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REVISED 3/25
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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1996
Commission File No. 1-13778
PHYSICIANS RESOURCE GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0456864
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
THREE LINCOLN CENTRE, 5430 LBJ FREEWAY, SUITE 1540, DALLAS, TX 75240
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
Registrant's telephone number, including area code: (972) 982-8200
Title of each class Name of each exchange on which registered
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COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE
Securities pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrants knowledge, in a definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The number of shares outstanding of the Registrant's common stock as of
March 21, 1997 was 30,146,748 shares. The aggregate market value of the voting
stock held by non-affiliates of the Registrant based on 25,862,289 shares held
by non-affiliates and a $11.13 closing price of the Registrants common stock on
the New York Stock Exchange as of March 21, 1997 was $287,847,277.
Documents incorporated by reference:
DOCUMENT FORM 10-K PART
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Portions of the Registrants definitive proxy statement for
the Registrants annual meeting of stockholders to be held
during 1997 and anticipated to be filed within 120 days
of the Registrants fiscal year ended December 31, 1996 III
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PART I
ITEM 1. BUSINESS
OVERVIEW
Physicians Resource Group, Inc. (with its subsidiaries as the context
requires, PRG or the Company) began operations in 1995 and is the leading
provider of physician practice management services to ophthalmic and optometric
practices (the Practices) and one of the nation's largest single-specialty
physician practice management companies. PRG develops integrated eye care
delivery systems through affiliations with locally prominent eye care practices
in selected geographic markets across the United States. PRG acquires the
operating assets of these practices and develops the practices into
comprehensive eye care networks by providing management expertise, marketing,
information systems, capital resources and ancillary services such as ambulatory
surgery centers (ASCs) and optical dispensaries. As of March 21, 1997, PRG
provided management services to 151 practices with 414 ophthalmologists and 223
optometrists at 387 locations in 25 states, owned or operated 45 ASCs and 176
optical dispensaries and owned or leased 24 excimer lasers.
Company Growth
PRG was incorporated in 1993 but did not conduct any significant operations
until its initial public offering (the IPO) and reorganization in June 1995
(the Reorganization) at which time the company began providing practice
management services to its initial 10 practices. No further acquisitions were
made during 1995. During 1996, however, the Company made a substantial number
of acquisitions beginning in February. The following discusses 1996 acquisition
activity which was composed of both pooling of interests transactions, as well
as various purchases. The Company acquired both the assets of individual
practices, as well as several large physician practice management companies.
1996 Practice Asset Acquisitions
As discussed above, at various times during 1996, the Company acquired, in
purchase transactions, the assets of 45 practices and 11 ASCs. Aggregate
consideration for the acquisitions was $100,650,000, in cash and common stock,
valued at closing, in transactions accounted for as purchases. These
acquisitions collectively strengthened PRGs position in Houston, Texas; Las
Vegas, Nevada; Cincinnati, Ohio and other markets and represented new entry into
the Dallas, Texas; Phoenix, Arizona; Oklahoma, Florida, New Jersey, North
Carolina and South Carolina markets. In addition, during the second and third
quarters of 1996, the Company merged with seven additional practices and one
ASC in transactions accounted for as poolings of interests. Aggregate
consideration paid for these practices was $79,779,000 in common stock, valued
at closing. These mergers strengthened PRGs position in Central Florida and
Cincinnati, Ohio.
1996 Practice Management Company Mergers and Acquisitions
In March 1996, PRG merged, in a pooling of interests transaction with EyeCorp,
Inc. (EyeCorp), a privately held physician practice management company devoted
solely to eye care, in exchange for common stock having a market value, at
closing, of approximately $152,000,000. The merger with EyeCorp (the EyeCorp
Merger), which provided management services to 50 ophthalmic and optometric
practices and five ASCs, increased PRGs penetration in Arkansas, California,
Ohio, Tennessee and Texas and afforded entry into Illinois, Kentucky,
Massachusetts, Mississippi and Missouri.
The Company acquired the assets of the eye care division of EquiMed, Inc.
(EquiMed), a publicly held multi-specialty physician practice management
company, on November 5, 1996 and acquired American Ophthalmic Incorporated
(AOI), a privately held physician practice management company devoted solely to
eye care, on November 22, 1996. Consideration for the EquiMed acquisition (the
EquiMed Acquisition) consisted of $55,077,000 in cash and assumption of
approximately $9,900,000 of indebtedness. Consideration for the AOI transaction
(the AOI Acquisition) consisted of $30,900,000 in cash and 1,323,341 shares of
common stock valued at $30,900,000. Additionally, PRG retired approximately
$44,500,000 of AOI debt and assumed approximately $13,400,000 of indebtedness.
Further, the EquiMed purchase price is subject to upward adjustment if EquiMed
delivers practice acquisitions to PRG that meet certain criteria.
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As a result of the EquiMed Acquisition, PRG added the assets of 22 practices
with 53 ophthalmologists and 36 optometrists at 52 locations in 13 states, 10
additional ASCs, 32 additional optical dispensaries and four additional excimer
lasers. The EquiMed Acquisition strengthens PRGs presences in Arkansas,
California, Illinois, Kentucky, Missouri and Ohio and represents the Company's
entrance into Iowa, Kansas, Louisiana, New York, Oregon, Pennsylvania and
Washington. As a result of the AOI Acquisition, PRG added the assets of 16
practices with 78 ophthalmologists and 29 optometrists at 74 locations in six
states and owns or operates nine additional ASCs and 15 additional optical
dispensaries and owns or leases two additional excimer lasers. The AOI
Acquisition strengthens PRG's presence in Florida, Nevada and Texas
(representing the Company's entrance into the San Antonio and Austin markets)
and represents new entry into Alabama.
INDUSTRY BACKGROUND
Market Overview
The Health Care Financing Administration estimates that national health care
spending in 1995 was approximately $1 trillion with approximately $200 billion
attributable to physician services. Unlike most medical specialists, eye care
professionals generally do not depend on primary care physicians for referrals;
rather, referrals originate from other eye care professionals since the
optometrist or the ophthalmologist represents the primary patient contact for
the vast majority of eye care services. PRG believes that in 1994 the revenues
generated by eye care professionals (ophthalmologists and optometrists) were in
excess of $20 billion and ophthalmic surgeons in the United States performed in
excess of 2.4 million major surgical procedures.
Eye care services in the United States are delivered through a fragmented
system of local providers, including individual or small groups of
ophthalmologists, optometrists and opticians. PRG believes that approximately
15,600 ophthalmologists and 28,200 optometrists were actively involved in
patient care in the United States in 1993. PRG believes that approximately 40%-
50% of ophthalmologists practice in a group environment.
Trends in Physician Organization
Physicians have traditionally provided medical services on a fee-for-service
basis. The fee-for-service model provides few incentives for the efficient
utilization of resources and has contributed to increases in health care costs
at rates significantly higher than inflation. Concerns over the accelerating
cost of health care have resulted in the increasing prominence of managed care
and a decline in fee-for-service medicine. Managed care typically involves a
third-party (frequently the payor) assuming responsibility for ensuring that
health care is provided in a high quality, cost-effective manner.
Trends toward managed care in health care generally, and eye care
specifically, have placed small to mid-size provider groups at a competitive
disadvantage because these practices typically have high operating costs
relative to revenue and lack the capital, information resources and management
expertise necessary to provide both high quality and cost-effective medical
care. To remain competitive, eye care providers are increasingly seeking to
affiliate with larger organizations that manage the non-medical aspects of eye
care practices and that can provide access to greater capital resources, more
efficient cost structures and better access to payors. PRG seeks to address
these demands for the Practices through the implementation of its business
strategy.
BUSINESS STRATEGY
PRG's business strategy is focused on (i) developing comprehensive eye care
service networks in each of its markets, both in terms of service mix and
geographic coverage, primarily through acquisitions, (ii) enabling its Practices
to provide efficient and cost-effective eye care services resulting from
economies of scale, purchasing discounts, facility consolidation and improved
personnel and information management and (iii) marketing the capabilities of the
Practices and networks to both payors and employers, particularly in the
developing and expanding managed care marketplace. PRG believes that by
establishing integrated delivery networks, the Practices are afforded
significant opportunities for cross-referrals, expanded service capabilities and
volume contracting with payors.
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Develop Comprehensive Eye Care Services
PRG believes that third-party payors increasingly will prefer to contract with
a single provider for comprehensive eye care services within selected geographic
areas, particularly as managed care proliferates. Accordingly, PRG intends to
continue to broaden the service mix and geographic coverage of the Practices and
networks within the markets in which they operate.
Complete Range of Services. Building service mix capabilities may involve
expanding the types of services provided by a particular Practice to include (i)
additional primary care capabilities, (ii) expanded specialty or subspecialty
care, such as corneal, retinal, glaucoma, pediatric or neuro-ophthalmology
expertise, and (iii) refractive, reconstructive or oculoplastic surgery
capabilities. Comprehensive eye care may also warrant the addition of an ASC or
optical dispensary in a given market. An ASC is a facility in which physicians
generally perform non-emergency procedures that typically do not require
overnight hospitalization. Surgical procedures generally can be performed in
ASCs on a more cost-effective basis than in hospitals, principally because ASCs
typically have lower operating costs and provide physicians with greater
scheduling flexibility than hospitals. Optical dispensaries allow patients with
glasses or frame prescriptions to fill such prescriptions in the convenience of
the Practice's facility.
Broad Geographic Coverage. PRG believes it is important not only to provide
a comprehensive service mix within the immediate market in which a Practice
operates, but also to provide such services within the entire geography of that
defined market. PRG believes this is particularly important in the era of
managed care, where payors may have enrollees, participants or employees living
throughout a large market area, such as a city, a county or a more broadly
defined region. The Company believes that location and convenience are important
selection factors when choosing eye care, particularly for managed care payors.
Therefore, PRG seeks to expand its geographic coverage within a defined market
where it already has established operations by opening or acquiring new
practices, ASCs, optical dispensaries or satellite locations.
Acquisition Objectives. The Company's objective is to utilize acquisitions
as the primary vehicle to develop a full spectrum of services and broad
geographic coverage within existing markets and to enter new markets.
Accordingly, PRG has implemented an acquisition program to acquire the assets
of, and provide management services to, selected ophthalmic and optometric
practices and their related ancillary businesses, such as ASCs and optical
dispensaries. The Company targets acquisitions in existing markets that enable
it to expand the range of services provided and absorb the acquired patient base
without a proportionate increase in administrative costs. The Company seeks to
acquire in attractive new markets practices that are well positioned to become
regional leaders in their markets. The Company typically targets larger
acquisitions in new markets that can serve as platforms from which the Company
can consolidate a given service area by making and integrating additional in-
market acquisitions.
Since its IPO and Reorganization in June 1995, the Company has acquired the
assets of 141 practices. These acquisitions represent additions within existing
markets as well as entries into new markets. PRG intends to continue to pursue
both in-market and new market acquisitions.
Provide Efficient and Cost Effective Services
PRG believes that to be competitive in the present health care environment,
providers, such as the Practices, need to achieve operating efficiencies and
reduce the cost of providing services. The Company believes that the physicians
at the Practices benefit from having the management and administrative support
provided by PRG. This support reduces the amount of time the physicians are
required to spend on administrative matters and enables them to dedicate their
time and efforts toward the growth of their professional practices and the
further development of their specialties.
PRG believes that there are significant local and national scale economies to
be realized in the development of comprehensive eye care networks. At a local
level, cost efficiencies can be achieved from the consolidation of clinic
administrative activities in central business offices, the sharing of facilities
such as ASCs and satellite locations and the reduction or more efficient
utilization of duplicative personnel. At a national level, the Company can
achieve economies through discounted purchasing of pharmaceutical, optical and
medical supplies, as well as more efficient purchasing of medical and surgical
equipment, information systems and insurance.
The Company believes that the increasing prevalence of managed care and other
risk-sharing arrangements are requiring health care providers to become more
sophisticated in gathering, processing and evaluating clinical outcomes
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and basic financial information. In order to process the information necessary
to track costs and to effectively negotiate managed care contracts, the Company
believes that providers will need to develop and implement more sophisticated
information systems. The Company has installed at all of its central business
offices, a client server based information management system to facilitate
communication and the timely reporting of periodic financial and operational
data. The Company also is developing the capability to interface this system
with existing practice management systems, with the intent of integrating
patient data and expense/cost data. See "Development and Operations--Information
Management Systems."
Market to Payors and Managed Care
The Company markets the services provided by its eye care networks to payors,
with a focus on the managed care community. PRG believes that by providing the
full spectrum of eye care services within a geographic area at a competitive
price, its Practices will be positioned as attractive providers to health
maintenance organizations (HMOs), insurance companies, employers, hospitals,
physician hospital organizations (PHOs), and possibly other physician practice
management companies. The Company believes that the cost structure and
comprehensive service mix of its Practices will appeal to both managed care and
non-managed care organizations.
PRG believes that its marketing resources and comprehensive eye care networks
will allow its Practices to participate in certain contractual managed care
relationships in which they would not otherwise have been able to participate.
The Company believes that the financial, operational and clinical data generated
by PRG's information management systems should enable the Company to negotiate
managed care arrangements under terms favorable to the Company and its
Practices.
DEVELOPMENT AND OPERATIONS
Acquisition Criteria
PRG's acquisition strategy is directed at acquiring the assets of, and
providing management services to, ophthalmic and optometric practices that are
financially and operationally strong and either strategically complement other
Practices or represent an entrance into new markets. Acquisition candidates must
demonstrate potential for revenue growth or continued profitability. PRG also
evaluates qualitative issues such as the medical professionals' training,
licensure and experience, the medical professionals' reputations in the local
and national marketplace, Medicare and Medicaid compliance, billing practices
and operating history. PRG believes that a substantial number of
ophthalmological and optometric practices meet these acquisition criteria. Prior
to entering any market, PRG considers such factors as the local level of
networking and consolidation activity, the regulatory environment, patient-
provider ratios and the economic condition of the local market. PRG also
considers the acquisition of ASCs, optical dispensaries and other complementary
practices and services that are consistent with its objective of providing
management services to eye care providers.
PRG believes that it is an attractive acquiror relative to other alternatives
available to eye care providers. Currently, physicians have several
alternatives, such as affiliating with an HMO, an independent physician
association, a PHO or a physician practice management company such as PRG. PRG
believes that it is attractive to acquisition candidates because of its (i)
governance structure, which promotes physician participation, (ii) fee structure
under its service agreements (Service Agreements), which allows physicians to
participate in the cost efficiencies and revenue growth realized by the
Practices and (iii) transaction structure, which permits physicians to become
stockholders of PRG, thus further aligning the interests of the Practices and
PRG.
PRG uses its common stock or a combination of its common stock, debt and cash
to fund practice acquisitions. The consideration for each practice will vary on
a case by case basis, with the major factors being historical operating results,
the future prospects of the practice and the ability of such practice to
complement the services offered by the other Practices. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
Practice Management Services Provided
PRG provides management expertise, marketing, information systems, capital
resources and acquisition services to its Practices. See "--Service Agreements."
As a result, PRG is involved in the daily on-site financial and administrative
management of the Practices and provides various other services to the Practices
from time to time, including legal,
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financial reporting, treasury, human resources and insurance assistance. PRG's
goals in providing such services are to (i) improve the performance of the
Practices in these non-medical activities, (ii) allow the physicians associated
with the Practices to more fully dedicate their time and efforts toward their
professional practice activities and (iii) enhance the financial return to PRG.
Generally, the Practices are solely responsible for all aspects of the practice
of medicine, and PRG has the primary responsibility for the business and
administrative aspects of the Practices. To facilitate the execution of these
separate responsibilities and the communication between the parties, PRG
establishes Joint Planning Boards comprised of representatives of the Practices
and PRG. The respective Joint Planning Boards are the primary vehicle through
which PRG and its Practices communicate, develop long-term strategic objectives
and make recommendations regarding significant capital expenditures, budgets and
acquisitions.
Network Development
Concurrent with entering into a given market, PRG and the Practices evaluate
the range of eye care services presently being provided in that market for the
purpose of determining what additions and acquisitions need to be made to
develop a fully comprehensive eye care product. In addition to utilizing its
acquisition strategy to achieve this objective, PRG also seeks to establish
networks within these markets and to develop a referral base among the Practices
and, possibly, providers not with PRG. One of the vehicles PRG uses to establish
these networks is the EyePA.
The EyePA, an independent practice association and a wholly owned subsidiary
of PRG, is establishing preferred provider networks that contract with various
forms of managed care entities to provide quality controlled comprehensive eye
care services. The EyePA offers the services of the Company's network of
Practices, and eye care providers not with PRG, to HMOs, PPOs, insurers,
employers, unions and other payors at a competitive price. In some cases,
contracting is performed on a city-wide basis, while in other cases, contracting
is more regional (or national) in scope. The EyePA therefore not only
establishes and monitors relationships with various payor organizations, but
also is charged with establishing relationships with eye care providers not with
PRG.
Central Business Offices
During 1996, the Company began the development of central business offices
(CBOs) to support and manage its Practices. These CBOs principally provide
administrative and accounting activities to multiple practices within a
geographic region. The long-term objective of the Company is to develop its
CBOs to provide a full range of services to its Practices, including billing and
collection, claims processing, managed care contracting and inventory and
facilities management. Currently, the Company is creating CBOs in Bakersfield,
California; Las Vegas, Nevada; Houston, Texas; Dallas, Texas; Memphis,
Tennessee; Atlanta, Georgia and Orlando, Florida and is considering development
of CBOs in Cincinnati, Ohio; Colton, California and Phoenix, Arizona during
1997.
Information Management Systems
The emergence of managed care has increased the need for specific and
extensive information collection, analysis and management throughout the entire
health care industry so that providers can better demonstrate outcomes and
quantify the revenues and expenses associated with managed care contracting.
Thus, information management systems in the health care industry are moving
beyond traditional systems that focused primarily on billing, insurance,
accounting and basic financial management, and are moving towards computerized
cost management, medical charting, quality measurements and clinical outcomes
analysis, with a particular emphasis on evaluating the risks and profitability
of managed care contracts.
PRG has installed a client server based, information management system
designed (i) to enable the Company to compare financial performance of the
Practices and to track and control costs (ii) to facilitate the accounting,
financial and operational reporting process between the Practices, CBOs and
corporate and (iii) to enhance communication between the Practices, CBOs and
corporate. PRG also is developing the capability to interface this system with
existing practice management systems at the Practices. This will enable PRG to
consolidate billing and patient data with cost and expense data, which will
provide the Company with additional critical information that the Company
believes it can use to beneficially structure the managed care relationships it
arranges for the Practices. In addition, PRG analyzes the capabilities of the
existing practice management systems within the Practices and determines the
extent to which such systems can be successfully applied to PRG and throughout
the Practices and what, if any, additional hardware and software investments
might be necessary to facilitate the improvement of Company-wide practice
management systems.
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Governance and Quality Assurance
PRG provides the Practices with assistance in strengthening their performance
in the medical quality area. One of the primary means by which PRG provides this
assistance is through PRG's various Physician Medical Advisory Boards, which,
among other things, have been formed to identify and communicate the best
practices and protocols in various aspects of the medical arena. PRG's
governance structure also promotes physician participation through
representation on PRG's board of directors.
THE PRACTICES
In the aggregate, PRG's Practices provide primary, secondary and tertiary eye
care. Primary eye care involves diagnosing and treating routine vision
impairments through non-surgical correction. Patients requiring routine eye
examinations can be treated by optometrists or ophthalmologists. PRG seeks to
enable ophthalmologists associated with the Practices to concentrate on
providing secondary and tertiary care. Secondary eye care involves the diagnosis
and treatment of eye diseases and disorders through medical regimens, laser
and/or routine surgical intervention. Secondary eye care includes the treatment
of cataracts, glaucoma, simple corneal problems, and various refractive surgical
procedures such as Radial Keratotomy (RK), Automated Lamellar Keratoplasty (ALK)
and Photo Refractive Keratotomy (PRK). Secondary eye care is provided by
ophthalmologists. Tertiary eye care involves medical and surgical treatment for
vitreoretinal disease, severe glaucoma and corneal diseases and is provided by
ophthalmologists who often have subspecialty training in these areas. A number
of the Practices provide refractive surgical services.
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As of March 21, 1997, PRG provided management services to 151 practices with
414 ophthalmologists and 223 optometrists at 387 locations in 25 states, owned
or operated 45 ASCs and 176 optical dispensaries and owned or leased 24 excimer
lasers. The following table sets forth the markets in which the Company
operates.
<TABLE>
<CAPTION>
NUMBER
OF EXCIMER OPTICAL
STATE/LOCATION OFFICES OPHTHALMOLOGISTS OPTOMETRISTS ASC'S LASERS DISPENSARIES
- -------------- ------- ---------------- ------------ ----- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
ALABAMA
Dothan 14 11 0 1 0 0
ARIZONA
Phoenix 17 6 15 6 1 4
ARKANSAS 7 4 4 0 0 4
CALIFORNIA
Northern 7 7 3 3 1 2
Southern 29 49 21 6 5 11
FLORIDA
Miami 13 20 12 2 0 2
Orlando 20 24 4 1 0 8
Tampa 17 35 3 1 1 7
IOWA
Clinton 4 1 0 1 0 3
ILLINOIS
Chicago 13 10 6 0 1 7
Other 12 8 6 1 2 3
KANSAS
Topeka 1 2 0 1 0 1
KENTUCKY 6 2 8 0 0 5
LOUISIANA
Baton Rouge 8 5 2 1 0 6
New Orleans 6 6 3 1 1 1
Other 5 4 4 1 0 3
MASSACHUSETTS
Plymouth 1 2 1 1 0 1
MISSISSIPPI 27 14 14 1 0 20
MISSOURI
St. Louis 6 6 5 0 0 9
NEVADA
Las Vegas 14 27 0 3 2 4
Reno 2 2 1 0 0 1
NEW JERSEY 2 3 0 1 0 2
NEW YORK 8 14 10 0 1 8
NORTH CAROLINA 2 1 2 0 0 1
OHIO
Cincinnati 9 19 11 2 2 1
Northern 12 9 18 0 1 6
OKLAHOMA 3 3 4 0 0 1
OREGON 1 1 1 0 0 0
PENNSYLVANIA
Washington 2 2 0 1 0 1
SOUTH CAROLINA
Myrtle Beach 1 2 0 0 0 1
TENNESSEE
Jackson 7 9 4 2 0 4
Memphis 19 16 12 1 0 11
Nashville 11 8 19 1 0 9
TEXAS
Austin 12 10 8 1 0 8
Dallas 18 16 1 1 1 3
Houston 34 49 16 3 4 13
San Antonio 15 6 5 1 0 5
WASHINGTON
Vancouver 2 1 0 0 1 0
--- --- --- -- -- ---
Total 387 414 223 45 24 176
=== === === == == ===
</TABLE>
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SERVICE AGREEMENTS
PRG is a party to Service Agreements with its Practices, under which PRG
generally is the exclusive manager and administrator of non-physician services
relating to the operation of such Practices. The following summary briefly
describes the terms generally contained in the Company's Service Agreements with
the Practices. The actual terms of the various Service Agreements vary from the
description below, on a case by case basis, depending on negotiations with the
individual Practice and the requirements of local regulations.
The service fees (Service Fees) payable to PRG by the Practices under the
Service Agreements vary based on the fair market value, as determined in arms-
length negotiations, for the nature and amount of services provided. Such fees
are payable monthly and consist of various combinations of the following: (i)
percentages of the revenues of the Practices, or percentages of the earnings of
the Practices or net income after payment by the Practices of physician
compensation, (ii) all revenues, or a substantial portion of revenues, relating
to facility and other non-physician fees with respect to certain assets owned by
PRG, (iii) operating and non-operating expenses of the Practices paid by PRG
pursuant to the Service Agreements and (iv) certain negotiated performance and
other adjustments. With respect to several of the Practices, the Service Fees
are based on flat rates, some of which are subject to renegotiation on an annual
basis or transition, over time, to a variable fee. In certain states in which
the corporate practice of medicine is permitted, PRG contracts with the
Practices for the provision of medical services by the Practice on behalf of PRG
and PRG pays such Practices for the services provided. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Overview" and Note 3 of Notes to Consolidated Financial Statements of the
Company.
Pursuant to the Service Agreements, PRG generally (i) acts as the exclusive
manager and administrator of non-physician services relating to the operation of
the Practices, subject to matters reserved for the Practices Joint Planning
Board, (ii) bills patients, insurance companies and other third-party payors and
collects on behalf of the Practices the fees for professional medical services
and other services and products rendered or sold by the Practices, (iii)
provides, as necessary, clerical, accounting, purchasing, payroll, legal,
bookkeeping and computer services and personnel, information management,
preparation of certain tax returns, printing, postage and duplication services
and medical transcribing services, (iv) supervises and maintains custody of
substantially all files and records, (v) provides facilities for the Practices,
(vi) orders and purchases inventory and supplies as reasonably requested by the
Practices, (vii) provides working capital financing and makes capital
expenditures for the Practices and (viii) implements, in consultation with the
Joint Planning Board and/or the Practice, national and local public relations or
advertising programs. In addition, pursuant to all Service Agreements, except
those to which PRG became a party as a result of the EquiMed Acquisition, PRG
(i) prepares, in most cases in consultation with the Joint Planning Board and
the Practices, all annual and capital operating budgets, (ii) provides
financial and business assistance on the negotiation, establishment, supervision
and maintenance of contracts and relationships with managed care and other
similar providers and payors and (iii) contracts with various forms of managed
care entities and payor organizations on behalf of the Practices.
Generally, under the Service Agreements, the respective Practices retain the
responsibility for, among other things, (i) hiring and compensating physician
employees and other medical professionals, (ii) ensuring that physicians have
the required licenses, credentials, approvals and other certifications needed to
perform their duties and (iii) complying with certain federal and state laws and
regulations applicable to the practice of medicine.
The Service Agreements are, generally, for initial terms of 40 years, with
automatic extensions (unless specified notice is given) ranging from one year to
40 years. Generally, the Service Agreements may be terminated by PRG if the
Practice (i) files a petition in bankruptcy or other similar events occur or
(ii) defaults on the performance of a material duty or obligation, which default
continues for a specified term after notice. In addition, all Service
Agreements, except those to which PRG became a party as a result of the EquiMed
Acquisition and certain of those to which PRG became a party upon the
consummation of the AOI Acquisition provide that the Practices may terminate the
agreement if PRG (i) files a petition in bankruptcy or other similar events
occur or (ii) defaults on the performance of a material duty or obligation,
which default continues for a specified term after notice.
During the term of certain of the Service Agreements, the Practice and, in
certain instances, each physician owner of the Practice, agrees not to compete
with PRG and certain other practices for which PRG provides management services
within a specified geographic area. The Service Agreements to which PRG became a
party as a result of the EquiMed Acquisition do not contain such provisions;
however, the employment agreements with the physician employees employed by such
practices contain similar provisions.
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With regard to the Practices and the Service Agreements to which PRG is a
party pursuant to the EquiMed Acquisition, the Service Agreements provide for
employment agreements (the Physician Employment Agreements) between the Practice
and the physicians associated with the Practice. The Physician Employment
Agreements generally provide that if such physician's employment is terminated
during the initial term, generally five years, the physician will be required to
pay liquidated damages.
With regard to the Service Agreements to which PRG is a party pursuant to the
1996 acquisitions and the EyeCorp Merger, the physician owners of the related
Practices are parties to the Service Agreements. Such Service Agreements contain
restrictive covenants and provide for liquidated damages in the event of a
breach of those restrictive covenants.
Each Practice (or PRG on behalf of the Practice) is responsible for obtaining
professional liability insurance for the employees of the Practice and PRG is
responsible for obtaining general liability and property insurance for the
Practice.
GOVERNMENT REGULATION AND SUPERVISION
General
The health care industry is highly regulated, and there can be no assurance
that the regulatory environment in which PRG operates will not change
significantly in the future. PRG believes its operations as described herein are
in substantial compliance with applicable law. The ability of PRG to operate
profitably will depend in part upon PRG, the Practices and their physicians
obtaining and maintaining all necessary licenses, certificates of need and other
approvals and operating in compliance with applicable health care regulations.
Fee-Splitting; Corporate Practice of Medicine
The laws of many states prohibit physicians from splitting fees with non-
physicians and prohibit non-physician entities from practicing medicine. These
laws vary from state to state and are enforced by the courts and by regulatory
authorities with broad discretion. The laws in most states regarding fee
splitting and the corporate practice of medicine have been subjected to limited
judicial and regulatory interpretation. Although PRG believes its operations as
described herein are in substantial compliance with existing applicable laws,
PRG's business operations have not been the subject of judicial or regulatory
interpretation. There can be no assurance that review of PRG's business by
courts or regulatory authorities will not result in determinations that could
adversely affect the operations of PRG or that the health care regulatory
environment will not change so as to restrict PRG's existing operations or their
expansion. In addition, the regulatory framework of certain jurisdictions may
limit PRG's expansion into such jurisdictions if PRG is unable to modify its
operational structure to conform with such regulatory framework. PRG has
adjusted its Service Fee methodology in states where it was deemed necessary to
comply with such laws.
Medicare Physician Payment System
PRG believes that regulatory trends in cost containment will continue to
result in a reduction from historical levels in per-patient revenue for medical
practices. The federal government has implemented, through the Medicare program,
the resource-based relative value scale (RBRVS) payment methodology for
physician services. This methodology went into effect in 1992 and was
implemented during a transition period in annual increments through December 31,
1995. RBRVS is a fee schedule that, except for certain geographical and other
adjustments, pays similarly situated physicians the same amount for the same
services. The RBRVS is adjusted each year, and is subject to increases or
decreases at the discretion of Congress. To date, the implementation of RBRVS
has reduced payment rates for certain of the procedures historically provided by
the Practices. There can be no assurance that any reduced operating margins
could be offset by PRG through cost reductions, increased volume, introduction
of additional procedures or otherwise.
Rates paid by nongovernmental insurers, including those that provide Medicare
supplemental insurance, are based on established physician, ASC and hospital
charges, and are generally higher than Medicare payment rates. Any decrease in
the relative number of patients covered by private insurance could adversely
affect PRG's revenues and income.
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Medicare and Medicaid Fraud and Abuse
Federal law prohibits the offer, payment, solicitation or receipt of any form
of remuneration in return for, or in order to induce, (i) the referral of a
person, (ii) the furnishing or arranging for the furnishing of items or services
reimbursable under Medicare or Medicaid programs or (iii) the purchase, lease or
order or arranging or recommending purchasing, leasing or ordering of any item
or service reimbursable under Medicare or Medicaid. Pursuant to this anti-
kickback law, the federal government has recently announced a policy of
increased scrutiny of joint ventures and other transactions among health care
providers in an effort to reduce potential fraud and abuse relating to Medicare
and Medicaid costs. The applicability of these provisions to many business
transactions in the health care industry has been subject to only limited
judicial and regulatory interpretation. Noncompliance with the federal anti-
kickback legislation can result in exclusion from Medicare and Medicaid programs
and civil and criminal penalties.
PRG believes that although it receives fees under the Service Agreements for
management services, the Service Agreements do not place PRG in a position to
make or influence referrals of patients for services reimbursed under Medicare
or Medicaid programs to the Practices or their physicians, or to receive such
referrals. Such Service Fees are intended by PRG to be consistent with fair
market value in arm's-length transactions for the nature and amount of
management services rendered and therefore would not constitute unlawful
remuneration under anti-kickback laws and regulations. Further, PRG, with regard
to the management services provided under the Service Agreements, is not a
provider of services under the Medicare or Medicaid programs. For these reasons,
PRG does not believe that fees payable to it would be viewed as remuneration for
referring or influencing referrals of patients or services covered by such
programs as prohibited by statute. If PRG is deemed to be in a position to make,
influence or receive referrals from or to physicians, or PRG is deemed to be a
provider under the Medicare or Medicaid programs, and if fees paid or received
are not commensurate with fair market value, the operations of PRG could be
subject to scrutiny under federal and state anti-kickback and anti-referral
laws.
Significant prohibitions against physician referrals have been enacted by
Congress. These prohibitions, commonly known as "Stark II," amended prior
physician self-referral legislation known as "Stark I" by dramatically
enlarging the field of physician-owned or physician-interested entities to which
the referral prohibitions apply. Stark II prohibits a physician from referring
Medicare or Medicaid patients to an entity providing ''designated health
services'' in which the physician has an ownership or investment interest, or
with which the physician has entered into a compensation arrangement. The
designated health services include prosthetic devices, which under applicable
regulations and interpretations include one pair of eyeglasses or contact lenses
furnished after cataract surgery and intraocular lenses provided at ASCs. The
penalties for violating Stark II include a prohibition on payment by these
government programs and civil penalties of as much as $15,000 for each violative
referral and $100,000 for participation in a "circumvention scheme." In August
1995, the Secretary of Health and Human Services published final regulations
interpreting Stark I. Although those regulations for the most part do not apply
to designated health services under Stark II, they do provide an exception to
the referral prohibition for clinical laboratory services furnished in an ASC.
Health and Human Services officials have unofficially confirmed that the ASC
exception also will be contained in Stark II regulations when they are
published. To the extent that PRG or any Practice is deemed to be subject to the
prohibitions contained in Stark II for services, PRG believes its activities
fall within the permissible activities defined in Stark II, including, but not
limited to, the provision of in-office ancillary services.
In addition, PRG also believes that the methods it uses to acquire the assets
of existing practices do not violate anti-kickback and anti-referral laws and
regulations. Specifically, PRG believes the consideration paid by PRG to
physicians to acquire the tangible and intangible assets associated with their
practices is consistent with fair market value in arm's length transactions and
is not intended to induce the referral of patients. Should this practice be
deemed to constitute an arrangement designed to induce the referral of Medicare
or Medicaid patients, then such could be viewed as possibly violating anti-
kickback or anti-referral laws and regulations. A determination of liability
under any such laws could have a material adverse effect on PRG's revenue.
In 1996, Congress passed the Health Insurance Portability and Accountability
Act which, among other things, provides increased funding for federal
investigations of healthcare fraud and abuse. For 1997, the Act provides
approximately $104,000,000 and $47,000,000 to be available for the Department of
Health and Human Services, the Department of Justice and the Federal Bureau of
Investigation to combat healthcare fraud. Such increased activity by federal
agencies could increase the likelihood of an investigation of PRG or a Practice.
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The last three or four years have also seen an increase in private
whistleblower actions (qui tam actions) against healthcare providers. Such
private enforcement of healthcare laws, often by disgruntled employees, also
could increase the potential for a healthcare investigation of PRG or a
Practice.
COMPETITION
PRG experiences competitive pressures for the acquisition of the assets of,
and the provision of management services to, additional practices and the
acquisition of MSOs. PRG knows of several private practice management companies
focused on eye care services. Several other practice management companies, both
publicly and privately held, that have established operating histories and, in
some instances, greater resources than PRG are pursuing the acquisition of the
assets of other general and specialty medical practices, including eye care
practices, and the management of such practices. Additionally, some hospitals,
clinics, health care companies, HMOs and insurance companies engage in
activities similar to the activities of these other practice management
companies. There can be no assurance that PRG will be able to compete
effectively with such competitors for the acquisition of, or affiliation with,
eye care practices, that additional competitors will not enter the market, that
such competition will not make it more difficult or expensive to acquire the
assets of, and provide management services to, eye care practices on terms
beneficial to PRG or that competitive pressures will not otherwise adversely
affect the Company.
The Practices compete with numerous local eye care service providers. PRG
believes that changes in governmental and private reimbursement policies and
other factors have resulted in increased competition among providers for the
provision of medical services to consumers. PRG believes that the cost,
accessibility and quality of services provided are the principal factors that
affect competition. There can be no assurance that the Practices will be able to
compete effectively in the markets that they serve, which inability to compete
could adversely affect PRG.
Further, the Practices will compete with other providers for managed care
contracts. PRG believes that trends toward managed care have resulted, and will
continue to result, in increased competition for such contracts. Other practices
and MSOs may have more experience than the Practices and PRG in obtaining such
contracts. There can be no assurance that PRG and the Practices will be able to
successfully acquire sufficient managed care contracts to compete effectively in
the markets they serve, which inability to compete could adversely affect PRG.
CORPORATE LIABILITY AND INSURANCE
The provision of medical services entails an inherent risk of professional
malpractice and other similar claims. PRG does not influence or control the
practice of medicine by physicians or have responsibility for compliance with
certain regulatory and other requirements directly applicable to physicians and
physician groups. However, as a result of the relationship between PRG and the
Practices, PRG may become subject to medical malpractice actions under various
theories, including agency and successor liability. There can be no assurance
that claims, suits or complaints relating to services and products provided by
the Practices will not be asserted against PRG in the future. PRG maintains
insurance coverage that it believes is adequate both as to risks and amounts.
Such insurance extends to professional liability claims that may be asserted
against employees of PRG that work on site at the Practice locations. In
addition, pursuant to the Service Agreements, either the Practices or PRG on
behalf of the Practices are required to maintain comprehensive professional
liability insurance for the employees of the Practices. The availability and
cost of such insurance has been affected by various factors, many of which are
beyond the control of PRG and the Practices. The cost of such insurance to PRG
and the Practices may have an adverse effect on PRG's operations. Although PRG
believes it will be able to negotiate and acquire malpractice insurance on
behalf of the Practices at a cost below that otherwise available to them, based
on the Practices' historical insurance expenditures, there can be no assurances
to that effect. In addition, successful malpractice or other claims asserted
against the Practices or PRG that exceed applicable policy limits could have a
material adverse effect on PRG.
EMPLOYEES
As of March 21, 1997, PRG had approximately 4,200 full-time and part-time
employees, of which approximately 140 were employed at PRG's corporate and
regional offices and the remainder of which were employed at the Practices. PRG
believes that its relationship with its employees is good.
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EXECUTIVE OFFICERS
The following table sets forth certain information concerning each of the
persons who are executive officers of PRG as of March 21, 1997.
NAME AGE POSITION
---- --- --------
Emmett E. Moore..... 55 Chairman of the Board and Chief Executive Officer
Richard M. Owen..... 43 President, Chief Financial Officer and Director
Richard J. D'Amico.. 38 Executive Vice President, Chief Administrative
Officer, General Counsel and Secretary
Mark P. Kingston.... 35 Senior Vice President and Chief Development Officer
Daniel D. Chambers.. 46 Senior Vice President - Practice Operations
Jonathan R. Bond.... 38 Senior Vice President - ASC Operations
John N. Bingham..... 43 Vice President, Controller and Chief Accounting
Officer
Executive officers' terms expire upon the first to occur of the following:
the election and qualification of such officer's successor, such officer's
resignation, termination of such officer's employment agreement, if any, or his
or her death.
Emmett E. Moore has served as the Chairman of the Board and Chief Executive
Officer of PRG since September 17, 1995 and a director of PRG since April 20,
1995. Mr. Moore was President from September 17, 1995 to January 1, 1997. From
March 1995 to April 20, 1995, he served as a consultant to PRG. From August
1983 to December 1994, Mr. Moore served in various capacities with Medical Care
America, Inc. (Medical Care), a publicly traded company that was acquired in
September 1994 by Columbia/HCA Healthcare Corporation and was an owner and
operator of outpatient surgery centers. Medical Care also owned and managed
numerous ophthalmic physician practices, dedicated eye surgery centers and
optical networks as well as imaging and physical therapy businesses. Mr. Moore
was responsible for Medical Care's acquisition and development activities, most
recently serving as its Senior Vice President and had previously served as its
Executive Vice President and Chief Financial Officer since joining Medical Care.
Additionally, Mr. Moore was employed with Arthur Andersen, received his J.D.,
M.P.A. and B.B.S. degrees from the University of Texas, and is a C.P.A.
Richard M. Owen has served as President of PRG since January 1, 1997 and a
director and Chief Financial Officer of PRG since April 20, 1995. Mr. Owen was
a Senior Vice President of PRG from January 1, 1996 and from April 20, 1995 to
the date of his promotion to President. Mr. Owen served as Executive Vice
President of PRG from April 20 through December 31, 1995. From September 1994
to April 20, 1995, Mr. Owen served as a consultant to PRG on financial and
accounting matters. From June 1976 through August 1994, Mr. Owen held various
positions in the accounting and business advisory division of Arthur Andersen
where he had been a partner since 1988. Mr. Owen is a C.P.A. and graduated from
Baylor University in 1976.
Richard J. D'Amico has served as Executive Vice President and Chief
Adminstrative Officer since January 1, 1997, as Senior Vice President of PRG
from January 1, 1996 until January 1, 1997 and as General Counsel and Secretary
of PRG since April 20, 1995. From March 1995 to April 1995, he served as a
consultant to PRG. From December 1994 through March 1995, Mr. D'Amico served as
President and General Counsel and from March 1993 through December 1994, Mr.
D'Amico served as Vice President and General Counsel for Radiation Care, Inc., a
corporation that operated radiation therapy and diagnostic imaging centers in
ten states. From June 1991 through March 1993, Mr. D'Amico served as Assistant
Vice President and in-house counsel for U.S. Healthcare, Inc., a company that
operates HMOs in eight states. Mr. D'Amico received his J.D. from Rutgers
University School of Law -- Camden in 1985 and his B.S. in electrical
engineering from Villanova University in 1981.
Mark P. Kingston has served as Senior Vice President of PRG since January
1, 1996 and as Chief Development Officer of PRG since April 20, 1995. From
September 1994 to April 20, 1995, Mr. Kingston served as a consultant to PRG on
practice asset acquisitions and operations. From July 1990 through September
1994, he served as a Manager for Iolab-Johnson & Johnson, Inc., a company that
provides ophthalmic devices, equipment and pharmaceuticals to ophthalmologists,
optometrists, and surgery facilities. Responsibilities included the development
of physician consulting services, national contracting with purchasing entities
and division sales management. Mr. Kingston received his M.B.A. from the
University of Indianapolis in 1988 and a B.S. from Mt. Union College in 1983.
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Daniel D. Chambers has served as Senior Vice President of PRG since
February 15, 1996. As Senior Vice President, Mr. Chambers oversees the
operational activities of ophthalmic and optometric practices. Mr. Chambers
served as Executive Director of Mann-Berkeley Eye Center, a PRG affiliate, from
October 1986 until February 1996 where he oversaw planning, operations and
financial management. From October 1986 until February 1996, Mr. Chambers also
served as a consultant to the Executive Director of Barnet Dulaney Eye Center, a
PRG affiliate. Mr. Chambers served as President of Sun Valley Acquisition
Company, Inc. from September 1995 to February 1996 and has served on the
Compensation Committees of both Sun Valley Acquisition Company, Inc. and
Marketing Success, Inc. Mr. Chambers received his B.A. from the University of
Connecticut in 1973 and received his M.B.A. from the University of Connecticut
in 1975.
Jonathan R. Bond has served as Senior Vice President of PRG since November
1995. From January 1984 until October 1995, Mr. Bond served in various
capacities with Medical Care America, Inc., its predecessor Medical Care
International, Inc., and Columbia/HCA Healthcare Corporation, which purchased
Medical Care in September 1994. These positions included: Senior Vice
President - Surgery Center Operations; Senior Vice President - Investor
Relations and Administration; Vice President - Acquisitions; Vice President -
Operations; and Vice President - Finance and Treasurer. From 1981 until 1983,
Mr. Bond was employed with Arthur Andersen & Company. Mr. Bond received his
B.B.A. in accounting from the University of Texas in 1981.
John N. Bingham has served as Vice President, Controller and Chief
Accounting Officer of PRG since April 20, 1995. From June 1994 to April 1995,
Mr. Bingham was a financial consultant to various medical and biotechnology
companies. Prior to that time, Mr. Bingham was the Vice President, Controller
and Treasurer of Houston Biotechnology Incorporated, a publicly traded company
specializing in the research and development of ophthalmic pharmaceutical
products. Mr. Bingham was previously associated with other publicly traded
companies as well as Arthur Andersen. Mr. Bingham is a C.P.A. and a graduate of
the University of Houston at Clear Lake City.
FACTORS THAT COULD AFFECT FUTURE PERFORMANCE
This report contains certain forward looking statements about the business
and financial condition of the Company, including various statements contained
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations." The actual results of the Company could differ materially from any
forward looking statements contained therein. The following information sets
forth certain factors that could cause the actual results to differ materially
from those contained in the forward looking statements.
Limited Operating History and Integration of Operations
Prior to PRG's acquisition of the initial 10 Practices in June 1995 pursuant
to the Reorganization, PRG conducted no significant operations. Since its
formation, PRG has grown principally through acquisitions, a substantial portion
of which have been consummated since March 1996, and is pursuing an aggressive
growth strategy. If PRG is to realize the anticipated benefits of acquisitions,
including the EyeCorp Merger, the EquiMed Acquisition, AOI Acquisition and the
various other 1996 acquisitions and any future acquisitions, the operations of
these entities must be integrated and combined effectively. The process of
integrating management services, administrative organizations, facilities,
management information systems and other aspects of operations, while managing a
larger and geographically expanded entity, presents a significant challenge to
the management of PRG. There can be no assurance that the integration process
will be successful or that the anticipated benefits of its business combinations
will be realized. The dedication of management resources to such integration may
detract attention from the day-to-day operations of PRG. The difficulties of
integration may be increased by the necessity of coordinating geographically
separated organizations, integrating personnel with disparate business
backgrounds and combining different corporate structures. There can be no
assurance that there will not be substantial unanticipated costs associated with
such activities or that there will not be other material adverse effects of
these integration efforts. Such efforts could materially reduce the earnings of
PRG. PRG has incurred approximately $12,000,000 in connection with the EyeCorp
Merger and certain other pooling of interests transactions. These transaction
costs have been recognized as an expense by the Company during 1996. These
amounts include legal, accounting, financial, advisory and other costs directly
attributable to negotiating and closing these transactions and do not reflect
integration costs. In addition, PRG has incurred approximately $5,761,000 of
costs in connection with the EquiMed Acquisition, the AOI Acquisition and the
various other 1996 acquisitions that were accounted for as purchases, all of
which were capitalized and will be amortized in the future. There can be no
assurance that PRG will not incur additional charges in subsequent periods to
reflect costs associated with these transactions.
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Acquisition Strategy and Limitation on Growth
An integral part of PRG's business strategy is to increase its revenues,
earnings and market share through the acquisition of the assets of eye care
physician practice groups, management services organizations (MSOs), ASCs and
related businesses and the entry into management services relationships with
such groups. There can be no assurance that PRG will be able to acquire the
assets of, or profitably provide management services to, additional eye care
practices or successfully integrate such additional management services
relationships. In addition, there can be no assurance that the assets of eye
care practices acquired in the future, or the management services relationships
entered into in the future, will be beneficial to the successful implementation
of PRG's overall strategy, or that such assets and relationships will ultimately
produce returns that justify their related investment or implementation by PRG.
PRG's ability to expand is also dependent upon factors such as its ability to
(i) identify attractive and willing candidates for acquisition, (ii) adapt or
amend PRG's structure to comply with present or future state legal requirements
affecting PRG's arrangements with physician practice groups, including state
prohibitions on fee-splitting, corporate practice of medicine and referrals to
facilities in which physicians have a financial interest, (iii) obtain
regulatory approval and certificates of need, where necessary, and comply with
licensing requirements applicable to physicians and facilities operated, and
services offered, by physicians and (iv) expand PRG's infrastructure and
management to accommodate expansion. There can be no assurance that PRG will be
able to achieve these objectives or its planned growth, that the assets of eye
care practice groups will continue to be available for acquisition by PRG, or
that the addition of such practice groups will be profitable.
PRG's expansion strategy also requires substantial capital investment. Capital
is needed not only for the acquisition of the assets of physician practices, but
also for their effective integration, operation and expansion and for the
addition of medical equipment and technology. PRG may finance future
acquisitions by using shares of common stock for all or a portion of the
consideration to be paid. In the event that the common stock does not maintain a
sufficient valuation, or potential acquisition candidates are unwilling to
accept common stock as part of the consideration for the sale of the assets of
their businesses, PRG may be required to utilize more of its cash resources, if
available, in order to pursue its acquisition program. If PRG does not have
sufficient cash resources, its growth could be limited and its existing
operations impaired, unless it is able to obtain additional capital through
subsequent debt or equity financings. There can be no assurance that PRG will be
able to obtain such financing or that, if available, such financing will be on
terms acceptable to PRG. The Company's credit facility requires, under certain
circumstances, the consent of the Company's lenders prior to the consummation of
acquisitions, and there can be no assurance the Company's lenders will grant
their consent each time the solicitation of such consent is required. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." As a result, there can be no
assurance that PRG will be able to continue to implement its acquisition
strategy successfully.
Risks Related to Intangible Assets
As a result of PRG's various acquisition transactions, net intangible assets
of approximately $367,000,000 have been recorded on PRG's December 31, 1996
balance sheet as a result of purchase accounting. Using an amortization period
ranging from seven to 40 years for intangibles, amortization expense relating to
these intangibles will be approximately $11,000,000 per year. Purchases of
practices that result in the recognition of additional intangible assets would
cause amortization expense to further increase. A substantial portion of the
amortization generated by these intangible assets is not deductible for tax
purposes.
As practice asset acquisitions are made, PRG evaluates each acquisition
considering the practice's market position, reputation, profitability, and
geographical penetration, its position in the PRG provider network, the
collective experience of its executives and employees, its relationships with
its customers and physicians, the relationships between its physicians and
their patients and the specific service agreements entered into with the
Practices. All of these factors contribute to the purchase price paid for the
acquisition and to the intangible created in the purchase transaction.
Generally, PRG management believes that these intangibles will have a life of
indefinite length.
At the time of or following each acquisition, PRG evaluates each acquisition
and establishes an appropriate amortization period based on the underlying facts
and circumstances. Subsequent to such initial evaluation, PRG periodically
reevaluates such facts and circumstances to determine if the related intangible
asset continues to be realizable and if the amortization period continues to be
appropriate. As the underlying facts and circumstances subsequent to the date of
acquisition can change, there can be no assurance that the value of such
intangible assets will
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be realized by PRG. Although at December 31, 1996, the net unamortized balance
of intangible assets acquired was not considered to be impaired, any future
determination that a significant impairment has occurred would require the
write-off of the impaired portion of unamortized intangible assets, which could
have a material adverse effect on the Company's results of operations.
Government Regulation
Various state and federal laws regulate the relationships between providers of
health care services, physicians and other clinicians. See "Business--Government
Regulation and Supervision."
These laws include the fraud and abuse provisions of the Social Security Act,
which include the "anti-kickback" and "anti-referral" laws. The "anti-
kickback" laws prohibit the offering, payment, solicitation or receipt of any
direct or indirect remuneration for the referral of Medicare or Medicaid
patients or for the ordering or providing of Medicare or Medicaid covered
services, items or equipment. The "anti-referral" laws impose restrictions on
physicians' referrals for designated health services to entities with which they
have financial relationships. Violations of these laws may result in substantial
civil or criminal penalties for individuals or entities, including large civil
monetary penalties and exclusion from participation in the Medicare and Medicaid
programs. Such exclusion, if applied to the Practices, could result in
significant loss of reimbursement. A determination of liability under any such
laws could have a material adverse effect on the Company's operations.
Several states, including states in which some Practices are located, have
adopted laws similar to the "anti-kickback" and "anti-referral" laws that
cover patients in private programs as well as government programs. The laws of
many states also prohibit physicians from splitting fees with non-physicians and
prohibit non-physician entities from practicing medicine. These laws vary from
state to state and are enforced by the courts and by regulatory authorities with
material discretion. A determination of liability under any such laws could have
a material adverse effect on PRG.
Although PRG believes that its operations are in substantial compliance with
existing applicable laws, PRG's business operations have not been the subject of
judicial or regulatory interpretation. There can be no assurance that review of
PRG's business by courts or regulatory authorities will not result in
determinations that could adversely affect the operations of PRG or that the
health care regulatory environment will not change so as to restrict PRG's
existing operations or their expansion. In addition, the regulatory framework of
certain jurisdictions may limit PRG's expansion into, or ability to continue
operations within, such jurisdictions if PRG is unable to modify its operational
structure to conform with such regulatory framework. Any limitation on PRG's
ability to expand could have a material adverse effect on the Company's
operations.
In addition to extensive existing government health care regulation, there
have been numerous initiatives on the federal and state levels for comprehensive
reforms affecting the payment for and availability of health care services. PRG
believes that such initiatives will continue during the foreseeable future.
Aspects of certain of these reforms as proposed in the past, such as further
reductions in Medicare and Medicaid payments and additional prohibitions on
physician ownership, directly or indirectly, of facilities to which they refer
patients, if adopted, could adversely affect PRG.
Reimbursement; Trends and Cost Containment
PRG's revenues are derived principally from service fees paid to PRG by the
Practices. Since the amount of service fees payable to the Company is generally
determined with reference to the revenues or earnings of the Practices, any
reduction in the revenues of Practices could adversely affect the Company. A
substantial portion of the revenues of the Practices are derived from
government sponsored health care programs (principally, the Medicare and
Medicaid programs) or private third party payors. The health care industry is
experiencing a trend toward cost containment as government and private third-
party payors seek to impose lower reimbursement and utilization rates and
negotiate reduced payment schedules with service providers. PRG believes that
these trends will continue to result in a reduction from historical levels in
per-patient revenue for such medical practices. Further reductions in payments
to physicians or other changes in reimbursement for health care services would
have an adverse effect on PRG's operations unless PRG is otherwise able to
offset such payment reductions.
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Rates paid by private third-party payors are based on established physician,
ASC and hospital charges and are generally higher than Medicare reimbursement
rates. Any decrease in the relative number of patients covered by private
insurance could have a material adverse effect on PRG's results of operations.
The federal government has implemented, through the Medicare program, the
RBRVS payment methodology for physician services. This methodology went into
effect in 1992 and was implemented during a transition period in annual
increments through December 31, 1995. RBRVS is a fee schedule that, except for
certain geographical and other adjustments, pays similarly situated physicians
the same amount for the same services. The RBRVS is adjusted each year, and is
subject to increases or decreases at the discretion of Congress. To date, the
implementation of RBRVS has reduced payment rates for certain of the procedures
historically provided by the Practices. RBRVS-type of payment systems have also
been adopted by certain private third-party payors and may become a predominant
payment methodology. Wider-spread implementation of such programs would reduce
payments by private third-party payors and could indirectly reduce PRG's
operating margins to the extent that costs of providing management services
related to such procedures could not be proportionately reduced.
There can be no assurance that any or all of these reduced revenues and
operating margins could be offset by PRG through cost reductions, increased
volume, introduction of new procedures or otherwise. See "Business--Government
Regulation and Supervision."
Risks Associated with Managed Care Contracts
As an increasing percentage of patients are coming under the control of
managed care entities, PRG believes that its success will, in part, be dependent
upon PRG's ability to negotiate, on behalf of the Practices, contracts with
HMOs, employer groups and other private third-party payors pursuant to which
services will be provided on a risk-sharing or capitated basis by some or all
Practices. Under some of such agreements, the healthcare provider accepts a pre-
determined amount per patient per month in exchange for providing all necessary
covered services to the patients covered under the agreement. Such contracts
pass much of the financial risk of providing care, such as over-utilization,
from the payor to the provider. Such contracts, in general, result in greater
predictability of revenues, but greater unpredictability of expenses. There can
be no assurance that PRG will be able to negotiate, on behalf of its Practices,
satisfactory arrangements on a risk-sharing or capitated basis. In addition, to
the extent that patients or enrollees covered by such contracts require more
frequent or extensive care than is anticipated, operating margins may be
reduced, or in the worst case, the revenues derived from such contracts may be
insufficient to cover the costs of the services provided. As a result, Practices
may incur additional costs, which would reduce or eliminate anticipated earnings
under such contracts. Any such reduction or elimination of earnings could have a
material adverse affect on PRG's results of operations.
Shares Eligible for Future Sale; Registration Rights
As of March 21, 1997, PRG had approximately 30,100,000 shares of outstanding
common stock. Of such shares, (i) approximately 9,300,000 shares were registered
in connection with two underwritten public offerings (which included the sale of
1,500,000 shares by certain selling stockholders); (ii) the issuance of
approximately 8,700,000 shares (excluding shares subsequently reacquired by the
Company) was registered and such shares were issued in connection with
acquisitions (with the resale of a portion of such shares contractually subject
to the holding periods and volume limitations provided for under Rule 144 of the
Securities Act (as in effect from time to time); (iii) the issuance of
approximately 1,500,000 shares was not registered and such shares were issued in
acquisitions or prior to PRG's IPO, but the resale of such shares has been
registered (a portion of which shares has already been resold); and (iv) the
issuance of approximately 10,200,000 shares was not registered and such shares
were issued in connection with acquisitions or prior to PRG's IPO, and the
holders of substantial portions of such shares have certain registration rights,
including approximately 9,800,000 of such shares that have piggyback
registration rights that entitle the holders to include such shares in the
registration statement required to be filed by the Company to register under the
Securities Act the resale of the convertible debentures (Debentures) and the
underlying common stock and demand registration rights were exercised in
March 1997.
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<PAGE>
The Company estimates that approximately 6,900,000 of such shares will become
eligible for sale under and in accordance with Rule 144, as currently in effect,
promulgated under the Securities Act (subject to the volume and manner of sale
restrictions of Rule 144) as early as April 29, 1997. As early as June 1997,
approximately 5,000,000 shares will become eligible for sale pursuant to the
terms of certain stockholders rights. In addition, in January 1997, the Company
registered approximately 10,000,000 shares under the Securities Act for issuance
in connection with future acquisitions.
In general, shares whose issuance has been registered are freely tradeable
without restriction except to the extent held or acquired by affiliates of PRG
and shares whose issuance has not been registered may be resold publicly only in
future transactions registered under the Securities Act or in compliance with an
exemption from registration requirements of the Securities Act, including the
exemption provided by Rule 144 thereunder. The Securities and Exchange
Commission has also implemented changes to Rule 144, such that effective April
29, 1997, the holding period under Rule 144 for sales subject to volume and
manner of sale restrictions will be reduced from two years to one year and the
holding period for sales not subject to such restrictions will be reduced from
three years to two years.
No prediction can be made as to the effect, if any, that the sale of shares or
the availability of shares for sale will have on the market price prevailing
from time to time. Nevertheless, sales of substantial amounts of the common
stock in the public market or the perception that such sales could occur could
adversely affect prevailing market prices and the ability of PRG to raise equity
capital in the future.
Competition
PRG experiences competitive pressures for the acquisition of the assets of,
and the provision of management services to, additional practices and the
acquisition of MSOs. PRG knows of several private practice management companies
focused on eye care services. Several other practice management companies, both
publicly and privately held, that have established operating histories and, in
some instances, greater resources than PRG, are pursuing the acquisition of the
assets of other general and specialty medical, including eye care practices and
the management of such practices. Additionally, some hospitals, clinics, health
care companies, HMOs and insurance companies engage in activities similar to the
activities of these other practice management companies. There can be no
assurance that PRG will be able to compete effectively with such competitors for
the acquisition of, or affiliation with, eye care practices, that additional
competitors will not enter the market, that such competition will not make it
more difficult or expensive to acquire the assets of, and provide management
services to, eye care practices on terms beneficial to PRG or that competitive
pressures will not otherwise adversely affect the Company.
The Practices compete with numerous local eye care service providers. PRG
believes that changes in governmental and private reimbursement policies and
other factors have resulted in increased competition among providers for the
provision of medical services to consumers. There can be no assurance that the
Practices will be able to compete effectively in the markets that they serve.
PRG believes that the cost, accessibility and quality of services provided are
the principal factors that affect competition. There can be no assurance that
the Practices will be able to compete effectively in the markets that they
serve, which inability to compete could adversely affect PRG.
Further, the Practices will compete with other providers for managed care
contracts. PRG believes that trends toward managed care have resulted, and will
continue to result, in increased competition for such contracts. Other practices
and MSOs may have more experience than the Practices and PRG in obtaining such
contracts. There can be no assurance that PRG and the Practices will be able to
successfully acquire sufficient managed care contracts to compete effectively in
the markets they serve, which inability to compete could adversely affect PRG.
Potential Liability and Insurance; Legal Proceedings
The provision of medical services entails an inherent risk of professional
malpractice and other similar claims. Generally, PRG only provides facilities
and administrative services in connection with the provision of its management
services to the Practices; however, in states where the Company is permitted
under applicable regulations, PRG directly contracts with physicians and
optometrists for the provision of professional services. In all cases, PRG does
not control or direct the practice of medicine by physicians and does not assume
responsibility for compliance with certain regulatory and other requirements
directly applicable to physicians and physician groups. There can be no
assurance that claims, suits or complaints relating to services and products
provided by Practices will not be asserted against PRG in the future.
Additionally, PRG owns and operates ASCs. A significant source of potential
liability would be claims of
17
<PAGE>
negligence on the part of health care professionals under direct contract with
the Company to provide professional services or employed by the Practices or in
connection with surgeries performed at the Company's ASCs and would be based on
the Company's relationship with the Practices or ASCs. The Company could also be
held liable for negligence regardless of the relationship between the Company
and the Practices if the Company were deemed negligent in selecting or retaining
health care professionals or otherwise in performing its management services or
operating ASCs.
PRG maintains insurance coverage that it believes is adequate both as to risks
and amounts. Such insurance extends to professional liability claims that may be
asserted against PRG directly or against employees of PRG that work on site at
the Practice locations. In addition, pursuant to the Service Agreements, the
Practices (or PRG on behalf of the Practices) are required to maintain
professional liability insurance. Nevertheless, there can be no assurance that
successful malpractice or other claims will not be asserted against the
Practices or PRG that exceed applicable policy limits, which could have a
material adverse effect on PRG.
PRG, in connection with the acquisition of the assets of certain of the
Practices, typically succeeds to some or all of the liabilities of the
Practices. Therefore, claims may be asserted against PRG for events that
occurred prior to the acquisition of the assets of certain of the Practices. PRG
maintains insurance coverage related to those risks that it believes is adequate
both as to risks and amounts, although no assurance can be provided that any
successful claims will not exceed applicable policy limits.
The availability and cost of professional liability insurance has been
affected by various factors, many of which are beyond the control of PRG and the
Practices. There can be no assurance that liability insurance will be available
to PRG in the future at acceptable costs or that the future cost of such
insurance to PRG and the Practices will not have an adverse effect on PRG's
operations. See "Business--Corporate Liability and Insurance."
During 1996, the Company acquired a Practice that is a party to litigation
regarding alleged infringement of three patents related to a refractive surgical
procedure. The Practice believes that its procedure does not infringe the
patented procedure and has not made any royalty payments related to its
performed procedures. The Company has incurred $353,000 of legal expenses
related to this litigation and expects to incur additional costs in 1997.
Management of the Company believes that the outcome of this litigation will not
have a material impact on its financial condition or results of operations.
Anti-Takeover Considerations
Certain provisions of the Company's Restated Certificate of Incorporation, the
Company's Bylaws and Delaware law could discourage potential acquisition
proposals, delay or prevent a change in control of the Company and,
consequently, limit the price that investors might be willing to pay in the
future for shares of the common stock. These provisions include a classified
Board of Directors, the inability to remove directors except for cause and the
ability to issue, without further stockholder approval, shares of preferred
stock with rights and privileges senior to the common stock. In addition, in
April 1996 the Company adopted a stockholder rights plan, which can have a
significant anti-takeover effect. The Company also is subject to Section 203 of
the Delaware General Corporation Law which, subject to certain exceptions,
prohibits a Delaware corporation from engaging in any of a broad range of
business combinations with an ''interested stockholder'' for a period of three
years following the date that such stockholder became an interested stockholder.
The Company's principal credit facilities require the Company to obtain the
consent of the lender following a change in PRG's senior management personnel,
and a "Change of Control" constitutes an event of default under the credit
facilities. In the event of a Change in Control, each holder of the Debentures
will have the right, at the holder's option, to require the Company to
repurchase all or a portion of such holder's Debentures at a purchase price
equal to 100% of the principal amount thereof plus accrued interest to the
repurchase date. These provisions of the Company's credit facilities and the
Debentures could serve to impede or prevent a change of control or have a
depressive effect on the price of the common stock. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
Leverage
The Company's indebtedness is significant in relation to its stockholders'
equity. Long-term debt accounted for approximately 32% of the Company's total
capitalization.
18
<PAGE>
Possible Volatility of Stock Price
The market price of the common stock could be subject to significant
fluctuations in response to various factors and events, including variations in
the Company's earnings results, changes in earnings estimates by securities
analysts, publicity regarding the Company, its competitors, the physician
practice management industry or the health care industry generally, new statutes
or regulations or changes in the interpretation of existing statutes or
regulations affecting the health care industry in general or the physician
practice management industry specifically, changes in the reimbursement
practices or policies of third party payors, sales of substantial amounts of
common stock in the public market or the perception that such sales could occur
and other factors. In addition, in recent years, the stock market and, in
particular, the physician practice management segment and the health care
industry, has experienced broad price and volume fluctuations that often have
been unrelated to the operating performance of particular companies. These
market fluctuations also may adversely affect the market price of the shares of
common stock. See "Market Information."
ITEM 2. PROPERTIES
In addition to its various practice facilities, PRG operates and leases
corporate offices in Dallas, Texas; Houston, Texas and Memphis, Tennessee. Its
corporate headquarters were relocated to Dallas in January 1996. All legal,
administrative, financial, accounting, information systems, and certain
operational activities are performed in Dallas. The Houston and Memphis offices
function as regional operational and development offices for the West and East
regions, respectively. As a result of the EquiMed Acquisition and the AOI
Acquisition, the Company also operates and leases regional operational and
development offices in Atlanta, Georgia and Orlando, Florida.
ITEM 3. LEGAL PROCEEDINGS
PRG is not a party to any claims, suits or complaints relating to services and
products provided by PRG or the Practices that PRG expects to have a material
adverse effect on its business or operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANTS EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The common stock was initially offered to the public on June 23, 1995 at a
price of $13.00 per share and is listed on the New York Stock Exchange (NYSE)
under the symbol "PRG." The following table sets forth the high and low sales
prices by quarter as reported by the NYSE.
HIGH LOW
---- ---
Fiscal year ended December 31, 1995
2nd Quarter (from June 23, 1995) $14 3/8 $13 1/8
3rd Quarter 24 1/8 12 1/4
4th Quarter 24 17 3/4
Fiscal year ended December 31, 1996
1st Quarter 28 3/4 16 1/4
2nd Quarter 34 3/8 26 3/4
3rd Quarter 33 1/8 19 3/4
4th Quarter 27 1/8 18 3/8
Fiscal year ended December 31, 1997
1st Quarter (through March 21,
1997) 18 1/8 10 3/8
19
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On March 21, 1997, the last sale price for the common stock as reported by the
NYSE was $11.13 per share. On March 21, 1997, there were 541 registered holders
of common stock.
DIVIDEND POLICY
PRG has not paid any cash dividends since its inception and does not intend to
pay cash dividends in the foreseeable future. Any payments of such dividends in
the future will depend upon the earnings and financial position of PRG, its
capital needs and such other factors as the Board of Directors may deem
appropriate.
ITEM 6. SELECTED FINANCIAL DATA
PRG was incorporated in 1993, but did not conduct any significant operations
prior to the IPO in June of 1995. The PRG Historical financial data for the
years ended December 31, 1994, 1995 and 1996 presented below reflects
actual results of operations and financial position of PRG (including the
acquisitions accounted for as poolings of interests) and has been derived from
and should be read in connection with the PRG consolidated financial statements
and notes thereto included elsewhere herein.
20
<PAGE>
<TABLE>
<CAPTION>
PRG HISTORICAL
---------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------
STATEMENT OF OPERATIONS 1994 1995 1996
DATA: --------- ------- --------
<S> <C> <C> <C>
Revenues $57,173 $89,967 $248,293
------- ------- --------
Costs and expenses:
Salaries, wages and
benefits 31,627 50,061 115,200
Pharmaceuticals and
supplies 6,793 9,487 30,919
General and administrative 10,951 22,478 62,353
Depreciation and
amortization 2,361 3,498 11,192
Interest expense, net 1,411 1,516 1,304
Executive resignation
expenses -- 1,117 --
Patent litigation defense
costs -- -- 353
Merger transaction
expenses -- -- 12,030
Minority interest -- -- --
------- ------- --------
Total costs and expenses 53,143 88,157 233,351
======= ======= ========
Income before income taxes
and extraordinary item 4,030 1,810 14,942
Provision for income taxes 1,162 501 7,770
------- ------- --------
Income before
extraordinary item 2,868 1,309 7,172
Extraordinary item -- (119) --
------- ------- --------
Net income $ 2,868 $ 1,190 $ 7,172
======= ======= ========
Income per share:
Income before
extraordinary item $0.37 $0.10 $0.28
Extraordinary item -- (0.01) --
------- ----- -----
Net income $0.37 $0.09 $0.28
======= ===== ======
Number of shares used in
net income per share
calculation 7,833 12,723 25,365
======= ======== ========
AS OF DECEMBER 31
---------------------------
BALANCE SHEET DATA: 1995 1996
---- ----
Working capital................................. $ 25,134 $103,559
Total assets.................................... 138,780 581,534
Long-term debt, net of current portion.......... 32,788 148,988
Stockholders' equity............................ 68,595 310,673
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Financial Statements and related notes contained elsewhere herein.
OVERVIEW
PRG was incorporated in 1993 but conducted no significant operations until the
IPO and Reorganization in June 1995. The Company provides management,
marketing, information systems, capital resources and other services to its
Practices in accordance with its Service Agreements. In fulfilling its
obligations under the Service Agreements, the Company pays the operating costs
and expenses on behalf of the Practices. As a result, the operating costs and
expenses previously incurred by the Practices are reflected in the operating
expenses of PRG. The Company provides services, to its Practices, ASCs and
optical dispensaries. In addition, the Company contracts with certain physicians
for the provision of medical services to Practices which the Company controls.
PRG also owns and controls certain ASCs and optical dispensaries. The revenues
recorded by the Company reflect a combination of management fees earned under
its Service Agreements and, in the case of its controlled Practices, ASCs and
optical dispensaries, medical services related to patient charges. In addition
to the operating costs and expenses discussed above, the Company is incurring
personnel and administrative expenses in connection with maintaining corporate
and regional offices, which provide additional management and administrative
services to the Practices.
As discussed above, PRG commenced operations in June 1995, when it began
providing management services to its initial 10 Practices. No further
acquisitions were completed in 1995. However, throughout the course of 1996, a
significant number of acquisitions were made by the Company. Between March and
August 1996, the Company merged, in pooling of interests transactions, with
EyeCorp, and seven practices (the Merged Entities). As a result of these
mergers, the Company's financial data has been restated to reflect the inclusion
of the Merged Entities for all periods presented.
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<PAGE>
In addition to the mergers/poolings referred to above, PRG and one of the
Merged Entities made purchase acquisitions throughout 1995 and 1996. During
June, 1995, PRG acquired, through the Reorganization, the initial 10 Practices.
On December 28, 1995, one of the Merged Entities acquired an additional 48
practices. Between February 1996 and the end of the year, the Company acquired
45 individual Practices, the eye care division of EquiMed (22 practices), and
AOI (16 practices) in purchase transactions. See "Business--Overview."
Accordingly, for the year ended December 31, 1994, the statement of operations
data included activity related to the EyeCorp practices (consisting of 2 during
1994) and the seven practices accounted for as poolings of interests. For the
year ended December 31, 1995, the statement of operations data included the
EyeCorp practices (consisting of 2 throughout most of 1995), the seven pooled
practices and the initial 10 practices for the second half of the year. For
the year ended December 31, 1996, the statement of operations data included the
EyeCorp practices (including the 48 practices acquired by EyeCorp on December
28, 1995), the seven pooled practices, the initial 10 practices and the 83
additional practices acquired throughout 1996 in purchase transactions.
RESULTS OF OPERATIONS - HISTORICAL
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenues. Revenues were $248,293,000 for the year ended December 31, 1996
versus $89,967,000 for the comparable period in 1995, an increase of
$158,326,000 or 176%. This significant increase is primarily attributable to (i)
the fact that the acquisition of the assets of the initial 10 Practices did not
occur until June 28, 1995, (ii) the assets of 48 of EyeCorp's 50 eye care
practices were acquired on December 28, 1995, and had no significant operating
results included in the 1995 period, (iii) a significant increase (45) in the
number of individual practice acquisitions made by PRG during 1996 and (iv) the
acquisition of the EquiMed and AOI practices.
Costs and Expenses. Costs and expenses were $233,351,000 for the year ended
December 31, 1996 versus $88,157,000 for the comparable period in 1995. This
overall increase of $145,194,000 or 166%, was primarily driven by the increase
in the number of practices as discussed in the revenue section above. The
components of costs and expenses are discussed below:
Salaries, Wages and Benefits. Salaries, wages and benefits were
$115,200,000 for the year ended December 31, 1996, compared to $50,061,000
for the year ended December 31, 1995, an increase of $65,139,000. The
decrease as a percentage of revenues (55.6% in 1995 to 46.4% in 1996) was
due to lower owner physician compensation withdrawals, as a percentage of
revenues, during 1996 versus 1995 related to several large practices that
were acquired under the pooling of interests method of accounting in 1996.
Pharmaceuticals and Supplies. Pharmaceuticals and supplies expenses were
$30,919,000 for the year ended December 31, 1996, compared to $9,487,000
for the year ended December 31, 1995, an increase of $21,432,000. The
increase as a percentage of revenues (10.6% in 1995 to 12.5% in 1996) was
due primarily to increased surgery center activity during 1996 (45 ASCs in
1996 versus six ASCs in 1995). ASCs generally use a higher level of
pharmaceuticals and supplies than an eye care practice.
General and Administrative. General and administrative expenses were
$62,353,000 for the year ended December 31, 1996, compared to $22,478,000
for the year ended December 31, 1995, an increase of $39,875,000 which was
attributable to the larger number of acquisitions discussed above. General
and Administrative expenses as a percentage of revenues did not change
significantly between the two periods.
Depreciation and Amortization. Depreciation and amortization expenses were
$11,192,000 for the year ended December 31, 1996, compared to $3,498,000
for the year ended December 31, 1995, an increase of $7,694,000. The
slight increase as a percentage of revenues (3.9% in 1995 to 4.5% in 1996)
was due primarily to increased amortization of intangible assets related to
acquisitions that were accounted for as purchases. A greater percentage of
1996 revenues were generated by practices accounted for as purchases.
Interest Expense, net. Interest expenses were $3,395,000 for the year
ended December 31, 1996, compared to $1,752,000 for the year ended December
31, 1995, an increase of $1,643,000. The increase was primarily
attributable to interest on its credit facilities and various practice
debt, both of which were incurred in connection with the significant
acquisition activity in 1996 and due to interest on the convertible
debentures
22
<PAGE>
sold in December 1996. Interest income was $2,124,000 for the year ended
December 31, 1996, compared to $236,000 for the year ended December 31,
1995, an increase of $1,888,000. The increase was primarily attributable to
additional cash available to invest during 1996 (principally from the 1996
Public Offering which generated net proceeds of approximately $113,640,000
and excess net proceeds from the $125,000,000 convertible debentures sold
in December 1996).
Patent Litigation Defense Costs. The Company incurred approximately
$353,000 of legal costs in connection with litigation involving alleged
infringement of three patents related to a refractive surgical procedure.
This patent litigation was brought against one of its Practices during late
1996.
Merger Transaction Expenses. The Company incurred approximately
$12,030,000 of transaction expenses during 1996 in connection with its
pooling of interests with EyeCorp (50 practices) and the mergers with
seven additional practices in the second and third quarter of 1996. There
were no poolings in 1995.
Provision for Income Taxes. The 52.0% effective tax rate for the 1996 period
is substantially higher than the U.S. statutory tax rate of 35%, primarily
because of the nondeductibility, for income tax purposes, of approximately
$7,000,000 of the $12,030,000 merger transaction expenses as well as, to a
lesser extent, the effect of state income taxes. The effective tax rate for the
year ended December 31, 1995 was approximately 27.7%. This percentage was less
than the U.S. statutory tax rate of 34% as a result, primarily, of the earnings
from nontaxable entities with which PRG merged in pooling of interests
transactions somewhat offset by state income taxes and the nondeductibility of a
portion of the executive resignation expenses.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Revenues. Revenues were $89,967,000 for the year ended December 31, 1995
compared to $57,173,000 for the year ended December 31, 1994, an increase of
$32,794,000 or 57%. The primary reason for the increase was the acquisition by
PRG of the initial 10 Practices during June 1995, which contributed $26,395,000
in revenues during the remainder of the year.
Costs and Expenses. Costs and expenses were $88,157,000 for the year ended
December 31, 1995 versus $53,143,000 for the comparable period in 1994. This
increase of $35,014,000 or 65.9%, was attributable to the acquisition of the
initial 10 practices discussed above and the establishment of corporate offices
during the second half of 1995. The components of costs and expenses are
discussed below:
Salaries, Wages and Benefits. Salaries, wages and benefits were $50,061,000
for the year ended December 31, 1995 compared to $31,627,000 for the year
ended December 31, 1994, an increase of $18,434,000 or 58.3%. The dollar
increase was primarily attributable to the acquisition of the initial 10
Practices and the establishment of corporate offices by PRG and EyeCorp
during the second half of 1995. As a percentage of revenues, salaries,
wages and benefits were relatively constant between years.
Pharmaceutical and Supplies. Pharmaceutical and supplies expenses were
$9,487,000 for the year ended December 31, 1995 compared to $6,793,000 for
the year ended December 31, 1994, an increase of $2,694,000, or 39.7%,
resulting from the initial 10 practices. Pharmaceutical and supplies
expenses were 10.5% and 11.9% of revenues for 1995 and 1994, respectively.
This slight decrease, as a percent of revenue, was attributable to the
higher rate of growth of medical service revenue versus surgery center
revenue in 1995. Fewer pharmaceuticals and supplies are used in generating
medical service revenue than in surgery center revenue.
General and Administrative. General and administrative expenses were
$22,478,000 for the year ended December 31, 1995, compared to $10,951,000
for the year ended December 31, 1994, an increase of $11,527,000, or
105.3%. Approximately $6,500,000 of the increase was due to the acquisition
of the initial 10 Practices and the establishment of corporate offices by
PRG and EyeCorp. Approximately $3,800,000 of this increase was attributable
to increased corporate costs of EyeCorp in preparing for the acquisition of
48 eye care practices on December 28, 1995. General and administrative
expenses were 25.0% and 19.2% of revenue for 1995 and 1994, respectively,
with the increase being attributable to the establishment of the corporate
offices.
Depreciation and Amortization. Depreciation and amortization expenses
were $3,498,000 for the year ended December 31, 1995, compared to
$2,361,000 for the year ended December 31, 1994, an increase of $1,137,000,
23
<PAGE>
or 48.2%. Depreciation and amortization expenses were relatively constant
at 3.9% and 4.1% of revenue for 1995 and 1994. The increase in total
dollar amount was primarily attributable to the acquisition of the initial
10 Practices during 1995 and the full year impact during 1995 of
acquisitions made by EyeCorp during 1994.
Interest Expense, net. Interest expenses did not increase significantly
between 1994 and 1995. A slight increase in EyeCorp's interest expenses
were offset by $236,000 of PRG interest income during 1995 related to
investment of unused IPO proceeds. The higher EyeCorp interest expenses
were the result of higher levels of indebtedness necessary to support the
increased corporate costs discussed above.
Executive Resignation Expense. The $1,117,000 of 1995 executive
resignation expenses were the result of payments associated with the
resignation of PRG's former chief executive officer in connection with the
terms of his separation agreement in September 1995.
Provision for Income Taxes. Total provision for income taxes in 1994 was
$1,594,000 (including pro forma effects) or 40% of income before income taxes
compared to $700,000 (including pro forma effects and extraordinary items) or
43% of income before income taxes during 1995. The increase, in 1995, as a
percentage of income before income taxes was attributable to a reduced tax
benefit percentage recognized on EyeCorp's 1995 pre-tax loss. EyeCorp's 1995
pre-tax loss was caused primarily by significantly increased 1995 corporate
costs, as discussed above.
Extraordinary Item. The $119,000 extraordinary item in 1995 was attributable
to a loss on early extinguishment of debt for EyeCorp, net of the related income
tax effect.
LIQUIDITY AND CAPITAL RESOURCES
Cash, Working Capital and Debt
During 1996, the Company made significant cash expenditures and incurred
significant obligations with respect to (i) the EyeCorp, EquiMed and AOI
physician practice management company acquisitions, (ii) various individual
practice and ASC acquisitions and related debt pay-off (see Note 1 of Notes to
Consolidated Financial Statements), (iii) capital expenditures for expansion and
relocation of the corporate and regional offices and information systems, (iv)
final payment of certain obligations due to the physician owners of the initial
10 Practices, (v) credit facility repayments and (vi) other miscellaneous cash
expenditures. To finance these cash expenditures, PRG utilized net proceeds from
its initial public offering ($37,229,000), the 1996 Public Offering
($113,640,000), the convertible debt offering ($121,679,000), borrowings under
its bank credit facilities and cash generated from operations during the year.
Accordingly, as of December 31, 1996, cash and short-term investments on hand
were $53,418,000, working capital was $103,559,000 and total long-term debt was
$160,268,000 (including current portion), $125,000,000 of which is related to
the convertible debentures.
Subsequent to December 31, 1996, the Company has made additional cash
expenditures for acquisitions, quarterly tax payments and debt repayments,
resulting in a cash balance as of March 21, 1997 of approximately $42,000,000.
The Company has also committed to loan to its Chairman approximately $2,200,000
to be used to purchase convertible preferred stock (subject to stockholder
approval) and will be making debt payments of approximately $3,300,000 by April
15, 1997. Additionally, certain amounts could be paid to EquiMed should it
deliver practice acquisitions that meet certain criteria.
Credit Facilities
During late 1995 and early 1996, PRG and EyeCorp established $55,000,000 of
credit facilities with NationsBank of Tennessee, N.A. (NationsBank) that were
used to fund acquisitions, capital expenditures and working capital throughout
1996. The entire amount of the facility, plus a $30,000,000 bridge loan, had
been substantially utilized in late November 1996, and was repaid with certain
of the proceeds from the $125,000,000 convertible debt offering in December
1996. In March 1997, PRG arranged a new $90,000,000 credit facility (the PRG
Credit Facility) with a syndicate of banks led by NationsBank, to be used for
acquisitions, capital expenditures, working capital and common stock
repurchases. The PRG Credit Facility is secured by the stock of the subsidiaries
of PRG and guaranteed by the subsidiaries of PRG. Amounts available under the
PRG Credit Facility are subject to an earnings-based borrowing base calculation.
Advances under the PRG Credit Facility bear interest at either LIBOR or the
lender's prime rate, at PRG's option, plus in the case of a LIBOR advance, a
spread between 1% and 2.125% or, in the case of a prime rate advance, up to a
1.125% spread. Under the terms of the PRG Credit Facility, NationsBank has the
right to approve certain acquisitions. Additionally, the
24
<PAGE>
terms of the PRG Credit Facility include certain financial and operating
covenants. No amounts are currently outstanding under the PRG Credit Facility.
The Offerings
In May 1996, PRG completed the 1996 Public Offering of 5,750,000 of common
shares at $28.50 per share. In connection with the 1996 Public Offering,
4,250,000 shares were sold by the Company and 1,500,000 were sold by existing
stockholders. Proceeds to the Company, net of underwriting commissions and
offering costs, were approximately $113,640,000. Of this amount, approximately
$38,100,000 was used to retire existing indebtedness under PRG's then existing
credit facilities. A substantial portion of the remaining proceeds were used
ultimately to fund the EquiMed Acquisition ($55,077,000).
In December of 1996, PRG consummated a $125,000,000 convertible subordinated
debenture offering. The Debentures are due in 2001 and bear 6% interest
payable June 1 and December 1 of each year. These Debentures are convertible
into common stock of the Company at $25 per share at the option of the holder
and are not redeemable by the Company prior to December 6, 1999. The net
proceeds of the offering were approximately $121,679,000. Of this amount,
approximately $80,000,000 was used to retire indebtedness related to the
existing credit facilities that had been utilized on the acquisition of AOI.
Liquidity
PRG management believes that its existing cash resources, cash to be
generated from operations and borrowings under its currently unused $90,000,000
credit facility will be sufficient to fund ongoing operations, working capital
needs, capital expenditures, and the planned acquisition program throughout the
remainder of 1997. Management further believes that other equity or debt
offerings could be utilized to supplement these existing resources in the event
that greater than anticipated cash resources are required to consummate major
acquisitions or stock repurchases. However, there can be no assurance that the
Company would be able to consummate such offerings in the future.
Inflation
To date, inflation has not had a material effect on the combined results of
operations of the Practices.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements and Supplementary Data are included herein on pages F-1
through F-20.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
25
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF PRG
The name, age, position and term of each executive officer of the Company is
set forth under the heading Executive Officers on page 12 under Item 1 of this
report. The remaining information required by this Item 10 is hereby
incorporated by reference to the Company's definitive proxy statement (the Proxy
Statement) for the Company's annual meeting of stockholders to be held during
1997 and to be filed pursuant to Regulation 14A promulgated by the Securities
and Exchange Commission under the Securities Exchange Act of 1934, which Proxy
Statement is anticipated to be filed within 120 days after the end of the
Company's fiscal year ended December 31, 1996.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item 11 is hereby incorporated by reference to
the Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this Item 12 is hereby incorporated by reference to
the Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item 13 is hereby incorporated by reference to
the Company's Proxy Statement.
26
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) 1. INDEX TO FINANCIAL STATEMENTS.
The following Financial Statements are included herein:
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996 F-4
Consolidated Statements of Operations for the three years ended
December 31, 1996 F-5
Consolidated Statements of Changes in Stockholders' Equity for
the three years ended December 31, 1996 F-6
Consolidated Statements of Cash Flows for the three years ended
December 31, 1996 F-7
Notes to Consolidated Financial Statements F-8
2. INDEX TO FINANCIAL SCHEDULES.
No schedules are included because of the absence of conditions under
which they are required or because information is disclosed in the financial
statements or notes thereto.
3. EXHIBITS
The exhibits filed as a part of this report are listed under
"Exhibits" at subsection (c) of this Item.
(b) REPORTS ON FORM 8-K:
The following reports on Form 8-K were filed on behalf of the Company
during the last quarter of the period covered by this report.
27
<PAGE>
INCLUDED
DATE OF DATE ITEMS FINANCIAL
FORM REPORT FILED REPORTED STATEMENTS
---- ------- ------- --------- ----------
8-K 10/07/96 10/07/96 2,7 N/A
8-K 10/09/96 10/16/96 2,5,7 N/A
8-K/A 10/09/96 10/30/96 2,5,7 Financial statements of
Melbourne Eye Associates of
Brevard, Inc., and Melbourne
Eye Associates, P.A., with
related pro forma financial
statements.
8-K/A 10/07/96 10/30/96 5,7 Financial statements of
EquiVision, Inc., EquiMed,Inc.s
Ophthalmology division, American
Ophthalmic, Incorporated, with
related pro forma financial
statements.
8-K/A 8/30/96 11/13/96 5,7 Financial
statements of Frederick A.
Hauber, M.D., P.A.,
HealthDynamic Specialties, Inc.,
Stuart J. Kaufman, M.D., P.A.
and Ophthalmological
Associates, Ltd.
8-K 11/21/96 12/02/96 5,7 N/A
8-K 12/06/96 12/16/96 5 N/A
(C) EXHIBITS
Exhibit
Number Description
------ -----------
2.1 -- Amended and Restated Agreement and Plan of Merger by and among
Physicians Resource Group, Inc., PRG Acquisition Corporation and
EyeCorp, Inc., dated December 22, 1995.(2)(8)
2.2 -- Asset Purchase Agreement by and among EquiMed, Inc., PRG Georgia,
and Physicians Resource Group, Inc. dated October 7, 1996.(8)
2.3 -- Agreement and Plan of Merger by and among American Ophthalmic
Incorporated, PRG Acquisition Corporation and Physician Resource
Group, Inc. dated October 7, 1996.(12)(8)
2.4 -- Asset Purchase Agreement by and among Sun Valley Acquisition
Corporation, Barnet-Dulaney Eye Center, P.L.L.C., Ronald W.
Barnet, M.D.,. David D. Dulaney, M.D., Robert B. Pinkert, O.D.
and Scott A. Perkins, M.D. dated November 29, 1995.(2)(8)
2.5 -- First Amendment to Asset Purchase Agreement and among Sun Valley
Acquisition Corporation, Barnet-Dulaney Eye Center, P.L.L.C.,
Ronald W. Barnet, M.D., David D.
28
<PAGE>
Dulaney, M.D., Robert B. Pinkert, O.D. and Scott A. Perkins, M.D.
dated February 14, 1996.(3)(8)
2.6 -- Agreement and Plan of Merger by and among Physicians Resource
Group, Inc., Sun Valley Acquisition Corporation, SVAC Acquisition
Corporation, Daniel D. Chamber, Michael R. Beck, John R. Hedrick
and Michael Yeary dated December 6, 1995.(2)(8)
2.7 -- Agreement and Plan of Reorganization by and among PRG Nevada
Acquisition Corporation II, Inc., Physician Resource Group, Inc.,
Shepard Eye Surgicenter, Ltd., John R. Shepherd, M.D. and Steven
Hansen, M.D. dated December 6, 1995.(2)(8)
2.8 -- Agreement and Plan of Reorganization by and among PRG Nevada
Acquisition Corporation III, Inc., Physicians Resource Group,
Inc., John R. Shepherd, M.D., Ltd., d/b/a/ Shepherd Eye Center,
John R. Shepherd, M.D. and Steven Hansen, M.D. dated
December 6, 1995.(2)(8)
2.9 -- Asset Purchase Agreement by and among Su Valley Acquisition
Corporation, Mann Berkeley Eye Center, P.A., Paul Michael Mann,
M.D. and Ralph G. Berkeley, M.D. dated November 11, 1995.(2)(8)
2.10 -- First Amendment to Asset Purchase Agreement by and among Sun
Valley Acquisition Corporation, Mann Berkeley Eye Center, P.A.,
Paul Michael Mann, M.D. and Ralph G. Berkeley, M.D. dated
February 14, 1996.(3)(8)
2.11 -- 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.(13)(8)
2.12 -- Agreement and Plan of Merger by an 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.(13)(8)
2.13 -- 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.(13)(8)
2.14 -- 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.(13)(8)
2.15 -- Agreement and Plan of Merger, dated August 13, 1996, between PRG
Ohio III, Inc., Physicians Resource Group, Inc., Cincinnati Eye
Institute, Inc., John S. Cohen, M.D., James D. Faulkner, M.D.,
William J. Faulkner, M.D., Robert C. Kersten, M.D., Richard S.
Kerstine, M.D., Robert H. Osher, M.D., Robert W. Nash, M.D.,
Michael R. Petersen, M.D., Gary A. Varley, M.D., Linda J. Greff,
M.D., Robert J. Cionni, M.D., Kevin T. Corcoran, O.D., and Corwin
M. Smith, MD.(14)(8)
2.16 -- Agreement and Plan of Reorganization, dated August 13, 1996,
between PRG HEA Acq. Corp., Physicians Resource Group, Inc.,
Houston Eye Associates, P.A., Malcom L. Mazow, M.D., Robert H.
Stewart, M.D., Robert B. Wilkins, M.D., Jeffrey D. Lanier, M.D.,
Michael A. Bloome, M.D., Paul C. Salmonsen, M.D., Richard L.
Kimbrough, M.D., Jack T. Holladay, M.D., Jeffrey B. Amoult, M.D.,
William H. Quayle, M.D., John D. Goosey, M.D., John M. Lim, M.D.,
Kathryn H. Musgrove, M.D., Marsha F. Soechting, M.D., and Marc N.
Longo, M.D.(14)(8)
2.17 -- Asset Purchase Agreement, dated August 13, 1996, between PRG Ohio
III, Inc., Physicians Resource Group, Inc. and CEI Realty
Associates, Ltd.(14)(8)
29
<PAGE>
2.18 -- Agreement and Plan of Merger, dated August 13, 1996, between
PRG IV Acq. Corp., Physicians Resource Group, Inc., Gregory L.
Henderson, M.D., P.A., and Gregory L. Henderson, M.D.(14)(8)
2.19 -- Agreement and Plan of Merger, dated August 13, 1996, between PRG
IX Acq. Corp., Physicians Resource Group, Inc., William Reynolds,
M.D., P.A., and William Reynolds, M.D.(14)(8)
2.20 -- Agreement and Plan of Merger, dated August 13, 1996, between PRG
II Acq. Corp., Physicians Resource Group, Inc., Tampa Eye Clinic,
P.A., J. Burns Creighton, M.D., Ronald Seeley, M.D., Lewis
Lauring, M.D., William Reynolds, M.D., David Leach, M.D., P.A.,
and Timothy Lorenzen, M.D., P.A.(14)(8)
2.21 -- Agreement and Plan of Merger, dated August 13, 1996, between PRG
XI Acq Corp., Physicians Resource Group, Inc., Timothy Lorenzen,
M.D., P.A. and Timothy Lorenzen, M.D.(14)(8)
2.22 -- Agreement and Plan of Merger, dated August 13, 1996, between PRG
VII Acq. Corp., Physicians Resource Group, Inc., Ronald Seeley,
M.D., P.A. and Ronald Seeley, M.D.(14)(8)
2.23 -- Agreement and Plan of Merger, dated August 13, 1996, between PRG
VI Acq. Corp., Physicians Resource Group, Inc., J. Burns
Creighton, M.D., P.A. and J. Burn Creighton, M.D.(14)(8)
2.24 -- Agreement and Plan of Merger, dated August 13, 1996, between PRG
X Acq. Corp., Physicians Resource Group, Inc., David Leach, M.D.,
P.A. and David Leach, M.D.(14)(8)
2.25 -- Agreement and Plan of Merger, dated August 13, 1996, between PRG
VIII Acq. Corp., Physicians Resource Group, Inc., Lewis Lauring,
M.D., P.A. and Lewis Lauring, M.D.(14)(8)
2.26 -- Asset Purchase Agreement, dated August 13, 1996, between PRG
Ohio, L.P., CEI Realty Associates, Ltd., and Physicians Resource
Group, Inc.(14)(8)
2.27 -- Share Exchange Agreement by and among PRG Florida XII, Inc.,
Melbourne Eye Associates of Brevard, Inc., Melbourne Eye
Associates, P.A., William Broussard, Trustee U.T.D. March 24,
1980, Michael F. Corcoran, M.D., Trustee U.T.D. September 26,
1998, Andrew Zorbis, M.D., Ralph Paylor, M.D., L. Neal Freeman,
M.D., and Kaukwok Frederick Ho, M.D., Trustee U.T.D. November 24,
1989 and Physicians Resource Group, Inc.(15)(8)
3.1 -- Second Restated Certificate of Incorporation of Physicians
Resource Group, Inc.(10)
3.2 -- Certificate of Designations, Preferences, Rights and Limitations
of Class A Preferred Stock of Physicians Resource Group, Inc.(1)
3.3 -- Third Amended and Restated Bylaws of Physicians Resource Group,
Inc.(5)
4.1 -- Form of Warrant Certificate.(1)
4.2 -- Form of certificate evidencing ownership of common stock of
Physicians Resource Group, Inc.(1)
4.3 -- Rights Agreement dated as of April 19, 1996 between Physicians
Resource Group, Inc. and Chemical Mellon Shareholder Services(9)
10.1 -- Physicians Resource Group, Inc. Amended and Restated 1995 Stock
Option Plan.(5)(7)
30
<PAGE>
10.2 -- Physicians Resource Group, Inc. 1995 Health Care Professionals
Stock Option Plan.(1)
10.3 -- Employment Agreement between Physicians Resource Group, Inc. and
Gregory L. Solomon.(1)(7)
10.4 -- Employment Agreement between Physicians Resource Group, Inc. and
Emmett E. Moore.(1)(7)
10.5 -- Employment Agreement between Physicians Resource Group, Inc. and
Richard M. Owen.(1)(7)
10.6 -- Form of Indemnification Agreement for certain Directors.(1)
10.7 -- Form of Service Agreement by and between Physicians Resource
Group, Inc., Physicians Resource Group Subsidiary, Inc. and TPZ,
Inc. d/b/a/ Eye Care of Medina, Inc.(1)
10.8 -- Form of Service Agreement by and between Physicians Resource
Group, Inc., its wholly-owned subsidiary and The Eye Clinic of
Texas.(1)
10.9 -- Form of Service Agreement by and between Physicians Resource
Group, Inc., its wholly-owned subsidiary and David M. Schneider,
M.D., Inc.(1)
10.10 -- Form of Service Agreement by and between Physicians Resource
Group, Inc., its wholly-owned subsidiary and Texas Eye Institute
Assoc.(1)
10.11 -- Form of Service Agreement by and between Physicians Resource
Group Subsidiary, Inc., its wholly-owned subsidiary and McDonald
Eye Associates, P.A.(1)
10.12 -- Form of Service Agreement by and between Physicians Resource
Group, Inc., its wholly-owned subsidiary and Michael A. Minadeo,
M.D., P.A.(1)
10.13 -- Form of Service Agreement by and between Physicians Resource
Group, Inc., its wholly-owned subsidiary and Southern Nevada Eye
Clinic, Inc., Kenneth C. Westfield, M.D., Ltd. and Nevada
Institute of Ambulatory Surgery, Inc.(1)
10.14 -- Form of Service Agreement by and between Physicians Resource
Group, Inc., its wholly-owned subsidiary and Eye Clinic, P.C.(1)
10.15 -- Form of Service Agreement by and between Superior Eye Care,
Inc. and Charles D. Fritch, M.D., Inc.(1)
10.16 -- Form of Service Agreement by and among Pacific Vision
Services, Inc. and Loma Linda Ophthalmology Medical Group, Inc.,
Inland Eye Institute Medical Group, Inc. and T.E.S.C., Inc.(1)
10.17 -- First Amendment to Service Agreement by and among Physicians
Resource Group, Inc., as successor by merger to Pacific Vision
Services, Inc., Loma Linda Ophthalmology Medical Group, Inc.,
Inland Eye Institute Medical Group, Inc. and T.E.S.C., Inc. dated
August 9, 1995.(4)
10.18 -- Subscription Agreement, dated March 31, 1995 between Notre
Capital Ventures, Ltd. and Physicians Resource Group, Inc.(1)
10.19 -- Form of Registration Rights Agreement.(1)
10.20 -- Form of Registration Rights Agreement.(1)
31
<PAGE>
10.21 -- Form of Registration Rights and Stockholders Agreement.(1)
10.22 -- Form of Registration Rights Agreement dated as of March 7, 1996,
by and among Physicians Resource Group, Inc. and the former
stockholders of EyeCorp, Inc.(5)
10.23 -- Form of Option Agreement between Physicians Resource Group, James
A. Price, M.D., Ben F. House, M.D., Bruce E. Herron, M.D. and
Mark R. Bateman, M.D.(1)
10.24 -- Separation and Mutual Release Agreement between Gregory Solomon
and Physicians Resource Group.(6)(7)
10.25 -- Loan Agreement dated as of January 8, 1996 between PRG and
NationsBank of Tennessee, N.A. ("NationsBank").(2)
10.26 -- Subordination Agreement dated as of December 28, 1995 by and
among NationsBank, EyeCorp, Eyecare Resource, Inc., the EyePA,
Inc. and PRG.(2)
10.27 -- Reimbursement Agreement dated as of December 28, 1995 between
EyeCorp and PRG.(2)
10.28 -- Service Agreement dated as of February 23, 1994, by and
between EyeCorp, Inc., the Vitreoretinal Foundation and David
Meyer, M.D., John E. Linn, M.D., John D. Armstrong, M.D., John L.
Elfervig, M.D. and Thomas A. Browning, M.D.(5)(8)
10.29 -- Amendment to Service Agreement, dated March 8, 1996, by and
between the Vitreoretinal Foundation, David Meyer, M.D., John E.
Linn, M.D., John D. Armstrong, M.D., John L. Elfervig, M.D. and
Thomas A. Browning, M.D. and EyeCorp, Inc.(5)
10.30 -- Second Amendment to Service Agreement dated as of February 23,
1994, by and between EyeCorp, Inc., the Vitreoretinal Foundation
and David Meyer, M.D., John E. Linn, M.D., John D. Armstrong,
M.D., John L. Elfervig, M.D. and Thomas A. Browning, M.D.(5)
10.31 -- Loan and Security Agreement dated as of December 28, 1995
among EyeCorp, Inc., EyeCare Resource, Inc. The EyePA, Inc. and
NationsBank of Tennessee, N.A.(5)
10.32 -- Form of Indenture, dated as of December 11, 1996, between
Physicians Resource Group, Inc. and U.S. Trust Company of New
York, N.A.(10)
10.33 -- Form of Registration Rights Agreement, dated as of December 6,
1996, between Physicians Resource Group, Inc., and Smith Barney,
Inc., Alex Brown & Sons Incorporated, Soloman Brothers, Dillon
Reed & Co., Inc. and Volpe Welty & Company.(10)
10.34 -- Form of Purchase Agreement dated as of December 6, 1996.(10)
10.35 -- Loan Agreement for $90,000,000 Revolving Credit Loan dated March
14, 1997, between Physician Resource Group, Inc. and NationsBank
of Tennessee, N.A. Agent the Banks Signatory Hereto.(16)
10.36 -- Physicians Resource Group, Inc. Employee Stock Purchase Plan(11)
10.37 -- Employment Agreement between Physicians Resource Group, Inc. and
Mark Kingston(7)
10.38 -- Employment Agreement between Physicians Resource Group, Inc. and
Richard D'Amico(7)
10.39 -- Employment Agreement between Physicians Resource Group, Inc. and
Jonathan Bond(7)
10.40 -- Employment Agreement between Physicians Resource Group, Inc. and
Daniel Chambers(7)
32
<PAGE>
21.1 -- Subsidiaries(5)
23.1 -- Consent of Arthur Andersen LLP.(16)
23.2 -- Consent of Coopers & Lybrand(16)
24.1 -- Power of Attorney (contained on the signature page of this
report).
27.0 -- Financial Data Schedule.
- -------------
(1) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (No. 33-91440) and incorporated herein by reference.
(2) Previously filed as an exhibit to the Company's Registration Statement on
Form S-4 (No. 333-00230) and incorporated herein by reference.
(3) Previously filed as an exhibit to the Company's Current Report on Form 8-K
dated February 14, 1996 and incorporated herein by reference.
(4) Previously filed as an exhibit to the Company's quarterly report on Form
10-Q for the quarter ending June 30, 1995, and incorporated herein by
reference.
(5) Previously filed as an exhibit to the Companys annual report on Form 10-K
for the year ending December 31, 1995, and incorporated herein by
reference.
(6) Previously filed as an exhibit to the Company's quarterly report on Form
10-Q for the quarter ending September 30, 1995, and incorporated by
reference.
(7) Management contract or compensatory plan or arrangement, which is being
identified as such pursuant to Item 14(a)3 of Form 10-K.
(8) Schedules and similar attachments to this Exhibit have not been filed
herewith, but the nature of their contents is described in the body of this
Exhibit. The Company agrees to furnish a copy of any such omitted
schedules and attachments to the Commission upon request.
(9) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (no.333-3852) and incorporated herein by reference.
(10) Previously filed as an exhibit to the Companys Registration Statement on
Form S-4 (333-19185) and incorporated herein by reference.
(11) Previously filed as an exhibit to the Companys Registration Statement on
Form S-8 (No. 333-15547) and incorporated herein by reference.
(12) Previously filed as an exhibit to the Companys Current Report on Form 8-K
dated October 7, 1996 and incorporated herein by reference.
(13) Previously filed as an exhibit to the Companys Current Report on Form 8-K
dated June 30, 1996, and incorporated herein by reference.
(14) Previously filed as an amendment to the Companys Current Report on Form 8-K
dated August 30, 1996, and incorporated herein by reference.
(15) Previously filed as an amendment to the Companys Current Report on Form 8-K
dated October 19, 1996, and incorporated herein by reference.
(16) Filed herewith
33
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PHYSICIANS RESOURCE GROUP, INC.
March 31, 1997
By: /s/ Richard J. D'Amico
___________________________________
Richard J. D'Amico
Executive Vice President,
Chief Administrative Officer,
General Counsel and Secretary
34
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
PHYSICIANS RESOURCE GROUP, INC.:
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996 F-4
Consolidated Statements of Operations for the three
years ended December 31, 1996 F-5
Consolidated Statements of Changes in Stockholders'
Equity for the three years ended December 31, 1996 F-6
Consolidated Statements of Cash Flows for the three
years ended December 31, 1996 F-7
Notes to Consolidated Financial Statements F-8
F-1
<PAGE>
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, 1995 and 1996, 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, 1996. 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., a company acquired
during 1996 in a transaction accounted for as a pooling of interests, as
discussed in Note 1. Such statements are included in the consolidated financial
statements of Physicians Resource Group, Inc., and reflect total assets and
total revenues of 55 percent and 25 percent, respectively, in 1995, and 34
percent of total revenues in 1994, of the related consolidated totals. These
statements were audited by other auditors whose report has been furnished to us
and our opinion, 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 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, 1995 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Dallas, Texas
March 24, 1997
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
EyeCorp, Inc.
We have audited the balance sheets of EyeCorp, Inc. (described in
Note 1) as of December 31, 1995 and the related statements of operations,
shareholders' equity and cash flows for each of the two years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, all material respects, the financial position of EyeCorp, Inc. as of
December 31, 1995 and the results of its operations and its cash flows for each
of the two years in the period ended December 31, 1995 in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND, L.L.P.
Memphis, Tennessee
April 5, 1996
F-3
<PAGE>
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(000'S, EXCEPT SHARE DATA)
DECEMBER 31,
-------------------
1995 1996
-------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents, including
restricted cash of $4,100 for 1996 $ 18,183 $ 53,418
Accounts receivable, net of contractual
and other allowances of $5,968 and
$20,161 for 1995 and 1996 15,285 32,162
Due from affiliates 6,265 46,170
Pharmaceuticals and supplies 2,546 6,768
Prepaid expenses and other 6,984 6,125
-------- --------
Total current assets 49,263 144,643
PROPERTY AND EQUIPMENT, net 35,550 64,184
INTANGIBLE ASSETS, net 52,257 366,857
OTHER NONCURRENT ASSETS, net 1,710 5,850
-------- --------
Total assets $138,780 $581,534
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of obligations to
affiliates $ 1,889 $ 8,447
Current portion of long-term debt 1,406 2,833
Accounts payable and accrued expenses 15,523 27,205
Amounts due under the ASC option 3,100 --
Deferred taxes 2,211 2,599
-------- --------
Total current liabilities 24,129 41,084
LONG-TERM DEBT, net of current portion 28,321 129,339
OBLIGATIONS TO AFFILIATES, net of
current portion 4,467 19,649
DEFERRED TAXES 13,002 78,186
OTHER LONG-TERM LIABILITIES 266 2,603
-------- --------
Total liabilities 70,185 270,861
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value,
30,000,000 and 100,000,000 shares
authorized, 19,285,000 and
29,782,000 shares outstanding for
1995 and 1996 193 298
Preferred stock, $.01 par value,
10,000,000 shares authorized,
none outstanding -- --
Additional paid-in capital 60,984 296,454
Retained earnings 7,418 13,921
-------- --------
Total stockholders' equity 68,595 310,673
--------- --------
Total liabilities and
stockholders' equity $138,780 $581,534
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE>
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(000'S, EXCEPT PER SHARE AMOUNTS)
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------------
1994 1995 1996
------- -------- --------
REVENUES:
Management services $12,747 $39,129 $167,565
Medical services 43,693 49,416 77,245
Other 733 1,422 3,483
------- ------- --------
Total revenues 57,173 89,967 248,293
------- ------- --------
COSTS AND EXPENSES:
Salaries, wages and benefits 31,627 50,061 115,200
Pharmaceuticals and supplies 6,793 9,487 30,919
General and administrative 10,951 22,478 62,353
Depreciation and amortization 2,361 3,498 11,192
Interest expense, net 1,411 1,516 1,304
Executive resignation expenses -- 1,117 --
Patent litigation defense
costs -- -- 353
Merger transaction expenses -- -- 12,030
-------- ------- --------
Total costs and expenses 53,143 88,157 233,351
-------- ------- --------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM 4,030 1,810 14,942
PROVISION FOR INCOME TAXES 1,162 501 7,770
-------- ------- --------
INCOME BEFORE EXTRAORDINARY ITEM 2,868 1,309 7,172
EXTRAORDINARY ITEM, loss on debt
extinguishment, net of income
tax benefit of $53 -- (119) --
-------- ------- --------
NET INCOME $ 2,868 $ 1,190 $ 7,172
======== ======= ========
NET INCOME PER SHARE:
Income before extraordinary item $ .37 $ .10 $ .28
Extraordinary item -- (.01) --
-------- ------- --------
NET INCOME PER SHARE $ .37 $ .09 $ .28
======== ======= ========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 7,833 12,723 25,365
======= ======= ========
PRO FORMA ADJUSTMENTS--
Income tax expense (Unaudited) $ 432 $ 252 $ --
------- ------- --------
PRO FORMA NET INCOME (Unaudited) $ 2,436 $ 938 $ 7,172
======= ======== ========
PRO FORMA NET INCOME PER SHARE (Unaudited) $ .31 $ .07 $ .28
======= ======== ========
PRO FORMA WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 7,833 12,723 25,365
======= ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
<PAGE>
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
(000'S, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL
------------------ --------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS EQUITY
------------------ --------- --------- --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993 -- $ -- 4,837,000 $ 48 $ 610 $ 6,802 $ 7,460
Capital contribution in conjunction
with stock split -- -- -- -- -- 11 11
Issuance of common stock, dividend paid
and formation of EyeCorp -- -- 1,320,000 13 100 (3,457) (3,344)
Issuance of common stock in conjunction
with acquisitions -- -- 1,962,000 20 8,819 -- 8,839
Net income -- -- -- -- -- 2,868 2,868
Distributions -- -- -- -- -- (729) (729)
---------- ------ ---------- ---- -------- ------- --------
BALANCE, December 31, 1994 -- -- 8,119,000 81 9,529 5,495 15,105
Issuance of common stock in conjunction
with the PRG Reorganization and IPO,
net of offering costs -- -- 7,941,000 80 37,149 -- 37,229
Cash dividends paid to physician
owners of PRG Founding
Affiliated Practices -- -- -- -- (13,362) -- (13,362)
Issuance of preferred stock 174,500 2 -- -- 1,743 -- 1,745
Retirement of preferred stock (174,500) (2) -- -- (1,743) -- (1,745)
Issuance of common stock in conjunction
with acquisitions -- -- 3,225,000 32 27,668 -- 27,700
Net income -- -- -- -- -- 1,190 1,190
Contributions, net -- -- -- -- -- 733 733
--------- ------ ----------- ----- -------- ------- ---------
BALANCE, December 31, 1995 -- -- 19,285,000 193 60,984 7,418 68,595
Issuance of common stock in
conjunction with acquisitions -- -- 6,027,000 60 119,893 -- 119,953
Issuance of common stock in conjunction
with the 1996 Public Offering -- -- 4,250,000 43 113,597 -- 113,640
Exercise of stock options -- -- 220,000 2 1,980 -- 1,982
Net income -- -- -- -- -- 7,172 7,172
Distributions, net -- -- -- -- -- (669) (669)
--------- ----- ----------- ---- -------- ------- --------
BALANCE, December 31, 1996 -- $ -- 29,782,000 $298 $296,454 $13,921 $310,673
========== ===== =========== ==== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
<PAGE>
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000'S)
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
1994 1995 1996
---------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,868 $ 1,190 $ 7,172
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities--
Depreciation and amortization 2,361 3,498 11,192
Change in deferred taxes (250) (1,394) (3,072)
Changes in assets and liabilities,
net of effects of acquisitions--
Accounts payable and accrued expenses 3,441 2,624 (8,806)
Accounts receivable, net and
due from affiliates (896) 2,331 (25,639)
Pharmaceuticals and supplies (96) (275) (904)
Prepaid expenses and other (1,411) (3,900) 4,091
-------- -------- ---------
Net cash provided by (used in)
operating activities 6,017 4,074 (15,966)
-------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash consideration paid to acquire a
management service organization,
net of cash acquired -- (2,174) --
Purchases of clinic operating assets,
net of cash acquired (8,936) (4,115) (103,034)
Cash paid as part of business formation -- (2,130) --
Additions to property and equipment,
net of effects of acquisitions (3,703) (4,982) (6,659)
-------- -------- ---------
Net cash used in investing
activities (12,639) (13,401) (109,693)
-------- -------- ---------
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 from offerings, net of
offering costs 20 42,953 113,640
Distributions to owners, net (4,148) (12,629) (669)
Proceeds from long-term debt 16,686 19,896 255,918
Payments on long-term debt (4,583) (19,888) (209,084)
Net proceeds (repayments) on obligations
to affiliates 536 (708) (893)
Proceeds from exercise of stock
options -- -- 1,982
Issuance of preferred stock -- 1,745 --
Retirement of preferred stock -- (1,745) --
------- ------- --------
Net cash provided by financing
activities 8,207 24,115 160,894
------- ------- --------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 1,585 14,788 35,235
CASH AND CASH EQUIVALENTS, beginning of
year 1,810 3,395 18,183
-------- -------- ---------
CASH AND CASH EQUIVALENTS, end of year $ 3,395 $ 18,183 $ 53,418
======== ======== =========
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
<PAGE>
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION, BUSINESS AND ORGANIZATION:
PRG Formation
Physicians Resource Group, Inc., a Delaware corporation (PRG or the Company)
and subsidiaries were formed to provide physician practice management services
to ophthalmic and optometric practices (the Practices). The Company was formed
in November 1993 but had no substantive operations prior to June 1995. PRG earns
revenues by owning or providing management, marketing, financial resources and
other services to ophthalmic and optometric practices, ambulatory surgery
centers (ASCs) and optical dispensaries.
On June 28, 1995, PRG consummated an initial public offering (the IPO) 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 and four
ASCs (the initial Practices). A total of 3,553,000 shares of common stock were
issued at $13 per share resulting in proceeds, net of underwriter commissions
and offering costs, of approximately $37,229,000. Simultaneously with the
closing of the IPO, the Company acquired certain assets and assumed certain
liabilities associated with nine of the initial Practices (the Reorganization).
This exchange was accounted for using the historical cost basis with the stock
being valued at the historical cost of the net assets received by PRG. The
owners of the initial 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. Concurrently with these transactions, the physicians associated with
seven of the initial Practices created new entities for the practice of
medicine. These new entities and the three remaining initial Practices entered
into 40-year service agreements with the Company.
EyeCorp Merger
On March 18, 1996, PRG merged with EyeCorp, Inc. (EyeCorp) through a wholly-
owned subsidiary, in a transaction accounted for as a pooling of interests (the
EyeCorp Merger). In connection therewith PRG issued 6,089,506 shares of 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. The Company incurred approximately $9,000,000
of costs associated with this merger. The consolidated financial statements
reflect the financial condition and results of operations of this subsidiary for
all periods presented.
At the time of the merger, EyeCorp provided management services to 50 eye
care practices and five ASCs. On December 28, 1995, EyeCorp had acquired certain
operating assets and assumed certain liabilities of 48 of the 50 eye care
practices and four of the five ASCs for consideration of $1,400,000 in cash,
approximately $1,800,000 in notes payable and 3,224,280 shares of EyeCorp common
stock. These acquisitions were accounted for as purchases.
Other Mergers
In June 1996, PRG merged with one eye care practice (the Second Quarter
Merger) through a wholly-owned subsidiary, in a transaction accounted for as a
pooling of interests. In connection therewith, PRG issued 281,832 shares of
common stock to the owners of the practice. In August 1996, PRG merged with six
additional eye care practices (collectively, the Third Quarter Mergers) through
wholly-owned subsidiaries, in transactions accounted for as poolings of
interests. In connection therewith, PRG issued 3,355,167 shares of common stock.
The Company incurred approximately $3,000,000 of costs associated with these
mergers. These consolidated financial statements reflect the financial condition
and results of operations of these subsidiaries for all periods presented.
F-8
<PAGE>
Separate and combined results for PRG and the EyeCorp, Second and Third
Quarter Mergers for the periods prior to consummation are as follows:
DESCRIPTION 1994 1995
----------- -------- -------
(000'S)
Revenues:
PRG $ -- $26,395
EyeCorp Merger 19,584 22,130
Second Quarter Merger 7,257 7,150
Third Quarter Mergers 30,332 34,292
------- -------
Total revenues $57,173 $89,967
======= =======
Net income:
PRG $ (22) $ 1,672
EyeCorp Merger 1,938 (1,127)
Second Quarter Merger (386) 475
Third Quarter Mergers 1,338 170
------- -------
Total net income $ 2,868 $ 1,190
======= =======
Practice Acquisitions
During the first quarter of 1996, PRG acquired certain assets and liabilities
of, and entered into service agreements with, 11 eye care practices and seven
ASCs (the First Quarter Acquisitions). These acquisitions were accounted for as
purchases. As consideration for these acquisitions, PRG paid approximately,
$7,883,000 in cash and issued 1,446,437 shares of its common stock. The PRG
common stock issued in connection with the First Quarter Acquisitions had a fair
value at the closing date ranging from $20.75 to $22.00 per share. The Company
incurred $1,387,000 of costs associated with these acquisitions.
During the second quarter of 1996, PRG acquired certain assets and liabilities
of, and entered into service agreements with, 11 eye care practices and two
ASCs (the Second Quarter Acquisitions). These acquisitions were accounted for
as purchases. As consideration for these acquisitions, PRG paid approximately
$1,835,000 in cash and issued 801,639 shares of its common stock. The PRG common
stock issued in connection with the Second Quarter Acquisitions had a fair value
at the closing date ranging from $26.24 to $30.41 per share. The Company
incurred $477,000 of costs associated with these acquisitions.
During the third quarter of 1996, PRG acquired certain assets and
liabilities of, and entered into service agreements with 11 eye care practices
and two ASCs (the Third Quarter Acquisitions). These acquisitions were
accounted for as purchases. As consideration for these acquisitions, PRG paid
approximately $767,000 in cash and issued 1,374,799 shares of its common stock.
The PRG common stock issued in connection with the Third Quarter Acquisitions
had a fair value at the closing date ranging from $21.46 to $30.45 per share.
The Company incurred $614,000 of costs associated with these acquisitions.
During the fourth quarter of 1996, PRG acquired certain assets and
liabilities of, and entered into service agreements with 12 eye care practices
(the Fourth Quarter Acquisitions). These acquisitions were accounted for as
purchases. As consideration for these acquisitions, PRG paid approximately
$1,335,000 in cash and issued 1,080,925 shares of its common stock. The PRG
common stock issued in connection with the Fourth Quarter Acquisitions had a
fair value at the closing date ranging from $17.75 to $23.14 per share. The
Company incurred $371,000 of costs associated with these acquisitions.
Company Acquisitions
On November 5, 1996, the Company acquired substantially all of the assets
and certain of the liabilities of the eye care division of EquiMed, Inc.
(EquiMed), a publicly held physician practice management company, in exchange
for $55,077,000 in cash and assumption of approximately $9,900,000 of
indebtedness in a purchase transaction. The purchase price is subject to upward
adjustment if EquiMed delivers practice acquisitions to PRG that meet certain
criteria. The Company incurred $500,000 of costs associated with this
acquisition. The eye care division of EquiMed provides management services to 22
eye care practices and 10 ASCs.
F-9
<PAGE>
On November 22, 1996, PRG acquired American Ophthalmic Incorporated (AOI),
a privately held physician practice management company devoted solely to eye
care. In connection with the AOI acquisition, PRG paid $30,900,000 in cash and
issued 1,323,341 shares of PRG common stock valued at $30,900,000 in a purchase
transaction. The Company retired $44,500,000 of AOI debt and assumed
approximately $13,400,000 of AOI debt at the date of closing. The Company
incurred $2,418,000 of costs associated with this acquisition. AOI provides
management services to 16 eye care practices and nine ASCs.
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 combined with the
financial position and results of operations of the merger (pooling)
transactions for all periods presented. The results of the practice acquisitions
and company acquisitions operations are included in PRG's consolidated financial
statements from the date of purchase. All significant intercompany transactions
have been eliminated. Certain reclassifications of prior year amounts have been
made to conform with the current year presentation.
Cash and Cash Equivalents
PRG considers all highly liquid investments purchased with an original
maturity or repricing within three months or less to be cash equivalents. The
Company primarily invests in overnight repurchase agreements, tax-free municipal
bonds and money market accounts. The interest rates vary from 3.5 percent to
5.75 percent. These investments are carried at fair value.
Fair Values of Financial Instruments
The carrying amounts of accounts receivable, accounts payable and accrued
expenses approximate fair value due to short maturity of these instruments. At
December 31, 1996, the carrying amount of PRG's long-term debt approximates fair
value.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets primarily consist of prepaid
expenses and deferred acquisition costs. All incremental costs incurred in
connection with acquisitions in process at the balance sheet dates have been
capitalized and will be charged to expense or included in the purchase
consideration upon its successful completion. If any of the acquisitions are not
successfully completed, these deferred costs will be charged to expense.
Pharmaceuticals and Supplies
Pharmaceuticals and supplies consist primarily of spectacle frames, lenses and
medical and pharmaceutical supplies and are valued at the lower of cost or
market with cost determined using the first-in, first-out (FIFO) method.
Long Lived Assets
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
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. Workforce intangibles are amortized on a straight line
basis over seven years. Intangible assets associated with management service
agreements are generally amortized on a straight line basis over 15 years for
small single-practitioner practices and over 40 years for multiple-practitioner
practices. Amounts paid for ASC acquisitions in excess of the net assets
acquired are treated as goodwill and amortized on a straight line basis over 40
years.
F-10
<PAGE>
The Company reviews the carrying value of the long lived 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 long lived 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 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,'' did not have a material impact on the Company's
financial condition or results of operations.
Income Taxes
Deferred income 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.
Net Income Per Share and Pro Forma Net Income Per Share
Net income per share has been computed by dividing net income by the weighted
average number of shares outstanding. The weighted average number of shares
outstanding include common share equivalents related to shares issuable upon
exercise of warrants and stock options, if dilutive. The weighted average
shares outstanding for the years ended December 31, 1994, 1995 and 1996, were
7,833,000, 12,723,000 and 25,365,000 respectively. Such amounts include
0, 553,000 and 769,000 of common stock equivalents for the respective periods.
Pro forma net income per share has been computed by dividing pro forma net
income by the pro forma weighted average number of shares outstanding during the
periods. The pro forma weighted average number of shares outstanding include
common share equivalents related to shares issuable upon exercise of warrants
and stock options, if dilutive. The weighted average shares outstanding and
common stock equivalents for the years ended December 31, 1994, 1995 and 1996,
were the same as those above.
Use of Estimates
The preparation of these financial statements, in accordance with generally
accepted accounting principles, requires the use of certain estimates by
management in determining the entities' assets, liabilities, revenues and
expenses. Actual results could differ from those estimates.
Concentration of Credit Risk
The Company's accounts receivable consist primarily 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 Practices perform ongoing credit evaluations of
their patients and generally does not require collateral. The Company and its
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.
F-11
<PAGE>
The individual Practices and ASCs' gross medical service revenues are based on
established rates reduced by contractual adjustments. Contractual adjustments
represent the difference between charges at established rates and estimated
recoverable amounts and are recognized in the period the services are rendered.
Any differences between estimated contractual adjustments and actual final
settlements are reported as contractual adjustments in the period final
settlements are made.
Revenues--Management Services
The Company manages the Practices under various types of service and
management agreements. The management services revenues are based on several
different types of arrangements, including percentages of the medical services
revenues or flat fees 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,
1995 and 1996:
DESCRIPTION 1994 1995 1996
----------- -------- -------- --------
(000's)
Gross medical services revenues $ 36,353 $ 89,460 $293,915
Less--Contractual adjustments (16,298) (38,713) (86,758)
-------- -------- --------
Net medical services revenues 20,055 50,747 207,157
Less--Amounts retained by the
Practices owner physicians (7,308) (11,618) (39,592)
-------- -------- --------
Management services revenues $ 12,747 $ 39,129 $167,565
======== ======== ========
Revenues--Medical Services
Certain states in which the Company operates, allow the corporate practice of
medicine. In those states, the Company's revenues are derived from medical
services performed. In addition, the Company owns and operates ASCs through
various arrangements. Revenues derived from ASCs are based on facility fees
charged to patients, third-party payors or other physician practices for use of
the ASCs as well as reimbursement of ASCs expenses. ASCs revenues are also net
of contractual adjustments. The following table presents amounts included in
determining the Company medical service revenues for the years ended December
31, 1994, 1995 and 1996:
DESCRIPTION 1994 1995 1996
----------- -------- -------- --------
(000's)
Gross medical services revenues $ 52,612 $ 57,730 $ 80,559
Gross ASCs revenues 22,173 27,314 38,942
-------- -------- --------
Total 74,785 85,044 119,501
Less--Contractual adjustments (31,092) (35,628) (42,256)
-------- -------- --------
Net medical services revenues 43,693 49,416 77,245
======== ======== ========
Accounts Receivable and Due from Affiliates
Due from affiliates includes management services receivables, receivables from
the Practices for certain expenses being paid on the Practices' behalf and
certain other receivables. The receivables due from certain of the Practices,
are collateralized by a security interest in the Practices' receivables from
third-party payors and patients.
Pursuant to the terms of certain of the Company's service agreements, the
Practices' accounts receivable are purchased without recourse. The purchase
price is the face amount of the accounts receivable less any reserve recorded by
the Practices for uncollectible amounts. Accounts receivable are purchased daily
and paid at the end of each month.
For the seven Practices owned by the Company, accounts receivable reflects the
receivables from patients and third party payors net of the recorded reserve for
contractual and other allowances.
F-12
<PAGE>
4. ACQUISITIONS:
The consideration paid and total net book value of the assets and liabilities
associated with the acquisition of the Practices were as follows:
<TABLE>
<CAPTION>
REORGANI- PURCHASED
PURCHASED ENTITIES ZATION ENTITIES
--------------------- --------- ---------
DESCRIPTION 1994 1995 1995 1996
----------- -------- -------- -------- ---------
<S> <C> <C> <C> <C>
(000's)
Current assets $ 3,128 $ 8,653 $ 9,445 $ 37,851
Property and equipment 3,396 6,951 8,743 28,863
Intangible and other noncurrent assets 15,923 35,687 1,583 321,079
Liabilities assumed ( 4,446) (14,928) (19,682) (164,276)
-------- -------- -------- ---------
Net assets acquired 18,001 36,363 89 223,517
Consideration for net assets
acquired--
Debt issued 160 3,770 -- --
Stock issued 8,905 27,700 89 119,953
-------- -------- -------- ---------
Cash paid 8,936 4,893 -- 103,564
Cash acquired through
acquisition -- (778) -- (530)
-------- -------- -------- ---------
Net cash paid $ 8,936 $ 4,115 $ -- $ 103,034
======== ======== ======== =========
</TABLE>
5. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following as of December 31, 1995 and
1996:
ESTIMATED
USEFUL
LIVES
DESCRIPTION (YEARS) 1995 1996
----------- --------- -------- --------
(000'S)
Land -- $ 2,305 $ 2,366
Buildings and improvements 5-40 11,050 11,087
Equipment, software and other 3-10 19,315 44,766
Leasehold improvements 3-10 5,511 9,948
Furniture and fixtures 7-10 8,362 13,898
-------- --------
46,543 82,065
Less--Accumulated depreciation and
amortization (10,993) (17,881)
-------- --------
Property and equipment, net $ 35,550 $ 64,184
======== ========
F-13
<PAGE>
6. INTANGIBLE ASSETS:
Intangible assets consists of the following as of December 31, 1995 and 1996:
ESTIMATED
USEFUL
LIVES
DESCRIPTION (YEARS) 1995 1996
----------- --------- ------- -------
(000's)
Noncompete agreements 3-5 $ 255 255
Work force in place 7 3,525 15,736
Management service agreements 15-40 37,489 250,745
Goodwill 40 12,513 105,950
------- -------
53,782 372,686
Less - Accumulated amortization (1,525) (5,829)
------- -------
Intangible assets, net $52,257 366,857
======= =======
7. LONG-TERM OBLIGATIONS:
Long-Term Debt
Long-term debt consists of the following as of December 31, 1995 and 1996:
DESCRIPTION 1995 1996
----------- -------- --------
(000's)
6% convertible subordinated
debentures due 2001, interest payable
on June 1 and December 1 $ -- $125,000
Credit facilities 18,882 --
Notes payable to banks, due through
1999 to 2011, bearing interest
from 6% to 10%, secured by certain
assets of the Company 8,302 4,131
Term loans payable to insurance
company, due 1999, bearing
interest at LIBOR plus 1.5% (7.5%
at December 31, 1996), collateralized
by certain assets of the Company 1,893 1,508
Other notes payable, due from 1996 to
2000, bearing interest at rates
from 7% to 12% 571 151
Other obligations 79 1,382
------- --------
Total long-term debt 29,727 132,172
Less--Current portion of long-term
debt (1,406) (2,833)
------- --------
Total $28,321 $129,339
======= ========
In December 1996, PRG completed an offering of 6% convertible subordinated
debentures (the Debentures) due in December 2001. The Debentures are
convertible at any time after the 60th day following issuance at a conversion
price of $25 per share. Interest is payable on June 1 and December 1. The
Debentures are not redeemable by the Company until December 1999. The Company
incurred approximately $3,321,000 in costs related to the offering, with such
amount being amortized over the life of the Debentures and is included in other
noncurrent assets. The Debentures trade in the Private Offerings, Resales and
Trading through Automated Linkage Market. The most recent trading price for a
Debenture with a $1,000 face value was $880 to $890 in March 1997.
In December 1995, EyeCorp entered into a $20,000,000 revolving credit facility
with a bank, a portion of which was used to retire amounts outstanding under a
prior credit facility. 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).
F-14
<PAGE>
In January 1996, PRG entered into a credit facility with the same bank that
provided the EyeCorp facility, in the amount of $35,000,000. Advances under the
credit facilities bear interest at either LIBOR plus 1.25 percent to 2.0 percent
or the bank's prime rate plus 0.5%. The credit facilities are collateralized by
the stock of PRG's subsidiaries. The Company had no borrowings outstanding under
this facility as of December 31, 1996.
On March 14, 1997, PRG entered into a new credit facility (the PRG Credit
Facility) with a group of lenders including the same bank used for the
facilities discussed above. This PRG Credit Facility, which replaces the credit
facilities discussed above, allows the Company to borrow up to $90,000,000 for
acquisitions, capital expenditures, working capital and stock repurchases.
Advances under the PRG Credit Facility bear interest at either LIBOR plus 1% to
2.125% or the bank's prime rate plus 1.125%. The credit facility has a three
year revolving credit feature. The PRG Credit Facility is secured by the stock
of the subsidiaries of PRG and guaranteed by the subsidiaries of PRG. Amounts
available are subject to an earnings-based borrowing base calculation. Terms of
the facility include certain financial and operating covenants and allows the
bank to approve certain acquisitions. The Company has no borrowings outstanding
under the PRG Credit Facility.
Obligations to Affiliates
Obligations to affiliates consist of the following as of December 31, 1995 and
1996:
DESCRIPTION 1995 1996
----------- ------- -------
(000's)
Installment notes payable to affiliates,
bearing interest ranging
from 7.5% to 10%, payable in monthly
installments $ 1,770 $24,298
Notes payable to affiliates for ASC
purchase, bearing interest at 7%, due
2001, payable in monthly installments 3,500 3,049
Other obligations to affiliates 1,086 749
------- -------
Total obligations to affiliates 6,356 28,096
Less-current portion of obligations
to affiliates (1,889) (8,447)
------- -------
Total $ 4,467 $19,649
======= =======
Installment notes payable to affiliates are primarily notes payable to
physicians which Equimed and AOI used to finance a portion of the purchase price
of their respective acquisitions prior to being acquired by PRG.
Maturities
The Company paid approximately $1,319,000, $1,981,000 and $1,742,000 in
interest for the years ended December 31, 1994, 1995 and 1996. As of December
31, 1996, the aggregate amounts of annual principal maturities of long-term debt
and obligations to affiliates are as follows:
YEAR OBLIGATIONS
---- LONG-TERM TO
DEBT AFFILIATES
-------- ----------
(000's)
1997 $ 2,833 $ 8,447
1998 2,447 5,405
1999 1,474 5,472
2000 288 4,258
2001 125,119 3,313
Thereafter 11 1,201
-------- -------
Total $132,172 $28,096
======== =======
8. COMMITMENTS AND CONTINGENCIES:
During 1996, the Company acquired a Practice that is a party to litigation
regarding alledged infringement of three patents related to a refractive
surgical procedure. The Practice believes that its procedure does not infringe
the patented procedures and has not made any royalty payments related to its
performed procedures. Although not named in the lawsuit, PRG is assisting in the
defense of this litigation due to the potential impact on certain other
Practices. The Company has incurred $353,000 of legal expenses related to this
litigation and expects to incur additional costs in 1997. Management of the
Company believes that the outcome of this litigation will not have a material
impact on its financial condition or results of operations.
In the normal course of business, certain of the affiliated physician groups
have been named in lawsuits alleging medical malpractice. In the opinion of the
Company's management, the ultimate liability, if any, without considering
F-15
<PAGE>
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.
Long-Term Lease Obligations
PRG leases medical equipment and office space under noncancelable operating
lease agreements which expire at various dates. At December 31, 1996, minimum
annual rental commitments under noncancelable operating leases with terms in
excess of one year are as follows:
YEAR AMOUNT
---- ------
(000's)
1997 $18,932
1998 16,324
1999 13,463
2000 10,414
2001 8,817
Thereafter 26,192
--------
Total $94,142
========
Rent expense related to operating leases amounted to $1,368,000, $3,646,000
and $18,216,000 for the years ended December 31, 1994, 1995 and 1996,
respectively. See note 12.
9. STOCKHOLDERS' EQUITY:
Common Stock
The Company has reserved (a) 3,000,000 shares of common stock for issuance
upon exercise of stock options under the Company's stock option plans, (b)
40,000 shares of common stock for issuance upon exercise of the warrants, which
are exercisable at $13.00 per share and (c) 5,000,000 shares of common stock for
issuance upon conversion of the Debentures. The Company registered an additional
11,000,000 and 10,000,000 shares of common stock during 1996 and 1997,
respectively, 11,111,500 of which were issued in connection with additional
acquisitions.
In May 1996, the Company completed the offering of 5,750,000 shares of common
stock (the 1996 Public Offering). The Company issued 4,250,000 new shares of
common stock and stockholders of the Company sold 1,500,000 shares of common
stock in the 1996 Public Offering. Proceeds to the Company, net of offering
costs and underwriting commissions, were approximately $113,640,000.
Preferred Stock
The Company has authorized the issuance of up to 10,000,000 shares of
preferred stock, $.01 par value. The Company issued 174,500 shares of preferred
stock on June 28, 1995, in conjunction with the Offering. These shares were
retired on July 10, 1995, in exchange for $1,745,000 in cash.
Distributions/Contributions
Distributions and contributions in the accompanying statement of changes in
stockholders' equity represents the funds withdrawn/contributed by the former
owners prior to the merger with PRG, for the Practices with which the Company
merged in pooling of interests transactions.
F-16
<PAGE>
10. INCOME TAX EXPENSE:
Income tax expense for the years ended December 31, 1994, 1995 and 1996
consists of the following:
DESCRIPTION 1994 1995 1996
----------- ------ ------- -------
(000's)
Current--
Federal $1,205 $ 1,573 $ 9,487
State 207 322 1,355
------ ------- -------
Total current 1,412 1,895 10,842
Deferred
Federal (225) (1,161) (2,726)
State (25) (233) (346)
------ ------- -------
Total deferred (250) (1,394) (3,072)
------ ------- -------
Total income tax expense $1,162 $ 501 $ 7,770
====== ======= =======
Total income tax expense differed from the amount computed by applying the
statutory federal income tax rate to income before income taxes as a result of
the following:
DESCRIPTION 1994 1995 1996
----------- ---- ---- ----
(000's)
Computed statutory tax expense 34.0% 34.0% 35.0%
Increase (decrease) in income taxes
resulting from--
State income taxes, net of federal
income tax benefit 3.0% 9.1% 3.3%
Nontaxable entities (8.1)% (12.1)% --
Non deductible merger expenses -- -- 16.7%
Other nondeductible expenses -- 1.8% 1.8%
Tax-exempt interest income -- (3.7)% (3.1)%
Other (0.1)% (1.4)% (1.7)%
---- ---- ----
Total income tax expense 28.8% 27.7% 52.0%
==== ==== ====
F-17
<PAGE>
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. Deferred taxes related to intangible
assets result from acquisitions for which there is no basis in the intangibles
for tax purposes. The deferred taxes related to intangible assets will not
result in future cash payments. The components of the net deferred tax liability
are as follows:
DESCRIPTION 1995 1996
----------- -------- --------
(000's)
Current deferred tax assets
(liabilities):
Temporary differences relating to
cash-to-accrual conversions
of the Practices $ (4,708) $ (5,918)
Allowance for doubtful accounts 801 731
Accrued expenses 2,095 1,688
Merger transaction expenses -- 1,181
Other book/tax differences (399) (281)
-------- --------
Net current deferred tax
liabilities $ (2,211) $ (2,599)
======== ========
Non-current deferred tax liabilities:
Property and equipment $ (44) $ (137)
Intangibles (12,097) (77,529)
Other (861) (520)
-------- --------
Net non-current deferred tax
liabilities $(13,002) $(78,186)
======== ========
The Company paid approximately $1,947,000 and $6,413,000 for federal and state
income taxes for the year ended December 31, 1995 and 1996, respectively.
11. EMPLOYEE BENEFIT PLANS:
Savings Plans
The Company maintains various defined contribution plans which permit
participants to make voluntary contributions. The Company pays all general and
administrative expenses of the plans, and, in some cases, makes matching
contributions on behalf of the employees. The Company incurred expenses of
$320,000 and $736,000 for the years ended December 31, 1995 and December 31,
1996 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. On August 19, 1996, the Board
approved, subject to stockholder approval, options to be granted for an
additional 1,000,000 shares. The Plan provides for the grant of incentive stock
options (ISO) and nonqualified stock options. The options vest over a five-year
period and expire 10 years from the date of grant.
In 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 a 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.
F-18
<PAGE>
In connection with the EyeCorp Merger, options outstanding under the EyeCorp
plans were converted into options to purchase PRG common stock at the conversion
rate as specified in the merger agreement and are included with existing PRG
options.
Transactions of the plans are summarized as follows:
<TABLE>
<CAPTION>
STOCK OPTIONS WEIGHTED
---------------------------------- AVERAGE
DESCRIPTION ISOS NONQUALIFIED TOTAL EXERCISE PRICE
----------- --------- ------------ --------- ---------------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1994 -- -- -- $ --
Granted in 1995 1,014,937 616,386 1,631,323 11.48
Exercised in 1995 -- -- -- --
Canceled in 1995 -- -- -- --
--------- ------- --------- ------------
Outstanding at December 31, 1995 1,014,937 616,386 1,631,323 11.48
Granted in 1996 156,548 1,463,311 1,619,859 25.21
Exercised in 1996 (166,038) (53,865) (219,903) 7.27
Canceled in 1996 -- (12,261) (12,261) 13.20
--------- --------- --------- ------------
Outstanding at December 31, 1996 1,005,447 2,013,571 3,019,018 $ 19.10
========= ========= ========= ============
</TABLE>
Certain of the above shares granted in 1996 are subject to stockholder
approval in May 1997. Of the stock option grants outstanding, 342,218 were
issued at prices between $5.00 and $10.00 per share, 894,035 were issued at
prices between $10.01 and $15.00 per share, 888,015 were issued at prices
between $15.01 and $25.00 per share, and 894,750 were issued at prices between
$25.01 and $35.00 per share. At December 31, 1996, 244,919 shares were
exercisable and the weighted average exercise price of exercisable shares was
$12.88. The weighted average fair value of options granted in 1995 and 1996 was
$7.60 and $17.37, respectively.
PRG accounts for this plan under APB Opinion 25, under which no compensation
cost has been recognized. Had compensation cost for this plan been determined
consistent with FASB Statement No. 123, net income and earnings per share would
have been reduced to the following proforma amounts:
DESCRIPTION 1995 1996
----------- ------- --------
(000'S, EXCEPT PER SHARE DATA)
Net Income - as reported $ 1,190 $7,172
- pro forma $(1,614) $ (755)
Earnings per share - as reported $ .09 $ .28
- pro forma $ (.13) $ (.03)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions for grants in 1995 and 1996, respectively; risk free interest rates
from 5.38% to 7.50% depending on the grant, volatility of 47.2%, expected lives
from 6.2 to 10, depending on the grant.
12. RELATED-PARTY TRANSACTIONS:
The Company leases facility space from various partnerships which include
affiliated physicians as partners and trusts in which relatives of the
affiliated physicians are named beneficiaries. Rent expense on related-party
operating leases amounted to $1,325,000, $2,604,000 and $7,701,000 for the
years ended December 31, 1994, 1995 and 1996, respectively. In addition, the
Company leases facilities to affiliated physicians. Rent income on related-party
operating leases amounted to $245,000 and $1,182,000 for the years ended
December 31, 1995 and 1996, respectively.
F-19
<PAGE>
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 the Practices.
13. PRO FORMA INFORMATION (UNAUDITED):
The summarized unaudited pro forma summary data for the years ended December
31, 1995 and 1996 presented below has been prepared as if (a) the Reorganization
and IPO had been completed; (b) the EyeCorp acquisitions, had been consummated;
and (c) the consummation of PRG's closed transactions and entry into management
service agreements with the 83 eye care practices acquired in 1996 had occurred;
all as if such transactions or events had occurred January 1, 1995. This
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 nor cost reductions anticipated by PRG have been reflected in
the accompanying unaudited pro forma combined financial data.
FOR THE YEAR ENDED
DECEMBER 31,
----------------------------
DESCRIPTION 1995 1996
----------- ---------- -----------
(000'S EXCEPT PER SHARE
AMOUNTS)
Revenues $375,573 $387,546
Net income $ 19,027 $ 15,044
Net income per share $ .63 $ .49
Number of shares used in net income 30,336 30,552
per share calculation
14. CONSOLIDATED QUARTERLY DATA (UNAUDITED):
Summarized below are the condensed results of operations of the Company for
the years ended December 31, 1995 and 1996:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-----------------------------------------------------
FOURTH THIRD SECOND FIRST
DESCRIPTION QUARTER QUARTER QUARTER QUARTER
----------- -------- -------- -------- ---------
(IN 000'S EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Total revenues $28,448 $28,926 $16,836 $15,757
Net income (loss) before taxes (1,016) (288) 1,752 1,362
Net income (loss) before
extraordinary item (600) (515) 1,323 1,101
Net income (loss) $ (719) $ (515) $ 1,323 $ 1,101
Net income (loss) per share $ (.04) $ (.03) $ .16 $ .13
YEAR ENDED DECEMBER 31, 1996
-------------------------------------------------------
FOURTH THIRD SECOND FIRST
DESCRIPTION QUARTER QUARTER QUARTER QUARTER
- ----------- ---------- --------- -------- ---------
(IN 000'S EXCEPT PER SHARE AMOUNTS)
Total revenues $84,902 $60,491 $55,686 $47,214
Net income (loss) before taxes 8,468 6,052 5,584 (5,162)
Net income (loss) $ 6,846 $ 3,515 $ 3,554 $(6,743)
Net income (loss) per share $ .24 $ .13 $ .15 $ (.34)
</TABLE>
F-20
<PAGE>
EXHIBIT 10.35
_______________________________________
PHYSICIANS RESOURCE GROUP, INC.
Borrower
_______________________________________
LOAN AGREEMENT
$90,000,000 REVOLVING CREDIT LOAN
Dated as of March 14, 1997
________________________________________
NATIONSBANK OF TENNESSEE, N.A., AGENT
THE BANKS SIGNATORY HERETO
Lenders
_______________________________________
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<C> <S> <C>
RECITALS 1
I. DEFINITIONS 1
1.1 Terms Defined in This Agreement 1
1.2 Terms Generally 18
II. LOANS AND LETTERS OF CREDIT 18
2.1 Amount of Revolving Credit Loan 18
2.2 Use of Proceeds of Revolving Credit Loan 18
2.3 Revolving Credit Loan Notes 19
2.4 Separate Commitments of Lender 19
2.5 Advances of Loans 19
2.6 Interest 22
2.7 Alternate Rate of Interest if LIBOR Unavailable 23
2.8 Change in Circumstances 23
2.9 Change in Legality of LIBOR Loans 26
2.10 Principal Repayment 26
2.11 Prepayment of LIBOR Loans 26
2.12 Prepayment of Base Rate Loans 27
2.13 Reduction of Commitment 27
2.14 Periodic Commitment Fee Based on Use of Facilities 28
2.15 Letters of Credit 28
2.16 Up-Front Fee 35
III. CONDITIONS PRECEDENT 35
3.1 Conditions to Initial Advance and Issuance 35
3.2 Conditions to Subsequent Loans and Issuances 38
IV. REPRESENTATIONS AND WARRANTIES 39
4.1 Capacity 39
4.2 Authorization 39
4.3 Binding Obligations 39
4.4 No Conflicting Law or Agreement 39
4.5 No Consent Required 39
4.6 Financial Statements 40
4.7 Fiscal Year 40
4.8 Litigation 40
4.9 Taxes; Governmental Charges 40
4.10 Title to Properties 40
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
<C> <S> <C>
4.11 No Default 40
4.12 Casualties; Taking of Properties 41
4.13 Compliance with Laws 41
4.14 Compliance with Fraud and Abuse Laws 41
4.15 ERISA 41
4.16 Full Disclosure of Material Facts 41
4.17 Accuracy of Projections 41
4.18 Investment Company Act 42
4.19 Personal Holding Company 42
4.20 Solvency 42
4.21 Chief Executive Office 42
4.22 Subsidiaries 42
4.23 Ownership of Patents, Licenses, Etc 42
4.24 Environmental Compliance 42
4.25 Labor Matters 42
4.26 OSHA Compliance 43
4.27 Regulation U 43
4.28 Affiliate Transactions 43
4.29 Subordinated Debentures 43
V. AFFIRMATIVE COVENANTS 43
5.1 Payment of Obligations 43
5.2 Maintenance of Existence and Business 43
5.3 Financial Statements and Reports 44
5.4 Taxes and Other Encumbrances 46
5.5 Payment of Funded Debt 46
5.6 Compliance with Laws 46
5.7 Maintenance of Property 46
5.8 Compliance with Contractual Obligations 47
5.9 Further Assurances 47
5.10 Security Interest; Setoff 47
5.11 Insurance 47
5.12 Accounts and Records 48
5.13 Official Records 48
5.14 Banking Relationships 48
5.15 Right of Inspection 48
5.16 ERISA Information and Compliance 49
5.17 Indemnity; Expenses 49
5.18 Assistance in Litigation 50
5.19 Name Changes 50
5.20 Estoppel Letters 50
5.21 Environmental Matters 50
5.22 Opinions of Counsel 51
5.23 Borrower Entities 52
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
<C> <S> <C>
VI. NEGATIVE COVENANTS 52
6.1 Debts, Guaranties, and Other Obligations 52
6.2 Change of Management 53
6.3 Change of Ownership 53
6.4 Encumbrances 53
6.5 Investments 53
6.6 Prepayments 54
6.7 Sales and Leasebacks 54
6.8 Change of Control 54
6.9 Nature of Business 54
6.10 Further Acquisitions, Mergers, Etc 54
6.11 Advances 54
6.12 Disposition of Assets 55
6.13 Inconsistent Agreements 55
6.14 Fictitious Names 55
6.15 Subsidiaries and Affiliates 55
6.16 Place of Business 55
6.17 Adverse Action With Respect to Plans 55
6.18 Transactions With Affiliates 55
6.19 Constituent Document Amendments 56
6.20 Adverse Transactions 56
6.21 Use of Lenders' Name 56
6.22 Margin Securities 56
6.23 Accounting Changes 56
6.24 Distributions 56
6.25 Action Outside Ordinary Course 56
6.26 Modification of Subordinated Debenture Documents 56
6.27 Non-Scheduled Payment of Subordinated Debentures 56
VII. FINANCIAL COVENANTS 57
7.1 Funded Debt to Consolidated Adjusted EBITDA 57
7.2 Funded Debt to Capital 57
7.3 Fixed Charge Coverage 57
7.4 Current Ratio 57
7.5 Net Worth 57
7.6 Capital Expenditures 57
7.7 Senior Funded Debt to Consolidated Adjusted EBITDA 57
VIII. EVENTS OF DEFAULT 58
8.1 Events of Default 58
8.2 Remedies 60
IX. AGENT 61
9.1 Appointment of Agent 61
9.2 Powers and Duties of Agent 61
</TABLE>
iv
<PAGE>
<TABLE>
<CAPTION>
<C> <S> <C>
9.3 Indemnification of Agent 63
9.4 No Representations by Agent 63
9.5 Independent Investigations by Lenders 63
9.6 Notice of Default 64
9.7 Funding of Advances Pursuant to Borrowing Notices 64
9.8 Agent in its Individual Capacity 64
9.9 Holders 64
9.10 Successor Agent 65
9.11 Sharing of Payments, etc 65
9.12 Separate Liens on Collateral 65
9.13 Payments Between Agent and Lenders 66
9.14 Assignments and Participations 66
9.15 Bankruptcy Provisions 66
9.16 Foreclosure of Collateral 67
9.17 Procedures for Notices and Approvals 67
9.18 Other Relationships With Borrower 67
X. GENERAL PROVISIONS 68
10.1 Notices 68
10.2 Renewal, Extension, or Rearrangement 70
10.3 Application of Payments 70
10.4 Counterparts 70
10.5 Negotiated Document 70
10.6 Consent to Jurisdiction; Exclusive Venue 70
10.7 Not Partners; No Third Party Beneficiaries 70
10.8 No Reliance on Lenders' Analysis 70
10.9 No Marshaling of Assets 71
10.10 Impairment of Collateral 71
10.11 Business Days 71
10.12 Standard of Care; Limitation of Damages 71
10.13 Incorporation of Schedules 71
10.14 Indulgence Not Waiver 71
10.15 Cumulative Remedies 71
10.16 Amendment and Waiver in Writing 71
10.17 Assignment 72
10.18 Entire Agreement 72
10.19 Severability 72
10.20 Time of Essence 72
10.21 Applicable Law 72
10.22 Captions Not Controlling 72
10.23 Waiver of Right to Jury Trial 72
10.24 Facsimile Signatures 72
</TABLE>
v
<PAGE>
EXHIBITS
1.1 Form of Acquisition Certificate
2.3 Form of Revolving Credit Note
2.5.1(b) Form of Borrowing Notice
3.1.1(c) Form of Subsidiary Guaranty
3.1.1(d) Form of Stock Pledge and Security Agreement
3.1.1(j) Form of Borrower's Counsel Opinions
SCHEDULES
1.1 Initial Borrower Entities
4.8 Litigation
4.28 Affiliate Transactions
6.2 Management Staffing
vi
<PAGE>
LOAN AGREEMENT
This Loan Agreement is entered into as of the 24th day of March, 1997, by
and among PHYSICIANS RESOURCE GROUP, INC. ("Borrower"), a Delaware corporation;
the banks that have executed this Agreement below (collectively "Lenders"); and
NATIONSBANK OF TENNESSEE, N.A., in its capacity as Agent for Lenders ("Agent").
RECITALS
WHEREAS, Lenders have agreed to extend a revolving credit facility to
Borrower, on certain terms and conditions; and
WHEREAS, Agent has agreed to serve as administrative and collateral agent,
on certain terms and conditions, with respect to the credit facility to be
extended to Borrower; and
WHEREAS, Borrower, Lenders and Agent wish to provide for the terms and
conditions of the revolving credit facility to be granted to Borrower and the
terms and conditions of Agent's service as administrative and collateral agent
hereunder;
NOW, THEREFORE, as an inducement to cause Lenders to extend credit to
Borrower; as an inducement for Agent to serve under this Agreement; and for
other valuable consideration, the receipt and sufficiency of which are
acknowledged, it is agreed as follows:
I. DEFINITIONS
1.1 Terms Defined in This Agreement. As used below in this Agreement,
the following capitalized terms shall have the following meanings, unless the
context expressly requires otherwise:
"ACQUIRED DEBT" means Debt that is outstanding as of the date of
determination and which was previously a loan obligation or a Capital Lease of
an Acquired Practice at the time the Practice was acquired by a Borrower Entity;
provided, however, if any portion of such Debt is subject to the unqualified and
noncontingent written obligation of a Provider to repay the Debt, with interest,
in accordance with its terms, then "Acquired Debt" shall only include the
portion of such Debt that is not subject to the Provider's obligation of
repayment.
"ACQUIRED PRACTICE" means a Practice that is either (i) owned by a Borrower
Entity as of the date hereof or (ii) acquired by a Borrower Entity after the
date hereof through a Permitted Acquisition.
"ACQUISITION EBITDA" means, with respect to a Practice acquired by a
Borrower Entity and covered by a Service Agreement, the pro forma income to the
Borrower Entities that would have arisen under the applicable Service Agreement
if the Service
<PAGE>
Agreement had been in effect, and the acquisition had occurred, prior to the
beginning of the relevant financial period, with Service Agreement income
determined based upon the actual financial performance of the Acquired Practice
over the relevant financial period, as adjusted only to reflect changes in
payments to owner or stockholder Providers (whether characterized as
professional fees or management fees) and demonstrable reductions in expenses
arising under Borrower's established programs for the purchase of services and
supplies. Acquisition EBITDA of a Practice must be based upon financial
information that Agent regards as accurate and reliable (which is confirmed as
to Acquired Practices owned by Borrower Entities as of the date hereof). In
assessing the accuracy and reliability of financial information for this
purpose, unqualified audited financial statements prepared by a regional or
national accounting firm shall be acceptable in any case, and shall be required
in the cases of acquisitions (i) of publicly held companies or their assets, and
(ii) in which the Acquisition EBITDA of the target would exceed fifteen percent
(15%) of the Consolidated Adjusted EBITDA of the Borrower Entities for the
previous fiscal year. If audited financial statements are not required to be
provided under the preceding sentence, other sources of financial information
will be considered for approval on a case-by-case basis, in Agent's reasonable
discretion.
"AFFILIATE" means, with respect to any Person, another Person that,
directly or indirectly, (i) has an equity interest in that Person in an amount
of more than twenty percent (20%) of such Person, (ii) has common ownership with
that Person, where the common owner owns more than twenty percent (20%) of each
Person so affiliated, (iii) Controls that Person, or (iv) shares common Control
with that Person.
"AGENT" means NationsBank of Tennessee, N.A., in its capacity as described
in Article IX of this Agreement, its lawful corporate successors and any
successor agent appointed pursuant to Article IX hereof.
"AGREEMENT" means this Loan Agreement (including all schedules and exhibits
hereto), as the same may be amended from time to time.
"ALTERNATE BASE RATE" means the greater of (i) the Federal Funds Rate plus
one-half percent (1/2%), and (ii) the rate announced by Agent as its "prime
rate" (which rate is not necessarily the lowest rate offered on any particular
type of loan), in each case as it may change from time to time.
"APPLICABLE COMMITMENT FEE," "APPLICABLE LIBO RATE MARGIN" and "APPLICABLE
BASE RATE MARGIN" mean, with respect to Loans advanced under and the commitment
fee respecting the Revolving Credit Loan, (i) until the earlier of the first
Pricing Tier Determination Date that occurs after June 30, 1997, or the first
draw under the Revolving Credit Loan, the rates defined as Tier 4 below, and
(ii) upon such event described in (i) and thereafter, the rates established by
Agent from time to time upon each Pricing Tier Determination Date pursuant to
the percentage rates per annum set forth opposite the appropriate test in the
pricing grid below (ratio values shall be rounded to the nearest one-hundredth,
with any value of .005 rounded upward):
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<PAGE>
<TABLE>
<CAPTION>
FUNDED DEBT TO BASE RATE MARGIN LIBOR COMMITMENT
CONSOLIDATED ADJUSTED MARGIN FEE
EBITDA
<S> <C> <C> <C>
Tier 1 0% 1.00% .25%
Less than 1.00
Tier 2 0% 1.125% .30%
Greater than or equal to 1.00
and less than 2.00
Tier 3 .375% 1.375% .325%
Greater than or equal to 2.00
and less than 2.50
Tier 4 .625% 1.625% .375%
Greater than or equal to 2.50
and less than 3.00
Tier 5 1.125% 2.125% .50%
Greater than or equal to 3.00
</TABLE>
The Funded Debt to Consolidated Adjusted EBITDA ratio shall be established by
Agent on each Pricing Tier Determination Date on the basis of the then current
consolidated quarterly financial statements of and schedules prepared by
Borrower delivered to Agent pursuant to this Agreement. Notwithstanding the
foregoing, during the existence and continuation of an Event of Default, the
Applicable Commitment Fee, Applicable LIBO Rate Margin, and Applicable Base Rate
Margin shall automatically become those provided for in Tier 5 above.
"BANKING DAY" means a Business Day, subject to the following additional
convention. As to notices or payments received on a Business Day at or before
11:00 a.m. Charlotte, North Carolina time, the Banking Day shall correspond to
the Business Day of receipt. As to notices or payments received on a Business
Day after 11:00 a.m. Charlotte, North Carolina time, the Banking Day of receipt
shall be deemed to be the next following Business Day.
"BANKRUPTCY CODE" means the Bankruptcy Reform Act of 1978, as it may be
amended from time to time.
"BASE RATE LOAN" means a Loan for which Borrower has elected the
application of an interest rate based upon the Alternate Base Rate.
"BORROWER" means Physicians Resource Group, Inc., a Delaware corporation,
and its successors and assigns. This definition does not abrogate the
requirement set forth below restricting Borrower's ability to assign any rights
under this Agreement.
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<PAGE>
"BORROWER ENTITIES" means Borrower and all Subsidiaries in existence from
time to time.
"BORROWING NOTICE" has the meaning assigned in Section 2.5.1(b) hereof.
"BUSINESS DAY" means any day on which Agent and national banks located in
Charlotte, North Carolina are open for the conduct of ordinary business;
provided however, that when used in connection with determining the LIBO Rate,
the term "Business Day" shall exclude any day on which banks are not open for
dealings in U.S. Dollar deposits in the London Interbank Market.
"CAPITAL" means Consolidated Net Worth plus Funded Debt.
"CAPITAL EXPENDITURES" means expenditures, determined according to GAAP on
a consolidated basis, that would be capitalized and depreciated over more than
one annual accounting period.
"CAPITAL LEASE" means a lease that would be characterized as a financed
sale or purchase under GAAP.
"CHANGE OF CONTROL" means the occurrence, after the date of this Agreement,
of (i) any Person or two or more Persons acting in concert acquiring beneficial
ownership (within the meaning of Rule 13d-3 of the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended), directly or
indirectly, of securities of Borrower (or other securities convertible into such
securities) representing 30% or more of the combined voting power of all
securities thereof entitled to vote in the election of directors; or (ii) during
any period of up to 24 consecutive months, individuals who at the beginning of
such 24-month period were directors of Borrower ceasing for any reason to
constitute a majority of the Board of Directors thereof unless the Persons
replacing such individuals were nominated by the Board of Directors of Borrower;
or (iii) any Person or two or more Persons acting in concert acquiring by
contract or otherwise, or entering into a contract or arrangement which upon
consummation will result in its acquisition of, or control over, securities of
Borrower (or other securities convertible into such securities) representing 30%
or more of the combined voting power of all securities of Borrower entitled to
vote in the election of directors.
"CLOSING DATE" means the date of this Agreement.
"CMLTD" means scheduled maturities of long-term Debt arising for the 12
months following a date of determination.
"COLLATERAL" means all Property now or hereafter securing the Obligations.
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<PAGE>
"COMMITMENT" means the amount of each Lender's commitment to fund the
Revolving Credit Loan. Each Lender's several Commitment for the Revolving
Credit Loan shall initially be as set forth below beside their signatures to
this Agreement.
"CONSOLIDATED ADJUSTED EBITDA" means EBITDA as calculated on a consolidated
basis according to GAAP, (i) less any non-expensed payments to Providers except
for (x) those advances permitted under Section 6.11(i) of this Agreement and (y)
non-expensed advances for fixed asset purchases or working capital on terms and
conditions satisfactory to, and approved in advance by, Agent, (ii) plus,
without duplication, any Acquisition EBITDA for the relevant accounting period
(for example, if Consolidated Adjusted EBITDA is being calculated for the
Borrower Entities for the four fiscal quarters ending December 31, 1997, and a
Permitted Acquisition occurred on July 1, 1997, Acquisition EBITDA would be
included for the first six months of 1997, resulting in inclusion of the
acquired entity for the entire fiscal year), (iii) reduced by the Non-Owned
Portion of any EBITDA arising from a Partially-Owned Subsidiary, and (iv)
reduced by any positive EBITDA arising from Permitted Unpledged Investments and
Subsidiaries. Additionally, EBITDA arising from the operations of Partially-
Owned Subsidiaries shall not exceed 20% of the total Consolidated Adjusted
EBITDA and EBITDA from Permitted Minority Interest Investment Entities shall not
exceed 3% of the total Consolidated Adjusted EBITDA.
"CONSOLIDATED CAPITAL EXPENDITURES" means expenditures of the Borrower
Entities, determined according to GAAP on a consolidated basis, that would be
capitalized and depreciated over more than one period of twelve (12) months.
"CONSOLIDATED CURRENT RATIO" means current assets, determined on a
consolidated basis according to GAAP, divided by current liabilities, determined
on a consolidated basis according to GAAP.
"CONSOLIDATED NET WORTH" means shareholders' equity, determined on a
consolidated basis according to GAAP.
"CONTROL" or "CONTROLLED" means that a Person has the direct or indirect
power to conduct or govern the policies of another Person, whether this power
exists as a matter of right or through economic compulsion.
"DEBT" means, with respect to any Person, all obligations, contingent or
otherwise, that would be classified under GAAP as a liability of that Person
including, but not limited to, any nonrecourse obligations secured by Property
of that Person.
"DEFAULT RATE" means the lesser of (i) two percent (2%) over the otherwise
applicable rate or, if no other rate is specified, two percent (2%) over the
Alternate Base Rate in effect from time to time, or (ii) the Maximum Lawful
Amount.
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<PAGE>
"EBITDA" means the sum of net income before extraordinary items plus
Interest Expense plus expenses for taxes, depreciation and amortization,
determined according to GAAP. It is agreed further that the merger expenses and
related expenses disclosed on Borrower's financial statements for periods in
fiscal year 1996 shall further be added to net income for the calculation of
EBITDA calculations covering periods in 1996.
"ENCUMBRANCE" means any interest in Property in favor of one not the owner
thereof, whether voluntary or involuntary, including, but not limited to, (i)
the lien or security interest arising from a deed of trust, mortgage, pledge,
security agreement, conditional sale, Capital Lease, consignment, or bailment
for security purposes, and (ii) reservations, exceptions, encroachments,
easements, rights-of-way, covenants, conditions, restrictions, leases, and other
such title encumbrances.
"ENVIRONMENTAL LAWS" means the Environmental Protection Act, the Resource
Conservation and Recovery Act of 1976, the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, the Hazardous Materials Transportation
Act and any other federal, state or municipal law, rule or regulation relating
to air emissions, water discharge, noise emissions, solid or liquid waste
disposal, hazardous or toxic waste or materials, or other environmental or
health matters.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, including (unless the context otherwise requires) any
rules or regulations promulgated thereunder.
"ERISA AFFILIATE" means any Person who for purposes of Title IV of ERISA is
a member of Borrower's controlled group, or under common control with Borrower,
within the meaning of Section 414 of the IRC, the regulations promulgated
pursuant thereto and the published revenue rulings issued thereunder.
"ERISA EVENT" means (i) the occurrence of a reportable event, within the
meaning of Section 4043 of ERISA, unless the 30-day notice requirement with
respect thereto has been waived by the PBGC; (ii) the provision by the
administrator of any Plan of a notice of intent to terminate such Plan, pursuant
to Section 4041(a)(2) of ERISA (including any such notice with respect to a plan
amendment referred to in Section 4041(e) of ERISA); (iii) the cessation of
operations at a facility in the circumstances described in Section 4068(f) of
ERISA; (iv) the withdrawal by Borrower or an ERISA Affiliate from a Multiple
Employer Plan during a plan year for which it was a substantial employer, as
defined in 4001(a)(2) of ERISA; (v) the failure by Borrower or any ERISA
Affiliate to make a material payment to a Plan required under Section 302(f)(1)
of ERISA; (vi) the adoption of an amendment to a Plan requiring the provision of
initial or additional security to such Plan, pursuant to Section 307 of ERISA;
or (vii) the institution by the PBGC of proceedings to terminate a Plan,
pursuant to Section 4042 of ERISA, or the occurrence of any event or condition
which might constitute grounds under Section 4042 of ERISA for the termination
of, or the appointment of a trustee to administer, a Plan.
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<PAGE>
"EVENT OF DEFAULT" means the occurrence of any of the events specified in
Section 8.1 hereof, as to which any requirement for notice or lapse of time has
been satisfied.
"FEDERAL FUNDS RATE" means, for any day, the rate set forth in the weekly
statistical release designated as H.15(519) or any successor publication,
published by the Federal Reserve Board (including any such successor,
"H.15(519)") for such day opposite the caption "Federal Funds (Effective)." If
on any relevant day such rate is not yet published in H.15(519), the rate for
such day will be the rate set forth in the daily statistical release designated
as the Composite 3:30 p.m. Quotations for U.S. Government Securities, or any
successor publication, published by the Federal Reserve Bank of New York
(including any such successor, the "Composite 3:30 p.m. Quotations") for such
day under the caption "Federal Funds Effective Rate." If on any relevant day the
appropriate rate for such day is not yet published in either H.15(519) or the
Composite 3:30 p.m. Quotations, the rate for such day shall be the arithmetic
mean of the rates for the last transaction in overnight federal funds arranged
prior to 9:00 a.m., New York City time, on that day by each of three leading
brokers of federal funds transactions in New York City, selected by Agent.
"FINANCIAL STATEMENTS" means the audited consolidated balance sheet, income
statement, and statement of cash flows for Borrower dated December 31, 1995 and
the unaudited consolidated financial statements dated September 30, 1996
delivered by Borrower to Agent, and all notes thereto.
"FIXED CHARGE COVERAGE RATIO" means (i) Consolidated Adjusted EBITDA, plus
Operating Lease expense, less the greater of actual maintenance Capital
Expenditures or the amount budgeted therefor as provided in Section 7.6 hereof,
and less the amount of cash taxes paid during the period, divided by (ii) the
sum of Interest Expense plus CMLTD (including the principal sum of payments due
on Capital Leases) plus Operating Lease expense.
"FRAUD AND ABUSE LAWS" means Section 1128B(b) of the Social Security Act,
42 U.S.C. Section 1320a-7b(b) and Section 1877 of the Social Security Act, 42
U.S.C. Section 1877, as from time to time amended; any successor statute(s)
thereto; all rules and regulations promulgated thereunder; and any other Law
relating to the ownership of medical facilities by providers of medical services
or the referral of patients to medical facilities owned by providers of medical
services.
"FUNDED DEBT" means all Debt for borrowed money evidenced by a promissory
note, debenture or similar instrument including, without limitation, Capital
Leases and the Subordinated Debentures and specifically excluding, without
limitation, trade payables, accrued liabilities, income taxes and deferred
income taxes, determined on a consolidated basis.
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<PAGE>
"GAAP" means generally accepted accounting principles pronounced by the
Financial Accounting Standards Board or any successor thereto, as in effect from
time to time.
"GOVERNMENTAL AUTHORITY" means any governmental or quasi-governmental
entity, court or tribunal including, without limitation, any department,
commission, board, bureau, agency, administration, service or other
instrumentality of any foreign or domestic governmental entity.
"HAZARDOUS SUBSTANCES" means those substances included from time to time
within the definition of hazardous substances, hazardous materials, toxic
substances, or solid waste under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 as amended, 42 U.S.C. (S) 9601 et seq.;
the Resource Conservation and Recovery Act of 1976, 42 U.S.C. (S) 6901 et seq.;
the Hazardous Materials Transportation Act, 49 U.S.C. (S) 1801 et seq.; the
Clean Water Act, 33 U.S.C. Section 1251 et. seq.; the Toxic Substances Control
Act, 15 U.S.C. Section 2601 et. seq., and in the regulations promulgated
pursuant to such acts and laws; and such other substances that are or become
regulated under any applicable local, state, or federal law or regulation
addressing environmental hazards.
"INITIAL BORROWER ENTITIES" means Borrower and all Subsidiaries of Borrower
that own, as of the Closing Date, assets and/or engage in business transactions
(other than entering into asset purchase agreements or merger agreements that
have not been closed), except for those Subsidiaries that have been created or
acquired by Borrower within the thirty (30) days preceding the Closing Date or
that have only entered into the foregoing asset purchase agreements or merger
agreements. A list of all Initial Borrower Entities is attached hereto as
Schedule 1.1 hereto.
"INTANGIBLE ASSETS" means goodwill, patents, copyrights, franchises,
trademarks, research and development costs, organizational costs and other
intangible assets under GAAP.
"INTEREST EXPENSE" means expenses for all interest (including current
charges on Capital Leases) and letter of credit fees.
"INTEREST PAYMENT DATE" means, (i) as to Base Rate Loans, the first day of
each calendar quarter and the Maturity Date and (ii) as to any LIBOR Loan, the
last day of the Interest Period applicable to such Loan and, in addition, in the
case of a LIBOR Loan with an Interest Period of six (6) months' duration, the
numerically corresponding day (or, if there is no numerically corresponding day,
on the last day) in the calendar month that is 3 months after the commencement
of the Interest Period.
"INTEREST PERIOD" means, as to any LIBOR Loan, the period commencing on
(and including) the date of such LIBOR Loan and ending on (but excluding) the
numerically corresponding day (or, if there is no numerically corresponding day,
on the last day) in the calendar month that is 1, 2, 3 or 6 months thereafter,
as Borrower may elect; provided,
8
<PAGE>
however, that (x) if any Interest Period would end on a day that is not a
Business Day, such Interest Period shall be extended to the next succeeding
Business Day unless, with respect to LIBOR Loans, such next succeeding Business
Day would fall in the next calendar month, in which case such Interest Period
shall end on the next preceding Business Day and (y) no Interest Period with
respect to any Loan shall end later than the Maturity Date.
"IRC" means the Internal Revenue Code of 1986, as amended from time to
time.
"ISSUING BANK" means NationsBank of Tennessee, N.A., its lawful corporate
successors, and any successor appointed pursuant to this Agreement in the event
of its resignation.
"LAW" or "LAWS" means all applicable constitutional provisions, statutes,
codes, acts, ordinances, orders, judgments, decrees, injunctions, rules,
regulations, and requirements of all Governmental Authorities.
"LENDERS" means the banks that are signatory hereto, their respective
successors and assigns.
"LETTER OF CREDIT DOCUMENTS" has the meaning assigned in Section 2.15.6 of
this Agreement.
"LETTER OF CREDIT LIABILITIES" has the meaning assigned in Section 2.15 of
this Agreement.
"LETTERS OF CREDIT" has the meaning assigned in Section 2.15 of this
Agreement.
"LIBO RATE" means, for any given Interest Period with respect to a given
LIBOR Loan, the rate per annum appearing on Telerate Page 3750 (or any successor
page) as the London interbank offered rate for deposits in Dollars (rounded
upwards, if necessary, to the next higher 1/100 of 1%) at approximately 11:00
a.m. (London time) two Business Days prior to the first day of such Interest
Period for a term comparable to such Interest Period. If for any reason such
rate is not available, the term LIBO Rate shall mean, for any given Interest
Period with respect to a given LIBOR Loan, the rate per annum appearing on
Reuters Screen LIBO Page as the London interbank offered rate for deposits in
Dollars at approximately 11:00 a.m. (London time) two Business Days prior to the
first day of such Interest Period for a term comparable to such Interest Period;
provided, however, if more than one rate is specified on Reuters Screen LIBO
Page, the applicable rate shall be the arithmetic mean of all such rates.
"LIBO RATE RESERVE PERCENTAGE" means the reserve percentage applicable
during any Interest Period (or if more than one such percentage shall be so
applicable, the daily average of such percentages for those days in such
Interest Period during which any
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<PAGE>
such percentage shall be so applicable) under regulations issued from time to
time by the Board of Governors of the Federal Reserve System (or any successor)
for determining the maximum reserve requirement (including, without limitation,
any emergency, supplemental or other marginal reserve requirement) for Lenders
with respect to liabilities or assets consisting of or including LIBOR
Liabilities having a term equal to such Interest Period.
"LIBOR LIABILITIES" means deposit liabilities which are deemed to be
eurocurrency liabilities as such term is defined under the regulations of the
Board of Governors of the Federal Reserve Bank.
"LIBOR LOAN" means a Loan for which Borrower has elected application of an
interest rate based on the LIBO Rate.
"LOAN" means a loan advanced under the Revolving Credit Loan.
"LOAN DOCUMENTS" means, collectively, each writing delivered at any time by
any Borrower Entity to Lenders or Agent relating to the Revolving Credit Loan or
relating to any Letters of Credit.
"MANAGEMENT STOCK ACQUISITION LOANS" means loans to Emmett Moore extended
on or before February 28, 1999 to enable him to purchase the aggregate amount of
up to Two Hundred Thousand (200,000) shares of (or equity securities convertible
or exchangeable for up to Two Hundred Thousand (200,000) shares of) Borrower's
common stock, which loans shall not exceed Five Million and No/100 Dollars
($5,000,000.00) in the aggregate.
"MATERIAL ADVERSE CHANGE" means any material and adverse change in the
business, Properties, financial condition or operations of the Borrower Entities
in the aggregate.
"MATERIAL ADVERSE EFFECT" means any event or condition which, singly or in
the aggregate with other events or conditions, materially and adversely affects
the business, Properties, financial condition or operations of the Borrower
Entities, in the aggregate.
"MATURITY DATE" means March 24, 2000. The Maturity Date may be extended
from time to time by the written agreement of all Lenders, Agent and Borrower.
"MAXIMUM LAWFUL AMOUNT" means the maximum lawful amount of interest, loan
charges, commitment fees or other charges that may be assessed under Tennessee
law or, if higher, under applicable federal law.
"MOODY'S" means Moody's Investors Service, Inc. or its successor.
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<PAGE>
"NET PROCEEDS" means gross proceeds of a transaction less reasonable and
customary underwriter and brokerage fees and commissions, the fees and expenses
of trustees and attorneys, and other reasonable and customary closing fees and
expenses.
"NON-OWNED PORTION" means the percentage of equity interest of a Partially-
Owned Subsidiary that is not owned by one or more Borrower Entities.
"NOTE" means any of the Revolving Credit Notes referred to in Section 2.3
hereof.
"OBLIGATIONS" means the obligations of Borrower to Lenders to repay the
Revolving Credit Loan, the Reimbursement Obligations and all other obligations
of Borrower and the other Borrower Entities to Lenders and to Agent under this
Agreement and the other Loan Documents.
"OPERATING LEASES" means leases that are not Capital Leases.
"PARTIALLY-OWNED SUBSIDIARY" means a Subsidiary that is not entirely owned
by one or more Borrower Entities.
"PBGC" means the Pension Benefit Guaranty Corporation and any entity
succeeding to any or all of its functions under ERISA.
"PERMITTED ACQUISITION" means the purchase (by asset purchase, stock
purchase, merger or otherwise, subject to the other requirements of this
definition set forth below) by a Borrower Entity of either (i) another physician
practice management company whose primary business is the ownership and
management of Practices in a manner similar to that of Borrower, or of another
company in a business substantially related thereto, or (ii) all or
substantially all of the assets of a Practice in the ordinary course of business
(it being acknowledged that medical records and certain other professional
assets that are required by Law to be owned by a Provider are not acquired in
these transactions), subject to the further satisfaction of the following
requirements, as applicable:
(a) If Borrower wishes to have pre-acquisition earnings approved as
Acquisition EBITDA hereunder or the approval of Lenders is
required under any of subsections (b), (c) or (d) of this
definition, Borrower shall have delivered to Agent and Lenders an
Acquisition Certificate in the form attached hereto as Exhibit
1.1, together with all required schedules and exhibits thereto,
within the time required by the terms of the Acquisition
Certificate.
(b) If the Total Cash Consideration to be paid by Borrower Entities in
connection with any single acquisition exceeds Fifteen Million and
No/100 Dollars ($15,000,000.00), the
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<PAGE>
prior written approval of the Required Lenders shall be required.
(c) Notwithstanding any other provision of this definition, if (i) the
total consideration to be paid by Borrower Entities for a single
acquisition is less than or equal to Two Million Five Hundred
Thousand and No/100 Dollars ($2,500,000.00), and (ii) the Total
Cash Consideration for the acquisition is less than or equal to
thirty percent (30%) of the total consideration therefor, the
approval of the Required Lenders shall not be required.
(d) If Borrower's ratio of Funded Debt to Consolidated Adjusted
EBITDA, as last reported in financial statements delivered to
Agent and Lenders pursuant to this Agreement, is greater than
2.50:1.00, the prior written approval of the Required Lenders
shall be required as to individual acquisitions for which the
Total Cash Consideration is greater than 3.0 times the Acquisition
EBITDA of the target Practice for the most recent four fiscal
quarters.
(e) If Borrower's ratio of Funded Debt to Consolidated Adjusted
EBITDA, as last reported in financial statements delivered to
Agent and Lenders pursuant to this Agreement, is greater than
3.00:1.00, the prior written approval of the Required Lenders
shall be further required as to individual acquisitions for which
the Total Cash Consideration is greater than Three Million and
No/100 Dollars ($3,000,000.00). (All approvals of the Required
Lenders under this definition shall be requested by Borrower
through the delivery of the Acquisition Certificate to Lenders and
Agent and responses of the Lenders shall be compiled by Agent).
(f) Borrower shall not enter into any acquisition unless both prior to
and giving effect to the acquisition no Event of Default shall
exist under this Agreement.
"PERMITTED ENCUMBRANCES" means all of the following:
(a) Encumbrances securing the payment of any of the Obligations.
(b) Encumbrances securing taxes, assessments, or other governmental
charges not yet due or which are being contested in good faith by
appropriate action promptly initiated and
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<PAGE>
diligently conducted, if Borrower has made reserve
therefor as required by GAAP.
(c) Mechanics', repairmen's, materialmen's, warehousemen's, landlords'
and other like liens arising by operation of law securing accounts
that are not delinquent.
(d) Consensual landlords' or real estate lessors' liens on real or
personal Property securing amounts not past due under leases (i)
entered into by a Borrower Entity prior to the date hereof, (ii)
entered into by a third-party predecessor in interest of a
Borrower Entity prior to the date of a Borrower Entity's
acquisition of an interest therein, or (iii) entered into by a
Borrower Entity after the date hereof, but in the case of (iii)
the aggregate annual rentals under leases including consensual
landlord liens shall not exceed One Million and No/100 Dollars
($1,000,000.00).
(e) Encumbrances on real property used by Borrower not securing
monetary obligations, provided that the Encumbrances are of a type
customarily placed on real property and do not materially impair
the value of the affected property.
(f) Pledges or deposits in the ordinary course of business to secure
nondelinquent obligations under workman's compensation or
unemployment laws or similar legislation or to secure the
performance of leases or contracts entered into in the ordinary
course of business.
(g) Encumbrances securing Acquired Debt and Purchase Money Security
Interests, to the extent permitted under Section 6.1.7 hereof.
(h) Rights for the use of Property provided for under Service
Agreements entered into in full compliance with this Agreement.
(i) In addition to any Encumbrance otherwise permitted by this
definition, consensual Encumbrances on assets of Acquired
Practices for thirty (30) days in each case after the closing of
the acquisition thereof by a Borrower Entity.
(j) Encumbrances securing Seller Debt existing as of the Closing Date,
to the extent Seller Debt is temporarily permitted to be secured
under Section 6.1.6 hereof.
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<PAGE>
"PERMITTED MINORITY INTEREST INVESTMENT ENTITIES" means Persons in which
one or more Borrower Entities own an equity interest and which are not
Subsidiaries, as to which Borrower has delivered or caused to be delivered to
Agent for the benefit of Lenders, within thirty (30) days after the later of (i)
a Borrower Entity's acquisition of an interest in such Person, or (ii) the
Person's first transaction of business (other than the entering into of asset
purchase agreements or merger agreements that have not been closed), a security
agreement granting to Agent to secure the Obligations a first priority perfected
security interest in the Borrower Entities' interest(s) in such Person pursuant
to documentation in form and substance acceptable to Agent, with the validity
and perfection of the security interest and other matters as Agent may
reasonably require confirmed to Agent and Lenders by an opinion of Borrower's
outside counsel satisfactory to Agent and Lenders in all respects, and with all
expenses related to such documentation (including, but not limited to, filing
fees and taxes and the reasonable fees and expenses of Agent's attorneys) to be
paid by Borrower.
"PERMITTED SUBSIDIARY" means a Subsidiary as to which Borrower has
delivered or caused to be delivered to Agent for the benefit of Lenders, within
thirty (30) days after the later of (i) a Borrower Entity's acquisition of an
interest in the Subsidiary, or (ii) the Subsidiary's first transaction of
business (other than the entering into of asset purchase agreements or merger
agreements that have not been closed), (x) if the Subsidiary is a Wholly-Owned
Subsidiary, a guaranty from such Subsidiary securing the Obligations, and (y) in
all circumstances, a security agreement granting to Agent to secure the
Obligations a first priority perfected security interest in the Borrower
Entities' interest(s) in the Subsidiary pursuant to documentation in form and
substance acceptable to Agent, with the validity of the guaranty (if
applicable), the perfection of the security interest and other matters as Agent
may reasonably require confirmed to Agent and Lenders by an opinion of
Borrower's outside counsel satisfactory to Agent and Lenders in all respects,
and with all expenses related to such documentation (including, but not limited
to, filing fees and taxes and the reasonable fees and expenses of Agent's
attorneys) to be paid by Borrower.
"PERMITTED UNPLEDGED INVESTMENTS AND SUBSIDIARIES" means equity interests
owned by Borrower Entities, which interests would qualify as either Permitted
Subsidiaries or Permitted Minority Interest Investment Entities except that the
equity interests owned by Borrower Entities are not encumbered to secure the
Obligations as required by those definitions or, if so encumbered, the
encumbrances are subject to material question as to the ability of Agent to
effect freely a transfer of the encumbered equity interest by exercise of
remedies pursuant to its security interest therein, provided that (i) the equity
interests at issue must be subject to limitations on their transferability or
assignability only pursuant to restrictions included in the constituent
documents of the investment entity that were in effect before the acquisition of
an interest therein by a Borrower Entity, and (ii) the EBITDA resulting from all
such entities shall not exceed the amount equal to 1% of Consolidated Adjusted
EBITDA.
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"PERSON" means any individual, corporation, partnership, joint venture,
limited liability company, association, joint stock company, trust,
unincorporated organization, government, governmental agency or political
subdivision thereof, or any other form of entity.
"PLAN" means any employee benefit or other plan established or maintained,
or to which contributions have been made, by Borrower or any Subsidiary and
covered by Title IV of ERISA or to which Section 412 of the IRC applies.
"PRACTICE" means a medical or optometric practice, optical practice,
ambulatory surgery center related practice or management service center at a
single location or various locations if owned by a single Seller or related
Sellers prior to acquisition by a Borrower Entity. Whenever in this Agreement
"Practice" is used in describing an acquisition by a Borrower Entity, such
reference is to the acquisition of the assets used in the operation of the
Practice that can lawfully be acquired by such Borrower Entity or to the
acquisition of the stock of a corporation or equity interest of another Person
that owns, as of the time of purchase, only those assets that can be lawfully
acquired by such Borrower Entity.
"PRICING TIER DETERMINATION DATE" means the fifth (5th) Business Day
following each date on which Borrower has delivered to Agent and Lenders
financial reports as required by Section 5.3 hereof that contain a calculation
of, and information sufficient to support the calculation of, Borrower's ratio
of Funded Debt to Consolidated EBITDA for the preceding four fiscal quarters.
"PRO RATA" OR "PRO RATA SHARE" refer to the apportionment among Lenders
according to their respective total Commitments at the time of determination;
provided, however, if at a time of determination there are principal amounts
outstanding under the Revolving Credit Loan, and if any Lender has failed to
fund in violation of this Agreement any unrepaid Loan that was funded by any
other Lender or Lenders, this apportionment shall be determined according to the
respective total principal amounts of the Revolving Credit Loan held by the
respective Lenders rather than by their Commitments.
"PROPERTY" or "PROPERTIES" means any interest in any kind of property,
whether real, personal, or mixed, or tangible or intangible.
"PROVIDER" means a physician or optometrist who performs professional
services respecting a Practice that is either managed by a Borrower or the
assets of which are owned by a Borrower.
"PURCHASE MONEY SECURITY INTEREST" means an Encumbrance on specific
equipment (including the Encumbrance arising under a Capital Lease), provided
that (i) the Debt secured by any such Encumbrance is not an Acquired Debt, shall
have arisen at the time of the acquisition thereof and shall not exceed 100% of
the cost of the equipment to the entity acquiring the same, and (ii) each such
Encumbrance shall attach only to the equipment so acquired with the proceeds of
the Debt secured thereby.
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"REIMBURSEMENT OBLIGATIONS" has the meaning assigned in Section 2.15.2 of
this Agreement.
"REQUIRED LENDERS" means Lenders holding more than sixty-six and two-thirds
percent (66 2/3%) of the total Commitments for the Revolving Credit Loan;
provided, however, if at a time of determination there are principal amounts
outstanding under the Revolving Credit Loan, and if any Lender has failed to
fund in violation of this Agreement any unrepaid Loan that was funded by any
other Lender or Lenders, this determination shall be made according to Lenders
holding the required percentage of principal amounts of the Revolving Credit
Loan rather than by the outstanding Commitments.
"REVOLVING CREDIT LOAN" means the revolving credit loan described in
Article II hereof.
"S & P" means Standard & Poor's Corporation or its successor.
"SELLER" means the owner or owners of a Practice that is acquired by a
Borrower Entity or that has entered into a firm and binding commitment letter,
asset purchase agreement, or merger agreement with a Borrower Entity.
"SELLER DEBT" means Debt incurred in favor of one or more Sellers
representing part of the purchase price of an Acquired Practice, including, but
not limited to, amounts due Sellers for the excess of accounts receivable
acquired over the amount of liabilities assumed in the acquisition.
"SENIOR FUNDED DEBT" means Funded Debt other than the Subordinated
Debentures.
"SERVICE AGREEMENT" means one of those Service Agreements now in effect or
hereafter entered into by a Borrower Entity and a Provider setting forth the
terms and conditions under which a Borrower Entity manages the administration of
the Provider's Practice.
"SOLVENT" shall mean, as to any Person, that as of any date of
determination, (i) the then fair value of the assets of such Person is (a)
greater than the then total amount of liabilities (including subordinated
liabilities) of such Person and (b) greater than the amount that will be
required to pay such Person's probable liability on such Person's then existing
debts as they become absolute and matured, (ii) such Person's capital is not
unreasonably small in relation to its business, and (iii) such Person has not
incurred and does not intend to incur, or believe or reasonably should believe
that it will incur, debts beyond its ability to pay such debts as they become
due.
"STOCK REPURCHASE PROGRAM" means Borrower's acquisition of up to Four
Million (4,000,000) shares of Borrower's own outstanding shares of common stock
at a price
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not to exceed Twenty and No/100 Dollars ($20.00) for any share, to be
completed on or before February 28, 1999.
"SUBORDINATED DEBENTURES" has the meaning assigned in Section 6.1.11
hereof.
"SUBSIDIARY" means any present or future corporation or other entity at
least a majority of whose outstanding voting stock or other voting securities
shall at the time be owned directly or indirectly by one or more Borrower
Entities or which is owned to a lesser degree but which is sufficiently
controlled by the Borrower Entities that the owned entity is required to be
reported with the other Borrower Entities on a consolidated basis under GAAP.
"TAXES" means all taxes and assessments, whether general or special,
ordinary or extraordinary, or foreseen or unforeseen, which at any time may be
assessed, levied, confirmed or imposed on the Borrower Entities or on any of
their properties or assets or any part thereof or in respect of any of their
franchises, businesses, income or profits.
"TOTAL CASH CONSIDERATION" means all noncontingent obligations to pay cash
(whether payable over time, such as Seller Debt, or at closing) as consideration
in connection with an acquisition, whether characterized as price, deferred
price, consulting fee (if regarded as part of the purchase price rather than for
bona fide services to be provided independent of the purchase) or otherwise,
plus fifty percent (50%) of the maximum amount of contingent consideration
(including, but not limited to, "earnout notes") that could arise as a result of
the acquisition, plus the principal amount of any Acquired Debt, and further
including the amount of any Debt of an Acquired Practice that is retired by a
Borrower Entity in connection with the acquisition (provided, however, if any
portion of such retired Debt is subject to the unqualified written obligation of
a Provider to repay to a Borrower Entity the Debt, with interest, then "Total
Cash Consideration" shall only include the portion of such Debt that is not
subject to the Provider's obligation of repayment), in each case without
discount for timing of payments.
"UCC" means the Uniform Commercial Code as adopted in Tennessee, as it may
be amended from time to time.
"UNMATURED DEFAULT" means any event or condition that, but for the giving
of any required notice by Agent and/or the passing of time, would be an Event of
Default hereunder.
"WHOLLY-OWNED SUBSIDIARY" means a Subsidiary that is entirely owned by one
or more Borrower Entities.
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1.2 Terms Generally.
1.2.1 Computations; Accounting Principles. Where the character or amount
of any asset or liability or item of income or expense is required to be
determined, or any consolidation or other accounting computation is required to
be made for the purposes of this Agreement, such determination or calculation,
to the extent applicable and except as otherwise specified in this Agreement,
shall be made in accordance with GAAP. If a change in GAAP after the date of
this Agreement would require a change affecting the calculation of any
requirement under this Agreement, then the Required Lenders and Borrower shall
negotiate in good faith for the amendment of the affected requirements;
provided, however, until and unless such an amendment is agreed upon, the
requirements of this Agreement shall remain as written and compliance therewith
shall be determined according to GAAP as in effect prior to the change.
1.2.2 Gender and Number. Words used herein indicating gender or number
shall be read as context may require.
1.2.3 References Include Successors. References herein to specific
Laws, regulatory bodies, parties or agreements also refer to any successor
Laws, regulatory bodies, and parties, and to all modifications, extensions,
renewals and restatements of agreements.
1.2.4 References to This Agreement. "Herein," "hereof" and words of
similar import refer to this Agreement as a whole and not to any particular
provision hereof, unless otherwise expressly stated.
II. LOANS AND LETTERS OF CREDIT
Concurrently with the execution of this Agreement, Lenders agree on a
several basis, and not on a joint basis, in accordance with their respective
Commitments, to make the Revolving Credit Loan to Borrower, under the following
terms and conditions:
2.1 Amount of Revolving Credit Loan. The principal indebtedness of
Borrower to Lenders under the Revolving Credit Loan shall not exceed Ninety
Million and No/100 Dollars ($90,000,000.00).
2.2 Use of Proceeds of Revolving Credit Loan. The proceeds of the
Revolving Credit Loan shall be used by Borrower for (i) the repayment of all
amounts outstanding under the Revolving/Term Loan made by NationsBank of
Tennessee, N.A., pursuant to that Loan Agreement dated as of January 8, 1996, as
amended, (ii) Permitted Acquisitions, (iii) other Capital Expenditures, (iv)
general corporate and working capital purposes, (v) repayment of Letters of
Credit issued in accordance with this Agreement for any of the foregoing
purposes, (vi) in an aggregate amount not to exceed Fifty Million and
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No/100 Dollars ($50,000,000.00), for the Stock Repurchase Program and/or the
extension of Management Stock Acquisition Loans, and (vii) to repay other
existing indebtedness other than indebtedness under the Subordinated Debentures.
2.3 Revolving Credit Loan Notes. Borrower's obligations under the
Revolving Credit Loan shall be evidenced by Revolving Credit Loan Notes in favor
of the respective Lenders in the form included as Exhibit 2.3 hereto payable to
each Lender in the maximum amount of its Commitment.
2.4 Separate Commitments of Lenders. Borrower acknowledges that each
Lender's commitment to fund its portion of the Revolving Credit Loan is made by
each Lender severally, and neither Agent nor any Lender shall be liable for the
failure of another Lender to timely perform under this Agreement.
2.5 Advances of Loans. Subject to the terms and conditions of this
Agreement, Borrower may borrow, repay and reborrow Loans under the Revolving
Credit Loan, provided that the outstanding principal balance of the Revolving
Credit Loan shall not at any time exceed the amount permitted under Section 2.1
above. Loans shall be disbursed as follows:
2.5.1 Loans Advanced Pursuant to Borrowing Notices.
2.5.1(a) Applicability. Loans under the Revolving Credit Loan
may be LIBOR Loans, Base Rate Loans, or a combination thereof, and the
funding thereof shall be subject to this Section 2.5.1.
2.5.1(b) Borrowing Notices. As long as Borrower meets the
conditions for funding stated in this Agreement, Borrower may submit
requests for Loans ("Borrowing Notices") to Agent. All requests shall
be made by telephone, subject to such security procedures as Agent may
require from time to time (provided that all such telephonic notices
shall be confirmed by written Borrowing Notices within one (1)
Business Day) and shall specify the proposed disbursement date for the
requested Loan; the amount of the Loan; the purpose of the Loan
(characterized in accordance with Section 2.2 above); the type of
Loan, i.e., LIBOR Loan or Base Rate Loan; and if a LIBOR Loan, the
designated Interest Period. Each Borrowing Notice shall irrevocably
obligate Borrower to accept the Loan requested thereby. Borrowing
Notices shall be in the form of Exhibit 2.5.1(b) hereto or such other
form as Agent may from time to time reasonably require.
2.5.1(c) Funding of Loans. Lenders shall fund their respective
portions of requested Loans on the next following Banking Day after
the Banking Day (determined with a cutoff of 11:00 a.m. Charlotte,
North Carolina time, as provided in the definition thereof) of
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Agent's receipt of the Borrowing Notice, in the case of Base Rate
Loans, and on the third (3rd) Banking Day following the Banking Day of
Agent's receipt of the Borrowing Notice, in the case of LIBOR Loans.
All funds shall be disbursed directly into an account maintained by
Borrower with Agent. Borrower agrees that if any Lender elects to fund
any requested Loan(s) sooner after requested than is required
hereunder, the Lender may nevertheless use the entire response period
allowed hereunder upon receipt of any subsequent request, at the
Lender's sole option.
2.5.1(d) Base Rate Loan Limitations. Individual Base Rate Loans
shall be in the minimum amount of One Million and No/100 Dollars
($1,000,000.00) each and in multiples of One Million and No/100
Dollars ($1,000,000.00).
2.5.1(e) LIBOR Loan Limitations. Individual LIBOR Loans shall
be in the minimum amount of Three Million and No/100 Dollars
($3,000,000.00) each and shall be requested in increments of One
Million and No/100 Dollars ($1,000,000.00). No more than six (6) LIBOR
Loans may be outstanding under the Revolving Credit Loan.
2.5.1(f) Additional Limitation on LIBOR Interest Periods.
Notwithstanding anything to the contrary in this Agreement, if an
Unmatured Default or an Event of Default shall have occurred and be
continuing, no additional LIBOR Loans may be created or continued and
no Base Rate Loan may be converted into a LIBOR Loan.
2.5.2 Conversion of Loans. Borrower shall have the right, on prior notice
to Agent made by telephone, subject to such security procedures as Agent may
require from time to time (provided that all such telephonic notices shall be
confirmed by written Borrowing Notices within one (1) Business Day), which
notice shall be given three (3) Banking Days (determined with a cutoff of 11:00
a.m. Charlotte, North Carolina time, as provided in the definition thereof)
prior to the date of any requested conversion, to convert any Base Rate Loan or
LIBOR Loan into a Loan of another type, or to continue any LIBOR Loan for
another Interest Period, subject in each case to the following:
2.5.2(a) Application of Loans. Each conversion shall be
effected by applying the proceeds of the new LIBOR Loan and/or Base
Rate Loan, as the case may be, to the Loan (or portion thereof) being
converted.
2.5.2(b) Notices of Conversions. Each notice pursuant to this
2.5.2(b) shall be irrevocable and shall refer to this Agreement and
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specify the identity and principal amount of the particular Loan that
Borrower requests be converted or continued; if such notice requests
conversion, the date of such conversion (which shall be a Business
Day); and if a Loan is to be converted to a LIBOR Loan or a LIBOR Loan
is to be continued, the Interest Period with respect thereto. No LIBOR
Loan shall be converted at any time other than at the end of the
Interest Period applicable thereto, except in accordance with Section
2.11 hereof. Conversion notices shall be in the form attached as
Exhibit 2.5.1(b) hereto.
2.5.3 Absence of Election. In the event that Borrower shall not give notice
to continue any LIBOR Loan for a subsequent period, such LIBOR Loan (unless
repaid) shall automatically be converted into a Base Rate Loan. If Borrower
fails to specify in any Borrowing Notice the type of borrowing or, in the case
of a LIBOR Loan, the applicable Interest Period, Borrower will be deemed to have
requested a Base Rate Loan. If Agent reasonably believes that any failure by
Borrower to specify the type of borrowing or the applicable Interest Period
shall have resulted from failure of communications equipment or clerical error,
then prior to funding any such borrowing Agent shall use reasonable efforts to
obtain confirmation from Borrower of the contents of such Borrowing Notice;
provided, however, in the absence of prompt confirmation by Borrower which
specifies the type of borrowing and/or the applicable Interest Period, Borrower
will be deemed to have requested a Base Rate Loan. Notwithstanding anything to
the contrary contained above, if an Event of Default shall have occurred and be
continuing, no LIBOR Loan may be continued and no Base Rate Loan may be
converted into a LIBOR Loan.
2.5.4 Implied Representations Upon Request for Loan. Upon making any
request for any Loan, Borrower shall be deemed to have warranted to Agent and
Lenders that all conditions to funding set forth in Article III hereof are
satisfied and that all warranties made herein are true and shall be true as of
the funding of the requested Loan, subject to exception for warranties that
speak to a specific date or for which the underlying facts have changed pursuant
to transactions permitted under this Agreement, as provided in Exhibit 2.5.1(b)
hereto.
2.5.5 Advance Not Waiver. Any Lender's making of any Loan that it is not
obligated to make under any provision of Article III hereof or any other
provision hereof shall not be construed as a waiver of such Lender's right to
withhold future Loans, declare an Event of Default, or otherwise demand strict
compliance with this Agreement, acting through Agent as permitted by the terms
hereof.
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2.5.6 Draws by Debit Memorandum. Agent may cause Lenders to draw
amounts that may be available under the Revolving Credit Loan to pay any
Obligation that is not otherwise timely paid.
2.6 Interest. Interest shall accrue on each Loan as follows:
2.6.1 Base Rate Loans. Interest shall accrue on each Base Rate Loan at an
annual rate equal to the Alternate Base Rate plus the Applicable Base Rate
Margin, said rate to change contemporaneously with any change in the Alternate
Base Rate.
2.6.2 LIBOR Loans. Interest shall accrue on each LIBOR Loan at a rate
equal to the LIBO Rate for the selected Interest Period plus the Applicable LIBO
Rate Margin.
2.6.3 Additional Interest on LIBOR Loans. In addition to the interest
described above, Borrower shall pay to any Lender, if and so long as such Lender
shall be required under regulations of the Board of Governors of the Federal
Reserve System to maintain reserves with respect to liabilities or assets
consisting of or including LIBOR Liabilities, additional interest on the unpaid
principal amount of each LIBOR Loan, from the date of such advance until said
principal amount is paid in full, at an interest rate per annum equal at all
times to the remainder obtained by subtracting (i) the LIBO Rate for the
Interest Period from (ii) the rate obtained by dividing the LIBO Rate by a
percentage equal to 100% minus the LIBO Rate Reserve Percentage for such
Interest Period. This additional interest shall be payable on each date on
which interest is payable and shall be effective only after the affected Lender
(or Agent on behalf of all Lenders) gives written notice thereof to Borrower.
The amount of additional interest shall be determined by each Lender, who shall
notify Borrower and Agent thereof and whose determination shall be conclusive,
absent manifest error.
2.6.4 Calculation of Interest. Interest for both Base Rate Loans and LIBOR
Loans shall be computed on the basis of a 360-day year counting the actual
number of days elapsed. Interest shall accrue on the Business Day a Loan is
extended and shall accrue through the Business Day of payment if payment is
received before 11:00 a.m. Charlotte, North Carolina time and through the next
following Business Day if received after that time.
2.6.5 Default Rate. Notwithstanding the foregoing, upon the occurrence of
an Event of Default and during the continuation of such Event of Default,
interest shall be charged at the Default Rate, regardless of whether Lenders
have elected to exercise any other remedies available to Lenders, including,
without limitation, acceleration of the maturity of the outstanding principal of
the Revolving Credit Loan.
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2.6.6 Payment of Interest. Interest for Base Rate Loans and LIBOR
Loans shall be due and payable in arrears, without notice, on each Interest
Payment Date.
2.6.7 Usury Savings Provision. It is the intention of the parties that
all charges under or in connection with this Agreement and the Obligations,
however denominated, and including (without limitation) all interest,
commitment fees, late charges and loan charges, shall be limited to the Maximum
Lawful Amount. Such charges hereunder shall be characterized and all provisions
of the Loan Documents shall be construed as to uphold the validity of charges
provided for therein to the fullest possible extent. Additionally, all charges
hereunder shall be spread over the full permitted term of the Obligations for
the purpose of determining the effective rate thereof to the fullest possible
extent, without regard to prepayment of or the right to prepay the Obligations.
If for any reason whatsoever, however, any charges paid or contracted to be
paid in respect of the Obligations shall exceed the Maximum Lawful Amount,
then, without any specific action by Lenders, Agent or Borrower, the obligation
to pay such interest and/or other charges shall be reduced to the Maximum
Lawful Amount in effect from time to time, and any amounts collected by Lenders
that exceed the Maximum Lawful Amount shall be applied to the reduction of the
principal balance of the Obligations and/or refunded to Borrower so that at no
time shall the interest or loan charges paid or payable in respect of the
Obligations exceed the Maximum Lawful Amount. This provision shall control
every other provision herein and in any and all other agreements and
instruments now existing or hereafter arising between Borrower and Lenders with
respect to the Obligations.
2.7 Alternate Rate of Interest if LIBOR Unavailable. In the event, and
on each occasion, that on the date of commencement of any Interest Period for a
LIBOR Loan, a Lender shall have determined (i) that dollar deposits in the
amount of the requested principal amount of such LIBOR Loan are not generally
available in the London Interbank Market; (ii) that the rate at which such
dollar deposits are being offered will not adequately and fairly reflect the
cost to the Lender of making or maintaining such LIBOR Loan during such Interest
Period; or (iii) that reasonable means do not exist for ascertaining the LIBO
Rate, the Lender shall, as soon as practicable thereafter, give written or
telephonic notice of such determination to Borrower and Agent. In the event of
any such determination, any request by Borrower for a LIBOR Loan under this
Agreement shall, until the circumstances giving rise to such notice no longer
exist, be deemed to be a request for a Base Rate Loan. Each determination by a
Lender hereunder shall be conclusive absent manifest error.
2.8 Change in Circumstances.
2.8.1 Imposition of Requirements. Notwithstanding any other provision
herein, if after the date of this Agreement any change in applicable
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Laws or in the interpretation or administration thereof by any Governmental
Authority charged with the interpretation or administration thereof (whether or
not having the force of Law) shall change the basis of taxation of payments to a
Lender under any LIBOR Loan made by the Lender or any other fees or amounts
payable hereunder (other than taxes imposed on the overall net income, gross
receipts or added value of a Lender by the country in which the Lender is
located, or by the jurisdiction in which a Lender has its principal office, or
by any political subdivision or taxing authority therein), or shall impose,
modify or deem applicable any reserve requirement, special deposit, insurance
charge (including FDIC insurance on LIBOR Liabilities) or similar requirement
against assets of, deposits with or for the account of, or credit extended by, a
Lender or shall impose on a Lender or the London Interbank Market any other
condition affecting this Agreement or LIBOR Loans made by a Lender, and the
result of any of the foregoing shall be to increase the cost to the Lender of
making or maintaining its LIBOR Loan or to reduce the amount of any sum received
or receivable by a Lender hereunder (whether of principal, interest or
otherwise) in respect thereof by an amount deemed by the affected Lender to be
material, then Borrower will pay to such Lender such additional amount or
amounts as will compensate the Lender for such additional costs of reduction.
2.8.2 Other Changes. If either (i) the introduction of, or any change in,
or in the interpretation of, any United States or foreign Law; or (ii)
compliance with any directive, guidelines or request from any central bank or
other United States or foreign Governmental Authority (whether or not having the
force of law) promulgated or made after the date hereof, affects or would affect
the amount of capital required or expected to be maintained by a Lender (or any
lending office of a Lender) or any corporation directly or indirectly owning or
controlling a Lender (or any lending office of a Lender) based upon the
existence of this Agreement, and the Lender shall have determined that such
introduction, change or compliance has or would have the effect of reducing the
rate of return on the Lender's capital or on the capital of such owning or
controlling corporation as a consequence of its obligations hereunder (including
its commitment) to a level below that which the Lender or such owning or
controlling corporation could have achieved but for such introduction, change or
compliance (after taking into account that Lender's policies or the policies of
such owning or controlling corporation, as the case may be, regarding capital
adequacy) by an amount deemed by the Lender (in its sole discretion) to be
material, then, from time to time, Borrower shall pay to the Lender such
additional amount or amounts as will compensate the Lender for such reduction
attributable to making, funding and maintaining its commitment and Loans
hereunder.
2.8.3 Computation of Amounts. A certificate of a Lender setting forth the
basis and method of computation of such amount or amounts
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specified in Sections 2.8.1 and 2.8.2 hereof as shall be necessary to compensate
the Lender (or its participating banks) as specified above, as the case may be,
shall be delivered to Borrower and shall be conclusive absent manifest error;
provided however, that Borrower shall be responsible for compliance herewith and
the payment of increased costs only to the extent that (i) any change in Laws
giving rise to increased costs occurs after the date of this Agreement; (ii)
such increased costs are imposed by the Lender on all other Borrowers similarly
situated with Borrower; and (iii) the Lender gives notice of the change giving
rise to increased costs within ninety (90) Business Days after the Lender has,
or with reasonable diligence should have had, knowledge of the change, or else
Lender can only collect costs from and after the date of the notice. Subject to
the foregoing, Borrower shall pay the affected Lender the amount shown as due on
any such certificate within ten (10) Business Days after its receipt of such
certificate.
2.8.4 No Duty to Contest. The protection of this Section 2.8 shall be
available to a Lender regardless of any possible contention of invalidity or
inapplicability of the Law or condition that shall have been imposed. Should a
Lender assess any charge to Borrower under this Section 2.8, and provided that
Borrower pays the assessment to the Lender, Borrower may within ninety (90)
days after receiving notice of such assessment undertake, at Borrower's own
expense, any contest of the matters giving rise to the charge that may, in the
opinion of Borrower's independent counsel issued to the affected Lender, and
concurred in by counsel to the Lender, have a reasonable chance of success,
provided further that the contest would not require the assertion of any
position contrary to a position taken by the Lender generally with taxing
authorities or any other involved parties and that there does not exist any
other circumstance that would disadvantage the Lender in the event of such
contest, as the affected Lender may determine in its discretion. The affected
Lender shall offer reasonable participation to Borrower for the purpose of
enabling Borrower to pursue the contest of such issue, with all expenses,
including fees and expenses of the affected Lender's counsel, to be paid by
Borrower.
2.8.5 Replacement of Lenders Under Certain Circumstances. If any specific
additional charge is assessed under Sections 2.6.3, 2.7 or 2.8 hereof by less
than a majority in number of the Lenders, Borrower shall be entitled to request
of Agent that the Lender(s) assessing such additional charge be replaced as
Lenders hereunder by other financial institutions proposed by Borrower who do
not then assess such additional charge. Agent shall arrange the appointment of
such replacement Lender(s), who must be acceptable to both Agent and Borrower in
their reasonable discretion. The appointment of such new Lender(s) shall be
accomplished in accordance with the other provisions of this Agreement and
Borrower shall pay the applicable fee to Agent for the transfer of the interest
of the replaced Lender(s).
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2.9 Change in Legality of LIBOR Loans. Notwithstanding anything to the
contrary herein contained, if any change in any Law or in interpretation thereof
by any Governmental Authority charged with the administration or interpretation
thereof shall make it unlawful for a Lender to make or maintain any LIBOR Loan
or to give effect to its obligations as contemplated hereby, then, by written
notice to Borrower, the Lender may (i) declare that LIBOR Loans will not
thereafter be made by the Lender hereunder, whereupon Borrower shall be
prohibited from requesting LIBOR Loans from the Lender hereunder unless such
declaration is subsequently withdrawn; and (ii) require that all outstanding
LIBOR Loans made by it be converted to Base Rate Loans, in which event (a) all
such LIBOR Loans shall be automatically converted to Base Rate Loans (but
without imposition of any additional charge that would normally become due under
Section 2.11 hereof) as of the effective date of such notice, and (b) all
payments and prepayments of principal that would otherwise have been applied to
repay the converted LIBOR Loans shall instead be applied to repay the Base Rate
Loans resulting from the conversion of such LIBOR Loans. Under such
circumstances, a borrowing request for a LIBOR Loan shall be regarded, as to the
Lender who has given notice under this Section 2.9, a request for a Base Rate
Loan, and as to all other Lenders, it shall be regarded as a request for a LIBOR
Loan. For purposes of this Section 2.9, a notice to Borrower by the Lender
pursuant to (a) above shall be effective, if lawful, on the last day of the then
current Interest Period; in all other cases, such notice shall be effective on
the date of receipt by Borrower.
2.10 Principal Repayment. All remaining principal outstanding under the
Revolving Credit Loan shall become due on the Maturity Date or the earlier
acceleration of the Revolving Credit Loan in accordance with the terms of this
Agreement.
2.11 Prepayment of LIBOR Loans.
2.11.1 Notice of LIBOR Loan Prepayment. Borrower may, upon three (3)
Banking Days' prior written notice to Agent (with a Banking Day cutoff of
11:00 a.m. Charlotte, North Carolina time, as provided in the definition
thereof), and upon payment of all applicable premiums set forth in Section
2.11.3 hereof, prepay any outstanding LIBOR Loans prior to any Interest
Payment Date for such LIBOR Loans, in whole or in part. Each notice of
prepayment of any LIBOR Loan shall specify the date and amount of such
prepayment and shall be irrevocable.
2.11.2 Amount of LIBOR Loan Prepayment. Each partial prepayment of
any LIBOR Loan shall be in an aggregate principal amount which is the
lesser of (i) the then outstanding principal balance of the one or more
LIBOR Loans to be prepaid, or (ii) Three Million and No/100 Dollars
($3,000,000.00) or a larger integral multiple of One Million and No/100
Dollars ($1,000,000.00). Interest on the amount prepaid accrued to the
prepayment date shall be paid on such date.
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2.11.3 LIBOR Loan Breakage Costs. Borrower shall indemnify,
defend and hold harmless each Lender against any loss or expense that a
Lender may incur in connection with the prepayment of a LIBOR Loan, the
Borrower's failure to borrow or to pay when it stated it would do so,
including, but not limited to, the fees or charges customarily included in
"breakage costs" that may result to a Lender from the early repayment of a
LIBOR Liability, which costs may be calculated by a Lender as though
Borrower's prepayment had been match-funded with a corresponding LIBOR
Liability, whether or not the Lender manages its LIBOR Liabilities on a
loan-by-loan basis. Additionally, upon prepayment of any LIBOR Loan on a
date other than the relevant Interest Payment Date for such borrowing,
Borrower shall pay to Lenders, in addition to all other payments then due
and owing Lenders, premiums which shall be equal to an amount, if any,
reasonably determined by Agent to be the difference between the rate of
interest then applicable to the relevant LIBOR Loan and the yield Lenders
would receive upon reinvestment of so much of the relevant LIBOR Loans as
is prepaid for the remainder of the term of the relevant LIBOR Loan or
Loans. Anything in this Section 2.11.3 to the contrary notwithstanding,
the premiums payable upon any such prepayment shall not exceed the amount,
if any, determined by Agent to be the difference between the rate of
interest then applicable to the relevant LIBOR Loan and the yield that
Lenders could receive upon reinvestment in the "Floor Reinvestment" of so
much of the relevant LIBOR Loan as is prepaid for the remainder of the
term of the relevant LIBOR Loan. For purposes hereof, "Floor Reinvestment"
shall mean an investment for the time period from the date of such
prepayment to the end of the relevant Interest Period applicable to such
LIBOR Loan at an interest rate per annum equal to the Federal Funds Rate
on the date of such prepayment. All determinations, estimates,
assumptions, allocations and the like required for the determination of
such premiums shall be made by Agent in good faith and shall be presumed
correct absent manifest error.
2.12 Prepayment of Base Rate Loans. Borrower may at any time prepay any
outstanding Base Rate Loans prior to the Maturity Date in whole or in part
without premium or penalty upon at least one Business Day's prior notice to
Agent. All such prepayments shall be made in minimum amounts of Three Million
and No/100 Dollars ($3,000,000.00) and in increments of One Million and No/100
Dollars ($1,000,000.00) each.
2.13 Reduction of Commitment. Borrower may prospectively and permanently
reduce the Commitment by giving Agent written notice of a reduction to be
effective on a date certain no earlier than ten (10) Business Days after the
notice is received by Agent. The principal balance of the Revolving Credit Loan
shall be reduced, if necessary, on the effective date of the reduction in
accordance with the notice. Reductions shall be shared by Lenders Pro Rata. If
it is necessary to prepay any LIBOR Loan to accommodate the requested reduction,
Borrower shall be liable for all costs provided for elsewhere in this Agreement.
All reductions shall be in amounts of at least Three Million
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and No/100 Dollars ($3,000,000.00) and shall be made in increments of One
Million and No/100 Dollars ($1,000,000.00).
2.14 Periodic Commitment Fee Based on Use of Facilities. Borrower shall
pay to Agent for distribution to Lenders Pro Rata an additional commitment fee
for the unused portion of the Revolving Credit Loan. This fee shall be
determined by applying the Applicable Commitment Fee (applied on the basis of a
360-day year) to the average daily unused balance of the Revolving Credit Loan.
The commitment fee shall be paid in arrears on each Interest Payment Date
applicable to Base Rate Loans. This commitment fee is not refundable. As
provided in Section 2.15.2 hereof, all outstanding Letter of Credit Liabilities
shall be treated as outstanding Loans for the purpose of determining the nonuse
fee.
2.15 Letters of Credit. Subject to the terms and conditions of this
Agreement, Lenders' respective Commitments for the Revolving Credit Loan may be
utilized, upon the request of Borrower, for the issuance by the Issuing Bank of
standby or commercial letters of credit (the "Letters of Credit") for the
account of Borrower for uses that would be permitted for the Revolving Credit
Loan; provided that in no event shall (i) the aggregate amount of all stated and
undrawn amounts under Letters of Credit (the "Letter of Credit Liabilities"),
together with the aggregate principal amount of the Loans advanced under the
Revolving Credit Loan, exceed the amount stated in Section 2.1 hereof, (ii) the
outstanding aggregate amount of all Letter of Credit Liabilities exceed Five
Million and No/100 Dollars ($5,000,000.00), or (iii) the expiration date of any
Letter of Credit extend beyond the Maturity Date applicable to the Revolving
Credit Loan. The following additional provisions shall apply to Letters of
Credit:
2.15.1 Procedure for Issuance. Borrower shall give Agent at least
three (3) Business Days' irrevocable prior notice (effective upon receipt)
specifying the Business Day (which shall be no later than thirty (30) days
preceding the Maturity Date) each Letter of Credit is to be issued and
describing in reasonable detail the proposed terms of such Letter of
Credit (including its beneficiary) and the nature of the transactions or
obligations proposed to be supported. Borrower shall be the account party
for each Letter of Credit, including Letters of Credit issuable to a
beneficiary having a claim or potential claim against a Subsidiary of
Borrower.
2.15.2 Participation Among Lenders. On each day during the period
commencing with the issuance by the Issuing Bank of any Letter of Credit
and until such Letter of Credit shall have expired or been terminated or,
if drawn upon, until the resulting obligations of reimbursement (the
"Reimbursement Obligations") have been satisfied in full by Borrower
(whether by a borrowing under this Agreement or otherwise), the Commitment
of each Lender shall be deemed to be utilized for all purposes of this
Agreement (including, but not limited to, the calculation of availability
and of the nonuse fee) in an amount equal to such Lender's Pro Rata Share
of the Letter of Credit Liabilities associated with such Letter of Credit.
Each Lender (other than the Issuing
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Bank) agrees that, upon the issuance of any Letter of Credit, it shall
automatically be deemed to have acquired a participation in the Issuing
Bank's liability under such Letter of Credit in an amount equal to such
Lender's Pro Rata Share of such liability, and each Lender (other than the
Issuing Bank) thereby shall absolutely, unconditionally and irrevocably
assume, as primary obligor and not as surety, and shall be unconditionally
obligated to the Issuing Bank to pay and discharge when due, its Pro Rata
Share of the Issuing Bank's liability under such Letter of Credit.
2.15.3 Reimbursement Obligation. Upon receipt from the beneficiary of
any Letter of Credit of any demand for payment under such Letter of
Credit, the Issuing Bank shall promptly notify Borrower of the amount to
be paid by the Issuing Bank as a result of such demand and the date on
which payment is to be made by the Issuing Bank to such beneficiary in
respect of such demand. Borrower hereby unconditionally agrees to pay and
reimburse Agent for the account of the Issuing Bank and the other Lenders
Pro Rata with respect to the amount of each demand for payment under such
Letter of Credit at or prior to the date on which payment is to be made by
the Issuing Bank to the beneficiary under such Letter of Credit, without
presentment, demand, protest or other formalities of any kind. Any amounts
not so paid or borrowed as set forth in Section 2.15.4 below shall bear
interest at the Default Rate applicable to Base Rate Loans.
2.15.4 Means of Reimbursement. Forthwith upon its receipt of a notice
referred to in Section 2.15.3 hereof, Borrower shall advise Agent whether
or not Borrower intends to obtain a Loan to finance its obligation to
reimburse the Issuing Bank for the amount of the related demand for
payment and, if it does, submit a notice of such borrowing as provided in
this Agreement. In the event that Borrower fails to so advise Agent, and
if Borrower fails to reimburse the Issuing Bank for a demand for payment
under a Letter of Credit by the date of such payment, Agent shall give
each Lender prompt notice of the amount of the demand for payment,
specifying such Lender's Pro Rata Share of the amount of the related
demand for payment, and Borrower shall be deemed in default hereunder for
breaching Section 2.15.3 above.
2.15.5 Payments by Lenders. Each Lender (other than the Issuing Bank)
shall pay to Agent for the account of the Issuing Bank in Dollars and in
immediately available funds, such Lender's Pro Rata Share of any payment
under a Letter of Credit upon notice by Agent to such Lender requesting
such payment and specifying such amount as provided in Section 2.15.4.
Each such Lender's obligation to make such payments to Agent for the
account of the Issuing Bank under this Section 2.15.5, and the Issuing
Bank's right to receive the same, shall be absolute and unconditional and
shall not be affected by any circumstance whatsoever, including the
failure of any other Lender to make its
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payment under this Section 2.15.5, the financial condition of Borrower,
the existence of any Unmatured Default or Event of Default or the
termination of the Commitments. Each such payment to the Issuing Bank
shall be made without any offset, abatement, withholding or reduction
whatsoever, EVEN IN THE PRESENCE OF ORDINARY NEGLIGENCE ON THE PART OF THE
ISSUING BANK; provided, nothing contained in the foregoing shall limit the
Issuing Bank's liability for its gross negligence or willful misconduct in
improperly honoring a draft drawn under a Letter of Credit.
2.15.6 Settlement Among Lenders. Upon the making of each payment by a
Lender to the Issuing Bank pursuant to Section 2.15.5 above in respect of
any Letter of Credit, such Lender shall, automatically and without any
further action on the part of Agent, the Issuing Bank or such Lender,
acquire (i) a participation in an amount equal to such payment in the
Reimbursement Obligation owing to the Issuing Bank by Borrower under this
Agreement and under the Letter of Credit Documents relating to such Letter
of Credit and (ii) a participation in a percentage equal to such Lender's
Pro Rata Share in any interest or other amounts payable by Borrower under
such Letter of Credit Documents and the other Loan Documents in respect of
such Reimbursement Obligation. Upon receipt by the Issuing Bank from or
for the account of Borrower of any payment in respect of any Reimbursement
Obligation or any such interest or other amount (including by way of set-
off or application of proceeds of any collateral security) the Issuing
Bank shall promptly pay to Agent for the account of each Lender who shall
have previously assumed a participation in such payment under clause (ii)
above, such Lender's Pro Rata Share of such payment, each such payment by
the Issuing Bank to be made in the same money and funds in which received
by the Issuing Bank. In the event any payment received by the Issuing Bank
and so paid to Lenders is rescinded or must otherwise be returned by the
Issuing Bank, each Lender shall, upon the request of the Issuing Bank
(through Agent), repay to the Issuing Bank (through Agent) the amount of
such payment paid to such Lender, with interest at the rate specified in
Section 2.15.10.
2.15.7 Letter of Credit Fee. Borrower shall pay to Agent for the
account of each Lender Pro Rata a letter of credit fee in respect of each
Letter of Credit on the daily average undrawn face amount of such Letter
of Credit for the period from and including the date of issuance of such
Letter of Credit to and including the date such Letter of Credit is drawn
in full, expires or is terminated (such fee to be non-refundable, to be
paid in arrears on the first day of each calendar quarter and on the
Maturity Date applicable to the Revolving Credit Loan and to be
calculated, for any day, after giving effect to any payments made under
such Letter of Credit on such day) in an amount equal to the Applicable
LIBO Rate Margin(s) in effect during the relevant period (or such margin
plus two percentage points (2%), upon and during the continuation of an
Event of Default hereunder). All calculations of Letter of
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Credit fees shall be based on a 360 day year counting the actual number of
elapsed days. The Issuing Bank shall also receive a facing fee of one-
eighth of one percent (1/8%) of the face amount of any Letter of Credit
upon the issuance thereof.
2.15.8 Letter of Credit Information. Upon the request of any Lender
from time to time, the Issuing Bank shall deliver any information
reasonably requested by such Lender with respect to each Letter of Credit
then outstanding.
2.15.9 Conditions Relating to Letters of Credit. The issuance by the
Issuing Bank of each Letter of Credit shall be subject, in addition to the
conditions precedent set forth in Article III hereof, to the conditions
precedent that (i) such Letter of Credit shall be in such form, contain
such terms and support such transactions as shall be satisfactory to the
Issuing Bank consistent with its then current practices and procedures
with respect to letters of credit of the same type and (ii) Borrower shall
have executed and delivered such applications, agreements and other
instruments relating to such Letter of Credit as the Issuing Bank shall
have reasonably requested consistent with its then current practices and
procedures with respect to letters of credit of the same type; provided
that in the event of any conflict between any such application, agreement
or other instrument and the provisions of this Agreement, the provisions
of this Agreement shall control. Without limiting the foregoing, it is
agreed that (i) an "Event of Default" under any reimbursement agreement
respecting a Letter of Credit shall be deemed to mean an Event of Default
under this Agreement, and (ii) no Borrower Entity shall be required to
provide any collateral to secure its obligations regarding any Letter of
Credit except as required herein.
2.15.10 Payments Among Lenders. In the event that any Lender fails to
pay any amount required to be paid pursuant to this Section 2.15 when due,
such Lender shall pay interest to the Issuing Bank (through Agent) on such
amount from and including such due date to but excluding the date such
payment is made (i) during the period from and including such due date to
but excluding the date three Business Days thereafter, at a rate per annum
equal to the Federal Funds Rate (as in effect from time to time) and (ii)
thereafter, at a rate per annum equal to the Alternate Base Rate plus
2.0%.
2.15.11 Modifications. The issuance by the Issuing Bank of any
modification or supplement to any Letter of Credit shall be subject to the
same conditions applicable under this Section 2.15 to the issuance of new
Letters of Credit, and no such modification or supplement shall be issued
unless either (x) the respective Letter of Credit as affected by such
action would have complied with such conditions had it originally been
issued in such modified or supplemented form or (y) each Lender or the
Required Lenders, as may be
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required under Article IX hereof, shall have consented to such
modification or supplement.
2.15.12 Absolute Obligations of Borrower. The obligations of Borrower
under this Section 2.15 shall be unconditional and absolute and shall not
be affected, modified or impaired, upon the happening at any time or from
time to time of any event, including any of the following, whether or not
with notice to or the consent of Borrower:
2.15.12(a) the compromise, settlement, release, modification,
amendment (whether material or otherwise) or termination of any or all of
the obligations, conditions covenants or agreements of any Person in
respect of any of the Loan Documents;
2.15.12(b) the occurrence, or the failure by Agent, any Lender or
any other Person to give notice to Borrower of the occurrence, of any
Event of Default or any default under any of the other Loan Documents;
2.15.12(c) the waiver of the payment, performance or observance
of any of the obligations, conditions, covenants or agreements of any
Person contained in any of the Loan Documents;
2.15.12(d) the extension of the time for performance of any other
obligations, covenants or agreements of any Person under or arising out of
any of the Loan Documents;
2.15.12(e) the taking or the omission of any of the actions
referred to in any of the Loan Documents;
2.15.12(f) any failure, omission or delay on the part of Agent,
any Lender, Borrower or the beneficiary of any Letter of Credit to
enforce, assert or exercise any right, remedy, power or privilege
conferred by this Agreement or any of the Loan Documents, or any other act
or acts on the part of Agent, any Lender, Borrower or the beneficiary of
any Letter of Credit;
2.15.12(g) the voluntary or involuntary liquidation, dissolution,
sale or other disposition of all or substantially all the assets of, the
marshaling of assets and liabilities, receivership, insolvency,
bankruptcy, assignment for the benefit of creditors, reorganization,
arrangement, composition with creditors or readjustment of, or other
similar proceedings which affect, Borrower or any other party to any of
the Loan Documents;
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2.15.12(h) any lack of validity or enforceability of this
Agreement, any Letter of Credit or any other Loan Document, or any
allegation of invalidity or unenforceability or any contest of such
validity or enforceability;
2.15.12(i) the existence of any claim, set-off, defense or other
right which Borrower may have at any time against Agent, any Lender or any
beneficiary or any transferee of any Letter of Credit (or any persons or
entities for whom the Lender or any such beneficiary or transferee may be
acting), or any other Person, whether in connection with this Agreement or
any of the other Loan Documents or any of the transactions contemplated by
any Loan Document or any unrelated transaction;
2.15.12(j) any statement in any certificate or any other document
presented under any Letter of Credit proving to be forged, fraudulent,
invalid or insufficient in any respect or any such statement being untrue
or inaccurate in any respect whatsoever;
2.15.12(k) payment by the Issuing Bank under any Letter of Credit
against presentation of a demand or certificate which does not comply with
the terms of such Letter of Credit;
2.15.12(l) the release or discharge by operation of law of
Borrower form the performance or observance of any obligation, covenant or
agreement contained in any of the Loan Documents; or
2.15.12(m) any other circumstance or happening whatsoever,
whether or not similar to any of the foregoing.
2.15.13 Indemnity. Without affecting Borrower's liability under any other
provision of this Agreement, Borrower agrees to indemnify the Issuing Bank,
Agent and each of the Lenders and their respective affiliates, directors,
officers, employees, attorneys and agents from, and hold each of them harmless
against, any and all losses, liabilities, damages or expenses incurred by any of
them in connection with or by reason of any actual or threatened investigation,
litigation or other proceeding relating to (a) the execution and delivery of any
Letter of Credit; (b) the use of the proceeds of any drawing under any Letter of
Credit; or (c) the transfer or substitution of, or payment or failure to pay
under, any Letter of Credit, including the reasonable fees and disbursements of
counsel incurred in connection with any such investigation, litigation or other
proceeding, AND EVEN IN THE PRESENCE OF ORDINARY NEGLIGENCE BY THE INDEMNIFIED
PARTY, but excluding damages, losses, liabilities or expenses to the extent, but
only to the extent, incurred by reason of the willful misconduct or gross
negligence of the Issuing Bank in
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determining whether a document presented under any Letter of Credit
complies with the terms of such Letter of Credit. It shall not be a
condition to any such indemnification that the Issuing Bank, Agent or any
Lender shall be a party to any such investigations, litigation or other
proceeding. Nothing in this Paragraph 2.15 is intended to limit Borrower's
payment obligations under this Agreement.
2.15.14 Assumption of Risk. Borrower assumes all risks of the ac or
omissions of any beneficiary of any Letter of Credit with respect to the
use of the Letter of Credit. None of Agent, any Lender nor any of their
respective affiliates, officers, directors, employees, attorneys or agents
shall be liable or responsible for: (a) the use which may be made of the
Letter of Credit or for any acts or omissions of any beneficiary of any
Letter of Credit in connection with such Letter of Credit; (b) the
validity, sufficiency or genuineness of documents presented to the Issuing
Bank, or of any endorsement on such documents, even if such documents
should in fact prove to be in any or all respects invalid, insufficient,
fraudulent or forged; (c) payment by the Issuing Bank against presentation
of documents which do not comply with the terms of any Letter of Credit,
including failure of any documents to bear any reference or adequate
reference to such Letter of Credit; (d) any delay and/or loss in transit
of any messages, letters or documents or delay, mutilation or other errors
arising in the transmission of any telecommunication; or (e) any other
circumstances whatsoever in making or failing to make payment under any
Letter of Credit, EVEN IN THE PRESENCE OF ORDINARY NEGLIGENCE BY THE
ISSUING BANK; provided that Borrower shall have a claim against the
Issuing Bank to the extent, but only to the extent, of any direct, as
opposed to consequential, damages suffered by Borrower which Borrower
proves were caused by the Issuing Bank's willful misconduct or gross
negligence in determining whether a document presented under any Letter of
Credit complied with the terms of such Letter of Credit. In furtherance
and not in limitation of the foregoing, the Issuing Bank may accept
documents that appear on their face to be in order, without responsibility
for further investigation, regardless of any notice or information to the
contrary.
2.15.15 Resignation of Issuing Bank. The Issuing Bank may resign from its
service as such upon at least fifteen (15) Business Days written notice to
Lenders, Agent and Borrower, upon which Borrower and the Required Lenders shall
appoint a replacement Issuing Bank from among the Lenders. The notice of
resignation shall state the material reason(s) that caused the Issuing Bank to
wish to resign from that capacity. Even after such resignation, the Issuing Bank
shall remain subject to the obligations and entitled to the benefits of the
status of Issuing Bank with respect to Letters of Credit that remain
outstanding.
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2.16 Up-Front Fee. Concurrently with the execution hereof, Borrower shall
pay an up-front fee to the respective Lenders in the amount of thirty-five basis
points (.35%) of each Lender's Commitment.
III. CONDITIONS PRECEDENT
3.1 Conditions to Initial Advance and Issuance. Lenders shall not be
obligated to make their initial Loan pursuant to this Agreement, and the Issuing
Bank shall not be obligated to issue any Letters of Credit, unless and until
Borrower satisfies the following conditions:
3.1.1 Loan Documents. Borrower shall have delivered to Agent the
following documents, fully executed and in form and substance acceptable to
Agent and Lenders:
3.1.1(a) Loan Agreement. This Agreement.
3.1.1(b) Revolving Credit Loan Notes. The Revolving Credit
Notes issued by Borrower payable to the order of the respective
Lenders in the maximum principal amounts of the Lenders' respective
Commitments.
3.1.1(c) Guaranty of Subsidiaries. Unconditional Continuing
Guaranty executed by all Subsidiaries of Borrower that are Initial
Borrower Entities, in the form attached hereto as Exhibit 3.1.1(c).
3.1.1(d) Pledge of Equity Interests. Security Agreement in the
form attached hereto as Exhibit 3.1.1(d), irrevocable proxies, blank
stock powers, original stock certificates, financing statements, and
such other documents as are necessary to grant to Agent to secure the
Obligations a first priority perfected security interest in all of
the equity interests of all of the Initial Borrower Entities other
than Borrower and in all equity interests in other Persons owned by
any Borrower Entity.
3.1.1(e) Charters. Certified Copies of the Borrower Entities'
corporate charters and all amendments thereto, issued by the
Secretaries of State for their states of domicile.
3.1.1(f) Bylaws. Certified Copies of Bylaws for each of the
Borrower Entities.
3.1.1(g) Certificates of Good Standing. Certificates of good
standing or existence, as applicable, issued as to the Borrower
Entities by the Secretaries of State for the states of their
domicile.
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3.1.1(h) Foreign Qualification. Certificates of Qualification issued by the
Secretaries of State for each state in which a Borrower Entity is required to
qualify as a foreign corporation.
3.1.1(i) Resolutions. Secretary Certifications including certified copies
of resolutions authorizing the execution of all applicable Loan Documents on
behalf of the Borrower Entities and certifying as to the incumbency of
authorized officers.
3.1.1(j) Opinions of Borrower's Counsel. Opinions of Texas and Tennessee
counsel to the Borrower Entities addressed to Agent and Lenders in substantially
the form attached hereto as Exhibit 3.1.1(j) and otherwise acceptable to
Lenders, Agent and their counsel.
3.1.1(k) Solvency Certification. Prior to the initial draw to be used for
the purpose of funding either the Stock Repurchase Program or Management Stock
Acquisition Loans, Borrower's chief financial officer shall issue to Lenders and
Agent a certification on behalf of Borrower as to the continued solvency of
Borrower giving effect to the Stock Repurchase Program and the Management Stock
Acquisition Loans, which certification shall include financial projections, the
basis of material assumptions, the basis of valuations and such other matters as
may be required.
3.1.1(l) UCC Searches. A current UCC search on the name of Borrower issued
by the Texas Secretary of State and like searches on all Borrower Entities that
are encumbering stock or other equity interests to secure the Obligations, from
such public offices as Agent may require.
3.1.1(m) Closing Statement and Funding of Expenses. Loan Closing
Statement describing expenses due in connection with the closing of the
Revolving Credit Loan and payment thereof in immediately available funds.
3.1.1(n) Certification of Termination of Facility. A certificate of
NationsBank of Tennessee, N.A., confirming the repayment and termination of its
existing Revolving/Term loan facility.
3.1.1(o) Compliance Certificate. A Compliance Certificate confirming
compliance with all provisions of this Agreement, including, but not limited to,
the financial covenants contained herein, giving effect to the closing of the
Revolving Credit Loan.
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3.1.1(p) Other Documents. Such other documents as Lenders or Agent
may reasonably require.
3.1.2 Additional Conditions. Borrower shall have satisfied the following
additional conditions:
3.1.2(a) Warranties. All warranties made in the Loan Documents must
be true in all material respects and shall be true in all material respects
taking into account the funding of the requested Loan.
3.1.2(b) Covenants. All covenants made in the Loan Documents must
have been complied with in all material respects and shall have been complied
with, taking into account the funding of the requested Loan.
3.1.2(c) Absence of Unmatured Default. No Event of Default or
Unmatured Default shall exist under this Agreement.
3.1.2(d) No Adverse Change. There must be no Material Adverse Change
since September 30, 1996.
3.1.2(e) General Diligence. The satisfaction of Agent and Lenders and
their counsel, in their reasonable discretion, regarding their completion of
diligence with respect to Borrower and the Revolving Credit Loan, including such
investigation of the Properties, agreements, leases and other matters as they
may require.
3.1.2(f) Corporate Matters. The satisfaction of Agent and Lenders, in
their reasonable discretion, regarding the corporate structure, constituent
documents, management, shareholder agreements and other corporate matters as to
all Borrower Entities, and including, but not limited to, the execution of
appropriate employment agreements.
3.1.2(g) Financial Information. The satisfaction of Agent and
Lenders, in their reasonable discretion, as to the financial information
presented in the financial statements of Borrower and its predecessors, as
applicable, for the fiscal years ending December 31, 1993, 1994 and the
Financial Statements. These financial statements must be audited by independent
public accountants of recognized national standing, except that the most recent
quarterly financial statements may be company-prepared.
3.1.2(h) Projections. The satisfaction of Agent and Lenders as of the
Closing Date, in their reasonable discretion, with three-year
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financial projections to be delivered to them by Borrower,
including pro forma balance sheets and statements of income and
cash flow in accordance with GAAP.
3.1.2(i) Absence of Litigation. There must be no action, suit,
proceeding or investigation against any Borrower Entity before or
through any Governmental Authority which, if adversely determined,
would likely have a Material Adverse Effect.
3.1.2(j) Additional Opinion Requirements. Prior to the initial
draw to be used for the purpose of funding either the Stock Repurchase Program
or Management Stock Acquisition Loans, Borrower shall deliver to Lenders and
Agent an opinion letter or letters of Borrower's outside tax counsel confirming
the absence of adverse tax consequences to Borrower of the making of Management
Stock Acquisition Loans and confirming the legality of the Stock Repurchase
Program, the noncontravention thereof with other agreements, laws, etc., and
related matters. All such opinions shall be in form and substance acceptable to
Agent.
3.2 Conditions to Subsequent Loans and Issuances. Lenders shall not be
obligated to make any Loan following the initial advance, and the Issuing Bank
shall not be obligated to issue any Letters of Credit, unless all of the
following conditions are satisfied as of the time of the request and of funding
or issuance:
3.2.1 Conditions to Initial Advance. All of the conditions in Section
3.1 hereof must have been satisfied as of the date of the initial advance
hereunder.
3.2.2 Permitted Subsidiaries. All of the documents required in Section
3.1 for Initial Subsidiaries shall have been received by Agent as to any
additional Permitted Subsidiaries, within the time required in this Agreement.
3.2.3 Warranties. All warranties made in the Loan Documents must be
true in all material respects and shall be true in all material respects taking
into account the funding of the requested Loan.
3.2.4 Covenants. All covenants made in the Loan Documents must have
been complied with in all material respects and shall have been complied with in
all material respects taking into account the funding of the requested Loan.
3.2.5 Absence of Unmatured Default. No Event of Default or Unmatured
Default shall exist under this Agreement.
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3.2.6 Material Adverse Change. There shall not have occurred a Material
Adverse Change.
IV. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants to Lenders and Agent that as of the
Closing Date:
4.1 Capacity. Each Borrower Entity is a corporation or other entity as
set forth in Schedule 1.1 hereof, and is duly organized, validly existing and in
good standing under the laws of the state of its domicile as set forth in
Schedule 1.1. Each Borrower Entity is qualified or authorized to do business in
all jurisdictions in which its ownership of property or conduct of business
requires such qualification or authorization or where the failure to be so
qualified or authorized would not have a Material Adverse Effect. Each Borrower
Entity has the power and authority to own its Properties and to carry on its
business as now being conducted and as proposed to be conducted after the
execution hereof, to execute and deliver this Agreement and the other Loan
Documents, and to perform its obligations hereunder and under the other Loan
Documents.
4.2 Authorization. The execution, delivery and performance of this
Agreement and the other Loan Documents by each Borrower Entity executing such
documents has been duly authorized by all requisite action.
4.3 Binding Obligations. This Agreement is and the other Loan Documents,
when executed and delivered to Agent and Lenders, will be, legal, valid and
binding upon each Borrower Entity who is a party thereto, enforceable in
accordance with its respective terms, subject only to principles of equity and
laws applicable to creditors generally, including bankruptcy laws.
4.4 No Conflicting Law or Agreement. The execution, delivery and
performance of this Agreement and the other Loan Documents by each Borrower
Entity does not constitute a breach of or default under, and will not violate or
conflict with, any provisions of the corporate charter or other constituent
documents of a Borrower Entity; any contract, financing agreement, lease, or
other agreement to which a Borrower Entity is a party or by which its Properties
may be affected, the violation of which would have a Material Adverse Effect; or
any Law to which a Borrower Entity is subject or by which its Properties may be
affected, the violation of which would have a Material Adverse Effect; nor will
the same result in the creation or imposition of any Encumbrance upon any
Property of any Borrower Entity, other than those contemplated by the Loan
Documents.
4.5 No Consent Required. The execution, delivery, and performance of this
Agreement and the other Loan Documents by the Borrower Entities do not require
the consent or approval of or the giving of notice to any Person except for
those consents which
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have been duly obtained and are in full force and effect on the date hereof and
others, if any, which by their omission would not result in a Material Adverse
Effect.
4.6 Financial Statements. The Financial Statements are complete and
correct, have been prepared in accordance with GAAP, and present fairly the
financial condition and results of operations of the Borrower Entities as of the
date and for the period stated therein, subject to year-end adjustments. No
Material Adverse Change has occurred since the date of the Financial Statements.
Borrower acknowledges that Lenders have advanced (or shall advance) the
Revolving Credit Loan in reliance upon the Financial Statements.
4.7 Fiscal Year. Borrower's fiscal year ends on December 31 of each
year.
4.8 Litigation. Except as disclosed on Schedule 4.8 hereto, (i) there is
no litigation, arbitration, legal or administrative proceeding, tax audit,
investigation, or other action or proceeding of any nature pending against any
Borrower Entity or any of its Properties which, if adversely determined, would
likely have a Material Adverse Effect, and (ii) there is no litigation,
arbitration, legal or administrative proceeding, tax audit, investigation, or
other action or proceeding of any nature threatened in writing against a
Borrower Entity which, if adversely determined, would have a Material Adverse
Effect. No Borrower Entity is subject to any outstanding court, arbitral or
administrative order, writ or injunction. To the best of Borrower's knowledge,
information and belief, no facts exist under which third parties have unasserted
claims against any Borrower Entity which, if adversely determined, would have a
Material Adverse Effect.
4.9 Taxes; Governmental Charges. Each Borrower Entity has filed or
caused to be filed or has lawfully extended the deadline for filing all tax
returns and reports required to be filed, other than those which, if not filed,
would not have a Material Adverse Effect. Each Borrower Entity has paid, or
made adequate provision for the payment of, all Taxes that have or may have
become due pursuant to such returns or otherwise, or pursuant to any assessment
received by it, except such Taxes, if any, as are being contested in good faith
by appropriate proceedings and for which adequate reserves have been provided.
To the best of Borrower's knowledge, there is no proposed material tax
assessment against any Borrower Entity. No extension of time for the assessment
of federal, state or local taxes of any Borrower Entity is in effect or has been
requested. Each Borrower Entity has timely made all required remittances of
withholding deposits and other assessments against payroll expenditures except
for matters that would not have a Material Adverse Effect.
4.10 Title to Properties. Each Borrower Entity has good and marketable
title to its Properties, free and clear of all Encumbrances except for Permitted
Encumbrances except for matters that would not have a Material Adverse Effect.
4.11 No Default. No Borrower Entity is in default in any respect that
affects its business, Properties, operations, or condition, financial or
otherwise, under any
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indenture, mortgage, deed of trust, obligation to equity holders, credit
agreement, note, agreement, lease, sale agreement or other instrument to which
any Borrower Entity is a party or by which its Properties are bound, which
default would have a Material Adverse Effect. To the best of Borrower's
knowledge, information and belief, no other party to any contract with any
Borrower Entity under which a default would have a Material Adverse Effect is in
default or breach thereof and no circumstances exist which, with the giving of
notice and/or the passing of time would constitute such default or breach. No
Event of Default or Unmatured Default exists under this Agreement.
4.12 Casualties; Taking of Properties. Neither the business nor the
Property of any Borrower Entity is presently impaired as a result of any fire,
explosion, earthquake, flood, drought, windstorm, accident, strike or other
labor disturbance, embargo, requisition or taking of property, cancellation of
contracts, permits, concessions by any domestic or foreign government or any
agency thereof, riot, activities of armed forces or acts of God or of any public
enemy, in any case as would have a Material Adverse Effect.
4.13 Compliance with Laws. No Borrower Entity is in violation of any Law
to which it, its business or any of its Properties are subject, the violation of
which would likely have a Material Adverse Effect, and there are no outstanding
citations, notices or orders of noncompliance issued to any Borrower Entity
under any such Law, the violation of which would likely have a Material Adverse
Effect. Each Borrower Entity has obtained all licenses, permits, franchises, or
other governmental authorizations necessary to the ownership of its Properties
or to the conduct of its business, except for those which, if not obtained,
would not have a Material Adverse Effect.
4.14 Compliance with Fraud and Abuse Laws. Without limiting any other
provision of this Agreement, no Borrower Entity and no Provider is in violation
of any Fraud and Abuse Law, the violation of which would have a Material Adverse
Effect.
4.15 ERISA. No ERISA Event has occurred with respect to any Plan or is
reasonably expected to occur with respect to any Plan, except for those which,
if not obtained, would not have a Material Adverse Effect.
4.16 Full Disclosure of Material Facts. Borrower has fully advised Agent
of all matters involving the financial condition, business, operations and
Properties of the Borrower Entities that would be reasonably expected to have a
Material Adverse Effect. No information, exhibit, or report furnished or to be
furnished by Borrower to Lenders in connection with this Agreement contains, as
of the date thereof, any misrepresentation of fact or failed or will fail to
state any material fact, the omission of which would render the statements
therein materially false or misleading.
4.17 Accuracy of Projections. With respect to all business plans and
other forecasts and projections furnished by or on behalf of Borrower and made
available to Agent relating to the financial condition, business, operations or
Properties of the Borrower Entities, all facts stated as such therein were true
and complete in all material respects as of
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the time made and all estimates and assumptions were made in good faith and
believed to be reasonable at the time made. As of the Closing Date, nothing had
come to the attention of Borrower that has changed its assessment of any such
matters, except for changes that would not have a Material Adverse Effect.
4.18 Investment Company Act. No Borrower Entity is an "investment
company" under the Investment Company Act of 1940, as amended.
4.19 Personal Holding Company. No Borrower Entity is a "personal holding
company" as defined in Section 542 of the IRC.
4.20 Solvency. Each Borrower Entity is Solvent as of the date hereof and
will remain Solvent upon the consummation of the transactions contemplated
hereby.
4.21 Chief Executive Office. The address designated herein to which
notices are to be sent under this Agreement is Borrower's chief executive office
within the meaning of Tennessee Code Annotated Section 47-9-103(3)(d).
included in the Initial Borrower Entities.
4.23 Ownership of Patents, Licenses, Etc. The Borrower Entities own all
licenses, permits, franchises, registrations, patents, copyrights, trademarks,
trade names or service marks, or the rights to use the foregoing, that are
necessary for the continued operation of their business except for such
licenses, etc., which, if not held or owned, would not have a Material Adverse
Effect.
4.24 Environmental Compliance. Each Borrower Entity has duly complied
with, and their Properties are owned and operated in compliance with, all
Environmental Laws, the violation of which would have a Material Adverse Effect.
There have been no citations, notices or orders of non-compliance issued to any
Borrower Entity or, to the best of Borrower's knowledge, relating to their
business or Properties pursuant to any Environmental Law, except for those which
would not have a Material Adverse Effect. Each Borrower Entity has obtained all
required federal, state and local licenses, certificates or permits relating to
them and their Properties as required by applicable Environmental Laws, except
for those which, if not obtained, would not have a Material Adverse Effect.
4.25 Labor Matters. No Borrower Entity is subject to any collective
bargaining agreements or any decrees or orders requiring them to recognize, deal
with or employ any Person. No demand for collective bargaining has been asserted
against any Borrower Entity by any union or organization. No Borrower Entity has
experienced any strike, labor dispute, slowdown or work stoppage due to labor
dispute and, to the best knowledge of Borrower, there is no such strike,
dispute, slowdown or work stoppage threatened against any Borrower Entity. All
Borrower Entities are in compliance in all
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material respects with the Fair Labor Standards Act of 1938,
as amended, except for those matters which would not have a Material Adverse
Effect.
4.26 OSHA Compliance. All Borrower Entities are in compliance in all
material respects with the Federal Occupational Safety and Health Act, as
amended, and all regulations under the foregoing, except for those matters which
would not have a Material Adverse Effect.
4.27 Regulation U. No Borrower Entity is engaged in the business of
extending credit for the purpose of purchasing or carrying margin stock (within
the meaning of Regulation U issued by the Board of Governors of the Federal
Reserve System). No proceeds of any Loan will be used to purchase or carry any
margin stock (within the meaning of Regulation U issued by the Board of
Governors of the Federal Reserve System) in violation of applicable law,
including, without limitation, Regulation U issued by the Board of Governors of
the Federal Reserve System.
4.28 Affiliate Transactions. No Borrower Entity is a party to any
transaction, contract or agreement with any Affiliate, except for Service
Agreements, lease agreements and other agreements among Borrower and its
Subsidiaries and those other agreements described in Schedule 4.28 hereof.
4.29 Subordinated Debentures. The Obligations constitute "Senior
Indebtedness" for the purpose of the subordination provisions of the Indenture
pursuant to which the Subordinated Debentures have been issued.
V. AFFIRMATIVE COVENANTS
Borrower covenants that, during the term of this Agreement (and thereafter
where expressly stated herein):
5.1 Payment of Obligations. Borrower shall pay all amounts owed under
the Obligations when due without setoff, counterclaim or withholdings of any
kind; provided, however, if Borrower is required by law to withhold any taxes
(other than taxes based upon the income of the Lender imposed by the
jurisdiction in which the Lender is organized or from which its interest herein
has been generated) from any payments on the Obligations to any Lender(s),
Borrower shall make additional payments to such Lender(s) along with the regular
payments as they become due so that the end result is that such Lender(s)
receives the amount that the Lender(s) would have received if no such
withholdings were made.
5.2 Maintenance of Existence and Business. Except for transactions among
Borrower Entities and other transactions permitted under this Agreement, each
Borrower Entity shall maintain its fundamental existence, name, rights, and
franchises, and shall maintain its qualification and good standing in all states
in which such qualification is necessary (except to the extent that failure to
so qualify would not have a Material Adverse
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Effect), and shall continue to operate in the same type of business as such
Borrower Entity engages in as of the date hereof.
5.3 Financial Statements and Reports. Borrower shall furnish to Agent
and Lenders or cause Agent and Lenders to receive all of the following, all of
which must be in number sufficient for all Lenders and otherwise in form and
substance satisfactory to Agent and Lenders:
5.3.1 Quarterly Financial Reports. As soon as available, and in any event
by the fiftieth (50th) day of each calendar quarter, Borrower shall deliver a
balance sheet, income statement and statement of cash flows of Borrower for
and as of the end of the preceding fiscal quarter, all prepared by Borrower
on a consolidated basis and certified by Borrower's president or chief
financial officer to be complete and correct and to present fairly, in
accordance with GAAP (excluding year-end adjustments and required footnote
disclosures), the financial condition of Borrower and its consolidated
affiliates as of the date of such statements and the results of their
operations for such period. The quarterly financial information shall further
include calculations of all financial ratios, the certification of Borrower's
president or chief financial officer as to the absence of any Event of
Default or Unmatured Default,.
5.3.2 Annual Financial Reports. As soon as available, and in any event
within one hundred (100) days after the end of each fiscal year, Borrower
shall deliver audited balance sheets of Borrower as of the end of such year
and the related audited statements of income, retained earnings and cash
flows for such year, together with supporting schedules, all such statements
prepared in accordance with GAAP on a consolidated basis and accompanied by
an unqualified audit report prepared by an independent "big six" certified
public accountant acceptable to Agent showing the financial condition of
Borrower and its consolidated affiliates at the close of such year and the
results of its operations during such year. The annual financial information
shall include calculations of all financial ratios as determined based upon
the audited financial statements and the certification of Borrower's
president or chief financial officer as to the absence of any Event of
Default or Unmatured Default.
5.3.3 Budgets. As soon as available, and in any event within sixty (60)
days after the beginning of each fiscal year, Borrower shall deliver its
Capital Expenditures budget and its operating budget for the current year.
5.3.4 Accountant Reports. Promptly upon the receipt thereof, Borrower
shall deliver a copy of each management letter submitted to Borrower or its
consolidated affiliates by their accountants in connection with any annual,
interim or special audit made by them.
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5.3.5 Owner Mailings. Promptly upon the sending thereof, Borrower
shall deliver a copy of each material statement, report or notice sent to its
shareholders.
5.3.6 SEC Filings. Promptly upon the filing thereof, should such filings
become applicable, Borrower shall deliver copies of all regular, periodic and
special reports that any Borrower Entity files with the United States Securities
and Exchange Commission or any successor thereto, or any national securities
exchanges or the National Association of Securities Dealers.
5.3.7 Change in Accounting Policies. Borrower shall promptly give written
notice of any material change in accounting policies or financial reporting
practices on the part of any Borrower Entity.
5.3.8 Notice Upon Perceived Breach. Borrower agrees to give prompt written
notice of any action or inaction by or on behalf of Agent or any Lender in
connection with this Agreement or the Obligations that Borrower believes may be
actionable against such party or a defense to payment of any or all of the
Obligations for any reason, including, but not limited to, commission of a tort
or violation of any contractual duty or duty implied by law.
5.3.9 Changes in Constituent Documents. Borrower shall give prompt written
notice of any material change in the corporate charter or bylaws of Borrower or
any Subsidiary following the encumbrance of the stock thereof in favor of Agent
as required under this Agreement, and shall provide Agent with a copy of such
change (Borrower Entities are restricted in the adoption of such amendments as
provided elsewhere in the Loan Documents, and nothing contained in this Section
shall be deemed a waiver of such restrictions).
5.3.10 Notice of Litigation. Borrower shall give prompt written notice of
any litigation, arbitration, tax audit, administrative proceeding or
investigation that may hereafter be instituted or threatened in writing in which
Borrower would be a party or which otherwise may affect any Borrower Entity or
any of their business, operations or Properties, except for (i) actions seeking
only monetary damages in an amount of less than the amount equal to three
percent (3%) of Borrower's Consolidated Adjusted EBITDA for the most recent four
(4) fiscal quarters for which Borrower has submitted financial statements to
Agent, as of the time of determination, (ii) actions seeking only monetary
damages in an unspecified amount, if Borrower believes in good faith that the
matter, if adversely determined, would not have a Material Adverse Effect, and
(iii) matters arising from premises or vehicular liability seeking only monetary
damages and which are fully covered by insurance, subject only to any applicable
deductible.
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5.3.11 Defaults and Changes. Borrower shall give prompt written notice
if Borrower learns of the occurrence of (i) any event that constitutes an
Event of Default or an Unmatured Default, together with a detailed
statement of the steps being taken as a result thereof, or (ii) any
Material Adverse Change.
5.3.12 Other Information. Borrower shall provide such other
information respecting the condition or operations, financial or otherwise,
of the Borrower Entities as Agent or any Lender may from time to time
reasonably request.
5.4 Taxes and Other Encumbrances. Each Borrower Entity shall make due
and timely payment or deposit of all federal, state and local taxes, assessments
or contributions required of it by law, and execute and deliver to Agent, on
demand, appropriate certificates attesting to the payment or deposit thereof;
provided, however, that the Borrower Entities shall not be required to pay or
discharge any such tax, assessment, charge or claim for as long as it is being
diligently contested in good faith by proper proceedings and for which
appropriate reserves are being maintained.
5.5 Payment of Funded Debt. Each Borrower Entity shall pay all of its
Funded Debt as and when the same becomes due in accordance with its terms
(unless such payment is not made due to its subordination to the Revolving
Credit Loan), unless the failure to pay would not have a Material Adverse Effect
or is being contested in good faith and appropriate reserves have been made for
payment thereof in accordance with GAAP.
5.6 Compliance with Laws. Each Borrower Entity shall observe and comply
with all Laws (including, but not limited to, Fraud and Abuse Laws), and shall
maintain all certificates, franchises, permits, licenses, and authorizations
necessary to the conduct of its business or the operation of its Properties,
except for such Laws, certificates, etc., which, if violated or not obtained and
full penalties were imposed for such violation, would not cause a Material
Adverse Effect. Each Borrower Entity shall further use its best efforts to
assure the compliance by all Providers with all applicable Laws, including, but
not limited to, medical licensure and Fraud and Abuse Laws, relating to their
providing of professional services, except for those which, if violated and full
penalties were imposed for such violation, would not cause a Material Adverse
Effect.
5.7 Maintenance of Property. All Borrower Entities shall maintain their
Property (and any Property leased by or consigned or held under title retention
or conditional sales contracts) in good and workable condition at all times,
subject to ordinary wear and tear, normal discards and replacements due to
functional and useful-life obsolescence, and shall make all repairs,
replacements, additions, and improvements to their Property reasonably necessary
and proper to ensure that the business carried on in connection with their
Property may be conducted properly and efficiently at all times.
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5.8 Compliance with Contractual Obligations. Each Borrower Entity will
perform all of its obligations in respect of all material contracts to which it
is a party and will use its best efforts to keep, and to take all action to
keep, such contracts in full force and effect and not allow any such contract to
lapse or be terminated or any rights to renew such to be forfeited or canceled,
if such lapse, etc. would have a Material Adverse Effect; provided, however,
that any such contract may lapse or be terminated or such renewal rights may be
forfeited or canceled if in the reasonable business judgment of the Borrower
Entities it is in their best interests to allow or cause such lapse,
termination, forfeiture or cancellation.
5.9 Further Assurances. The Borrower Entities shall promptly cure any
defects in the creation, issuance, or delivery of the Loan Documents. The
Borrower Entities at their expense will execute (or cause to be executed) and
deliver to Agent upon request all such other and further documents, agreements,
and instruments in compliance with or accomplishment of the covenants and
agreements applicable to them in the Loan Documents, or to evidence further and
to describe more fully any Collateral intended as security for the Obligations,
or to correct any omissions in the Loan Documents, or to state more fully the
Obligations and agreements set out in any of the Loan Documents, or to perfect,
protect, or preserve any Encumbrances created pursuant to any of the Loan
Documents, or to make any recordings, to file any notices, or to obtain any
consents, all as may be reasonably necessary or appropriate in connection
therewith. Borrower appoints Agent as Borrower's attorney-in-fact to execute
any financing statements or other instruments of perfection with respect to the
Collateral.
5.10 Security Interest; Setoff. In order to further secure the payment of
the Obligations, Borrower hereby grants to Agent and to each Lender a security
interest and right of setoff against all of Borrower's presently owned or
hereafter acquired monies, items, credits, deposits and instruments (including
certificates of deposit) presently or hereafter in the possession of any Lender
or Agent. By maintaining any such accounts or other property with a Lender or
Agent, Borrower acknowledges that Borrower voluntarily subjects the property to
the security interest arising hereunder. Subject to the provisions in Article
IX hereof, a Lender may exercise its rights under this Section without prior
notice (but with prompt notice following the setoff) following an Event of
Default. Borrower agrees that neither Lenders nor Agent shall be liable for the
dishonor of any instrument after notice of setoff shall have been duly given
resulting from a Lender's exercise of its rights under this Section.
5.11 Insurance.
5.11.1 General Insurance Requirements. In addition to the other
specific requirements set forth in this Agreement and as may be required
by other Loan Documents, the Borrower Entities shall maintain insurance
(i) on all insurable Properties now or hereafter owned by them under
coverage that insures against the risks included in fire and extended
coverage insurance and against such other risks as are customarily insured
in their industry, in an
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amount equal to not less than the actual cash value thereof and with a
deductible of no more than One Thousand and No/100 Dollars ($1,000.00),
(ii) against public liability in the amount of at least One Million and
No/100 Dollars ($1,000,000.00) per occurrence, and (iii) with respect to
worker's compensation liabilities in the amount required by law or, if
higher, the amount customary in the industry. All policies of insurance
shall be issued by insurance companies acceptable to Agent and shall be in
form and substance acceptable to Agent.
5.11.2 Practice-Related Insurance Requirements. The Borrower
Entities shall maintain insurance for claims, however characterized,
against them in connection with the provision of medical services by
Providers and/or ancillary services provided by them at Practices covered
by Service Agreements, in an amount of at least One Million and No/100
Dollars ($1,000,000.00) per occurrence with respect to Practices whose
Providers are physicians and Three Hundred Thousand and No/100 Dollars
($300,000.00) per occurrence with respect to Practices whose Providers who
are not physicians. The Borrower Entities shall further cause each Provider
to maintain medical malpractice insurance of at least One Million and
No/100 Dollars ($1,000,000.00) per occurrence. All required insurance shall
be in form and substance acceptable to Agent.
5.12 Accounts and Records. The Borrower Entities shall maintain current
books of record and account, in which full, true, and correct entries will be
made of all transactions.
5.13 Official Records. The Borrower Entities shall maintain current
corporate and official records, minute books and stock ledgers.
5.14 Banking Relationships. The Borrower Entities shall maintain their
deposit accounts with Lenders or with other FDIC-insured depository
institutions.
5.15 Right of Inspection. The Borrower Entities shall permit any officer,
employee, or agent of a Lender or Agent to visit and inspect during ordinary
business hours any of their Property, to examine their books of record and
accounts and corporate records, to take copies and extracts from such books of
record and accounts, and to discuss the affairs, finances, and accounts of the
Borrower Entities with their respective officers, accountants, and auditors, all
at such reasonable times and as often as Agent or a Lender may reasonably desire
and upon reasonable advance notice absent an Event of Default. Without limiting
Agent's right to obtain equitable relief as to any other appropriate right in
this Agreement or in other Loan Documents, Borrower agrees that the rights in
this Section may be enforced by affirmative injunction and, to the extent the
right to review records may be denied, the right may be enforced by a
restraining order prohibiting the interference by Borrower with the exercise of
rights to review of the records pursuant to this Section. Absent an Event of
Default, all expenses of such inspections, etc. shall be paid by the
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respective Lenders, and in the presence of an Event of Default, all reasonable
expenses thereof shall be paid by Borrower.
5.16 ERISA Information and Compliance. The Borrower Entities shall comply
with ERISA and all other applicable laws governing any pension or profit sharing
plan or arrangement to which they are a party, except for matters which would
not have a Material Adverse Effect. The Borrower Entities shall (i) upon
request, provide Agent with copies of any annual report required to be filed
pursuant to ERISA with respect to any Plan or any other employee benefit plan;
(ii) notify Agent upon the occurrence of any ERISA Event or of any additional
act or condition arising in connection with any Plan which they believe might
constitute grounds for termination thereof by the PBGC or for the appointment of
a trustee to administer the Plan; and (iii) furnish to Agent, promptly upon
request, such additional information concerning any Plan or any other employee
benefit plan as Agent may request.
5.17 Indemnity; Expenses. Borrower agrees to indemnify, defend (with
counsel reasonably satisfactory to the indemnified party or parties) and hold
harmless Lenders and Agent against any loss, liability, claim or expense,
including reasonable attorneys' fees, that they may incur in connection with the
Loan Documents or the Obligations, INCLUDING THOSE EXPENSES, ETC. THAT MAY
RESULT FROM THEIR ORDINARY NEGLIGENCE, except those losses, etc. that may result
from a Lender's or Agent's gross negligence or willful misconduct. Without
limiting the foregoing, upon demand by Agent, Borrower will reimburse Lenders
and/or Agent for the following reasonable expenses if not paid by Borrower
promptly after written demand by Agent:
5.17.1 Taxes. All taxes that Lenders or Agent may be required to pay
because of the Obligations or because of Lenders' or Agent's interest in any
property securing the payment of the Obligations, excepting taxes based upon
the net income of a Lender or Agent.
5.17.2 Administration. All reasonable costs of the preparation of this
Agreement and any other related documents and the administration of the
Obligations (except for Lenders' and Agent's usual overhead incurred in the
acceptance and processing of payments, the routine review of financial
statements, certifications and reports, routine communications with
Borrower, and other ordinary activities that are not occasioned by an
Unmatured Default, Event of Default or by a request of Borrower to waive or
vary the terms of this Agreement).
5.17.3 Protection of Collateral. All costs of preserving, insuring,
preparing for sale (whether by improvement, repair or otherwise) or selling
any Collateral.
5.17.4 Costs of Collection. All court costs and other costs of
collecting any debt, overdraft or other obligation included in the
Obligations.
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5.17.5 Litigation. All reasonable costs arising from any litigation,
investigation, or administrative proceeding (whether or not Agent or a
Lender is a party thereto) that Agent or a Lender may incur as a result of
the Obligations or as a result of their association with any of the
Borrower Entities, including, but not limited to, expenses incurred by
Agent or a Lender in connection with a case or proceeding involving any
Borrower Entity under any chapter of the Bankruptcy Code or any successor
statute thereto.
5.17.6 Attorneys' Fees. Reasonable attorneys' fees incurred in
connection with any of the foregoing (except that Borrower shall only be
responsible for the fees and expenses of Agent's attorneys in connection
with the original negotiation and execution of this Agreement).
If a Lender or Agent pays any of the foregoing expenses, they shall become a
part of the Obligations and shall bear interest at the Default Rate applicable
to Base Rate Loans. This Section shall remain in full effect regardless of the
full payment of the Obligations, the purported termination of this Agreement,
the delivery of the executed original of this Agreement to Borrower, or the
content or accuracy of any representation made by Borrower to Lenders or Agent;
provided, however, Agent or any Lender may terminate this Section as to itself
by executing and delivering to Borrower a written instrument of termination
specifically referring to this Section.
5.18 Assistance in Litigation. Borrower covenants to, upon request,
cooperatively participate in any proceeding in which Borrower is not an adverse
party to Lenders or Agent and which concerns Lenders' or Agent's rights
regarding the Obligations or any Collateral.
5.19 Name Changes. Borrower shall give Agent notice no more than thirty
(30) days after any Borrower Entity changes its name or begins doing business
under any trade name.
5.20 Estoppel Letters. Borrower covenants to provide Agent, within ten
(10) days after request, an estoppel letter stating (i) the balance of the
Obligations, (ii) whether Borrower has any defenses to payment of the
Obligations, and (iii) the nature of any defenses to payment of the Obligations.
Such balance as presented for confirmation and the nonexistence of defenses
shall be presumed if Borrower fails to respond to such a request within the
required period.
5.21 Environmental Matters.
5.21.1 Compliance With Environmental Laws. All Borrower Entities will
(i) employ in connection with their operations, appropriate technology and
compliance procedures to maintain compliance with any applicable
Environmental Laws, the violation of which would reasonably be expected to
have a Material Adverse Effect, (ii) obtain and maintain any and all
materials
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permits or other permits required by applicable Environmental
Laws in connection with its operations, excepting only such permits, etc.
which would not by their absence cause a Material Adverse Effect, and
(iii) dispose of any and all Hazardous Substances only at facilities and
with carriers reasonably believed to possess valid permits under any
applicable state and local Environmental Laws. All Borrower Entities shall
use their best efforts to obtain all certificates required by law to be
obtained by them from all contractors employed by them in connection with
the transport or disposal of any Hazardous Substances.
5.21.2 Remedial Work. If any investigation, site monitoring,
containment, clean-up, removal, restoration or other remedial work of any
kind or nature with respect to any Borrower Entity's Properties is
required to be performed by them under any applicable local, state or
federal law or regulation, any judicial order, or by any governmental or
non-governmental entity or Person because of, or in connection with, the
current or future presence, suspected presence, release or suspected
release of a Hazardous Substance in or into the air, soil, groundwater,
surface water or soil vapor at, on, about, under, or within any of a
Borrower Entity's Property (or any portion thereof), Borrower shall within
30 days after written demand for performance thereof (or such shorter
period of time as may be required under applicable law, regulation, order
or agreement), commence and thereafter diligently prosecute to completion,
all such remedial work.
5.21.3 Indemnification of Lenders and Agent. Borrower agrees to
indemnify, defend (with counsel reasonably satisfactory to the indemnified
party or parties) and hold harmless Lenders and Agent against any loss,
liability claim or expense, including attorneys' fees, that a Lender or
Agent may incur as a result of the violation or alleged violation of any
Environmental Law by a Borrower Entity or with respect to any other
violation of Environmental Laws with respect to any Borrower Entity's
Properties. This covenant shall survive the repayment of the Revolving
Credit Loan.
5.22 Opinions of Counsel. Borrower agrees that Agent may from time to
time, but not more frequently than once per calendar year absent an Unmatured
Default or an Event of Default, request in writing the opinion of in-house
counsel and/or outside healthcare counsel to the Borrower Entities as to the
absence, except as disclosed in the opinion, of such counsel's knowledge of any
actual, threatened or asserted violation of any Fraud and Abuse Law on the part
of any Borrower Entity and/or the Providers, and the sufficiency of
documentation then in use for the acquisition of Practices as complying with
Fraud and Abuse Laws. Absent the existence of an Unmatured Default or and Event
of Default, such opinions shall require no special diligence on the part of the
opining attorney(s), but only requiring a report of matters then known to such
attorneys, unless Agent specifically inquires about facts that Agent reasonably
believes may raise a Fraud and Abuse Law issue. Such opinions shall be in form
and substance acceptable to Agent, shall be delivered to Agent at
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Borrower's expense within fifteen (15) days of the date of request and shall
address specifically any facts inquired of in Agent's request.
5.23 Borrower Entities. All Borrower Entities shall at all times be
guarantors of the Obligations, excepting only Subsidiaries that are not required
to be guarantors under the definition of Permitted Subsidiaries in this
Agreement.
VI. NEGATIVE COVENANTS
Borrower covenants and agrees that, without Agent's prior written
confirmation of approval by the Required Lenders:
6.1 Debts, Guaranties, and Other Obligations. No Borrower Entity shall
incur, create, assume, or in any manner become or be liable with respect to any
Debt, except the following:
6.1.1 Obligations to Lenders. The Obligations, as defined in this
Agreement.
6.1.2 Existing Liabilities. Liabilities, direct or contingent, of
Borrower Entities existing on the date of this Agreement that are reflected in
the Financial Statements, subject to additional specific limitations set forth
below.
6.1.3 Endorsements. Endorsements of negotiable or similar instruments
for collection or deposit in the ordinary course of business.
6.1.4 Trade Debt. Trade payables and accruals from time to time
incurred in the ordinary course of business.
6.1.5 Taxes. Taxes, assessments, or other governmental charges that are
not delinquent or are being contested in good faith by appropriate action
promptly initiated and diligently conducted, if Borrower has made the reserve
therefor required by GAAP.
6.1.6 Seller Debt. Seller Debt, which must be unsecured Debt; provided,
however, as of the Closing Date, the Borrower Entities may have up to Twenty-
Six Million and No/100 Dollars ($26,000,000.00) of Seller Debt that is secured
by assets of the Borrower Entities, all of which secured Seller Debt shall be
retired or rendered unsecured on or before September 30, 1997.
6.1.7 Acquired Debt and Purchase Money Security Interests. Acquired
Debt and Debt secured by Purchase Money Security Interests, not to exceed
Twenty Million and No/100 Dollars ($20,000,000.00) in the aggregate.
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6.1.8 Accounting Accruals. Liabilities arising from reserves and
accruals required by GAAP that do not reflect liquidated and mature
obligations to third parties, including, but not limited to, current deferred
income taxes.
6.1.9 Debt Among Borrower Entities. Debt incurred to other Borrower
Entities incurred in the ordinary course of business.
6.1.10 Certain Subordinated Debt. Subordinated Debentures in the amount
not exceeding One Hundred Forty-Three Million, Seven Hundred Fifty Thousand
and No/100 Dollars ($143,750,000.00) issued pursuant to that certain Indenture
dated as of December 11, 1996, between Borrower and U.S. Trust Company of New
York, N.A. (the "Subordinated Debentures").
6.2 Change of Management. Borrower shall not allow or suffer any change
of management effecting a material change in the duties or change in the
personnel presently staffing the positions of chief executive officer, president
or chief financial officer, as set forth in Schedule 6.2 hereto.
Notwithstanding the foregoing, should any of the named managers cease such
active participation in Borrower's management due to their death or disability,
Lenders shall allow Borrower a period of sixty (60) days thereafter in which a
management succession plan may be presented so that the Required Lenders may, in
their discretion, elect to accept new management in lieu of prior management,
subject to such revisions of this Agreement as they may require.
6.3 Change of Ownership. Borrower shall not cause or suffer to exist a
change of ownership or suffer the issuance of new stock or other event that
would result in the ownership of more than 30% of the stock of Borrower by any
Person not presently a shareholder thereof.
6.4 Encumbrances. No Borrower Entity shall create, incur, assume, or
permit to exist any Encumbrance on any of its Property (now owned or hereafter
acquired) except for Permitted Encumbrances, and shall not undertake a
commitment of any kind in favor of any Person (other than Lender) (i) requiring
that any or all of such Borrower Entity's Property be or remain unencumbered, or
(ii) requiring that a Borrower Entity grant an Encumbrance (other than a
Permitted Encumbrance) in favor of any Person (other than Lenders or Agent for
the benefit of Lenders) on a Borrower Entity's Property under any circumstances
whatsoever. No Borrower Entity shall sign or file under the Uniform Commercial
Code a financing statement that names such Borrower Entity as debtor or the
equivalent or sign any security agreement authorizing any secured party
thereunder to file any such financing statement, except to secure Permitted
Encumbrances.
6.5 Investments. No Borrower Entity shall make investments (including
but not limited to acquisitions or purchases of the obligations or stock of, or
any other or additional interest) in any person, firm, partnership, joint
venture or corporation except: (a) those specific investments in existence as
of the Closing Date, (b) general obligations of, or
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obligations unconditionally guaranteed as to principal and interest by, the
United States of America maturing within fifteen (15) months of the date of
purchase, (c) commercial paper having a rating of not less than "A2" or "P2"
from Moody's or S & P, respectively, (d) Permitted Acquisitions, (e)
certificates of deposit and bankers acceptances issued by a Lender or another
banking institution with a minimum net worth of Five Hundred Million and No/100
Dollars ($500,000,000.00) and having a letter of credit rating of not less than
"A" from Moody's or S & P, respectively, (f) municipal bonds rated "A" or better
by Moody's or S & P, (g) Permitted Minority Investment Entities, (h) Borrower's
common stock acquired pursuant to the Stock Repurchase Program (provided that no
such stock may be acquired at a time that an Event of Default exists or under
circumstances whereby the acquisition of such stock would create an Event of
Default or an Unmatured Event of Default), (i) Permitted Unpledged Investments
and Subsidiaries, and (j) such other investments as Agent may approve, in its
reasonable discretion.
6.6 Prepayments. No Borrower Entity shall prepay the Subordinated
Debentures, except from the Net Proceeds of an equity issuance or from
additional subordinated debt at least as subordinated as the Subordinated
Debentures and otherwise in form and substance acceptable to the Required
Lenders .
6.7 Sales and Leasebacks. No Borrower Entity shall enter into any
arrangement, directly or indirectly, with any Person other than another Borrower
Entity by which such Borrower Entity shall sell or transfer any of its Property,
whether now owned or hereafter acquired, and by which a Borrower Entity shall
then or thereafter rent or lease as lessee such Property or any part thereof or
other Property that it intends to use for substantially the same purpose or
purposes as the Property sold or transferred.
6.8 Change of Control. Borrower shall not suffer or permit the
occurrence of a Change of Control.
6.9 Nature of Business. No Borrower Entity shall suffer or permit any
material changes to be made in the character of its business as carried on at
the Closing Date, except for the accomplishment of Permitted Acquisitions.
6.10 Further Acquisitions, Mergers, Etc. Except for transactions
involving only Borrower Entities, no Borrower Entity shall enter into any
agreement to merge, consolidate, or otherwise reorganize or recapitalize, or
sell, assign, lease, or otherwise dispose of (whether in one transaction or in a
series of transactions) all or substantially all of their Property (whether now
owned or hereafter acquired), except for (i) Permitted Acquisitions and (ii) the
"unwinding" of Practice acquisitions and other dispositions in the ordinary
course of business which, in the aggregate with asset dispositions addressed by
Section 6.12 hereof, do not exceed in value the amount of Ten Million and No/100
Dollars ($10,000,000.00) in any fiscal year.
6.11 Advances. No Borrower Entity shall extend any loans to any other
Persons, except for loans to other Borrower Entities in the ordinary course of
business and
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advances to Providers made in the ordinary course of business arising from (i)
expenses advanced by Borrower Entities, which expenses are reimbursable to the
Borrower Entities under the terms of the applicable Service Agreements, (ii)
amounts due from Providers due to the difference between the calculation of fees
due under certain Service Agreements on an accrual basis and the duty of
remittance of those fees by Providers on a cash basis, provided that the amount
outstanding under this subsection (ii) shall be reviewed annually by Agent and
may be subject to limitations in amount, as Agent may reasonably require, based
upon such reviews, and (iii) Management Stock Acquisition Loans.
6.12 Disposition of Assets. No Borrower Entity shall dispose of any of
its assets other than in the "unwinding" of Practice acquisitions and otherwise
in the ordinary course of their present business upon terms standard in the
industry, and in any event, in no fiscal year shall the Borrower Entities
collectively dispose of assets which, in the aggregate with transactions
addressed by Section 6.10 hereof, exceed in value the amount of Ten Million and
No/100 Dollars ($10,000,000.00).
6.13 Inconsistent Agreements. No Borrower Entity shall enter into any
agreement containing any provision which would be violated or breached by the
performance by Borrower of the Obligations.
6.14 Fictitious Names. Borrower shall not use any name other than the
name used in executing this Agreement or any assumed or fictitious name.
6.15 Subsidiaries and Affiliates. No Borrower Entity shall create or
acquire any direct or indirect Subsidiary or Affiliate or divest itself of any
material assets by transferring them to any existing Subsidiary or Affiliate
other than Permitted Subsidiaries; nor shall Borrower enter into any
partnership, joint venture, or similar arrangement, or otherwise make any
material change in its corporate structure, except that Borrower may acquire and
create Permitted Subsidiaries from time to time in the ordinary course of
business and may own Permitted Unpledged Investments and Subsidiaries.
6.16 Place of Business. Borrower shall not transfer its executive
offices, or maintain records with respect to accounts at any locations other
than at the address for notices specified herein and at the locations of
Practices affiliated with Borrower, except as Agent may approve, in its
reasonable discretion.
6.17 Adverse Action With Respect to Plans. No Borrower Entity shall take
any action to terminate any Plan which would reasonably result in a material
liability of a Borrower Entity to any Person.
6.18 Transactions With Affiliates. Except with regard to Management Stock
Acquisition Loans, to the extent applicable, no Borrower Entity shall enter into
any transaction with any Affiliate except in the ordinary course of business and
on fair and reasonable terms no less favorable to the Borrower Entity than they
would obtain in a comparable arms length transaction with a Person not an
Affiliate.
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6.19 Constituent Document Amendments. No Borrower Entity shall amend its
corporate charter or bylaws in any material respect, except as necessary to
accomplish corporate transactions that do not require Agent's specific approval
or transactions for which such approval is necessary and has been granted.
6.20 Adverse Transactions. No Borrower Entity shall enter into any
transaction that materially and adversely affects or, to the best of its
knowledge, is likely to materially and adversely affect the Collateral or
Borrower's ability to repay the Obligations.
6.21 Use of Lenders' Name. No Borrower Entity shall, without the prior
written consent of the applicable Lender, use the name of a Lender or the name
of any Affiliates of a Lender in connection with any of their business or
activities, except in connection with internal business matters, as required in
making required securities law disclosures, in dealings with Providers in the
ordinary course of business, in Permitted Acquisitions, in dealings with
governmental agencies and financial institutions and to trade creditors of the
Borrower Entities solely for credit reference purposes.
6.22 Margin Securities. No Borrower Entity shall own, purchase or acquire
(or enter into any contract to purchase or acquire) any "margin security" as
defined by any regulation of the Federal Reserve Board as now in effect or as
the same may hereafter be in effect.
6.23 Accounting Changes. Borrower shall not change its fiscal year or
make any other significant change in consolidated or consolidating accounting
treatment and reporting practices, except as required or permitted by GAAP. Any
change in fiscal year shall be subject to Agent's prior written approval.
6.24 Distributions. Except in favor of other Borrower Entities and for
the repurchases pursuant to the Stock Repurchase Program, no Borrower Entity
shall declare or pay any dividends or other distributions of cash or other
property (except for dividends paid in its own stock) or redeem any of its own
outstanding stock or the stock of any other Borrower Entity.
6.25 Action Outside Ordinary Course. No Borrower Entity shall take any
other action outside the ordinary course of their business.
6.26 Modification of Subordinated Debenture Documents. Borrower shall not
cause or permit the Subordinated Debentures or the related Indenture to be
modified, directly or indirectly, in any manner that (a) would accelerate the
stated maturity of any principal or interest due thereunder or (b) might
terminate or impair the subordination of the Subordinated Debentures to the
Obligations.
6.27 Non-Scheduled Payment of Subordinated Debentures. Borrower will not
(a) give any notice of election to redeem any or all of the Subordinated
Debentures; (b) take any action to defease the Subordinated Debentures; or (c)
otherwise make or permit to be
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made any payment (other than regularly scheduled payments of interest made in
accordance with the terms of the Subordinated Debentures as they exist as of the
date hereof or as they may hereafter be amended with the prior written approval
of the Required Lenders) with respect to the Subordinated Debentures, if an
Event of Default then exists or if the taking of such action (including any
borrowing of funds to enable Borrower to take such an action) would result in
the occurrence of an Event of Default under this Agreement.
VII. FINANCIAL COVENANTS
7.1 Funded Debt to Consolidated Adjusted EBITDA. Borrower shall maintain
a ratio of Funded Debt to Consolidated Adjusted EBITDA, measured as of the end
of each fiscal quarter for the previous four consecutive fiscal quarters, of no
greater than 3.50:1.00 through December 31, 1998 and 3:00:1:00 as of March 31,
1999 and thereafter.
7.2 Funded Debt to Capital. Borrower shall maintain a ratio of Funded
Debt to Capital, measured as of the end of each fiscal quarter, of no greater
than .50:1.00
7.3 Fixed Charge Coverage. Borrower shall maintain a Fixed Charge
Coverage Ratio measured as of the end of each fiscal quarter for the previous
four consecutive fiscal quarters of at least 1.75:1.00 for each fiscal quarter
ending through December 31, 1997, and 2.00:1.00 as of each quarter-end
thereafter.
7.4 Current Ratio. Borrower shall maintain a Consolidated Current Ratio
of not less than 2.00:1.00, tested as of the end of each fiscal quarter.
7.5 Net Worth. Borrower shall maintain a Consolidated Net Worth as of
the end of each fiscal quarter in an amount at least equal to the sum of Two
Hundred Seventy-Five Million and No/100 Dollars ($275,000,000.00), plus the Net
Proceeds of all equity issued after the date hereof, plus seventy-five percent
(75%) of the amount of net income for the fourth quarter ending December 31,
1996 and for each fiscal year thereafter, without adjustment for net losses, and
less amounts expended to acquire Borrower's own stock pursuant to the Stock
Repurchase Program.
7.6 Capital Expenditures. The Borrower Entities' Consolidated Capital
Expenditures during any fiscal year shall not exceed 115% of the amount to be
budgeted for such fiscal year and subject to the Required Lenders' approval
annually in advance.
7.7 Senior Funded Debt to Consolidated Adjusted EBITDA. Borrower shall
maintain a ratio of Senior Funded Debt to Consolidated Adjusted EBITDA, measured
as of the end of each fiscal quarter for the previous four consecutive fiscal
quarters, of no greater than 2.00:1.00.
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VIII. EVENTS OF DEFAULT
8.1 Events of Default. Any of the following events shall be considered
an Event of Default under this Agreement:
8.1.1 Payments. Borrower's failure to make payment of any installment of
principal included in the Obligations when due or any payment of interest or
expenses included in the Obligations within three (3) days of when due.
8.1.2 Representations and Warranties. The making of any representation or
warranty by Borrower or any other party in any Loan Document that was incorrect
in any material respect as of the date thereof.
8.1.3 Negative Covenants. The failure of any Borrower Entity to comply
with any of the requirements of Article VI hereof.
8.1.4 Financial Covenants. The failure of any Borrower Entity to comply
with any of the requirements of Article VII hereof.
8.1.5 Reporting Requirements. The failure of any Borrower Entity or
any other party to timely perform any covenant in the Loan Documents requiring
the furnishing of notices, financial reports or other information to Agent or
Lenders within five (5) days of when due.
8.1.6 Other Covenants. The failure of any Borrower Entity to observe or
perform any covenant contained in any Loan Document, which covenant is not
subject to any specific provision in this Article VIII; provided, however, as to
any such breach that is reasonably susceptible to being cured, the occurrence of
such breach shall not constitute an Event of Default hereunder if such breach is
fully cured within thirty (30) days (or ten (10) days, if such breach may be
cured by the payment of a specific sum of money) after the earlier of the
Borrower Entity's knowledge of the facts giving rise thereto or Agent's written
notice thereof to Borrower given in accordance with the provisions hereof.
8.1.7 Involuntary Bankruptcy or Receivership Proceedings. The appointment
of a receiver, custodian, liquidator, or trustee for any Borrower Entity, or for
any of their Property, by the order or decree of any court or agency or
supervisory authority having jurisdiction; or any Borrower Entity's adjudication
as being bankrupt or insolvent; or the sequestering of any of the Property of
any Borrower Entity by court order or the filing of a petition against any
Borrower Entity under any state or federal bankruptcy, reorganization, debt
arrangement, insolvency, readjustment of debt,
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dissolution, liquidation, or receivership law of any jurisdiction, whether now
or hereafter in effect, unless dismissed (in the case of involuntary proceedings
only) within sixty (60) days.
8.1.8 Voluntary Petitions. Any Borrower Entity's filing of a petition in
voluntary bankruptcy or to seek relief under any provision of any bankruptcy,
reorganization, debt arrangement, insolvency, receivership, readjustment of
debt, assignment of assets or general arrangement for the benefit of creditors,
dissolution, or liquidation law of any jurisdiction, whether now or hereafter in
effect, or their consent to the filing of any petition against them under any
such law.
8.1.9 Discontinuance of Business. Any Borrower Entity's discontinuance of
its usual business or its dissolution, except pursuant to transactions permitted
under this Agreement.
8.1.10 Default on Other Funded Debt. Any Borrower Entity's failure to
make any payment when due on any Debt in excess of Two Million Five Hundred
Thousand and No/100 Dollars ($2,500,000.00).
8.1.11 Undischarged Judgments. Existence of a final judgment or judgments
for the payment of money in excess of two percent (2%) of the consolidated gross
revenues of the Borrower Entities for the previous fiscal year by any court or
other Governmental Authority against any Borrower Entity, which is not paid,
discharged or bonded within thirty (30) days after entry.
8.1.12 Insolvency. Borrower shall no longer be Solvent on a consolidated
basis.
8.1.13 Attachment. The issuance of an attachment or other process against
any Property of any Borrower Entity, unless removed (by bond or otherwise)
within twenty (20) days, unless the issuance thereof would not have a Material
Adverse Effect.
8.1.14 Insurance. Any Borrower Entity's failure to maintain any insurance
required herein or in any other Loan Document.
8.1.15 Contest. Any Borrower Entity's challenge or contest of the
validity or enforceability of this Agreement or any other Loan Document or the
validity, priority or perfection of any security interest created hereunder or
under any other Loan Document in any action, suit or proceeding, or should they
cease to be in full force and effect.
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8.1.16 Fraud and Abuse Laws. Receipt by a Borrower Entity of a notice from
a Governmental Authority that it (i) intends to disallow requested
reimbursements, demand adjustment or repayment of past reimbursements in excess
of two percent (2%) of the consolidated gross revenues of the Borrower Entities
for the previous fiscal year respecting amounts submitted for reimbursement or
collected by a Borrower Entity or a Provider, or (ii) intends to impose civil
money penalties or to seek to exclude any Borrower Entity or a Provider from
participation in the Medicare or Medicaid programs due to a failure to comply
with Fraud and Abuse Laws, if the consolidated gross revenues to the Borrower
Entities arising from the affected Borrower Entity or Provider exceed one-half
percent (1/2%) of the consolidated gross revenues of the Borrower Entities for
the previous fiscal year.
8.1.17 Subordinated Debentures. The occurrence of an Event of Default
under the Subordinated Debentures.
8.2 Remedies. Upon the happening of any Event of Default:
8.2.1 Default Rate. The Required Lenders may instruct Agent to declare
that the Obligations thereafter bear interest at the Default Rate.
8.2.2 Termination of Commitments. As provided in Article III hereof,
Lenders shall not be obligated to advance any additional Loans and the Issuing
Bank will not be obligated to issue any Letters of Credit, and additionally, the
Required Lenders may terminate the obligation of Lenders to advance any
additional Loans and the obligation of the Issuing Bank to issue
Letters of Credit by causing Agent to give written notice thereof to Borrower,
which formal termination shall remain in effect notwithstanding any subsequent
cure of the Event of Default and whether or not the Revolving Credit Loan is
accelerated unless the Revolving Credit Loan is reinstated in writing by the
Required Lenders.
8.2.3 Acceleration. The Required Lenders may declare the entire principal
amount of all Obligations then outstanding, including interest accrued thereon,
to be immediately due and payable without presentment, demand, protest, notice
of protest, or dishonor or other notice of default of any kind, all of which are
hereby expressly waived.
8.2.4 Setoff. Subject to Section 9.11 hereof, any Lender may exercise its
lien upon and right of setoff against any monies, items, credits, deposits or
instruments that such Lender may have in its possession and which belong to
Borrower or to any other person or entity liable for the payment of any or all
of the Obligations.
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8.2.5 Cash Security for Letters of Credit. Agent shall, at the
direction of the Required Lenders, demand that Borrower immediately deposit
cash to a deposit account maintained with Agent and pledged to Agent for
the benefit of Lenders to secure the Obligations in the amount of all
Letter of Credit Liabilities.
8.2.6 Other Remedies. Agent shall, at the direction of the Required
Lenders, exercise any right that Lenders have under any other document
evidencing or securing the Obligations or otherwise available to Lenders or
Agent at law or equity.
8.2.7 Attorney-in-Fact. Borrower hereby irrevocably appoints Agent as
Borrower's attorney-in-fact to take any action to facilitate Agent's
exercise of remedies hereunder.
IX. AGENT
9.1 Appointment of Agent. Lenders hereby appoint Agent to act as
specified in this Article IX.
9.2 Powers and Duties of Agent.
9.2.1 Powers and Duties of Agent; Standard of Care. Agent shall
perform all duties expressly imposed upon Agent in this Agreement and those
other duties reasonably incidental thereto, subject to the approval of the
Required Lenders as provided in this Agreement. Agent's duties hereunder
are administrative and ministerial in nature, and Agent's capacity is that
of an independent contractor for Lenders. Agent is not a trustee or other
fiduciary for Lenders, and Agent has no duties whatsoever to Lenders except
as expressly set forth in this Agreement. Agent shall have no liability to
Lenders for any action or inaction relating to this Agreement or the other
Loan Documents, EVEN FOR MATTERS ARISING FROM ITS ORDINARY NEGLIGENCE,
except for actual losses caused by its gross negligence or reckless or
willful misconduct.
9.2.2 Matters Reserved to all Lenders. Absent the prior approval of
all Lenders, Agent shall not increase any Lender's Commitment; forgive or
reduce any principal, interest or fees due a Lender or Agent (unless the
affected party so agrees); extend scheduled maturities or payment dates;
release Collateral release the guarantor Subsidiaries, except for the
release of stock of (and other equity interests in) and guaranties executed
by Subsidiaries in the course of transactions undertaken by Borrower
Entities for which the consent of the Required Lenders is not required
under the other provisions of this Agreement (including, but not limited
to, transactions for the "unwinding"
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of Practice acquisitions to the extent expressly permitted under Sections 6.10
and 6.12 of this Agreement, respecting which Agent may issue releases without
obtaining the approval of any Lenders).
9.2.3 Limitations on Agent's Duties. Agent shall not be obligated to
take any action hereunder or under any other Loan Document (i) if such action
would, in the opinion of Agent, be contrary to applicable law, this Agreement or
the other Loan Documents, (ii) if it shall not first be specifically indemnified
to its satisfaction pursuant to Section 9.3 hereof against any and all liability
and expense that may be incurred by it by reason of taking or continuing to take
any such action, (iii) if it would likely subject Agent to a tax in any
jurisdiction where it is not then subject to a tax, (iv) if it would likely
require Agent to qualify to do business in any jurisdiction where it is not then
so qualified, unless Agent receives security or indemnity satisfactory to it
against any tax or other liability in connection with such qualification or
resulting from the taking of such action in connection therewith, or (v) if it
would likely subject Agent to in personam jurisdiction in any location where it
is not then so subject.
9.2.4 Agent's Right to Require Instructions in Performance of Duties.
If Agent, in its sole and absolute discretion, requests instructions from the
Required Lenders with respect to any act or action (including the failure to
act) in connection with this Agreement or any other Loan Document for which the
approval of the Required Lenders or all Lenders is not otherwise required, Agent
shall be entitled, at its option, to refrain from such action, or to continue
such inaction, unless and until Agent shall have received such instructions, and
Agent shall incur no liability by reason of so acting or refraining from action.
No Lender shall have any right of action whatsoever against Agent as a result of
Agent's acting or refraining from acting hereunder or under any other Loan
Document in accordance with the instructions of the Required Lenders in such a
case.
9.2.5 Agent's Reliance on Others in Performance of Duties. Agent shall
be entitled to rely, and shall be fully protected in relying, upon any note,
writing, resolution, notice, statement, consent, certificate, telex, teletype or
facsimile message, order or other documentary, teletransmission or telephone
message believed by it in good faith to be genuine and correct and to have been
signed, sent or made by the proper Person. Agent may consult with legal counsel
(including counsel for Borrower), accountants and other experts selected by it
with respect to all matters pertaining to this Agreement and the other Loan
Documents and its duties hereunder and thereunder and shall not be liable for
any action taken or omitted to be taken by it in good faith in accordance with
the advice of such counsel (including counsel for Borrower), accountants or
experts.
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9.2.6 Sharing of Information. Except as otherwise expressly provided in
this Agreement, Agent shall have no duty or responsibility, either initially
or on a continuing basis, to provide any Lender with any credit or other
information concerning the business, prospects, operations, properties,
financial or other condition or creditworthiness of the Borrower Entities or
any other Person that may come into its possession, whether before the
Closing Date or at any time or times thereafter. All notices to be given to
Borrower by a Lender hereunder shall be concurrently given to Agent.
9.3 Indemnification of Agent. To the extent Agent is not reimbursed by
or on behalf of Borrower, and without limiting the obligation of Borrower to do
so, Lenders will Pro Rata reimburse and indemnify Agent, from and against any
and all liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses (including attorneys' fees and expenses) or
disbursements of any kind or nature whatsoever that may at any time (including
at any time following the indefeasible repayment in full of the Revolving Credit
Loan) be imposed on, incurred by or asserted against Agent in any way relating
to or arising out of this Agreement or any other Loan Document or the
transactions contemplated thereby or any action taken or omitted by Agent under
or in connection with any of the foregoing, and in particular will reimburse
Agent for out-of-pocket expenses promptly upon demand by Agent therefor, EVEN IF
INCURRED DUE TO THE ORDINARY NEGLIGENCE OF AGENT; provided, however, that no
Lender shall be liable for any portion of such liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses or disbursements
finally determined by a court of competent jurisdiction and not subject to any
appeal or pursuant to arbitration to have resulted from Agent's gross negligence
or reckless or willful misconduct. Agent may offset any amounts due Agent by
any Lender against obligations of Agent to that Lender.
9.4 No Representations by Agent. Each Lender acknowledges that neither
Agent nor any of its officers, directors, employees, attorneys, accountants or
agents has made any representation or warranty to it regarding the Borrower
Entities, the Revolving Credit Loan, the Collateral or otherwise relating to
this Agreement. Agent shall not be responsible to any Lender for any recitals,
statements, information, representations or warranties herein or in any other
Loan Document or in any document, instrument, certificate or other writing
delivered in connection herewith or therewith or for the execution,
effectiveness, genuineness, validity, enforceability, perfection, priority or
sufficiency of this Agreement or any other Loan Document or the financial
condition of the Borrower Entities or any other Person, or be required to make
any inquiry concerning either the performance or observance of any of the terms,
provisions or conditions of this Agreement or any other Loan Document, or the
financial condition of the Borrower Entities or any other Person or the
existence or possible existence of any Unmatured Default or Event of Default.
9.5 Independent Investigations by Lenders. Each Lender acknowledges
that, independently and without reliance upon Agent or any other Lender and
based on such documents and information as it has deemed and may deem
appropriate, (i) it has made its own appraisal of and investigation into the
business, prospects, operations, properties,
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financial and other condition and creditworthiness of the Borrower Entities in
connection with its decision to enter into this Agreement and extend credit to
Borrower hereunder, and (ii) it will continue to make its own credit analysis,
appraisals and decisions in taking or not taking action hereunder.
9.6 Notice of Default. Agent shall not be deemed to have knowledge or
notice of the occurrence of any Unmatured Default or Event of Default, other
than any Unmatured Default or Event of Default arising out of the failure to pay
any principal, interest, fees or other amounts payable to Agent for the account
of the Lenders, unless Agent has received written notice from Borrower or a
Lender describing such Unmatured Default or Event of Default and stating that
such notice is a "notice of default." In the event that Agent receives such a
notice, Agent shall promptly give notice thereof to the Lenders; provided,
however, that if any such notice has also been furnished to the Lenders, Agent
shall have no obligation to notify the Lenders with respect thereto. Each
Lender shall promptly give Agent such a notice upon its actual knowledge of an
Unmatured Default or an Event of Default; provided, however, that the failure of
any Lender to deliver such notice in the absence of gross negligence or reckless
or willful misconduct shall not affect its rights hereunder or under the other
Loan Documents.
9.7 Funding of Advances Pursuant to Borrowing Notices. Promptly
following receipt of notice from Agent that a Borrowing Notice has been
submitted, and provided that all conditions to funding are believed to have been
satisfied, each Lender shall, provided that it received timely notice of the new
Loan, transfer to a designated account with Agent that Lender's Pro Rata Share
of the requested funding. The transfer of funds shall occur within the time
required for funding under this Agreement. Should any Lender fail to timely
fund its Pro Rata Share of a requested Loan, Agent may, but shall be under no
obligation whatsoever to, advance to Borrower the defaulted Lender's Pro Rata
Share of the requested Loan. If such an advance is made, it shall be deemed an
advance by Agent for the account of the defaulting Lender and shall bear
interest at the rate applicable to the Loan, payable upon demand.
9.8 Agent in its Individual Capacity. With respect to its Commitments,
and the Loans made by it, Agent shall have the same rights and powers under the
Loan Documents as any other Lender or holder of a Note and may exercise the same
as though it were not performing the duties specified herein; and the terms
"Lenders," "Required Lenders," and any similar terms shall, unless the context
clearly otherwise indicates, include Agent in its individual capacity as a
Lender. Agent may accept deposits from, lend money to and generally engage in
any kind of banking, trust, financial advisory or other business with the
Borrower Entities or any of their respective Affiliates as if it were not
performing the servicing duties specified herein, and may accept fees and other
consideration from Borrower for services in connection with this Agreement and
otherwise without having to disclose or account for the same to Lenders.
9.9 Holders. Agent may deem and treat the payee of any Note as the
holder thereof and Lender hereunder for all purposes hereof unless and until a
written notice
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of the assignment, transfer or endorsement thereof purportedly executed by the
payee, as the case may be, shall have been filed with Agent. Any request,
authority or consent of any Person that, at the time of making such request or
giving such authority or consent, is the holder of any Note according to Agent's
information, shall be conclusive and binding on any subsequent holder,
transferee, assignee or endorsee, as the case may be, of such Note or of any
Note or Notes issued in exchange therefor.
9.10 Successor Agent. Agent may resign at any time upon sixty (60) days'
prior written notice to Borrower and the Lenders. Agent may be removed upon
Agent's insolvency, liquidation or the appointment of a receiver for Agent, by
action of the Required Lenders, at any time upon sixty (60) days' prior written
notice to Borrower and Agent. Such resignation or removal, as the case may be,
shall take effect upon the appointment of a successor Agent as provided herein.
The Required Lenders will, with Borrower's approval (which shall not be
unreasonably withheld), appoint from among the Lenders a successor Agent. If no
successor Agent shall have been appointed within such sixty (60) day period, (i)
if no Unmatured Default or Unmatured Default then exists, Borrower may appoint a
successor Agent from among the Lenders, and (ii) otherwise, Agent may appoint,
after consulting with the Lenders and Borrower, a successor agent from among the
Lenders, which Agent, however selected, shall serve as Agent until such time, if
any, as the Required Lenders and Borrower shall have appointed a successor Agent
as provided hereinabove. Upon the written acceptance of any appointment as Agent
hereunder by a successor Agent, such successor Agent shall thereupon succeed to
and become vested with all the rights, powers, privileges and duties of the
retiring Agent, and the retiring Agent shall be discharged from its duties and
obligations hereunder and under the other Loan Documents. After any retiring
Agent's resignation as Agent, the provisions of this Article shall inure to its
benefit as to any actions taken or omitted to be taken by it while it was Agent.
9.11 Sharing of Payments, etc. Each Lender agrees that if it shall,
through the exercise of a right of banker's lien, set-off, counterclaim or
otherwise, obtain payment with respect to the Obligations which results in its
receiving more than its Pro Rata Share of the aggregate payments with respect to
all of the Obligations, then (a) such Lender shall be deemed to have
simultaneously purchased from the other Lenders a share in the Obligations so
that the amount of the Obligations held by each of the Lenders shall continue to
equal their respective Pro Rata Shares, and (b) such other adjustments shall be
made from time to time as shall be equitable to insure that the Lenders share
such payments ratably. If any Lender remits payments to other Lenders under
this Section 9.11 and later is required to refund the same as a preferential
payment or otherwise, the other Lenders who shared in the payment shall
similarly arrange their interests in the Obligations to reverse the distribution
to them as to allow the originally remitting Lender to refund such payment. No
Lender shall exercise its banker's lien, set-off or other right to accomplish
such payment absent Agent's prior confirmation that the exercise of such right
would be consistent with the instructions of the Required Lenders then in effect
regarding the outstanding Event of Default.
9.12 Separate Liens on Collateral. Each Lender agrees with the other
Lenders that, with the exception of security interests in deposit accounts and
like property in
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the possession of a Lender as expressly provided for in this Agreement, it will
not take or permit to exist any Encumbrance in its favor on any of the
Collateral or other property of any of Borrowers other than Encumbrances
securing the Obligations due to all Lenders pursuant to the Loan Documents.
9.13 Payments Between Agent and Lenders. All payments by Agent to any
Lender, and all payments by any Lender to Agent, under the terms of this
Agreement shall be made by wire transfer in immediately available funds to the
receiving party's address specified for notices in this Agreement. If any of
the Lenders fail to pay when due any sum payable to Agent, then, except as
otherwise provided in Section 9.7 hereof, such sum shall bear interest until
paid at the interest rate per annum for overnight borrowing by the payee from
the Federal Reserve Bank for the period commencing on the date such payment was
due and ending on, but excluding, the date such payment is made.
9.14 Assignments and Participations. Any Lender may assign all of its
interest in the Revolving Credit Loan or any portion(s) thereof in the minimum
amount of Ten Million and No/100 Dollars ($10,000,000.00) and in increments of
One Million and No/100 Dollars ($1,000,000.00) each, subject to the prior
written approval of Agent (and of Borrower, provided that no Event of Default
then exists), which approval shall not be unreasonably withheld. The assignment
shall be evidenced by documents in form and substance acceptable to Agent, and
the acquiring Lender shall expressly assume full responsibility as a Lender
hereunder, including, but not limited to, assumption of the applicable portion
of the Commitment. Upon consummation of such assignment, the assigning Lender
shall be deemed released from its obligations under the Loan Documents to the
extent of such assignment. An assignment fee of Three Thousand and No/100
Dollars ($3,000.00) shall be paid to Agent as a condition to any assignment of
an interest in the Revolving Credit Loan (including assignments, if any, among
banks that are already Lenders). Lenders may sell participation interests in
their interests in the Revolving Credit Loan as long as the terms of such
participations establish that no participant will be regarded as a Lender under
this Agreement and permit the participants to vote in determining the vote of
the Lender which sold the applicable participation only with respect to matters
for which the unanimous vote of all Lenders is required under this Agreement.
Lenders may disclose financial information in their possession to prospective
purchasers of interests in the Revolving Credit Loan and to prospective
participants.
9.15 Bankruptcy Provisions. Should any of the Borrower Entities become
a party to a case under the Bankruptcy Code, each Lender shall be entitled to
file its own claim, to the extent such a filing may be necessary. Agent shall
review each claim before being filed by a Lender to assure that the claim is
filed on a basis consistent with Agent's records and Agent's legal positions
taken pursuant to this Agreement. Should any of the Borrower Entities become a
party to a reorganization proceeding under the Bankruptcy Code, each Lender
shall be recognized as the holder of a separate claim for the purpose of the
approval or rejection of a plan under 11 U.S.C. (S) 1126, may freely vote such
claim, and the provisions of that Section shall control the other provisions of
this Agreement that otherwise require the consent of the Required Lenders or all
Lenders in certain circumstances. Agent
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shall continue to administer the Revolving Credit Loan on behalf of Lenders, as
they may be amended by any adopted Plan of Reorganization.
9.16 Foreclosure of Collateral. In the event of a foreclosure of any
Collateral, Agent may issue a credit bid for the account of all Lenders, up to
the amount of the then outstanding Obligations. Any Property acquired at such a
foreclosure (or acquired by Agent through a conveyance in lieu of foreclosure)
shall be held and administered by Agent for the benefit of all Lenders pursuant
to the terms of this Article IX.
9.17 Procedures for Notices and Approvals. All notices given among
Lenders and Agent with respect to this Agreement or the other Loan Documents
shall be given in the manner provided in this Agreement.
9.18 Other Relationships With Borrower. Each Lender is free to engage
in deposit relationships and other business relationships with the Borrower
Entities, provided that such relationship does not violate any restriction set
forth in this Agreement.
9.19 Foreign Tax Matters. Each Lender which is a foreign person (i.e., a
Person other than a United States Person for United States Federal income tax
purposes) hereby agrees that:
9.19.1 Delivery of Forms. Such Lender shall, no later than the Closing
Date (or, in the case of a Lender which becomes a party hereto after the Closing
Date, the date upon which such Lender becomes a party hereto) deliver to the
Agent and Borrower:
9.19.1(a) two accurate and complete signed originals of Form 4224, or
9.19.1(b) two accurate and complete signed originals of Form 1001,
in each case indicating that such Lender is on the date of delivery thereof
entitled to receive payments of principal, interest and fees for the
account of such lending office or offices under this Loan Agreement free
from withholding of United States Federal income tax.
9.19.2 Change of Office. At any time such a Lender changes its lending
office or offices or selects an additional lending office, it shall, at the same
time or reasonably promptly thereafter, deliver to Agent and Borrower in
replacement for, or in addition to, the forms previously delivered by it
hereunder;
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9.19.2(a) if such changed or additional lending office is located in
the United States, two accurate and complete signed originals of Form 4224,
or
9.19.2(b) otherwise, two accurate and complete signed originals of
Form 1001,
in each case indicating that such Lender is on the date of delivery thereof
entitled to receive payments of principal, interest and fees for the
account of such changed or additional lending office under this Loan
Agreement free from withholding of United States federal income tax.
9.19.3 Additional Documentation. Each such Lender shall, promptly upon
Agent's or Borrower's reasonable request to that effect, deliver to the Agent
and Borrower such other forms or similar documentation as may be required from
time to time by any applicable law, treaty, rule or regulation in order to
establish such Lender's tax status for withholding purposes.
9.20 Responses to Requests. With respect to any consent or approval
requested by Borrower or Agent under a provision of this Agreement, Lenders
shall endeavor to provide to Agent written notice of their approval or
disapproval within seven (7) Business Days of receipt of the request; provided,
however, if any Lender fails to give such notice within seven (7) Business Days,
the request shall be regarded as disapproved by such Lender.
X. GENERAL PROVISIONS
10.1 Notices. All communications relating to this Agreement or any of the
other Loan Documents shall be in writing and shall effective when be delivered
by mail, overnight courier, special courier, telecopier or otherwise to the
following addresses:
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if to Borrower:
Physicians Resource Group, Inc.
Attn: President
5430 LBJ, Three Lincoln Centre, Suite 1540
Dallas, Texas 75240
Telecopier: (972) 982-8299
With a Copy To:
Physicians Resource Group, Inc.
Attn: General Counsel
5430 LBJ, Three Lincoln Centre, Suite 1540
Dallas, Texas 75240
Telecopier: (972) 982-8299
And With a Copy To:
Jackson & Walker
Attn: Jim Ryan
901 Main Street, Suite 6000
Dallas, Texas 75202
Telecopier: (214) 953-5736
If to Agent:
NationsBank of Tennessee, N.A., Agent
Attn: Elizabeth Knox
1 NationsBank Plaza
Nashville, Tennessee 37239
Telecopier: (615) 749-4951
With a Copy To:
Boult, Cummings, Conners & Berry
Attn: John E. Murdock III, Esq.
414 Union Street, Suite 1600
Nashville, Tennessee 37219
Telecopier: (615) 252-2380
If to any Lender:
As set forth beside such Lender's signature hereto.
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Any party may change its address for receipt of notice by written direction
to the other parties hereto.
10.2 Renewal, Extension, or Rearrangement. All provisions of this
Agreement relating to Obligations shall apply with equal force and effect to
each and all promissory notes executed hereafter which in whole or in part
represent a renewal, extension for any period, increase, or rearrangement of any
part of the Obligations originally represented by any part of such other
Obligations.
10.3 Application of Payments. Amounts received with respect to the
Obligations, except for payments or prepayments expressly provided for elsewhere
in this Agreement, shall be applied (i) first, to any expenses due Lenders or
Agent, (ii) second, to any fee due Agent, (iii) third, to accrued and unpaid
interest under any of the Obligations, (iv) fourth, to any commitment fees due
Lenders, and (iii) fifth, to reduce the unpaid principal portion of the
Obligations, in such manner as determined by Agent.
10.4 Counterparts. This Agreement may be executed in counterparts with
all signatures or by counterpart signature pages, and it shall not be necessary
that the signatures of all parties be contained on any one counterpart. Each
counterpart shall be deemed an original, but all of them together shall
constitute one and the same instrument.
10.5 Negotiated Document. This Agreement and the other Loan Documents
have been negotiated by the parties with full benefit of counsel and should not
be construed against any party as author.
10.6 Consent to Jurisdiction; Exclusive Venue. Each party hereto hereby
irrevocably consents to the jurisdiction of the United States District Court for
the Middle District of Tennessee and of all Tennessee state courts sitting in
Davidson County, Tennessee, for the purpose of any litigation to which Borrower,
Lenders or Agent may be a party and which concerns this Agreement or the
Obligations. It is further agreed that venue for any such action shall lie
exclusively with courts sitting in Davidson County, Tennessee, unless Lenders
and Agent agree to the contrary in writing.
10.7 Not Partners; No Third Party Beneficiaries. The relationship of
Lenders and Borrower is that of lenders and borrower only, and neither is a
fiduciary, partner or joint venturer of the other for any purpose. This
Agreement has been executed for the sole benefit of Lenders, and no third party
is authorized to rely upon Lenders' rights or duties hereunder.
10.8 No Reliance on Lenders' Analysis. Borrower acknowledges and
represents that, in connection with the Obligations, Borrower has not relied
upon any financial projection, budget, assessment or other analysis by Lenders
or Agent upon any representation by Lenders as to the risks, benefits or
prospects of Borrower's business activities or present or future capital needs
incidental thereto, all such considerations having been examined fully and
independently by Borrower.
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10.9 No Marshaling of Assets. Lenders and Agent may proceed against
collateral securing the Obligations and against parties liable therefor in such
order as they may elect, and neither Borrower nor any surety or guarantor for
Borrower nor any creditor of Borrower shall be entitled to require Lenders or
Agent to marshal assets. The benefit of any rule of law or equity to the
contrary is hereby expressly waived.
10.10 Impairment of Collateral. Lenders or Agent (acting as permitted
under this Agreement) may release any Collateral securing the Obligations or
release any party liable therefor. The defenses of impairment of collateral and
impairment of recourse and any requirement of diligence in collecting the
Obligations are hereby waived.
10.11 Business Days. If any payment date under the Obligations falls on
a day that is not a Business Day, or if the last day of any notice period falls
on such a day, the payment shall be due and the notice period shall end on the
next following Business Day.
10.12 Standard of Care; Limitation of Damages. Lenders and Agent shall
be liable to Borrower only for matters arising from this Agreement or otherwise
related to the Obligations resulting from such Lender's or Agent's gross
negligence or willful misconduct, AND NOT FOR MATTERS ARISING FROM THEIR
ORDINARY NEGLIGENCE, and liability for all other matters is hereby waived.
Lenders and Agent shall not in any event be liable to Borrower for special or
consequential damages arising from this Agreement or otherwise related to the
Obligations.
10.13 Incorporation of Schedules. All Schedules and Exhibits referred to
in this Agreement are incorporated herein by this reference.
10.14 Indulgence Not Waiver. Lenders' or Agent's indulgence in the
existence of a default hereunder or any other departure from the terms of this
Agreement shall not prejudice Lenders' or Agent's rights to declare a default or
otherwise demand strict compliance with this Agreement.
10.15 Cumulative Remedies. The remedies provided Lenders and Agent in
this Agreement are not exclusive of any other remedies that may be available to
Lenders and Agent under any other document or at law or equity.
10.16 Amendment and Waiver in Writing. No provision of this Agreement
can be amended or waived, except by a statement in writing signed by the party
or parties against whom enforcement of the amendment or waiver is sought.
Provisions of this Agreement may be amended or waived by the agreement of
Borrower and the Required Lenders (which consent of the Required Lenders may be
evidenced by the confirmation thereof issued by Agent to Borrower), except that
(i) no amendment or waiver regarding matters expressly requiring the unanimous
consent of Lenders under Section 9.2.2 of this Agreement may be entered into
absent the written consent of all Lenders, (ii) the amendment of Section 9.2.2
hereof, this subsection (ii), the definition of Pro Rata or Pro Rata Share and
the definition of Required Lenders under this Agreement shall require the
written consent of
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all Lenders, and (iii) no amendment or waiver may affect the rights or duties of
the Agent or the Issuing Bank without their written consent.
10.17 Assignment. This Agreement shall be binding upon and inure to the
benefit of the respective successors and assigns of Borrower and Lenders, except
that Borrower shall not assign any rights or delegate any obligations arising
hereunder without the prior written consent of Lenders. Any attempted assignment
or delegation by Borrower without the required prior consent shall be void.
10.18 Entire Agreement. This Agreement and the other written agreements
among Borrower, Lenders and Agent represent the entire agreement between the
parties concerning the subject matter hereof, and all oral discussions and prior
agreements are merged herein. Provided, if there is a conflict between this
Agreement and any other document executed contemporaneously herewith with
respect to the Obligations, the provision in this Agreement shall control.
10.19 Severability. Should any provision of this Agreement be declared
invalid or unenforceable for any reason, the remaining provisions hereof shall
remain in full effect.
10.20 Time of Essence. Time is of the essence of this Agreement, and all
dates and time periods specified herein shall be strictly observed.
10.21 APPLICABLE LAW. THE VALIDITY, CONSTRUCTION AND ENFORCEMENT OF THIS
AGREEMENT AND ALL OTHER DOCUMENTS EXECUTED WITH RESPECT TO THE OBLIGATIONS SHALL
BE DETERMINED ACCORDING TO THE LAWS OF TENNESSEE APPLICABLE TO CONTRACTS
EXECUTED AND PERFORMED ENTIRELY WITHIN THAT STATE.
10.22 Captions Not Controlling. Captions and headings have been included
in this Agreement for the convenience of the parties, and shall not be construed
as affecting the content of the respective Sections.
10.23 Waiver of Right to Jury Trial. THE PARTIES HERETO HEREBY KNOWINGLY
AND VOLUNTARILY, WITH BENEFIT OF COUNSEL, WAIVE THE RIGHT TO HAVE ANY DISPUTE
ARISING FROM OR RELATED TO THIS AGREEMENT OR THE OBLIGATIONS TRIED BY A JURY,
WITH THE RESULT THAT ANY SUCH DISPUTE WOULD BE TRIED BY A JUDGE RATHER THAN A
JURY. BORROWER ACKNOWLEDGES THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO AGENT
AND LENDERS IN ENTERING INTO THIS AGREEMENT AND CONFIRMS THAT NO REPRESENTATIVE
OF AGENT OR LENDERS HAS MADE ANY STATEMENT OR SUGGESTION THAT THIS PROVISION
WILL NOT BE ENFORCED IN ACCORDANCE WITH ITS TERMS.
10.24 Facsimile Signatures. This Agreement may be executed by facsimile
signatures, and shall be effective when Agent has received telecopy
transmissions of the
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signature pages executed by all parties hereto; provided, however, that all
parties shall deliver original executed documents to Agent promptly following
the execution hereof.
Executed as of the date first written above.
PHYSICIANS RESOURCE GROUP, INC.
By: /s/RON M OWEN
______________________________
Title: PRESIDENT
______________________________
SIGNATURE PAGE TO LOAN AGREEMENT DATED AS OF MARCH 14, 1997,
PHYSICIANS RESOURCE GROUP, INC., BORROWER.
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NATIONSBANK OF TENNESSEE, N.A.,
a national banking association, as Agent
By:
--------------------------------
Elizabeth Knox
NATIONSBANK OF TENNESSEE, N.A.,
a national banking association, as a Lender
Commitment in Dollars: $50,000,000.00
Commitment as Percentage of Total: 55.6%
By:
----------------------------------
Elizabeth Knox
Address: 1 NationsBank Plaza
Nashville, TN 37239
Fax number: 615/749-4951
Voice number: 615/749-3918
SIGNATURE PAGE TO LOAN AGREEMENT DATED AS OF MARCH 14, 1997,
PHYSICIANS RESOURCE GROUP, INC., BORROWER.
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BANK ONE TEXAS,
a Texas banking corporation, as a Lender
Commitment in Dollars: $20,000,000.00
Commitment as Percentage of Total: 22.22%
By: /s/ Karen A. Patterson
-------------------------------------
Karen A. Patterson
Address: 910 Travis, 7th Floor
Houston, TX 77002-5860
Fax number: 713/751-6199
Voice number: 713/751-3863
SIGNATURE PAGE TO LOAN AGREEMENT DATED AS OF MARCH 14, 1997
PHYSICIANS RESOURCE GROUP, INC., BORROWER
75
<PAGE>
AMSOUTH BANK OF TENNESSEE,
a Tennessee banking corporation, as a Lender
Commitment in Dollars: $20,000,000.00
Commitment as Percentage of Total: 22.22%
By: /s/ Cathy M. Wind
-------------------------------------
Cathy M. Wind
Address: 333 Union Street, Suite 200
Nashville, Tennessee 37201
Fax number: 615/291-5268
Voice number: 615/291-5257
SIGNATURE PAGE TO LOAN AGREEMENT DATED AS OF MARCH 14, 1997
PHYSICIANS RESOURCE GROUP, INC., BORROWER
76
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EXHIBIT 10.37
EMPLOYMENT AGREEMENT
--------------------
Employment Agreement (the "Agreement"), dated April ___, 1995, by and
between Physicians Resource Group, Inc., a Delaware corporation (the "Company"),
and Mark Kingston ("Employee").
In consideration of the mutual premises and conditions contained herein,
the parties hereto agree as follows:
Section 1. EMPLOYMENT. The Company hereby agrees to employ Employee, and
Employee hereby accepts employment by the Company, upon the terms and subject to
the conditions hereinafter set forth.
Section 2. DUTIES. Employee shall serve as the Chief Development Officer
of the Company. Except as otherwise provided pursuant to Section 11 hereof,
Employee agrees to devote his full time and best efforts to the performance of
his duties to the Company. Employee acknowledges that the executive offices of
the Company will be located in Houston, Texas. Employee recognizes that
fulfillment of his duties hereunder will require his presence at the Company's
executive offices. The Employee's failure to relocate his personal residence to
the Houston, Texas metropolitan area shall not constitute grounds for
termination for "Cause" pursuant to Section 6(b) hereof.
Section 3. TERM. Except as otherwise provided in Section 6 hereof, the
term of this Agreement shall be for five years, commencing on the date that the
registration statement on Form S-1, relating to an underwritten initial public
offering of the Company's Common Stock (the "IPO"), is filed initially with the
Securities and Exchange Commission (the "Commencement Date"), and shall be
automatically renewed thereafter for successive one year terms unless either
party gives to the other written notice of termination no fewer than thirty (30)
days prior to the expiration of any such term that it does not wish to extend
this Agreement.
Section 4. COMPENSATION AND BENEFITS. In consideration for the services
of the Employee hereunder, the Company will compensate Employee as follows:
(a) Base Salary. Commencing on the date of consummation of the IPO,
Employee shall be entitled to receive a base salary of $100,000 per annum or as
increased from time to time by the Board of Directors of the Company.
(b) Bonus. Employee shall be eligible to receive an annual cash bonus in
an amount equal to up to 50% of his base salary in the event that the Company
experiences at least 20% or greater growth in earnings per share on a year to
year basis (calculated on a pro forma basis for the calendar year prior to the
Company's first fiscal year of operations) in accordance with the following
schedule:
1
<PAGE>
Percentage Increase Bonus as a Percentage
in Earnings Per Share of Annual Base Salary
--------------------- ---------------------
20.0 - 22.5% 10%
Over 22.5 - 25.0% 20%
Over 25.0 - 27.5% 30%
Over 27.5 - 30.0% 40%
Over 30.0% 50%
Employee will be entitled to draw in advance against 75% of his maximum
"projected" annual bonus, on a quarterly basis, as determined based on Company
projections, and actual quarterly results, of operations. For purposes of this
Section 6(a), calculations of earnings per share for 1995 and 1996 shall be made
in accordance with Exhibit A attached hereto.
(c) Benefits. The Company shall grant Employee options to purchase shares
of the Company's Common Stock at the initial public offering price for the
Company's Common Stock on terms and in a quantity to be agreed upon following
good faith negotiations between the Company's management team and the
underwriters of the IPO, which terms shall be consistent with the terms of the
stock option plans adopted by the Company pursuant to which the options are
granted and the provisions of Section 7 hereof. It currently is contemplated
that such options will vest over a period of five years. In addition, during
the term of this Agreement, Employee shall be entitled to participate in and
receive benefits under any and all employee benefit plans and programs which are
from time to time generally made available to the executive employees of the
Company, subject to approval and grant by the appropriate Company committee with
respect to programs calling for such approvals or grants.
Section 5. EXPENSES.
(a) General. It is acknowledged by the parties that Employee, in
connection with the services to be performed by him pursuant to the terms of
this Agreement, will be required to make payments for travel, entertainment of
business associates and similar expenses. The Company will reimburse Employee
for all reasonable expenses of types authorized by the Company and incurred by
Employee in the performance of his duties hereunder. Employee will comply with
such budget limitations and approval and reporting requirements with respect to
expenses as the Company may establish from time to time.
(b) Moving Expenses. The Company shall (i) reimburse Employee for any
reasonable, out-of-pocket and adequately documented moving expenses incurred by
Employee in connection with the transfer of his residence to Houston, Texas and
pay to Employee an amount of cash reasonably calculated by the Company to negate
adverse
2
<PAGE>
income tax consequences of Employee of the foregoing reimbursement and (ii) pay
to Employee an amount equal to two months' salary (less required federal income
tax withholding) for miscellaneous relocation expense.
Section 6. TERMINATION. Employee's employment hereunder will commence on
the Commencement Date and continue until the end of the term specified in
Section 3 hereof and any renewals of such term, except that the employment of
Employee hereunder will terminate earlier in the following manner:
(a) Death or Disability. Immediately upon the death of Employee during the
term of his employment hereunder or, at the option of the Company, in the event
of Employee's disability, upon 30 days notice to Employee. Employee will be
deemed disabled if, as a result of Employee's incapacity due to physical or
mental illness, Employee shall have been absent from his duties with the Company
on a full-time basis for 120 consecutive business days;
(b) For Cause. For "Cause" immediately upon written notice by the Company
to Employee. For purposes of this Agreement, a termination will be for Cause
if: (i) Employee willfully and continuously fails to perform his duties with the
Company (other than any such failure resulting from incapacity due to physical
or mental illness), (ii) Employee willfully engages in gross misconduct
materially and demonstrably injurious to the Company or (iii) Employee has been
convicted of a felony;
(c) Failure of IPO. Automatically in the event that the IPO is not
consummated on or before June 30, 1995; or
(d) Termination Upon Anniversary. Upon the occurrence of any annual
anniversary of the date of this Agreement, in the event that one party has
provided to the other 60 days prior written notice of its election to terminate
this Agreement.
Employee will not be entitled to any severance pay or other compensation
upon termination of his employment pursuant to Subsections (a)-(c) or Section 3
or in the event that Employee voluntarily leaves the employment of the Company
except for any portion of his base salary accrued but unpaid from the last
monthly payment date to the date of termination and expense reimbursements under
Section 5 hereof for expenses incurred in the performance of his duties
hereunder prior to termination. In the event Employee's employment with the
Company is terminated by the Company for reasons other than any of the reasons
enumerated in Subsections 6(a)-(c) above, the Company will pay Employee, as
Employee's sole remedy in connection with such termination, severance pay in the
amount of Employee's monthly base salary at the rate in effect immediately
preceding the termination of Employee's employment for 12 months after the
termination of Employee's employment (the "Separation Payment Period"), which
severance pay will be paid by the Company in equal monthly payments in arrears.
The Company will also pay Employee the portion of his base salary accrued but
unpaid from the last monthly payment date
3
<PAGE>
to the date of termination and expense reimbursements under Section 5 hereof for
expenses incurred in the performance of his duties hereunder prior to
termination.
Section 7. Effect of Termination on Options. Options held by the Employee
will automatically expire if the Employee's employment with the Company is
terminated for Cause as defined in Section 6(b) or if the Employee voluntarily
leaves the employment of the Company in breach of this Agreement. If Employee's
employment with the Company ends for any other reason than termination for
Cause, voluntary departure in breach of this Agreement, due to death or pursuant
to Section 6(d) above, such Employee's options will remain exercisable and will
vest and expire in accordance with the terms of the applicable option
agreements. If the Employee dies while employed by the Company his options shall
become fully exercisable on the date of his death and shall expire twelve months
thereafter. If this Agreement is terminated by the Company pursuant to Section
6(d) above, (i) the options that are vested as of the date of termination shall
remain exercisable for a period of twelve months after the date of termination
and shall expire at the end of such twelve month period and (ii) the options
that would have vested during the twelve months following termination shall vest
upon termination, remain exercisable for a period of twelve months after the
date of termination and expire at the end of such twelve month period. If this
Agreement is terminated by the Employee pursuant to Section 6(d) above, the
options that are vested as of the date of termination shall remain exercisable
for a period of twelve months after the date of termination and shall expire at
the end of such twelve month period.
Section 8. CHANGE IN CONTROL TERMINATION PAYMENT.
(a) Termination Payment.
(i) Amount. Notwithstanding anything to the contrary contained
in Section 6 hereof, in the event Employee's employment with the
Company terminates for any reason (other than death) within the
twelve month period following a Change In Control (as defined in
subsection 8(b) hereof) occurring after consummation of the IPO,
the Company will pay Employee a lump sum payment (the "Termination
Payment") in cash equal to 2.99 times the sum of the items in the
following subsections (I) through (VI):
(I) Employee's annual base compensation determined by
reference to his base salary in effect immediately prior to
the Change In Control;
(II) the maximum bonus that Employee could receive under
any management incentive bonus plan of the Company for the
year in which the Change In Control occurs, assuming all
incentives and financial targets were achieved that are
necessary to require payment of the largest bonus amount by
the Company to Employee; provided that the maximum bonus
4
<PAGE>
under this subsection 8(a)(i)(II) will not be less than 60% of
the amount specified under subsection 8(a)(i)(I) hereof;
(III) the amount of Employee's base salary accrued but
unpaid from the last monthly payment date to the date of
termination;
(IV) expense reimbursement under Section 5 hereof for
expenses incurred in the performance of his duties hereunder
prior to the termination of his employment with the Company;
(V) any other benefit accrued but unpaid as of the date
of such termination; and
(VI) the estimated cost to Employee of obtaining medical,
dental, life and disability insurance coverage for a period of
eighteen months after the expiration of his continuation
(COBRA) rights; provided that such coverage will be
substantially similar to the coverage provided to Employee by
Employer immediately prior to the Change In Control; and
provided further that this subsection 8(a)(i)(VI) will be
applied without regard to, and the amount payable under this
subsection 8(a)(i)(VI) is in addition to, any continuation
(COBRA) rights or conversion rights under any plan provided by
Employer, which rights are not affected by any provision
hereof.
(ii) Time for Payment; Interest. The Company will pay the Termination
Payment to Employee concurrent with Employee's termination of employment.
Employer's obligation to pay to Employee any amounts under this Section 8,
including without limitation the Termination Payment and any Gross Up
Payment due under subsection (c), will bear interest at the maximum rate
allowed by law until paid by the Company, and all accrued and unpaid
interest will bear interest at the same rate, all of which interest will be
compounded daily.
(iii) Payment Authority. Any officer of the Company (other than
Employee) is authorized to issue and execute a check, initiate a wire
transfer or otherwise effect payment on behalf of the Company to satisfy
the Company's obligations to pay all amounts due to Employee under this
Section 8.
(iv) Termination. The Company's obligation to pay the Termination
Payment will not be affected by the manner in which Employee's employment
with the Company is terminated. Without limiting the generality of the
foregoing, the Company will be obligated to pay the Termination Payment and
any Gross Up Payment regardless of whether Employee's termination of
employment is voluntary, involuntary, for cause, without cause, in
violation of any employment agreement or other agreement in effect at the
time of the Change In Control, or due
5
<PAGE>
to Employee's retirement or disability. Employee's notice of his
termination of employment in connection with a Change In Control may be
made by any means.
(b) Change In Control. A Change In Control will be deemed to have occurred
for purposes hereof (i) when a change of stock ownership of the Company of
a nature that would be required to be reported in response to Item 6(e) of
Schedule 14A promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and any successor Item of a similar nature
has occurred; or (ii) upon the acquisition of beneficial ownership,
directly or indirectly, by any person (as such term is used in Sections
13(d) and 14(d)(2) of the Exchange Act) of securities of the Company
representing 33% or more of the combined voting power of the Company's then
outstanding securities; or (iii) a change during any period of two
consecutive years of a majority of the members of the Board of Directors of
the Company for any reason, unless the election, or the nomination for
election by the Company's shareholders, of each director was approved by a
vote of a majority of the directors then still in office who were directors
at the beginning of the period; provided that a Change In Control will not
be deemed to have occurred for purposes hereof with respect to any person
meeting the requirements of clauses (i) and (ii) of Rule 13d-1(b)(1)
promulgated under the Securities Exchange Act of 1934, as amended.
(c) Gross Up Payment.
(i) Excess Parachute Payment. If Employee incurs the tax (the
"Excise Tax") imposed by Section 4999 of the Internal Revenue Code of 1986
(the "Code") on "excess parachute payments" within the meaning of Section
280G(b)(1) of the Code, the Company will pay to Employee an amount (the
"Gross Up Payment") such that the net amount retained by Employee, after
deduction of any Excise Tax on the excess parachute payment and any
federal, state and local income tax (together with penalties and interest)
and Excise Tax upon the payment provided for by this subsection (c)(i),
will be equal to the amount of the excess parachute payment.
(ii) Applicable Rates. For purposes of determining the amount of the
Gross Up Payment, Employee will be deemed to pay federal income taxes at
the highest marginal rate of federal income taxation in the calendar year
in which the Gross Up Payment is to be made and state and local income
taxes at the highest marginal rates of taxation in the state and locality
of Employee's residence on the date of his termination of employment, net
of the maximum reduction in federal income taxes that could be obtained
from deduction of such state and local taxes.
(iii) Determination of Gross Up Payment Amount. The determination of
whether the Excise Tax is payable and the amount thereof will be based upon
the opinion of tax counsel selected by Employee. If such opinion is not
finally
6
<PAGE>
accepted by the Internal Revenue Service (or state and local taxing
authorities), then appropriate adjustments to the Excise Tax will be
computed and additional Gross Up Payments will be made in the manner
provided by this subsection (c).
(iv) Time For Payment. The Company will pay the estimated amount
of the Gross Up Payment in cash to Employee concurrent with Employee's
termination of employment. Employee and the Company agree to
reasonably cooperate in the determination of the actual amount of the
Gross Up Payment. Further, Employee and the Company agree to make such
adjustments to the estimated amount of the Gross Up Payment as may be
necessary to equal the actual amount of the Gross Up Payment, which in
the case of Employee will refer to refunds of prior overpayments and
in the case of the Company will refer to makeup of prior
underpayments.
(d) Arbitration. Any controversy or claim arising out of or relating to
this Section 8, or the breach thereof, will be settled exclusively by
arbitration in Dallas, Texas, in accordance with the Commercial
Arbitration Rules of the American Arbitration Association then in
effect. Judgment upon the award rendered by the arbitrator(s) may be
entered in, and enforced by, any court having jurisdiction thereof.
(f) No Right To Continued Employment. This Section 8 will not give
Employee any right of continued employment or any right to compensation
or benefits from the Company except the rights specifically stated
herein.
(g) Exercise of Stock Options. Notwithstanding anything to the contrary
contained herein, all of Employee's options to purchase the Company's
Common Stock will become immediately exercisable upon a Change In
Control.
Section 9. CONFIDENTIAL INFORMATION. Employee recognizes and acknowledges
that certain assets of Employer and its affiliates, including without limitation
information regarding customers, pricing policies, methods of operation,
proprietary computer programs, sales, products, profits, costs, markets, key
personnel, formulae, product applications, technical processes, and trade
secrets (hereinafter called "Confidential Information") are valuable, special
and unique assets of Employer and its affiliates. Employee will not, during or
after his term of employment, disclose any of the Confidential Information to
any person, firm, corporation, association, or any other entity for any reason
or purpose whatsoever, directly or indirectly, except as may be required
pursuant to his employment hereunder, unless and until such Confidential
Information becomes publicly available other than as a consequence of the breach
by Employee of his confidentiality obligations hereunder. In the event of the
termination of his employment, whether voluntary or involuntary and whether by
the Company or Employee, Employee will deliver to the Company all documents and
data pertaining to the Confidential Information and will not take with him any
documents or data of any kind or any reproductions (in whole or in part) of any
items relating to the Confidential Information.
7
<PAGE>
Section 10. NONCOMPETITION. Until two years after termination of
Employee's employment hereunder, Employee will not (i) engage directly or
indirectly, alone or as a shareholder, partner, officer, director, employee or
consultant of any other business organization, in any business activities which
(A) relate to the acquisition and consolidation of medical practices (the
"Designated Industry") and (B) were either conducted by the Company prior to
Employee's termination or proposed to be conducted by the Company at the time of
such termination, (ii) divert to any competitor of the Company in the Designated
Industry any customer of Employee, or (iii) solicit or encourage any officer,
employee, or consultant of the Company to leave its employ for employment by or
with any competitor of the Company in the Designated Industry. The parties
hereto acknowledge that Employee's noncompetition obligations hereunder will not
preclude Employee from (i) owning less than 5% of the common stock of any
publicly traded corporation conducting business activities in the Designated
Industry or (ii) serving as an officer of an entity engaged in the healthcare
industry whose business operations are not competitive with those of the
Company. Employee will continue to be bound by the provisions of this Section
10 until their expiration and will not be entitled to any compensation from the
Company with respect thereto. If at any time the provisions of this Section 10
are determined to be invalid or unenforceable, by reason of being vague or
unreasonable as to area, duration or scope of activity, this Section 10 will be
considered divisible and will become and be immediately amended to only such
area, duration and scope of activity as will be determined to be reasonable and
enforceable by the court or other body having jurisdiction over the matter; and
Employee agrees that this Section 10 as so amended will be valid and binding as
though any invalid or unenforceable provision had not been included herein.
Section 11. GENERAL.
(a) Notices. Except as provided in Section 8(a) hereof, all notices and
other communications hereunder will be in writing or by written
telecommunication, and will be deemed to have been duly given if delivered
personally or if mailed by certified mail, return receipt requested or by
written telecommunication, to the relevant address set forth below, or to such
other address as the recipient of such notice or communication will have
specified to the other party hereto in accordance with this Section 11(a):
If to Employer, to: with a copy to:
Physicians Resource Group, Inc. Jackson & Walker, L.L.P.
One Woodway Building 901 Main Street, Suite 6000
4801 Woodway Dr. Dallas, Texas 75202
Suite 300 East Attn: James S. Ryan, III
Houston, Texas 77056 Fax No.: (214) 953-5822
Attn: Chief Executive Officer
Fax No.: (713) 965-0239
If to Employee, to:
8
<PAGE>
Mark Kingston
336 Dogwood Trail
Coppell, Texas 75019
Fax No.: (214) 393-4199
(b) Withholding; No Offset. All payments required to be made by Employer
under this Agreement to Employee will be subject to the withholding of such
amounts, if any, relating to federal, state and local taxes as may be required
by law. No payment under this Agreement will be subject to offset or reduction
attributable to any amount Employee may owe to the Company or any other person.
(c) Equitable Remedies. Each of the parties hereto acknowledges and agrees
that upon any breach by Employee of his obligations under any of Sections 9 and
10 hereof, the Company will have no adequate remedy at law, and accordingly will
be entitled to specific performance and other appropriate injunctive and
equitable relief.
(d) Severability. If any provision of this Agreement is held to be
illegal, invalid or unenforceable, such provision will be fully severable and
this Agreement will be construed and enforced as if such illegal, invalid or
unenforceable provision never comprised a part hereof; and the remaining
provisions hereof will remain in full force and effect and will not be affected
by the illegal, invalid or unenforceable provision or by its severance herefrom.
Furthermore, in lieu of such illegal, invalid or unenforceable provision, there
will be added automatically as part of this Agreement a provision as similar in
its terms to such illegal, invalid or unenforceable provision as may be possible
and be legal, valid and enforceable.
(f) Waivers. No delay or omission by either party hereto in exercising any
right, power or privilege hereunder will impair such right, power or privilege,
nor will any single or partial exercise of any such right, power or privilege
preclude any further exercise thereof or the exercise of any other right, power
or privilege.
(g) Counterparts. This Agreement may be executed in multiple counterparts,
each of which will be deemed an original, and all of which together will
constitute one and the same instrument.
(h) Captions. The captions in this Agreement are for convenience of
reference only and will not limit or otherwise affect any of the terms or
provisions hereof.
(i) Reference to Agreement. Use of the words "herein," "hereof," "hereto"
and the like in this Agreement refer to this Agreement only as a whole and not
to any particular subsection or provision of this Agreement, unless otherwise
noted.
(j) Binding Agreement. This Agreement will be binding upon and inure to
the benefit of the parties and will be enforceable by the personal
representatives and heirs of Employee
9
<PAGE>
and the successors of Employer. If Employee dies while any amounts would still
be payable to him hereunder, such amounts will be paid to Employee's estate.
This Agreement is not otherwise assignable by Employee.
(k) Entire Agreement. This Agreement contains the entire understanding of
the parties, supersedes all prior agreements and understandings relating to the
subject matter hereof and may not be amended except by a written instrument
hereafter signed by each of the parties hereto.
(l) Governing Law. This Agreement and the performance hereof will be
construed and governed in accordance with the laws of the State of Texas,
without regard to its choice of law principles.
EXECUTED as of the date and year first above written.
PHYSICIANS RESOURCE GROUP, INC.
By: ___________________________________
Its: __________________________________
_______________________________________
Mark Kingston
10
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EXHIBIT 10.38
EMPLOYMENT AGREEMENT
--------------------
Employment Agreement (the "Agreement"), dated April _____, 1995 by and
between Physicians Resource Group, Inc., a Delaware corporation (the "Company"),
and Richard J. D'Amico ("Employee").
In consideration of the mutual premises and conditions contained herein,
the parties hereto agree as follows:
Section 1. EMPLOYMENT. The Company hereby agrees to employ Employee, and
Employee hereby accepts employment by the Company, upon the terms and subject to
the conditions hereinafter set forth.
Section 2. DUTIES. Employee shall serve as the General Counsel of the
Company. Except as otherwise provided pursuant to Section 11 hereof, Employee
agrees to devote his full time and best efforts to the performance of his duties
to the Company. Employee acknowledges that the executive offices of the Company
will be located in Houston, Texas.
Section 3. TERM. Except as otherwise provided in Section 6 hereof, the
term of this Agreement shall be for five years, commencing on the date that the
Registration Statement on Form S-1, relating to an underwritten initial public
offering of the Company's Common Stock (the "IPO"), is filed initially with the
Securities and Exchange Commission (the "Commencement Date"), and shall be
automatically renewed thereafter for successive one year terms unless either
party gives to the other written notice of termination no fewer than thirty (30)
days prior to the expiration of any such term that it does not wish to extend
this Agreement.
Section 4. COMPENSATION AND BENEFITS. In consideration for the services
of the Employee hereunder, the Company will compensate Employee as follows:
(a) Base Salary. Commencing on the date of consummation of the IPO,
Employee shall be entitled to receive a base salary of $120,000 per annum or as
increased from time to time by the Board of Directors of the Company.
(b) Bonus. Employee shall be eligible to receive an annual cash bonus
in an amount equal to up to 50% of his base salary in the event that the Company
experiences at least 20% or greater growth in earnings per share on a year to
year basis (calculated on a pro forma basis for the calendar year prior to
Company's first fiscal year of operations) in accordance with the following
schedule:
<PAGE>
Percentage Increase Bonus as a Percentage
in Earnings Per Share of Annual Base Salary
--------------------- ---------------------
20.0 - 22.5% 10%
Over 22.5 - 25.0% 20%
Over 25.0 - 27.5% 30%
Over 27.5 - 30.0% 40%
Over 30.0% 50%
Employee will be entitled to draw in advance against 75% of his maximum
"projected" annual bonus, on a quarterly basis, as determined based on Company
projections, and actual quarterly results, of operations. For purposes of this
Section 6(a), calculations of earnings per share for 1995 and 1996 shall be made
in accordance with Exhibit A attached hereto.
(c) Benefits. The Company shall grant Employee an option to purchase
70,000 shares of the Company's Common Stock, with the per share exercise price
for 3,750 of such shares being $5.00 per share and the per share exercise price
for the remaining 66,250 of such shares being the initial public offering price
for the Company's Common Stock, on terms to be agreed upon following good faith
negotiations between the Company's management team and the underwriters of the
IPO, which terms shall be consistent with the terms of the stock option plans
adopted by the Company pursuant to which the options are granted and the
provisions of Section 7 hereof. It currently is contemplated that such options
will vest over a period of five years. In addition, during the term of this
Agreement, Employee shall be entitled to participate in and receive benefits
under any and all employee benefit plans and programs which are from time to
time generally made available to the executive employees of the Company, subject
to approval and grant by the appropriate Company committee with respect to
programs calling for such approvals or grants.
Section 5. EXPENSES.
(a) General. It is acknowledged by the parties that Employee, in
connection with the services to be performed by him pursuant to the terms of
this Agreement, will be required to make payments for travel, entertainment of
business associates and similar expenses. The Company will reimburse Employee
for all reasonable expenses of types authorized by the Company and incurred by
Employee in the performance of his duties hereunder. Employee will comply with
such budget limitations and approval and reporting requirements with respect to
expenses as the Company may establish from time to time.
(b) Moving Expenses. The Company shall (i) reimburse Employee for any
reasonable, out-of-pocket, adequately documented moving expenses incurred by
Employee
-2-
<PAGE>
in connection with the transfer of his residence to Houston, Texas and pay to an
Employee an amount of cash reasonably calculated by the Company to negate
adverse income tax consequences to employee of the foregoing reimbursement and
(ii) pay to Employee an amount equal to two months' salary (less required
federal income tax withholding) for miscellaneous relocation expense.
Section 6. TERMINATION. Employee's employment hereunder will commence on
the Commencement Date and continue until the end of the term specified in
Section 3 hereof and any renewals of such term, except that the employment of
Employee hereunder will terminate earlier in the following manner:
(a) Death or Disability. Immediately upon the death of Employee during
the term of his employment hereunder or, at the option of the Company, in the
event of Employee's disability, upon 30 days notice to Employee. Employee will
be deemed disabled if, as a result of Employee's incapacity due to physical or
mental illness, Employee shall have been absent from his duties with the Company
on a full-time basis for 120 consecutive business days;
(b) For Cause. For "Cause" immediately upon written notice by the
Company to Employee. For purposes of this Agreement, a termination will be for
Cause if: (i) Employee willfully and continuously fails to perform his duties
with the Company (other than any such failure resulting from incapacity due to
physical or mental illness), (ii) Employee willfully engages in gross misconduct
materially and demonstrably injurious to the Company or (iii) Employee has been
convicted of a felony;
(c) Failure of IPO. Automatically in the event that the IPO is not
consummated on or before June 30, 1995; or
(d) Termination Upon Anniversary. Upon the occurrence of any annual
anniversary of the date of this Agreement, in the event that one party has
provided to the other 60 days prior written notice of its election to terminate
this Agreement.
Employee will not be entitled to any severance pay or other compensation
upon termination of his employment pursuant to Subsections (a)-(c) or Section 3
or in the event that Employee voluntarily leaves the employment of the Company
except for any portion of his base salary accrued but unpaid from the last
monthly payment date to the date of termination and expense reimbursements under
Section 5 hereof for expenses incurred in the performance of his duties
hereunder prior to termination. In the event Employee's employment with the
Company is terminated by the Company for reasons other than any of the reasons
enumerated in Subsections 6(a)-(c) above, the Company will pay Employee, as
Employee's sole remedy in connection with such termination, severance pay in the
amount of Employee's monthly base salary at the rate in effect immediately
preceding the termination of Employee's employment for 12 months after the
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termination of Employee's employment (the "Separation Payment Period"), which
severance pay will be paid by the Company in equal monthly payments in arrears.
The Company will also pay Employee the portion of his base salary accrued but
unpaid from the last monthly payment date to the date of termination and expense
reimbursements under Section 5 hereof for expenses incurred in the performance
of his duties hereunder prior to termination.
Section 7. Effect of Termination on Options. Options held by the Employee
will automatically expire if the Employee's employment with the Company is
terminated for Cause as defined in Section 6(b) or if the Employee voluntarily
leaves the employment of the Company in breach of this Agreement. If Employee's
employment with the Company ends for any other reason than termination for
Cause, voluntary departure in breach of this Agreement, due to death or pursuant
to Section 6(d) above, such Employee's options will remain exercisable and will
vest and expire in accordance with the terms of the applicable option
agreements. If the Employee dies while employed by the Company his options shall
become fully exercisable on the date of his death and shall expire twelve months
thereafter. If this Agreement is terminated by the Company pursuant to Section
6(d) above, (i) the options that are vested as of the date of termination shall
remain exercisable for a period of twelve months after the date of termination
and shall expire at the end of such twelve month period and (ii) the options
that would have vested during the twelve months following termination shall vest
upon termination, remain exercisable for a period of twelve months after the
date of termination and expire at the end of such twelve month period. If this
Agreement is terminated by the Employee pursuant to Section 6(d) above, the
options that are vested as of the date of termination shall remain exercisable
for a period of twelve months after the date of termination and shall expire at
the end of such twelve month period.
Section 8. CHANGE IN CONTROL TERMINATION PAYMENT.
(a) Termination Payment.
(i) Amount. Notwithstanding anything to the contrary contained in
Section 7 hereof, in the event Employee's employment with the Company
terminates for any reason (other than death) within the twelve month
period following a Change In Control (as defined in subsection 8(b)
hereof) occurring after consummation of the IPO, the Company will pay
Employee a lump sum payment (the "Termination Payment") in cash equal
to 2.99 times the sum of the items in the following subsections (I)
through (VI):
(I) Employee's annual base compensation determined by reference to his base
salary in effect immediately prior to the Change In Control;
(II) the maximum bonus that Employee could receive under any
management incentive bonus plan of the Company for the year in which
the
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Change In Control occurs, assuming all incentives and financial
targets were achieved that are necessary to require payment of the
largest bonus amount by the Company to Employee; provided that the
maximum bonus under this subsection 8(a)(i)(II) will not be less than
60% of the amount specified under subsection 8(a)(i)(I) hereof;
(III) the amount of Employee's base salary accrued but unpaid from
the last monthly payment date to the date of termination;
(IV) expense reimbursement under Section 5 hereof for expenses
incurred in the performance of his duties hereunder prior to the
termination of his employment with the Company;
(V) any other benefit accrued but unpaid as of the date of such
termination; and
(VI) the estimated cost to Employee of obtaining medical, dental,
life and disability insurance coverage for a period of eighteen months
after the expiration of his continuation (COBRA) rights; provided that
such coverage will be substantially similar to the coverage provided
to Employee by the Company immediately prior to the Change In Control;
and provided further that this subsection 8(a)(i)(VI) will be applied
without regard to, and the amount payable under this subsection
8(a)(i)(VI) is in addition to, any continuation (COBRA) rights or
conversion rights under any plan provided by the Company, which rights
are not affected by any provision hereof.
(ii) Time for Payment; Interest. The Company will pay the Termination
Payment to Employee concurrent with Employee's termination of employment.
The Company's obligation to pay to Employee any amounts under this Section
8, including without limitation the Termination Payment and any Gross Up
Payment due under subsection (c), will bear interest at the maximum rate
allowed by law until paid by the Company, and all accrued and unpaid
interest will bear interest at the same rate, all of which interest will be
compounded daily.
(iii) Payment Authority. Any officer of the Company (other than
Employee) is authorized to issue and execute a check, initiate a wire
transfer or otherwise effect payment on behalf of the Company to satisfy
the Company's obligations to pay all amounts due to Employee under this
Section 8.
(iv) Termination. The Company's obligation to pay the Termination
Payment will not be affected by the manner in which Employee's employment
with the Company is terminated. Without limiting the generality of the
foregoing, the
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Company will be obligated to pay the Termination Payment and any Gross Up
Payment regardless of whether Employee's termination of employment is
voluntary, involuntary, for cause, without cause, in violation of any
employment agreement or other agreement in effect at the time of the Change
In Control, or due to Employee's retirement or disability. Employee's
notice of his termination of employment in connection with a Change In
Control may be made by any means.
(b) Change In Control. A Change In Control will be deemed to have occurred
for purposes hereof (i) when a change of stock ownership of the Company of
a nature that would be required to be reported in response to Item 6(e) of
Schedule 14A promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and any successor Item of a similar nature
has occurred; or (ii) upon the acquisition of beneficial ownership,
directly or indirectly, by any person (as such term is used in Sections
13(d) and 14(d)(2) of the Exchange Act) of securities of the Company
representing 33% or more of the combined voting power of the Company's then
outstanding securities; or (iii) a change during any period of two
consecutive years of a majority of the members of the Board of Directors of
the Company for any reason, unless the election, or the nomination for
election by the Company's shareholders, of each director was approved by a
vote of a majority of the directors then still in office who were directors
at the beginning of the period; provided that a Change In Control will not
be deemed to have occurred for purposes hereof with respect to any person
meeting the requirements of clauses (i) and (ii) of Rule 13d-1(b)(1)
promulgated under the Securities Exchange Act of 1934, as amended.
(c) Gross Up Payment.
(i) Excess Parachute Payment. If Employee incurs the tax (the "Excise
Tax") imposed by Section 4999 of the Internal Revenue Code of 1986 (the
"Code") on "excess parachute payments" within the meaning of Section
280G(b)(1) of the Code, the Company will pay to Employee an amount (the
"Gross Up Payment") such that the net amount retained by Employee, after
deduction of any Excise Tax on the excess parachute payment and any
federal, state and local income tax (together with penalties and interest)
and Excise Tax upon the payment provided for by this subsection (c)(i),
will be equal to the amount of the excess parachute payment.
(ii) Applicable Rates. For purposes of determining the amount of the
Gross Up Payment, Employee will be deemed to pay federal income taxes at
the highest marginal rate of federal income taxation in the calendar year
in which the Gross Up Payment is to be made and state and local income
taxes at the highest marginal rates of taxation in the state and locality
of Employee's residence on the
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date of his termination of employment, net of the maximum reduction in
federal income taxes that could be obtained from deduction of such state
and local taxes.
(iii) Determination of Gross Up Payment Amount. The determination of
whether the Excise Tax is payable and the amount thereof will be based upon
the opinion of tax counsel selected by Employee. If such opinion is not
finally accepted by the Internal Revenue Service (or state and local taxing
authorities), then appropriate adjustments to the Excise Tax will be
computed and additional Gross Up Payments will be made in the manner
provided by this subsection (c).
(iv) Time For Payment. The Company will pay the estimated amount of the
Gross Up Payment in cash to Employee concurrent with Employee's termination
of employment. Employee and the Company agree to reasonably cooperate in
the determination of the actual amount of the Gross Up Payment. Further,
Employee and the Company agree to make such adjustments to the estimated
amount of the Gross Up Payment as may be necessary to equal the actual
amount of the Gross Up Payment, which in the case of Employee will refer to
refunds of prior overpayments and in the case of the Company will refer to
makeup of prior underpayments.
(d) Arbitration. Any controversy or claim arising out of or relating to
this Section 8, or the breach thereof, will be settled exclusively by
arbitration in Dallas, Texas, in accordance with the Commercial Arbitration
Rules of the American Arbitration Association then in effect. Judgment upon
the award rendered by the arbitrator(s) may be entered in, and enforced by,
any court having jurisdiction thereof.
(f) No Right To Continued Employment. This Section 8 will not give Employee
any right of continued employment or any right to compensation or benefits
from the Company except the rights specifically stated herein.
(g) Exercise of Stock Options. Notwithstanding anything to the contrary
contained herein, all of Employee's options to purchase the Company's
Common Stock will become immediately exercisable upon a Change In Control.
Section 9. CONFIDENTIAL INFORMATION. Employee recognizes and acknowledges
that certain assets of the Company and its affiliates, including without
limitation information regarding customers, pricing policies, methods of
operation, proprietary computer programs, sales, products, profits, costs,
markets, key personnel, formulae, product applications, technical processes, and
trade secrets (hereinafter called "Confidential Information") are valuable,
special and unique assets of the Company and its affiliates. Employee will not,
during or after his term of employment, disclose any of the Confidential
Information to any person, firm, corporation,
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association, or any other entity for any reason or purpose whatsoever, directly
or indirectly, except as may be required pursuant to his employment hereunder,
unless and until such Confidential Information becomes publicly available other
than as a consequence of the breach by Employee of his confidentiality
obligations hereunder. In the event of the termination of his employment,
whether voluntary or involuntary and whether by the Company or Employee,
Employee will deliver to the Company all documents and data pertaining to the
Confidential Information and will not take with him any documents or data of any
kind or any reproductions (in whole or in part) of any items relating to the
Confidential Information.
Section 10. NONCOMPETITION. Until two years after termination of
Employee's employment hereunder, Employee will not (i) engage directly or
indirectly, alone or as a shareholder, partner, officer, director, employee or
consultant of any other business organization, in any business activities which
(A) relate to the acquisition and consolidation of medical practices (the
"Designated Industry") and (B) were either conducted by the Company prior to
Employee's termination or proposed to be conducted by the Company at the time of
such termination, (ii) divert to any competitor of the Company in the Designated
Industry any customer of Employee, or (iii) solicit or encourage any officer,
employee, or consultant of the Company to leave its employ for employment by or
with any competitor of the Company in the Designated Industry. The parties
hereto acknowledge that Employee's noncompetition obligations hereunder will not
preclude Employee from (i) owning less than 5% of the common stock of any
publicly traded corporation conducting business activities in the Designated
Industry or (ii) serving as an officer or employee of an entity engaged in the
healthcare industry whose business operations are not competitive with those of
the Company. Employee will continue to be bound by the provisions of this
Section 10 until their expiration and will not be entitled to any compensation
from the Company with respect thereto. If at any time the provisions of this
Section 10 are determined to be invalid or unenforceable, by reason of being
vague or unreasonable as to area, duration or scope of activity, this Section 10
will be considered divisible and will become and be immediately amended to only
such area, duration and scope of activity as will be determined to be reasonable
and enforceable by the court or other body having jurisdiction over the matter;
and Employee agrees that this Section 10 as so amended will be valid and binding
as though any invalid or unenforceable provision had not been included herein.
Section 11. CONSULTING. During the term of this Agreement, Employee may
devote up to 10% of his professional time or two (2) days per month to a
consulting business independent from the Company.
Section 12. GENERAL.
(a) Notices. Except as provided in Section 8(a) hereof, all notices
and other communications hereunder will be in writing or by written
telecommunication, and will be deemed to have been duly given if delivered
personally or if mailed by certified mail, return receipt requested or by
written telecommunication, to the relevant address set forth below, or to such
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other address as the recipient of such notice or communication will have
specified to the other party hereto in accordance with this Section 12(a):
If to the Company, to: with a copy to:
Physicians Resource Group, Inc. Jackson & Walker, L.L.P.
One Woodway Building 901 Main Street, Suite 6000
4801 Woodway Drive Dallas, Texas 75202
Suite 300 East Attn: James S. Ryan, III
Houston, Texas 77056 Fax No.: (214) 953-5822
Attn: Chief Executive Officer
Fax No.: (713) 965-0239
If to Employee, to:
Richard J. D'Amico
1155 Hammond Drive
Building A
Atlanta, GA 30328
(b) Withholding; No Offset. All payments required to be made by the
Company under this Agreement to Employee will be subject to the withholding of
such amounts, if any, relating to federal, state and local taxes as may be
required by law. No payment under this Agreement will be subject to offset or
reduction attributable to any amount Employee may owe to the Company or any
other person.
(c) Equitable Remedies. Each of the parties hereto acknowledges and
agrees that upon any breach by Employee of his obligations under any of Sections
9 and 10 hereof, the Company will have no adequate remedy at law, and
accordingly will be entitled to specific performance and other appropriate
injunctive and equitable relief.
(d) Severability. If any provision of this Agreement is held to be
illegal, invalid or unenforceable, such provision will be fully severable and
this Agreement will be construed and enforced as if such illegal, invalid or
unenforceable provision never comprised a part hereof; and the remaining
provisions hereof will remain in full force and effect and will not be affected
by the illegal, invalid or unenforceable provision or by its severance herefrom.
Furthermore, in lieu of such illegal, invalid or unenforceable provision, there
will be added automatically as part of this Agreement a provision as similar in
its terms to such illegal, invalid or unenforceable provision as may be possible
and be legal, valid and enforceable.
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(f) Waivers. No delay or omission by either party hereto in
exercising any right, power or privilege hereunder will impair such right, power
or privilege, nor will any single or partial exercise of any such right, power
or privilege preclude any further exercise thereof or the exercise of any other
right, power or privilege.
(g) Counterparts. This Agreement may be executed in multiple
counterparts, each of which will be deemed an original, and all of which
together will constitute one and the same instrument.
(h) Captions. The captions in this Agreement are for convenience of
reference only and will not limit or otherwise affect any of the terms or
provisions hereof.
(i) Reference to Agreement. Use of the words "herein," "hereof,"
"hereto" and the like in this Agreement refer to this Agreement only as a whole
and not to any particular subsection or provision of this Agreement, unless
otherwise noted.
(j) Binding Agreement. This Agreement will be binding upon and inure
to the benefit of the parties and will be enforceable by the personal
representatives and heirs of Employee and the successors of the Company. If
Employee dies while any amounts would still be payable to him hereunder, such
amounts will be paid to Employee's estate. This Agreement is not otherwise
assignable by Employee.
(k) Entire Agreement. This Agreement contains the entire
understanding of the parties, supersedes all prior agreements and understandings
relating to the subject matter hereof and may not be amended except by a written
instrument hereafter signed by each of the parties hereto.
(l) Governing Law. This Agreement and the performance hereof will be
construed and governed in accordance with the laws of the State of Texas,
without regard to its choice of law principles.
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EXECUTED as of the date and year first above written.
PHYSICIANS RESOURCE GROUP, INC.
By: _________________________________
Its: ________________________________
_____________________________________
Richard J. D'Amico
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EXHIBIT 10.39
EMPLOYMENT AGREEMENT
--------------------
Employment Agreement (the "Agreement"), dated October 29, 1995 by and
between Physicians Resource Group, Inc., a Delaware corporation (the "Company"),
and Jonathan R. Bond ("Employee").
In consideration of the mutual premises and conditions contained herein,
the parties hereto agree as follows:
Section 1. EMPLOYMENT. The Company hereby agrees to employ Employee, and
Employee hereby accepts employment by the Company, upon the terms and subject to
the conditions hereinafter set forth.
Section 2. DUTIES. Employee shall serve as the Senior Vice President of
the Company. Except as otherwise provided pursuant to Section 11 hereof,
Employee agrees to devote his full time and best efforts to the performance of
his duties to the Company. Employee will report to the Company's President and
Chief Executive Officer. Initially Employee's duties will include assistance
with acquisitions. It is anticipated that within six (6) months following the
Commencement Date (hereinafter defined), Employee's duties will be expanded to
include operational responsibilities.
Section 3. TERM. Except as otherwise provided in Section 6 hereof, the
term of this Agreement shall be for five years, commencing on the date of
employment as reflected in the employment records of the Company (the
"Commencement Date"), and shall be automatically renewed thereafter for
successive one year terms unless either party gives to the other written notice
of termination no fewer than sixty (60) days prior to the expiration of any such
term that it does not wish to extend this Agreement.
Section 4. COMPENSATION AND BENEFITS. In consideration for the services
of the Employee hereunder, the Company will compensate Employee as follows:
(a) Base Salary. Commencing on the Commencement Date, Employee shall be
entitled to receive a base salary of $155,000 per annum or as increased from
time to time by the Board of Directors of the Company.
(b) Bonus. Employee shall be eligible to receive an annual cash bonus in
an amount equal to up to 50% of his base salary in the event that the Company
experiences at least 20% or greater growth in earnings per share on a year to
year basis (calculated on a pro forma basis for the calendar year prior to
Company's first fiscal year of operations) in accordance with the following
schedule:
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Percentage Increase Bonus as a Percentage
in Earnings Per Share of Annual Base Salary
--------------------- ---------------------
20.0 - 22.5% 10%
Over 22.5 - 25.0% 20%
Over 25.0 - 27.5% 30%
Over 27.5 - 30.0% 40%
Over 30.0% 50%
Employee will be entitled to draw in advance against 75% of his maximum
"projected" annual bonus, on a quarterly basis, as determined based on Company
projections, and actual quarterly results, of operations. For purposes of this
Section 6(a), calculations of earnings per share for 1995 and 1996 shall be made
in accordance with Exhibit A attached hereto.
(c) Benefits. The Company shall grant Employee an option to purchase
95,000 shares of the Company's Common Stock, with the per share exercise price
being the closing sale price for the Company's Common Stock on the New York
Stock Exchange on the Commencement Date and on other terms that are consistent
with the terms of the stock option plans adopted by the Company pursuant to
which the options are granted and the provisions of Section 7 hereof. Such
options will vest over a period of five years. In addition, during the term of
this Agreement, Employee shall be entitled to participate in and receive
benefits under any and all employee benefit plans and programs which are from
time to time generally made available to the executive employees of the Company,
subject to approval and grant by the appropriate Company committee with respect
to programs calling for such approvals or grants.
Section 5. EXPENSES. It is acknowledged by the parties that Employee, in
connection with the services to be performed by him pursuant to the terms of
this Agreement, will be required to make payments for travel, entertainment of
business associates and similar expenses. The Company will reimburse Employee
for all reasonable expenses of types authorized by the Company and incurred by
Employee in the performance of his duties hereunder. Employee will comply with
such budget limitations and approval and reporting requirements with respect to
expenses as the Company may establish from time to time.
Section 6. TERMINATION. Employee's employment hereunder will commence on
the Commencement Date and continue until the end of the term specified in
Section 3 hereof and any renewals of such term, except that the employment of
Employee hereunder will terminate earlier in the following manner:
(a) Death or Disability. Immediately upon the death of Employee during the
term of his employment hereunder or, at the option of the Company, in the event
of
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Employee's disability, upon 30 days notice to Employee. Employee will be deemed
disabled if, as a result of Employee's incapacity due to physical or mental
illness, Employee shall have been absent from his duties with the Company on a
full-time basis for 120 consecutive business days;
(b) For Cause. For "Cause" immediately upon written notice by the Company
to Employee. For purposes of this Agreement, a termination will be for Cause
if: (i) Employee willfully and continuously fails to perform his duties with the
Company (other than any such failure resulting from incapacity due to physical
or mental illness), (ii) Employee willfully engages in gross misconduct
materially and demonstrably injurious to the Company or (iii) Employee has been
convicted of a felony;
(c) Termination Upon Anniversary. Upon the occurrence of any annual
anniversary of the Commencement Date, in the event that one party has provided
to the other 60 days prior written notice of its election to terminate this
Agreement.
Employee will not be entitled to any severance pay or other compensation
upon termination of his employment pursuant to Subsections (a) or (b) or Section
3 or in the event that Employee voluntarily leaves the employment of the Company
except for any portion of his base salary accrued but unpaid from the last
monthly payment date to the date of termination and expense reimbursements under
Section 5 hereof for expenses incurred in the performance of his duties
hereunder prior to termination. In the event Employee's employment with the
Company is terminated by the Company for reasons other than any of the reasons
enumerated in Subsections 6(a) or (b) above, the Company will pay Employee, as
Employee's sole remedy in connection with such termination, severance pay in the
amount of Employee's monthly base salary at the rate in effect immediately
preceding the termination of Employee's employment for 12 months after the
termination of Employee's employment (the "Separation Payment Period"), which
severance pay will be paid by the Company in equal monthly payments in arrears.
The Company will also pay Employee the portion of his base salary accrued but
unpaid from the last monthly payment date to the date of termination and expense
reimbursements under Section 5 hereof for expenses incurred in the performance
of his duties hereunder prior to termination.
Section 7. Effect of Termination on Options. Options held by the Employee
will automatically expire if the Employee's employment with the Company is
terminated for Cause as defined in Section 6(b) or if the Employee voluntarily
leaves the employment of the Company in breach of this Agreement. If Employee's
employment with the Company ends for any other reason than termination for
Cause, voluntary departure in breach of this Agreement, due to death or pursuant
to Section 6(c) above, such Employee's options will remain exercisable and will
vest and expire in accordance with the terms of the applicable option
agreements. If the Employee dies while employed by the Company his options shall
become fully exercisable on the date of his death and shall expire twelve months
thereafter. If this Agreement is terminated by the Company pursuant to Section
6(c) above, (i) the options that are vested as of the date of termination shall
remain exercisable for a period of twelve months after the date of termination
and shall expire at the end of
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such twelve month period and (ii) the options that would have vested during the
twelve months following termination shall vest upon termination, remain
exercisable for a period of twelve months after the date of termination and
expire at the end of such twelve month period. If this Agreement is terminated
by the Employee pursuant to Section 6(c) above, the options that are vested as
of the date of termination shall remain exercisable for a period of twelve
months after the date of termination and shall expire at the end of such twelve
month period.
Section 8. CHANGE IN CONTROL TERMINATION PAYMENT.
(a) Termination Payment.
(i) Amount. Notwithstanding anything to the contrary contained in
Section 7 hereof, in the event Employee's employment with the Company
terminates for any reason (other than death) within the twelve month period
following a Change In Control (as defined in subsection 8(b) hereof)
occurring after the Commencement Date, the Company will pay Employee a lump
sum payment (the "Termination Payment") in cash equal to 2.99 times the sum
of the items in the following subsections (I) through (VI):
(I) Employee's annual base compensation determined by reference to his base
salary in effect immediately prior to the Change In Control;
(II) the maximum bonus that Employee could receive under any
management incentive bonus plan of the Company for the year in which
the Change In Control occurs, assuming all incentives and financial
targets were achieved that are necessary to require payment of the
largest bonus amount by the Company to Employee; provided that the
maximum bonus under this subsection 8(a)(i)(II) will not be less than
60% of the amount specified under subsection 8(a)(i)(I) hereof;
(III) the amount of Employee's base salary accrued but unpaid from
the last monthly payment date to the date of termination;
(IV) expense reimbursement under Section 5 hereof for expenses
incurred in the performance of his duties hereunder prior to the
termination of his employment with the Company;
(V) any other benefit accrued but unpaid as of the date of such
termination; and
(VI) the estimated cost to Employee of obtaining medical, dental,
life and disability insurance coverage for a period of eighteen months
after
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the expiration of his continuation (COBRA) rights; provided that such
coverage will be substantially similar to the coverage provided to
Employee by the Company immediately prior to the Change In Control;
and provided further that this subsection 8(a)(i)(VI) will be applied
without regard to, and the amount payable under this subsection
8(a)(i)(VI) is in addition to, any continuation (COBRA) rights or
conversion rights under any plan provided by the Company, which rights
are not affected by any provision hereof.
(ii) Time for Payment; Interest. The Company will pay the Termination
Payment to Employee concurrent with Employee's termination of employment.
The Company's obligation to pay to Employee any amounts under this Section
8, including without limitation the Termination Payment and any Gross Up
Payment due under subsection (c), will bear interest at the maximum rate
allowed by law until paid by the Company, and all accrued and unpaid
interest will bear interest at the same rate, all of which interest will be
compounded daily.
(iii) Payment Authority. Any officer of the Company (other than
Employee) is authorized to issue and execute a check, initiate a wire
transfer or otherwise effect payment on behalf of the Company to satisfy
the Company's obligations to pay all amounts due to Employee under this
Section 8.
(iv) Termination. The Company's obligation to pay the Termination
Payment will not be affected by the manner in which Employee's employment
with the Company is terminated. Without limiting the generality of the
foregoing, the Company will be obligated to pay the Termination Payment and
any Gross Up Payment regardless of whether Employee's termination of
employment is voluntary, involuntary, for cause, without cause, in
violation of any employment agreement or other agreement in effect at the
time of the Change In Control, or due to Employee's retirement or
disability. Employee's notice of his termination of employment in
connection with a Change In Control may be made by any means.
(b) Change In Control. A Change In Control will be deemed to have occurred
for purposes hereof (i) when a change of stock ownership of the Company of a
nature that would be required to be reported in response to Item 6(e) of
Schedule 14A promulgated under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and any successor Item of a similar nature has occurred;
or (ii) upon the acquisition of beneficial ownership, directly or indirectly, by
any person (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange
Act) of securities of the Company representing 33% or more of the combined
voting power of the Company's then outstanding securities; or (iii) a change
during any period of two consecutive years of a majority of the members of the
Board of Directors of the Company for any reason, unless the election, or the
nomination for election by the Company's shareholders, of each director was
approved by a vote of a majority of the directors then still in office who were
directors at the beginning of the period; provided that
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a Change In Control will not be deemed to have occurred for purposes hereof with
respect to any person meeting the requirements of clauses (i) and (ii) of Rule
13d-1(b)(1) promulgated under the Securities Exchange Act of 1934, as amended.
(c) Gross Up Payment.
(i) Excess Parachute Payment. If Employee incurs the tax (the "Excise
Tax") imposed by Section 4999 of the Internal Revenue Code of 1986 (the
"Code") on "excess parachute payments" within the meaning of Section
280G(b)(1) of the Code, the Company will pay to Employee an amount (the
"Gross Up Payment") such that the net amount retained by Employee, after
deduction of any Excise Tax on the excess parachute payment and any
federal, state and local income tax (together with penalties and interest)
and Excise Tax upon the payment provided for by this subsection (c)(i),
will be equal to the amount of the excess parachute payment.
(ii) Applicable Rates. For purposes of determining the amount of the
Gross Up Payment, Employee will be deemed to pay federal income taxes at
the highest marginal rate of federal income taxation in the calendar year
in which the Gross Up Payment is to be made and state and local income
taxes at the highest marginal rates of taxation in the state and locality
of Employee's residence on the date of his termination of employment, net
of the maximum reduction in federal income taxes that could be obtained
from deduction of such state and local taxes.
(iii) Determination of Gross Up Payment Amount. The determination of
whether the Excise Tax is payable and the amount thereof will be based upon
the opinion of tax counsel selected by Employee. If such opinion is not
finally accepted by the Internal Revenue Service (or state and local taxing
authorities), then appropriate adjustments to the Excise Tax will be
computed and additional Gross Up Payments will be made in the manner
provided by this subsection (c).
(iv) Time For Payment. The Company will pay the estimated amount of
the Gross Up Payment in cash to Employee concurrent with Employee's
termination of employment. Employee and the Company agree to reasonably
cooperate in the determination of the actual amount of the Gross Up
Payment. Further, Employee and the Company agree to make such adjustments
to the estimated amount of the Gross Up Payment as may be necessary to
equal the actual amount of the Gross Up Payment, which in the case of
Employee will refer to refunds of prior overpayments and in the case of the
Company will refer to makeup of prior underpayments.
(d) Arbitration. Any controversy or claim arising out of or relating
to this Section 8, or the breach thereof, will be settled exclusively by
arbitration in Dallas, Texas, in accordance with the Commercial Arbitration
Rules of the American Arbitration
6
<PAGE>
Association then in effect. Judgment upon the award rendered by the
arbitrator(s) may be entered in, and enforced by, any court having jurisdiction
thereof.
(e) No Right To Continued Employment. This Section 8 will not give
Employee any right of continued employment or any right to compensation or
benefits from the Company except the rights specifically stated herein.
(f) Exercise of Stock Options. Notwithstanding anything to the contrary
contained herein, all of Employee's options to purchase the Company's Common
Stock will become immediately exercisable upon a Change In Control.
Section 9. CONFIDENTIAL INFORMATION. Employee recognizes and acknowledges
that certain assets of the Company and its affiliates, including without
limitation information regarding customers, pricing policies, methods of
operation, proprietary computer programs, sales, products, profits, costs,
markets, key personnel, formulae, product applications, technical processes, and
trade secrets (hereinafter called "Confidential Information") are valuable,
special and unique assets of the Company and its affiliates. Employee will not,
during or after his term of employment, disclose any of the Confidential
Information to any person, firm, corporation, association, or any other entity
for any reason or purpose whatsoever, directly or indirectly, except as may be
required pursuant to his employment hereunder, unless and until such
Confidential Information becomes publicly available other than as a consequence
of the breach by Employee of his confidentiality obligations hereunder. In the
event of the termination of his employment, whether voluntary or involuntary and
whether by the Company or Employee, Employee will deliver to the Company all
documents and data pertaining to the Confidential Information and will not take
with him any documents or data of any kind or any reproductions (in whole or in
part) of any items relating to the Confidential Information.
Section 10. NONCOMPETITION. Until two years after termination of
Employee's employment hereunder, Employee will not (i) engage directly or
indirectly, alone or as a shareholder, partner, officer, director, employee or
consultant of any other business organization, in any business activities which
(A) relate to the acquisition and consolidation of medical practices (the
"Designated Industry") and (B) were either conducted by the Company prior to
Employee's termination or proposed to be conducted by the Company at the time of
such termination, (ii) divert to any competitor of the Company in the Designated
Industry any customer of Employee, or (iii) solicit or encourage any officer,
employee, or consultant of the Company to leave its employ for employment by or
with any competitor of the Company in the Designated Industry. The parties
hereto acknowledge that Employee's noncompetition obligations hereunder will not
preclude Employee from (i) owning less than 5% of the common stock of any
publicly traded corporation conducting business activities in the Designated
Industry or (ii) serving as an officer or employee of an entity engaged in the
healthcare industry whose business operations are not competitive with those of
the Company. Employee will continue to be bound by the provisions of this
Section 10 until their expiration and will not be entitled to any compensation
from the Company with respect thereto. If at any time the provisions of this
Section 10 are determined to be invalid or unenforceable, by reason of being
vague or unreasonable as to area, duration or scope of activity, this Section 10
will be
7
<PAGE>
considered divisible and will become and be immediately amended to only such
area, duration and scope of activity as will be determined to be reasonable and
enforceable by the court or other body having jurisdiction over the matter; and
Employee agrees that this Section 10 as so amended will be valid and binding as
though any invalid or unenforceable provision had not been included herein.
Section 11. CONSULTING. During the term of this Agreement, Employee may
devote up to 10% of his professional time or two (2) days per month to a
consulting business independent from the Company.
Section 12. GENERAL.
(a) Notices. Except as provided in Section 8(a) hereof, all notices
and other communications hereunder will be in writing or by written
telecommunication, and will be deemed to have been duly given if delivered
personally or if mailed by certified mail, return receipt requested or by
written telecommunication, to the relevant address set forth below, or to
such other address as the recipient of such notice or communication will
have specified to the other party hereto in accordance with this Section
12(a):
If to the Company, to: with a copy to:
Physicians Resource Group, Inc. Jackson & Walker, L.L.P.
5005 Riverway Drive 901 Main Street, Suite 6000
Suite 400 Dallas, Texas 75202
Houston, Texas 77056 Attn: James S. Ryan, III
Attn: Chief Executive Officer Fax No.: (214) 953-5822
Fax No.: (713) 629-5780
If to Employee, to:
Jonathan R. Bond
7827 Idlewood Ln.
Dallas, Texas 75230
(b) Withholding; No Offset. All payments required to be made by
the Company under this Agreement to Employee will be subject to the
withholding of such amounts, if any, relating to federal, state and
local taxes as may be required by law. No payment under this Agreement
will be subject to offset or reduction attributable to any amount
Employee may owe to the Company or any other person.
(c) Equitable Remedies. Each of the parties hereto acknowledges
and agrees that upon any breach by Employee of his obligations under
any of Sections 9 and 10 hereof, the
8
<PAGE>
Company will have no adequate remedy at law, and accordingly will be
entitled to specific performance and other appropriate injunctive and
equitable relief.
(d) Severability. If any provision of this Agreement is held to be
illegal, invalid or unenforceable, such provision will be fully
severable and this Agreement will be construed and enforced as if such
illegal, invalid or unenforceable provision never comprised a part
hereof; and the remaining provisions hereof will remain in full force
and effect and will not be affected by the illegal, invalid or
unenforceable provision or by its severance herefrom. Furthermore, in
lieu of such illegal, invalid or unenforceable provision, there will
be added automatically as part of this Agreement a provision as
similar in its terms to such illegal, invalid or unenforceable
provision as may be possible and be legal, valid and enforceable.
(f) Waivers. No delay or omission by either party hereto in
exercising any right, power or privilege hereunder will impair such
right, power or privilege, nor will any single or partial exercise of
any such right, power or privilege preclude any further exercise
thereof or the exercise of any other right, power or privilege.
(g) Counterparts. This Agreement may be executed in multiple
counterparts, each of which will be deemed an original, and all of
which together will constitute one and the same instrument.
(h) Captions. The captions in this Agreement are for convenience
of reference only and will not limit or otherwise affect any of the
terms or provisions hereof.
(i) Reference to Agreement. Use of the words "herein," "hereof,"
"hereto" and the like in this Agreement refer to this Agreement only
as a whole and not to any particular subsection or provision of this
Agreement, unless otherwise noted.
(j) Binding Agreement. This Agreement will be binding upon and
inure to the benefit of the parties and will be enforceable by the
personal representatives and heirs of Employee and the successors of
the Company. If Employee dies while any amounts would still be payable
to him hereunder, such amounts will be paid to Employee's estate. This
Agreement is not otherwise assignable by Employee.
(k) Entire Agreement. This Agreement contains the entire
understanding of the parties, supersedes all prior agreements and
understandings relating to the subject matter hereof and may not be
amended except by a written instrument hereafter signed by each of the
parties hereto.
(l) Governing Law. This Agreement and the performance hereof will
be construed and governed in accordance with the laws of the State of
Texas, without regard to its choice of law principles.
9
<PAGE>
EXECUTED as of the date and year first above written.
PHYSICIANS RESOURCE GROUP, INC.
By: __________________________________
Emmett E. Moore
President and Chief Executive Officer
______________________________________
Jonathan R. Bond
10
<PAGE>
EXHIBIT 10.40
EMPLOYMENT AGREEMENT
--------------------
Employment Agreement (the "Agreement"), dated February 16, 1996 by and
between Physicians Resource Group, Inc., a Delaware corporation (the "Company"),
and Daniel Chambers ("Employee").
In consideration of the mutual premises and conditions contained herein,
the parties hereto agree as follows:
Section 1. EMPLOYMENT. The Company hereby agrees to employ Employee, and
Employee hereby accepts employment by the Company, upon the terms and subject to
the conditions hereinafter set forth.
Section 2. DUTIES. Employee shall serve as a Senior Vice President of the
Company. Employee agrees to devote his full time and best efforts to the
performance of his duties to the Company. Employee will report to the Company's
President and Chief Executive Officer.
Section 3. TERM. Except as otherwise provided in Section 6 hereof, the
term of this Agreement shall be for two (2) years, commencing on the date of
consummation of the Merger Agreement between the Company and Sun Valley
Acquisition Corporation (the "Commencement Date"), and shall be automatically
renewed thereafter for successive one year terms unless either party gives to
the other written notice of termination no fewer than sixty (60) days prior to
the expiration of any such term that it does not wish to extend this Agreement.
Section 4. COMPENSATION AND BENEFITS. In consideration for the services
of the Employee hereunder, the Company will compensate Employee as follows:
(a) Base Salary. Commencing on the Commencement Date, Employee shall
be entitled to receive a base salary of $125,000 per annum or as increased
from time to time by the Board of Directors of the Company.
(b) Bonus. Employee shall be eligible to receive an annual cash bonus
in an amount determined to be appropriate by the Compensation Committee of
the Board of Directors of the Company in accordance with the criteria for
such bonuses which may be adopted from time to time by said committee.
(c) Benefits. The Company shall grant Employee an option to purchase
70,000 shares of the Company's Common Stock, with the per share exercise
price being the closing sale price for the Company's Common Stock on the
New York Stock Exchange on the Commencement Date and on other terms that
are consistent with the terms of the stock option plans adopted by the
Company pursuant to which the options are granted and the
1
<PAGE>
provisions of Section 7 hereof. Such options will vest over a period of
five years. In addition, during the term of this Agreement, Employee shall
be entitled to participate in and receive benefits under any and all
employee benefit plans and programs which are from time to time generally
made available to the executive employees of the Company, subject to
approval and grant by the appropriate Company committee with respect to
programs calling for such approvals or grants.
Section 5. EXPENSES. It is acknowledged by the parties that Employee, in
connection with the services to be performed by him pursuant to the terms of
this Agreement, will be required to make payments for travel, entertainment of
business associates and similar expenses. The Company will reimburse Employee
for all reasonable expenses of types authorized by the Company and incurred by
Employee in the performance of his duties hereunder. Employee will comply with
such budget limitations and approval and reporting requirements with respect to
expenses as the Company may establish from time to time.
Section 6. TERMINATION. Employee's employment hereunder will commence on
the Commencement Date and continue until the end of the term specified in
Section 3 hereof and any renewals of such term, except that the employment of
Employee hereunder will terminate earlier in the following manner:
(a) Death or Disability. Immediately upon the death of Employee during
the term of his employment hereunder or, at the option of the Company, in
the event of Employee's disability, upon 30 days notice to Employee.
Employee will be deemed disabled if, as a result of Employee's incapacity
due to physical or mental illness, Employee shall have been absent from his
duties with the Company on a full-time basis for 120 consecutive business
days;
(b) For Cause. For "Cause" immediately upon written notice by the
Company to Employee. For purposes of this Agreement, a termination will be
for Cause if: (i) Employee willfully and continuously fails to perform his
duties with the Company (other than any such failure resulting from
incapacity due to physical or mental illness), (ii) Employee willfully
engages in gross misconduct materially and demonstrably injurious to the
Company or (iii) Employee has been convicted of a felony;
(c) Termination Upon Anniversary. Upon the occurrence of any annual
anniversary of the Commencement Date, in the event that one party has
provided to the other 60 days prior written notice of its election to
terminate this Agreement.
Employee will not be entitled to any severance pay or other compensation
upon termination of Employee's employment pursuant to Subsections (a) or (b) or
Section 3 or in the event that Employee voluntarily leaves the employment of the
Company either pursuant to Section 3 or Section 6(c) except for any portion of
Employee's base salary accrued but unpaid from the last payment date to the date
of termination and expense reimbursements under Section 5 hereof for
2
<PAGE>
expenses incurred in the performance of Employee's duties hereunder prior to
termination. In the event Employee's employment with the Company is terminated
by the Company other than pursuant to Section 3 or Subsections 6(a) or (b)
above, the Company will pay Employee, as Employee's sole remedy in connection
with such termination, severance pay in the amount of Employee's monthly base
salary at the rate in effect immediately preceding the termination of Employee's
employment for 12 months after the termination of Employee's employment (the
"Separation Payment Period"), which severance pay will be paid by the Company in
equal monthly payments in arrears. The Company will also pay Employee the
portion of his base salary accrued but unpaid from the last payment date to the
date of termination and expense reimbursements under Section 5 hereof for
expenses incurred in the performance of his duties hereunder prior to
termination.
Section 7. Effect of Termination on Options. Options held by the Employee
will automatically expire upon the date of termination of Employee's employment
if (i) the Employee's employment with the Company is terminated pursuant to
Section 3 or Section 6(b) or (ii) if the Employee voluntarily leaves the
employment of the Company either pursuant to Section 3 or Section 6(c). If the
Employee dies while employed by the Company, Employee's options shall become
fully exercisable on the date of Employee's death and shall expire twelve months
thereafter. If this Agreement is terminated by the Company pursuant to Section
6(c) above or for any other reason than termination for Cause, (i) the options
that are vested as of the date of termination shall remain exercisable for a
period of twelve months after the date of termination and shall expire at the
end of such twelve month period, (ii) the options that would have vested during
the twelve months following termination shall vest upon termination, remain
exercisable for a period of twelve months after the date of termination and
expire at the end of such twelve month period, and (iii) any other options shall
automatically expire.
Section 8. CHANGE IN CONTROL TERMINATION PAYMENT.
(a) Termination Payment.
(i) Amount. Notwithstanding anything to the contrary contained in
Section 7 hereof, in the event Employee's employment with the Company
terminates for any reason (other than death) within the twelve month
period following a Change In Control (as defined in subsection 8(b)
hereof) occurring after the Commencement Date, the Company will pay
Employee a lump sum payment (the "Termination Payment") in cash equal
to the sum of the items in the following subsections (I) through (VI):
(I) Employee's annual base compensation determined by reference to his base
salary in effect immediately prior to the Change In Control;
3
<PAGE>
(II) the amount of Employee's base salary accrued but unpaid
from the last payment date to the date of termination;
(III) expense reimbursement under Section 5 hereof for
expenses incurred in the performance of his duties hereunder prior
to the termination of his employment with the Company;
(IV) any other benefit accrued but unpaid as of the date of
such termination; and
(V) the estimated cost to Employee of obtaining medical,
dental, life and disability insurance coverage for a period of
eighteen months after the expiration of his continuation (COBRA)
rights; provided that such coverage will be substantially similar
to the coverage provided to Employee by the Company immediately
prior to the Change In Control; and provided further that this
subsection 8(a)(i)(VI) will be applied without regard to, and the
amount payable under this subsection 8(a)(i)(VI) is in addition
to, any continuation (COBRA) rights or conversion rights under any
plan provided by the Company, which rights are not affected by any
provision hereof.
(ii) Time for Payment; Interest. The Company will pay the Termination
Payment to Employee concurrent with Employee's termination of employment.
The Company's obligation to pay to Employee any amounts under this Section
8, will bear interest at the maximum rate allowed by law until paid by the
Company, and all accrued and unpaid interest will bear interest at the same
rate, all of which interest will be compounded daily.
(iii) Payment Authority. Any officer of the Company (other than
Employee) is authorized to issue and execute a check, initiate a wire
transfer or otherwise effect payment on behalf of the Company to satisfy
the Company's obligations to pay all amounts due to Employee under this
Section 8.
(iv) Termination. The Company's obligation to pay the Termination
Payment will not be affected by the manner in which Employee's employment
with the Company is terminated. Without limiting the generality of the
foregoing, the Company will be obligated to pay the Termination Payment
regardless of whether Employee's termination of employment is voluntary,
involuntary, for cause, without cause, in violation of any employment
agreement or other agreement in effect at the time of the Change In
Control, or due to Employee's retirement or disability. Employee's notice
of his termination of employment in connection with a Change In Control may
be made by any means.
4
<PAGE>
(b) Change In Control. A Change In Control will be deemed to have
occurred for purposes hereof (i) when a change of stock ownership of the
Company of a nature that would be required to be reported in response to
Item 6(e) of Schedule 14A promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and any successor Item of a similar
nature has occurred; or (ii) upon the acquisition of beneficial ownership,
directly or indirectly, by any person (as such term is used in Sections
13(d) and 14(d)(2) of the Exchange Act) of securities of the Company
representing 33% or more of the combined voting power of the Company's then
outstanding securities; or (iii) a change during any period of two
consecutive years of a majority of the members of the Board of Directors of
the Company for any reason, unless the election, or the nomination for
election by the Company's shareholders, of each director was approved by a
vote of a majority of the directors then still in office who were directors
at the beginning of the period; provided that a Change In Control will not
be deemed to have occurred for purposes hereof with respect to any person
meeting the requirements of clauses (i) and (ii) of Rule 13d-1(b)(1)
promulgated under the Securities Exchange Act of 1934, as amended.
(c) Arbitration. Any controversy or claim arising out of or relating
to this Section 8, or the breach thereof, will be settled exclusively by
arbitration in Dallas, Texas, in accordance with the Commercial Arbitration
Rules of the American Arbitration Association then in effect. Judgment upon
the award rendered by the arbitrator(s) may be entered in, and enforced by,
any court having jurisdiction thereof.
(d) No Right To Continued Employment. This Section 8 will not give
Employee any right of continued employment or any right to compensation or
benefits from the Company except the rights specifically stated herein.
Section 9. CONFIDENTIAL INFORMATION. Employee recognizes and acknowledges
that certain assets of the Company and its affiliates, including without
limitation information regarding customers, pricing policies, methods of
operation, proprietary computer programs, sales, products, profits, costs,
markets, key personnel, formulae, product applications, technical processes, and
trade secrets (hereinafter called "Confidential Information") are valuable,
special and unique assets of the Company and its affiliates. Employee will not,
during or after his term of employment, disclose any of the Confidential
Information to any person, firm, corporation, association, or any other entity
for any reason or purpose whatsoever, directly or indirectly, except as may be
required pursuant to his employment hereunder, unless and until such
Confidential Information becomes publicly available other than as a consequence
of the breach by Employee of his confidentiality obligations hereunder. In the
event of the termination of his employment, whether voluntary or involuntary and
whether by the Company or Employee, Employee will deliver to the Company all
documents and data pertaining to the Confidential Information and will not take
with him any documents or data of any kind or any reproductions (in whole or in
part) of any items relating to the Confidential Information.
5
<PAGE>
Section 10. NONCOMPETITION. Until one year after termination of
Employee's employment hereunder for any reason, Employee will not (i) engage
directly or indirectly, alone or as a shareholder, partner, officer, director,
employee or consultant of any other business organization, in any business
activities which (A) relate to the acquisition and consolidation of medical
practices (the "Designated Industry") and (B) were either conducted by the
Company prior to Employee's termination or proposed to be conducted by the
Company at the time of such termination, (ii) divert to any competitor of the
Company in the Designated Industry any customer of Employee, or (iii) solicit or
encourage any officer, employee, or consultant of the Company to leave its
employ for employment by or with any competitor of the Company in the Designated
Industry. The parties hereto acknowledge that Employee's noncompetition
obligations hereunder will not preclude Employee from (i) owning less than 5% of
the common stock of any publicly traded corporation conducting business
activities in the Designated Industry or (ii) serving as an officer or employee
of an entity engaged in the healthcare industry whose business operations are
not competitive with those of the Company. Employee will continue to be bound
by the provisions of this Section 10 until their expiration and will not be
entitled to any compensation from the Company with respect thereto. If at any
time the provisions of this Section 10 are determined to be invalid or
unenforceable, by reason of being vague or unreasonable as to area, duration or
scope of activity, this Section 10 will be considered divisible and will become
and be immediately amended to only such area, duration and scope of activity as
will be determined to be reasonable and enforceable by the court or other body
having jurisdiction over the matter; and Employee agrees that this Section 10 as
so amended will be valid and binding as though any invalid or unenforceable
provision had not been included herein.
Section 11. GENERAL.
(a) Notices. Except as provided in Section 8(a) hereof, all notices
and other communications hereunder will be in writing or by written
telecommunication, and will be deemed to have been duly given if delivered
personally or if mailed by certified mail, return receipt requested or by
written telecommunication, to the relevant address set forth below, or to
such other address as the recipient of such notice or communication will
have specified to the other party hereto in accordance with this Section
11(a):
If to the Company, to: with a copy to:
Physicians Resource Group, Inc. Jackson & Walker, L.L.P.
Three Lincoln Centre, Suite 1540 901 Main Street, Suite 6000
5430 LBJ Freeway Dallas, Texas 75202
Dallas, Texas 75240 Attn: James S. Ryan, III
Attn: Chief Executive Officer Fax No.: (214) 953-5822
6
<PAGE>
If to Employee, to:
Daniel Chambers
3110 Brock Grove
Kingwood, Texas 77345
(b) Withholding; No Offset. All payments required to be made by the
Company under this Agreement to Employee will be subject to the withholding
of such amounts, if any, relating to federal, state and local taxes as may
be required by law. No payment under this Agreement will be subject to
offset or reduction attributable to any amount Employee may owe to the
Company or any other person.
(c) Equitable Remedies. Each of the parties hereto acknowledges and
agrees that upon any breach by Employee of his obligations under any of
Sections 9 and 10 hereof, the Company will have no adequate remedy at law,
and accordingly will be entitled to specific performance and other
appropriate injunctive and equitable relief.
(d) Severability. If any provision of this Agreement is held to be
illegal, invalid or unenforceable, such provision will be fully severable
and this Agreement will be construed and enforced as if such illegal,
invalid or unenforceable provision never comprised a part hereof; and the
remaining provisions hereof will remain in full force and effect and will
not be affected by the illegal, invalid or unenforceable provision or by
its severance herefrom. Furthermore, in lieu of such illegal, invalid or
unenforceable provision, there will be added automatically as part of this
Agreement a provision as similar in its terms to such illegal, invalid or
unenforceable provision as may be possible and be legal, valid and
enforceable.
(e) Waivers. No delay or omission by either party hereto in exercising
any right, power or privilege hereunder will impair such right, power or
privilege, nor will any single or partial exercise of any such right, power
or privilege preclude any further exercise thereof or the exercise of any
other right, power or privilege.
(f) Counterparts. This Agreement may be executed in multiple
counterparts, each of which will be deemed an original, and all of which
together will constitute one and the same instrument.
(g) Captions. The captions in this Agreement are for convenience of
reference only and will not limit or otherwise affect any of the terms or
provisions hereof.
(h) Reference to Agreement. Use of the words "herein," "hereof,"
"hereto" and the like in this Agreement refer to this Agreement only as a
whole and not to any particular subsection or provision of this Agreement,
unless otherwise noted.
7
<PAGE>
(i) Binding Agreement. This Agreement will be binding upon and inure
to the benefit of the parties and will be enforceable by the personal
representatives and heirs of Employee and the successors of the Company. If
Employee dies while any amounts would still be payable to him hereunder,
such amounts will be paid to Employee's estate. This Agreement is not
otherwise assignable by Employee.
(j) Entire Agreement. This Agreement contains the entire understanding
of the parties, supersedes all prior agreements and understandings relating
to the subject matter hereof and may not be amended except by a written
instrument hereafter signed by each of the parties hereto.
(k) Governing Law. This Agreement and the performance hereof will be
construed and governed in accordance with the laws of the State of Texas,
without regard to its choice of law principles.
EXECUTED as of the date and year first above written.
PHYSICIANS RESOURCE GROUP, INC.
By: ________________________________
Emmett E. Moore
President and Chief Executive Officer
____________________________________
Daniel Chambers
8
<PAGE>
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 10-K, into the Company's previously filed Form S-8
Registration Statement File No. 33-93712, Form S-8 Registration Statement File
No. 33-93746, Form S-8 Registration Statement File No. 333-03460, Form S-8
Registration Statement File No. 333-03478, Form S-4 Registration Statement File
No. 333-00230, Form S-4 Registration Statement File No. 333-04406, Form S-4
Registration Statement File No. 333-09905, Form S-3 Registration Statement File
No. 333-10531, Form S-3 Registration Statement File No. 333-11607, Form S-8
Registration Statement File No. 333-15547, and Form S-4 Registration Statement
File No. 333-19185.
ARTHUR ANDERSEN LLP
Dallas, Texas
March 28, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements on
Form S-8, (File Nos. 33-93712, 33-93746, 333-03460, 333-03478 and 333-15547)
Form S-4, (File Nos. 333-00230, 333-4406, 333-09905 and 333-19185) and Form S-3
(File Nos. 333-10531 and 333-11607) of Physicians Resource Group, Inc. of our
report dated April 5, 1996, on our audits of the financial statements of
EyeCorp, Inc. as of December 31, 1995 and 1994 and for the years then ended
which report is included in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
Memphis, Tennessee
March 28, 1997
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<PAGE>
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 53,418
<SECURITIES> 0
<RECEIVABLES> 98,493
<ALLOWANCES> (20,161)
<INVENTORY> 6,768
<CURRENT-ASSETS> 144,643
<PP&E> 82,065
<DEPRECIATION> (17,881)
<TOTAL-ASSETS> 581,534
<CURRENT-LIABILITIES> 41,084
<BONDS> 125,000
0
0
<COMMON> 298
<OTHER-SE> 310,375
<TOTAL-LIABILITY-AND-EQUITY> 581,534
<SALES> 244,810
<TOTAL-REVENUES> 248,293
<CGS> 30,919
<TOTAL-COSTS> 233,351
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 1,304
<INCOME-PRETAX> 14,942
<INCOME-TAX> 7,770
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