stock
and (2) the payment of approximately $9,354 in cash upon closing.
Simultaneously, with the purchase of the eye care practices' assets and
liabilities, the Company enters into a 40 year service agreement with the
practices. The estimated fair market value of the assets and liabilities of the
PRG Acquisition Practices are as follows:
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
-------------------------------------------------------------------------- --------
(000'S)
<S> <C>
Net assets acquired --
Accounts receivable, net................................................ $ 7,139
Inventories............................................................. 731
Prepaid expenses and other current assets............................... 1,048
Property and equipment, net............................................. 7,130
Intangible assets --
Work force........................................................... 5,612
Service Agreements................................................... 46,587
Goodwill............................................................. 8,068
Other noncurrent assets, net............................................ 2,537
Obligations to former owners of affiliated practices.................... (386)
Notes payable and current portion of long-term debt..................... (1,636)
Accounts payable and accrued expenses................................... (3,626)
Accrued salaries and benefits........................................... (1,390)
Long-term debt, net..................................................... (5,990)
Deferred taxes.......................................................... (15,989)
--------
$ 49,835
========
Consideration paid --
Cash.................................................................... $ 9,354
Common stock............................................................ 40,481
--------
$ 49,835
========
</TABLE>
The value of the shares issued in the 1996 PRG Acquisitions was based on
the average trading price prior to the closing of the individual transactions
and is discounted, as appropriate, for trading restrictions. Identifiable
intangible assets consist of the nonphysician employee work force, the service
agreements and goodwill related to ASCs. The estimated fair value of the
nonphysician employee work force is based on the estimated cost to replace the
work force. The estimated fair value of the service agreement for clinics is the
excess of the purchase price over the estimated fair value of the tangible
assets and work force acquired and liabilities assumed. Goodwill associated with
ASCs is the purchase price in excess of net tangible assets acquired.
F-40
<PAGE> 100
PHYSICIANS RESOURCE GROUP, INC. AND EYECORP, INC.
NOTES TO UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(000'S, EXCEPT SHARE AMOUNTS)
In connection with the allocation of the purchase price to identifiable
intangible assets, PRG and EyeCorp analyzed the nature of each practice
including the number of physicians in each group, number of clinics and their
ability to recruit and develop additional physicians; value of the nonphysician
employee work force; length of service agreement and ability to enforce the
agreement; existence of an ambulatory surgery center (ASC) and the trend in
health care delivery methods to an ASC-type facility. Management's analysis
indicated that the work force in place to be acquired represents an intangible
asset. The typical replacement cost of the work force has been estimated and
will be amortized over the expected average seven-year worklife of the existing
work force. The physician groups have the ability to extend their existence
indefinitely; however, the length of the service agreement, typically 40 years
with additional renewal options, effectively establishes a finite life for the
amortization of intangibles. Because PRG and EyeCorp do not practice medicine,
hire physicians, enter into employment contracts with the physicians, directly
contract with payors, etc., the intangible asset created in the purchase
allocation process is associated with the service agreement with the physician
group. These practices typically break into two categories:
(1) Physician practices and larger optometric practices are
characterized by multiple clinics, large staffs and multiple practitioners
and are composed of a mixture of surgery and complex vision service
providers with high-volume optometric providers. These practice groups
typically operate in a partnership manner and actively recruit physicians
for fellowship programs, or as employee physicians and, if appropriate,
subsequently admit qualified physicians into various levels of group
practice ownership. This manner of operations allows a practice to
perpetuate itself as individual physicians retire or are otherwise
replaced. Management of PRG and EyeCorp estimates that the average major
practice group has practiced as a group for more than 15 years. The service
agreements with these groups are typically 40 years and, because the
practice group has an indefinite life, the Company has chosen to amortize
the intangible created over the shorter of 40 years or the life of the
related service agreement.
(2) The second practice category, optometric practices, can be
characterized as being composed of a single provider, smaller staffs and
one clinic and are typically limited to optometric services and primary eye
care. These practices do not normally have the same indefinite life
characteristics as the larger practices, and the intangible created in the
purchase transaction will be amortized over a 15-year period representing
the expected life of the related practice although the related service
agreement may extend well beyond that period.
The final intangible is the goodwill associated with the ASCs acquired. PRG
and EyeCorp believe that outpatient surgery is rapidly becoming the preferred
method of delivery of many surgical procedures, replacing in-patient delivery in
hospitals and other extended-stay facilities. Benefits of ASCs include (1) lower
cost of service, (2) more efficient staffing and space utilization and (3)
improved physician productivity because of improved scheduling and faster
turnaround. In addition, an increasing number of surgeries are being performed
in ASCs by various medical specialists because of improved technology, treatment
protocols and anesthesiology. Because of these considerations, management
believes that goodwill arising from ASC purchases has an indefinite life and,
therefore, a 40-year amortization period is being utilized for this asset.
The carrying value of the intangible assets will be reviewed at each
reporting period on a practice-by-practice basis to determine if facts and
circumstances exist which would suggest that the intangible assets may be
impaired or that the amortization period needs to be modified. Among the factors
PRG will consider in making the evaluation are changes in the market position,
reputation, profitability and geographical penetration of the practices or ASCs.
If indicators are present which indicate impairment is probable, PRG will
prepare a projection of the undiscounted cash flows of the specific practice and
determine if the intangible assets are recoverable based on these undiscounted
cash flows. If impairment is indicated, then an adjustment
F-41
<PAGE> 101
PHYSICIANS RESOURCE GROUP, INC. AND EYECORP, INC.
NOTES TO UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(000'S, EXCEPT SHARE AMOUNTS)
will be made to reduce the carrying amounts of the intangible assets to their
values. PRG does not expect the adoption of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-lived Assets and for
Long-Lived Assets to Be Disposed Of," to have a material impact on its financial
condition or results of operations.
(A-2) Reflects $2,900 of transaction costs for the 1996 PRG Acquisitions
and related borrowing to pay for those costs.
(B) Reflects transaction costs related to the Merger of $9,000 which will
be charged to expense in the first quarter of 1996. These transaction costs will
be paid with proceeds from borrowings under PRG's Credit Facility.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS ADJUSTMENTS
The accompanying unaudited pro forma consolidated statements of operations
for the year ended December 31, 1995 assume that as of January 1, 1995, PRG and
EyeCorp had completed the Merger, the IPO and Reorganization, the 1996 PRG
Acquisitions, the 1995 EyeCorp Acquisitions and the financing under the new PRG
and EyeCorp Credit Facilities.
NOTES (C) - (G) REPRESENT ADJUSTMENTS RELATING TO THE IPO AND REORGANIZATION
(C) Represents calculated management service revenues of PRG, determined in
accordance with the management service agreements applied to the historical
operating results of the Founding Affiliated Practices for the first six months
of 1995.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
DESCRIPTION 1995
------------------------------------------------------------------------ ------------
(000'S)
<S> <C>
Management service revenues(1).......................................... $22,085
=======
Revenues from ACSs(2)................................................... $ 2,821
=======
</TABLE>
PRG receives, with respect to each of the Founding Affiliated Practices,
revenues based on the following components:
(1) Under the terms of its service agreements, PRG receives service
revenues based on certain operating and nonoperating expenses incurred on
behalf of the practice and a percentage of revenues relating to physician
and certain other medical services.
(2) With respect to several of the Practices, PRG owns or operates
ASCs and receives the related revenues for certain nonphysician services.
Various of these services fees are subject to certain negotiated
performance and other adjustments. The negotiated adjustments vary on a
practice-by-practice basis and include adjustments that cap or otherwise align
the fees based on percentages of revenues at specified levels related to the
profitability of the practice. Additionally, certain of the service fees based
on percentages of revenues are adjusted based on the actual results of the
practices, resulting in lower service fee ratios for incremental practice
results over specified base levels.
F-42
<PAGE> 102
PHYSICIANS RESOURCE GROUP, INC. AND EYECORP, INC.
NOTES TO UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(000'S, EXCEPT SHARE AMOUNTS)
(D) Represents an adjustment to reflect historical costs of the Founding
Affiliated Practices which have been subsequently assumed by PRG in order to
fulfill PRG's obligations under the Service Agreements with such Practices. The
components of the adjustment for the first half of the year ended December 31,
1995, include costs of the Founding Affiliated Practices and a management
services organization (MSO) purchased by PRG in the Reorganization which are
included in the historical financial statements of the Founding Affiliated
Practices.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
DESCRIPTION 1995
------------------------------------------------------------------------ ------------
(000'S)
<S> <C>
Other revenue, net...................................................... $ (5)
Salaries, wages and benefits............................................ 10,199
Pharmaceuticals and supplies............................................ 3,494
General and administrative expenses..................................... 6,115
Depreciation and amortization........................................... 1,217
Interest expense........................................................ 233
</TABLE>
(E) Reflects the elimination of interest expense related to debt
extinguished with proceeds of the IPO.
(F) Reflects adjustments to the historical costs and expenses as follows:
<TABLE>
<CAPTION>
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).
F-43
<PAGE> 103
PHYSICIANS RESOURCE GROUP, INC. AND EYECORP, INC.
NOTES TO UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(000'S, EXCEPT SHARE AMOUNTS)
(3) Certain capital leases recorded by the Founding Affiliated
Practices were not assumed by PRG because the underlying assets have been
acquired by PRG from their owners.
(G) Reflects reversal of operating lease expense for previously leased
assets with a net book value of approximately $3,736 acquired from owners of the
Founding Affiliated Practices and the recording of depreciation expense on a
straightline basis over a composite average useful life of 12 years. Debt
obligations relating to the underlying assets under operating leases of $2,401
as of December 31, 1995 have been extinguished with the proceeds of the IPO.
Accordingly, interest expense on such debt has not been reflected in the
accompanying pro forma statement of operations.
<TABLE>
<CAPTION>
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>
NOTE (H) REFERS TO EXCLUDED ASSETS FROM THE 1996 PRG ACQUISITION PRACTICES
(H) Reflects the elimination of expenses related to certain assets which
have been included within the historical costs and expenses of the 1996 PRG
Acquisition Practices but will not be associated with PRG on an ongoing basis.
NOTE (I) REFERS TO INCOME TAXES
(I) Reflects federal and state income taxes that PRG and EyeCorp would have
incurred on pro forma income before taxes.
NOTES (J) - (N) REFER TO ADJUSTMENTS RELATING TO 1996 PRG ACQUISITION PRACTICES
(J) Represents calculated management service revenues of PRG, determined in
accordance with the applicable service agreement applied to the historical
operating results of the 1996 PRG Acquisition Practices.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
DESCRIPTION 1995
------------------------------------------------------------------------ ------------
(000'S)
<S> <C>
$ 56,774
Management service revenues ............................................ ========
Revenues from ASCs(2)................................................... $ 7,303
========
</TABLE>
PRG will receive, with respect to each of the Acquisition Practices, revenues
based on the following components:
(1) Under the terms of its service agreements, the Company receives
service revenues based on certain operating and nonoperating expenses
incurred on behalf of the practice and a percentage of revenues relating to
physician and certain other medical services.
F-44
<PAGE> 104
PHYSICIANS RESOURCE GROUP, INC. AND EYECORP, INC.
NOTES TO UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(000'S, EXCEPT SHARE AMOUNTS)
(2) With respect to several of the practices, PRG owns or operates
ASCs and receives related revenues for certain nonphysician services.
(K) Represents an adjustment to reflect historical costs of the 1996 PRG
Acquisition Practices which will be assumed by PRG in order to fulfill PRG's
obligation under the applicable service agreements. The components of the
adjustment include costs of the acquisition practices being purchased by PRG.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
DESCRIPTION 1995
------------------------------------------------------------------------ ------------
(000'S)
<S> <C>
Other revenue, net...................................................... $ (322)
Salaries, wages and benefits............................................ 27,364
Pharmaceuticals and supplies............................................ 6,590
General and administrative expenses..................................... 18,174
Depreciation and amortization........................................... 2,688
Interest expense........................................................ 553
</TABLE>
(L) Reflects adjustments to historical costs and expenses of $801, $202 and
$1,165 for the year ended December 31, 1995, for (1) amortization of work force,
(2) amortization of goodwill related to the ASCs and (3) amortization of
intangibles related to the service agreements. This pro forma amortization is on
$60,267 of intangible assets as reflected on the pro forma balance sheet
amortized over periods of seven, 40 and 40 years, respectively.
(M) Reflects reversal of operating lease expense for previously leased
assets which will be acquired from owners of the PRG Acquisition Practices and
the recording of depreciation expense on a straight-line basis.
<TABLE>
<CAPTION>
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 PRG Acquisitions which are included in the historical
financials of the 1996 PRG Acquisition Practices.
NOTES (O) - (S) REFER TO 1995 EYECORP ACQUISITIONS
(O) Represents calculated EyeCorp management service revenues determined in
accordance with the applicable service agreements applied to the historical
operating results of the 1995 EyeCorp Acquisitions.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
DESCRIPTION 1995
------------------------------------------------------------------------ ------------
(000'S)
<S> <C>
Management service revenues(1).......................................... $ 40,424
========
Revenues from ASCs(2)................................................... $ 4,749
========
</TABLE>
F-45
<PAGE> 105
PHYSICIANS RESOURCE GROUP, INC. AND EYECORP, INC.
NOTES TO UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(000'S, EXCEPT SHARE AMOUNTS)
EyeCorp will receive, with respect to each of the 1995 EyeCorp
Acquisitions, revenues based on the following primary components:
(1) Under the terms of its service agreements (which have terms
similar to PRG's service agreements), EyeCorp receives service revenues
based on certain operating and nonoperating expenses incurred on behalf of
the practice and a percentage of each practice's revenues or pretax
earnings relating to physician and certain other medical services.
(2) EyeCorp owns or operates ASCs and receives the related revenues
for certain nonphysician services.
(P) Represents an adjustment to reflect historical costs of the 1995
EyeCorp Acquisitions which will be assumed by EyeCorp in order to fulfill
EyeCorp's obligations under the applicable Service Agreements.
<TABLE>
<CAPTION>
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>
(Q) Represents an adjustment to remove the nonrecurring unsuccessful
financing costs included in the EyeCorp historical financials.
(R) Represents additional amortization of intangible assets established in
the 1995 EyeCorp Acquisitions which occurred in late December 1995. If the 1995
EyeCorp Acquisitions had occurred on January 1, 1995, intangible assets would
have aggregated approximately $36,566 and additional amortization would have
aggregated $1,359 for the year ended December 31, 1995. Also includes $89
amortization of capitalized transaction and other fees for the year ended
December 31, 1995.
(S) Reflects a reduction in interest expense due to a reduction in interest
rates associated with repaying EyeCorp's existing debt borrowed under the Prior
Credit Facility with a portion of the proceeds from the borrowings under the
EyeCorp Credit Facility. This interest reduction was partially offset by an
overall increase in debt due to additional borrowings to fund the purchase price
of the 1995 EyeCorp Acquisitions. The reduction in interest expenses is
calculated as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
DESCRIPTION 1995
------------------------------------------------------------------------ ------------
(000'S)
<S> <C>
Interest expense --
Prior Credit Facility................................................. $1,393
EyeCorp Credit Facility............................................... 1,186
------
Reduction in interest expense................................. $ (207)
======
</TABLE>
The Prior Credit Facility's weighted average principal balance outstanding
for the year ended December 31, 1995, was approximately $14,287 and the
applicable interest rate was 9.75%. The EyeCorp Credit Facility pro forma
weighted average principal balance outstanding (assuming additional borrowings
to fund
F-46
<PAGE> 106
PHYSICIANS RESOURCE GROUP, INC. AND EYECORP, INC.
NOTES TO UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(000'S, EXCEPT SHARE AMOUNTS)
the cash portion of the purchase price of the 1995 EyeCorp Acquisitions and
related transactions) for the year ended December 31, 1995 was approximately
$14,825 and the applicable interest rate was 8.0%.
(T) Reflects interest expense related to additional borrowings under the
PRG and EyeCorp Credit Facilities of approximately $11,900 to pay transaction
costs and provide working capital associated with the Merger and the 1996 PRG
Acquisitions. The applicable interest rate was 8.0%.
NOTES (U) - (W) REFER TO THE PRO FORMA TOTALS
(U) The Company has decided to continue to apply the provisions of APB
Opinion 25 to its stock-based employee compensation arrangements.
(V) Direct transactions costs of approximately $9,000 associated with the
Merger are not included in the accompanying pro forma income statement. These
costs are anticipated to be recorded in the first quarter of 1996.
(W) Weighted average shares outstanding is summarized below:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
DESCRIPTION 1995
------------------------------------------------------------------------ ------------
(000'S)
<S> <C>
Outstanding PRG shares after IPO and additional shares purchased
by underwriters....................................................... 9,558,244
PRG stock options impact, using the treasury stock method............... 344,684
PRG shares issued in the 1996 PRG Acquisitions.......................... 2,213,045
PRG shares issued to EyeCorp shareholders in connection with the
Merger................................................................ 6,089,506
PRG stock options impact, EyeCorp options assumed using the treasury
stock method.......................................................... 208,117
----------
18,413,596
==========
</TABLE>
F-47
<PAGE> 107
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholders of
Physicians Resource Group, Inc.:
We have audited the accompanying combined balance sheets of Physicians
Resource Group, Inc. -- Founding Affiliated Practices (as identified in Note 1)
as of December 31, 1993 and 1994 and the related combined statements of
operations, owners' equity and cash flows for each of the three years in the
period ended December 31, 1994. These combined financial statements are the
responsibility of the Physicians Resource Group, Inc. -- Founding Affiliated
Practices' management. Our responsibility is to express an opinion on these
combined 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 combined financial statements referred to above present
fairly, in all material respects, the financial position of Physicians Resource
Group, Inc. -- Founding Affiliated Practices as of December 31, 1993 and 1994,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1994, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 3, 1995
F-48
<PAGE> 108
PHYSICIANS RESOURCE GROUP, INC. -- FOUNDING AFFILIATED PRACTICES
COMBINED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1993 1994 1995
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 3,444 $ 4,287 $ 3,537
Accounts receivable, less allowance for contractual
adjustments
and bad debts of $6,075 in 1993, $5,871 in 1994 and
$6,000
in 1995................................................ 7,223 7,303 8,439
Inventories............................................... 527 688 812
Prepaid expenses and other current assets................. 207 225 339
------- ------- -------
Total current assets.............................. 11,401 12,503 13,127
PROPERTY AND EQUIPMENT, net................................. 5,997 7,174 7,630
OTHER NONCURRENT ASSETS, net................................ 3,184 3,396 3,200
------- ------- -------
Total assets...................................... $20,582 $23,073 $23,957
======= ======= =======
LIABILITIES AND OWNERS' EQUITY
CURRENT LIABILITIES:
Short-term notes payable.................................. $ 893 $ 563 $ 561
Current portion of long-term debt......................... 1,052 1,593 1,550
Current portion of obligations under capital leases....... 109 146 149
Accounts payable and accrued expenses..................... 1,782 2,589 2,152
Accrued salaries and benefits............................. 2,025 1,880 1,550
------- ------- -------
Total current liabilities......................... 5,861 6,771 5,962
LONG-TERM DEBT, net of current portion...................... 1,794 2,968 2,754
LONG-TERM OBLIGATIONS UNDER CAPITAL LEASES,
net of current portion.................................... 442 409 371
OTHER LONG-TERM LIABILITIES................................. 2 280 272
------- ------- -------
Total liabilities................................. 8,099 10,428 9,359
OWNERS' EQUITY.............................................. 12,483 12,645 14,598
------- ------- -------
Total liabilities and owners' equity.............. $20,582 $23,073 $23,957
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-49
<PAGE> 109
PHYSICIANS RESOURCE GROUP, INC. -- FOUNDING AFFILIATED PRACTICES
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER FOR THE SIX MONTHS
31, ENDED JUNE 30,
----------------------------- ------------------
1992 1993 1994 1994 1995
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Medical service revenues, net.............. $46,203 $48,986 $51,619 $25,870 $26,695
Other revenues............................. 5,204 5,570 5,770 2,473 2,902
------- ------- ------- ------- -------
Total revenues..................... 51,407 54,556 57,389 28,343 29,597
------- ------- ------- ------- -------
COSTS AND EXPENSES:
Compensation to physician owners........... 17,065 15,889 19,568 7,280 6,680
Salaries, wages and benefits............... 15,600 16,515 18,128 8,567 10,198
Pharmaceuticals and supplies............... 5,932 6,046 6,081 3,167 3,494
General and administrative expenses........ 11,247 12,214 12,855 6,213 6,115
Depreciation and amortization.............. 1,530 1,768 1,973 980 1,217
Interest expense........................... 356 356 348 149 232
Other (income) expense, net................ (75) (30) (69) (45) (8)
------- ------- ------- ------- -------
Total costs and expenses........... 51,655 52,758 58,884 26,311 27,928
------- ------- ------- ------- -------
Net earnings (loss)................ $ (248) $ 1,798 $(1,495) $ 2,032 $ 1,669
======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE:
Combined compensation to and net earnings
of physician owners..................... $16,817 $17,687 $18,073 $ 9,312 $ 8,349
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-50
<PAGE> 110
PHYSICIANS RESOURCE GROUP, INC. -- FOUNDING AFFILIATED PRACTICES
COMBINED STATEMENTS OF OWNERS' EQUITY
(IN THOUSANDS)
<TABLE>
<S> <C>
BALANCE, December 31, 1991......................................................... $ 7,240
Net earnings (loss).............................................................. (248)
Capital contributions by owners and partners..................................... 320
-------
BALANCE, December 31, 1992......................................................... 7,312
Net earnings..................................................................... 1,798
Capital contributions by owners and partners..................................... 182
Capital contribution by third-party entering Founding Affiliated Practices (Note
3)............................................................................ 3,191
-------
BALANCE, December 31, 1993......................................................... 12,483
Net earnings (loss).............................................................. (1,495)
Capital contributions by owners and partners..................................... 1,657
-------
BALANCE, December 31, 1994......................................................... 12,645
Net earnings (loss) (unaudited).................................................. 1,669
Capital contributions by owners and partners (unaudited)......................... 1,209
Distributions to owners and partners (unaudited)................................. (925)
-------
BALANCE, June 30, 1995 (unaudited)................................................. $14,598
=======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-51
<PAGE> 111
PHYSICIANS RESOURCE GROUP, INC. -- FOUNDING AFFILIATED PRACTICES
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
------------------------------- -------------------
1992 1993 1994 1994 1995
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss).................... $ (248) $ 1,798 $(1,495) $ 2,032 $ 1,669
------- ------- ------- ------- -------
Adjustments to reconcile net earnings
to net cash provided by operating
activities --
Depreciation and amortization....... 1,530 1,768 1,973 980 1,217
Changes in assets and liabilities --
(Increase) decrease in --
Accounts receivable, net....... 218 (263) (80) (221) (1,136)
Inventories.................... 26 105 (161) (88) (124)
Prepaid expenses and other
current assets............... (493) 149 (147) 36 (114)
Increase (decrease) in --
Accounts payable and accrued
expenses..................... 648 147 807 1,404 (437)
Accrued salaries and
benefits..................... 432 (103) (145) (1,573) 329
Other liabilities.............. (588) -- 5 48 214
------- ------- ------- ------- -------
1,773 1,803 2,252 586 (51)
------- ------- ------- ------- -------
Net cash provided by (used
in) operating
activities................ 1,525 3,601 757 2,618 1,618
------- ------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for acquisition of clinic
operating assets, net of cash
acquired............................ (250) (200) (354) (50) (739)
Purchase of property and equipment..... (1,182) (1,507) (2,277) (963) (1,449)
------- ------- ------- ------- -------
Net cash used in investing
activities................ (1,432) (1,707) (2,631) (1,013) (2,188)
------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term obligations.... 1,486 1,335 3,407 170 170
Repayment of long-term obligations..... (1,701) (2,087) (2,040) (321) (429)
Repayment of obligations under capital
leases.............................. (6) (58) (106) (39) (35)
Cash contributions by owners and
partners............................ 33 182 1,456 29 114
------- ------- ------- ------- -------
Net cash provided by (used
in) financing
activities................ (188) (628) 2,717 (161) (180)
------- ------- ------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................ (95) 1,266 843 1,444 (750)
CASH AND CASH EQUIVALENTS, beginning of
period................................. 2,273 2,178 3,444 3,444 4,287
------- ------- ------- ------- -------
CASH AND CASH EQUIVALENTS,
end of period.......................... $ 2,178 $ 3,444 $ 4,287 $ 4,888 $ 3,537
======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTMENT ACTIVITIES:
Capital lease obligations incurred to
acquire equipment................... $ 20 $ 520 $ 126 $ 100 $ --
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-52
<PAGE> 112
PHYSICIANS RESOURCE GROUP, INC. -- FOUNDING AFFILIATED PRACTICES
NOTES TO COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS)
1. BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION:
Physicians Resource Group, Inc. (PRG), was formed to create an eye care
services company which will own the assets of and provide management services to
ophthalmic and optometric businesses. PRG plans to consummate an initial public
offering and simultaneously exchange cash and shares of its common stock for
selected assets of, and liabilities associated with ten eye care practices (the
Founding Affiliated Practices). The Founding Affiliated Practices, which are
comprised of numerous legal entities, conduct business as Texas Eye Institute
Assoc., The Eye Clinic of Texas, Minadeo Eye Clinic, Fritch Eye Care Center,
Inland Eye Institute Medical Group, Inc., Eye Clinic, P.C., Joseph C. Noreika,
M.D., Inc., Midwest Eye Center, McDonald Eye Associates, P.A. and Westfield Eye
Center. The Founding Affiliated Practices are based in Texas, California,
Tennessee, Ohio, Arkansas and Nevada. The completion of the asset acquisition,
public offering and the entry by PRG into service agreements with the owners of
the physician practice groups will mark the beginning of PRG's operations.
The combined financial statements of the Founding Affiliated Practices have
been prepared as supplemental information about the entities to which PRG will
provide management services following the initial public offering. The Founding
Affiliated Practices previously have operated as separate independent entities.
Their historical financial positions, results of operations and cash flows have
been combined in the accompanying financial statements and do not reflect any
adjustments relating to the proposed transaction or the impacts that may have
occurred if the operations of the Founding Affiliated Practices had been
combined. PRG will provide management services to the Founding Affiliated
Practices. PRG will not own the Founding Affiliated Practices nor practice
medicine, thus the combined financial statements are not representative of the
future operations of PRG. All significant intercompany accounts and transactions
have been eliminated.
Most of the Founding Affiliated Practices maintained their books and
records on the cash basis of accounting. The accompanying financial statements
have been prepared on the accrual basis of accounting. These combined financial
statements have been prepared to show the operations and financial position of
the Founding Affiliated Practices, a portion of whose assets and operations will
be acquired by PRG. Because certain entities are nontaxpaying (i.e.,
partnerships, S Corporations and corporations managed to result in taxes being
the responsibility of the respective owners), the financial statements have been
presented on a pretax basis, as further described in Note 2. The supplemental
caption on the statements of operations, combined compensation to and net
earnings of physician owners, reflects the total earnings available to the
physician owners for each period.
The financial information for the interim periods ended June 30, 1994 and
1995, has not been audited by independent accountants. Certain information and
footnote disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted from the unaudited interim financial information. In the opinion of
management of PRG, the unaudited interim financial information includes all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation. Results of operations for the interim periods are not
necessarily indicative of the results of operations for the respective full
years.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash Equivalents
The Founding Affiliated Practices consider all highly liquid investments
with a maturity of three months or less when purchased to be cash equivalents.
Accounts Receivable
Accounts receivable primarily consist of receivables from patients,
insurers, government programs and other third-party payers for medical services
provided by physicians. Such amounts are reduced by an
F-53
<PAGE> 113
PHYSICIANS RESOURCE GROUP, INC. -- FOUNDING AFFILIATED PRACTICES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
allowance for contractual adjustments and other uncollectible amounts.
Contractual adjustments result from the differences between the rates charged by
the physicians for services performed and the amounts allowed by the Medicare
and Medicaid programs and other public and private insurers.
Inventories
Inventories consist primarily of spectacle frames and lenses and are valued
at the lower of cost or market with cost determined using the first-in,
first-out (FIFO) method.
Property and Equipment
Property and equipment are stated at cost. Equipment under capital leases
is stated at the net present value of the future minimum lease payments at the
inception of the related leases.
Depreciation of property and equipment is calculated using accelerated
methods over the estimated useful lives of the assets. Routine maintenance and
repairs are charged to expense as incurred, while costs of betterments and
renewals are capitalized.
Other noncurrent assets
Other noncurrent assets consist primarily of the excess of cost of acquired
assets over the fair value (Goodwill) and noncompete agreements. Goodwill is
amortized on a straight-line basis over periods ranging from five to 20 years.
Noncompete agreements are amortized on the straight-line basis over periods
ranging from three to five years, which represent the shorter of the economic
value or the term of the respective agreements.
Income Taxes
Certain of the Founding Affiliated Practices are S Corporations or
partnerships; accordingly, income tax liabilities are the responsibility of the
respective owners or partners. The taxable corporations included in the Founding
Affiliated Practices historically have not incurred significant tax liabilities
for federal or state income taxes. Compensation to physician owners has
traditionally reduced taxable income to nominal levels. This relationship would
be expected to continue in the absence of the PRG transaction. Because of this
practice, provisions for income taxes and deferred tax assets and liabilities of
the taxable entities have not been reflected in these combined financial
statements. The consistent presentation of the financial statements on a pretax
basis also provides comparability that would not otherwise be the case when
presenting a combination of various taxable and nontaxable entities.
Owners' Equity
Owners' equity includes the respective capital stock, additional paid-in
capital, partnership capital and retained earnings of the various legal entities
reflected herein as the Founding Affiliated Practices. For the Founding
Affiliated Practices with multiple owners, various types of agreements exist
among the owners which call for the transfer of a physician's ownership interest
by the continuing owners in the case of certain events such as the owner's
retirement or death. Frequently, the existing owners or practices are required
to pay the departed owner for his interest.
Revenues
Medical service revenues are accounted for in the period the services are
provided. The revenues are reported at the estimated realizable amounts from
patients, third-party payers and others. Provisions for estimated third-party
payer adjustments are estimated in the period the related services are provided.
Any adjustment to the amounts recorded will be recorded in the period in which
the revised amount is determined.
F-54
<PAGE> 114
PHYSICIANS RESOURCE GROUP, INC. -- FOUNDING AFFILIATED PRACTICES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Due to the demographics of ophthalmic patients, a significant portion of the
founding affiliated practices' medical services revenues are related to medicare
and other governmental programs. Medicare and other governmental programs
reimburse physicians based on fee schedules which are determined by the related
governmental agency. Additionally, the Founding Affiliated Practices participate
in agreements with managed care organizations to provide services at negotiated
rates or for capitated payments.
Other revenues consist primarily of sales of spectacle frames and lenses
and contact lenses.
Concentration of Credit Risk
The Founding Affiliated Practices extend credit to patients covered by
insurance programs such as governmental programs like Medicare and Medicaid and
private insurers. The Founding Affiliated Practices manage credit risk with the
various public and private insurance providers, as appropriate. Allowances for
doubtful accounts have been made for potential losses, where appropriate.
3. ACQUISITIONS AND OTHER TRANSACTIONS:
Certain of the Founding Affiliated Practices have completed acquisitions of
certain operating assets of additional practices over the three-year period
ended December 31, 1994. These acquisitions were accounted for using the
purchase method. The financial results of the acquisitions have been included in
the combined financial statements of the Founding Affiliated Practices from the
date of their acquisition. The pro forma effect of the acquisitions was not
material to the results of operations or financial position of the Founding
Affiliated Practices. The estimated fair value of assets acquired is summarized
as follows:
<TABLE>
<CAPTION>
ACQUISITIONS COMPLETED
DURING THE YEAR ENDED
DECEMBER 31,
----------------------
1992 1993 1994
---- ---- ----
<S> <C> <C> <C>
Property and equipment........................................ $270 $631 $422
Inventories................................................... 70 -- --
Intangible assets............................................. 411 335 134
---- ---- ----
Purchase price................................................ $751 $966 $556
==== ==== ====
</TABLE>
Additionally, in 1993, a third party acquired certain assets of one of the
practices for an amount that exceeded the carrying value of the tangible assets
by $3,200 and contracted to provide management services to the Founding
Affiliated Practice. This step up in the value has been reflected as a capital
contribution by a third-party in the combined statement of owners' equity.
The accompanying combined Founding Affiliated Practices financial
statements include the financial results of the practice for all periods and the
financial results of the management services organization (MSO) from its
inception (April 30, 1993). Summarized unaudited financial information of the
MSO is as follows:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
FOR THE PERIOD FOR THE YEAR ENDED JUNE 30,
FROM INCEPTION TO ENDED -------------------
DECEMBER 31, 1993 DECEMBER 31, 1994 1994 1995
----------------- ----------------- ------- -------
<S> <C> <C> <C> <C>
MSO revenues.......................... $ 3,849 $ 6,339 $ 2,777 $ 2,591
Costs and expenses.................... (3,327) (4,977) (2,256) (5,199)
------- ------- ------- -------
Net earnings................ $ 522 $ 1,362 $ 521 $(2,608)
======= ======= ======= =======
</TABLE>
F-55
<PAGE> 115
PHYSICIANS RESOURCE GROUP, INC. -- FOUNDING AFFILIATED PRACTICES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------- JUNE 30,
1993 1994 1995
----------------- ----------------- -------
<S> <C> <C> <C>
Current assets........................ $ 1,789 $ 1,339 $ 1,219
Property and equipment, net........... 2,289 2,121 1,988
Other noncurrent assets, net.......... 1,970 1,954 1,863
------- ------- -------
Total assets................ $ 6,048 $ 5,414 $ 5,070
======= ======= =======
Current liabilities................... $ 474 $ 309 $ 314
Long-term obligations................. 286 289 281
Owner's equity........................ 5,288 4,816 4,475
------- ------- -------
Total liabilities and
equity.................... $ 6,048 $ 5,414 $ 5,070
======= ======= =======
</TABLE>
Included in current assets of the MSO are interentity receivables of
$1,125, $873, and $817 as of December 31, 1993 and 1994, and June 30, 1995,
respectively, which have been eliminated in the combined financial statements.
The above MSO revenues have been eliminated in the combined results of
operations of the Founding Affiliated Practices as they represent management
service fees charged to the related Founding Affiliated Practice whose operating
results are included in the combined financial statements. As further discussed
in Note 10, PRG will acquire these assets and assume certain liabilities from
the third party in exchange for cash and a note payable in a transaction to be
accounted for under the purchase method of accounting. Following purchase of the
MSO, a new service agreement will be entered into between the related Founding
Affiliated Practice and PRG. For this reason, the historical operating results
presented for the MSO are not necessarily indicative of future results from
operations.
During the six months ended June 30, 1995, one of the Founding Affiliated
Practices made two asset acquisitions in exchange for stock of the Founding
Affiliated Practices. These acquisitions resulted in an increase in property and
equipment of approximately $643, inventories of approximately $142 and accounts
receivable of approximately $88.
4. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL DECEMBER 31,
LIVES -------------------
(YEARS) 1993 1994
--------- ------- -------
<S> <C> <C> <C>
Equipment.............................................. 3-10 $10,487 $12,564
Leasehold improvements................................. 5-30 1,514 1,892
Furniture and fixtures................................. 5-7 1,573 1,824
Equipment under capital leases......................... 5-7 618 744
------- -------
14,192 17,024
Less -- Accumulated depreciation....................... (8,195) (9,850)
------- -------
Net property and equipment................... $ 5,997 $ 7,174
======= =======
</TABLE>
F-56
<PAGE> 116
PHYSICIANS RESOURCE GROUP, INC. -- FOUNDING AFFILIATED PRACTICES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. OTHER NONCURRENT ASSETS:
Other noncurrent assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1993 1994
------ ------
<S> <C> <C>
Excess of cost of acquired assets over fair value.................. $2,141 $2,172
Noncompete agreements.............................................. 809 962
Other.............................................................. 726 1,072
------ ------
3,676 4,206
Less -- Accumulated amortization................................... (492) (810)
------ ------
$3,184 $3,396
====== ======
</TABLE>
6. SHORT-TERM AND LONG-TERM OBLIGATIONS:
Short-Term Notes Payable
Short-term notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1993 1994
------ ------
<S> <C> <C>
Notes payable to various financial institutions, bearing interest
at prime to 11.75%, collateralized by various assets of the
Founding Affiliated Practices.................................... $ 468 $ 58
Unsecured notes payable to various owners of the Founding
Affiliated Practices, bearing interest from 7% to 8%............. 425 505
------ ------
$ 893 $ 563
====== ======
</TABLE>
Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1993 1994
------ ------
<S> <C> <C>
Term loans payable to insurance companies, due through 1999,
bearing interest of 5.96% to 10.17%, payable monthly, secured by
the equipment of a Founding Affiliated Practice.................. $ 456 $1,886
Term loans payable to banks, due through 2000, bearing interest at
prime to prime plus 1%, payable monthly, collateralized by
various assets of the Founding Affiliated Practices.............. 874 1,266
Term loans payable to banks, due through 2001, bearing interest
from 8.3% to 10.5%, payable monthly, collateralized by assets of
various Founding Affiliated Practices............................ 439 304
Notes payable to financing companies and various individuals, due
from 1995 to 2007, payable in installments, bearing interest
ranging from
8.75% to 17.9%, collateralized by assets of various Founding
Affiliated Practices............................................. 520 492
Notes payable to various owners of the Founding Affiliated
Practices, due from 1995 to 1999, bearing interest ranging from
6% to 10%, payable in installments, some of which are secured by
assets of the Founding Affiliated Practices...................... 557 613
------ ------
Total long-term debt..................................... 2,846 4,561
Less -- Current portion............................................ 1,052 1,593
------ ------
Long-term debt, excluding current portion................ $1,794 $2,968
====== ======
</TABLE>
F-57
<PAGE> 117
PHYSICIANS RESOURCE GROUP, INC. -- FOUNDING AFFILIATED PRACTICES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Certain debt obligations contain covenants that require maintenance of
certain financial ratios. Default of any covenant could affect the ability of
individual entities to borrow under the agreements and, if not waived or
corrected, could accelerate the maturity of any borrowings outstanding under the
agreements. As of December 31, 1994, each of the Founding Affiliated Practices
has complied with existing loan covenants. Various of these debt instruments are
guaranteed by the owners of the Founding Affiliated Practices or related
entities. The Founding Affiliated Practices have also guaranteed debt of other
parties. The Founding Affiliated Practices have not previously been required to
assume any significant responsibility for these financial obligations as a
result of defaults and are not aware of any existing conditions which would
adversely affect the financial position or results of operations of the Founding
Affiliated Practices.
As of December 31, 1994, the aggregate amounts of annual principal
maturities of long-term debt (excluding capital lease obligations) are as
follows:
<TABLE>
<S> <C>
1995........................................................................ $1,593
1996........................................................................ 861
1997........................................................................ 761
1998........................................................................ 543
1999........................................................................ 467
Thereafter.................................................................. 336
------
Total............................................................. $4,561
======
</TABLE>
The Founding Affiliated Practices lease office space as well as certain
equipment under capital leases and noncancelable operating lease agreements
which expire at various dates. At December 31, 1994, minimum annual rental
commitments under capital leases and noncancelable operating leases with terms
in excess of one year are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1995.............................................................. $ 226 $ 2,513
1996.............................................................. 222 1,811
1997.............................................................. 196 1,312
1998.............................................................. 69 1,124
1999.............................................................. 7 824
Thereafter........................................................ -- 3,051
------ --------
Total minimum lease payments............................ 720 $ 10,635
========
Less -- Amounts representing interest............................. 165
------
Present value of minimum capital lease payments......... 555
Less -- Current portion of obligations under capital leases....... 146
------
Long-term obligations under capital leases, net of
current portion...................................... $ 409
======
</TABLE>
F-58
<PAGE> 118
PHYSICIANS RESOURCE GROUP, INC. -- FOUNDING AFFILIATED PRACTICES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Rent expense related to operating leases amounted to $3,190, $3,448 and
$3,496 for the years ended December 31, 1992, 1993 and 1994, respectively. Cash
interest paid was approximately $356, $356 and $348 in 1992, 1993 and 1994,
respectively.
7. EMPLOYEE BENEFIT PLANS:
Certain of the Founding Affiliated Practices have qualified defined
contribution plans which permit participants to make voluntary contributions.
The applicable Founding Affiliated Practices pay all general and administrative
expenses of the plans and, in some cases, make matching contributions on behalf
of the employees. The Founding Affiliated Practices made contributions related
to these plans totaling $733, $775 and $777 in 1992, 1993 and 1994,
respectively.
The Founding Affiliated Practices do not typically provide employees any
postretirement benefits other than pensions and, accordingly, the impact of
Statement of Financial Accounting Standards No. 106 had no material effect on
the Founding Affiliated Practices.
8. COMMITMENTS AND CONTINGENCIES:
The various Founding Affiliated Practices are insured with respect to
medical malpractice risks on a claims made basis. In the normal course of
business, certain of the individual Founding Affiliated Practices have been
named in various lawsuits, primarily alleging medical malpractice. In the
opinion of the Founding Affiliated Practices' management, the ultimate
liability, if any, of the Founding Affiliated Practices will not exceed the
insurance coverages carried by the applicable Founding Affiliated Practices and
will not impact the operating results or results of financial condition of the
Founding Affiliated Practices.
9. RELATED-PARTY TRANSACTIONS:
Lease Transactions
The Founding Affiliated Practices lease facility space from various
partnerships which include owning physicians as partners and trusts in which
relatives of the owner physicians are named beneficiaries. Additionally, several
Founding Affiliated Practices lease equipment from physician owners, some of
which are capital leases. Interest expense recognized on related-party capital
lease obligations amounted to $33, $55 and $64 for the years ended December 31,
1992, 1993 and 1994, respectively. Rent expense on related-party operating
leases amounted to $1,499, $2,025 and $2,083 for the years ended December 31,
1992, 1993 and 1994, respectively.
Other Related-Party Balances and Transactions
Included in other noncurrent assets at December 31, 1993 and 1994, are
approximately $219 and $202, respectively, of amounts due from owners of the
Founding Affiliated Practices. Included in accounts payable are amounts of $76
and $582 which are payable to owners of the Founding Affiliated Practices as of
December 31, 1993 and 1994, respectively.
In various instances, relatives of the owners of the Founding Affiliated
Practices are employees of the clinics. A relative of one owner of a Founding
Affiliated Practice serves as the entity's insurance agent. A relative of
another owner of one of the Founding Affiliated Practices serves as a consultant
to the entity.
10. SUBSEQUENT EVENTS:
PRG consummated an initial public offering as of June 30, 1995 for
accounting purposes and simultaneously exchanged cash and shares of its common
stock for selected assets of and liabilities associated with the Founding
Affiliated Practices. The exchange was accounted for utilizing the historical
cost basis with
F-59
<PAGE> 119
PHYSICIANS RESOURCE GROUP, INC. -- FOUNDING AFFILIATED PRACTICES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
the stock being valued at the historical cost of the net assets exchanged. Cash
consideration given in these acquisitions and an anticipated payment obligation
under an option of a Founding Affiliated Practice to require the purchase of an
ASC have been treated for accounting purposes as a dividend from PRG to the
Founding Affiliated Practices and their owners. Additionally, PRG acquired
certain assets and liabilities of one Founding Affiliated Practice from a third
party in exchange for cash and a note payable in a transaction to be accounted
for under the purchase method of accounting.
The selling physicians have created new entities for the practice of
medicine (New PCs) and have entered into 40-year service agreements with PRG.
Additionally, all physicians have entered into employment and noncompete
agreements with the New PCs. The employment or noncompete agreements did not
increase the expenses of the Founding Affiliated Practices. Service fees are
being paid from the medical service revenues earned by the physicians owning and
working for the New PCs. The physician owners of the New PCs are looking to
continuing earnings from their New PCs and the investment potential of PRG stock
to replace the earnings distributable to owners from the prior Founding
Affiliated Practices.
The financial information as of June 30, 1995 and for the six-month periods
ended June 30, 1994 and 1995, reflect the financial position and results of
operations of the Founding Affiliated Practices immediately prior to the effect
of the Reorganization and Offering of PRG as discussed in the above paragraphs.
F-60
<PAGE> 120
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Physicians Resource Group, Inc.:
We have audited the accompanying balance sheets of Barnet Dulaney Eye
Center, P.L.L.C., as of December 31, 1994 and 1995, and the related statements
of earnings, owners' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Barnet Dulaney Eye Center,
P.L.L.C., as of December 31, 1994 and 1995, and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 8, 1996
F-61
<PAGE> 121
BARNET DULANEY EYE CENTER, P.L.L.C.
BALANCE SHEETS -- DECEMBER 31, 1994 AND 1995
ASSETS
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents......................................... $ 39,593 $ 14,696
Accounts receivable, less contractual allowances of approximately
$1,290,642 and $1,150,552 at December 31, 1994 and 1995,
respectively................................................... 1,924,888 2,289,680
Inventories....................................................... 40,326 52,455
Prepaid expenses and other current assets......................... 314,556 584,502
---------- ----------
Total current assets...................................... 2,319,363 2,941,333
EQUIPMENT, net...................................................... 593,791 838,579
OTHER NONCURRENT ASSETS, net........................................ 149,500 --
---------- ----------
Total assets.............................................. $3,062,654 $3,779,912
========== ==========
LIABILITIES AND OWNERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt................................. $ 184,523 $ 158,907
Current portion of obligations under capital leases............... 90,082 244,829
Accounts payable and accrued expenses............................. 753,205 1,194,062
Accrued salaries and benefits..................................... 294,322 386,816
---------- ----------
Total current liabilities................................. 1,322,132 1,984,614
LONG-TERM DEBT, net of current portion.............................. 104,277 233,271
LONG-TERM OBLIGATIONS UNDER CAPITAL LEASES, net of current
portion........................................................... 175,054 24,627
---------- ----------
Total liabilities......................................... 1,601,463 2,242,512
OWNERS' EQUITY...................................................... 1,461,191 1,537,400
---------- ----------
Total liabilities and owners' equity...................... $3,062,654 $3,779,912
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-62
<PAGE> 122
BARNET DULANEY EYE CENTER, P.L.L.C.
STATEMENTS OF EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
MEDICAL SERVICE REVENUES, net..................................... $16,119,404 $16,658,711
----------- -----------
COSTS AND EXPENSES:
Compensation to physician owners................................ 4,240,852 4,118,108
Salaries, wages and benefits.................................... 6,126,847 6,584,258
Pharmaceuticals and supplies.................................... 1,657,804 1,671,804
General and administrative expenses............................. 3,326,991 3,903,002
Depreciation and amortization................................... 369,571 352,354
Interest expense................................................ 59,056 78,592
Other (income) expense, net..................................... (8,956) (125,616)
----------- -----------
Total costs and expenses................................ 15,772,165 16,582,502
----------- -----------
Net earnings............................................ $ 347,239 $ 76,209
=========== ===========
SUPPLEMENTAL DISCLOSURE:
Combined compensation to and net earnings of physician owners... $ 4,588,091 $ 4,194,317
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-63
<PAGE> 123
BARNET DULANEY EYE CENTER, P.L.L.C.
STATEMENTS OF OWNERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
<TABLE>
<S> <C>
BALANCE, December 31, 1993....................................................... $1,113,952
Net earnings................................................................... 347,239
----------
BALANCE, December 31, 1994....................................................... 1,461,191
Net earnings................................................................... 76,209
----------
BALANCE, December 31, 1995....................................................... $1,537,400
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-64
<PAGE> 124
BARNET DULANEY EYE CENTER, P.L.L.C.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings....................................................... $ 347,239 $ 76,209
--------- ---------
Adjustments to reconcile net earnings to net cash provided by
operating activities --
Depreciation and amortization................................... 369,571 352,354
Gain on sale of asset........................................... -- (125,590)
Changes in assets and liabilities --
(Increase) decrease in --
Accounts receivable, net................................... 177,215 (364,792)
Inventories................................................ 3,774 (12,129)
Prepaid expenses and other current assets.................. (201,994) 63,322
Increase (decrease) in --
Accounts payable and accrued expenses...................... 64,357 440,857
Accrued salaries and benefits.............................. (662,115) 92,494
--------- ---------
(249,192) 446,516
--------- ---------
Net cash provided by operating activities................ 98,047 522,725
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment............................................. (103,983) (586,671)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt....................................... 100,000 314,178
Repayment of long-term debt........................................ (94,015) (210,800)
Repayment of obligations under capital leases...................... (97,783) (64,329)
--------- ---------
Net cash provided by (used in) financing activities...... (91,798) 39,049
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS............................ (97,734) (24,897)
CASH AND CASH EQUIVALENTS, beginning of period....................... 137,327 39,593
--------- ---------
CASH AND CASH EQUIVALENTS, end of period............................. $ 39,593 $ 14,696
========= =========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTMENT ACTIVITIES:
Long-term obligations incurred to acquire equipment................ $ 149,500 $ 68,649
Equipment sold in exchange for receivable from purchaser........... -- 333,268
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-65
<PAGE> 125
BARNET DULANEY EYE CENTER, P.L.L.C.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION:
Barnet Dulaney Eye Center, P.L.L.C. (BDEC), an Arizona limited liability
company, was formed under an operating agreement dated October 1, 1992, and
commenced operations effective January 1, 1993. BDEC was formed by the
individual sole stockholders of The Eye Surgery Center at Phoenix, Ltd. (d.b.a.
The Barnet Center of Ophthalmology, Ltd.), and Dulaney Eye Institute, Ltd., both
incorporated as professional corporations. BDEC and the individual doctors'
professional corporations engaged in the general practice of medicine,
specializing in ophthalmology primarily in Arizona. The majority of the assets
and all operations of the professional corporations were transferred to BDEC
beginning January 1, 1993. Since that time, additional members have been
admitted.
The accompanying financial statements have been prepared on the accrual
basis of accounting. The supplemental caption on the statements of earnings,
"Combined compensation to and net earnings of physician owners," reflects the
total earnings available to the physician owners for each period.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash Equivalents
BDEC considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Accounts Receivable
Accounts receivable primarily consist of receivables from patients,
insurers, government programs and other third-party payers for medical services
provided by physicians. Such amounts are reduced by an allowance for contractual
adjustments and other uncollectible amounts. Contractual adjustments result from
the differences between the rates charged by the physicians for services
performed and the amounts allowed by the Medicare and Medicaid programs and
other public and private insurers.
Inventories
Inventories consist primarily of spectacle frames and lenses and are valued
at the lower of cost or market with cost determined using the first-in,
first-out (FIFO) method.
Equipment
Equipment is stated at cost. Equipment under capital leases is stated at
the net present value of the future minimum lease payments at the inception of
the related leases. Depreciation of equipment is calculated using accelerated
methods over the estimated useful lives of the assets. Routine maintenance and
repairs are charged to expense as incurred, while costs of betterments and
renewals are capitalized.
Other Noncurrent Assets
Other noncurrent assets consist of a deposit on the purchase of equipment.
Income Taxes
BDEC is a limited liability corporation which is taxed similarly to a
partnership under sections of the federal and state income tax laws; therefore,
income tax liabilities are the responsibility of the respective owners or
members. Accordingly, the accompanying financial statements do not include any
provision for income taxes.
F-66
<PAGE> 126
BARNET DULANEY EYE CENTER, P.L.L.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Revenues
Medical service revenues are accounted for in the period in which the
services are provided. The revenues are reported at the estimated realizable
amounts from patients, third-party payers and others. Provisions for estimated
third-party payer adjustments are estimated and recorded in the period the
related services are provided. Any adjustment to the amounts recorded will be
recorded in the period in which the revised amount is determined. A significant
portion of BDEC's medical service revenues are related to Medicare and other
governmental programs. Medicare and other governmental programs reimburse
physicians based on fee schedules which are determined by the related
governmental agency. Additionally, BDEC participates in agreements with managed
care organizations to provide services at negotiated rates or for capitated
payments.
Concentration of Credit Risk
BDEC extends credit to patients covered by programs such as Medicare and
Medicaid and private insurers. BDEC manages credit risk with the various public
and private insurance providers, as appropriate. Allowances for doubtful
accounts have been made for potential losses, where appropriate.
3. EQUIPMENT:
Equipment consists of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL DECEMBER 31
LIVES ---------------------------
(YEARS) 1994 1995
--------- ----------- -----------
<S> <C> <C> <C>
Equipment....................................... 5 $ 710,090 $ 1,291,320
Leasehold improvements.......................... 5 270,288 376,661
Furniture and fixtures.......................... 7 220,516 255,320
Equipment under capital leases.................. 5 440,642 81,452
----------- -----------
1,641,536 2,004,753
Less -- Accumulated depreciation and
amortization.................................. (1,047,745) (1,166,174)
----------- -----------
Net equipment......................... $ 593,791 $ 838,579
=========== ===========
</TABLE>
F-67
<PAGE> 127
BARNET DULANEY EYE CENTER, P.L.L.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. DEBT:
Debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1994 1995
--------- ---------
<S> <C> <C>
Line of credit, bearing interest at prime plus 1.25% (9.75%
at December 31, 1995), maturing on February 28, 1998,
secured by equipment and accounts receivable............... $ 249,500 $ 107,263
Note payable to bank, bearing interest at prime plus 1.25% at
December 31, 1995, maturing on October 10, 1998, secured by
equipment and accounts receivable.......................... -- 229,167
Note payable to supplier, payable in monthly installments
through August 1998........................................ -- 55,748
Various notes payable to financing companies, due in 1995,
payable in installments, bearing interest ranging from 2%
to 12.6%, collateralized by various vehicles and
equipment.................................................. 39,300 --
--------- ---------
Total long-term debt............................... 288,800 392,178
Less -- Current portion...................................... (184,523) (158,907)
--------- ---------
Long-term debt, excluding current portion.......... $ 104,277 $ 233,271
========= =========
</TABLE>
Certain debt obligations contain covenants that require maintenance of
certain financial ratios. The most restrictive covenant is the debt coverage
ratio. Default of any covenant could affect the ability of BDEC to borrow under
the agreements and, if not waived or corrected, could accelerate the maturity of
any borrowings outstanding under the agreements. As of December 31, 1995, BDEC
has complied with existing loan covenants. In addition, the note payable to bank
is guaranteed by two of the physician owners.
As of December 31, 1995, the aggregate amounts of annual principal
maturities of long-term debt (excluding capital lease obligations) are as
follows:
<TABLE>
<S> <C>
1996.............................................. $158,907
1997.............................................. 158,907
1998.............................................. 74,364
--------
Total................................... $392,178
========
</TABLE>
F-68
<PAGE> 128
BARNET DULANEY EYE CENTER, P.L.L.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
BDEC leases office space as well as certain equipment under capital leases
and noncancelable operating lease agreements which expire at various dates. At
December 31, 1995, minimum annual rental commitments under capital leases and
noncancelable operating leases with terms in excess of one year are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ----------
<S> <C> <C>
1996......................................................... $251,259 $ 852,923
1997......................................................... 26,005 544,108
1998......................................................... -- 524,416
1999......................................................... -- 464,216
2000......................................................... -- 436,693
Thereafter................................................... -- 23,119
-------- ----------
Total minimum lease payments....................... 277,264 $2,845,475
==========
Less -- Amounts representing interest........................ 7,808
--------
Present value of minimum capital lease payments.... 269,456
Less -- Current portion of obligations under capital
leases..................................................... 244,829
--------
Long-term obligations under capital leases, net of
current portion.................................. $ 24,627
========
</TABLE>
Rent expense related to operating leases amounted to $1,141,526 and
$1,189,230 for the years ended December 31, 1994 and 1995, respectively. Cash
interest paid was approximately $59,056 and $78,592 in 1994 and 1995,
respectively.
5. EMPLOYEE BENEFIT PLANS:
BDEC has a 401(k) profit-sharing plan which permits participants to make
voluntary contributions. BDEC pays all general and administrative expenses of
the plan. BDEC contributions are discretionary, and no contributions were made
to this plan in 1994 or 1995.
BDEC does not provide postretirement benefits to employees and,
accordingly, the impact of Statement of Financial Accounting Standards No. 106
had no material effect on BDEC.
6. COMMITMENTS AND CONTINGENCIES:
BDEC is insured with respect to medical malpractice risks on a claims-made
basis. In the normal course of business, BDEC has been named in various
lawsuits. In the opinion of BDEC's management, final settlement, if any, due as
a result of the litigation is not expected to be material to the operating
results or the financial position of BDEC.
7. RELATED-PARTY TRANSACTIONS:
Lease Transactions
BDEC leases facility space from one of the owner physicians. Rent expense
on related-party operating leases amounted to $273,566 for each of the years
ended December 31, 1994 and 1995.
Other Related-Party Balances and Transactions
Net amounts due from owners of BDEC are reflected on the accompanying
balance sheet and reflect the net transactions between BDEC and its owners (and
their related entities). As of December 31, 1995 and
F-69
<PAGE> 129
BARNET DULANEY EYE CENTER, P.L.L.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1994, amounts due from owners totaled $458,803 and $221,824, respectively, and
are included in other current assets.
A member of BDEC who is also the stockholder of The Eye Surgery Center at
Phoenix, Ltd., has a personal note payable to Bank One, Arizona, of
approximately $180,500 at December 31, 1995, collateralized by certain accounts
receivable and equipment of BDEC. The note was paid in February 1996.
In various instances, relatives of the owners of BDEC are employees of the
clinic.
8. SUBSEQUENT EVENT:
On February 15, 1996, substantially all assets and liabilities of BDEC were
acquired by Physicians Resource Group, Inc. (PRG), in exchange for 408,576
shares of PRG common stock and cash of $1,716,446. In connection therewith, BDEC
entered into a 40-year service agreement with PRG, whereby PRG will provide
substantially all nonmedical services to the practice.
The financial statements of BDEC have been prepared as supplemental
information about the entity to which PRG will provide management services
following consummation of the acquisition. BDEC previously operated as a
separate independent entity. The historical financial position, results of
operations and cash flows do not reflect any adjustments relating to the
acquisition.
F-70
<PAGE> 130
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Physicians Resource Group, Inc.:
We have audited the accompanying combined balance sheet of Physicians
Resource Group, Inc. -- Selected Acquisition Practices (as identified in Note 1)
as of December 31, 1994, and the related combined statements of earnings,
owners' equity and cash flows for the year then ended. These combined financial
statements are the responsibility of the Physicians Resource Group,
Inc. -- Selected Acquisition Practices' management. Our responsibility is to
express an opinion on these combined financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Physicians Resource
Group, Inc. -- Selected Acquisition Practices as of December 31, 1994, and the
results of their operations and their cash flows for the year then ended, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
November 21, 1995
F-71
<PAGE> 131
PHYSICIANS RESOURCE GROUP, INC. -- SELECTED ACQUISITION PRACTICES
COMBINED BALANCE SHEETS -- DECEMBER 31, 1994 AND 1995
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
1994 1995
------- ----------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................................ $ 1,030 $ 1,192
Accounts receivable, less allowance for contractual adjustments and
bad debts of $1,766 in 1994 and $1,699 in 1995.................... 3,075 2,779
Inventories.......................................................... 375 356
Prepaid expenses and other current assets............................ 434 492
------- --------
Total current assets......................................... 4,914 4,819
PROPERTY AND EQUIPMENT, net............................................ 4,679 4,145
OTHER NONCURRENT ASSETS, net........................................... 652 704
------- --------
Total assets................................................. $10,245 $ 9,668
======= ========
LIABILITIES AND OWNERS' EQUITY
CURRENT LIABILITIES:
Short-term notes payable............................................. $ 367 $ 237
Current portion of long-term debt.................................... 1,438 770
Current portion of obligations under capital leases.................. 130 34
Accounts payable and accrued expenses................................ 1,094 643
Accrued salaries and benefits........................................ 891 671
------- --------
Total current liabilities.................................... 3,920 2,355
LONG-TERM DEBT, net of current portion................................. 2,157 2,580
LONG-TERM OBLIGATIONS UNDER CAPITAL LEASES, net of current portion..... 114 53
------- --------
Total liabilities............................................ 6,191 4,988
OWNERS' EQUITY......................................................... 4,054 4,680
------- --------
Total liabilities and owners' equity......................... $10,245 $ 9,668
======= ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-72
<PAGE> 132
PHYSICIANS RESOURCE GROUP, INC. -- SELECTED ACQUISITION PRACTICES
COMBINED STATEMENTS OF EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995
------- -----------
(UNAUDITED)
<S> <C> <C>
REVENUES:
Medical service revenues, net....................................... $27,446 $28,587
Other revenues...................................................... 2,552 2,652
------- -------
Total revenues.............................................. 29,998 31,239
COSTS AND EXPENSES:
Compensation to physician owners.................................... 6,780 6,180
Salaries, wages and benefits........................................ 11,780 11,764
Pharmaceuticals and supplies........................................ 3,209 3,185
General and administrative expenses................................. 8,300 7,967
Depreciation and amortization....................................... 1,500 1,462
Interest expense.................................................... 158 285
Other (income) expense, net......................................... (44) (230)
------- -------
Total costs and expenses.................................... 31,683 30,613
------- -------
Net earnings (loss)......................................... $(1,685) $ 626
======= =======
SUPPLEMENTAL DISCLOSURE:
Combined compensation to and net earnings of physician owners....... $ 5,095 $ 6,806
======= =======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-73
<PAGE> 133
PHYSICIANS RESOURCE GROUP, INC. -- SELECTED ACQUISITION PRACTICES
COMBINED STATEMENTS OF OWNERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<S> <C>
BALANCE, December 31, 1993......................................................... $ 5,535
Net earnings (loss).............................................................. (1,685)
Capital contributions by owners.................................................. 204
-------
BALANCE, December 31, 1994......................................................... 4,054
Net earnings (loss) (unaudited).................................................. 626
-------
BALANCE, December 31, 1995 (unaudited)............................................. $ 4,680
=======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-74
<PAGE> 134
PHYSICIANS RESOURCE GROUP, INC. -- SELECTED ACQUISITION PRACTICES
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995
------- -----------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)................................................. $(1,685) $ 626
------- -------
Adjustments to reconcile net earnings (loss) to net cash provided by
operating activities --
Depreciation and amortization.................................... 1,500 1,462
Changes in assets and liabilities --
(Increase) decrease in --
Accounts receivable, net.................................... 382 296
Inventory................................................... 149 19
Prepaid expenses and other assets........................... (244) (158)
Increase (decrease) in --
Accounts payable and other accrued expenses................. 145 (451)
Accrued salaries and benefits............................... 156 (220)
------- -------
2,088 948
------- -------
Net cash provided by operating activities................. 403 1,574
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for acquisition of clinic operating assets, net of cash
acquired......................................................... (630) --
Purchase of property and equipment.................................. (1,150) (880)
------- -------
Net cash used in investing activities..................... (1,780) (880)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term obligations................................. 1,635 2,478
Repayment of long-term obligations.................................. (765) (2,853)
Repayment of obligations under capital leases....................... (111) (157)
Cash contributions by owners and partners........................... 204 --
------- -------
Net cash provided by (used in) financing activities....... 963 (532)
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................. (414) 162
CASH AND CASH EQUIVALENTS, beginning of period........................ 1,444 1,030
------- -------
CASH AND CASH EQUIVALENTS, end of period.............................. $ 1,030 $ 1,192
======= =======
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTMENT ACTIVITIES:
Capital lease obligations incurred to acquire equipment............. $ 76 $ --
======= =======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-75
<PAGE> 135
PHYSICIANS RESOURCE GROUP, INC. -- SELECTED ACQUISITION PRACTICES
NOTES TO COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS)
1. BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION:
Physicians Resource Group, Inc., and subsidiaries (PRG) was formed to
create an eye care services company which owns the assets of and provides
management services to ophthalmic and optometric businesses. Effective June 30,
1995, PRG consummated an initial public offering (the Offering) and
simultaneously exchanged cash, shares of its common stock and a note payable for
certain assets of and liabilities associated with 10 eye care practices (the
Founding Affiliated Practices). Concurrent with these transactions, the Founding
Affiliated Practices entered into 40-year service agreements with PRG for
management, operational and administrative services in return for management
service fees.
PRG intends to exchange shares of its stock and cash for certain assets of,
and liabilities associated with, 10 additional eye care practices and enter into
40-year service agreements with the practices and the physician owners of the
practices. The accompanying combined financial statements of Physicians Resource
Group, Inc. -- Selected Acquisition Practices represent five of those practices
(Selected Acquisition Practices). The Selected Acquisition Practices are
comprised of numerous legal entities and conduct business as Mann Berkeley Eye
Center, Shepherd Eye Clinic, Nevada Eye and Ear, P.A., Sandusky Ophthalmology
and William Lipsky M.D., P.A. The Selected Acquisition Practices are based in
Texas, Nevada and Ohio.
The combined financial statements of the Selected Acquisition Practices
have been prepared as supplemental information about the entities to which PRG
will provide management services following consummation of the acquisitions. The
Selected Acquisition Practices previously have operated as separate independent
entities. Their historical financial positions, results of operations and cash
flows have been combined in the accompanying financial statements and do not
reflect any adjustments relating to the proposed acquisition or the impacts that
may have occurred if the operations of the Selected Acquisition Practices had
been combined. PRG will provide management services to the Selected Acquisition
Practices. PRG will not practice medicine, thus the combined financial
statements are not representative of the future operations of PRG. All
significant intercompany accounts and transactions have been eliminated.
Most of the Selected Acquisition Practices maintained their books and
records on the cash basis of accounting. The accompanying financial statements
have been prepared on the accrual basis of accounting. These combined financial
statements have been prepared to show the operations and financial position of
the Selected Acquisition Practices, a portion of whose assets and operations
will be acquired by PRG. Because certain entities are nontaxpaying (i.e.,
partnerships, S Corporations and corporations managed to result in taxes being
the responsibility of the respective owners), the financial statements have been
presented on a pretax basis, as further described in Note 2.
The supplemental caption on the statements of earnings, "Combined
compensation to and net earnings of physician owners," reflects the total
earnings available to the physician owners for each period.
The financial information for the year ended December 31, 1995, has not
been audited. Certain information and note disclosures normally included in the
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted from the unaudited financial
information. In the opinion of the management of the Selected Acquisition
Practices, the unaudited financial information includes all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash Equivalents
All highly liquid investments with a maturity of three months or less when
purchased are considered to be cash equivalents.
F-76
<PAGE> 136
PHYSICIANS RESOURCE GROUP, INC. -- SELECTED ACQUISITION PRACTICES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Accounts Receivable
Accounts receivable primarily consist of receivables from patients,
insurers, government programs and other third-party payers for medical services
provided by physicians. Such amounts are reduced by an allowance for contractual
adjustments and other uncollectible amounts. Contractual adjustments result from
the differences between the rates charged by the physicians for services
performed and the amounts allowed by the Medicare and Medicaid programs and
other public and private insurers.
Inventories
Inventories consist primarily of spectacle frames and lenses and are valued
at the lower of cost or market with cost determined using the first-in,
first-out (FIFO) method.
Property and Equipment
Property and equipment are stated at cost. Equipment under capital leases
is stated at the net present value of the future minimum lease payments at the
inception of the related leases. Depreciation of property and equipment is
calculated using accelerated methods over the estimated useful lives of the
assets. Routine maintenance and repairs are charged to expense as incurred,
while cost of betterments and renewals are capitalized.
Other Noncurrent Assets
Other noncurrent assets consist primarily of the excess of cost of acquired
assets over the fair value (goodwill) and noncompete agreements. Goodwill is
amortized on a straight-line basis over periods ranging from five to 40 years.
Noncompete agreements are amortized on the straight-line basis over periods
ranging from two to 15 years, which represent the shorter of the economic value
or the term of the respective agreements.
Income Taxes
Certain of the Selected Acquisition Practices are S Corporations or
partnerships; accordingly, income tax liabilities are the responsibility of the
respective owners or partners. The taxable corporations included in the Selected
Acquisition Practices historically have not incurred significant tax liabilities
for federal or state income taxes. Compensation to physician owners has
traditionally reduced taxable income to nominal levels. This relationship would
be expected to continue in the absence of the PRG transaction. Because of this
practice, provisions for income taxes and deferred tax assets and liabilities of
the taxable entities have not been reflected in these combined financial
statements. The consistent presentation of the financial statements on a pretax
basis also provides comparability that would not otherwise be the case when
presenting a combination of various taxable and nontaxable entities.
Owners' Equity
Owners' equity includes the respective capital stock, additional paid-in
capital, partnership capital and retained earnings of the various legal entities
reflected herein as the Selected Acquisition Practices. For the Selected
Acquisition Practices with multiple owners, various types of agreements exist
among the owners which call for the transfer of a physician's ownership interest
to the continuing owners in the case of certain events such as the owner's
retirement or death. Frequently, the existing owners or practices are required
to pay the departed owner for his interest.
F-77
<PAGE> 137
PHYSICIANS RESOURCE GROUP, INC. -- SELECTED ACQUISITION PRACTICES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Revenues
Medical services revenues are accounted for in the period the services are
provided. The revenues are reported at the estimated realizable amounts from
patients, third-party payers and others. Provisions for estimated third-party
payer adjustments are estimated in the period the related services are provided.
Any adjustment to the amounts recorded will be recorded in the period in which
the revised amount is determined. Due to the demographics of ophthalmic
patients, a significant portion of the Selected Acquisition Practices' medical
services revenues are related to Medicare and other governmental programs.
Medicare and other governmental programs reimburse physicians based on fee
schedules which are determined by the related governmental agency. Additionally,
the Selected Acquisition Practices participate in agreements with managed care
organizations to provide services at negotiated rates or for capitated payments.
Other revenues consist primarily of sales of spectacle frames, lenses and
contact lenses.
Concentration of Credit Risk
The Selected Acquisition Practices extend credit to patients covered by
insurance programs such as governmental programs like Medicare and Medicaid and
private insurers. The Selected Acquisition Practices manage credit risk with the
various public and private insurance providers, as appropriate. Allowances for
doubtful accounts have been made for potential losses, where appropriate.
3. ACQUISITIONS AND OTHER TRANSACTIONS:
Certain of the Selected Acquisition Practices have completed acquisitions
of certain operating assets of additional practices. These acquisitions were
accounted for using the purchase method. The financial results of the
acquisitions have been included in the combined financial statements of the
Selected Acquisition Practices from the date of their acquisition. The pro forma
effect of the acquisitions was not material to the results of operations or
financial position of the Selected Acquisition Practices. The estimated fair
value of assets acquired is summarized as follows:
<TABLE>
<CAPTION>
ACQUISITIONS
COMPLETED DURING
THE YEAR ENDED
DECEMBER 31, 1994
-----------------
<S> <C>
Property and equipment......................................... $ 336
Accounts receivable............................................ 41
Inventories.................................................... 130
Intangible assets.............................................. 412
-----
Purchase price................................................. $ 919
=====
</TABLE>
F-78
<PAGE> 138
PHYSICIANS RESOURCE GROUP, INC. -- SELECTED ACQUISITION PRACTICES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED USEFUL DECEMBER 31,
LIVES (YEARS) 1994
---------------- ------------
<S> <C> <C>
Equipment............................................... 3-7 $ 7,108
Leasehold improvements.................................. 5-40 2,649
Furniture and fixtures.................................. 3-7 5,438
Equipment under capital leases.......................... 5-7 399
--------
15,594
Less -- Accumulated depreciation and amortization....... (10,915)
--------
Net property and equipment.................... $ 4,679
========
</TABLE>
5. OTHER NONCURRENT ASSETS:
Other noncurrent assets consist of the following as of December 31, 1994:
<TABLE>
<S> <C>
Excess of cost of acquired assets over fair value............................. $480
Noncompete agreements......................................................... 170
Other......................................................................... 88
----
738
Less -- Accumulated amortization.............................................. (86)
----
Net other noncurrent assets......................................... $652
====
</TABLE>
6. SHORT-TERM AND LONG-TERM OBLIGATIONS:
Short-Term Notes Payable
Short-term notes payable consist of the following as of December 31, 1994:
<TABLE>
<S> <C>
Note payable to a financial institution, bearing interest at prime plus 2%
(10.75% at December 31, 1994), collateralized by various assets of one
Selected Acquisition Practice............................................... $ 65
Notes payable to financing companies and individual owners, some of which are
collateralized by certain assets of various Selected Acquisition Practices,
bearing interest from 10% to 12%............................................ 302
----
Total short-term debt............................................... $367
====
</TABLE>
F-79
<PAGE> 139
PHYSICIANS RESOURCE GROUP, INC. -- SELECTED ACQUISITION PRACTICES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Long-Term Debt
Long-term debt consists of the following as of December 31, 1994:
<TABLE>
<S> <C>
Term loans payable to banks, due through 2000, bearing interest at prime
plus 0.5% to prime plus 2%, payable monthly, collateralized by certain
assets of various Selected Acquisition Practices......................... $ 861
Term loans payable to banks, due through 1998, bearing interest from 6.5%
to 8.5%, payable monthly, collateralized by certain assets of various
Selected Acquisition Practices........................................... 1,739
Notes payable to financing companies and various individuals, due from 1995
to 1999, payable in installments, bearing interest ranging from 6.0% to
10.75%, collateralized by certain assets of various Selected Acquisition
Practices................................................................ 995
-------
Total long-term debt............................................. 3,595
Less -- Current portion.................................................... (1,438)
-------
Long-term debt, excluding current portion........................ $ 2,157
=======
</TABLE>
Certain debt obligations contain covenants that require maintenance of
certain financial ratios. Default of any covenant could affect the ability of
individual entities to borrow under the agreements and, if not waived or
corrected, could accelerate the maturity of any borrowings outstanding under the
agreements. As of December 31, 1994, each of the Selected Acquisition Practices
has complied with existing loan covenants. Certain of these debt instruments are
guaranteed by the owners of the Selected Acquisition Practices.
As of December 31, 1994, the aggregate amounts of annual principal
maturities of long-term debt (excluding capital lease obligations) are as
follows:
<TABLE>
<S> <C>
1995................................................ $1,438
1996................................................ 632
1997................................................ 504
1998................................................ 376
1999................................................ 188
Thereafter.......................................... 457
------
Total..................................... $3,595
======
</TABLE>
Cash interest paid was approximately $131 in 1994.
F-80
<PAGE> 140
PHYSICIANS RESOURCE GROUP, INC. -- SELECTED ACQUISITION PRACTICES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Leases
The Selected Acquisition Practices lease office space as well as certain
equipment under capital leases and noncancelable operating lease agreements
which expire through 2005. At December 31, 1994, minimum annual rental
commitments under capital leases and noncancelable operating leases with terms
in excess of one year are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1995.............................................................. $ 177 $ 2,142
1996.............................................................. 45 1,920
1997.............................................................. 21 1,818
1998.............................................................. 17 1,643
1999.............................................................. 3 1,484
Thereafter........................................................ -- 4,782
------ --------
Total minimum lease payments............................ 263 $ 13,789
========
Less -- Amounts representing interest............................. (19)
------
Present value of minimum capital lease payments......... 244
Less -- Current portion of obligations under capital leases....... (130)
------
Long-term obligations under capital leases, net of
current portion....................................... $ 114
======
</TABLE>
Rent expense related to operating leases amounted to $2,354 for the year
ended December 31, 1994.
7. EMPLOYEE BENEFIT PLANS:
Certain of the Selected Acquisition Practices have qualified defined
contribution plans which permit participants to make voluntary contributions.
The applicable Selected Acquisition Practices pay all general and administrative
expenses of the plans and, in some cases, make matching contributions on behalf
of the employees. The Selected Acquisition Practices made contributions related
to these plans totaling $86 in 1994.
The Selected Acquisition Practices have not provided employees any
postretirement benefits and, accordingly, the impact of Statement of Financial
Accounting Standards No. 106 had no material effect on the Selected Acquisition
Practices.
8. COMMITMENTS AND CONTINGENCIES:
The Selected Acquisition Practices are insured with respect to medical
malpractice risks on a claims-made basis. In the normal course of business,
certain of the individual Selected Acquisition Practices have been named in
various lawsuits, primarily alleging medical malpractice. In the opinion of the
Selected Acquisition Practices' management, final settlement, if any, due as a
result of the litigation, and without consideration of possible insurance
recoveries, is not expected to be material to the operating results or financial
condition of the Selected Acquisition Practices.
9. RELATED-PARTY TRANSACTIONS:
Lease Transactions
The Selected Acquisition Practices lease facility space from various
partnerships which include owning physicians and trusts in which relatives of
the owner physicians are named as beneficiaries. Additionally, several Selected
Acquisition Practices lease equipment from physician owners, some of which are
capital leases. Interest expense recognized on related-party capital lease
obligations amounted to $4 for the year
F-81
<PAGE> 141
PHYSICIANS RESOURCE GROUP, INC. -- SELECTED ACQUISITION PRACTICES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
ended December 31, 1994. Rent expense on related-party operating leases amounted
to $794 for the year ended December 31, 1994.
Other Related-Party Balances and Transactions
Included in other current assets at December 31, 1994, is approximately
$320 of amounts due from owners of the Selected Acquisition Practices. Included
in accounts payable is $84 of amounts which are payable to owners of the
Selected Acquisition Practices as of December 31, 1994.
In various instances, relatives of the owners of the Selected Acquisition
Practices are employees of the clinics.
10. EVENTS (UNAUDITED) SUBSEQUENT TO DATE OF AUDITORS' REPORT:
From late January to mid-February of 1996, PRG consummated the acquisition
of certain assets of and liabilities associated with the Selected Acquisition
Practices in exchange for cash and PRG common stock. The transactions have been
recorded by PRG using the purchase method of accounting. The selling physicians
have created new entities for the practice of medicine (New PCs) and have
entered into 40-year service agreements with PRG.
F-82
<PAGE> 142
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Physicians Resource Group, Inc.:
We have audited the accompanying combined balance sheet of Physicians
Resource Group, Inc. -- Certain Acquisition Practices (as identified in Note 1)
as of December 31, 1995, and the related combined statements of operations and
owners' equity and cash flows for the year then ended. These combined financial
statements are the responsibility of the Physicians Resource Group,
Inc. -- Certain Acquisition Practices management. Our responsibility is to
express an opinion on these combined financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Physicians Resource
Group, Inc. -- Certain Acquisition Practices as of December 31, 1995, and the
results of their operations and their cash flows for the year then ended, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
April 12, 1996
F-83
<PAGE> 143
PHYSICIANS RESOURCE GROUP, INC. -- CERTAIN ACQUISITION PRACTICES
COMBINED BALANCE SHEET -- DECEMBER 31, 1995
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents...................................................... $ 473,191
Accounts receivable, less allowance for contractual adjustments
and bad debts of $1,191,548................................................. 1,619,484
Inventories.................................................................... 215,895
Prepaid expenses and other current assets...................................... 234,464
----------
Total current assets................................................... 2,543,034
PROPERTY AND EQUIPMENT, net...................................................... 1,337,295
OTHER NONCURRENT ASSETS.......................................................... 1,549,010
----------
Total assets........................................................... $5,429,339
==========
LIABILITIES AND OWNERS' EQUITY
CURRENT LIABILITIES:
Short-term notes payable
Related parties............................................................. $ 170,000
Other....................................................................... 109,658
Current portion of long-term debt and capital lease
Related parties............................................................. 501,553
Other....................................................................... 10,545
Accounts payable............................................................... 249,689
Accrued expenses............................................................... 233,069
Accrued salaries and benefits.................................................. 364,857
----------
Total current liabilities.............................................. 1,639,371
LONG-TERM DEBT AND CAPITAL LEASE, net of current portion......................... 2,047,655
----------
Total liabilities...................................................... 3,687,026
----------
OWNERS' EQUITY................................................................... 1,742,313
----------
Total liabilities and owners' equity................................... $5,429,339
==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-84
<PAGE> 144
PHYSICIANS RESOURCE GROUP, INC. -- CERTAIN ACQUISITION PRACTICES
COMBINED STATEMENT OF OPERATIONS AND OWNERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
NET REVENUES.................................................................... $15,268,213
COSTS AND EXPENSES:
Compensation to physician owners.............................................. 4,140,595
Salaries, wages, and benefits................................................. 5,412,256
Pharmaceuticals and supplies.................................................. 924,380
General and administrative expenses........................................... 3,962,447
Depreciation and amortization................................................. 511,906
Interest expense.............................................................. 110,932
Other (income) expense, net................................................... (40,471)
-----------
Total costs and expenses.............................................. 15,022,045
-----------
NET EARNINGS.................................................................... $ 246,168
OWNERS' EQUITY, beginning of year............................................... 1,496,145
-----------
OWNERS' EQUITY, end of year..................................................... $ 1,742,313
===========
SUPPLEMENTAL DISCLOSURE:
Combined compensation to and net earnings of physician owners................. $ 4,386,763
===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-85
<PAGE> 145
PHYSICIANS RESOURCE GROUP, INC. -- CERTAIN ACQUISITION PRACTICES
COMBINED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings.................................................................... $246,168
Adjustments to reconcile net earnings to net cash provided by operating
activities --
Depreciation and amortization................................................ 511,906
Changes in assets and liabilities --
(Increase) decrease in --
Accounts receivable, net................................................ (58,763)
Inventories............................................................. 8,127
Prepaid expenses and other current assets............................... (88,017)
Increase (decrease) in --
Accounts payable and accrued expenses................................... (24,787)
Accrued salaries and benefits........................................... 90,788
--------
Net cash provided by operating activities............................... 685,422
--------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for acquisition of clinic operating assets, net of cash acquired....... (50,000)
Purchase of property and equipment.............................................. (301,862)
--------
Net cash used in investing activities................................... (351,862)
--------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt.................................................... 70,655
Repayment of long-term debt and capital leases.................................. (127,656)
--------
Net cash used in financing activities................................... (57,001)
--------
NET INCREASE IN CASH AND CASH EQUIVALENTS......................................... 276,559
CASH AND CASH EQUIVALENTS, beginning of period.................................... 196,632
--------
CASH AND CASH EQUIVALENTS, end of period.......................................... $473,191
========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-86
<PAGE> 146
PHYSICIANS RESOURCE GROUP, INC. -- CERTAIN ACQUISITION PRACTICES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION:
Physicians Resource Group, Inc., and subsidiaries (PRG) was formed to
create an eye care services company which owns the assets of and provides
management services to ophthalmic and optometric businesses. Effective June 30,
1995, PRG consummated an initial public offering (the Offering) and
simultaneously exchanged cash, shares of its common stock and a note payable for
certain assets of and liabilities associated with 10 eye care practices (the
Founding Affiliated Practices). Concurrent with these transactions, the Founding
Affiliated Practices entered into 40-year service agreements with PRG for
management, operational and administrative services in return for management
service fees.
During the first quarter of 1996, PRG completed the acquisition of 61 eye
care practices. The service agreements with these additional 61 eye care
practices are substantially similar to those that PRG has entered into with the
Founding Affiliated Practices.
PRG intends to exchange shares of its stock and cash for certain assets of,
and liabilities associated with, 10 additional eye care practices and enter into
40-year service agreements with the practices and the physician owners of the
practices. The accompanying combined financial statements of Physicians Resource
Group, Inc. -- Certain Acquisition Practices represent five of those practices
(Certain Acquisition Practices). The Certain Acquisition Practices are comprised
of numerous legal entities and conduct business as John M. Haley, M.D., P.A.;
Shelby A. Wyll, M.D., P.A.; Association in Ophthalmology, P.A.; Milauskas Eye
Institute Medical Group; Key Whitman Eye Center, P.A. The Certain Acquisition
Practices are based in Texas, South Carolina, and California.
The combined financial statements of the Certain Acquisition Practices have
been prepared as supplemental information about the entities to which PRG will
provide management services following consummation of the acquisitions. The
Certain Acquisition Practices previously have operated as separate independent
entities. Their historical financial positions, results of operations and cash
flows have been combined in the accompanying financial statements and do not
reflect any adjustments relating to the proposed acquisition or the impacts that
may have occurred if the operations of the Certain Acquisition Practices had
been combined. PRG will provide management services to the Certain Acquisition
Practices. PRG will not practice medicine, thus the combined financial
statements are not representative of the future operations of PRG. All
significant intercompany accounts and transactions have been eliminated.
Most of the Certain Acquisition Practices maintained their books and
records on the cash basis of accounting. The accompanying financial statements
have been prepared on the accrual basis of accounting. Because certain entities
are nontaxpaying (i.e., partnerships, S Corporations and corporations managed to
result in taxes being the responsibility of the respective owners), the
financial statements have been presented on a pretax basis, as further described
in Note 2.
The supplemental caption on the statements of earnings, "Combined
compensation to and net earnings of physician owners," reflects the total
earnings available to the physician owners for the period.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash Equivalents
All highly liquid investments with a maturity of three months or less when
purchased are considered to be cash equivalents.
Accounts Receivable
Accounts receivable primarily consist of receivables from patients,
insurers, government programs and other third-party payers for medical services
provided by physicians. Such amounts are reduced by an allowance for contractual
adjustments and other uncollectible amounts. Contractual adjustments result from
F-87
<PAGE> 147
PHYSICIANS RESOURCE GROUP, INC. -- CERTAIN ACQUISITION PRACTICES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
the differences between the rates charged by the physicians for services
performed and the amounts allowed by the Medicare and Medicaid programs and
other public and private insurers.
Inventories
Inventories consist primarily of spectacle frames and lenses and are valued
at the lower of cost or market with cost determined using the first-in,
first-out (FIFO) method.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated using accelerated methods over the estimated useful
lives of the assets. Routine maintenance and repairs are charged to expense as
incurred, while costs of betterments and renewals are capitalized.
Other Noncurrent Assets
Other noncurrent assets consist primarily of the excess of cost of acquired
assets over the fair value (goodwill) and noncompete agreements. Goodwill is
amortized on a straight-line basis over five to 15 years. Noncompete agreements
are amortized on the straight-line basis over five years, which represent the
shorter of the economic value or the term of the respective agreements.
Income Taxes
Some of the Certain Acquisition Practices are S Corporations; accordingly,
income tax liabilities are the responsibility of the respective owners. The
taxable corporations included in the Certain Acquisition Practices historically
have not incurred significant tax liabilities for federal or state income taxes.
Compensation to physician owners has traditionally reduced taxable income to
nominal levels. This relationship would be expected to continue in the absence
of the PRG transaction. Because of this practice, provisions for income taxes
and deferred tax assets and liabilities of the taxable entities have not been
reflected in these combined financial statements. The consistent presentation of
the financial statements on a pretax basis also provides comparability that
would not otherwise be the case when presenting a combination of various taxable
and nontaxable entities.
Owners' Equity
Owners' equity includes the respective capital stock, additional paid-in
capital, partnership capital and retained earnings of the various legal entities
reflected herein as the Certain Acquisition Practices.
Net Revenues
Medical services revenues are accounted for in the period the services are
provided. The revenues are reported at the estimated realizable amounts from
patients, third-party payers and others. Provisions for estimated third-party
payer adjustments are estimated in the period the related services are provided.
Any adjustment to the amounts recorded will be recorded in the period in which
the revised amount is determined. Due to the demographics of ophthalmic
patients, a significant portion of the Certain Acquisition Practices' medical
services revenues are related to Medicare and other governmental programs.
Medicare and other governmental programs reimburse physicians based on fee
schedules which are determined by the related governmental agency. Additionally,
the Certain Acquisition Practices participate in agreements with managed care
organizations to provide services at negotiated rates or for capitated payments.
F-88
<PAGE> 148
PHYSICIANS RESOURCE GROUP, INC. -- CERTAIN ACQUISITION PRACTICES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Concentration of Credit Risk
The Certain Acquisition Practices extend credit to patients covered by
insurance programs such as governmental programs like Medicare and Medicaid and
private insurers. The Certain Acquisition Practices manage credit risk with the
various public and private insurance providers, as appropriate. Allowances for
doubtful accounts have been made for potential losses, where appropriate.
Use of Estimates
The preparation of these financial statements requires the use of certain
estimates by management in determining the entities' assets, liabilities,
revenues and expenses. Actual results could differ from those estimates.
3. ACQUISITIONS AND OTHER TRANSACTIONS:
Several of the Certain Acquisition Practices completed acquisitions of
operating assets of additional practices. These acquisitions were accounted for
using the purchase method. The financial results of the acquisition have been
included in the combined financial statements of the Certain Acquisition
Practices from the date of its acquisition. The Key Whitman Eye Center P.A.
acquired an ambulatory surgery center (ASC) on October 1, 1995. The related
operations since October 1, 1995 are reflected in the accompanying financial
statements. Had the operations of the ASC been reflected for twelve months, net
revenues would have increased $1,412,496 and net earnings would have increased
$849,077. The pro forma effect of the other acquisitions were not material to
the results of operations or financial position of the Certain Acquisition
Practices. The following table reflects the allocation of the purchase price.
<TABLE>
<S> <C>
Tangible assets........................................................... $337,786
Goodwill and other intangibles............................................ 614,752
Liabilities assumed....................................................... 44,716
--------
Total purchase price............................................ $997,254
========
Cash paid................................................................. $ 50,000
Debt issued............................................................... 947,254
--------
$997,254
========
</TABLE>
4. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED USEFUL DECEMBER 31,
LIVES (YEARS) 1995
---------------- ------------
<S> <C> <C>
Land.................................................... -- $ 332,108
Equipment............................................... 3-7 5,056,884
Leasehold improvements.................................. 5-40 441,833
Furniture and fixtures.................................. 3-7 875,438
------------
6,706,263
Less -- Accumulated depreciation and amortization....... (5,368,968)
------------
Property and equipment, net................... $ 1,337,295
============
</TABLE>
F-89
<PAGE> 149
PHYSICIANS RESOURCE GROUP, INC. -- CERTAIN ACQUISITION PRACTICES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. OTHER NONCURRENT ASSETS:
Other noncurrent assets consist of the following as of December 31, 1995:
<TABLE>
<S> <C>
Goodwill................................................................. $1,489,803
Noncompete agreements.................................................... 125,000
Other.................................................................... 46,319
----------
1,661,122
Less -- Accumulated amortization......................................... (112,112)
----------
Net other noncurrent assets.................................... $1,549,010
==========
</TABLE>
6. SHORT-TERM NOTES PAYABLE
Short-term notes payable consist of the following as of December 31, 1995:
<TABLE>
<CAPTION>
RELATED
PARTIES OTHER
-------- --------
<S> <C> <C>
Line of credit, payable to a bank, bearing interest at 9.5%,
due
in April, 1996............................................... $ -- $ 96,701
Note payable to owner, bearing interest at 9% at December 31,
1995, collateralized by various assets, payment due on
demand....................................................... 20,000 --
Note payable, bearing interest at 8%, payable in three equal
principal installments of $50,000 on the first day of
January, April and
July of 1996, together with any unpaid interest,
collateralized
by various assets............................................ 150,000 --
Note payable to a financing company, bearing interest at 6.5%
at December 31, 1995......................................... -- 12,957
-------- --------
Total short-term debt................................ $170,000 $109,658
======== ========
</TABLE>
F-90
<PAGE> 150
PHYSICIANS RESOURCE GROUP, INC. -- CERTAIN ACQUISITION PRACTICES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. LONG-TERM DEBT AND CAPITAL LEASES
Long-term debt and capital leases consist of the following as of December
31, 1995:
<TABLE>
<CAPTION>
RELATED
PARTIES OTHER
---------- --------
<S> <C> <C>
Capital lease to financing company, due from 1996 to 2000,
payable in monthly installments of $1,508 with interest at
13.46%, collateralized by certain equipment................ $ -- $ 60,843
Note payable to seller, interest rate at 5.34%. Monthly
payments of principal and interest of $18,352,
collateralized by certain assets, due in year 2000......... 884,912 --
Note payable to seller, bearing interest at prime (8.5% at
December 31, 1995), monthly payments of $14,046 plus
interest, collateralized by certain assets, due in year
2000....................................................... 793,837 --
Note payable to seller, non-interest bearing, monthly
payments of $1,667, collateralized by certain assets, due
in year 2000............................................... 95,000 --
Note payable to an owner, bearing interest at prime (8.5% at
December 31, 1995), monthly payments of $12,274 plus
interest, collateralized by certain assets, due September
2000....................................................... 699,615 --
Note payable to an owner, bearing interest at prime (8.5% at
December 31, 1995), collateralized by certain assets, due
February 1999.............................................. 25,546 --
---------- --------
Total long-term debt and capital leases............ 2,498,910 60,843
Less -- Current portion....................... (501,553) (10,545)
---------- --------
Long-term debt, excluding current portion.......... $1,997,357 $ 50,298
========== ========
</TABLE>
Several of these debt instruments are guaranteed by the owners of the
Certain Acquisition Practices.
As of December 31, 1995, the aggregate amounts of annual principal
maturities of long-term debt (excluding capital lease obligations) are as
follows:
<TABLE>
<S> <C>
1996..................................................................... $ 501,553
1997..................................................................... 526,346
1998..................................................................... 531,149
1999..................................................................... 541,868
2000..................................................................... 397,994
Thereafter............................................................... --
----------
Total.......................................................... $2,498,910
==========
</TABLE>
F-91
<PAGE> 151
PHYSICIANS RESOURCE GROUP, INC. -- CERTAIN ACQUISITION PRACTICES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1995, the minimum annual lease commitments under the
capital lease are as follows:
<TABLE>
<S> <C>
1996...................................................................... $ 18,098
1997...................................................................... 18,098
1998...................................................................... 18,098
1999...................................................................... 18,098
2000...................................................................... 9,050
--------
Total Minimum Lease Payments.............................................. $ 81,442
Less: amount representing interest...................................... (20,599)
--------
Present value of Minimum Lease Payments................................... $ 60,843
Less: Current portion................................................... (10,545)
--------
Long Term Obligation, net of current portion.............................. $ 50,298
========
</TABLE>
Cash paid for interest during 1995 was $161,789.
The Certain Acquisition Practices lease office space as well as certain
equipment under noncancelable operating lease agreements. At December 31, 1995,
minimum annual rental commitments under noncancelable operating leases with
terms in excess of one year are as follows:
<TABLE>
<CAPTION>
RELATED
PARTIES OTHERS
---------- --------
<S> <C> <C>
1996......................................................... $ 466,364 $290,027
1997......................................................... 464,891 44,303
1998......................................................... 464,891 27,180
1999......................................................... 464,891 6,831
2000......................................................... 300,157 --
Thereafter................................................... 1,082,256 --
---------- --------
Total.............................................. $3,243,450 $368,341
========== ========
</TABLE>
Rent expense related to operating leases amounted to $946,603 for the year
ended December 31, 1995.
8. EMPLOYEE BENEFIT PLANS:
Several of the Certain Acquisition Practices have qualified defined
contribution plans which permit participants to make voluntary contributions.
The applicable Certain Acquisition Practices pay general and administrative
expenses of the plans and, in some cases, make matching contributions on behalf
of the employees. The Certain Acquisition Practices made contributions related
to these plans totaling $195,873 in 1995. The Certain Acquisition Practices do
not provide employees with any postretirement or postemployment benefits.
9. COMMITMENTS AND CONTINGENCIES:
The Certain Acquisition Practices are insured with respect to medical
malpractice risks on a claims-made basis. In the normal course of business,
certain of the individual Certain Acquisition Practices have been named in
various lawsuits, primarily alleging medical malpractice. In the opinion of
Certain Acquisition Practices' management, final settlement, if any, due as a
result of the litigation, and without consideration of possible insurance
recoveries, is not expected to be material to the operating results or financial
position of the Certain Acquisition Practices.
F-92
<PAGE> 152
PHYSICIANS RESOURCE GROUP, INC. -- CERTAIN ACQUISITION PRACTICES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
10. RELATED-PARTY TRANSACTIONS:
Lease Transactions
The Certain Acquisition Practices lease facility space from various
partnerships which include owning physicians and trusts in which relatives of
the owner physicians are named as beneficiaries. Additionally, several of the
Certain Acquisition Practices lease equipment from physician owners. Rent
expense on related-party operating leases was to $682,096 for the year ended
December 31, 1995.
F-93
<PAGE> 153
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
EyeCorp, Inc.
We have audited the balance sheets of EyeCorp, Inc. (described in Note 1)
as of December 31, 1994 and 1995 and the related 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 financial position of EyeCorp, Inc. as of December
31, 1994 and 1995 and the 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.
COOPERS & LYBRAND L.L.P.
Memphis, Tennessee
April 5, 1996, except as to paragraph 4 of Note 5,
for which the date is April 18, 1996
F-94
<PAGE> 154
EYECORP, INC.
(AND PREDECESSOR ENTITIES)
BALANCE SHEETS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
ASSETS
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents....................................... $ 2,848,000 $ 1,488,000
Accounts receivable, less allowance for uncollectible amounts of
$3,090,000 for 1994 and $3,700,000 for 1995.................. 4,933,000 9,264,000
Inventories..................................................... 158,000 1,136,000
Prepaid expenses and other assets............................... 215,000 1,973,000
----------- -----------
Total current assets.................................... 8,154,000 13,861,000
Property and equipment, net....................................... 7,335,000 12,733,000
Intangible assets, net............................................ 15,349,000 47,602,000
Deferred charges, net............................................. 1,203,000 2,328,000
Other assets...................................................... 463,000
----------- -----------
Total assets............................................ $32,041,000 $76,987,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt.......................... $ 1,793,000 $ 197,000
Accounts payable and accrued expenses........................... 922,000 6,149,000
Salaries and benefits payable................................... 378,000 1,547,000
Due to physician groups (Note 2)................................ 1,280,000 153,000
Income taxes payable............................................ 1,376,000
Deferred income taxes........................................... 465,000 577,000
----------- -----------
Total current liabilities............................... 6,214,000 8,623,000
Long-term debt, less current installments......................... 12,631,000 20,455,000
Deferred income taxes............................................. 3,032,000 11,232,000
----------- -----------
Total liabilities....................................... 21,877,000 40,310,000
----------- -----------
Commitments and contingency (Notes 6 and 9)
Shareholders' equity:
Common stock, $.05 par value; 100,000,000 shares authorized,
4,923,103 and 10,463,102 issued and outstanding at December
31, 1994 and 1995, respectively.............................. 246,000 523,000
Additional paid-in capital...................................... 8,702,000 36,125,000
Retained earnings................................................. 1,216,000 29,000
----------- -----------
Total shareholders' equity.............................. 10,164,000 36,677,000
----------- -----------
Total liabilities and shareholders' equity.............. $32,041,000 $76,987,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-95
<PAGE> 155
EYECORP, INC.
(AND PREDECESSOR ENTITIES)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
---------- ----------- -----------
<S> <C> <C> <C>
Net service fee revenue.............................. $12,747,000 $15,866,000
Surgery center revenue............................... $7,133,000 6,695,000 6,185,000
Other revenue........................................ 419,000 142,000 79,000
---------- ----------- -----------
Total revenue.............................. 7,552,000 19,584,000 22,130,000
---------- ----------- -----------
Operating expenses (income):
Clinic salaries, wages and benefits................ 4,173,000 6,622,000
Clinic supplies.................................... 788,000 876,000
Other clinic expenses.............................. 3,419,000 4,191,000
Surgery center salaries, wages and benefits........ 698,000 799,000 985,000
Surgery center supplies............................ 2,246,000 2,637,000 2,431,000
Other surgery center expenses...................... 972,000 511,000 442,000
General corporate expenses......................... 293,000 1,428,000 4,269,000
Rents and lease expense............................ 273,000 573,000
Depreciation and amortization...................... 382,000 1,470,000 1,930,000
Interest income.................................... (81,000) (75,000)
Interest expense................................... 250,000 1,157,000 1,468,000
---------- ----------- -----------
Net operating expenses..................... 4,841,000 16,574,000 23,712,000
---------- ----------- -----------
Income (loss) before income taxes and extraordinary
item............................................... 2,711,000 3,010,000 (1,582,000)
Income tax expense (benefit)......................... 1,126,000 (514,000)
---------- ----------- -----------
Income (loss) before extraordinary item.............. 2,711,000 1,884,000 (1,068,000)
Extraordinary item -- loss on early extinguishment of
debt, net of income tax benefit of $53,000......... (119,000)
---------- ----------- -----------
Net income (loss).......................... $2,711,000 $ 1,884,000 $(1,187,000)
========== =========== ===========
Net loss per share:
Loss before extraordinary item..................... $ (.22)
Extraordinary item................................. (.02)
-----------
Net loss........................................... $ (.24)
-----------
Weighted average number of common shares
outstanding........................................ 4,984,000
===========
Net income........................................... $2,711,000 $ 1,884,000
Pro forma adjustments (unaudited) --
Income tax expense................................. 1,030,000 62,000
---------- -----------
Pro forma net income (unaudited)..................... $1,681,000 $ 1,822,000
========== ===========
Pro forma income per common share (unaudited)........ $ 0.74 $ 0.42
========== ===========
Pro forma weighted average number of common shares
outstanding (unaudited)............................ 2,268,000 4,354,000
========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-96
<PAGE> 156
EYECORP, INC.
(AND PREDECESSOR ENTITIES)
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
---------- -------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1992......... $ 1,822,000 $ 1,822,000
Net income....................... 2,711,000 2,711,000
Distributions.................... (1,744,000) (1,744,000)
----------- -----------
Balance, December 31, 1993......... 2,789,000 2,789,000
Formation of EyeCorp (Note 1):
Merger of
EyeCorp -- Predecessor and
related distributions....... 2,268,265 $113,000 (3,457,000) (3,344,000)
Issuance of common stock in
connection with
acquisitions................ 1,820,856 91,000 $ 5,972,000 6,063,000
Issuance of common stock in
connection with acquisitions
(Note 1)...................... 833,981 42,000 2,730,000 2,772,000
Net income............... 1,884,000 1,884,000
---------- -------- ----------- ----------- -----------
Balance, December 31, 1994......... 4,923,102 246,000 8,702,000 1,216,000 10,164,000
Issuance of common stock in
connection with acquisitions
(Note 1)......................... 5,540,000 277,000 27,423,000 27,700,000
Net loss................. (1,187,000) (1,187,000)
---------- -------- ----------- ----------- -----------
Balance, December 31, 1995......... 10,463,102 $523,000 $36,125,000 $ 29,000 $36,677,000
========== ======== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-97
<PAGE> 157
EYECORP, INC.
(AND PREDECESSOR ENTITIES)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1993 1994 1995
----------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................... $ 2,711,000 $ 1,884,000 $ (1,187,000)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary item -- loss on early extinguishment of
debt.................................................... 178,000
Depreciation and amortization............................. 382,000 1,470,000 1,930,000
Deferred income taxes..................................... (253,000) (530,000)
Increase (decrease) in cash and cash equivalents, net of
effects of clinic acquisitions, due to changes in:
Accounts receivable..................................... (947,000) 84,000 646,000
Inventories............................................. (23,000) (13,000)
Prepaid expenses and other assets....................... 50,000 (123,000) (729,000)
Deferred charges........................................ (1,122,000)
Accounts payable and accrued expenses................... 24,000 1,000 3,431,000
Salaries and benefits payable........................... (101,000) 340,000
Due to physician groups................................. 1,280,000 (1,127,000)
Income taxes payable.................................... 1,376,000 (1,376,000)
----------- ------------ ------------
Net cash provided by operating activities............ 2,197,000 4,496,000 1,563,000
----------- ------------ ------------
Cash flows from investing activities:
Payments for clinic operating assets, net of cash
acquired.................................................. (8,936,000) (4,115,000)
Merger costs Incurred....................................... (1,126,000)
Purchase of property and equipment.......................... (107,000) (1,227,000) (1,397,000)
----------- ------------ ------------
Net cash used by investing activities................ (107,000) (10,163,000) (6,638,000)
----------- ------------ ------------
Cash flows from financing activities:
Distribution to owners...................................... (1,744,000) (3,419,000)
Proceeds from long-term debt................................ 15,567,000 18,646,000
Repayment of long-term debt................................. (51,000) (3,529,000) (14,424,000)
Proceeds from issuance of stock............................. 5,000
Loan costs incurred......................................... (245,000) (507,000)
Repayment of obligations under capital leases............... (255,000)
----------- ------------ ------------
Net cash provided (used) by financing activities..... (2,050,000) 8,379,000 3,715,000
----------- ------------ ------------
Net increase (decrease) in cash and cash
equivalents........................................ 40,000 2,712,000 (1,360,000)
Cash and cash equivalents, beginning of period................ 96,000 136,000 2,848,000
----------- ------------ ------------
Cash and cash equivalents, end of period...................... $ 136,000 $ 2,848,000 $ 1,488,000
=========== ============ ============
Supplemental disclosure of cash flow information --
Cash paid during the year for:
Interest.................................................. $ 250,000 $ 1,065,000 $ 1,469,000
=========== ============ ============
Income taxes.............................................. $ 1,412,000
============
Supplemental schedule of noncash investing and financing
activities:
Effects of clinic acquisitions:
Intangible assets......................................... 15,814,000 32,891,000
Property and equipment.................................... 3,345,000 4,963,000
Accounts receivable....................................... 3,078,000 4,977,000
Other assets.............................................. 50,000 2,457,000
------------ ------------
Total assets acquired, net of cash........................ 22,287,000 45,288,000
Liabilities assumed....................................... (4,446,000) (13,473,000)
Issuance of common stock.................................. (8,905,000) (27,700,000)
------------ ------------
Payments for clinic operating assets.................... $ 8,936,000 $ 4,115,000
============ ============
</TABLE>
The Company purchased an airplane in 1994 by issuing a note payable for
approximately $475,000
The accompanying notes are an integral part of these financial statements.
F-98
<PAGE> 158
EYECORP, INC.
(AND PREDECESSOR ENTITIES)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND FORMATION OF EYECORP AND DESCRIPTION OF BUSINESS:
The accompanying financial statements for the year ended December 31, 1993
and the one month ended January 31, 1994 represent the combined financial
statements of RME Associates and Ridge Lake Ambulatory Surgery Center
("Predecessor Entities"). The Predecessor Entities are presented on a combined
basis since they were subject to a business combination effective February 1,
1994, resulting in the formation of EyeCorp, Inc. (the "Company"). Dr. David
Meyer owned a majority interest in both RME Associates and Ridge Lake Ambulatory
Surgery Center for these periods.
Ridge Lake Ambulatory Surgery Center is a multi-specialty center primarily
providing ophthalmic surgeries on an outpatient basis. RME Associates owns a
professional office building and enters into real property leasing contracts of
various lengths ranging from three to five years. Gross rental income is
included in other revenues. Operating and rental expenses relating to the
professional office building are included in general corporate expenses.
EyeCorp, Inc. began operations on February 1, 1994. The Company acquired
through mergers certain operating assets and assumed certain liabilities of the
Predecessor Entities. Aggregate distributions of $3,457,000 were made to the
owners of the Predecessor Entities just prior to the EyeCorp, Inc. formation
transactions. The mergers have been accounted for similar in manner to a pooling
of interests since the mergers were considered a combination of entities under
common control.
In 1994, the Company acquired certain operating assets and assumed certain
liabilities ("Practice Assets") of the following clinics ("1994 Acquisition
Practices"):
<TABLE>
<CAPTION>
EFFECTIVE DATE
CLINIC LOCATION OF ACQUISITION
----------------------------------------------- ----------------------- -----------------
<S> <C> <C>
Vitreoretinal Foundation....................... Memphis, Tennessee February 1, 1994
Ophthalmic Associates P.C...................... Knoxville, Tennessee February 1, 1994
Mid-South Eye Clinic........................... Clarksville, Tennessee April 8, 1994
Rayner Eye Clinic P.C.......................... Oxford, Mississippi June 30, 1994
</TABLE>
The Company's consideration in exchange for the Practice Assets consisted
of approximately $5,052,000 cash and 1,728,242 shares of its Common Stock for
Vitreoretinal Foundation, approximately $550,000 cash and 92,614 shares of its
Common Stock for Ophthalmic Associates, P.C., $1,000,000 cash for Mid-South Eye
Clinic and approximately $2,288,000 cash and 833,981 shares of its Common Stock
for Rayner Eye Clinic, P.C. A value per share of $3.32 was determined by the
board of directors of EyeCorp based on a good faith determination of the
relative fair market values of the Predecessor Entities. In connection with the
EyeCorp, Inc. merger transaction with the Predecessor Entities and the
acquisitions of Vitreoretinal Foundation, Ophthalmic Associates, P.C., Mid-South
Eye Clinic and Rayner Eye Clinic, P.C., the owners of the acquirees were given
the option of receiving all or part of the total consideration in cash or in the
Company's Common Stock.
On December 28, 1995, the Company acquired certain operating assets and
assumed certain liabilities of an additional 49 eyecare practices and 4
ambulatory surgery centers ("1995 Acquisition Practices") located primarily in
the southeastern United States. The Company's consideration in exchange for the
1995 Acquisition Practices consisted of approximately $1,400,000 cash,
approximately $1,800,000 in notes payable, and approximately 5,540,000 shares of
its Common Stock. A value per share of $5 was determined based upon an
independent valuation.
The acquisitions of the 1994 and 1995 Acquisition Practices have been
accounted for as purchases and the accompanying financial statements include the
results of their operations from their respective dates of acquisition.
F-99
<PAGE> 159
EYECORP, INC.
(AND PREDECESSOR ENTITIES)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Simultaneously with each acquisition or merger, the Company entered into a
long-term clinic service agreement with the clinic practices.
The Company provides management services to the clinics under service and
management agreements. The Company is currently earning revenues under the
following arrangements:
The Company's revenue is based on a percentage of the practice net revenue
defined in the agreements as net professional services revenue less clinical
expenses.
The Company is reimbursed for all clinic expenses, as defined in the
agreement.
Under the terms of the service agreements, the Company purchases the
clinics' accounts receivable without recourse. The purchase price is the face
amount of the accounts receivable less any reserve recorded by the clinics for
uncollectible amounts. The Company therefore bears the risk of collection.
Accounts receivable are purchased daily by the Company and paid for at the end
of each month. Additionally, the Company is responsible for the operating
expenses of the clinics. Accordingly, receivables, payables and professional
services of the clinics are included in the accompanying financial statements.
2. SIGNIFICANT ACCOUNTING POLICIES:
Basis of Consolidation
These consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, The EyePA, Inc. ("EyePA") and EyeCare
Resources, Inc. ("EyeCare"). All significant intercompany balances and
transactions have been eliminated in consolidation. EyePA was formed to
establish a preferred provider network to provide comprehensive vision care
services to enrollees in various health insurance plans. EyeCare was formed to
negotiate purchasing programs and national buying contracts for equipment and
supplies for the practices.
Cash and Cash Equivalents
The Company considers highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Accounts Receivable
Accounts receivable represents amounts due from patients for medical
services provided by physician groups and the surgery center. Such amounts are
recorded net of uncollectible amounts. Accounts receivable are a function of net
clinic and surgery center revenue. (See Note 3).
Due to the demographics of ophthalmic patients, a significant portion of
clinic and Surgery Center medical service revenues are related to third-party
reimbursement agreements, primarily Medicare and other governmental programs.
Medicare and other governmental programs reimburse physicians based on fee
schedules which are determined by the related governmental agency. In the
ordinary course of business, practices receiving reimbursement from Medicare and
other governmental programs are potentially subject to a review by regulatory
agencies concerning the accuracy of billings and sufficiency of supporting
documentation of procedures performed. Provisions for estimated third-party
payor settlements and adjustments are estimated in the period the related
services are rendered and adjusted in future periods as final settlements are
determined.
F-100
<PAGE> 160
EYECORP, INC.
(AND PREDECESSOR ENTITIES)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Inventories
The Company values inventories at the lower of cost or market with cost
determined using the first-in, first-out (FIFO) method. Inventories are
comprised primarily of medical supplies, medications and other materials used in
the delivery of services.
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the assets as
follows:
<TABLE>
<S> <C>
Land improvements........................................................ 5 years
Building and improvements................................................ 5-40 years
Leasehold improvements................................................... 7 years
Medical equipment, furniture and fixtures................................ 5-7 years
Vehicles................................................................. 3 years
</TABLE>
When assets are retired or otherwise disposed, the costs and related
accumulated depreciation are removed from the accounts. The difference between
the net book value of the assets and proceeds from disposition is recognized as
a gain or loss. Routine maintenance and repairs are charged to expenses as
incurred, while costs of betterments and renewals are capitalized.
Intangible Assets
Clinic Service Agreements -- Costs of obtaining clinic service agreements
arose from the acquisitions described in Note 1 and were created by the excess
of the purchase price over the fair value of net assets of the acquired
businesses and represent the exclusive right to operate clinics, including
utilizing the bases of employees, medical technology and know-how, contracts and
other intellectual property acquired from such clinics, in affiliation with the
related physician groups during the term of the agreements. In the event of
termination of a service agreement without cause, as defined, the related
physician groups are required to purchase all clinic assets, including
intangibles, at the then fair market value. Costs of obtaining clinic service
agreements are amortized using the straight-line method over the periods during
which the agreements are effective, currently twenty-five years (See Note 15).
The net book value and accumulated amortization of clinic service agreements was
$11,711,000 and $350,000, respectively, at December 31, 1994 and $44,106,000 and
$844,000, respectively, at December 31, 1995.
Goodwill -- The excess cost over fair value of net assets acquired is being
amortized over 25 years. The net book value of goodwill at December 31, 1994 and
1995 was $3,638,000 and $3,496,000, respectively. The accumulated amortization
at December 31, 1994 and 1995 was $112,000 and $256,000, respectively.
At each reporting period, the Company reviews the carrying value of
intangible assets 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
considered by the Company in making the evaluation are changes in the practices'
market position, reputation, profitability and geographical penetration. Using
these factors, if circumstances are present which may indicate impairment is
probable, the Company will prepare a projection of the undiscounted cash flows
before interest charges 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 value of
intangible assets to fair value. Based on the factors considered above, the
Company does not believe that there are any current factors indicating any
impairment of intangible assets as of December 31, 1995.
F-101
<PAGE> 161
EYECORP, INC.
(AND PREDECESSOR ENTITIES)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deferred Charges, net
Deferred charges consist of the following at December 31, 1994 and 1995:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Organizational costs........................................ $1,097,000 $1,121,000
Deferred loan costs......................................... 244,000 506,000
Deferred merger costs....................................... 1,126,000
Non-compete agreement....................................... 25,000
---------- ----------
1,366,000 2,753,000
Accumulated amortization.................................... (163,000) (425,000)
---------- ----------
$1,203,000 $2,328,000
========== ==========
</TABLE>
As discussed in Note 15, the Company merged with Physicians Resource Group,
Inc. ("PRG"), a publicly-owned ophthalmic and optometric practice management
services company, on March 18, 1996. Total deferred merger costs incurred in
connection with the PRG merger are anticipated to be approximately $1,500,000,
of which $1,126,000 was incurred at December 31, 1995. The PRG merger will be
accounted for as a pooling-of-interest; therefore, these costs will be expensed
in the first quarter of 1996, which corresponds with the closing of the PRG
merger.
Costs associated with obtaining long-term financing are being amortized on
the interest method over the terms of the related debt. Organizational costs are
being amortized on the straight-line method over five years.
Income Taxes
For the year ended December 31, 1993 and the one month ended January 31,
1994, the Company was not subject to federal or state income taxes; however, the
partnerships described in Note 1 filed informational income tax returns and the
partners recorded the related partnership income or loss in their respective tax
returns. Therefore, the statements of operations for these periods contain no
provision for federal or state income taxes.
Upon the consummation of the EyeCorp formation transactions and related
acquisitions of the 1994 and 1995 Acquisition Practices, as described in Note 1,
the Company recognized deferred tax assets and liabilities for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Concentration of Credit Risk
The Company's accounts receivable consists primarily of amounts due from
patients funded through Medicare, Medicaid, commercial insurance and private
payment. The Company performs ongoing credit
F-102
<PAGE> 162
EYECORP, INC.
(AND PREDECESSOR ENTITIES)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
evaluations of its patients and generally does not require collateral. The
Company maintains allowances for potential credit losses and such losses have
been within management's expectation.
The Company has deposits with two financial institutions which exceed
federal depository insurance limits by $2,095,000 at December 31, 1995.
Pro Forma Adjustments
Pro forma amounts reflect adjustments for additional income tax expenses
that would have been reported had the Predecessor Entities been taxable
corporations for income tax purposes for the years ended December 31, 1993 and
the one month ended January 31, 1994.
Pro Forma Income Per Common Share
Pro forma income per common share has been computed by dividing pro forma
net income by pro forma weighted average number of common shares outstanding
during the periods. Pro forma weighted average number of common shares
outstanding during the periods includes the number of common shares issued in
the acquisitions of the 1994 Acquisition Practices described in Note 1.
3. NET SERVICE FEE REVENUE:
Revenue for all clinics is recorded at established rates reduced by
provisions for uncollectible amounts and amounts retained by physician groups.
The following represents amounts included in the determination of net
service fee revenue (which represents the total management fees earned by the
Company) for the years ended December 31, 1994 and 1995.
<TABLE>
<CAPTION>
1994 1995
----------- ------------
<S> <C> <C>
Gross physician group revenue............................ $33,110,000 $ 40,489,000
Less: Contractual adjustments and allowance for doubtful
accounts............................................... (13,055,000) (18,156,000)
----------- -----------
Net physician group revenue.................... 20,055,000 22,333,000
Less amounts retained by physician groups................ (7,308,000) (6,467,000)
----------- -----------
$12,747,000 $ 15,866,000
=========== ===========
</TABLE>
4. PROPERTY AND EQUIPMENT:
Property and equipment at December 31, 1994 and 1995 is as follows:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Land and improvements..................................... $ 100,000 $ 172,000
Building and improvements................................. 3,316,000 3,651,000
Leasehold improvements.................................... 1,205,000 1,959,000
Medical equipment......................................... 4,146,000 6,248,000
Furniture and fixtures.................................... 742,000 3,696,000
Vehicles.................................................. 643,000 786,000
----------- -----------
10,152,000 16,512,000
Less accumulated depreciation............................. 2,817,000 3,779,000
----------- -----------
Net property and equipment...................... $ 7,335,000 $12,733,000
=========== ===========
</TABLE>
F-103
<PAGE> 163
EYECORP, INC.
(AND PREDECESSOR ENTITIES)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. DEBT:
Debt at December 31, 1994 and 1995 consists of the following:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Term loans, bearing interest ranging from 9.5% to 10.0%,
due in monthly principal and interest installments of
$226,000 and collateralized by accounts receivable and
equipment with an aggregate net book value of
$12,434,000............................................. $12,296,000
Term loan, bearing interest at 9.5%, due in monthly
principal and interest installments of $10,000, and
collateralized by an airplane with a net book value of
$418,000................................................ 417,000
Mortgage notes payable, bearing interest at 7.85% and
8.50%, respectively, due in monthly principal and
interest installments of $220,000, and collateralized by
a first lien mortgage on a building with a net book
value of $1,616,000 at December 31, 1994................ 1,711,000
Revolving term loan....................................... $18,882,000
Various installment notes payable to physician practices
(See Note 1), bearing interest ranging from 8% to 10%,
due in monthly and quarterly installments............... 1,770,000
----------- -----------
Total long-term debt............................ 14,424,000 20,652,000
Less current installments................................. (1,793,000) (197,000)
----------- -----------
$12,631,000 $20,455,000
=========== ===========
</TABLE>
In December 1995, the Company entered into a $20 million revolving credit
facility ($18,882,000 outstanding at December 31, 1995) which was used primarily
for the acquisition of the 1995 Acquisition described in Note 1 and for the
repayment of amounts outstanding under the existing credit facility. Advances to
the Company under the new credit facility bear interest at either LIBOR plus
2.0% to 2.5% or the bank's prime rate plus 0.5%. The Company has the option to
convert from LIBOR to the bank's prime rate and vice-versa at certain times.
Monthly interest payments are due under the new credit facility and quarterly
principal installments of 3.57% of outstanding borrowings are to be paid
commencing on March 1, 1997, with the remainder due December 28, 1997. The new
credit facility is collateralized by certain assets and the common stock of the
Company.
The unused portion of the new credit facility, based on eligible
collateral, was $1,118,000 at December 31, 1995. The new credit facility
contains covenants, the most restrictive of which require that the Company: a)
not incur any purchase money liens, borrowed funds under the credit facilities
excluded, in excess of $600,000, b) maintain a debt coverage ratio as defined in
the credit facility agreement of 1.5 to 1, c) maintain a consolidated current
ratio of 1.5 to 1, d) maintain net worth of approximately $37.7 million, and e)
maintain a ratio of debt under the new credit facility to debt plus
stockholders' equity not to exceed .5 to 1. The new credit facility also
subjects the Company to prepayment penalties on amounts outstanding under the
LIBOR rate as defined in the agreement. Additionally, the Company is obligated
to pay a fee of up to $300,000 in the event that the Company terminates the new
credit facility prior to its maturity date.
The Company was in violation of the net worth covenant at December 31,
1995. On April 18, 1996, the violation was waived by the lender and the covenant
was amended, as of January 1, 1996, requiring the Company to maintain net worth
of at least $37,677,000 as defined in the agreement.
F-104
<PAGE> 164
EYECORP, INC.
(AND PREDECESSOR ENTITIES)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the repayment of the existing credit facility, the
Company recognized an extraordinary loss of $178,000, which consisted of
unamortized loan costs.
The aggregate maturities of long-term debt at December 31, 1995, are as
follows:
<TABLE>
<S> <C>
1996.................................................................... $ 197,000
1997.................................................................... 19,132,000
1998.................................................................... 269,000
1999.................................................................... 293,000
2000.................................................................... 161,000
Thereafter.............................................................. 600,000
-----------
$20,652,000
===========
</TABLE>
6. LEASES:
The Company leases clinic and administrative facilities and medical
equipment under noncancelable operating leases.
Future minimum lease payments under noncancelable operating leases at
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
------------------------------------------------------------------------ -----------
<S> <C>
1996.................................................................... $ 2,661,000
1997.................................................................... 2,356,000
1998.................................................................... 2,231,000
1999.................................................................... 1,656,000
2000.................................................................... 1,528,000
Thereafter.............................................................. 3,640,000
-----------
Total minimum lease payments.................................. $14,072,000
===========
</TABLE>
Total rental expense for operating leases for the years ended December 31,
1994 and 1995 was approximately $273,000 and $573,000.
In connection with the purchase of certain 1994 and 1995 Acquisition
Practices, the Company assumed the practices' leases of facility space from
various partnerships which include affiliated physicians as partners and trusts
in which relatives of the affiliated physicians are named beneficiaries. These
leases expire at various dates through 2010 and are included in the minimum
lease payments. Rental expense paid to affiliated physicians amounted to $39,000
and $78,000 for the years ended December 31, 1994 and 1995, respectively.
F-105
<PAGE> 165
EYECORP, INC.
(AND PREDECESSOR ENTITIES)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAX EXPENSE (BENEFIT):
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
1994 1995
---------- ---------
<S> <C> <C>
Current:
Federal................................................... $1,169,000 $(103,000)
State..................................................... 207,000 (16,000)
Deferred:
Federal................................................... (225,000) (337,000)
State..................................................... (25,000) (58,000)
---------- ---------
$1,126,000 $(514,000)
========== =========
</TABLE>
Total income tax expense (benefit) differed from the amount computed by
applying the statutory federal income tax rate to income (loss) before income
taxes as a result of the following:
<TABLE>
<CAPTION>
1994 1995
---------- ---------
<S> <C> <C>
Computed statutory tax expense (benefit).................... $1,023,000 $(538,000)
Increase in income taxes resulting from:
State income taxes, net of federal income tax benefit..... 120,000 54,000
Permanent differences, primarily amortization of
goodwill............................................... 45,000 (65,000)
Other..................................................... (62,000) 35,000
---------- ---------
Total income tax expense (benefit)................ $1,126,000 $(514,000)
========== =========
</TABLE>
The components of the net deferred tax liability are as follows:
<TABLE>
<CAPTION>
1994 1995
---------- -----------
<S> <C> <C>
Deferred tax liabilities:
Accounts receivable...................................... $ 555,000 $ 1,490,000
Property and equipment................................... 77,000 $ 171,000
Intangible assets........................................ 2,955,000 11,082,000
Deferred tax assets:
Allowance for uncollectible amounts...................... (90,000) (740,000)
Accrued bonuses.......................................... (194,000)
---------- -----------
Net deferred tax liability................................. $3,497,000 $11,809,000
========== ===========
</TABLE>
8. MAJOR CUSTOMERS:
The Company derives its net service fee revenue from clinic practices with
which it has service and management agreements. For the year ended December 31,
1995, two of these clinic practices each contributed over 10% of the Company's
net service fee revenue.
The Company's affiliated clinic practices derived approximately 53% of
their net revenues from services provided under the Medicare program for the
year ended December 31, 1995.
F-106
<PAGE> 166
EYECORP, INC.
(AND PREDECESSOR ENTITIES)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. COMMITMENTS AND CONTINGENCY:
The Company has employment agreements with four executive officers that
specify their salaries, a percentage of salary discretionary bonus and stock
options (Note 11). The terms of the employment agreements range from three to
five years.
In the normal course of business, certain of the affiliated physician
groups have been named in lawsuits alleging medical malpractice. In the opinion
of the Company's management, the ultimate liability, if any and without
considering possible insurance recoveries, will not have a material impact on
its financial position, results of operations, or cash flows.
Additionally, the Company's affiliated physician groups are insured with
respect to medical malpractice risks on a claims made basis.
During 1995, the Company entered into a contract to purchase surgical
supplies of approximately $2.3 million over a three year period. The contract
requires monthly payments of $60,000. As of December 31, 1995, the Company had
received supplies of approximately $183,000 under the contract.
10. PRO FORMA FINANCIAL INFORMATION (UNAUDITED):
The following unaudited pro forma information for the years ended December
31, 1994 and 1995 is presented as if the acquisitions described in Note 1 and
commencement of the new credit facility occurred on January 1, 1994. The
following information is not necessarily indicative of what actual results of
operations would have been had such acquisitions and new credit facility been
completed on January 1, 1994, nor does it purport to represent the results of
operations for future periods. In management's opinion, all adjustments
necessary to reflect the acquisitions have been made. Summarized pro forma
information is as follows:
<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Statement of Operations
Revenues.................................................... $64,814 $67,303
Operating expenses.......................................... 56,668 63,559
------- -------
--
Income before income taxes.................................. 8,146 3,744
Income tax expense.......................................... 3,297 1,498
------- -------
--
Net income................................................ $ 4,849 $ 2,246
======= =======
Net income per common share............................... $ .46 $ .21
======= =======
Weighted average number of common shares outstanding...... 10,463 10,463
======= =======
</TABLE>
11. STOCK OPTION PLAN:
On January 31, 1995, the Company established an Incentive and Non-Qualified
Stock Option Plan (the "Plan") reserving 902,620 common shares for issuance
under the Plan. On February 1, 1995, the Company granted certain employees
options to purchase an aggregate 486,873 of the Company's Common Stock at $3.32
per share. In connection with the acquisition of the 1994 Acquisition Practices
described in Note 1, the Company's Common Stock given as consideration was
valued at $3.32 per share. The Company believes the option price per share of
$3.32 to be equal to the fair market value per share of the Company's Common
Stock. Consequently, no compensation expense was recognized in connection with
the stock options granted.
F-107
<PAGE> 167
EYECORP, INC.
(AND PREDECESSOR ENTITIES)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In July and August 1995, the Company granted certain new employees options
to purchase an aggregate 264,166 of the Company's Common Stock of $3.32 per
share. In September 1995 and February 1996, the Company granted a new employee
and a new director options to purchase an aggregate 25,000 of the Company's
Common Stock at the respective grant dates. Consequently, no compensation
expense was recognized in connection with the stock options granted. The options
granted under the Plan vest and are exercisable as follows:
<TABLE>
<CAPTION>
VEST EXERCISABLE
------- -----------
<S> <C> <C>
1995........................................................... 213,287 158,047
1996........................................................... 221,548 166,308
1997........................................................... 221,548 166,308
1998........................................................... 54,254 149,329
1999........................................................... 65,402 136,047
------- -------
776,039 776,039
======= =======
</TABLE>
As of December 31, 1995, no options had been exercised. Unexercised options
expire ten years after the date of grant.
12. BUSINESS SEGMENTS:
The Company's operations consist of providing management services to
physician groups, providing ophthalmic surgeries in its Ridge Lake Ambulatory
Surgery Center and leasing its professional office building.
Revenues, income (loss) before income taxes and extraordinary item,
identifiable assets, depreciation and amortization and capital expenditures of
these business segments as of and for the years ended December 31, are as
follows:
<TABLE>
<CAPTION>
1993 1994 1995
---------- ----------- -----------
<S> <C> <C> <C>
Total revenues
Management services........................ $12,747,000 $15,866,000
Ophthalmic surgeries....................... $7,133,000 6,695,000 6,185,000
Leasing.................................... 419,000 142,000 79,000
---------- ----------- -----------
$7,552,000 $19,584,000 $22,130,000
========== =========== ===========
Income (loss) before income taxes and
extraordinary item
Management services........................ $ 566,000 $(3,926,000)
Ophthalmic surgeries....................... $2,566,000 2,314,000 2,327,000
Leasing.................................... 145,000 130,000 17,000
---------- ----------- -----------
$2,711,000 $ 3,010,000 $(1,582,000)
========== =========== ===========
Identifiable assets
Management services........................ $27,203,000 $72,639,000
Ophthalmic surgeries....................... $3,634,000 2,244,000 1,553,000
Leasing.................................... 2,249,000 2,594,000 2,795,000
---------- ----------- -----------
$5,883,000 $32,041,000 $76,987,000
========== =========== ===========
</TABLE>
F-108
<PAGE> 168
EYECORP, INC.
(AND PREDECESSOR ENTITIES)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1993 1994 1995
---------- ----------- -----------
<S> <C> <C> <C>
Business Segments:
Depreciation and amortization
Management services........................ $ 1,179,000 $ 1,724,000
Ophthalmic surgeries....................... $ 292,000 198,000 116,000
Leasing.................................... 90,000 93,000 90,000
---------- ----------- -----------
$ 382,000 $ 1,470,000 $ 1,930,000
========== =========== ===========
Capital expenditures
Management services........................ $ 1,108,000 $ 909,000
Ophthalmic surgeries....................... $ 9,000 89,000 274,000
Leasing.................................... 98,000 30,000 214,000
---------- ----------- -----------
$ 107,000 $ 1,227,000 $ 1,397,000
========== =========== ===========
</TABLE>
Corporate expenses are allocated on a consistent basis among industry
segments over the three year period. Capital expenditures for 1994 and 1995 do
not include the payments for clinic operating assets of $8,936,000 and
$4,115,000, respectively, all of which is attributable to the Management
Services business segment.
13. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards 107 requires all entries to
disclose the fair value of certain financial instruments in their financial
statements. Accordingly, the Company reports that the carrying amount of
accounts receivables, accounts payable and accrued expenses approximates fair
value due to the short maturity of these instruments.
The carrying amount of the Company's debt approximates fair value due to
the Company's ability to obtain such borrowings at a comparable interest rate.
14. RECENTLY ISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS:
During 1995, the Financial Accounting Standards Board issued Statement No.
123 (SFAS No. 123) Accounting for Stock-Based Compensation. As permitted by SFAS
No. 123, the Company will continue to follow the existing accounting
requirements for stock options contained in APB Opinion No. 25 (Accounting for
Stock Issued to Employees). Beginning in 1996, however, the Company will provide
the pro forma disclosures required by SFAS No. 123.
15. SUBSEQUENT EVENTS (UNAUDITED):
Merger
On March 18, 1996, the Company completed a stock-for-stock merger
transaction with PRG. PRG is currently providing management services to ten
ophthalmic practices and is in the process of acquiring certain assets and
liabilities of, and entering into service agreements with, approximately ten
additional practices.
Under the terms of the agreement, PRG issued approximately 6,090,000 shares
of its common stock for all of the outstanding Common Stock of the Company in a
transaction accounted for as a pooling-of-interests.
In connection with the PRG merger, the Company extended the term of the
service agreements from 25 to 40 years for certain practices. Additionally, the
termination without cause provision was removed from all service agreements.
F-109
<PAGE> 169
EYECORP, INC.
(AND PREDECESSOR ENTITIES)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Pro Forma
The summarized unaudited pro forma consolidated statements of operations
data for the years ended December 31, 1994 and 1995 is presented below as if:
(a) the merger with PRG occurred on January 1, 1994 (b) the acquisitions
described in Note 1 and (c) the consummation of the new credit facility occurred
on January 1, 1994. The 1995 results include increased expenses relative to the
establishment and development of corporate offices at EyeCorp and PRG, the
resignation of PRG's former chief executive officer and transaction costs of
unsuccessful acquisitions.
<TABLE>
<CAPTION>
EYECORP
EYECORP PRG PRO AND PRG
PRO FORMA FORMA PRO FORMA
--------- --------- ---------
<S> <C> <C> <C>
Statement of Operations for the year ended
December 31, 1994:.................................
Revenues........................................ $64,814 $47,484 $ 112,298
Operating expenses.............................. 56,668 38,639 95,307
------- ------- ---------
Income before income taxes...................... 8,146 8,845 16,991
Income tax expense.............................. 3,297 3,450 6,747
------- ------- ---------
Net income.................................... $ 4,849 $ 5,395 $ 10,244
======= ======= =========
Net income per common share................... $ .41
=========
Weighted average number of common shares
outstanding................................ 25,241
=========
Statement of Operations for the year ended
December 31, 1995:
Revenues........................................ $67,303 $51,306 $ 118,609
Operating expenses.............................. 63,559 44,531 108,090
------- ------- ---------
Income before taxes............................. 3,744 6,775 10,519
Income tax expense.............................. 1,498 2,585 4,083
------- ------- ---------
Net income.................................... $ 2,246 $ 4,190 $ 6,436
======= ======= =========
Net income per common share................... $ .25
=========
Weighted average number of common shares
outstanding................................... 25,241
=========
</TABLE>
F-110
<PAGE> 170
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of EyeCorp, Inc.
We have audited the accompanying balance sheet of EyeCorp, Inc. -- Baker
Acquisition Practice, (as identified in Note 1) as of December 31, 1994 and the
related statements of excess of revenues over expenses, equity and cash flows
for the year then ended. These financial statements are the responsibility of
the EyeCorp, Inc. -- Baker Acquisition Practice's management. Our responsibility
is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
The accompanying financial statements were prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission as described in Note 1 to the financial statements and are not
intended to be a complete presentation of the EyeCorp., Inc. -- Baker
Acquisition Practice.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of EyeCorp., Inc. -- Baker
Acquisition Practice as of December 31, 1994, and the excess of revenues over
expenses and its cash flows for the year then ended, as described in Note 1, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Memphis, Tennessee
October 31, 1995
F-111
<PAGE> 171
EYECORP, INC. -- BAKER ACQUISITION PRACTICE
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
1994
------------
<S> <C>
Current assets:
Cash and cash equivalents..................................................... $ 98,161
Accounts receivable, less allowance for uncollectible amounts of $12,000 for
1994 and $24,000 for 1995.................................................. 103,805
Inventories................................................................... 33,896
Prepaid expenses and other current assets..................................... 18,380
--------
Total current assets.................................................. 254,242
Property and equipment, net..................................................... 45,494
--------
Total assets.......................................................... $299,736
========
LIABILITIES AND EQUITY
Current liabilities:
Short-term notes payable to owner............................................. $ 46,292
Obligations under capital leases.............................................. 8,888
Accounts payable and accrued expenses......................................... 21,170
Accrued salaries and benefits................................................. 138,739
--------
Total current liabilities............................................. 215,089
Equity.......................................................................... 84,647
--------
Total liabilities and equity.......................................... $299,736
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-112
<PAGE> 172
EYECORP, INC. -- BAKER ACQUISITION PRACTICE
STATEMENTS OF EXCESS OF REVENUES OVER EXPENSES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1994 1995
---------- -----------
(UNAUDITED)
<S> <C> <C>
Revenues:
Medical service revenues, net..................................... $1,757,803 $ 2,235,628
Other revenues.................................................... 10,984 22,045
---------- -----------
Total revenues............................................ 1,768,787 2,257,673
---------- -----------
Costs and expenses:
Compensation to owner............................................. 1,031,268 1,022,447
Salaries, wages and benefits...................................... 267,219 392,847
Pharmaceuticals and supplies...................................... 195,497 238,601
General and administrative expenses............................... 240,906 493,464
Depreciation...................................................... 15,962 15,962
Interest expense.................................................. 7,819 12,979
---------- -----------
Total costs and expenses.................................. 1,758,671 2,176,300
---------- -----------
Excess of revenues over expenses.......................... $ 10,116 $ 81,373
========== ===========
Supplemental disclosure:
Combined compensation to owners and excess of revenues over
expenses....................................................... $1,041,384 $ 1,103,820
========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-113
<PAGE> 173
EYECORP, INC. -- BAKER ACQUISITION PRACTICE
STATEMENTS OF EQUITY
<TABLE>
<S> <C>
Balance, December 31, 1993........................................................ $ 74,531
Excess of revenues over expenses................................................ 10,116
--------
Balance, December 31, 1994........................................................ 84,647
Excess of revenues over expenses (unaudited).................................... 81,373
--------
Balance, December 31, 1995 (unaudited)............................................ $166,020
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-114
<PAGE> 174
EYECORP, INC. -- BAKER ACQUISITION PRACTICE
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1994 1995
-------- -----------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Excess of revenues over expenses.................................... $ 10,116 $ 81,373
Adjustments to reconcile excess of revenues over expenses to net
cash provided by (used in) operating activities:
Depreciation..................................................... 15,962 15,962
Changes in assets and liabilities:
Accounts receivable, net....................................... 16,767 (92,890)
Inventories.................................................... (482) 4,004
Prepaid expenses and other current assets...................... (4,189) 365
Notes receivable............................................... 63,421
Accounts payable and accrued expenses.......................... (14,442) 4,181
Accrued salaries and benefits.................................. 127,037 (119,643)
-------- ----------
Net cash provided (used in) by operating activities......... 150,769 (43,227)
-------- ----------
Cash flows from investing activities:
Purchase of property and equipment.................................. (2,046) (13,550)
-------- ----------
Net cash used in investing activities....................... (2,046) (13,550)
-------- ----------
Cash flows from financing activities:
Bank overdraft...................................................... 4,998
Repayment of obligations under capital leases....................... (19,691) (8,888)
Repayment of short term notes payable............................... (37,906) (37,494)
-------- ----------
Net cash used in financing activities....................... (57,597) (41,384)
-------- ----------
Net increase (decrease) in cash and cash equivalents.................. 91,126 (103,159)
Cash and cash equivalents, beginning of period........................ 7,035 98,161
-------- ----------
Cash and cash equivalents, end of period.............................. $ 98,161 $ 0
======== ==========
Supplemental disclosure of noncash investment activities:
Capital lease obligations incurred to acquire equipment............. $ 28,579
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-115
<PAGE> 175
EYECORP, INC. -- BAKER ACQUISITION PRACTICE
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION:
Eyecorp, Inc. (Eyecorp) was formed to create an eye care service company
which will own the assets of and provide management services to ophthalmic and
optometric businesses. Eyecorp plans to consummate acquisitions through the
exchange of cash, notes and shares of its common stock for selected assets of,
and liabilities associated with approximately 50 eyecare practices.
The Eyecorp Inc. -- Baker Acquisition Practice, which conducted business as
a professional corporation under the name Baker Eye Center, P.C., maintained its
books and records on the cash basis of accounting. The accompanying financial
statements have been prepared on the accrual basis of accounting. These
financial statements have been prepared to show the operations and financial
position of The Eyecorp, Inc. -- Baker Acquisition Practice, substantially all
of whose assets and operations will be acquired by Eyecorp. Because the Eyecorp
Inc. -- Baker Acquisition Practice was managed to result in taxes being the
responsibility of the owner, the financial statements have been prepared on a
pretax basis, as further described in Note 2. The supplemental caption on the
statement of excess of revenues over expenses, combined compensation to the
owners and excess of revenues over expenses, reflects the total earnings
available to the owners.
The accompanying financial statements of the Eyecorp, Inc. -- Baker
Acquisition Practice have been prepared as supplemental information about the
entities to which Eyecorp will provide management services following the
consummation of the acquisitions. The accompanying financial statements do not
reflect any adjustments relating to the proposed acquisition. Eyecorp will
provide management services to the Eyecorp, Inc. -- Baker Acquisition Practice.
Eyecorp will not own the medical practice nor practice medicine. Thus, the
financial statements are not representative of the future operations or
financial position of Eyecorp.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash Equivalents
The Eyecorp, Inc. -- Baker Acquisition Practice considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents.
Accounts Receivable
Accounts receivable primarily consist of receivables from patients,
insurers, government programs and other third-party payers for medical services
provided by physicians. Such amounts are reduced by an allowance for
uncollectible amounts.
Inventories
Inventories consist primarily of spectacle frames, optical lenses and
contact lenses and are valued at the lower of cost or market with cost
determined using the first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment are stated at cost. Equipment under capital leases
is stated at the net present value of the future 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. Routine maintenance and repairs are charged to expense as incurred,
while costs of betterments and renewals are capitalized.
Income Taxes
The Eyecorp, Inc. -- Baker Acquisition Practice is a personal service
corporation for federal and state income tax purposes which historically has not
incurred significant tax liabilities for federal or state income
F-116
<PAGE> 176
EYECORP, INC. -- BAKER ACQUISITION PRACTICE
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
taxes. Compensation to the owner has traditionally reduced taxable income to
nominal levels. This relationship would be expected to continue in the absence
of the Eyecorp Acquisition. Because of this practice, provisions for income
taxes and deferred tax assets and liabilities of the taxable entity have not
been reflected in these financial statements.
Equity
Equity includes the capital stock, additional paid-in capital, and retained
earnings of the Eyecorp, Inc. -- Baker Acquisition Practice.
Revenues
Medical service revenues are accounted for in the period the services are
provided. The revenues are reported at the estimated realizable amounts from
patients, third-party payers and others. Due to the demographics of ophthalmic
patients, a significant portion of the Eyecorp, Inc. -- Baker Acquisition
Practice's medical service revenues are related to Medicare and other
governmental programs. Medicare and other governmental programs reimburse
physicians based on fee schedules which are determined by the related
governmental agency. In the ordinary course of business, practices receiving
reimbursement from Medicare and other governmental programs are potentially
subject to a review by regulatory agencies concerning the accuracy of billings
and sufficiency of supporting documentation of procedures performed.
Additionally, the Eyecorp, Inc. -- Baker Acquisition Practice participates in
agreements with managed care organizations to provide services at negotiated
rates.
Concentration Of Credit Risk
The Eyecorp, Inc. -- Baker Acquisition Practice extends credit to patients
covered by insurance programs such as governmental programs like Medicare and
Medicaid and private insurers. The Eyecorp, Inc. -- Baker Acquisition Practice
manages credit risk with the various public and private insurance providers, as
appropriate. Allowances for doubtful accounts have been made for potential
losses, where appropriate.
Unaudited Financial Information
The unaudited financial statements for the year ended December 31, 1995
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). The accompanying unaudited financial statements
reflect, in the opinion of management, all adjustments necessary for a fair
presentation of the unaudited financial statements. All such adjustments are of
a normal and recurring nature.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
(YEARS)
------------
<S> <C> <C>
Equipment.................................................... 3-10 $ 313,336
Leasehold improvements....................................... 5-10 2,386
Furniture and fixtures....................................... 5-7 36,973
Equipment under capital leases............................... 5-7 28,579
---------
381,274
Less -- accumulated depreciation............................. (335,780)
---------
Net property and equipment......................... $ 45,494
=========
</TABLE>
F-117
<PAGE> 177
EYECORP, INC. -- BAKER ACQUISITION PRACTICE
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. SHORT-TERM OBLIGATIONS:
Short-term notes payable at December 31, 1994 consist of a $46,292, 12%
note payable to the owner which is payable in installments and matures on
November 1, 1995.
The EyeCorp, Inc. -- Baker Acquisition Practice leases certain professional
equipment under capital and operating leases which expire in 1995.
Rent expense related to operating leases amounted to $56,598 for the year
ended December 31, 1994. Cash interest paid was approximately $3,935 in 1994.
5. COMMITMENTS AND CONTINGENCIES:
The EyeCorp, Inc. -- Baker Acquisition Practice is insured with respect to
medical malpractice risks on a claims made basis. Management is not aware of any
malpractice claims which might have a material impact on the financial position,
results of operations, or cash flows of the EyeCorp, Inc. -- Baker Acquisition
Practice.
6. RELATED PARTY TRANSACTIONS:
The EyeCorp, Inc. -- Baker Acquisition Practice relocated its practice in
1995 to a building owned by an entity which includes the owner of the EyeCorp,
Inc. -- Baker Acquisition as a partial owner. The building was financed through
a line of credit of $1,200,000 which is guaranteed by the owner of EyeCorp,
Inc. -- Baker Acquisition Practice. No formal lease agreement has been entered
into at this time.
F-118
<PAGE> 178
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of EyeCorp, Inc.
We have audited the accompanying balance sheet of EyeCorp, Inc. -- Coleman
Acquisition Practice, (as identified in Note 1) as of December 31, 1994 and the
related statements of excess of revenues over expenses, equity and cash flows
for the year then ended. These financial statements are the responsibility of
the EyeCorp, Inc. -- Coleman Acquisition Practice's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
The accompanying financial statements were prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission as described in Note 1 to the financial statements and are not
intended to be a complete presentation of the EyeCorp, Inc. -- Coleman
Acquisition Practice.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of EyeCorp, Inc. -- Coleman
Acquisition Practice as of December 31, 1994, and the excess of revenues over
expenses and its cash flows for the year then ended, as described in Note 1, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND, L.L.P.
Memphis, Tennessee
January 12, 1996
F-119
<PAGE> 179
EYECORP, INC. -- COLEMAN ACQUISITION PRACTICE
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
1994
------------
<S> <C>
Current assets:
Cash and cash equivalents..................................................... $ 11,627
Accounts receivable, less allowance for uncollectible amounts of $243,000 for
1994 and $275,000 for 1995................................................. 197,856
Inventories................................................................... 82,681
Prepaid expenses and other current assets..................................... 12,960
--------
Total current assets.................................................. 305,124
Other assets.................................................................. 3,774
Property and equipment, net................................................... 54,403
--------
Total assets.......................................................... $363,301
========
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable and accrued expenses......................................... $ 28,660
Accrued salaries and benefits................................................. 9,818
--------
Total current liabilities............................................. 38,478
Equity........................................................................ 324,823
--------
Total liabilities and equity.......................................... $363,301
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-120
<PAGE> 180
EYECORP, INC. -- COLEMAN ACQUISITION PRACTICE
STATEMENTS OF EXCESS OF REVENUES OVER EXPENSES AND EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1994 1995
---------- ----------
(UNAUDITED)
<S> <C> <C>
Revenues:
Medical service revenues, net....................................... $2,720,069 $2,571,268
Other revenues...................................................... 183,018 137,665
---------- ----------
Total revenues.............................................. 2,903,087 2,708,933
---------- ----------
Costs and expenses:
Compensation to owner............................................... 1,700,935 1,400,572
Salaries, wages and benefits........................................ 598,049 484,637
Pharmaceuticals and supplies........................................ 292,220 332,267
General and administrative expenses................................. 274,743 381,751
Depreciation........................................................ 18,613 23,421
Other............................................................... 38,268
---------- ----------
Total costs and expenses.................................... 2,922,828 2,622,648
---------- ----------
Excess (deficiency) of revenues over expenses............... (19,741) $ 86,285
========== ==========
Supplemental disclosure:
Combined compensation to owners and excess (deficiency) of revenues
over expenses.................................................... $1,681,194 $1,486,857
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-121
<PAGE> 181
EYECORP, INC. -- COLEMAN ACQUISITION PRACTICE
COMBINED STATEMENTS OF EQUITY
<TABLE>
<S> <C>
Balance, December 31, 1993........................................................ $322,364
Contributions from owner, net................................................... 22,200
Excess of revenues over expenses................................................ (19,741)
--------
Balance, December 31, 1994........................................................ 324,823
Excess of revenues over expenses (unaudited).................................... 86,285
--------
Balance, December 31, 1995 (unaudited)............................................ $411,108
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-122
<PAGE> 182
EYECORP, INC. -- COLEMAN ACQUISITION PRACTICE
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------
1994
-------- 1995
--------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Excess (deficiency) of revenues over expenses........................ $(19,741) $ 86,285
Adjustments to reconcile excess (deficiency) of revenues over
expenses to net cash provided by operating activities:
Depreciation...................................................... 18,613 23,421
Changes in assets and liabilities:
Accounts receivable, net........................................ 17,390 (98,836)
Other assets.................................................... 1,693 3,774
Prepaid expenses and other current assets....................... (1,670) 12,960
Notes receivable................................................ (3,832)
Accounts payable and accrued expenses........................... 8,692 11,755
Accrued salaries and benefits................................... 2,805 1,561
-------- --------
Net cash provided by operating activities.................... 27,782 37,088
-------- --------
Cash flows from investing activities:
Purchase of property and equipment................................... (33,952) (51,318)
-------- --------
Net cash used in investing activities........................ (33,952) (51,318)
-------- --------
Cash flows from financing activities:
Bank overdraft....................................................... (4,403) 2,603
Cash contributions by owner.......................................... 22,200
-------- --------
Net cash provided by financing activities.................... 17,797 2,603
-------- --------
Net increase (decrease) in cash and cash equivalents................... 11,627 (11,627)
Cash and cash equivalents, beginning of period......................... 0 11,627
-------- --------
Cash and cash equivalents, end of period............................... $ 11,627 $ 0
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-123
<PAGE> 183
EYECORP, INC. -- COLEMAN ACQUISITION PRACTICE
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION:
Eyecorp, Inc. (Eyecorp) was formed to create an eye care service company
which will own the assets of and provide management services to ophthalmic and
optometric businesses. Eyecorp plans to consummate acquisitions through the
exchange of cash, notes and shares of its common stock for selected assets of,
and liabilities associated with approximately 50 eyecare practices.
The Eyecorp Inc. -- Coleman Acquisition Practice, which conducted business
as a professional association under the name Coleman Eye Center, P.A.,
maintained its books and records on the cash basis of accounting. The
accompanying financial statements have been prepared on the accrual basis of
accounting. These financial statements have been prepared to show the operations
and financial position of the Eyecorp, Inc. -- Coleman Acquisition Practice,
substantially all of whose assets and operations will be acquired by Eyecorp.
Because the Eyecorp Inc. -- Coleman Acquisition Practice was managed to result
in taxes being the responsibility of the owner, the financial statements have
been presented on a pretax basis, as further described in Note 2. The
supplemental caption on the statement of excess of revenues over expenses,
combined compensation to the owner and excess of revenues over expenses,
reflects the total earnings available to the owner.
The accompanying financial statements of the Eyecorp, Inc. -- Coleman
Acquisition Practice have been prepared as supplemental information about the
entities to which Eyecorp will provide management services following the
consummation of the Acquisitions. The accompanying financial statements do not
reflect any adjustments relating to the proposed Acquisition. Eyecorp will
provide management services to the Eyecorp, Inc. -- Coleman Acquisition
Practice. Eyecorp will not own the medical practice nor practice medicine. Thus,
the financial statements are not representative of the future operations or
financial position of Eyecorp.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash Equivalents
The Eyecorp, Inc. -- Coleman Acquisition Practice considers all highly
liquid investments with a maturity of three months or less when purchased to be
cash equivalents.
Accounts Receivable
Accounts receivable primarily consist of receivables from patients,
insurers, government programs and other third-party payers for medical services
provided by physicians. Such amounts are reduced by an allowance for
uncollectible amounts.
Inventories
Inventories consist primarily of spectacle frames, optical lenses and
contact lenses and are valued at the lower of cost or market with cost
determined using the first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated using the straight-line method over the estimated useful
lives of the assets. Routine maintenance and repairs are charged to expense as
incurred, while costs of betterments and renewals are capitalized.
Income Taxes
The Eyecorp, Inc. -- Coleman Acquisition Practice is a professional
association for federal and state income tax purposes which historically has not
incurred significant tax liabilities for federal or state income
F-124
<PAGE> 184
EYECORP, INC. -- COLEMAN ACQUISITION PRACTICE
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
taxes. Compensation to the owner has traditionally reduced taxable income to
nominal levels. This relationship would be expected to continue in the absence
of the Eyecorp acquisition. Because of this practice, provisions for income
taxes and deferred tax assets and liabilities of the taxable entity have not
been reflected in these financial statements.
Equity
Equity includes the capital stock and retained earnings of the Eyecorp,
Inc. -- Coleman Acquisition Practice.
Revenues
Medical service revenues are accounted for in the period the services are
provided. The revenues are reported at the estimated realizable amounts from
patients, third-party payers and others. Due to the demographics of ophthalmic
patients, a significant portion of the Eyecorp, Inc. -- Coleman Acquisition
Practice's medical services revenues are related to Medicare and other
governmental programs. Medicare and other governmental programs reimburse
physicians based on fee schedules which are determined by the related
governmental agency. In the ordinary course of business, practices receiving
reimbursement from Medicare and other governmental programs are potentially
subject to a review by regulatory agencies concerning the accuracy of billings
and sufficiency of supporting documentation of procedures performed.
additionally, the Eyecorp, Inc. -- Coleman Acquisition Practice participates in
agreements with managed care organizations to provide services at negotiated
rates.
Concentration of Credit Risk
The Eyecorp, Inc. -- Coleman Acquisition Practice extends credit to
patients covered by insurance programs such as governmental programs like
Medicare and Medicaid and private insurers. The Eyecorp, Inc. -- Coleman
Acquisition Practice manages credit risk with the various public and private
insurance providers, as appropriate. allowances for doubtful accounts have been
made for potential losses, where appropriate.
Unaudited Financial Information
The unaudited financial statements for the year ended December 31, 1995
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). The accompanying unaudited financial statements
reflect, in the opinion of management, all adjustments necessary for a fair
presentation of the unaudited financial statements. All such adjustments are of
a normal and recurring nature.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
LIVES
(YEARS)
---------
<S> <C> <C>
Equipment............................................................... 3-10 $ 125,095
Furniture and fixtures.................................................. 5-7 4,463
Automobiles............................................................. 5-7 25,099
---------
154,657
Less -- accumulated depreciation........................................ (100,254)
---------
Net Property and equipment.................................... $ 54,403
=========
</TABLE>
F-125
<PAGE> 185
EYECORP, INC. -- COLEMAN ACQUISITION PRACTICE
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. COMMITMENTS AND CONTINGENCIES:
The EyeCorp, Inc. -- Coleman Acquisition Practice is insured with respect
to medical malpractice risks on a claims made basis. Management is not aware of
any malpractice claims which might have a material impact on the financial
position, results of operations, or cash flows of the EyeCorp, Inc. -- Coleman
Acquisition Practice.
5. RELATED PARTY TRANSACTIONS:
The EyeCorp, Inc. -- Coleman Acquisition Practice leases facility space and
equipment from certain entities which include owners. Rent expense on related
party operating leases amounted to $102,960 for the year ended December 31,
1994.
In certain instances, relatives of the owners of the EyeCorp,
Inc. -- Coleman Acquisition Practice are employees of the clinics.
F-126
<PAGE> 186
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of EyeCorp, Inc.
We have audited the accompanying combined balance sheet of EyeCorp,
Inc. -- Eggleston Acquisition Practice, (as identified in Note 1) as of December
31, 1994 and the related combined statements of excess of revenues over
expenses, equity, and cash flows for the year then ended. These financial
statements are the responsibility of the EyeCorp, Inc. -- Eggleston Acquisition
Practice's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
The accompanying financial statements were prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission as described in Note 1 to the financial statements and are not
intended to be a complete presentation of the EyeCorp, Inc. -- Eggleston
Acquisition Practice.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of EyeCorp, Inc. -- Eggleston
Acquisition Practice as of December 31, 1994, and the excess of revenues over
expenses and its cash flows for the year then ended, as described in Note 1, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Memphis, Tennessee
November 16, 1995
F-127
<PAGE> 187
EYECORP, INC. -- EGGLESTON ACQUISITION PRACTICE
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
1994
------------
<S> <C>
Current assets:
Cash........................................................................... $ 85,035
Accounts receivable less allowance for uncollectible amounts of $276,000 for
1994 and $232,000 for 1995.................................................. 522,517
Prepaid expenses and other current assets...................................... 15,113
--------
Total current assets................................................... 622,665
Property and equipment, net......................................................
--------
Total assets........................................................... $622,665
========
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable and accrued expenses.......................................... $448,989
Accrued salaries and benefits.................................................. 43,522
--------
Total liabilities...................................................... 492,511
Commitments and contingencies (Note 5)
Equity........................................................................... 130,154
--------
Total liabilities and equity........................................... $622,665
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-128
<PAGE> 188
EYECORP, INC. -- EGGLESTON ACQUISITION PRACTICE
COMBINED STATEMENTS OF EXCESS OF REVENUES OVER EXPENSES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1994 1995
---------- -----------
(UNAUDITED)
<S> <C> <C>
Revenues:
Medical service revenues, net..................................... $4,056,086 $ 3,345,276
Other revenues.................................................... 24,941 39,953
---------- -----------
Total revenues............................................ 4,081,027 3,385,229
---------- -----------
Costs and expenses:
Compensation to physician owners.................................. 226,075 483,198
Salaries, wages and benefits...................................... 1,206,532 1,010,739
Pharmaceuticals and supplies...................................... 239,598 249,981
General and administrative expenses............................... 1,152,024 855,011
Rent expense...................................................... 814,948 914,059
Depreciation and amortization..................................... 15,502 13,149
Interest expense.................................................. 12,563 469
Other expense, net................................................ 28,651 25,641
---------- -----------
Total costs and expenses.................................. 3,695,893 3,552,247
---------- -----------
Excess (deficiency) of revenues over expenses............. $ 385,134 $ (167,018)
========== ===========
Supplemental disclosure:
Combined compensation to owners and excess (deficiency) of
revenues over expenses......................................... $ 611,209 $ 316,180
========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-129
<PAGE> 189
EYECORP, INC. -- EGGLESTON ACQUISITION PRACTICE
COMBINED STATEMENTS OF EQUITY
<TABLE>
<S> <C>
Balance, December 31, 1993....................................................... $(609,511)
Contributions from owner, net.................................................. 354,531
Excess of revenues over expenses............................................... 385,134
---------
Balance, December 31, 1994....................................................... 130,154
Contributions from owner (unaudited)........................................... 440,010
Deficiency of revenues over expenses (unaudited)............................... (167,018)
---------
Balance, December 31, 1995 (unaudited)........................................... $ 403,146
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-130
<PAGE> 190
EYECORP, INC. -- EGGLESTON ACQUISITION PRACTICE
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1994 1995
--------- -----------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Excess (deficiency) of revenues over expenses...................... $ 385,134 $ (167,018)
Adjustments to reconcile excess (deficiency) of revenues over
expenses to net cash provided by (used in) operating activities:
Depreciation and amortization................................... 15,502 13,149
Changes in assets and liabilities:
Accounts receivable, net...................................... 30,587 3,922
Prepaid expenses and other current assets..................... 2,774 28,372
Accounts payable and accrued expenses......................... (246,190) (37,739)
Accrued salaries and benefits................................. 7,438 23,221
--------- ----------
Net cash provided by (used in) operating activities........ 195,245 (136,093)
--------- ----------
Cash flows from investing activities:
Purchase of property and equipment................................. (394,463)
----------
Net cash used in financing activities...................... (394,463)
----------
Cash flows from financing activities:
Increase (decrease) in bank overdraft.............................. (164,741) 5,511
Repayment of long-term obligations................................. (300,000)
Owner contributions, net........................................... 354,531 440,010
--------- ----------
Net cash provided by (used in) financing activities........ (110,210) 445,521
Net increase (decrease) in cash and cash equivalents................. 85,035 (85,035)
Cash and cash equivalents, beginning of period....................... 85,035
--------- ----------
Cash and cash equivalents, end of period............................. $ 85,035 $ 0
========= ==========
Supplemental disclosure of noncash investment activities --
Cash paid for interest............................................. $ 12,563 $ 469
========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-131
<PAGE> 191
EYECORP, INC. -- EGGLESTON ACQUISITION PRACTICE
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION:
Eyecorp, Inc. (Eyecorp) was formed to create an eye care services company
which will own the assets of and provide management service to ophthalmic and
optometric businesses. Eyecorp plans to consummate acquisitions through the
exchange of cash, notes and shares of its common stock for selected assets of,
and liabilities associated with approximately 50 eyecare practices.
The combined financial statements of the Eyecorp, Inc. -- Eggleston
Acquisition Practice includes entities which conduct business under the names
Eagle Eye Care and Creve Coeur Surgery Center, Inc. Both entities are owned by
the same individual.
The Eyecorp, Inc. -- Eggleston Acquisition Practice maintained its books
and records on the cash basis of accounting. The accompanying financial
statements have been prepared on the accrual basis of accounting. These
financial statements have been prepared to show the operations and financial
position of the Eyecorp, Inc. -- Eggleston Acquisition Practice, substantially
all of whose assets and operations will be acquired by Eyecorp. Because the
entities comprising the Eyecorp, Inc. -- Eggleston Acquisition Practice were
either nontaxpaying or managed to result in taxes being the responsibility of
the owner, the financial statements have been presented on a pretax basis, as
further described in Note 2. The supplemental caption on the combined statement
of excess of revenues over expenses, combined compensation to and excess of
revenues over expenses of owners, reflects the total earnings available to the
owner.
The accompanying financial statements of the Eyecorp, Inc. -- Eggleston
Acquisition Practice have been prepared as supplemental information about the
entities to which Eyecorp will provide management services following the
consummation of the acquisitions. The entities comprising the Eyecorp,
Inc. -- Eggleston Acquisition Practice have previously operated as separate
entities. The accompanying financial statements do not reflect any adjustments
relating to the proposed acquisition. Eyecorp will provide management services
to the Eyecorp, Inc. -- Eggleston Acquisition Practice. Eyecorp will not own the
medical practice nor practice medicine. Thus, the financial statements are not
representative of the future operations or financial position of Eyecorp.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash Equivalents
The Eyecorp, Inc. -- Eggleston Acquisition Practice considers all highly
liquid investments with a maturity of three months or less when purchased to be
cash equivalents.
Accounts Receivable
Accounts receivable primarily consist of receivables from patients,
insurers, government programs and other third-party payers for medical services
provided by physicians. Such amounts are reduced by an allowance for
uncollectible amounts.
Property and Equipment
Property and equipment are stated at cost. Equipment under capital leases
is stated at the net present value of the future minimum lease payments at the
inception of the related leases. Depreciation of property and equipment is
calculated using straight-line and accelerated methods over the estimated useful
lives of the assets. Routine maintenance and repairs are charged to expense as
incurred, while costs of betterments and renewals are capitalized.
F-132
<PAGE> 192
EYECORP, INC. -- EGGLESTON ACQUISITION PRACTICE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
The entities comprising the Eyecorp, Inc. -- Eggleston Acquisition Practice
include a personal service corporation and an S Corporation for federal and
state income tax purposes. The personal service corporation historically has not
incurred significant tax liabilities for federal or state income taxes.
Compensation to the owner has traditionally reduced taxable income to nominal
levels. Federal and state income taxes for the S Corporation are the
responsibility of the shareholders. These relationships would be expected to
continue in the absence of the Eyecorp acquisition. Because of this practice,
provisions for income taxes and deferred tax assets and liabilities of the
taxable entity have not been reflected in these financial statements.
Equity
Equity includes the capital stock, additional paid-in capital, and retained
earnings of the entities comprising the Eyecorp, Inc. -- Eggleston Acquisition
Practice.
Revenues
Medical service revenues are accounted for in the period the services are
provided. The revenues are reported at the estimated realizable amounts from
patients, third-party payers and others. Due to the demographics of ophthalmic
patients, a significant portion of the Eyecorp, Inc. -- Eggleston Acquisition
Practice's medical service revenues are related to Medicare and other
governmental programs. Medicare and other governments programs reimburse
physicians based on fee schedules which are determined by the related
governmental agency. In the ordinary course of business, practices receiving
reimbursement from Medicare and other governmental programs are potentially
subject to a review by regulatory agencies concerning the accuracy of billings
and sufficiency of supporting documentation of procedures performed.
Additionally, the Eyecorp, Inc. -- Eggleston Acquisition Practice participates
in agreements with managed care organizations to provide services at negotiated
rates.
Concentration Of Credit Risk
The Eyecorp, Inc. -- Eggleston Acquisition Practice extends credit to
patients covered by insurance programs such as governmental programs like
Medicare and Medicaid and private insurers. The Eyecorp, Inc. -- Eggleston
Acquisition Practice manages credit risk with the various public and private
insurance providers, as appropriate. Allowances for doubtful accounts have been
made for potential losses, where appropriate.
Interim Financial Information
The unaudited interim financial statements as of September 30, 1995 and for
the nine months ended September 30, 1994 and 1995 have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission ("SEC"). The
accompanying interim financial statements reflect, in the opinion of management,
all adjustments necessary for a fair presentation of the interim financial
statements. All such adjustments are of a normal and recurring nature.
F-133
<PAGE> 193
EYECORP, INC. -- EGGLESTON ACQUISITION PRACTICE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
(YEARS)
------------
<S> <C> <C>
Equipment...................................................... 3-10 $ 469,031
Less accumulated depreciation.................................. (469,031)
---------
Net property and equipment..................................... $ --
=========
</TABLE>
4. COMMITMENTS AND CONTINGENCIES:
In the normal course of business, the EyeCorp, Inc. -- Eggleston
Acquisition Practice has been named in a lawsuit alleging medical malpractice.
In the opinion of the EyeCorp, Inc. -- Eggleston Acquisition Practice's
management, the ultimate liability, if any and without considering possible
insurance recoveries, will not have a material impact on its financial position,
results of operations, or cash flows.
Additionally, the EyeCorp, Inc. -- Eggleston Acquisition Practice is
insured with respect to medical malpractice risks on a claims made basis.
5. RELATED PARTY TRANSACTIONS:
EyeCorp, Inc. -- Eggleston Acquisition Practice leases its primary office
facilities and equipment from the president under an informal rental agreement.
During 1994, the Company paid rent to the president of $807,052.
F-134
<PAGE> 194
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of EyeCorp, Inc.
We have audited the accompanying combined balance sheet of EyeCorp,
Inc. -- Gordon Acquisition Practice, (as identified in Note 1) as of December
31, 1994 and the related combined statements of excess of revenues over
expenses, equity and cash flows for the year then ended. These financial
statements are the responsibility of the EyeCorp, Inc. -- Gordon Acquisition
Practice's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
The accompanying financial statements were prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission as described in Note 1 to the financial statements and are not
intended to be a complete presentation of the EyeCorp, Inc. -- Gordon
Acquisition Practice.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of EyeCorp, Inc. -- Gordon
Acquisition Practice as of December 31, 1994, and the excess of revenues over
expenses and its cash flows for the year then ended, as described in Note 1, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Memphis, Tennessee
October 23, 1995
F-135
<PAGE> 195
EYECORP, INC. -- GORDON ACQUISITION PRACTICE
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
1994
------------
<S> <C>
Current assets:
Accounts receivable, less allowance for uncollectible amounts of $382,000 for
1994 and $370,000 for 1995.................................................. $ 421,323
Inventories.................................................................... 99,592
Prepaid expenses and other current assets...................................... 10,907
----------
Total current assets................................................... 531,822
Property and equipment, net...................................................... 480,193
Other noncurrent assets, net..................................................... 1,100
----------
Total assets........................................................... $1,013,115
==========
LIABILITIES AND EQUITY
Current liabilities:
Bank overdraft................................................................. $ 551,323
Short-term notes payable....................................................... 96,000
Current portion of obligations under capital leases............................ 49,143
Accounts payable and accrued expenses.......................................... 106,066
Accrued salaries and benefits.................................................. 92,402
----------
Total current liabilities.............................................. 894,934
Long-term obligations under capital leases, net of current portion............... 24,768
----------
Total liabilities...................................................... 919,702
Commitments and contingencies (Note 5)...........................................
Equity (deficit)................................................................. 93,413
----------
Total liabilities and equity........................................... $1,013,115
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-136
<PAGE> 196
EYECORP, INC. -- GORDON ACQUISITION PRACTICE
COMBINED STATEMENTS OF EXCESS OF
REVENUES OVER EXPENSES AND EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1994 1995
---------- -----------
(UNAUDITED)
<S> <C> <C>
Revenues:
Medical service revenues, net..................................... $3,728,721 $ 3,294,009
Other revenues.................................................... 426,376 235,515
---------- -----------
Total revenues............................................ 4,155,097 3,529,524
---------- -----------
Costs and expenses:
Compensation to owners............................................ 1,308,329 948,833
Salaries, wages and benefits...................................... 1,708,199 1,467,829
Pharmaceuticals and supplies...................................... 249,128 212,356
General and administrative expenses............................... 966,658 813,430
Depreciation and amortization..................................... 176,440 176,620
Interest expense.................................................. 25,431 58,331
Other expense, net................................................ 21,873
---------- -----------
Total costs and expenses.................................. 4,456,058 3,677,399
---------- -----------
Deficiency of revenues over expenses...................... $ (300,961) $ (147,875)
========== ===========
Supplemental disclosure:
Combined compensation to owners and deficiency of revenues
over expenses.................................................. $1,007,368 $ 800,958
========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-137
<PAGE> 197
EYECORP, INC. -- GORDON ACQUISITION PRACTICE
COMBINED STATEMENTS OF EQUITY
<TABLE>
<S> <C>
Balance, December 31, 1993....................................................... $ 385,410
Excess (deficiency) of revenues over expenses.................................. (300,961)
Contributions from owner....................................................... 8,964
---------
Balance, December 31, 1994....................................................... 93,413
Excess (deficiency) of revenues over expenses (unaudited)...................... (147,875)
---------
Balance, December 31, 1995 (unaudited)........................................... $ (54,462)
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-138
<PAGE> 198
EYECORP, INC. -- GORDON ACQUISITION PRACTICE
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1994 1995
--------- -----------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Deficiency of revenues over expenses.............................. $(300,961) $(147,875)
Adjustments to reconcile deficiency of
revenues over expenses to net cash used in
operating activities:
Depreciation and amortization.................................. 176,440 176,620
Loss on disposal of property and equipment..................... 1,113
Changes in assets and liabilities:
Accounts receivable, net..................................... 80,279 (55,704)
Inventories.................................................. 3,517 (10,529)
Prepaid expenses and other current assets.................... 21,460 10,907
Other noncurrent assets...................................... (1,500)
Accounts payable and accrued expenses........................ (41,303) (27,277)
Accrued salaries and benefits................................ 35,648 39,184
--------- ---------
Net cash used in operating
activities.............................................. (23,807) (16,174)
--------- ---------
Cash flows from investing activities:
Purchase of property and equipment................................ (77,428) (48,174)
--------- ---------
Net cash used by investing activities..................... (77,428) (48,174)
--------- ---------
Cash flows from financing activities:
Proceeds from short-term obligations.............................. 71,333 608,125
Repayment of short-term obligations............................... (479,729) (118,601)
Repayment of obligations under capital leases..................... (38,589) (27,947)
Bank overdraft.................................................... 539,258 (396,579)
Capital contributions from owner.................................. 8,962
--------- ---------
Net cash provided by financing
activities.............................................. 101,235 64,998
--------- ---------
Net increase (decrease) in cash and cash equivalents................ 0 650
Cash and cash equivalents, beginning of period...................... 0 0
--------- ---------
Cash and cash equivalents, end of period............................ $ 0 $ 650
========= =========
Supplemental disclosure of noncash investment activities:
Capital lease obligations incurred to acquire
equipment...................................................... $ 88,754
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-139
<PAGE> 199
EYECORP, INC. -- GORDON ACQUISITION PRACTICE
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION:
Eyecorp, Inc. (Eyecorp) was formed to create an eye care service company
which will own the assets of and provide management services to ophthalmic and
optometric businesses. Eyecorp plans to consummate acquisitions through the
exchange of cash, notes and shares of its common stock for selected assets of,
and liabilities associated with approximately 50 eyecare practices.
The combined financial statements of Eyecorp, Inc. -- Gordon Acquisition
Practice includes entities which conduct business under the names Eye Health
Care of St. Louis, Inc. and Eye Health Care of Illinois, Ltd. Both entities are
owned by the same individuals.
The Eyecorp, Inc. -- Gordon Acquisition Practice maintained its books and
records on the cash basis of accounting. The accompanying financial statements
have been prepared on the accrual basis of accounting. These financial
statements have been prepared to show the operations and financial position of
the Eyecorp, Inc. -- Gordon Acquisition Practice, substantially all of whose
assets and operations will be acquired by Eyecorp. Because the entities
comprising the Eyecorp, Inc. -- Gordon Acquisition Practice were either
nontaxpaying or managed to result in taxes being the responsibility of the
respective owners. The financial statements have been presented on a pretax
basis, as further described in Note 2. The supplemental caption on the combined
statement of excess of revenues over expenses, combined compensation to owners
and excess of revenues over expenses, reflects the total earnings available to
the owners.
The accompanying financial statements of the Eyecorp, Inc. -- Gordon
Acquisition Practice have been prepared as supplemental information about the
entities to which Eyecorp will provide management services following the
consummation of the acquisitions. The entities comprising the Eyecorp,
Inc. -- Gordon Acquisition Practice have previously operated as separate
entities. The accompanying financial statements do not reflect any adjustments
relating to the proposed acquisition. Eyecorp will provide management services
to the Eyecorp, Inc. -- Gordon Acquisition Practice. Eyecorp will not own the
medical practice nor practice medicine. Thus, the financial statements are not
representative of the future operations or financial position of Eyecorp.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash Equivalents
The Eyecorp, Inc. -- Gordon Acquisition Practice considers all highly
liquid investments with a maturity of three months or less when purchased to be
cash equivalents. The Eyecorp, Inc. -- Gordon Acquisition Practice historically
has a bank overdraft due to its cash management practice of maintaining cash
balances only to the extent of checks presented.
Accounts Receivable
Accounts receivable primarily consist of receivables from patients,
insurers, government programs and other third-party payers for medical services
provided by physicians. Such amounts are reduced by an allowance for
uncollectible amounts.
Inventories
Inventories consist primarily of spectacle frames, optical lenses and
contact lenses and are valued at the lower of cost or market with cost
determined using the first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment are stated at cost. Equipment under capital leases
is stated at the net present value of the future minimum lease payments at the
inception of the related leases. Depreciation of property
F-140
<PAGE> 200
EYECORP, INC. -- GORDON ACQUISITION PRACTICE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
and equipment is calculated using the straight-line method over the estimated
useful lives of the assets. Routine maintenance and repairs are charged to
expense as incurred, while costs of betterments and renewals are capitalized.
Income Taxes
The entities comprising the Eyecorp, Inc. -- Gordon Acquisition Practice
are personal service corporations for federal and state income tax purposes.
These personal service corporations historically have not incurred significant
tax liabilities for federal or state income taxes. Compensation to owners has
traditionally reduced taxable income to nominal levels. These relationships
would be expected to continue in the absence of the Eyecorp Acquisition. Because
of this practice, provisions for income taxes and deferred tax assets and
liabilities of the taxable entity have not been reflected in these financial
statements.
Equity
Equity includes the capital stock, additional paid-in capital and retained
earnings of the Eyecorp, Inc. -- Gordon Acquisition Practice.
Revenues
Medical service revenues are accounted for in the period the services are
provided. The revenues are reported at the estimated realizable amounts from
patients, third-party payers and others. Due to the demographics of ophthalmic
patients, a significant portion of Eyecorp, Inc. -- Gordon Acquisition
Practice's medical service revenues are related to Medicare and other
governmental programs. Medicare and other governmental programs reimburse
physicians based on fee schedules which are determined by the related
governmental agency. In the ordinary course of business, practices receiving
reimbursement from Medicare and other governmental programs are potentially
subject to a review by regulatory agencies concerning the accuracy of billings
and sufficiency of supporting documentation of procedures performed.
Additionally, the Eyecorp, Inc. -- Gordon Acquisition Practice participates in
agreements with managed care organizations to provide services at negotiated
rates.
Other revenues consist primarily of sales of spectacle frames and lenses
and contact lenses.
Concentration of Credit Risk
The Eyecorp, Inc. -- Gordon Acquisition Practice extends credit to patients
covered by insurance programs such as governmental programs like Medicare and
Medicaid and private insurers. The Eyecorp, Inc. -- Gordon Acquisition Practice
manages credit risk with the various public and private insurance providers, as
appropriate. allowances for doubtful accounts have been made for potential
losses, where appropriate.
Unaudited Financial Information
The unaudited financial statements for the year ended December 31, 1995
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). The accompanying unaudited financial statements
reflect, in the opinion of management, all adjustments necessary for a fair
presentation of the unaudited financial statements. All such adjustments are of
a normal and recurring nature.
F-141
<PAGE> 201
EYECORP, INC. -- GORDON ACQUISITION PRACTICE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
(YEARS)
------------
<S> <C> <C>
Equipment..................................................... 3-10 $ 808,868
Leasehold improvements........................................ 5-10 194,666
Furniture and fixtures........................................ 5-7 198,528
Equipment under capital leases................................ 5-7 109,251
----------
1,311,313
Less -- accumulated depreciation.............................. (831,120)
----------
Net property and equipment.......................... $ 480,193
==========
</TABLE>
4. SHORT-TERM AND LONG-TERM OBLIGATIONS:
Short-Term Notes Payable
The EyeCorp, Inc. -- Gordon Acquisition Practice has an agreement with
United Missouri Bank of St. Louis, expiring in March 1995, which provides for a
master revolving note bearing interest at the prime rate. Borrowings are limited
to $100,000. The borrowings are collateralized by the accounts receivable,
equipment, furniture and fixtures of the Company. At December 31, 1994,
borrowings under the master revolving note totaled $96,000. (See Note 7.)
The EyeCorp, Inc. -- Gordon Acquisition Practice leases certain equipment
under capital leases which expire at various dates. At December 31, 1994,
minimum annual rental commitments under capital leases are as follows:
<TABLE>
<CAPTION>
CAPITAL
LEASES
-------
<S> <C>
1995....................................................................... $58,178
1996....................................................................... 7,562
1997....................................................................... 7,562
1998....................................................................... 7,562
1999....................................................................... 7,562
Thereafter................................................................. 5,971
-------
Total minimum lease payments............................................... 94,397
Less -- Amounts representing interest...................................... 20,486
-------
Present value of minimum capital lease payments............................ 73,911
Less -- Current portion of obligations under capital leases................ 49,143
-------
Long-term obligations under capital leases, net of current portion......... $24,768
=======
</TABLE>
Rent expense related to operating leases amounted to $157,689 for the year
ended December 31, 1994. Cash interest paid was approximately $24,021 in 1994.
5. COMMITMENTS AND CONTINGENCIES:
The EyeCorp, Inc. -- Gordon Acquisition Practice is insured with respect to
medical malpractice risks on a claims made basis. Management is not aware of any
malpractice claims which might have a material impact
F-142
<PAGE> 202
EYECORP, INC. -- GORDON ACQUISITION PRACTICE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
on the financial position, results of operations, or cash flows of the EyeCorp,
Inc. -- Gordon Acquisition Practice.
A physician formerly affiliated with the EyeCorp, Inc. -- Gordon
Acquisition Practice is alleging that the Practice owes the physician for
services rendered of approximately $180,000. The Practice believes it has
meritorious defenses and will vigorously defend its position. It is the opinion
of management that the ultimate resolution of this claim, if filed, will not
have a material effect on the Practice's financial position, results of
operations, or cash flows.
6. RELATED PARTY TRANSACTIONS:
The EyeCorp, Inc. -- Gordon Acquisition Practice leases the St. Louis
practice office facility from a partnership, 50% of which is owned by the
president. The EyeCorp, Inc. -- Gordon Acquisition Practice pays all related
building expenses including building maintenance and related property taxes
which amounted to $112,207 in 1994. No formal lease agreement exists.
7. SUBSEQUENT EVENTS:
Subsequent to year end, the EyeCorp, Inc. -- Gordon Acquisition Practice
entered into a promissory note with a borrowing limit of $100,000 which matures
on February 10, 1996. The note bears interest at the bank's referenced rate plus
1% and is collateralized by inventory and accounts receivable. The proceeds from
this borrowing were used to pay the short term note payable as described in Note
4.
Additionally, the EyeCorp, Inc. -- Gordon Acquisition Practice entered into
an agreement borrowing $500,000 which is due on February 10, 1996. Interest
accrues at the bank's referenced rate plus 2%.
F-143
<PAGE> 203
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of EyeCorp, Inc.
We have audited the accompanying combined balance sheets of EyeCorp,
Inc. -- Post Acquisition Practice, (as identified in Note 1) as of December 31,
1993 and 1994 and the related combined statements of excess of revenues over
expenses, equity and cash flows for the years then ended. These financial
statements are the responsibility of the EyeCorp, Inc. -- Post Acquisition
Practice's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The accompanying financial statements were prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission as described in Note 1 to the financial statements and are not
intended to be a complete presentation of the EyeCorp, Inc. -- Post Acquisition
Practice.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of EyeCorp, Inc. -- Post
Acquisition Practice as of December 31, 1993 and 1994, and the excess of
revenues over expenses and its cash flows for the years then ended, as described
in Note 1, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Memphis, Tennessee
October 20, 1995
F-144
<PAGE> 204
EYECORP, INC. -- POST ACQUISITION PRACTICE
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1993 1994
-------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................................... $ $ 61,154
Accounts receivable, less allowance for uncollectible amounts of
$279,000 in 1993, $344,000 in 1994 and $371,000 in 1995......... 294,012 423,286
Prepaid expenses and other current assets.......................... 17,518 25,585
-------- ----------
Total current assets....................................... 311,530 510,025
Property and equipment, net........................................ 671,960 1,098,933
Other noncurrent assets............................................ 1,591
-------- ----------
Total assets............................................... $985,081 $1,608,958
======== ==========
LIABILITIES AND EQUITY
Current liabilities:
Bank overdraft..................................................... $ 76,062
Accounts payable and accrued expenses.............................. 87,865 $ 101,921
Accrued salaries and benefits...................................... 9,469 14,774
Current portion of long-term debt.................................. 17,857 123,853
Current portion of obligations under capital leases................ 5,629 4,505
Current portion of note payable to owner........................... 306,700 529,240
-------- ----------
Total current liabilities.................................. 503,582 774,293
Long-term debt, net of current portion............................... 40,179 225,493
Long-term obligations under capital leases, net of current portion... 12,583 8,078
Note payable to owner, net of current portion........................ 85,000
-------- ----------
Total liabilities.......................................... 641,344 1,007,864
Commitments and contingencies (Note 6)
Equity............................................................... 343,737 601,094
-------- ----------
Total liabilities and equity............................... $985,081 $1,608,958
======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-145
<PAGE> 205
EYECORP, INC. -- POST ACQUISITION PRACTICE
COMBINED STATEMENTS OF EXCESS OF REVENUES OVER EXPENSES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1993 1994 1995
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
Medical service revenues, net........................ $2,498,532 $3,757,098 $ 4,637,025
Other revenues....................................... 99,119 59,131 59,692
---------- ---------- -----------
Total revenues............................... 2,597,651 3,816,229 4,696,717
---------- ---------- -----------
Costs and expenses:
Compensation to owner................................ 837,979 931,761 1,306,392
Salaries, wages and benefits......................... 983,829 1,186,668 1,605,914
Pharmaceuticals and supplies......................... 110,874 344,959 365,578
General and administrative expenses.................. 572,024 767,273 723,335
Depreciation......................................... 144,714 268,463 283,351
Interest expense..................................... 42,617 69,748 38,818
---------- ---------- -----------
Total costs and expenses..................... 2,692,037 3,568,872 4,323,388
---------- ---------- -----------
Excess (deficiency) of revenues over
expenses................................... $ (94,386) $ 247,357 $ 373,329
========== ========== ===========
Supplemental disclosure:
Combined compensation to owners and excess
(deficiency) of revenues over expenses............ $ 743,593 $1,179,118 $ 1,679,721
========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-146
<PAGE> 206
EYECORP, INC. -- POST ACQUISITION PRACTICE
COMBINED STATEMENTS OF EQUITY
<TABLE>
<S> <C>
Balance, December 31, 1992....................................................... $ 438,123
Excess (deficiency) of revenues over expenses.................................. (94,386)
----------
Balance, December 31, 1993....................................................... 343,737
Excess (deficiency) of revenues over expenses.................................. 247,357
Capital contributions by owner................................................. 10,000
----------
Balance, December 31, 1994....................................................... 601,094
Excess of revenues over expenses (unaudited)................................... 373,329
----------
Balance, September 30, 1995 (unaudited).......................................... $ 974,423
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-147
<PAGE> 207
EYECORP, INC. -- POST ACQUISITION PRACTICE
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1993 1994 1995
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Excess (deficiency) of revenues over
expenses............................................. $ (94,386) $ 247,357 $ 373,329
Adjustments to reconcile excess (deficiency) of revenues
over expenses to net cash provided by operating
activities:
Depreciation......................................... 144,714 268,463 283,351
Changes in assets and liabilities:
Accounts receivable, net........................... 44,673 (129,274) 25,975
Prepaid expenses and other current assets.......... (7,727) (8,067) 25,309
Other noncurrent assets............................ 1,591
Accounts payable and accrued expenses.............. (24,434) 14,056 (43,923)
Accrued salaries and benefits...................... 5,053 5,305 904
--------- --------- ----------
Net cash provided by operating activities....... 67,893 399,431 664,945
--------- --------- ----------
Cash flows from investing activities:
Purchase of property and equipment...................... (121,904) (695,436) (77,387)
--------- --------- ----------
Net cash used in investing activities........... (121,904) (695,436) (77,387)
--------- --------- ----------
Cash flows from financing activities:
Bank overdraft.......................................... 76,062 (76,062)
Proceeds from long-term obligations..................... 309,167
Repayment of long-term obligations...................... (114,857) (17,857) (349,346)
Proceeds from obligations under capital leases.......... 1,432
Repayment of obligations under capital leases........... (2,003) (5,629) (3,900)
Repayment of loans from owners.......................... (529,240)
Net proceeds from note payable to owner................. 137,540 371,700
Capital contribution to owner........................... 10,000
--------- --------- ----------
Net cash provided by (used in) financing
activities.................................... (40,798) 357,159 (509,354)
--------- --------- ----------
Net increase (decrease) in cash and cash equivalents...... (94,809) 61,154 78,204
Cash and cash equivalents, beginning of period............ 94,809 61,154
--------- --------- ----------
Cash and cash equivalents, end of period.................. $ 0 $ 61,154 $ 139,358
========= ========= ==========
Supplemental disclosure of noncash investment activities:
Capital lease obligations incurred to acquire
equipment............................................ $ 20,215
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-148
<PAGE> 208
EYECORP, INC. -- POST ACQUISITION PRACTICE
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION:
Eyecorp, Inc. (Eyecorp) was formed to create an eye care service company
which will own the assets of and provide management services to ophthalmic and
optometric businesses. Eyecorp plans to consummate acquisitions through the
exchange of cash, notes and shares of its common stock for selected assets of,
and liabilities associated with approximately 50 Eyecare practices.
The combined financial statements of Eyecorp, Inc. -- Post Acquisition
Practice include entities which conduct business under the names Post Eye
Center, P.C. and Plymouth Laser and Surgery Center. Plymouth Laser and Surgery
Center is a subchapter S-Corporation which is wholly owned by the same
stockholder as that of Post Eye Center.
The Eyecorp Inc. -- Post Acquisition Practice maintained its books and
records on the cash basis of accounting. The accompanying financial statements
have been prepared on the accrual basis of accounting. These financial
statements have been prepared to show the operations and financial position of
the Eyecorp, Inc. -- Post Acquisition Practice, substantially all of whose
assets and operations will be acquired by Eyecorp. Because the entities
comprising the Eyecorp, Inc. -- Post Acquisition Practice were either
nontaxpaying or managed to result in taxes being the responsibility of the
owner, the financial statements have been presented on a pretax basis, as
further described in Note 2. The supplemental caption on the statements of
excess of revenues over expenses, combined compensation to owners and excess of
revenues over expenses, reflects the total earnings available to the owners.
The accompanying financial statements of the Eyecorp, Inc. -- Post Eye
Center Acquisition Practice have been prepared as supplemental information about
the entities to which Eyecorp will provide management services following the
consummation of the acquisitions. The entities comprising the Eyecorp,
Inc. -- Post Acquisition Practice have previously operated as separate entities.
The accompanying financial statements do not reflect any adjustments relating to
the proposed acquisition. Eyecorp will provide management services to the
Eyecorp, Inc. -- Post Acquisition Practice. Eyecorp will not own the medical
practice nor practice medicine. Thus, the financial statements are not
representative of the future operations or financial position of Eyecorp.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash Equivalents
The Eyecorp, Inc. -- Post Acquisition Practice considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents.
Accounts Receivable
Accounts receivable primarily consists of receivables from patients,
insurers, government programs and other third-party payers for medical services
provided by physicians. Such amounts are reduced by an allowance for
uncollectible amounts. Contractual adjustments result from the differences
between the rates charged by the physicians for services performed and the
amounts allowed by the Medicare and Medicaid programs and other public and
private insurers.
Property and Equipment
Property and equipment are stated at cost. Equipment under capital leases
is stated at the net present value of the future 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. Routine maintenance and repairs are charged to expense as incurred,
while costs of betterments and renewals are capitalized.
F-149
<PAGE> 209
EYECORP, INC. -- POST ACQUISITION PRACTICE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
The entities comprising the Eyecorp, Inc. -- Post Acquisition Practice
include a personal service corporation and a subchapter S Corporation for
federal and state income tax purposes. The personal service Corporation
historically has not incurred significant tax liabilities for federal or state
income taxes. Compensation to the owner has traditionally reduced taxable income
to nominal levels. Federal and state income taxes for the subchapter S
Corporation are the responsibility of the shareholders. These relationships
would be expected to continue in the absence of the Eyecorp acquisition. Because
of this practice, provisions for income taxes and deferred tax assets and
liabilities of the taxable entity have not been reflected in these financial
statements.
Equity
Equity includes the capital stock, additional paid-in capital, and retained
earnings of the entities comprising the Eyecorp, Inc. -- Post Acquisition
Practice.
Revenues
Medical service revenues are accounted for in the period the services are
provided. The revenues are reported at the estimated realizable amounts from
patients, third-party payers and others. Due to the demographics of ophthalmic
patients, a significant portion of the Eyecorp, Inc. -- Post Acquisition
Practice's medical service revenues are related to Medicare and other
governmental programs. Medicare and other governmental programs reimburse
physicians based on fee schedules which are determined by the related
governmental agency. In the ordinary course of business, practices receiving
reimbursement from Medicare and other governmental programs are potentially
subject to a review by regulatory agencies concerning the accuracy of billings
and sufficiency of supporting documentation of procedures performed.
Additionally, the Eyecorp, Inc. -- Post Acquisition Practice participates in
agreements with managed care organizations to provide services at negotiated
rates.
Concentration of Credit Risk
The Eyecorp, Inc. -- Post Acquisition Practice extends credit to patients
covered by insurance programs such as governmental programs like Medicare and
Medicaid and private insurers. The Eyecorp, Inc. -- Post Acquisition Practice
manages credit risk with the various public and private insurance providers, as
appropriate. Allowances for doubtful accounts have been made for potential
losses, where appropriate.
Unaudited Financial Information
The unaudited financial statements for the year ended December 31, 1995
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). The accompanying unaudited financial statements
reflect, in the opinion of management, all adjustments necessary for a fair
presentation of the unaudited financial statements. All such adjustments are of
a normal and recurring nature.
F-150
<PAGE> 210
EYECORP, INC. -- POST ACQUISITION PRACTICE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER
USEFUL LIVES --------------------------
(YEARS) 1993 1994
------------ ---------- -----------
<S> <C> <C> <C>
Equipment..................................... 3-10 $ 467,472 $ 868,462
Leasehold improvements........................ 5-10 491,241 782,776
Furniture and fixtures........................ 5-7 436,827 439,738
Equipment under capital leases................ 3-5 20,215 20,215
---- ---------- -----------
1,415,755 2,111,191
Less -- accumulated depreciation.............. (743,795) (1,012,258)
---------- -----------
Net property and equipment.......... $ 671,960 $ 1,098,933
========== ===========
</TABLE>
4. LONG-TERM OBLIGATIONS:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1993 1994
------- --------
<S> <C> <C>
Unsecured note payable, due in March, 1997, payable in monthly
installments of $1,488 plus accrued interest at prime plus
1%.......................................................... $58,036 $ 40,179
Line of Credit with bank, due November, 1997, payable in equal
monthly principal installments of $8,833 plus accrued
interest at prime plus 2%................................... 309,167
------- --------
$58,036 $349,346
======= ========
</TABLE>
These debt instruments are guaranteed by the owner of the EyeCorp,
Inc. -- Post Acquisition Practice or related entities.
As of December 31, 1994, the aggregate amounts of annual principal
maturities of long-term debt (excluding capital lease obligations) are as
follows:
<TABLE>
<S> <C>
1995.............................................. $123,853
1996.............................................. 123,853
1997.............................................. 101,640
--------
Total................................... $349,346
========
</TABLE>
F-151
<PAGE> 211
EYECORP, INC. -- POST ACQUISITION PRACTICE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The EyeCorp, Inc. -- Post Acquisition Practice leases office space, an
automobile and certain equipment under capital leases and noncancelable
operating leases which expire at various dates. At December 31, 1994, minimum
annual rental commitments under capital leases with terms in excess of one year
are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ----------
<S> <C> <C>
1995.......................................................... $ 4,505 $ 247,200
1996.......................................................... 4,505 247,200
1997.......................................................... 3,573 243,800
1998.......................................................... 240,200
1999.......................................................... 240,200
Thereafter.................................................... 1,997,296
------- ----------
Total minimum lease payments........................ $12,583 $3,215,896
======= ==========
</TABLE>
Rent expense related to operating leases amounted to $179,150 and $284,192
for the years ended December 31, 1993 and 1994. Cash interest paid was $42,600
and $69,000 in 1993 and 1994, respectively.
5. EMPLOYEE BENEFIT PLANS:
The EyeCorp, Inc. -- Post Acquisition Practice has a qualified defined
contribution plan which permits participants to make voluntary contributions.
The EyeCorp, Inc. -- Post Acquisition Practice pays all general and
administrative expenses of the plan and, in some cases, makes matching
contributions on behalf of the employees. The EyeCorp, Inc. -- Post Acquisition
Practice made contributions related to this plan totaling $16,165 and $14,544 in
1993 and 1994, respectively.
6. COMMITMENTS AND CONTINGENCIES:
In the normal course of business, the EyeCorp, Inc. -- Post Acquisition
Practice and a physician formerly associated with the EyeCorp, Inc. -- Post
Acquisition Practice have been named in a lawsuit alleging medical malpractice.
In the opinion of the EyeCorp, Inc. -- Post Acquisition Practice's management,
the ultimate liability, if any and without considering possible insurance
recoveries, will not have a material impact on its financial position, results
of operations, or cash flows.
Additionally, the EyeCorp, Inc. -- Post Acquisition Practice and the
physician formerly associated with the EyeCorp, Inc. -- Post Acquisition
Practice are insured with respect to medical malpractice risks on a claims made
basis.
7. RELATED PARTY TRANSACTIONS:
The EyeCorp, Inc. -- Post Acquisition Practice leases facility space from
an entity which includes the owner. These leases are classified as operating
leases. Rent expense on related party operating leases amounted to $164,450, and
$240,200 for the years ended December 31, 1993 and 1994, respectively.
Included in notes payable at December 31, 1993 and 1994 are $391,700 and
$529,240 of amounts due to the owner of the EyeCorp, Inc. -- Post Acquisition
Practice, respectively. These notes are due on demand in 1995, thus all have
been classified as current at December 31, 1994. The notes accrue interest at
rates between 8% and 10%, which is to be paid monthly.
F-152
<PAGE> 212
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of EyeCorp, Inc.
We have audited the accompanying balance sheets of EyeCorp,
Inc. -- Southern Eye Center Acquisition Practice, (as identified in Note 1) as
of December 31, 1993 and 1994 and the related statements of excess of revenues
over expenses, equity and cash flows for each of the three years in the period
ended December 31, 1994. These financial statements are the responsibility of
the EyeCorp, Inc. -- Southern Eye Center Acquisition Practice's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The accompanying financial statements were prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission as described in Note 1 to the financial statements and are not
intended to be a complete presentation of the EyeCorp, Inc. -- Southern Eye
Center Acquisition Practice.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of EyeCorp, Inc. -- Southern
Eye Center Acquisition Practice as of December 31, 1993 and 1994, and the excess
of revenues over expenses and its cash flows for each of the three years in the
period ended December 31, 1994, as described in Note 1, in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Memphis, Tennessee
November 3, 1995
F-153
<PAGE> 213
EYECORP, INC. -- SOUTHERN EYE CENTER ACQUISITION PRACTICE
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1993 1994
---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents......................................... $ 67,998 $ 446,848
Accounts receivable, less allowance for uncollectible amounts of
$517,000 in 1993, $868,000 in 1994 and $795,000 in 1995........ 522,837 954,840
Prepaid expenses and other current assets......................... 27,718 21,025
---------- ----------
Total current assets...................................... 618,553 1,422,713
Property and equipment, net......................................... 549,698 310,209
Other noncurrent assets, net........................................ 55,435 46,708
---------- ----------
Total assets.............................................. $1,223,686 $1,779,630
========== ==========
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable and accrued expenses............................. $ 105,366 $ 145,773
Accrued salaries and benefits..................................... 107,633 123,297
---------- ----------
Total current liabilities................................. 212,999 269,070
Commitments and contingencies (Note 8)
Equity.............................................................. 1,010,687 1,510,560
---------- ----------
Total liabilities and equity.............................. $1,223,686 $1,779,630
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-154
<PAGE> 214
EYECORP, INC. -- SOUTHERN EYE CENTER ACQUISITION PRACTICE
STATEMENTS OF EXCESS OF REVENUES OVER EXPENSES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1993 1994 1995
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
Medical service revenues, net.......................... $2,935,667 $4,944,122 $6,734,102
---------- ---------- ----------
Costs and expenses:
Compensation to owners................................. 1,040,000 1,350,521 3,640,738
Salaries, wages and benefits........................... 832,751 1,631,478 2,014,936
Pharmaceuticals and supplies........................... 43,725 304,143 397,185
General and administrative expenses.................... 572,457 806,122 833,968
Depreciation and amortization.......................... 142,121 149,313 159,587
Interest expense....................................... 5,781
Other expense (income), net............................ (3,316) (36,950) (7,902)
---------- ---------- ----------
Total costs and expenses....................... 2,633,519 4,204,627 7,038,512
---------- ---------- ----------
Excess (deficiency) of revenues over
expenses..................................... $ 302,148 $ 739,495 $ (304,410)
========== ========== ==========
Supplemental disclosure:
Combined compensation to owners and excess (deficiency)
of revenues over expenses........................... $1,342,148 $2,090,016 $3,336,328
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-155
<PAGE> 215
EYECORP, INC. -- SOUTHERN EYE CENTER ACQUISITION PRACTICE
STATEMENTS OF EQUITY
<TABLE>
<S> <C>
Balance, December 31, 1992....................................................... $ 608,798
Excess of revenues over expenses............................................... 302,148
Capital contributions by owners................................................ 99,741
----------
Balance, December 31, 1993....................................................... 1,010,687
Excess of revenues over expenses............................................... 739,495
Distribution of property and equipment to owners............................... (239,622)
----------
Balance, December 31, 1994....................................................... 1,510,560
Excess of revenues over expenses (unaudited)................................... (304,410)
----------
Balance, December 31, 1995 (unaudited)........................................... $1,206,150
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-156
<PAGE> 216
EYECORP, INC. -- SOUTHERN EYE CENTER ACQUISITION PRACTICE
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
--------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Excess (deficiency) of revenues over expenses............. $ 302,148 $ 739,495 $ (304,410)
Adjustments to reconcile excess of revenues over expenses
to net cash provided by (used in) operating
activities --
Depreciation and amortization.......................... 142,121 149,313 159,587
Changes in assets and liabilities:
Accounts receivable, net............................. (72,410) (432,003) 166,222
Prepaid expenses and other current assets............ (19,515) (13,210) (13,975)
Noncurrent assets.................................... (23,764)
Accounts payable and accrued expenses................ (95,578) 40,407 (88,772)
Accrued salaries and benefits........................ 11,892 15,664 40,875
--------- --------- ----------
Net cash provided by (used in) operating
activities...................................... 268,658 499,666 (64,237)
--------- --------- ----------
Cash flows from investing activities:
Acquisition of eyecare practice........................... (90,000)
Purchase of property and equipment........................ (283,526) (120,816) (136,507)
--------- --------- ----------
Net cash used in investing activities............. (373,526) (120,816) (136,507)
--------- --------- ----------
Cash flows from financing activities --
Cash contributions by owners.............................. 99,741
--------- --------- ----------
Net cash provided by financing activities......... 99,741
--------- --------- ----------
Net increase (decrease) in cash and cash equivalents........ (5,127) 378,850 (200,744)
Cash and cash equivalents, beginning of period.............. 73,125 67,998 446,848
--------- --------- ----------
Cash and cash equivalents, end of period.................... $ 67,998 $ 446,848 $ 246,104
========= ========= ==========
</TABLE>
Supplemental disclosure of noncash investment activities:
During 1994, the practice distributed medical equipment with a cost of
$262,036 and a net book value of $221,717 and other current assets of $17,905 to
the owner.
The accompanying notes are an integral part of these financial statements.
F-157
<PAGE> 217
EYECORP, INC. -- SOUTHERN EYE CENTER ACQUISITION PRACTICE
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION:
Eyecorp, Inc. (Eyecorp) was formed to create an eye care service company
which will own the assets of and provide management services to ophthalmic and
optometric businesses. Eyecorp plans to consummate acquisitions through the
exchange of cash, notes and shares of its common stock for selected assets of,
and liabilities associated with approximately 50 eyecare practices.
The financial statements of Eyecorp, Inc. -- Southern Eye Center
Acquisition Practice include eyecare facilities which conduct businesses in
Hattiesburg, MS., Pascagoula, MS., and Biloxi, MS. (D/B/A Southern Eye Center).
Southern Eye Center is a subchapter S-Corporation. In June 1994, the Eyecorp,
Inc. -- Southern Eye Center Acquisition Practice began operating a new
ambulatory surgery center which increased medical service revenues, net by
approximately $1,100,000.
The Eyecorp Inc. -- Southern Eye Center Acquisition Practice maintained its
books and records on the cash basis of accounting. The accompanying financial
statements have been prepared on the accrual basis of accounting. These
financial statements have been prepared to show the operations and financial
position of the Eyecorp, Inc. -- Southern Eye Center Acquisition Practice,
substantially all of whose assets and operations will be acquired by Eyecorp.
Because Eyecorp, Inc. -- Southern Eye Center Acquisition Practice was an
S-Corporation with taxes on income being the responsibility of the owner, the
financial statements have been presented on a pretax basis, as further described
in Note 2. The supplemental caption on the statements of excess of revenues over
expenses, combined compensation to owners and excess of revenues over expenses,
reflects the total earnings available to the owners.
The accompanying financial statements of the Eyecorp, Inc. -- Southern Eye
Center Acquisition Practice have been prepared as supplemental information about
the entities to which Eyecorp will provide management services following the
consummation of the acquisitions. The accompanying financial statements do not
reflect any adjustments relating to the proposed acquisition. Eyecorp will
provide management services to the Eyecorp, Inc. -- Southern Eye Center
Acquisition Practice. Eyecorp will not own the medical practice nor practice
medicine. Thus, the financial statements are not representative of the future
operations or financial position of Eyecorp.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash equivalents
The Eyecorp, Inc. -- Southern Eye Center Acquisition Practice considers all
highly liquid investments with a maturity of three months or less when purchased
to be cash equivalents.
Accounts receivable
Accounts receivable primarily consists of receivables from patients,
insurers, government programs and other third-party payers for medical services
provided by physicians. Such amounts are reduced by an allowance for
uncollectible amounts.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated using the straight-line method over the estimated useful
lives of the assets. Routine maintenance and repairs are charged to expense as
incurred, while costs of betterments and renewals are capitalized.
F-158
<PAGE> 218
EYECORP, INC. -- SOUTHERN EYE CENTER ACQUISITION PRACTICE
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Other Noncurrent Assets
Other noncurrent assets consist primarily of the excess of cost of acquired
assets over the fair value (Goodwill) and noncompete agreements. Goodwill is
amortized on a straight-line basis over 15 years. Noncompete agreements are
amortized on the straight-line basis over the three year term of the agreements.
Income Taxes
Eyecorp, Inc. -- Southern Eye Center Acquisition Practice is an subchapter
S Corporation for federal and state income tax purposes. Federal and state
income taxes for the subchapter S Corporation are the responsibility of the
shareholder. This relationship would be expected to continue in the absence of
the Eyecorp acquisition. Because of this practice, provisions for income taxes
and deferred tax assets and liabilities of the taxable entity have not been
reflected in these financial statements.
Equity
Equity includes the capital stock, additional paid-in capital, and retained
earnings of the Eyecorp, Inc. -- Southern Eye Center Acquisition Practice.
Revenues
Medical service revenues are accounted for in the period the services are
provided. The revenues are reported at the estimated realizable amounts from
patients, third-party payers and others. Due to the demographics of ophthalmic
patients, a significant portion of the Eyecorp, Inc. -- Southern Eye Center
Acquisition Practice's medical service revenues are related to Medicare and
other governmental programs. Medicare and other governmental programs reimburse
physicians based on fee schedules which are determined by the related
governmental agency. In the ordinary course of business, practices receiving
reimbursement from Medicare and other governmental programs are potentially
subject to a review by regulatory agencies concerning the accuracy of billings
and sufficiency of supporting documentation of procedures performed.
Additionally, the Eyecorp, Inc. -- Southern Eye Center Acquisition Practice
participates in agreements with managed care organizations to provide services
at negotiated rates.
Concentration of Credit Risk
The Eyecorp, Inc. -- Southern Eye Center Acquisition Practice extends
credit to patients covered by insurance programs such as governmental programs
like Medicare and Medicaid and private insurers. The Eyecorp, Inc. -- Southern
Eye Center Acquisition Practice manages credit risk with the various public and
private insurance providers, as appropriate. Allowances for doubtful accounts
have been made for potential losses, where appropriate.
Unaudited Financial Information
The unaudited financial statements for the year ended December 31, 1995
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission ('SEC'). The accompanying unaudited financial statements
reflect, in the opinion of management, all adjustments necessary for a fair
presentation of the unaudited financial statements. All such adjustments are of
a normal and recurring nature.
3. ACQUISITIONS:
The EyeCorp, Inc. -- Southern Eye Center Acquisition Practice completed an
acquisition of certain operating assets of an eyecare practice during 1993. The
acquisition was accounted for using the purchase method. The financial results
of the acquisition have been included in the financial statements of the
EyeCorp, Inc. -- Southern Eye Center Acquisition Practice from the date of its
acquisition. The pro forma effect of the
F-159
<PAGE> 219
EYECORP, INC. -- SOUTHERN EYE CENTER ACQUISITION PRACTICE
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
acquisition was not material to the results of operations or financial position
of the EyeCorp, Inc. -- Southern Eye Center Acquisition Practice. The estimated
fair value of assets acquired consisted of property and equipment and intangible
assets of $40,500 and $49,500, respectively.
4. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER
USEFUL LIVES ------------------------
(YEARS) 1993 1994
------------ ---------- ----------
<S> <C> <C> <C>
Equipment........................................ 3-10 $ 693,159 $ 522,547
Leasehold improvements........................... 5-10 185,553 194,930
Furniture and fixtures........................... 5-7 343,571 363,597
Equipment under capital leases................... 3-5 29,278 29,278
---------- ----------
1,251,561 1,110,352
Less -- accumulated depreciation................. (701,863) (800,143)
---------- ----------
Net property and equipment............. $ 549,698 $ 310,209
========== ==========
</TABLE>
5. OTHER NONCURRENT ASSETS:
Other noncurrent assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1993 1994
------- --------
<S> <C> <C>
Excess of cost of acquired assets over fair value............... $18,000 $ 18,000
Non compete agreements.......................................... 31,500 31,500
Other........................................................... 6,910 8,908
------- --------
56,410 58,408
Less -- Accumulated amortization................................ (975) (11,700)
------- --------
$55,435 $ 46,708
======= ========
</TABLE>
6. LONG-TERM OBLIGATIONS:
The EyeCorp, Inc. -- Southern Eye Center Acquisition Practice leases office
space, as well as certain equipment under operating leases which expire at
various dates. At December 31, 1994, minimum annual rental commitments under
noncancelable operating leases with terms in excess of one year are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
----------
<S> <C>
1995..................................................................... $ 163,095
1996..................................................................... 259,095
1997..................................................................... 163,095
1998..................................................................... 163,095
1999..................................................................... 94,183
Thereafter............................................................... 336,000
----------
Total minimum lease payments................................... $1,178,563
==========
</TABLE>
Rent expense related to operating leases amounted to $84,000, $88,654 and
$246,376 for the years ended December 31, 1992, 1993 and 1994, respectively.
F-160
<PAGE> 220
EYECORP, INC. -- SOUTHERN EYE CENTER ACQUISITION PRACTICE
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES:
In the normal course of business, the EyeCorp, Inc. -- Southern Eye Center
Acquisition Practice has been named in a lawsuit alleging medical malpractice.
In the opinion of the EyeCorp, Inc. -- Southern Eye Center Acquisition
Practice's management, the ultimate liability, if any and without considering
possible insurance recoveries, will not have a material impact on its financial
position, results of operations, or cash flows.
Additionally, the EyeCorp, Inc. -- Southern Eye Center Acquisition Practice
is insured with respect to medical malpractice risks on a claims made basis.
8. RELATED PARTY TRANSACTIONS:
The EyeCorp, Inc. -- Southern Eye Center Acquisition Practice leases
facility space and equipment from the owner under operating leases. Rent expense
for related party operating leases amounted to $84,000, $77,000, and $232,910 in
1992, 1993 and 1994, respectively. Rent expense for related party operating
leases in 1994 includes $80,000 of rent expense attributable to the new
ambulatory surgery center described in Note 1.
The EyeCorp, Inc. -- Southern Eye Center Acquisition Practice distributed
medical equipment with a cost of $262,036 and a net book value of $221,717 and
other current assets of $17,905 to the owner during 1994. The medical equipment
was leased back to the practice. Rent expense associated with this lease was
$45,819 in 1994.
F-161
<PAGE> 221
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of EyeCorp, Inc.
We have audited the accompanying combined balance sheet of EyeCorp,
Inc. -- Selected Acquisition Practices (as identified in Note 1) as of December
31, 1994 and the related combined statements of excess of revenues over
expenses, equity and cash flows for the year then ended. These financial
statements are the responsibility of the EyeCorp, Inc. -- Selected Acquisition
Practices' management. Our responsibility is to express an opinion on these
combined financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
The accompanying financial statements were prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission as described in Note 1 to the financial statements and are not
intended to be a complete presentation of the EyeCorp, Inc. -- Selected
Acquisition Practices.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of EyeCorp, Inc. -- Selected
Acquisition Practices as of December 31, 1994 and the excess of revenues over
expenses and its cash flows for the year then ended, as described in Note 1, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Memphis, Tennessee
October 24, 1995
F-162
<PAGE> 222
EYECORP, INC. -- SELECTED ACQUISITION PRACTICES
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
1994
------------
<S> <C>
Current assets:
Cash and cash equivalents..................................................... $ 230,233
Accounts receivable, less allowance for uncollectible amounts of $1,449,000
for 1994 and $1,091,000 for 1995........................................... 1,072,630
Inventories................................................................... 88,682
repaid expenses and other current assets...................................... 66,745
----------
Total current assets.................................................. 1,458,290
Property and equipment, net..................................................... 1,123,632
Other noncurrent assets......................................................... 55,998
----------
Total assets.......................................................... $2,637,920
==========
LIABILITIES AND EQUITY
Current liabilities:
Short-term notes payable...................................................... $ 281,685
Current portion of long-term debt............................................. 219,047
Current portion of obligations under capital leases........................ 7,349
Bank overdrafts............................................................... 48,051
Accounts payable and accrued expenses......................................... 536,536
Accrued salaries and benefits................................................. 303,055
----------
Total current liabilities............................................. 1,395,723
Long-term debt, net of current portion.......................................... 234,149
----------
Total liabilities..................................................... 1,629,872
Commitments and contingencies (Note 6)
Equity.......................................................................... 1,008,048
----------
Total liabilities and equity.......................................... $2,637,920
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-163
<PAGE> 223
EYECORP, INC. -- SELECTED ACQUISITION PRACTICES
COMBINED STATEMENTS OF EXCESS OF REVENUES OVER EXPENSES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1994 1995
----------- -----------
(UNAUDITED)
<S> <C> <C>
Revenues:
Medical service revenues, net................................... $12,051,430 $12,186,852
----------- -----------
Costs and expenses:
Compensation to owners.......................................... 4,641,566 4,873,137
Salaries, wages and benefits.................................... 3,512,830 3,649,858
Pharmaceuticals and supplies.................................... 869,600 957,765
Film development and supplies................................... 113,621 129,104
General and administrative expenses............................. 2,451,830 2,092,931
Depreciation and amortization................................... 302,388 318,547
Interest expense................................................ 62,222 75,663
Other (income) expense, net..................................... (15,838) 8,315
----------- -----------
Total costs and expenses................................ 11,938,219 12,105,320
----------- -----------
Excess of revenues over expenses........................ $ 113,211 $ 81,532
=========== ===========
Supplemental disclosure:
Combined compensation to owners and excess of revenues over
expenses..................................................... $ 4,754,777 $ 4,954,669
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-164
<PAGE> 224
EYECORP, INC. -- SELECTED ACQUISITION PRACTICES
COMBINED STATEMENTS OF EQUITY
<TABLE>
<S> <C>
Balance, December 31, 1993....................................................... $1,150,307
Excess of revenues over expenses............................................... 113,211
Capital contributions by owners................................................ 56,460
Purchase of company stock...................................................... (93,540)
Issuance of common stock....................................................... 1,500
Loan to shareholder............................................................ (219,890)
----------
Balance, December 31, 1994....................................................... 1,008,048
Excess of revenues over expenses (unaudited)................................... 81,532
Issuance of common stock (unaudited)........................................... 3,000
----------
Balance, September 30, 1995 (unaudited).......................................... $1,092,580
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-165
<PAGE> 225
EYECORP, INC. -- SELECTED ACQUISITION PRACTICES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1994 1995
--------- -----------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Excess of revenues over expenses................................... $ 113,211 $ 81,532
Adjustments to reconcile excess of revenues over expenses to net
cash provided by operating activities:
Depreciation and amortization................................... 302,388 318,547
Gain on sale of assets.......................................... (9,323)
Changes in assets and liabilities:
Accounts receivable, net...................................... 11,966 76,593
Inventories................................................... 3,268 (6,746)
Prepaid expenses and other current assets..................... 36,455 603
Other noncurrent assets....................................... (18,907)
Notes receivable.............................................. (10,270)
Accounts payable and accrued expenses......................... (108,079) (95,413)
Accrued salaries and benefits................................. 47,367 (13,019)
--------- ---------
Net cash provided by operating activities.................. 397,253 332,920
--------- ---------
Cash flows from investing activities:
Proceeds from sale of property and equipment....................... 20,000 19,035
Purchase of property and equipment................................. (204,858) (298,681)
--------- ---------
Net cash used in investing activities...................... (184,858) (279,646)
--------- ---------
Cash flows from financing activities:
Bank overdrafts.................................................... 48,051 (48,051)
Repayment of short-term obligations................................
Proceeds from long-term obligations................................ 358,349 356,419
Repayment of long-term obligations................................. (428,136) (315,605)
Repayment of obligations under capital lease....................... (17,083) (1,563)
Loan to shareholder................................................ (219,890)
Cash contributions by owners and partners.......................... 56,460
Owner distributions................................................
Purchase of company stock.......................................... (93,540)
Proceeds from sale of common stock................................. 1,500 3,000
--------- ---------
Net cash used in financing activities...................... (294,289) (5,800)
--------- ---------
Net increase (decrease) in cash and cash equivalents................. (81,894) 47,474
Cash and cash equivalents, beginning of period....................... 312,127 230,233
--------- ---------
Cash and cash equivalents, end of period............................. $ 230,233 $ 277,707
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-166
<PAGE> 226
EYECORP, INC. -- SELECTED ACQUISITION PRACTICES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION:
Eyecorp, Inc. (Eyecorp) was formed to create an eye care service company
which will own the assets of and provide management services to ophthalmic and
optometric businesses. Eyecorp plans to consummate acquisitions through the
exchange of cash, notes and shares of its common stock for selected assets of,
and liabilities associated with approximately 50 eye care practices.
The accompanying combined financial statements of the Eyecorp,
Inc. -- Selected Acquisition Practices consist of eight eye care practices which
are individually insignificant but (in the aggregate) are required to be audited
in accordance with Securities and Exchange Commission rules and regulations. The
Eyecorp, Inc. -- Selected Acquisition Practices, which are comprised of numerous
legal entities, conduct business as Aden Eye Clinic; Advanced Eye Care; Dr. Fred
L. McMillan, P.A.; Eye Care Associates; Johnny Justice, Inc.; Louis Glazer,
M.D.; Newton Eye Center; and Ohio Eye Alliance. The Eyecorp, Inc. -- Selected
Acquisition Practices are based in Tennessee, Mississippi, Ohio and Texas.
The combined financial statements of the Eyecorp, Inc. -- Selected
Acquisition Practices have been prepared as supplemental information about the
entities to which Eyecorp will provide management services following
consummation of the Acquisitions. The entities comprising the Eyecorp,
Inc. -- Selected Acquisition Practices previously have operated as separate
independent entities. Their historical financial positions, excess of revenues
over expenses and cash flows have been combined in the accompanying financial
statements and do not reflect any adjustments relating to the proposed
acquisition or the impact that may have occurred if the operations of the
Eyecorp, Inc. -- Selected Acquisition Practices had been combined. Eyecorp will
provide management services to The Eyecorp, Inc. -- Selected Acquisition
Practices. Eyecorp will not own the medical practice nor practice medicine, thus
the combined financial statements are not necessarily representative of the
future operations or financial position of Eyecorp.
Most of the Eyecorp, Inc. -- Selected Acquisition Practices maintained
their books and records on the cash basis of accounting. The accompanying
financial statements have been prepared on the accrual basis of accounting.
These combined financial statements have been prepared to show the excess of
revenues over expenses and financial position of The Eyecorp, Inc. -- Selected
Acquisition Practice, substantially all of whose assets and operations will be
acquired by Eyecorp. Because certain entities comprising The Eyecorp,
Inc. -- Selected Acquisition Practices were either nontaxpaying (i.e.,
partnerships, S Corporations) or managed to result in taxes being the
responsibility of the respective owners, the financial statements have been
presented on a pretax basis, as further described in Note 2. The supplemental
caption on the statement of excess of revenues over expenses, combined
compensation to owners and excess of revenues over expenses, reflects the
earnings available to the owners.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash Equivalents
The Eyecorp, Inc. -- Selected Acquisition Practices consider all highly
liquid investments with a maturity of three months or less when purchased to be
cash equivalents.
Accounts Receivable
Accounts receivable primarily consists of receivables from patients,
insurers, government programs and other third-party payers for medical services
provided by physicians. Such amounts are reduced by an allowance for
uncollectible amounts.
F-167
<PAGE> 227
EYECORP, INC. -- SELECTED ACQUISITION PRACTICES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Inventories
Inventories consist primarily of spectacle frames, optical lenses and
contact lenses and are valued at the lower of cost or market with cost
determined using the first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment are stated at cost. Equipment under capital leases
is stated at the net present value of the future minimum lease payments at the
inception of the related leases. Depreciation of property and equipment is
calculated using straight-line and accelerated methods over the estimated useful
lives of the assets. Routine maintenance and repairs are charged to expense as
incurred, while costs of betterments and renewals are capitalized.
Income Taxes
Certain of the Eyecorp, Inc. -- selected acquisition practices are S
Corporations, personal service corporations, or partnerships, accordingly,
income tax liabilities are the responsibility of the respective owners or
partners. The taxable corporations included in the Eyecorp, Inc. -- Selected
Acquisition Practices historically have not incurred significant tax liabilities
for federal or state income taxes. Compensation to owners has traditionally
reduced taxable income to nominal levels. This relationship would be expected to
continue in the absence of the Eyecorp Acquisition. Because of this practice,
provisions for income taxes and deferred tax assets and liabilities of the
taxable entities have not been reflected in these combined financial statements.
The consistent presentation of the financial statements on a pretax basis also
provides comparability that would not otherwise be the case when presenting a
combination of various taxable and nontaxable entities.
Equity
Equity includes the respective capital stock, additional paid-in capital,
partnership capital and retained earnings of the various legal entities
comprising the Eyecorp, Inc. -- Selected Acquisition Practices. For the Eyecorp,
Inc. -- Selected Acquisition Practices with multiple owners, ownership
agreements call for the transfer of an ownership interest to the continuing
owners in the case of certain events such as the owner's retirement or death.
Frequently, the existing owners or practices are required to pay the departed
owner for his interest or for the company to repurchase the owner's stock, in
which case, the cost of the acquired shares are charged to equity and classified
as treasury stock.
Certain practices of the Eyecorp, Inc. -- Selected Acquisition Practices
provide stock options to the practicing doctors. These options are exercisable
upon the completion of a pre-determined length of service.
Revenues
Medical service revenues are accounted for in the period the services are
provided. The revenues are reported at the estimated realizable amounts from
patients, third-party payers and others. Due to the demographics of ophthalmic
patients, a significant portion of the Eyecorp, Inc. -- Selected Acquisition
Practices' medical service revenues are related to Medicare and other
governmental programs. Medicare and other governmental programs reimburse
physicians based on fee schedules which are determined by the related
governmental agency. In the ordinary course of business, practices receiving
reimbursement from Medicare and other governmental programs are potentially
subject to a review by regulatory agencies concerning the accuracy of billings
and sufficiency of supporting documentation of procedures performed.
Additionally, the Eyecorp, Inc. -- Selected Acquisition Practices participate in
agreements with managed care organizations to provide services at negotiated
rates.
F-168
<PAGE> 228
EYECORP, INC. -- SELECTED ACQUISITION PRACTICES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Concentration of Credit Risk:
The Eyecorp, Inc. -- Selected Acquisition Practices extend credit to
patients covered by insurance programs such as governmental programs like
medicare and Medicaid and private insurers. The Eyecorp, Inc. -- Selected
Acquisition Practices manage credit risk with the various public and private
insurance providers, as appropriate. Allowances for doubtful accounts have been
made for potential losses, where appropriate.
Unaudited Financial Information
The unaudited financial statements for the year ended December 31, 1995
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). The accompanying unaudited financial statements
reflect, in the opinion of management, all adjustments necessary for a fair
presentation of the unaudited financial statements. All such adjustments are of
a normal and recurring nature.
3. PROPERTY AND EQUIPMENT:
Property and Equipment at December 31, 1994 consist of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
(YEARS)
------------
<S> <C> <C>
Land........................................................ $ 54,299
Building.................................................... 40 137,739
Equipment................................................... 3-10 2,783,065
Leasehold improvements...................................... 5-10 245,667
Furniture and fixtures...................................... 5-7 834,960
Equipment under capital leases.............................. 5-7 12,335
----------
4,068,065
Less -- accumulated depreciation............................ (2,944,433)
----------
Net property and equipment........................ $1,123,632
==========
</TABLE>
4. SHORT-TERM AND LONG-TERM OBLIGATIONS:
Short-Term Notes Payable
Short-term debt at December 31, 1994 consists of the following:
<TABLE>
<S> <C>
Demand notes payable to a bank. Interest accrues at rates between prime
plus .50% and .75%. The notes are secured by various assets of the
practice with a net book value of $651,970.............................. $ 76,015
Line of credit of $250,000 with a bank due upon demand with interest due
in monthly installments at prime plus .25%, (8.75% at December 31,
1994). The line is secured by various assets of the practice with a net
book value of $651,970.................................................. 190,620
Unsecured note payable to a bank due December 1995, due in monthly
installments of $675 including interest calculated at prime plus .50%,
(9.0% at December 31, 1994)............................................. 15,050
--------
$281,685
========
</TABLE>
F-169
<PAGE> 229
EYECORP, INC. -- SELECTED ACQUISITION PRACTICES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Long-Term Debt
Long-term debt at December 31, 1994 consists of the following:
<TABLE>
<S> <C>
Unsecured promissory note to a bank with a maturity date of June 1995.
Monthly payments are $750 including interest at prime plus 1.00% (9.50%
at December 31, 1994)................................................... $ 43,966
Promissory note to a bank with a maturity date of June 1995. Monthly
payments are $2,030 including interest at prime plus 1.00% (9.50% at
December 31, 1994). The note is collateralized by a building with a net
book value of $113,348.................................................. 130,272
Installment notes payable to a bank with maturity dates between June 1995
and September 1997. Monthly payments are between $277 and $755 including
interest of between 7.50% and 8.62%. The notes are collateralized by
various autos and equipment with an aggregate net book value of
$52,902................................................................. 32,772
Installment notes payable to a bank with maturity dates between February
1998 and May 1999. Monthly payments are between $450 and $2,691
including interest of between prime plus .25% and .75% (8.75% and 9.25%
at December 31, 1994.) These notes are secured by various assets of a
practice with a net book value of $651,970.............................. 246,186
--------
$453,196
========
</TABLE>
Certain debt obligations contain covenants that require maintenance of
certain financial ratios. Default of any covenant could affect the ability of
individual entities to borrow under the agreements and, if not waived or
corrected, could accelerate the maturity of any borrowings outstanding under the
agreements. As of December 31, 1994, the EyeCorp, Inc. -- Selected Acquisition
Practices have complied with existing loan covenants. Certain of these debt
instruments are guaranteed by the owners of the EyeCorp, Inc. -- Selected
Acquisition Practices or related entities. The EyeCorp, Inc. -- Selected
Acquisition Practices have also guaranteed debt of other parties. EyeCorp,
Inc. -- Selected Acquisition Practices have not previously been required to
assume any significant responsibility for these financial obligations as a
result of defaults and are not aware of any existing conditions which would
adversely affect the financial position or results of operations of the EyeCorp,
Inc. -- Selected Acquisition Practices.
As of December 31, 1994, the aggregate amounts of annual principal
maturities of long-term debt (excluding capital lease obligations) are as
follows:
<TABLE>
<S> <C>
1995...................................................................... $219,047
1996...................................................................... 81,799
1997...................................................................... 77,577
1998...................................................................... 50,334
1999...................................................................... 24,439
--------
Total........................................................... $453,196
========
</TABLE>
F-170
<PAGE> 230
EYECORP, INC. -- SELECTED ACQUISITION PRACTICES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The EyeCorp, Inc. -- Selected Acquisition Practices lease office space as
well as certain equipment under capital leases and noncancelable operating lease
agreements which expire at various dates. At December 31, 1994, minimum annual
rental commitments under capital leases amounted to $7,349 and noncancelable
operating leases with terms in excess of one year amounted to the following:
<TABLE>
<CAPTION>
OPERATING
LEASES
--------
<S> <C>
1995...................................................................... $157,454
1996...................................................................... 83,177
1997...................................................................... 80,267
1998...................................................................... 80,012
1999...................................................................... 80,012
--------
Total minimum lease payments.................................... $480,922
========
</TABLE>
Rent expense related to operating leases amounted to $479,218 for the year
ended December 31, 1994.
5. EMPLOYEE BENEFIT PLANS:
The EyeCorp, Inc. -- Selected Acquisition Practices have qualified defined
contribution plans which permit participants to make voluntary contributions.
The applicable EyeCorp, Inc. -- Selected Acquisition Practices pay all general
and administrative expenses of the plans and, in some cases, make matching
contributions on behalf of the employees. The EyeCorp, Inc. -- Selected
Acquisition Practices made contributions related to these plans that totaled
$206,763 in 1994.
One of the EyeCorp, Inc. -- Selected Acquisition Practices provides a
deferred compensation plan for the owners. The plan provides for the payment of
60% of the participants' average annual salary over the participants' most
recent 6 years of service prior to retirement for a period of 5 years. The plan
is unfunded. Included in accrued salaries and benefits is a deferred
compensation liability of $196,111 at December 31, 1994. The plan is to be
terminated upon acquisition by EyeCorp, Inc. Payments will continue to those
participants currently receiving distributions from the plan.
6. COMMITMENTS AND CONTINGENCIES:
In the normal course of business, certain of the individual EyeCorp,
Inc. -- Selected Acquisition Practices have been named in various lawsuits,
primarily alleging medical malpractice. In the opinion of the EyeCorp,
Inc. -- Selected Acquisition Practices' management, the ultimate liability, if
any and without considering possible insurance recoveries, will not have a
material impact on its financial position, results of operations, or cash flows.
Additionally, the EyeCorp, Inc. -- Selected Acquisition Practices are
insured with respect to medical malpractice risks on a claims made basis.
7. RELATED PARTY TRANSACTIONS:
The EyeCorp, Inc. -- Selected Acquisition Practices lease facility space
and equipment from certain entities which include owners. Rent expense in
related party operating leases amounted to $176,011 for the year ended December
31, 1994.
In certain instances, relatives of the owners of the EyeCorp,
Inc. -- Selected Acquisition Practices are employees of the clinics.
F-171
<PAGE> 231
EYECORP, INC. -- SELECTED ACQUISITION PRACTICES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The EyeCorp, Inc. -- Selected Acquisition Practices lease office space as
well as certain equipment under capital leases and noncancelable operating lease
agreements which expire at various dates. At December 31, 1994, minimum annual
rental commitments under capital leases amounted to $7,349 and noncancelable
operating leases with terms in excess of one year amounted to the following:
<TABLE>
<CAPTION>
OPERATING
LEASES
--------
<S> <C>
1995...................................................................... $157,454
1996...................................................................... 83,177
1997...................................................................... 80,267
1998...................................................................... 80,012
1999...................................................................... 80,012
--------
Total minimum lease payments.................................... $480,922
========
</TABLE>
Rent expense related to operating leases amounted to $479,218 for the year
ended December 31, 1994.
5. EMPLOYEE BENEFIT PLANS:
The EyeCorp, Inc. -- Selected Acquisition Practices have qualified defined
contribution plans which permit participants to make voluntary contributions.
The applicable EyeCorp, Inc. -- Selected Acquisition Practices pay all general
and administrative expenses of the plans and, in some cases, make matching
contributions on behalf of the employees. The EyeCorp, Inc. -- Selected
Acquisition Practices made contributions related to these plans that totaled
$206,763 in 1994.
One of the EyeCorp, Inc. -- Selected Acquisition Practices provides a
deferred compensation plan for the owners. The plan provides for the payment of
60% of the participants' average annual salary over the participants' most
recent 6 years of service prior to retirement for a period of 5 years. The plan
is unfunded. Included in accrued salaries and benefits is a deferred
compensation liability of $196,111 at December 31, 1994. The plan is to be
terminated upon acquisition by EyeCorp, Inc. Payments will continue to those
participants currently receiving distributions from the plan.
6. COMMITMENTS AND CONTINGENCIES:
In the normal course of business, certain of the individual EyeCorp,
Inc. -- Selected Acquisition Practices have been named in various lawsuits,
primarily alleging medical malpractice. In the opinion of the EyeCorp,
Inc. -- Selected Acquisition Practices' management, the ultimate liability, if
any and without considering possible insurance recoveries, will not have a
material impact on its financial position, results of operations, or cash flows.
Additionally, the EyeCorp, Inc. -- Selected Acquisition Practices are
insured with respect to medical malpractice risks on a claims made basis.
7. RELATED PARTY TRANSACTIONS:
The EyeCorp, Inc. -- Selected Acquisition Practices lease facility space
and equipment from certain entities which include owners. Rent expense in
related party operating leases amounted to $176,011 for the year ended December
31, 1994.
In certain instances, relatives of the owners of the EyeCorp,
Inc. -- Selected Acquisition Practices are employees of the clinics.
F-172
<PAGE> 232
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY
OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE SHARES OF
COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................... 3
The Company............................ 6
Risk Factors........................... 6
Recent Developments.................... 12
Use of Proceeds........................ 14
Price Range of Common Stock............ 14
Dividend Policy........................ 14
Capitalization......................... 15
Unaudited Pro Forma Combined Financial
Statements........................... 16
Selected Financial Data................ 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 20
Business............................... 26
Management............................. 38
Certain Transactions................... 44
Principal and Selling Stockholders..... 47
Description of Capital Stock........... 50
Shares Eligible for Future Sale........ 55
Underwriting........................... 57
Legal Matters.......................... 58
Experts................................ 58
Available Information.................. 59
Index to Financial Statements.......... F-1
- --------------------------------------------
- --------------------------------------------
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
5,000,000 SHARES
(LOGO)
COMMON STOCK
------------
PROSPECTUS
MAY 14, 1996
------------
SMITH BARNEY INC.
ALEX. BROWN & SONS
INCORPORATED
VOLPE, WELTY & COMPANY
- ------------------------------------------------------
- ------------------------------------------------------
