<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
(Amendment No. 1)
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) June 30, 1996
-------------------
Physicians Resource Group, Inc.
--------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 1-13778 76-0456864
----------------- ------------ --------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
Three Lincoln Centre, Suite 1540, 5430 LBJ Freeway, Dallas, TX 75240
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (214) 982-8200
-------------------
<PAGE> 2
Reference is made to the Current Report on Form 8-K dated June 30, 1996
(the "Form 8-K") filed by Physicians Resource Group, Inc. on July 12, 1996. The
Form 8-K is hereby amended to read in its entirety as follows:
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
LAKELAND ACQUISITION
Physicians Resource Group, Inc., a Delaware corporation (the
"Company") and wholly-owned corporate or partnership subsidiaries of the
Company (collectively, "Lakeland Merger Subs"), entered into Agreements and
Plans of Merger (the "Lakeland Acquisition Agreements") with the following
ophthalmological practices (the "Lakeland Practices") and physicians: Central
Florida Eye Associates, P.A., Central Florida Eye Associates Partners, G.C.R.
Investors, Ronald Case, M.D., Brian Renz, M.D., Teo Kulyk, M.D. and Jay
Mulaney, M.D.
Pursuant to such agreements, on June 30, 1996, Lakeland Merger Subs
acquired (the "Lakeland Acquisitions"), with certain limited exceptions, all of
the assets and properties, real and personal, tangible and intangible, and
certain liabilities of the Lakeland Practices. The respective Lakeland Merger
Subs intend to provide the use of such assets to the respective
ophthalmological practices from which they were acquired pursuant to the terms
of the management services agreements entered into at the time of the Lakeland
Acquisitions.
To the best knowledge of the Company, at the time of the Lakeland
Acquisitions there was no material relationship between (i) the Lakeland
Practices, Ronald Case, M.D., Brian Renz, M.D., Teo Kulyk, M.D., and Jay
Mulaney, M.D., on the one hand, and (ii) the Company, or any of its affiliates,
any director or officer of the Company, or any associate of such director or
officer on the other.
The aggregate consideration paid by the Company as a result of the
Lakeland Acquisitions was 281,832 shares of the common stock, par value $.01
per share, of the Company and the assumption of certain liabilities. The
acquisition consideration for such acquisitions was determined by arms-length
negotiations between the parties to the applicable acquisition agreements.
CAMPBELL ACQUISITION
The Company and a wholly-owned subsidiary of the Company ("Campbell
Merger Sub"), entered into an Agreements and Plan of Merger (the "Campbell
Acquisition Agreement") with the following ophthalmological practices (the
"Campbell Practices") and physician: South Texas Retina Affiliates, Inc.,
South Texas Retina Consultants, L.L.P., Charles H. Campbell, M.D., P.A. and
Charles H. Campbell, M.D.
Pursuant to such agreement, on July 3, 1996, Campbell Merger Sub
acquired (the "Campbell Acquisition"), with certain limited exceptions, all of
the assets and properties, real and personal, tangible and intangible, and
certain liabilities of the Campbell Practices. Campbell Merger Sub intends to
provide the use of such assets to the respective ophthalmological practices
from which they were acquired pursuant to the terms of the management services
agreement entered into at the time of the Campbell Acquisition.
2
<PAGE> 3
To the best knowledge of the Company, at the time of the Campbell
Acquisition there was no material relationship between (i) the Campbell
Practices and Charles H. Campbell, M.D. on the one hand, and (ii) the Company,
or any of its affiliates, any director or officer of the Company, or any
associate of such director or officer on the other.
The aggregate consideration paid by the Company as a result of the
Campbell Acquisition was 160,919 shares of the common stock, par value $.01 per
share, of the Company and the assumption of certain liabilities. The
acquisition consideration for such acquisitions was determined by arms-length
negotiations between the parties to the applicable acquisition agreements.
ITEM 5. OTHER EVENTS.
In addition to the financial statements required to be filed as a
result of the consummation of the transactions described in Item 2 of this Form
8-K/A, the Company is filing additional financial statements more particularly
described in Item 7 hereof to permit their incorporation by reference.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) The required audited financial statements for the Lakeland
Acquisitions and the Campbell Acquisition, described in Item 2, have been
included herein as Annex A.
(b) The unaudited pro forma combined balance sheet of the Company
attached hereto as Annex B has been adjusted to give effect to the Lakeland
Acquisitions, the Campbell Acquisition and the acquisition of the assets of the
Edward Yavitz Eye Center, Ltd., along with other prior transactions described
more fully in Annex B, as though such transactions had occurred on March 31,
1996. The unaudited pro forma combined statements of operations of the Company
for the three years in the period ended December 31, 1995 and for the three
months ended March 31, 1996 and 1995, also attached hereto as Annex B, present
the historical results of the Company as if the Lakeland Acquisitions,
accounted for as a pooling of interests, had occurred on January 1, 1993 and
the remaining acquisitions and other transactions had occurred on January 1,
1995. Such pro forma information is not necessarily indicative of operating
results that would have been achieved had such transactions been consummated at
the beginning of the respective periods presented and should not be construed
as representative of future operations.
(c) Included herein as Annex C are the Company's audited
historical financial statements and the audited financial statements of various
entities acquired by the Company, which financial statements are required to be
filed in accordance with the rules and regulations of the Securities and
Exchange Commission. These financial statements, which are similar to financial
statements previously filed by the Company, have been included herein to
reflect changes required by the consummation of a pooling of interests
transaction and the recent acquisition of the assets of The Edward Yavitz Eye
Center, Ltd.
(d) Included herein as Annex D are the combined audited financial
statements of entities involved in two significant acquisitions, Key Whitman
Eye Center, P.A. ("Key Whitman") and Milauskas Eye Institute Medical Group
("Milauskas"), previously made by the Company. These financial statements were
previously filed by the Company, in combination with other insignificant
acquisitions, in a Current Report on Form 8-K/A. The Company has elected to
voluntarily file the combined audited financial statements of Key Whitman and
Milauskas, exclusive of the other insignificant acquisitions.
(e) Exhibits.
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
2.1 - Agreement and Plan of Merger by and among Central Florida Eye Associates, P.A.,
Ronald Case, M.D., Brian Renz, M.D., Teo Kulyk, M.D., Jay Mulaney, M.D., PRG FL
Acquisition Corporation, and Physicians Resource Group, Inc. (1)
2.2 - Agreement and Plan of Merger by and among G.C.R. Investors, Ronald Case, M.D.
Brian Renz, M.D., Jay Mulaney, M.D., PRG FL Partnership I, and Physicians
Resource Group, Inc. (1)
2.3 - Agreement and Plan of Merger by and among Central Florida Eye Associates, Partners,
Ronald Case, M.D., Brian Renz, M.D., Teo Kulyk, M.D., Jay Mulaney, M.D., PRG FL
Partnership II, and Physicians Resource Group, Inc. (1)
2.4 - Agreement and Plan of Merger by and among South Texas Retina Affiliates, Inc.,
South Texas Retina Consultants, L.L.P., Charles H. Campbell, M.D., P.A., Charles
H. Campbell, M.D., PRG TX Acquisition Corp. I and Physicians Resource Group, Inc. (1)
4.1 - Restated Certificate of Incorporation of Physicians Resource Group, Inc.(2)
</TABLE>
3
<PAGE> 4
<TABLE>
<S> <C>
4.2 - Certificate of Designations, Preferences, Rights and Limitations of Class A Preferred
Stock of Physicians Resource Group, Inc.(2)
4.3 - Third Amended and Restated Bylaws of Physicians Resource Group, Inc.(3)
4.4 - Form of Warrant Certificate(2)
4.5 - Rights Agreement dated as of April 19, 1996 between Physicians Resource Group, Inc. and
Chemical Mellon Shareholder Services(4)
4.6 - Form of certificate evidencing ownership of Common Stock of Physicians Resource Group, Inc.(2)
23.1 - Consent of Arthur Andersen LLP(5)
23.2 - Consent of Coopers & Lybrand LLP(5)
</TABLE>
- -------------------
(1) - Previously filed herewith.
(2) - Previously filed as an exhibit to the Company's
Registration Statement on Form S-1 (No. 33-91440)
and incorporated herein by reference.
(3) - Previously filed as an exhibit to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995,
and incorporated herein by reference.
(4) - Previously filed as an exhibit to the Company's
Registration Statement on Form S-1 (No. 333-3852) and
incorporated herein by reference.
(5) - Filed herewith.
4
<PAGE> 5
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
PHYSICIANS RESOURCE GROUP, INC.
Date: July 17, 1996 By:/s/ Richard J. D'Amico
-------------------------------------
Richard J. D'Amico
Senior Vice President and
General Counsel
5
<PAGE> 6
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
ANNEX A
PHYSICIANS RESOURCE GROUP, INC. -- CENTRAL FLORIDA EYE
ASSOCIATES, P.A.
Report of Independent Public Accountants.......................................... A-1
Combined Balance Sheets as of December 31, 1994 and 1995 (audited) and as of March
31, 1996 (unaudited)........................................................... A-2
Combined Statements of Earnings for the two years ended December 31, 1995
(audited) and for the three months ended March 31, 1995 and 1996 (unaudited)... A-3
Combined Statements of Owners' Equity for the two years ended December 31, 1995
(audited) and for the three months ended March 31, 1996 (unaudited)............ A-4
Combined Statements of Cash Flows for the two years ended December 31, 1995
(audited) and for the three months ended March 31, 1995 and 1996 (unaudited)... A-5
Notes to Combined Financial Statements............................................ A-6
PHYSICIANS RESOURCE GROUP, INC. -- SOUTH TEXAS RETINA
CONSULTANTS, P.A.
Report of Independent Public Accountants.......................................... A-10
Combined Balance Sheets as of December 31, 1995 (audited) and March 31, 1996
(unaudited).................................................................... A-11
Combined Statements of Earnings for the year ended December 31, 1995 (audited) and
for the three months ended March 31, 1995 and 1996 (unaudited)................. A-12
Combined Statements of Owners' Equity for the year ended December 31, 1995
(audited) and for the three months ended March 31, 1996 (unaudited)............ A-13
Combined Statements of Cash Flows for the year ended December 31, 1995 (audited)
and for the three months ended March 31, 1995 and 1996 (unaudited)............. A-14
Notes to Combined Financial Statements............................................ A-15
ANNEX B
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES -- UNAUDITED MERGER/SIGNIFICANT
TRANSACTIONS PRO FORMA COMBINED
FINANCIAL STATEMENTS:
Unaudited Merger/Significant Transactions Pro Forma Combined Financial Statements
Headnote....................................................................... B-1
Unaudited Merger/Significant Transactions Pro Forma Combined Balance Sheet as of
March 31, 1996................................................................. B-2
Unaudited Merger/Significant Transactions Pro Forma Combined Statement of
Operations for the three years ended December 31, 1995 and for the three months
ended March 31, 1995 and 1996.................................................. B-3
Notes to Unaudited Merger/Significant Transactions Pro Forma Combined Financial
Statements..................................................................... B-8
ANNEX C
PHYSICIANS RESOURCE GROUP, INC. -- CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants.......................................... C-1
Consolidated Balance Sheets as of December 31, 1994 and 1995...................... C-2
Consolidated Statements of Operations for the three years ended December 31,
1995........................................................................... C-3
Consolidated Statements of Changes in Stockholders' Equity for the three years
ended December 31, 1995........................................................ C-4
Consolidated Statements of Cash Flows for the three years ended December 31,
1995........................................................................... C-5
Notes to Consolidated Financial Statements........................................ C-6
</TABLE>
<PAGE> 7
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
PHYSICIANS RESOURCE GROUP, INC. -- FOUNDING AFFILIATED PRACTICES
Report of Independent Public Accountants.......................................... C-19
Combined Balance Sheets as of December 31, 1993 and 1994 (audited), and June 30,
1995 (unaudited)............................................................... C-20
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)..... C-21
Combined Statements of Owners' Equity for the three years ended December 31, 1994
(audited), and for the six months ended June 30, 1995 (unaudited).............. C-22
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)..... C-23
Notes to Combined Financial Statements............................................ C-24
PHYSICIANS RESOURCE GROUP, INC. -- BARNET DULANEY EYE CENTER:
Report of Independent Public Accountants.......................................... C-32
Balance Sheets as of December 31, 1994 and 1995................................... C-33
Statements of Earnings for the two years ended December 31, 1995.................. C-34
Statements of Owners' Equity for the two years ended December 31, 1995............ C-35
Statements of Cash Flows for the two years ended December 31, 1995................ C-36
Notes to Financial Statements..................................................... C-37
PHYSICIANS RESOURCE GROUP, INC. -- SELECTED ACQUISITION PRACTICES:
Report of Independent Public Accountants.......................................... C-42
Combined Balance Sheets as of December 31, 1994 (audited) and 1995 (unaudited).... C-43
Combined Statements of Earnings for the years ended December 31, 1994 (audited)
and 1995 (unaudited)........................................................... C-44
Combined Statements of Owners' Equity for the years ended December 31, 1994
(audited) and 1995 (unaudited)................................................. C-45
Combined Statements of Cash Flows for the years ended December 31, 1994 (audited)
and 1995 (unaudited)........................................................... C-46
Notes to Combined Financial Statements............................................ C-47
PHYSICIANS RESOURCE GROUP, INC. -- CERTAIN ACQUISITION PRACTICES:
Report of Independent Public Accountants.......................................... C-54
Combined Balance Sheet as of December 31, 1995.................................... C-55
Combined Statement of Operations and Owners' Equity for the year ended December
31, 1995....................................................................... C-56
Combined Statement of Cash Flows for the year ended December 31, 1995............. C-57
Notes to Combined Financial Statements............................................ C-58
PHYSICIANS RESOURCE GROUP, INC. -- THE EDWARD YAVITZ EYE CENTER, LTD.
Report of Independent Public Accountants.......................................... C-65
Balance Sheets as of December 31, 1995 (audited) and March 31, 1996 (unaudited)... C-66
Statements of Earnings for the year ended December 31, 1995 (audited) and for the
three months ended March 31, 1995 and 1996 (unaudited)......................... C-67
Statements of Owner's Equity for the year ended December 31, 1996 (audited) and
for the three months ended March 31, 1996 (unaudited).......................... C-68
Statements of Cash Flows for the year ended December 31, 1995 (audited) and for
the three months ended March 31, 1995 and 1996 (unaudited)..................... C-69
Notes to Financial Statements..................................................... C-70
EYECORP, INC. -- BAKER ACQUISITION PRACTICE
Report of Independent Public Accountants.......................................... C-73
Balance Sheets at December 31, 1994............................................... C-74
Statements of Excess of Revenues Over Expenses for the years ended December 31,
1994 (audited) and 1995 (unaudited)............................................ C-75
Statements of Equity for the years ended December 31, 1994 (audited) and 1995
(unaudited).................................................................... C-76
</TABLE>
<PAGE> 8
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Statements of Cash Flows for the years ended December 31, 1994 (audited) and 1995
(unaudited).................................................................... C-77
Notes to the Financial Statements................................................. C-78
EYECORP, INC. -- COLEMAN ACQUISITION PRACTICE:
Report of Independent Accountants................................................. C-81
Balance Sheets at December 31, 1994............................................... C-82
Statements of Excess of Revenues Over Expenses for the years ended December 31,
1994 (audited) and 1995 (unaudited)............................................ C-83
Combined Statements of Equity for the years ended December 31, 1994 (audited) and
1995 (unaudited)............................................................... C-84
Statements of Cash Flows for the years ended December 31, 1994 (audited) and 1995
(unaudited).................................................................... C-85
Notes to the Financial Statements................................................. C-86
EYECORP, INC. -- EGGLESTON ACQUISITION PRACTICE:
Report of Independent Accountants................................................. C-89
Combined Balance Sheets at December 31, 1994...................................... C-90
Combined Statements of Excess of Revenues Over Expenses for the years ended
December 31, 1994 (audited) and 1995 (unaudited)............................... C-91
Combined Statements of Equity for the years ended December 31, 1994 (audited) and
1995 (unaudited)............................................................... C-92
Combined Statements of Cash Flows for the years ended December 31, 1994 (audited)
and 1995 (unaudited)........................................................... C-93
Notes to the Combined Financial Statements........................................ C-94
EYECORP, INC. -- GORDON ACQUISITION PRACTICE:
Report of Independent Accountants................................................. C-97
Combined Balance Sheets at December 31, 1994...................................... C-98
Combined Statements of Excess of Revenues Over Expenses for the years ended
December 31, 1994 (audited) and 1995 (unaudited)............................... C-99
Combined Statements of Equity for the years ended December 31, 1994 (audited) and
1995 (unaudited)............................................................... C-100
Combined Statements of Cash Flows for the years ended December 31, 1994 (audited)
and 1995 (unaudited)........................................................... C-101
Notes to the Combined Financial Statements........................................ C-102
EYECORP, INC. -- POST ACQUISITION PRACTICE:
Report of Independent Accountants................................................. C-106
Combined Balance Sheets at December 31, 1993 and 1994............................. C-107
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)........................................................... C-108
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).................................................................... C-109
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).................................................................... C-110
Notes to the Combined Financial Statements........................................ C-111
EYECORP, INC. -- SOUTHERN EYE CENTER ACQUISITION PRACTICE:
Report of Independent Accountants................................................. C-115
Balance Sheets at December 31, 1993 and 1994...................................... C-116
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)............................................................... C-117
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)............ C-118
</TABLE>
<PAGE> 9
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
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)........ C-119
Notes to Financial Statements..................................................... C-120
EYECORP, INC. -- SELECTED ACQUISITION PRACTICES:
Report of Independent Public Accountants.......................................... C-124
Combined Balance Sheets at December 31, 1994...................................... C-125
Combined Statements of Excess of Revenues Over Expenses for the years ended
December 31, 1994 (audited) and 1995 (unaudited)............................... C-126
Combined Statements of Equity for the years ended December 31, 1994 (audited) and
1995 (unaudited)............................................................... C-127
Combined Statements of Cash Flows for the years ended December 31, 1994 (audited)
and 1995 (unaudited)........................................................... C-128
Notes to the Combined Financial Statements........................................ C-129
ANNEX D
PHYSICIANS RESOURCE GROUP, INC. -- Key Whitman/Milauskas
Report of Independent Public Accountants.......................................... D-1
Combined Balance Sheet as of December 31, 1995.................................... D-2
Combined Statement of Earnings for the year ended December 31, 1995............... D-3
Combined Statement of Owners' Equity for the year ended December 31, 1995......... D-4
Combined Statement of Cash Flows for the year ended December 31, 1995............. D-5
Notes to the Combined Financial Statements........................................ D-6
</TABLE>
<PAGE> 10
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Physicians Resource Group, Inc.:
We have audited the accompanying combined balance sheets of Central Florida
Eye Associates, P.A. and affiliates as of December 31, 1994 and 1995, and the
related combined statements of earnings, owners' equity and cash flows for the
years then ended. These financial statements are the responsibility of the
Companies' 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 financial statements referred to above present fairly,
in all material respects, the financial position of Central Florida Eye
Associates, P.A. and affiliates as of December 31, 1994 and 1995, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas
July 12, 1996
A-1
<PAGE> 11
CENTRAL FLORIDA EYE ASSOCIATES, P.A. AND AFFILIATES
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- MARCH 31,
1994 1995 1996
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................ $ 294,213 $ 74,190 $ 680,536
Accounts receivable, less allowance for contractual
adjustments and bad debts of approximately
$690,000 in 1994, $740,000 in 1995 and $759,000 in
1996.............................................. 563,622 719,131 489,160
Inventories.......................................... 18,111 19,546 19,546
Prepaid expenses and other current assets............ 118,338 47,384 59,997
---------- ---------- ----------
Total current assets......................... 994,284 860,251 1,249,239
PROPERTY AND EQUIPMENT, net............................ 3,510,413 5,189,488 5,172,786
OTHER NONCURRENT ASSETS, net........................... 26,037 23,929 13,262
---------- ---------- ----------
Total assets................................. $4,530,734 $6,073,668 $ 6,435,287
========== ========== ==========
LIABILITIES AND OWNERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt.................... $ 359,805 $ 413,544 $ 413,544
Accounts payable and accrued expenses................ 69,483 90,028 728,044
Accrued salaries and benefits........................ 362,555 67,458 40,881
---------- ---------- ----------
Total current liabilities.................... 791,843 571,030 1,182,469
LONG-TERM DEBT, net of current portion................. 3,145,623 4,339,002 4,345,737
---------- ---------- ----------
Total liabilities............................ 3,937,466 4,910,032 5,528,206
---------- ---------- ----------
OWNERS' EQUITY......................................... 593,268 1,163,636 907,081
---------- ---------- ----------
Total liabilities and owners' equity......... $4,530,734 $6,073,668 $ 6,435,287
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
A-2
<PAGE> 12
CENTRAL FLORIDA EYE ASSOCIATES, P.A.
AND AFFILIATES
COMBINED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
----------------------- -----------------------
1994 1995 1995 1996
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Medical service revenues, net................. $6,770,743 $5,852,640 $1,481,543 $1,177,358
Other revenues................................ 240,013 296,502 45,274 134,844
---------- ---------- ---------- ----------
Total revenues........................ 7,010,756 6,149,142 1,526,817 1,312,202
COSTS AND EXPENSES:
Compensation to physician owners.............. 4,005,704 3,706,872 379,055 1,490,387
Salaries, wages, and benefits................. 1,054,049 1,365,085 326,494 311,135
Pharmaceuticals and supplies.................. 820,363 249,105 57,436 57,849
General and administrative expenses........... 1,231,194 917,657 322,686 148,256
Depreciation and amortization................. 286,503 143,744 36,135 31,897
Interest expense.............................. 244,909 292,311 56,463 76,049
---------- ---------- ---------- ----------
Total costs and expenses.............. 7,642,722 6,674,774 1,178,269 2,115,573
---------- ---------- ---------- ----------
Gain on sale of ASC........................... 246,022 1,000,000 -- 636,816
---------- ---------- ---------- ----------
Net earnings (loss)................... $ (385,944) $ 474,368 $ 348,548 $ (166,555)
========== ========== ========== ==========
Supplemental DISCLOSURE:
Combined compensation to and net earnings of
physician owners........................... $3,619,760 $4,181,240 $ 727,603 $1,323,832
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
A-3
<PAGE> 13
CENTRAL FLORIDA EYE ASSOCIATES, P.A.
AND AFFILIATES
COMBINED STATEMENTS OF OWNERS' EQUITY
<TABLE>
<S> <C>
BALANCE, December 31, 1993....................................................... $1,161,212
Net loss....................................................................... (385,944)
Distributions to partners...................................................... (212,000)
Contributions from partners.................................................... 30,000
----------
BALANCE, December 31, 1994....................................................... 593,268
Net earnings................................................................... 474,368
Distributions to partners...................................................... (96,000)
Contributions from partners.................................................... 192,000
----------
BALANCE, December 31, 1995....................................................... 1,163,636
Net loss (unaudited)........................................................... (166,555)
Distributions to partners (unaudited).......................................... (90,000)
----------
BALANCE, March 31, 1996 (unaudited).............................................. $ 907,081
==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
A-4
<PAGE> 14
CENTRAL FLORIDA EYE ASSOCIATES, P.A.
AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
------------------------ ----------------------
1994 1995 1995 1996
--------- ----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)........................ $(385,944) $ 474,368 $ 348,548 $(166,555)
Adjustments to reconcile net earnings
(loss) to net cash provided by operating
activities --
Depreciation and amortization........... 286,503 143,744 36,135 31,897
Gain on sale of assets.................. (246,022) (1,000,000) -- (636,816)
Changes in assets and liabilities --
(Increase) decrease in --
Accounts receivable, net........... 156,681 (155,509) (28,417) 229,971
Inventories........................ -- (1,435) (2,997) --
Prepaid expenses and other current
assets........................... (93,552) 70,954 66,167 (12,613)
Increase (decrease) in --
Accounts payable and accrued
expenses......................... 19,737 20,545 -- 638,016
Accrued salaries and benefits...... 283,737 (295,097) (290,577) (26,577)
--------- ----------- --------- ---------
Net cash provided by (used in)
operating activities............. 21,140 (742,430) 128,859 57,323
--------- ----------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Refunds from land deposit.................. -- -- -- 10,090
Purchases of property and equipment, net... (497,499) (1,820,711) (181,393) (14,618)
Proceeds from sale of ASC.................. 700,000 1,000,000 -- 636,816
--------- ----------- --------- ---------
Net cash provided by (used in)
investing activities............. 202,501 (820,711) (181,393) 632,288
--------- ----------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt............... 360,000 1,970,000 -- 120,000
Repayment of long-term debt................ (539,950) (722,882) (105,763) (113,265)
Contributions from partners................ 30,000 192,000 192,000 --
Distributions to partners.................. (18,000) (96,000) -- (90,000)
--------- ----------- --------- ---------
Net cash provided by (used in)
financing activities............. (167,950) 1,343,118 86,237 (83,265)
--------- ----------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................ 55,691 (220,023) 33,703 606,346
CASH AND CASH EQUIVALENTS, beginning of
period..................................... 238,522 294,213 294,213 74,190
--------- ----------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period..... $ 294,213 $ 74,190 $ 327,916 $ 680,536
========= =========== ========= =========
SUPPLEMENTAL DISCLOSURE:
Cash interest paid......................... $ 70,992 $ 114,175 $ 10,736 $ 7,033
Noncash distributions to partners.......... $ 194,000 $ -- $ -- $ --
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
A-5
<PAGE> 15
CENTRAL FLORIDA EYE ASSOCIATES, P.A. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION:
The accompanying combined financial statements include Central Florida Eye
Associates, P.A. ("CFEA"), Central Florida Eye Associates Partners ("CFEAP") and
G.C.R. Investors. CFEA is a Florida professional services corporation that is
engaged in the practice of medicine, specializing in ophthalmology in Florida.
CFEAP and G.C.R. Investors are both Florida general partnerships that own land
and facilities that are leased to CFEA and outside parties. CFEA, CFEAP, and
G.C.R. Investors (collectively, the "Companies") are affiliated through common
ownership.
The accompanying combined financial statements have been prepared on the
accrual basis of accounting and include the accounts of the Companies after
eliminating all intercompany transactions. The supplemental caption on the
statements of earnings, "Combined compensation to and net earnings of physician
owners," reflects the total earnings available to the physician owners for each
period.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Accounts Receivable
Accounts receivable primarily consist of receivables from patients,
insurers, government programs and other third-party payors for medical services
provided by physicians. Such amounts are reduced by an allowance for contractual
adjustments and other uncollectible amounts. Contractual adjustments result from
the differences between the rates charged by the physicians for services
performed and the amounts allowed by the Medicare and Medicaid programs and
other public and private insurers.
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 is stated at cost. Depreciation of property and
equipment is calculated using accelerated methods over the estimated useful
lives of the assets ranging from 5 to 30 years. Routine maintenance and repairs
are charged to expense as incurred, while costs of betterments and renewals are
capitalized.
Equity
Owners' equity includes partnership capital of CFEAP and G.C.R. as well as
the common stock, additional paid-in capital, and retained earnings of CFEA.
Common shares authorized, issued, and outstanding of CFEA as of December 31,
1994 and 1995, were 10,000, 4,000, and 4,000, respectively.
Income Taxes
CFEAP and G.C.R. Investors are partnerships. CFEA 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 taxes.
Compensation to the owners has traditionally reduced taxable income to nominal
levels. 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. Accordingly, the accompanying financial statements do not
include any provision for income taxes.
A-6
<PAGE> 16
CENTRAL FLORIDA EYE ASSOCIATES, P.A. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Revenues
Medical service revenues are accounted for in the period in which the
services are provided. The revenues are reported at the estimated realizable
amounts from patients, third-party payors and others. Provisions for estimated
third-party payor adjustments are estimated and recorded in the period in which
the related services are provided. Any adjustment to the amounts is recorded in
the period in which the revised amount is determined. A significant portion of
CFEA's medical service revenues is 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, CFEA participates in agreements with managed care organizations to
provide service at negotiated rates or for capitated payments.
Concentration of Credit Risk
CFEA extends credit to patients covered by programs such as Medicare and
Medicaid and private insurers. CFEA manages credit risk with the various public
and private insurance providers, as appropriate. Allowances for bad debts have
been made for potential losses, where appropriate.
Use of Estimates
The preparation of combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the combined
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Unaudited Financial Information
The unaudited combined financial statements for the periods ended March 31,
1995 and March 31, 1996 have been prepared pursuant to the rules and regulations
of the Securities and Exchange Commission. The accompanying unaudited combined
financial statements reflect, in the opinion of management, all adjustments
necessary for a fair presentation of the unaudited combined financial
statements. All such adjustments are of a normal and recurring nature.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1995
------------ ------------
<S> <C> <C>
Equipment......................................................... $ 140,447 $ 168,134
Leasehold improvements............................................ 101,414 101,414
Furniture and fixtures............................................ 926,401 837,592
Buildings and land................................................ 3,828,835 5,616,869
------------ ------------
Total property and equipment............................ 4,997,097 6,724,009
Less- Accumulated depreciation and amortization................... (1,486,684) (1,534,521)
------------ ------------
Property and equipment, net..................................... $ 3,510,413 $ 5,189,488
========== ==========
</TABLE>
On September 15, 1994, CFEA sold a 70% interest in the net assets of its
ambulatory surgical center ("ASC") for $700,000 cash proceeds and future
consideration contingent upon the operating performance of the ASC through 1997.
The sale resulted in a gain of $246,022 in 1994. In 1995 and 1996, $1,000,000
and $636,816, respectively, was received and recorded as additional gain. The
remaining 30% interest of the net assets of the ASC was distributed to the
owners in 1994.
A-7
<PAGE> 17
CENTRAL FLORIDA EYE ASSOCIATES, P.A. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1994 1995
---------- ----------
<S> <C> <C>
Note payable to bank, bearing variable interest, from 6% to 9.5%,
maturing on July 1, 1998, secured by real property................ $ 41,680 $ 39,940
Note payable to bank, bearing interest at 8.25% at December 31, 1995
and prime plus 1% at December 31, 1994, maturing on July 1, 1998,
secured
by real property.................................................. 1,339,665 1,284,345
Note payable to bank, bearing interest at 6% at December 31, 1995
and December 31, 1994, maturing on August 3, 1998, secured by real
property.......................................................... 1,049,237 998,462
Note payable to bank, bearing variable interest, from 7% to 10%,
maturing on February 28, 2011, secured by real and personal
property.......................................................... 360,000 1,970,000
Note payable to bank, bearing interest at 6.25% at December 31, 1995
and December 31, 1994, maturing on August 3, 1998, secured by
medical equipment................................................. 599,108 459,799
Notes payable to others............................................. 115,738 --
---------- ----------
Total long-term debt...................................... 3,505,428 4,752,546
Less -- Current portion............................................. (359,805) (413,544)
---------- ----------
Long-term debt, excluding current portion........................... $3,145,623 $4,339,002
========== ==========
</TABLE>
CFEA has a revolving line of credit with a bank of $100,000. No amounts
were outstanding as of December 31, 1995 and 1994.
As of December 31, 1995, the aggregate amounts of annual principal
maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1996..................................................... $ 413,544
1997..................................................... 340,249
1998..................................................... 2,338,458
1999..................................................... 90,195
2000..................................................... 96,611
Thereafter............................................... 1,473,489
----------
Total.................................................... $4,752,546
=========
</TABLE>
CFEA leases office space as well as certain equipment under noncancelable
operating lease agreements which expire at various dates. At December 31, 1995,
minimum annual rental commitments under noncancelable operating leases with
terms in excess of one year are as follows:
<TABLE>
<S> <C>
1996....................................................... $36,793
1997....................................................... 36,793
1998....................................................... 21,463
-------
Total future minimum lease payments........................ $95,049
=======
</TABLE>
Rent expense related to operating leases amounted to $122,661 and $162,598
for the years ended December 31, 1994 and 1995, respectively.
A-8
<PAGE> 18
CENTRAL FLORIDA EYE ASSOCIATES, P.A. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. EMPLOYEE BENEFIT PLAN:
CFEA has a profit-sharing plan which provides for CFEA to make
discretionary contributions. CFEA pays all general and administrative expenses
of the plan. Contributions of approximately $185,000 and $178,000 were made to
this plan in 1994 and 1995, respectively.
CFEA does not provide postretirement benefits to employees.
6. COMMITMENTS AND CONTINGENCIES:
CFEA is insured with respect to medical malpractice risks on a claims-made
basis. In the normal course of business, CFEA has been named in various
lawsuits. In the opinion of CFEA'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 CFEA.
7. RELATED-PARTY TRANSACTIONS:
Net amounts due from owners of CFEA are reflected on the accompanying
combined balance sheets and reflect the net transactions between CFEA and its
owners (and their related entities). As of December 31, 1994, amounts due from
owners totaled $105,174 and are included in other current assets.
In various instances, relatives of the owners of CFEA are employees of the
clinic.
8. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107 requires all entities
to disclose the fair value of certain financial instruments in their financial
statements. Accordingly, the carrying amounts of accounts receivable, accounts
payable and accrued expenses approximate fair value due to the short maturity of
these instruments.
The carrying amount of the Company's long-term debt approximates fair value
due to the Company's ability to obtain such borrowings on comparable terms.
9. SUBSEQUENT EVENTS:
On June 28, 1996, the Companies completed a stock-for-stock merger
transaction with Physicians Resource Group, Inc. (PRG), in exchange for 281,832
shares of PRG common stock.
The combined financial statements of the Companies have been prepared as
supplemental information about the entities which PRG acquired. The Companies
previously operated as separate independent entities. The historical financial
position, results of operations and cash flows do not reflect any adjustments
relating to the acquisition.
The Company obtained an additional $120,000 of debt from a bank in February
1996. The profit-sharing plan was terminated June 28, 1996.
A-9
<PAGE> 19
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 South Texas
Retina Consultants, P.A. and affiliate as of December 31, 1995, and the related
combined statements of earnings, owner's equity, and cash flows for the year
then ended. These combined financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
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 financial statements referred to above present fairly,
in all material respects, the financial position of South Texas Retina
Consultants, P.A. and affiliate as of December 31, 1995, and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
July 12, 1996
A-10
<PAGE> 20
SOUTH TEXAS RETINA CONSULTANTS, P.A.
AND AFFILIATE
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
<S> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................................... $143,709 $212,495
Accounts receivable, less allowance for contractual adjustments
and bad debts of approximately $608,000 and $525,000, at
December 31, 1995 and March 31, 1996, respectively............. 382,687 369,211
Inventory......................................................... 10,300 12,402
Prepaid expenses and other current assets......................... 30,695 29,892
-------- --------
Total current assets...................................... 567,391 624,000
FURNITURE AND EQUIPMENT, net........................................ 111,426 109,040
-------- --------
Total assets.............................................. $678,817 $733,040
======== ========
LIABILITIES AND OWNER'S EQUITY
LIABILITIES:
Accounts payable and accrued expenses............................. $ 20,609 $ 26,192
Accrued salaries and benefits..................................... 19,842 15,176
-------- --------
Total liabilities......................................... 40,451 41,368
-------- --------
OWNER'S EQUITY...................................................... 638,366 691,672
-------- --------
Total liabilities and owner's equity...................... $678,817 $733,040
======== ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
A-11
<PAGE> 21
SOUTH TEXAS RETINA CONSULTANTS, P.A.
AND AFFILIATE
COMBINED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
FOR THE ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, -----------------------
1995 1995 1996
------------ -------- --------
<S> <C> <C> <C>
(UNAUDITED)
MEDICAL SERVICE REVENUES, net........................ $2,733,933 $575,713 $699,891
COSTS AND EXPENSES:
Compensation to physician owner.................... 1,240,462 60,000 351,615
Salaries, wages, and benefits...................... 479,402 124,808 121,749
Pharmaceuticals and supplies....................... 62,877 13,927 10,557
General and administrative expenses................ 597,480 97,103 129,163
Depreciation and amortization...................... 24,752 6,057 5,994
Other (income) expense, net........................ (30,767) (1,336) (2,042)
---------- -------- --------
Total costs and expenses................... 2,374,206 300,559 617,036
---------- -------- --------
Net earnings............................... $ 359,727 $275,154 $ 82,855
========== ======== ========
SUPPLEMENTAL DISCLOSURE:
Combined compensation to and net earnings of
physician owner................................. $1,600,189 $335,154 $434,470
========== ======== ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
A-12
<PAGE> 22
SOUTH TEXAS RETINA CONSULTANTS, P.A.
AND AFFILIATE
COMBINED STATEMENTS OF OWNER'S EQUITY
<TABLE>
<S> <C>
BALANCE, December 31, 1994....................................................... $ 456,639
Net earnings................................................................... 359,727
Distributions to owner......................................................... (178,000)
---------
BALANCE, December 31, 1995....................................................... 638,366
Net earnings (unaudited)....................................................... 82,855
Distributions to owner (unaudited)............................................. (29,549)
---------
BALANCE, March 31, 1996 (unaudited).............................................. $ 691,672
=========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
A-13
<PAGE> 23
SOUTH TEXAS RETINA CONSULTANTS, P.A.
AND AFFILIATE
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE FOR THE THREE MONTHS
YEAR ENDED ENDED MARCH 31,
DECEMBER 31, --------------------
1995 1995 1996
------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings............................................. $ 359,727 $275,154 $ 82,855
Adjustments to reconcile net earnings to net cash
provided by operating activities --
Depreciation and amortization......................... 24,752 6,057 5,994
Gain on sale of assets................................ (3,750) -- --
Changes in assets and liabilities
(Increase) decrease in --
Accounts receivable, net......................... (137,970) 10,954 13,476
Inventory........................................ -- (700) (2,102)
Prepaid expenses and other current assets........ (803) (11,587) 803
Increase (decrease) in --
Accounts payable and accrued expenses............ 14,568 2,636 5,583
Accrued salaries and benefits.................... 5,185 (4,404) (4,666)
--------- -------- --------
Net cash provided by operating activities........ 261,709 278,110 101,943
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of furniture and equipment..................... (54,248) (282) (3,608)
--------- -------- --------
Net cash used in investing activities............ (54,248) (282) (3,608)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Owner distribution, net.................................. (178,000) (20,124) (29,549)
--------- -------- --------
Net cash used in financing activities............ (178,000) (20,124) (29,549)
--------- -------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS.................. 29,461 257,704 68,786
CASH AND CASH EQUIVALENTS, beginning of period............. 114,248 114,248 143,709
--------- -------- --------
CASH AND CASH EQUIVALENTS, end of period................... $ 143,709 $371,952 $212,495
========= ======== ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
A-14
<PAGE> 24
SOUTH TEXAS RETINA CONSULTANTS, P.A.
AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION:
The accompanying combined financial statements include South Texas Retina
Consultants, P.A. ("STRC") and Texas Neurosensory Research Lab ("TNRL"). STRC is
a Texas professional services corporation that is engaged in the practice of
medicine, specializing in ophthalmology in South Texas. TNRL is a sole
proprietorship that holds medical equipment which is used by the physician owner
to deliver medical services. STRC and TNRL (collectively, the "Company") are
affiliated through common ownership.
The accompanying combined financial statements have been prepared on the
accrual basis of accounting. The supplemental caption on the statements of
earnings, "Combined compensation to and net earnings of physician owner,"
reflects the total earnings available to the physician owner for each period.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Accounts Receivable
Accounts receivable primarily consist of receivables from patients,
insurers, government programs and other third-party payors for medical services
provided by physicians. Such amounts are reduced by an allowance for contractual
adjustments and other uncollectible amounts. Contractual adjustments result from
the differences between the rates charged by the physicians for services
performed and the amounts allowed by the Medicare and Medicaid programs and
other public and private insurers.
Inventory
Inventory consists primarily of surgical and photographic materials which
are valued at the lower of cost or market with cost determined using the
first-in, first-out (FIFO) method.
Furniture and Equipment
Furniture and equipment is stated at cost. 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.
Income Taxes
The STRC is a professional association for federal income and state
franchise tax purposes. Historically, STRC has not incurred significant tax
liabilities as compensation to the owner typically reduces taxable income to a
nominal level. As this would be expected to continue in the absence of the STRC
acquisition, provisions for income taxes are not reflected in these combined
financial statements.
Revenues
Medical service revenues are accounted for in the period in which the
services are provided. The revenues are reported at the estimated realizable
amounts from patients, third-party payors and others. Provisions for estimated
third-party payor adjustments are estimated and recorded in the period in which
the related services are provided. Any adjustment to the amounts is recorded in
the period in which the revised amount is determined. A significant portion of
STRC medical service revenues is 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, STRC participates in agreements with managed care organizations to
provide services at negotiated rates.
A-15
<PAGE> 25
SOUTH TEXAS RETINA CONSULTANTS, P.A.
AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Concentration of Credit Risk
STRC extends credit to patients covered by programs such as Medicare and
Medicaid and private insurers. STRC manages credit risk with the various public
and private insurance providers, as appropriate. Allowances for bad debts have
been made for potential losses, where appropriate.
Use of Estimates
The preparation of combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the combined
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Unaudited Financial Information
The unaudited interim financial statements as of March 31, 1996, and for
the three months ended March 31, 1996 and 1995, have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission. The
accompanying unaudited combined financial statements reflect, in the opinion of
management, all adjustments necessary for a fair presentation of the unaudited
combined financial statements. All such adjustments are of a normal and
recurring nature.
3. FURNITURE AND EQUIPMENT:
Furniture and equipment at December 31, 1995, consists of the following:
<TABLE>
<S> <C>
Equipment........................................................ $ 464,145
Autos............................................................ 36,716
Leasehold improvements........................................... 55,803
Furniture and fixtures........................................... 107,035
---------
663,699
Less -- Accumulated depreciation and amortization................ (552,273)
---------
Net furniture and equipment............................ $ 111,426
=========
</TABLE>
4. LEASE:
STRC leases office space from the owner physician under a noncancelable
operating lease agreement which expires at June 30, 2001. At December 31, 1995,
minimum annual rental commitments under the noncancelable operating lease are as
follows:
<TABLE>
<S> <C>
1996...................................................................... $ 81,043
1997...................................................................... 81,043
1998...................................................................... 81,043
1999...................................................................... 81,043
2000...................................................................... 81,043
Thereafter................................................................ 40,522
--------
Total future minimum lease payments............................. $445,737
========
</TABLE>
A-16
<PAGE> 26
SOUTH TEXAS RETINA CONSULTANTS, P.A.
AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. EMPLOYEE BENEFIT PLAN:
STRC has a 401(k) profit-sharing plan which provides for STRC to make
discretionary contributions. STRC pays all general and administrative expenses
of the plan. No contributions were made to the plan in 1995. The physician owner
and his spouse are the trustees of the plan.
STRC does not provide postretirement or postemployment benefits to
employees.
6. SUBSEQUENT EVENTS:
Effective January 1, 1996, TNRL transferred its medical equipment to STRC.
On July 3, 1996, the common stock of STRC was acquired by Physicians
Resource Group, Inc. (PRG), in exchange for 80,460 shares of restricted and
80,459 shares of unrestricted PRG common stock.
The combined financial statements of the Company have been prepared as
supplemental information about the entities which PRG acquired. The Company
previously operated as a separate independent entity. The historical financial
position, results of operations and cash flows do not reflect any adjustments
relating to the acquisition.
A-17
<PAGE> 27
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements include the
unaudited pro forma combined balance sheet as of March 31, 1996 as if the merger
with Central Florida Eye Associates P.A., and affiliates (Central Florida
Merger) and certain other transactions described below had occurred on that
date, and include the unaudited pro forma combined statement of operations for
the years ended December 31, 1993, 1994, and 1995 and for the three months ended
March 31, 1995 and 1996 as if the Central Florida Merger and certain other
transactions as described below had occurred as of January 1, 1993. In the
Central Florida Merger, shares of common stock of Physicians Resource Group,
Inc. (PRG) were exchanged for shares of stock of Central Florida. The Central
Florida Merger will be accounted for as a pooling of interests, and accordingly
the historical operations and balance sheets of PRG and Central Florida have
been combined in these financial statements.
The unaudited pro forma statements of operations for the year ended
December 31, 1995 and the three months ended March 31, 1996 also give effect to
(i) the consummated PRG initial public offering (IPO) and simultaneous exchange
of cash, shares of its common stock and note payable for certain assets of and
liabilities (the Reorganization) associated with ten eye care practices; (ii)
the issuance of 3,553,000 shares of PRG common stock in the IPO and the
application of the net proceeds therefrom; (iii) the acquisition of certain
assets from and consummation of service agreements with 22 eye care practices by
PRG during the first and second quarter of 1996 (the 1996 Acquisitions); (iv)
acquisition of certain assets from and consummation of service agreements with
eye care practices during 1995 (the 1995 EyeCorp Acquisitions); and (v) the
issuance of 4,250,000 shares of PRG in a public offering during May, 1996 and
the application of the net proceeds therefrom. The pro forma balance sheet as of
March 31, 1996 also gives effect to (i) consummation of the 1996 PRG
Acquisitions; and (ii) the issuance of 4,250,000 shares of PRG in a public
offering during May, 1996 and the application of the net proceeds therefrom.
The unaudited merger/significant transactions pro forma combined financial
statements have been prepared by PRG based on the financial statements of PRG
and Central Florida included elsewhere in this Form 8-K/A, the unaudited
financial statements of practices acquired by PRG in the 1996 Acquisitions and
the practices acquired in the 1995 EyeCorp Acquisitions and other assumptions
deemed appropriate by PRG. These unaudited pro forma combined financial
statements may not be indicative of the actual results had the above events and
transactions occurred on the dates indicated or of actual results which may be
realized in the future. Neither expected benefits and cost reductions
anticipated by PRG nor future corporate costs and expenses related to the
Central Florida Merger, the 1996 Acquisitions and the 1995 EyeCorp Acquisitions
have been reflected in the accompanying unaudited pro forma combined financial
statements.
B-1
<PAGE> 28
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA COMBINED BALANCE SHEET
AS OF MARCH 31, 1996
(000'S)
<TABLE>
<CAPTION>
PURCHASE
ADJUSTMENTS
POOLING ------------
----------------------- 1996
CENTRAL ACQUISITIONS TOTAL
PRG FLORIDA ADJUSTMENTS SUBTOTAL AND OTHER PRO FORMA
-------- ------- ----------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................. $ 9,872 681 -- 10,553 $ (2,149)(A-1) $ 85,720
77,316(A-2)
Accounts receivable, net................... 13,365 489 -- 13,854 3,085(A-1) 16,939
Receivables due from affiliated
practices................................ 11,801 -- -- 11,801 -- 11,801
Inventories................................ 2,726 20 -- 2,746 327(A-1) 3,073
Prepaid expenses and other current
assets................................... 3,037 60 -- 3,097 344(A-1) 3,441
-------- ------ --------- -------- -------- --------
Total current assets................. 40,801 1,250 -- 42,051 78,923 120,974
PROPERTY AND EQUIPMENT, net:................. 33,462 5,173 -- 38,635 2,518(A-1) 41,153
INTANGIBLE ASSETS, net:
Work force................................. 5,881 -- -- 5,881 955(A-1) 6,836
Service Agreements......................... 63,117 -- -- 63,117 32,421(A-1) 95,538
Goodwill................................... 11,969 -- -- 11,969 3,213(A-1) 15,182
-------- ------ --------- -------- -------- --------
80,967 -- -- 80,967 36,589 117,556
OTHER NONCURRENT ASSETS, net................. 4,234 13 -- 4,247 1,708(A-1) 5,955
-------- ------ --------- -------- -------- --------
Total assets......................... $159,464 $6,436 -- $165,900 $119,738 $285,638
======== ====== ========= ======== ======== ========
LIABILITIES AND OWNERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current portion of
long-term debt........................... $ 4,982 $ 414 -- $ 5,396 $ 852(A-1) $ 6,248
Accounts payable and accrued expenses...... 16,553 728 -- 17,281 1,215(A-1) 18,496
Accrued salaries and benefits.............. 4,082 41 -- 4,123 315(A-1) 4,438
-------- ------ --------- -------- -------- --------
Total current liabilities............ 25,617 1,183 -- 26,800 2,382 29,182
LONG-TERM DEBT, net of current portion....... 32,699 4,346 -- 37,045 3,102(A-1) 2,033
(38,114)(A-2)
DEFERRED TAXES............................... 19,916 -- -- 19,916 13,898(A-1) 33,814
OTHER LONG-TERM LIABILITIES.................. 3,312 -- -- 3,312 12(A-1) 3,324
-------- ------ --------- -------- -------- --------
Total liabilities.................... 81,544 5,529 -- 87,073 (18,720) 68,353
OWNER'S EQUITY:
11(A-1)
Common stock............................... 171 4 (1)(B-1) 174 43(A-2) 228
Additional paid-in capital................. 82,794 49 1(B-1) 82,844 23,017(A-1) 221,248
115,387(A-2)
Deficit.................................... (5,045) 854 (4,191) -- (4,191)
-------- ------ --------- -------- -------- --------
Total owners' equity................. 77,920 907 -- 78,827 138,458 217,285
-------- ------ --------- -------- -------- --------
Total liabilities and owners'
equity............................. $159,464 $6,436 -- $165,900 $119,738 $285,638
======== ====== ========= ======== ======== ========
</TABLE>
See accompanying notes to unaudited merger/significant transactions pro forma
combined balance sheet.
B-2
<PAGE> 29
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1993
(000'S, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CENTRAL
FLORIDA POOLING TOTAL PRO
PRG MERGER ADJUSTMENTS FORMA
------- ------- ----------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Management service revenues................. $ -- $ 3,878 $ -- $ 3,878
Surgery center revenue...................... 7,133 326 -- 7,459
Other revenues.............................. 419 -- -- 419
------- ------ ------- -------
Total revenues...................... 7,552 4,204 -- 11,756
COSTS AND EXPENSES:
Salaries, wages and benefits................ 698 2,434 (1,486)(B-2) 1,646
Pharmaceuticals and supplies................ 2,246 319 -- 2,565
General and administrative expenses......... 1,265 1,173 861(B-2) 3,299
Depreciation and amortization............... 382 284 -- 666
Interest expense............................ 250 155 -- 405
------- ------ ------- -------
Total costs and expenses............ 4,841 4,365 (625) 8,581
------- ------ ------- -------
INCOME BEFORE INCOME TAXES.................... 2,711 (161) 625 3,175
PROVISION FOR INCOME TAXES.................... (1,030) -- (180)(I) (1,210)
------- ------ ------- -------
NET INCOME.................................... $ 1,681 $ (161) $ 445 $ 1,965
======= ====== ======= =======
NET INCOME PER SHARE.......................... $ 0.56 $ 0.60
======= =======
NUMBER OF SHARES USED IN NET INCOME PER SHARE
CALCULATION................................. 2,982 3,264(V)
======= =======
</TABLE>
See accompanying notes to unaudited merger/significant transactions pro forma
combined statement of operations.
B-3
<PAGE> 30
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994
(000'S, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CENTRAL
FLORIDA POOLING TOTAL PRO
PRG MERGER ADJUSTMENTS FORMA
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Management service revenues............................... $ 12,747 $ 6,771 $ -- $ 19,518
Surgery center revenue.................................... 6,695 -- -- 6,695
Other revenues............................................ 142 486 -- 628
--------- --------- --------- ---------
Total revenues.................................... 19,584 7,257 -- 26,841
COSTS AND EXPENSES:
Salaries, wages and benefits.............................. 4,972 5,060 (4,006)(B-2) 6,026
Pharmaceuticals and supplies.............................. 3,425 820 -- 4,245
General and administrative
expenses............................................... 5,650 1,231 2,353(B-2) 9,234
Depreciation and amortization............................. 1,383 287 -- 1,670
Interest expense.......................................... 1,076 245 -- 1,321
--------- --------- --------- ---------
Total costs and expenses.......................... 16,506 7,643 (1,653) 22,496
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES.................................. 3,078 (386) 1,653 4,345
PROVISION FOR INCOME TAXES.................................. (1,224) -- (494)(I) (1,718)
--------- --------- --------- ---------
NET INCOME.................................................. $ 1,854 $ (386) $ 1,159 $ 2,627
========= ========= ========= =========
NET INCOME PER SHARE........................................ $ 0.44 $ 0.59
========= =========
NUMBER OF SHARES USED IN NET INCOME PER SHARE CALCULATION... 4,196 4,478(V)
========= =========
</TABLE>
See accompanying notes to unaudited merger/significant transactions pro forma
combined statement of operations.
B-4
<PAGE> 31
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(000'S, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PURCHASE ADJUSTMENTS
---------------------------------------------------------------
1995
CENTRAL 1996 EYECORP
FLORIDA POOLING IPO ACQUISITIONS ACQUISITIONS TOTAL
PRG MERGER ADJUSTMENTS SUBTOTAL REORGANIZATION AND OTHER AND OTHER PRO FORMA
------- ------ ----------- ------- -------------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Management
service
revenues.... $39,129 $5,853 $ -- $44,982 $ 22,085(C) $ 60,868(J) $ 40,424(O) $168,359
Surgery center
revenue..... 9,317 -- -- 9,317 2,821(C) 7,303(J) 4,749(O) 24,190
Other
revenues.... 79 1,297 -- 1,376 5(D) 353(K) -- 1,734
-------
-
------- ------ ----- ------- ------- ------- --------
Total
revenues... 48,525 7,150 -- 55,675 24,911 68,524 45,173 194,283
COSTS AND
EXPENSES:
Salaries,
wages and
benefits.... 19,768 5,072 (3,707)(B-2) 21,133 10,199(D) 28,691(K) 15,455(P) 75,478
Pharmaceuticals
and
supplies.... 6,687 249 -- 6,936 3,494(D) 6,723(K) 7,659(P) 24,812
General and
administrative
expenses.... 16,022 917 2,718(B-2) 19,657 6,115(D) 19,645(K) 13,653(P) 57,546
(334)(G) (54)(M) (676)(Q)
(460)(N)
Depreciation
and
amortization... 2,609 144 -- 2,753 1,217(D) 3,114(K) 1,264(P) 11,932
(194)(F) (20)(H) 1,448(R)
159(G) 2,168(L)
23(M)
Executive
resignation
expenses.... 1,117 -- -- 1,117 -- -- -- 1,117
Interest
expense..... 1,157 292 -- 1,449 233(D) 591(K) 379(P) (2,728 )
(82)(E) (22)(H) (207)(S)
-- (24)(F) (5,045)(T)
------- ------ ----- ------- ------- ------- ------- --------
Total
costs
and
expenses... 47,360 6,674 (989) 53,045 20,783 55,354 38,975 168,157
------- ------ ----- ------- ------- ------- ------- --------
INCOME BEFORE
INCOME
TAXES......... 1,165 476 989 2,630 4,128 13,170 6,198 26,126
PROVISION FOR
INCOME
TAXES......... (501) -- (571)(I) (1,072) (1,610)(I) (3,730)(I) (2,479)(I) (8,891)(I)
------- ------ ----- ------- ------- ------- ------- --------
NET INCOME...... $ 664 $ 476 $ 418 $ 1,558 $ 2,518 $ 9,440 $ 3,719 $ 17,235 (U)
======= ====== ===== ======= ======= ======= ======= ========
NET INCOME PER
SHARE......... $ 0.07 $ 0.17 $ 0.74
======= ======+ ========
NUMBER OF SHARES
USED IN NET
INCOME PER
SHARE
CALCULATION... 9,086 9,368 23,168 (V)
======= ======= ========
</TABLE>
See accompanying notes to unaudited merger/significant transactions pro forma
combined statement of operations.
B-5
<PAGE> 32
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1995
(000'S, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CENTRAL
FLORIDA POOLING TOTAL PRO
PRG MERGER ADJUSTMENTS FORMA
------ ------ ----------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Management service revenues....................................... $5,281 $1,482 $ -- $ 6,763
Surgery center revenue............................................ 1,855 -- -- 1,855
Other revenues.................................................... -- 45 -- 45
------- ------- ----- -------
Total revenues............................................ 7,136 1,527 -- 8,663
COSTS AND EXPENSES:
Salaries, wages and benefits...................................... 1,403 706 (379)(B-2) 1,730
Pharmaceuticals and supplies...................................... 877 57 -- 934
General and administrative
expenses....................................................... 3,791 323 473(B-2) 4,587
Depreciation and amortization..................................... 332 36 -- 368
Interest expense.................................................. 374 56 -- 430
------- ------- ----- -------
Total costs and expenses.................................. 6,777 1,178 94 8,049
------- ------- ----- -------
INCOME BEFORE INCOME TAXES.......................................... 359 349 (94) 614
PROVISION FOR INCOME TAXES.......................................... (132) -- (99)(I) (231)
------- ------- ----- -------
NET INCOME.......................................................... $ 227 $ 349 $(193) $ 383
====== ====== ===== =======
NET INCOME PER SHARE................................................ $ 0.05 $ 0.08
====== =======
NUMBER OF SHARES USED IN NET INCOME PER SHARE CALCULATION........... 4,634 4,916(V)
====== =======
</TABLE>
See accompanying notes to unaudited merger/significant transactions pro forma
combined statement of operations.
B-6
<PAGE> 33
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(000'S, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PURCHASE
ADJUSTMENTS
------------
CENTRAL 1996
FLORIDA POOLING ACQUISITIONS TOTAL
PRG MERGER ADJUSTMENTS SUBTOTAL AND OTHER PRO FORMA
------- ------ ----------- ------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Management service revenues...... $30,601 $1,177 $ -- $31,778 $ 9,834(J) $41,612
Surgery center revenue........... 4,725 -- -- 4,725 1,368(J) 6,093
Other revenues................... 894 772 -- 1,666 58(K) 1,724
------- ------ ------- ------- -------- -------
Total revenues........... 36,220 1,949 -- 38,169 11,260 49,429
COSTS AND EXPENSES:
Salaries, wages and benefits..... 14,744 1,802 (1,490)(B-2) 15,056 3,719(K) 18,775
Pharmaceuticals and supplies..... 4,899 58 -- 4,957 1,663(K) 6,620
General and administrative
expenses...................... 10,806 148 860(B-2) 11,814 3,794(K) 15,608
Depreciation and amortization.... 1,804 32 -- 1,836 206(K) 2,457
415(L)
EyeCorp merger transaction....... 9,000 -- -- 9,000 -- 9,000
Interest expense................. 391 76 -- 467 161(K) (849)
(1,477)(T)
-- --
------- ------ ------- ------- -------- -------
Total costs and
expenses............... 41,644 2,116 (630) 43,130 8,481 51,611
------- ------ ------- ------- -------- -------
INCOME BEFORE INCOME
TAXES............................ (5,424) (167) 630 (4,961) 2,779 (2,182)
PROVISION FOR INCOME TAXES......... (1,413) -- (181)(I) (1,594) (805)(I) (2,401)
------- ------ ------- ------- -------- -------
NET INCOME (LOSS).................. $(6,837) $ (167) $ 449 $(6,555) $ 1,974 $(4,583)(U)
======= ====== ======= ======= ======== =======
NET INCOME (LOSS) PER SHARE........ $ (0.42) $ (.20)
=======
NUMBER OF SHARES USED IN NET INCOME
PER SHARE CALCULATION............ 16,420 22,636(V)
======= =======
</TABLE>
See accompanying notes to unaudited merger/significant transactions pro forma
combined statement of operations.
B-7
<PAGE> 34
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA COMBINED FINANCIAL STATEMENTS
(000'S, EXCEPT SHARE AMOUNTS)
PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS
The accompanying combined pro forma balance sheet as of March 31, 1996
gives effect to the Central Florida Merger, certain acquisitions and other
significant transactions as if such transactions or events had occurred on March
31, 1996. The estimated fair market values reflected below are based on
preliminary estimates and assumptions and are subject to revision. In
management's opinion, the preliminary allocation is not expected to be
materially different than the final allocation.
(A-1) Reflects the 1996 Acquisitions. Pursuant to the 1996 Acquisitions
which were consummated subsequent to March 31, 1996, PRG acquired certain
practice assets and liabilities, excluding cash, in exchange for (1) the
issuance of 986,790 shares of PRG common stock and (2) the payment of
approximately $2,149 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 1996 Acquisitions which were consummated in
the second quarter are as follows:
<TABLE>
<CAPTION>
DESCRIPTION
-------------------------------------------------------------------------- AMOUNT
--------
(000'S)
<S> <C>
Net assets acquired --
Accounts receivable, net................................................ $ 3,085
Inventories............................................................. 327
Prepaid expenses and other current assets............................... 344
Property and equipment, net............................................. 2,518
Intangible assets --
Work force........................................................... 955
Service Agreements................................................... 32,421
Goodwill............................................................. 3,213
Other noncurrent assets, net............................................ 1,708
Notes payable and current portion of long-term debt..................... (852)
Accounts payable and accrued expenses................................... (1,215)
Accrued salaries and benefits........................................... (315)
Long-term debt, net..................................................... (3,102)
Deferred taxes and other long-term liabilities.......................... (13,910)
--------
$ 25,177
========
Consideration paid --
Cash.................................................................... $ 2,149
Common stock............................................................ 23,028
--------
$ 25,177
========
</TABLE>
The value of the shares issued in the 1996 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.
In connection with the allocation of the purchase price to identifiable
intangible assets, PRG analyzed the nature of each practice including the number
of physicians in each group, number of clinics and their ability to recruit and
develop additional physicians; value of the nonphysician employee work force;
length of service agreement and ability to enforce the agreement; existence of
an ambulatory surgery center (ASC) and the
B-8
<PAGE> 35
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(000'S, EXCEPT SHARE AMOUNTS)
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 has not typically practiced
medicine, hire physicians, enter into employment contracts with the physicians,
directly contract with payors, etc., the intangible asset created in the
purchase allocation process is associated with the service agreement with the
physician group. These practices typically break into two categories:
(1) Physician practices and larger optometric practices are
characterized by multiple clinics, large staffs and multiple practitioners
and are composed of a mixture of surgery and complex vision service
providers with high-volume optometric providers. These practice groups
typically operate in a partnership manner and actively recruit physicians
for fellowship programs, or as employee physicians and, if appropriate,
subsequently admit qualified physicians into various levels of group
practice ownership. This manner of operations allows a practice to
perpetuate itself as individual physicians retire or are otherwise
replaced. Management of PRG estimates that the average major practice group
has practiced as a group for more than 15 years. The service agreements
with these groups are typically 40 years and, because the practice group
has an indefinite life, the Company has chosen to amortize the intangible
created over the shorter of 40 years or the life of the related service
agreement.
(2) The second practice category, optometric practices, can be
characterized as being composed of a single provider, smaller staffs and
one clinic and are typically limited to optometric services and primary eye
care. These practices do not normally have the same indefinite life
characteristics as the larger practices, and the intangible created in the
purchase transaction will be amortized over a 15-year period representing
the expected life of the related practice although the related service
agreement may extend well beyond that period.
The final intangible is the goodwill associated with the ASCs acquired. PRG
believes that outpatient surgery is rapidly becoming the preferred method of
delivery of many surgical procedures, replacing in-patient delivery in hospitals
and other extended-stay facilities. Benefits of ASCs include (1) lower cost of
service, (2) more efficient staffing and space utilization and (3) improved
physician productivity because of improved scheduling and faster turnaround. In
addition, an increasing number of surgeries are being performed in ASCs by
various medical specialists because of improved technology, treatment protocols
and anesthesiology. Because of these considerations, management believes that
goodwill arising from ASC purchases has an indefinite life and, therefore, a
40-year amortization period is being utilized for this asset.
The carrying value of the intangible assets will be reviewed at each
reporting period on a practice-by-practice basis to determine if facts and
circumstances exist which would suggest that the intangible assets may be
impaired or that the amortization period needs to be modified. Among the factors
PRG will consider in making the evaluation are changes in the market position,
reputation, profitability and geographical penetration of the practices or ASCs.
If indicators are present which indicate impairment is probable, PRG will
prepare a projection of the undiscounted cash flows of the specific practice and
determine if the intangible assets are recoverable based on these undiscounted
cash flows. If impairment is indicated, then an adjustment will be made to
reduce the carrying amounts of the intangible assets to their values. PRG does
not expect the adoption of Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-lived Assets and for Long-Lived Assets to
Be Disposed Of," to have a material impact on its financial condition or results
of operations.
B-9
<PAGE> 36
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(000'S, EXCEPT SHARE AMOUNTS)
(A-2) Reflects the issuance of 4,250,000 shares in May, 1996. The proceeds
to the Company, net of underwriting discounts and commission, of $115,430 were
used to repay long-term debt in the amount of $38,114. The remaining proceeds of
$77,316 were invested in short-term securities with initial maturities of 90
days or less, which are included in cash and cash equivalents.
(B-1) Represents adjustment required to properly state common stock
outstanding as a result of the Central Florida merger.
(B-2) Historical compensation to the owners has been reversed and future
professional service fees properly recorded. The previous owners of Central
Florida will receive a professional service fee equal to 65% of income before
taxes as compensation for the services rendered by the physicians to the Clinic.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS ADJUSTMENTS
The accompanying unaudited pro forma consolidated statements of operations
for the years ended December 31, 1993 and 1994 and for the three months ended
March 31, 1995 assume that as of January 1, 1993, PRG and Central Florida had
completed the Merger. In addition, the accompanying unaudited pro forma
consolidated statements of operations for the year ended December 31, 1995 and
for the 3 months ended March 31, 1996 assume that as of January 1, 1995, PRG had
completed the IPO and Reorganization, the 1996 Acquisitions, the 1995 EyeCorp
Acquisitions, and the May, 1996 issuance of shares in a public offering.
NOTES (C) - (G) REPRESENT ADJUSTMENTS RELATING TO THE IPO AND REORGANIZATION
(C) Represents calculated management service revenues of PRG, determined in
accordance with the management service agreements applied to the historical
operating results of the initial Affiliated Practices for the first six months
of 1995.
<TABLE>
<CAPTION>
DESCRIPTION
------------------------------------------------------------------------ YEAR ENDED
DECEMBER 31,
1995
------------
(000'S)
<S> <C>
Management service revenues(1).......................................... $ 22,085
=======
Revenues from ACSs(2)................................................... $ 2,821
=======
</TABLE>
PRG receives, with respect to each of the initial Affiliated Practices, revenues
based on the following components:
(1) Under the terms of its service agreements, PRG receives service
revenues based on certain operating and nonoperating expenses incurred on
behalf of the practice and a percentage of revenues relating to physician
and certain other medical services.
(2) With respect to several of the Practices, PRG owns or operates
ASCs and receives the related revenues for certain nonphysician services.
Various of these services fees are subject to certain negotiated
performance and other adjustments. The negotiated adjustments vary on a
practice-by-practice basis and include adjustments that cap or otherwise align
the fees based on percentages of revenues at specified levels related to the
profitability of the practice. Additionally, certain of the service fees based
on percentages of revenues are adjusted based on the actual
B-10
<PAGE> 37
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(000'S, EXCEPT SHARE AMOUNTS)
results of the practices, resulting in lower service fee ratios for incremental
practice results over specified base levels.
(D) Represents an adjustment to reflect historical costs of the initial
Affiliated Practices which have been subsequently assumed by PRG in order to
fulfill PRG's obligations under the Service Agreements with such Practices. The
components of the adjustment for the first half of the year ended December 31,
1995, include costs of the initial Affiliated Practices and a management
services organization (MSO) purchased by PRG in the Reorganization which are
included in the historical financial statements of the initial Affiliated
Practices.
<TABLE>
<CAPTION>
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).
B-11
<PAGE> 38
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(000'S, EXCEPT SHARE AMOUNTS)
(3) Certain capital leases recorded by the initial Affiliated
Practices were not assumed by PRG because the underlying assets have been
acquired by PRG from their owners.
(G) Reflects reversal of operating lease expense for previously leased
assets with a net book value of approximately $3,736 acquired from owners of the
initial Affiliated Practices and the recording of depreciation expense on a
straightline basis over a composite average useful life of 12 years. Debt
obligations relating to the underlying assets under operating leases of $2,401
as of December 31, 1995 have been extinguished with the proceeds of the IPO.
Accordingly, interest expense on such debt has not been reflected in the
accompanying pro forma statement of operations.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
DESCRIPTION 1995
------------------------------------------------------------------------ ------------
(000'S)
<S> <C>
Reduction of lease expense.............................................. $ (353)
Property tax on acquired assets......................................... 19
------
Total general and administrative.............................. $ (334)
======
Depreciation of acquired assets......................................... $ 159
======
</TABLE>
NOTE (H) REFERS TO EXCLUDED ASSETS FROM THE 1996 ACQUISITIONS
(H) Reflects the elimination of expenses related to certain assets which
have been included within the historical costs and expenses of the 1996
Acquisitions but will not be associated with PRG on an ongoing basis.
NOTE (I) REFERS TO INCOME TAXES
(I) Reflects federal and state income taxes that PRG would have incurred on
pro forma income before taxes.
NOTES (J) - (N) REFER TO ADJUSTMENTS RELATING TO 1996 ACQUISITIONS
(J) Represents calculated management service revenues of PRG, determined in
accordance with the applicable service agreement applied to the historical
operating results of the 1996 Acquisitions.
<TABLE>
<CAPTION>
THREE
MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
DESCRIPTION 1995 1996
--------------------------------------------------------------- ------------ ---------
(000'S)
<S> <C> <C>
Management service revenues(1)................................. $ 60,868 $ 9,834
======== =======
Revenues from ASCs(2).......................................... $ 7,303 $ 1,368
======== =======
</TABLE>
PRG will receive, with respect to each of the 1996 Acquisitions, revenues based
on the following components:
(1) Under the terms of its service agreements, the Company receives
service revenues based on certain operating and nonoperating expenses
incurred on behalf of the practice and a percentage of revenues relating to
physician and certain other medical services.
B-12
<PAGE> 39
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
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
Acquisitions which will be assumed by PRG in order to fulfill PRG's obligation
under the applicable service agreements. The components of the adjustment
include costs of the acquisition practices being purchased by PRG.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
DESCRIPTION 1996
----------------------------------------------------------- YEAR ENDED ------------
DECEMBER 31, (000'S)
1995
------------
(000'S)
<S> <C> <C>
Other revenue, net......................................... $ (353) (58)
Salaries, wages and benefits............................... 28,691 3,719
Pharmaceuticals and supplies............................... 6,723 1,663
General and administrative expenses........................ 19,645 3,794
Depreciation and amortization.............................. 3,114 206
Interest expense........................................... 591 161
</TABLE>
(L) Reflects adjustments to historical costs and expenses of $120, $33 and
$262 for the three months ended March 31, 1996 and $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.
(M) Reflects reversal of operating lease expense for previously leased
assets which will be acquired from owners of the 1996 Acquisitions and the
recording of depreciation expense on a straight-line basis.
<TABLE>
<CAPTION>
DESCRIPTION
------------------------------------------------------------------------ YEAR ENDED
DECEMBER 31,
1995
------------
(000'S)
<S> <C>
Reduction of lease expense.............................................. $(54)
Depreciation of acquired assets......................................... 23
</TABLE>
(N) Includes the elimination of nonrecurring professional fees related to a
reorganization of one of the practices and nonrecurring professional fees
related to the 1996 Acquisitions which are included in the historical financials
of the 1996 Acquisitions.
NOTES (O) - (S) REFER TO 1995 EYECORP ACQUISITIONS
(O) Represents calculated EyeCorp management service revenues determined in
accordance with the applicable service agreements applied to the historical
operating results of the 1995 EyeCorp Acquisitions.
<TABLE>
<CAPTION>
DESCRIPTION
------------------------------------------------------------------------ YEAR ENDED
DECEMBER 31,
1995
------------
(000'S)
<S> <C>
Management service revenues(1).......................................... $ 40,424
=======
Revenues from ASCs(2)................................................... $ 4,749
=======
</TABLE>
B-13
<PAGE> 40
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
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>
B-14
<PAGE> 41
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED MERGER/SIGNIFICANT TRANSACTIONS
PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(000'S, EXCEPT SHARE AMOUNTS)
The Prior Credit Facility's weighted average principal balance outstanding
for the year ended December 31, 1995, was approximately $14,287 and the
applicable interest rate was 9.75%. The EyeCorp Credit Facility pro forma
weighted average principal balance outstanding (assuming additional borrowings
to fund the cash portion of the purchase price of the 1995 EyeCorp Acquisitions
and related transactions) for the year ended December 31, 1995 was approximately
$14,825 and the applicable interest rate was 8.0%.
(T) Reflects reduction of interest expense of $1,440 and $762 associated
with an $18,000 and $38,114 reduction in debt bearing interest at 8% during 1995
and the three months ended March 31, 1996, respectively, from the proceeds of
the May 1996 stock offering. In addition, the remaining proceeds from the stock
offering of $97,430 and $77,316 during 1995 and the three months ended March 31,
1996, has been invested in tax-free securities bearing interest at approximately
3.7%. Therefore interest income of $3,604 and $715 during 1995 and the three
months ended March 31, 1996, has also been included in income.
NOTES (U) - (V) REFER TO THE PRO FORMA TOTALS
(U) The Company has decided to continue to apply the provisions of APB
Opinion 25 to its stock-based employee compensation arrangements.
(V) Weighted average shares outstanding is summarized below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------ -----------------------
DESCRIPTION 1993 1994 1995 1996 1995
---------------------------- --------- --------- ---------- ---------- ---------
(000'S)
<S> <C> <C> <C> <C> <C>
Outstanding PRG shares...... 1,662,274 1,662,274 9,558,244 9,558,244 1,662,274
PRG stock options impact,
using the treasury stock
method.................... -- -- 344,684 --* --
PRG shares issued in the
1996 Acquisitions......... -- -- 2,436,071 2,436,071 --
Equivalent shares of EyeCorp
common stock equivalents
at the exchange ratio..... 1,319,976 2,534,028 6,089,506 6,089,506 2,972,049
PRG shares issued to Central
Florida shareholders...... 281,832 281,832 281,832 281,832 281,832
PRG shares issued in
connection with the public
offering during May,
1996...................... -- -- 4,250,000 4,250,000 --
PRG stock options impact,
EyeCorp options assumed
using the treasury stock
method.................... -- -- 208,117 --* --
PRG stock issued in
connection with stock
options
exercised................. -- -- -- 20,000 --
---------- ---------- ---------- ---------- ---------
3,264,082 4,478,134 23,168,454 22,635,653 4,916,155
========== ========== ========== ========== =========
</TABLE>
- ---------------
* Impact of stock options as of March 31, 1996 is anti-dilutive.
B-15
<PAGE> 42
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 and cash flows for each of the years in the
three-year 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 did not audit the financial statements of EyeCorp, Inc., included in the
consolidated 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 consolidated 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 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 each of the years in the three-year period
ended December 31, 1995, 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
C-1
<PAGE> 43
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED 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 consolidated financial
statements.
C-2
<PAGE> 44
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED 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 consolidated financial
statements.
C-3
<PAGE> 45
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED 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 consolidated financial
statements.
C-4
<PAGE> 46
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED 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 consolidated financial
statements.
C-5
<PAGE> 47
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED 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 accounted for as
a pooling of interests (the Merger). These financial statements have been
restated to reflect this pooling of interests transaction.
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.
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.
C-6
<PAGE> 48
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 was accounted for as a pooling of interests and,
accordingly, the accompanying consolidated 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 consolidated financial statements include the financial position and
results of operations of PRG and all of its subsidiaries. As previously
discussed, these consolidated financial statements reflect the restatement for
the merger with EyeCorp. For the purposes of this restatement, EyeCorp 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
C-7
<PAGE> 49
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
C-8
<PAGE> 50
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
C-9
<PAGE> 51
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
C-10
<PAGE> 52
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED 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.
C-11
<PAGE> 53
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED 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>
C-12
<PAGE> 54
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED 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.
C-13
<PAGE> 55
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED 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>
C-14
<PAGE> 56
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED 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>
C-15
<PAGE> 57
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED 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.
C-16
<PAGE> 58
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the EyeCorp Merger, options outstanding under the
EyeCorp Plans were converted into options to purchase PRG common stock and
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.
C-17
<PAGE> 59
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED 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>
DESCRIPTION
-------------------------------------------------------------------- FOR THE YEAR
ENDED DECEMBER 31
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.
C-18
<PAGE> 60
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
C-19
<PAGE> 61
PHYSICIANS RESOURCE GROUP, INC. -- FOUNDING AFFILIATED PRACTICES
COMBINED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, 1995
------------------- -----------
1993 1994
------- ------- (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.
C-20
<PAGE> 62
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.
C-21
<PAGE> 63
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.
C-22
<PAGE> 64
PHYSICIANS RESOURCE GROUP, INC. -- FOUNDING AFFILIATED PRACTICES
COMBINED STATEMENTS OF CASH FLOWS
(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>
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.
C-23
<PAGE> 65
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
C-24
<PAGE> 66
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.
C-25
<PAGE> 67
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>
C-26
<PAGE> 68
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> <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>
C-27
<PAGE> 69
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>
C-28
<PAGE> 70
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>
C-29
<PAGE> 71
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
C-30
<PAGE> 72
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.
C-31
<PAGE> 73
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
C-32
<PAGE> 74
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.
C-33
<PAGE> 75
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.
C-34
<PAGE> 76
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.
C-35
<PAGE> 77
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.
C-36
<PAGE> 78
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.
C-37
<PAGE> 79
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>
C-38
<PAGE> 80
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>
C-39
<PAGE> 81
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
C-40
<PAGE> 82
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.
C-41
<PAGE> 83
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
C-42
<PAGE> 84
PHYSICIANS RESOURCE GROUP, INC. -- SELECTED ACQUISITION PRACTICES
COMBINED BALANCE SHEETS -- DECEMBER 31, 1994 AND 1995
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
1995
1994 ----------
------- (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.
C-43
<PAGE> 85
PHYSICIANS RESOURCE GROUP, INC. -- SELECTED ACQUISITION PRACTICES
COMBINED STATEMENTS OF EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995
1994 -----------
------- (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.
C-44
<PAGE> 86
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.
C-45
<PAGE> 87
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>
1995
1994 -----------
------- (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.
C-46
<PAGE> 88
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.
C-47
<PAGE> 89
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.
C-48
<PAGE> 90
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>
C-49
<PAGE> 91
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>
C-50
<PAGE> 92
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.
C-51
<PAGE> 93
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
C-52
<PAGE> 94
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.
C-53
<PAGE> 95
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
C-54
<PAGE> 96
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.
C-55
<PAGE> 97
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.
C-56
<PAGE> 98
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.
C-57
<PAGE> 99
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
C-58
<PAGE> 100
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.
C-59
<PAGE> 101
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>
C-60
<PAGE> 102
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>
C-61
<PAGE> 103
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>
C-62
<PAGE> 104
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.
C-63
<PAGE> 105
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.
C-64
<PAGE> 106
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Physicians Resource Group, Inc.:
We have audited the accompanying balance sheet of The Edward Yavitz Eye
Center, Ltd. as of December 31, 1995, and the related statements of earnings,
owner's equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Edward Yavitz Eye
Center, Ltd. as of December 31, 1995, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
July 12, 1996
C-65
<PAGE> 107
THE EDWARD YAVITZ EYE CENTER, LTD.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ ----------
<S> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................................... $ 42,139 $ 83,761
Investments....................................................... 31,191 31,191
Accounts receivable, less allowance for contractual adjustments
and bad debts of approximately $304,000 and $352,000 at
December 31, 1995 and March 31, 1996, respectively............. 434,688 404,977
Advances to owner................................................. -- 15,953
Prepaid expenses and other current assets......................... 20,773 19,010
---------- ----------
Total current assets...................................... 528,791 554,892
PROPERTY AND EQUIPMENT, net......................................... 632,987 693,557
OTHER NONCURRENT ASSETS............................................. 27,925 27,925
---------- ----------
Total assets.............................................. $1,189,703 $1,276,374
========== ==========
LIABILITIES AND OWNER'S EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt................................. $ 406,000 $ 306,460
Accounts payable and accrued expenses............................. 289,330 258,933
Accrued salaries and benefits..................................... 30,830 20,395
Advances from owner............................................... 63,672 --
---------- ----------
Total current liabilities................................. 789,832 585,788
LONG-TERM DEBT, net of current portion.............................. 134,707 290,166
---------- ----------
Total liabilities......................................... 924,539 875,954
---------- ----------
OWNER'S EQUITY...................................................... 265,164 400,420
---------- ----------
Total liabilities and owner's equity...................... $1,189,703 $1,276,374
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
C-66
<PAGE> 108
THE EDWARD YAVITZ EYE CENTER, LTD.
STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
FOR THE THREE
FOR THE MONTHS ENDED MARCH
YEAR ENDED 31,
DECEMBER 31, --------------------
1995 1995 1996
------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C>
MEDICAL SERVICE REVENUES, net.............................. $2,753,829 $601,395 $758,748
COSTS AND EXPENSES:
Compensation to physician owner.......................... 506,019 17,717 8,164
Salaries, wages, and benefits............................ 847,819 185,497 222,455
Pharmaceuticals and supplies............................. 69,822 8,406 24,925
General and administrative expenses...................... 601,796 139,892 172,327
Depreciation and amortization............................ 171,800 34,366 49,023
Interest expense......................................... 37,503 8,499 10,411
Other expense............................................ 271,983 39,101 50,797
---------- -------- --------
Total costs and expenses......................... 2,506,742 433,478 538,102
---------- -------- --------
Earnings before income taxes............................... 247,087 167,917 220,646
Income tax expense....................................... 98,294 36,752 85,390
---------- -------- --------
Net earnings............................................... $ 148,793 $131,165 $135,256
========== ======== ========
SUPPLEMENTAL DISCLOSURE:
Combined compensation to and net earnings of physician
owner................................................. $ 654,812 $148,882 $143,420
========== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
C-67
<PAGE> 109
THE EDWARD YAVITZ EYE CENTER, LTD.
STATEMENTS OF OWNER'S EQUITY
<TABLE>
<S> <C>
BALANCE, December 31, 1994........................................................ $116,371
Net earnings.................................................................... 148,793
--------
BALANCE, December 31, 1995........................................................ 265,164
Net earnings (unaudited)........................................................ 135,256
--------
BALANCE, March 31, 1996 (unaudited)............................................... $400,420
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
C-68
<PAGE> 110
THE EDWARD YAVITZ EYE CENTER, LTD.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE FOR THE THREE MONTHS
YEAR ENDED ENDED MARCH 31,
DECEMBER 31, ----------------------
1995 1995 1996
------------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings........................................... $ 148,793 $ 131,165 $ 135,256
Adjustments to reconcile net earnings to net cash
provided by operating activities --
Depreciation and amortization....................... 171,800 34,366 49,023
Gain on sale of assets.............................. (9,820) -- --
Loss on investments................................. 117,774 -- --
Changes in assets and liabilities
(Increase) decrease in --
Investments.................................... (31,191) -- --
Accounts receivable, net....................... (182,814) 12,474 29,711
Advances to owner.............................. 60,145 -- (15,953)
Prepaid expenses and other current assets...... 28,077 8,471 1,763
Other noncurrent assets........................ 36,008 -- --
Increase (decrease) in --
Accounts payable and accrued expenses.......... 180,116 62,303 (30,397)
Accrued salaries and benefits.................. 5,579 (16,830) (10,435)
--------- --------- ---------
Net cash provided by operating activities...... 524,467 231,949 158,968
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments................................ (97,057) -- --
Purchases of property and equipment.................... (347,660) (352,088) (109,593)
Proceeds from sale of property and equipment........... 25,000 -- --
--------- --------- ---------
Net cash used in investing activities.......... (419,717) (352,088) (109,593)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt........................... 225,000 310,000 86,459
Repayment of long-term debt............................ (108,647) (46,909) (30,540)
Repayment of advances from owner....................... (265,479) (114,063) (63,672)
--------- --------- ---------
Net cash provided by (used in) financing
activities................................... (149,126) 149,028 (7,753)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..... (44,376) 28,889 41,622
CASH AND CASH EQUIVALENTS, beginning of period........... 86,515 86,515 42,139
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period................. $ 42,139 $ 115,404 $ 83,761
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF INVESTMENT ACTIVITIES:
Cash paid for interest................................. $ 37,502 $ 8,497 $ 10,411
Cash paid for income taxes............................. -- -- 130,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
C-69
<PAGE> 111
THE EDWARD YAVITZ EYE CENTER, LTD.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION:
The Edward Yavitz Eye Center, Ltd. ("EYEC") is an Illinois professional
services corporation that is engaged in the practice of medicine, specializing
in ophthalmology in Illinois.
Owner's equity includes the common stock, additional paid-in capital, and
retained earnings of EYEC. Common shares authorized, issued, and outstanding as
of December 31, 1995, are 20,000, 1,000, and 1,000, respectively.
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 owner," reflects the
total earnings available to the physician owner for each period.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Accounts Receivable
Accounts receivable primarily consist of receivables from patients,
insurers, government programs and other third-party payors for medical services
provided by physicians. Such amounts are reduced by an allowance for contractual
adjustments and other uncollectible amounts. Contractual adjustments result from
the differences between the rates charged by the physicians for services
performed and the amounts allowed by the Medicare and Medicaid programs and
other public and private insurers.
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 which range from 3 to 15 years. Routine maintenance and
repairs are charged to expense as incurred, while costs of betterments and
renewals are capitalized.
Revenues
Medical service revenues are accounted for in the period in which the
services are provided. The revenues are reported at the estimated realizable
amounts from patients, third-party payors and others. Provisions for estimated
third-party payor adjustments are estimated and recorded in the period the
related services are provided. Any adjustment to the amounts is recorded in the
period in which the revised amount is determined. A significant portion of
EYEC'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, EYEC participates in agreements with managed care organizations to
provide services at negotiated rates or for capitated payments.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
C-70
<PAGE> 112
THE EDWARD YAVITZ EYE CENTER, LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments approximate
fair value.
Concentration of Credit Risk
EYEC extends credit to patients covered by programs such as Medicare and
Medicaid and private insurers. EYEC manages credit risk with the various public
and private insurance providers, as appropriate. Allowances for bad debts have
been made for potential losses, where appropriate.
Unaudited Financial Information
The unaudited financial statements for the periods ended March 31, 1996 and
1995, have been prepared pursuant to the rules and regulations of the Securities
and Exchange Commission. The accompanying unaudited financial statements
reflect, in the opinion of management, all adjustments necessary for a fair
presentation of the unaudited financial statements. All such adjustments are of
a normal and recurring nature.
3. PROPERTY AND EQUIPMENT:
Property and Equipment at December 31, 1995, consists of the following:
<TABLE>
<S> <C>
Equipment........................................................ $1,200,905
Leasehold improvements........................................... 314,353
Furniture and fixtures........................................... 110,910
----------
Total property and equipment..................................... 1,626,168
Less -- Accumulated depreciation and amortization................ (993,181)
----------
Property and equipment, net............................ $ 632,987
==========
</TABLE>
4. LONG-TERM DEBT:
Long-term debt consists of a note payable bearing interest at 8.25% to a
bank. The note was retired in 1996 (see Note 9).
5. OPERATING LEASES:
EYEC leases office space as well as certain equipment under noncancelable
operating lease agreements which expire at various dates. At December 31, 1995,
minimum annual rental commitments under noncancelable operating leases with
terms in excess of one year are as follows:
<TABLE>
<S> <C>
1996...................................................... $146,166
1997...................................................... 135,442
1998...................................................... 139,164
1999...................................................... 120,324
2000...................................................... 120,324
Thereafter................................................ 240,648
--------
Total minimum lease payments.............................. $902,068
========
</TABLE>
Rent expense related to operating leases amounted to $185,616 for the year
ended December 31, 1995.
C-71
<PAGE> 113
THE EDWARD YAVITZ EYE CENTER, LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES:
The provision for income taxes for the year ended December 31, 1995,
consists of the following:
<TABLE>
<CAPTION>
1995
--------
<S> <C>
Federal................................................... $ 71,110
State..................................................... 27,184
--------
Total..................................................... $ 98,294
========
</TABLE>
Because there are no significant temporary differences between income
reported for financial reporting purposes and for tax purposes, deferred income
taxes are not material.
7. COMMITMENTS AND CONTINGENCIES:
EYEC is insured with respect to medical malpractice risks on a claims-made
basis. In the normal course of business, EYEC has been named in various
lawsuits. In the opinion of EYEC'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 EYEC.
8. RELATED-PARTY TRANSACTIONS:
At December 31, 1995, EYEC had a noninterest bearing advance of $63,672
from the owner. The advance was repaid during the first quarter of 1996. At
March 31, 1996, EYEC had a noninterest bearing advance to owner of $15,953.
9. SUBSEQUENT EVENT:
On June 28, 1996, substantially all assets and liabilities of EYEC were
acquired by Physicians Resource Group, Inc. (PRG), in exchange for 62,106 shares
of PRG common stock and cash of $465,800. In connection therewith, EYEC entered
into a 40-year management service agreement with PRG, whereby PRG will provide
substantially all nonmedical services to the practice.
The financial statements of EYEC have been prepared as supplemental
information about the entity which PRG acquired. EYEC 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.
Subsequent to the acquisition, the debt described in Note 4, was retired by
PRG.
C-72
<PAGE> 114
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
C-73
<PAGE> 115
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.
C-74
<PAGE> 116
EYECORP, INC. -- BAKER ACQUISITION PRACTICE
STATEMENTS OF EXCESS OF REVENUES OVER EXPENSES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995
1994 -----------
---------- (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.
C-75
<PAGE> 117
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.
C-76
<PAGE> 118
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 (98,161)
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.
C-77
<PAGE> 119
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
C-78
<PAGE> 120
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>
C-79
<PAGE> 121
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.
C-80
<PAGE> 122
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
C-81
<PAGE> 123
EYECORP, INC. -- COLEMAN ACQUISITION PRACTICE
BALANCE SHEETS
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.
C-82
<PAGE> 124
EYECORP, INC. -- COLEMAN ACQUISITION PRACTICE
STATEMENTS OF EXCESS OF REVENUES OVER EXPENSES AND EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995
1994 ----------
---------- (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.
C-83
<PAGE> 125
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.
C-84
<PAGE> 126
EYECORP, INC. -- COLEMAN ACQUISITION PRACTICE
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------
1995
1994 --------
-------- (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.
C-85
<PAGE> 127
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
C-86
<PAGE> 128
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>
C-87
<PAGE> 129
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.
C-88
<PAGE> 130
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
C-89
<PAGE> 131
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.
C-90
<PAGE> 132
EYECORP, INC. -- EGGLESTON ACQUISITION PRACTICE
COMBINED STATEMENTS OF EXCESS OF REVENUES OVER EXPENSES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995
1994 -----------
---------- (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.
C-91
<PAGE> 133
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.
C-92
<PAGE> 134
EYECORP, INC. -- EGGLESTON ACQUISITION PRACTICE
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995
1994 -----------
--------- (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.
C-93
<PAGE> 135
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.
C-94
<PAGE> 136
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.
C-95
<PAGE> 137
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.
C-96
<PAGE> 138
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
C-97
<PAGE> 139
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.
C-98
<PAGE> 140
EYECORP, INC. -- GORDON ACQUISITION PRACTICE
COMBINED STATEMENTS OF EXCESS OF
REVENUES OVER EXPENSES AND EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995
1994 -----------
---------- (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.
C-99
<PAGE> 141
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.
C-100
<PAGE> 142
EYECORP, INC. -- GORDON ACQUISITION PRACTICE
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995
1994 -----------
--------- (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.
C-101
<PAGE> 143
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
C-102
<PAGE> 144
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.
C-103
<PAGE> 145
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
C-104
<PAGE> 146
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%.
C-105
<PAGE> 147
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
C-106
<PAGE> 148
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.
C-107
<PAGE> 149
EYECORP, INC. -- POST ACQUISITION PRACTICE
COMBINED STATEMENTS OF EXCESS OF REVENUES OVER EXPENSES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1995
1993 1994 -----------
---------- ---------- (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.
C-108
<PAGE> 150
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, December 31, 1995 (unaudited)........................................... $ 974,423
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
C-109
<PAGE> 151
EYECORP, INC. -- POST ACQUISITION PRACTICE
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1995
1993 1994 -----------
--------- --------- (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.
C-110
<PAGE> 152
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.
C-111
<PAGE> 153
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.
C-112
<PAGE> 154
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>
C-113
<PAGE> 155
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.
C-114
<PAGE> 156
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
C-115
<PAGE> 157
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.
C-116
<PAGE> 158
EYECORP, INC. -- SOUTHERN EYE CENTER ACQUISITION PRACTICE
STATEMENTS OF EXCESS OF REVENUES OVER EXPENSES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1995
1993 1994 ----------
---------- ---------- (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.
C-117
<PAGE> 159
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.
C-118
<PAGE> 160
EYECORP, INC. -- SOUTHERN EYE CENTER ACQUISITION PRACTICE
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995
1993 1994 ----------
--------- --------- (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.
C-119
<PAGE> 161
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.
C-120
<PAGE> 162
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
C-121
<PAGE> 163
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.
C-122
<PAGE> 164
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.
C-123
<PAGE> 165
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
C-124
<PAGE> 166
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.
C-125
<PAGE> 167
EYECORP, INC. -- SELECTED ACQUISITION PRACTICES
COMBINED STATEMENTS OF EXCESS OF REVENUES OVER EXPENSES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995
1994 -----------
----------- (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.
C-126
<PAGE> 168
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.
C-127
<PAGE> 169
EYECORP, INC. -- SELECTED ACQUISITION PRACTICES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995
1994 -----------
--------- (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.
C-128
<PAGE> 170
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.
C-129
<PAGE> 171
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.
C-130
<PAGE> 172
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>
C-131
<PAGE> 173
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>
C-132
<PAGE> 174
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.
C-133
<PAGE> 175
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 Key
Whitman/Milauskas (as identified in Note 1) as of December 31, 1995, and the
related combined statements of operations, owners' equity and cash flows for the
year then ended. These combined financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
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 Key
Whitman/Milauskas 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
D-1
<PAGE> 176
KEY WHITMAN/MILAUSKAS
COMBINED BALANCE SHEET
DECEMBER 31, 1995
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents...................................................... $ 245,443
Accounts receivable, less allowance for contractual adjustments and bad debts
of $869,843................................................................. 1,055,018
Inventories.................................................................... 94,988
Prepaid expenses............................................................... 187,443
----------
Total current assets................................................... 1,582,892
EQUIPMENT, net................................................................... 757,580
OTHER NONCURRENT ASSETS.......................................................... 1,356,699
----------
Total assets........................................................... $3,697,171
==========
LIABILITIES AND OWNERS' EQUITY
CURRENT LIABILITIES:
Short-term notes payable --
Related parties............................................................. $ 20,000
Other....................................................................... 109,658
Current portion of long-term debt and capital lease --
Related parties............................................................. 501,553
Other....................................................................... 10,545
Accounts payable............................................................... 120,861
Accrued expenses............................................................... 131,346
Accrued salaries and benefits.................................................. 107,503
----------
Total current liabilities.............................................. 1,001,466
LONG-TERM DEBT AND CAPITAL LEASE, net of current portion......................... 2,047,655
----------
Total liabilities...................................................... 3,049,121
----------
OWNERS' EQUITY................................................................... 648,050
----------
Total liabilities and owners' equity................................... $3,697,171
==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
D-2
<PAGE> 177
KEY WHITMAN/MILAUSKAS
COMBINED STATEMENT OF EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
MEDICAL SERVICE REVENUES, net.................................................... $9,114,559
COSTS AND EXPENSES:
Compensation to physician owners............................................... 1,731,880
Salaries, wages, and benefits.................................................. 3,196,296
Pharmaceuticals and supplies................................................... 568,647
General and administrative..................................................... 2,890,389
Depreciation and amortization.................................................. 334,859
Interest expense............................................................... 110,932
Other expense, net............................................................. 10,186
----------
Total costs and expenses............................................... 8,843,189
----------
NET EARNINGS..................................................................... $ 271,370
==========
SUPPLEMENTAL DISCLOSURE:
Combined compensation to and net earnings of physician owners.................. $2,003,250
==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
D-3
<PAGE> 178
KEY WHITMAN/MILAUSKAS
COMBINED STATEMENT OF OWNERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
BALANCE, December 31, 1994........................................................ $376,680
Net earnings.................................................................... 271,370
--------
BALANCE, December 31, 1995........................................................ $648,050
========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
D-4
<PAGE> 179
KEY WHITMAN/MILAUSKAS
COMBINED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings................................................................... $ 271,370
Adjustments to reconcile net earnings to net cash provided by operating
activities --
Depreciation and amortization............................................. 262,518
Changes in assets and liabilities --
(Increase) decrease in --
Accounts receivable, net............................................. (226,458)
Inventories.......................................................... (13,710)
Prepaid expenses..................................................... (62,619)
Other assets......................................................... 54,894
Increase (decrease) in --
Accounts payable and accrued expenses................................ (49,413)
Accrued salaries and benefits........................................ 51,601
---------
Net cash provided by operating activities............................ 288,183
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment............................................. (164,589)
Proceeds from sale of fixed assets............................................. 39,600
Gain on sale of fixed assets................................................... (30,277)
---------
Net cash used in investing activities................................ (155,266)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt................................................... 136,264
Repayment of long-term debt and capital leases................................. (124,230)
---------
Net cash provided by financing activities............................ 12,034
---------
NET INCREASE IN CASH AND CASH EQUIVALENTS........................................ 144,951
CASH AND CASH EQUIVALENTS, beginning of period................................... 100,492
---------
CASH AND CASH EQUIVALENTS, end of period......................................... $ 245,443
=========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
D-5
<PAGE> 180
KEY WHITMAN/MILAUSKAS
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION:
Key Whitman/Milauskas is comprised of Key Whitman Eye Center, P.A. (Key
Whitman) and Milauskas Eye Institute Medical Group (Milauskas). Key Whitman and
Milauskas are involved in the general practice of medicine, specializing in
opthalmology, in Texas and California, respectively.
The combined financial statements of Key Whitman/Milauskas have been
prepared as supplemental information about the entities to which Physicians
Resource Group, Inc. (PRG) will provide management services following
consummation of the acquisitions of these entities by PRG. Key Whitman/Milauskas
previously 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 Key Whitman and Milauskas had been combined.
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 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 payors for medical services
provided by physicians. Such amounts are reduced by an allowance for contractual
adjustments and other uncollectible amounts. Contractual adjustments result from
the differences between the rates charged by the physicians for services
performed and the amounts allowed by the Medicare and Medicaid programs and
other public and private insurers.
Inventories
Inventories consist primarily of spectacle frames 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 cost of acquired
assets over the fair value (goodwill) and noncompete agreements. Goodwill is
amortized on a straight-line basis over five to fifteen years. Noncompete
agreements are amortized on the straight-line basis over five years, which
represents the shorter of the economic value or the term of the respective
agreements.
D-6
<PAGE> 181
KEY WHITMAN/MILAUSKAS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
Some of the Key Whitman/Milauskas practices are S Corporations;
accordingly, income tax liabilities are the responsibility of the respective
owners. The taxable corporations included in Key Whitman/Milauskas 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, a provision 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 Key Whitman/Milauskas.
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 payors and others. Provisions for estimated third-party
payor 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 Key Whitman/Milauskas' 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, Key
Whitman/Milauskas participate in agreements with managed care organizations to
provide services at negotiated rates or for capitated payments.
Concentration of Credit Risk
Key Whitman/Milauskas extend credit to patients covered by insurance
programs such as governmental programs like Medicare and Medicaid and private
insurers. Key Whitman/Milauskas 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.
D-7
<PAGE> 182
KEY WHITMAN/MILAUSKAS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. ACQUISITIONS
Key Whitman acquired an ambulatory surgery center (ASC) on October 1, 1995.
The acquisition was accounted for using the purchase method. 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 certain other acquisitions were not material
to the results of operations or financial position of Key Whitman/Milauskas. The
following table reflects the allocation of the purchase price.
<TABLE>
<CAPTION>
ACQUISITIONS COMPLETED
DURING THE YEAR ENDED
DECEMBER 31, 1995
----------------------
<S> <C>
Tangible assets.................................................. $312,786
Goodwill and other intangibles................................... 439,752
Liabilities assumed.............................................. 44,716
--------
Total Purchase price............................................. $797,254
========
Cash paid........................................................ --
Debt issued...................................................... 797,254
</TABLE>
4. EQUIPMENT:
Equipment consists of the following:
<TABLE>
<CAPTION>
ESTIMATED USEFUL DECEMBER 31,
LIVES (YEARS) 1995
---------------- ------------
<S> <C> <C>
Equipment....................................... 3-7 $ 2,625,402
Leasehold improvements.......................... 5-40 402,856
Furniture and fixtures.......................... 3-7 195,548
------------
3,223,806
Less- Accumulated depreciation and
amortization.................................. (2,466,226)
------------
Net equipment......................... $ 757,580
============
</TABLE>
5. OTHER NONCURRENT ASSETS:
Other noncurrent assets consist of the following as of December 31, 1995:
<TABLE>
<S> <C> <C>
Goodwill........................................ $ 1,339,803
Noncompete agreements........................... 100,000
Other........................................... 21,508
------------
1,461,311
Less- Accumulated amortization.................. (104,612)
------------
Net other noncurrent assets........... $ 1,356,699
============
</TABLE>
D-8
<PAGE> 183
KEY WHITMAN/MILAUSKAS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 to a financing company, bearing interest at
6.5% at December 31, 1995............................. -- 12,957
------- --------
Total short-term debt......................... $20,000 $109,658
======= ========
</TABLE>
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 seller, 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 Key
Whitman/Milauskas.
D-9
<PAGE> 184
KEY WHITMAN/MILAUSKAS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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............................................... --
----------
......................................................... $2,498,910
==========
</TABLE>
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
Thereafter........................................................ --
--------
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 $157,506.
Leases
Key Whitman/Milauskas 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 OTHER
---------- --------
<S> <C> <C>
1996................................................. $ 232,979 $264,507
1997................................................. 232,979 17,702
1998................................................. 232,979 --
1999................................................. 232,979 --
2000................................................. 68,245 --
Thereafter........................................... -- --
---------- --------
Total minimum lease payments......................... $1,000,161 $282,209
========== ========
</TABLE>
Rent expense related to operating leases amounted to $496,886 for the year
ended December 31, 1995.
8. EMPLOYEE BENEFIT PLANS:
Milauskas has a qualified defined contribution plan which permits
participants to make voluntary contributions. Milauskas pays general and
administrative expenses of the plan and, in some cases, makes matching
contributions on behalf of the employees. Milauskas made contributions related
to these plans
D-10
<PAGE> 185
KEY WHITMAN/MILAUSKAS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
totaling $30,164 in 1995. Key Whitman/Milauskas does not provide employees with
any postretirement or postemployment benefits.
9. COMMITMENTS AND CONTINGENCIES:
Key Whitman/Milauskas are insured with respect to medical malpractice risks
on a claims-made basis. In the normal course of business, Key Whitman/Milauskas
have been named in various lawsuits, primarily alleging medical malpractice. In
the opinion of the Key Whitman/Milauskas' 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 Key Whitman/Milauskas.
10. RELATED-PARTY TRANSACTIONS:
Lease Transactions
Key Whitman/Milauskas 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 Key Whitman/Milauskas
practices lease equipment from physician owners. Rent expense on related-party
operating leases was $232,379 for the year ended December 31, 1995.
D-11
<PAGE> 186
Exhibit Index
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
2.1 - Agreement and Plan of Merger by and among Central Florida Eye Associates, P.A.,
Ronald Case, M.D., Brian Renz, M.D., Teo Kulyk, M.D., Jay Mulaney, M.D., PRG FL
Acquisition Corporation, and Physicians Resource Group, Inc. (1)
2.2 - Agreement and Plan of Merger by and among G.C.R. Investors, Ronald Case, M.D.
Brian Renz, M.D., Jay Mulaney, M.D., PRG FL Partnership I, and Physicians
Resource Group, Inc. (1)
2.3 - Agreement and Plan of Merger by and among Central Florida Eye Associates, Partners,
Ronald Case, M.D., Brian Renz, M.D., Teo Kulyk, M.D., Jay Mulaney, M.D., PRG FL
Partnership II, and Physicians Resource Group, Inc. (1)
2.4 - Agreement and Plan of Merger by and among South Texas Retina Affiliates, Inc.,
South Texas Retina Consultants, L.L.P., Charles H. Campbell, M.D., P.A., Charles
H. Campbell, M.D., PRG TX Acquisition Corp. I and Physicians Resource Group, Inc. (1)
4.1 - Restated Certificate of Incorporation of Physicians Resource Group, Inc.(2)
4.2 - Certificate of Designations, Preferences, Rights and Limitations of Class A Preferred
Stock of Physicians Resource Group, Inc.(2)
4.3 - Third Amended and Restated Bylaws of Physicians Resource Group, Inc.(3)
4.4 - Form of Warrant Certificate(2)
4.5 - Rights Agreement dated as of April 19, 1996 between Physicians Resource Group, Inc. and
Chemical Mellon Shareholder Services(4)
4.6 - Form of certificate evidencing ownership of Common Stock of Physicians Resource Group, Inc.(2)
23.1 - Consent of Arthur Andersen LLP.(5)
23.2 - Consent of Coopers & Lybrand LLP.(5)
</TABLE>
- -------------------
(1) - Previously filed.
(2) - Previously filed as an exhibit to the Company's
Registration Statement on Form S-1 (No. 33-91440)
and incorporated herein by reference.
(3) - Previously filed as an exhibit to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995,
and incorporated herein by reference.
(4) - Previously filed as an exhibit to the Company's
Registration Statement on Form S-1 (No. 333-3852) and
incorporated herein by reference.
(5) - Filed herewith.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports included in this Form 8-K/A, into the Company's previously filed
Form S-8 Registration Statement File No. 33-93712, Form S-8 Registration
Statement File No. 33-93946, Form S-8 Registration Statement File No. 333-03460,
Form S-8 Registration Statement File No. 333-03478, Form S-4 Registration
Statement File No. 333-00230, and Form S-4 Registration Statement File No.
333-4406.
ARTHUR ANDERSEN LLP
Houston, Texas
July 15, 1996
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement
of Physicians Resource Group, Inc. on Form S-8 (File No. 33-93712), Form S-8
(File No. 33-93946), Form S-8 (File No. 333-03460), Form S-8 (File No.
333-03478), Form S-4 (File No. 333-00230), and Form S-4 (File No. 333-4406) of
our reports included in this Form 8-K/A.
COOPERS & LYBRAND L.L.P.
Memphis, Tennessee
July 15, 1996
