<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) December 23, 1997
Physicians Resource Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware 1-13778 76-0456864
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
Three Lincoln Centre, Suite 1540, 5430 LBJ Freeway, Dallas, TX 75240
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (972) 982-8200
<PAGE> 2
Item 5. Other Events.
On December 23, 1997, a class action lawsuit was filed against
Physicians Resource Group, Inc., in the United States District Court for the
Northern District of Texas on behalf of all purchasers of Physicians Resource
Group, Inc. common stock between September 15, 1997 and March 27, 1997,
inclusive. A copy of the complaint is attached hereto as Exhibit 99.1 and
incorporated herein by reference.
On December 29, 1997, a class action lawsuit was filed against
Physicians Resource Group, Inc., in the United States District Court for the
Northern District of Texas on behalf of all purchasers of Physicians Resource
Group, Inc. common stock between June 17, 1997 and November 19, 1997, inclusive.
A copy of the complaint is attached hereto as Exhibit 99.2 and incorporated
herein by reference.
Item 7. Exhibits.
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
99.1 - Complaint - Class Action, Jeffrey Schiller, and
Diversified Investment Holdings LP, on behalf of
themselves and all others similarly situated,
plaintiffs, against Physicians Resource Group, Inc.,
Emmett E. Moore, Richard M. Owen, and John N.
Bingham, defendants, filed December 23, 1997, in the
U.S. District Court, Northern District of Texas.(1)
99.2 - Complaint - Class Action, Regina Peltz, on behalf of
herself and all others similarly situated, plaintiff,
against Physicians Resource Group, Inc. and Emmett E.
Moore, defendants, filed December 29, 1997, in the
U.S. District Court, Northern District of Texas.(1)
</TABLE>
- -------------------
(1) - Filed herewith.
<PAGE> 3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
PHYSICIANS RESOURCE GROUP, INC.
Date: January 2, 1998 By: /s/ RICHARD A. GILLELAND
----------------------------------
Richard A. Gilleland
President and Chief Executive Officer
<PAGE> 4
<TABLE>
<CAPTION>
INDEX TO EXHIBIT
Exhibit No. Description
<S> <C>
99.1 - Complaint - Class Action, Jeffrey Schiller, and
Diversified Investment Holdings LP, on behalf of
themselves and all others similarly situated,
plaintiffs, against Physicians Resource Group, Inc.,
Emmett E. Moore, Richard M. Owen, and John N.
Bingham, defendants, filed December 23, 1997, in the
U.S. District Court, Northern District of Texas.(1)
99.2 - Complaint - Class Action, Regina Peltz, on behalf of
herself and all others similarly situated, plaintiff,
against Physicians Resource Group, Inc. and Emmett E.
Moore, defendants, filed December 29, 1997, in the
U.S. District Court, Northern District of Texas.(1)
</TABLE>
<PAGE> 1
EXHIBIT 99.1
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF TEXAS
DALLAS DIVISION
<TABLE>
<S> <C> <C>
JEFFREY SCHILLER, and DIVERSIFIED ) Civ. Action No. 3-97CU3158-R
INVESTMENT HOLDINGS LP, On Behalf of )
Themselves and All Others Similarly Situated, ) COMPLAINT - CLASS ACTION
)
Plaintiffs, )
) COMPLAINT FOR VIOLATION OF
vs. ) THE SECURITIES EXCHANGE ACT
) OF 1934
PHYSICIANS RESOURCE GROUP, INC., )
EMMETT E. MOORE, RICHARD M. OWEN, )
RICHARD J. D'AMICO and JOHN N. BINGHAM, )
)
)
)
Defendants. )
)
) Plaintiffs Demand A
) Trial By Jury
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</TABLE>
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INTRODUCTION AND OVERVIEW
1. This is a class action on behalf of all persons who purchased
or otherwise acquired the stock of Physicians Resource Group, Inc. ("PRG" or
the "Company") between 9/15/95 and 3/27/97, inclusive (the "Class Period"),
alleging that defendants violated the Securities Exchange Act of 1934 (the
111934 Act") by engaging in a scheme and course of business that operated as a
fraud on the Class members. PRG is a provider of physician practice management
services to ophthalmic and optometric practices. During the Class Period, PRG
and its top officers falsified its reported profits while issuing false
statements about PRG's operations, its success in integrating acquisitions,
including the operating efficiencies and cost savings being and to be achieved
thereby, its ability to continue to make acquisitions and its future earnings
per share ("EPS") growth. These false statements drove PRG stock to an all-time
high of $34-3/8 per share in 5/96. PRG and its insiders (the "defendants") made
these false statements to artificially inflate PRG's stock price so that during
the Class Period: (i) PRG could sell 4.25 million new shares of stock to the
public at $28.50 per share raising $115 million; (ii) PRG could issue (sell)
over 14 million shares of stock to complete the acquisitions of over 150
ophthalmic and optometric practices during 1996-1997; and (iii) PRG could sell
new convertible debentures raising $125 million.
2. However, in late 1996 when PRG announced it would temporarily
slow the pace of its acquisitions, its stock declined sharply. Then, as 1997
unfolded, PRG's President, Chairman, and Chief Financial officer were all fired
as PRG revealed it would take millions in non-recurring special charges for
uncollectible
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accounts receivable and closing of physician practices resulting in a huge 3rdQ
1997 loss, that PRG would abandon its expansion/ acquisition program and not
acquire any more eye care physician practices and it had hired investment
banking firms to try to sell the Company. PRG's stock collapsed to as low as
$2-5/8 per share -- 93% below its Class Period high of $34-3/8 per share! Later,
certain PRG officers and directors admitted in meetings and interviews that:
o PRG had internal control weaknesses in its accounting system
and that it could not run a public company in a proper fashion. As a
result, PRG's 10-Qs were not reliable.
o PRG's corporate infrastructure had burdened the acquired eye
practices with poor financial structures, had forced mergers of
practices which were not practical and PRG had acquired too many
practices to manage.
o PRG had numerous infrastructure problems and the
infrastructure that was in place was not sufficient to service the
practices acquired.
o The integration of the practices had not in fact occurred at
all.
o The practices and PRG had been in chronic disputes over the
included and excluded expenses and PRG's business model had been a
failure.
o "The essential systems that were lacking were the financial
systems." "In particular [two large acquisitions] outstripped our
ability to provide resources at an adequate level." "Our reach
exceeded our grasp."
The chart set forth below shows this debacle:
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Physicians Resource Group, Inc.
June 23, 1995 - December 8, 1997
Daily Stock Prices - Acquisitions for PRG Stock / PRG Sales of Securities
[GRAPH]
3. PRG was founded to undertake what is known as a "consolidation
play," whereby small fragmented businesses are acquired and once under common
ownership, are integrated so that economies of scale and synergies of operation
are achieved through management expertise, increased capital, improved
information and accounting systems, operating efficiencies and synergies, etc.
PRG attempted its consolidation play by acquiring optometric and ophthalmic
practices throughout the United States. Ophthalmic and optometric practices are
types of medical practices which traditionally have been conducted on a sole
practitioner or small operation basis, although in recent years, other
companies also
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attempted to consolidate ophthalmology practices into larger regional or
national businesses.
4. However, in order to successfully pursue a consolidation play
on the scale -- and in the time frame PRG was attempting to consolidate large
numbers of eye doctor practices -- it was necessary for PRG to use a
combination of cash and its common stock as the currency to make the
acquisitions. This was because the cash flow from PRG's operations, even as PRG
expanded, was inadequate to fund the number of acquisitions of the size that it
was making. Thus, in order for PRG to be able to make the large number of
acquisitions it was attempting to make in rapid-fire fashion, it was absolutely
necessary that PRG's stock price be kept trading at a very high level. This was
because a high stock price was indispensable for PRG to be able to make those
acquisitions in as non-dilutive a manner as possible -- that is by issuing the
fewest number of shares possible to acquire eyecare practices so that the
acquisitions would not dilute PRG's EPS. A high stock price was also
indispensable to PRG raising the millions in additional capital it needed to
fund its ongoing operations and to help pay for the large number of acquisitions
it was making. However, PRG's insiders knew that its stock price would only
trade at high levels if PRG was presented to the investing public as not only
currently profitable, but a company that would achieve increased profitability
going forward and a business that had the management talent, experience and
expertise, as well as the information systems and internal financial and
accounting controls that were critical to successfully completing the large
number of acquisitions it was making and then integrating those acquired
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practices into its business, thereby achieving the economies of scale,
synergies of operation and EPS growth that were the sine qua non of PRG's
consolidation play.
5. PRG went public in 6/95. By pursuing its acquisition strategy,
over the next 18 months, PRG acquired over 150 eye care practices by issuing
over 14 million shares of PRG stock, while reporting current profitable
operations and forecasting future profitable growth. PRG assured investors
that, due to its management's experience and expertise and its effectively
operating accounting and management information and control systems, it was
successfully integrating the acquisitions it was making into its operations and
was on track to achieve both economies of scale and synergies of operations. As
a result, PRG's stock soared to a Class Period high of $34-3/8 per share in
5/96. While PRG's stock soared to these high levels, PRG sold 4.25 million new
shares of PRG common stock at $28.50 per share and $125 million in convertible
debentures to investors to raise $240 million in new capital in 1996 to help
fund its ongoing aggressive acquisition program.
6. Throughout the Class Period, defendants issued very positive
statements about PRG's business and acquisition program while reporting
profitable current operations and forecasting strong EPS growth for 1997 and
1998. Defendants described PRG as the "preeminent leader" in the eye care
industry, whose "dominant position created a barrier to entry." According to
them, PRG had "successfully integrated the 10 founding practices," its huge
EyeCorp acquisition "advances [the] overall Company strategy" and PRG was "ready
to move forward with [the] successful future
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integration" of EyeCorp. Consistently, defendants assured the securities
markets that PRG had a "strong" or "deep management team" of the kind
necessary to execute PRG's rapid pace of acquisitions and generate 25%-35% EPS
growth over the next three to five years. They represented that PRG provided its
acquired practices the "management expertise" and "sophisticated management
information systems" needed to develop those acquired practices into "efficient
networks". Defendants assured investors that "PRG has strong operational and
financial controls in place," as the "rapid growth ... reported by PRG requires
competent management and strong internal monitoring and controls [and] the
Company does have the proper controls in place to control its rapid growth
and to manage its current operations." Defendants also assured investors that
PRG did careful and thorough due diligence of acquisitions to assure that the
acquired practices were of the quality necessary to meet PRG's standards and so
that they could be successfully integrated into PRG's operations. This, they
said, left PRG "positioned to continue to take advantage of" the continuing
consolidation of the eye care industry, and to obtain operating cost
efficiencies "achieved through the consolidation of administrative office
management activities." When PRG acquired American Ophthalmic and EquiMed later
in 1996, it stated that they "bring us significant operational infrastructure,"
that "despite [PRG's] rapid acquisition pace, there is still room for growth,"
and that PRG had a "full," "healthy" "pipeline of acquisitions." Defendants
assured investors that PRG was "continuing to meet [its] financial objectives,"
despite its rapid acquisition pace and that "those acquisitions plus
operational synergies" would provide "EPS
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growth in the near-term." Thus, PRG had "outstanding-prospects" and was "on
track" to make its 1996-1997 EPS estimates and forecasts of $.75-$.82 and
$1.05-$1.15, respectively, as well as 25%-35% EPS growth over the next three to
five years.
7. In mid-11/96 when PRG reported its 3rdQ 1996 results, it
disclosed that efforts to close recent acquisitions and integrate their
operations with PRG's would "cause a delay in the execution of acquisitions
otherwise contemplated in the fourth quarter," but as a result the "Company
will be better positioned for the future." But then in 3/97 when PRG
announced its 4thQ 1996 results, it revealed that PRG would not be able to
maintain its pace of acquisitions going forward, that ongoing acquisitions
would not add to its EPS in 1997 and its 1997 EPS would be much lower than
earlier forecast. PRG admitted to analysts that instead of the
growth-by-acquisition strategy it had previously pursued, it would now focus on
a "same practice growth" strategy. As 1997 unfolded, PRG continued to reveal
very adverse information. While it initially blamed its worsening results on
"an expected seasonal downturn in earnings" and the "lower-than-expected
performance of the EquiMed practice," PRG admitted its 1997 EPS would be lower
than even the lowered expectations because its reduced 1997 acquisition program
was going "slower than anticipated" and it had to spend more money on
"operational infrastructures." Then, PRG's President, Richard Owen, its
Chairman, Emmett Moore, and its then Chief Financial Officer were all fired,
and PRG revealed it would take millions in special charges for uncollectible
accounts receivable and closing of physician practices that would result in a
huge loss in the 3rdQ 1997 (over $18 million) and that PRG was
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<PAGE> 9
completely abandoning its acquisition program and thus would not buy any more
eye care physician practices. PRG also announced that it had hired investment
banking firms to try to sell the Company because of PRG's inability to
stabilize or improve its operations. PRG's stock collapsed to as low as
$2-5/8 per share -- 93% below its Class Period high of $34-3/8 per share.
8. In late 11/97, during a meeting with doctors in Tampa, Florida
whose practices had been acquired by PRG, Richard D'Amico, a top PRG officer,
made a number of admissions demonstrating that PRG's prior statements during
the Class Period had been false, including the following:
o PRG admitted that it had internal control weaknesses in its
accounting and that it could not run a public company in such a
fashion.
o The PRG concept does not work. The practices that PRG acquired
had diminishing bottom lines, whereas the practices that were not
acquired by PRG had increased in the bottom line. Therefore, the
acquired practices were less profitable than they had been in the
past.
o PRG's model was flawed.
o PRG's 10-Qs are not reliable.
o PRG's corporate infrastructure had burdened the acquired eye
practices with poor financial structures, had forced mergers of
practices which were not practical, did not take into account the
geographical needs and trends and PRG had acquired too many practices
to manage.
o PRG also had numerous infrastructure problems. It could not
add any more practices to its current operation because the
infrastructure was not in place to service them. PRG had 150 practices
which it did not have enough personnel to service.
o PRG's accrual accounting created a nightmare, as PRG lacked
the necessary systems to convert the cash basis accounting used by the
local practices into accrual accounting needed for PRG's financial
statements.
o That, in actuality, PRG had become an accounting company and
it did not know how to do accounting. It had numerous
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mistakes on its payroll and benefits plan and the Company had grown
from 200 to 6,000 employees within 12 months without the
infrastructure or the accounting system necessary to handle this
explosive growth.
o PRG had done too many deals, too quickly.
o The integration of the practices had not occurred.
o PRG had tried to centralize too quickly and it had too many
practices.
o The practices and the Company had been in chronic disputes
over the included and excluded expenses and the accuracy of its
financial statements and its model had turned into a failure.
o PRG's model had demolished the entrepreneurial spirit of the
individual doctors in the practices and it had created a lack of
synergy and the practices had decreases in revenue with PRG in place,
rather than increased in revenue as they had historically. PRG
admitted that the corporate culture imposed on the individual
practices had made for disincentives for practice growth.
o PRG's accounting department was discontented, the turnover
rate was high and it lacked the necessary accounting infrastructure.
9. In an article published in the Review Of Ophthalmology in
12/97, PRG Board member Joseph Noreika admitted, "The essential systems that
were lacking were the financial systems." PRG Board member David Schulman, in
the same article, admitted, "In particular, the acquisition of Equimed and AOI
outstripped our ability to provide resources at an adequate level," "[o]ur
reach exceeded our grasp." Standard & Poor's also lowered its rating on PRG's
debt for a second time, to even lower "junk" levels, saying that "[A]fter
consummating a series of acquisitions, PRG had difficulty in integrating and
controlling operations," stressing PRG's "inability to adequately track and
recoup accounts receivable from affiliated practices."
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10. The picture of profits, growth and successful operations
painted by PRG and its top executives during the Class Period was
completely fictitious. In fact, PRG's business was out of control. Its
top executives had neither the expertise nor experience to successfully
pursue the kind of rapid-fire acquisition program PRG was undertaking.
As a result of their incompetence as well as PRG's complete lack of
adequate accounting and management information systems, PRG was unable
integrate into its operations the acquisitions it was making, its
accounts receivable (including receivables from affiliates) had
ballooned out of control as local physician practices refused to remit
monies to PRG and the profits reported by PRG to the investment
community were phony, created by illegal accounting manipulations and
not the result of solid or sustainable business operations. PRG's stock
price collapsed in 1997, ultimately falling to as low as $2-5/8 per
share -- a 93% decline from its Class Period high -- when it became
impossible for it to continue this facade. As a result of this
fraudulent scheme and course of business, public investors, as well as
the physicians whose eye care practices PRG acquired, have been cheated
out of hundreds of millions of dollars, which losses can only be
remedied through this action.
11. The positive statements made by defendants during the
Class Period about PRG's business, operations and its acquisitions and
their impact upon the Company's business, and PRG's EPS prospects, were
each false and misleading when made. The true facts, which were then
available to defendants but defendants failed to disclose, included:
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(a) Contrary to defendants' representations, in order
to keep up with its rapid pace of acquisitions, PRG did virtually no
due diligence prior to making an acquisition and, in the case of the
EquiMed/EquiVision acquisition, never obtained separate accurate and
complete financial statements of EquiMed's EquiVision division, prior
to completing the acquisition.
(b) PRG could not generate accurate monthly financial
statements for the individual eye practices it supposedly managed,
which generated persistent disputes with the practices, including a
refusal by practices to pay disputed receivables to PRG.
(c) PRG's internal accounting department was
overwhelmed and thus ineffective. It did not have adequate personnel,
systems or controls to monitor PRG's existing operations, let alone
cope with the increasing number of acquisitions. As a result, PRG could
not generate accurate financial statements for its local practices or
the parent public company.
(d) PRG's financial statements were completely
unreliable and false for the reasons detailed in Sections 80-95.
(e) PRG was unable to successfully convert the cash
basis accounting systems used by the local eye care practices it
acquired to the accrual accounting methods necessary for PRG to prepare
accrual financial statements conforming with both Generally Accepted
Accounting Principles ("GAAP") and SEC regulations.
(f) PRG's business model was fundamentally flawed and
did not work as it was not possible for PRG to assemble the
practices it was acquiring into an efficient network which was
profitable and generated accurate financial information.
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(g) The acquisition program was out of control; PRG had
neither the personnel nor the systems to make as many system
acquisitions as it was making
(h) Many of PRG's acquired practices were incurring
decreasing revenues rather than growth, due to the lack of synergies
and efficiencies, as well as the ongoing disputes between the practices
and PRG.
(i) Many of the practice management agreements entered
into between PRG and the local practices were illegal because they
amounted to illegal fee-splitting or violations of anti-kickback or
patient-brokering laws of certain states, including Florida.
(j) Contrary to its representations of a strong and
experienced management team, PRG lacked the management personnel and
management information systems and internal accounting controls
necessary to permit it to integrate the large number of acquisitions it
was pursuing and still adequately manage its existing business.
(k) PRG did not have, as represented, a seasoned and experienced
management team as, in fact, none of its top managers had ever successfully
implemented an acquisition program anywhere near the scope of that being
undertaken by PRG, nor had they successfully managed a business enterprise as
large as PRG would be after the EyeCorp, American Ophthalmic and EquiMed
acquisitions.
(l) PRG had undertaken its vastly accelerated
acquisition program without performing a feasibility study to determine
whether or not it would be capable of acquiring and then integrating
into its operations the large number of hospital and laboratory
facilities it was acquiring and thus defendants knew it
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that PRG would encounter serious problems in integrating those
acquisitions.
(m) The growth in PRG's existing practices was slowing,
due in part to PRG management's distraction by the demands of pursuing
the accelerated acquisition program and attempting to integrate several
acquired businesses into PRG's existing operations at the same time; as
a result, revenue growth in PRG's core businesses was slowing, which was
putting pressure on PRG's ability to achieve EPS growth.
(n) The businesses being acquired by PRG had internal
accounting and management information systems which were incompatible
with those utilized by PRG in its core business and, notwithstanding
claims to the contrary, PRG did not have software available which would
permit those incompatible systems to efficiently interact with or
communicate with its existing accounting and management information
systems. As a result, defendants knew that the process of integrating
the acquired businesses into PRG's operations would take much longer
and be much more expensive than was being publicly presented and that
as a result, after each of these acquisitions took place, PRG was
encountering serious and persistent difficulties in obtaining the type
of accurate business and accounting information it needed from the
acquired entities in order to successfully oversee or manage those
businesses, let alone integrate them into PRG's operations.
(o) PRG did not have a business plan by which it would
integrate its acquired operations into its business in a way to achieve
economies of scale or generate the type of accurate
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information on a timely basis that PRG management needed to oversee
those acquired businesses and manage them in a profitable manner.
(p) As a result of the foregoing, PRG was not
experiencing the acquisition synergies, efficiencies or cost savings
represented by the PRG defendants, but rather was having difficulty
integrating the operations of acquired practices, which was leading to
increased costs which would hurt PRG's 4thQ 1996 results and its 1997
results as well.
(q) As a result of the inability of PRG's top managers to
pay attention to this part of the business due to the demands of
pursuing PRG's accelerated acquisition program and the problems they
were encountering in attempting to integrate the acquired businesses
into PRG'S operations, PRG was required to cut prices and engage in
promotional activities in that part of its business, which was
adversely impacting PRG's EPS growth.
(r) As a result of the foregoing, there was no basis for
the assurances that the acquisitions contained the potential for
significant economies or synergies of operations or that they would be
accretive or non-dilutive to PRG's results during 1997 as, in truth,
defendants actually knew these acquisitions would badly hurt PRG's
results from operations.
(s) As a result of the foregoing, defendants' forecasts
that PRG would achieve EPS of $1.05-$1.18 in 1997, were known by
defendants to be false, as such EPS were impossible to achieve in light
light of these undisclosed problems.
(t) As a result of the foregoing, the forecasts of 25%-35%
EPS growth for PRG over the next three to five years were known by
defendants to be false, as they were aware of the adverse
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information set forth above which contradicted these forecasts and made
them impossible to achieve.
12. The graph below demonstrates the price action of PRG's
stock during the Class Period as defendants: (i) completed the
acquisition of several companies by issuing (selling) over 14 million
shares of PRG stock in acquisitions; and (ii) sold $4.25 million shares
of PRG common stock and $125 million in PRG convertible subordinated
debentures. The graph also illustrates the collapse of PRG's stock
price as the previously concealed facts about PRG's businesses emerged:
Physicians Resource Group, Inc.
June 23,1995 - December 8,1997
Daily Stock Prices - Acquisitions for PRG Stock/PRG Sales of Securities
[graph]
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JURISDICTION AND VENUE
13. Jurisdiction exists pursuant to Section 27 of the 1934 Act, 15
U.S.C. Section 78aa, and 28 U.S.C. Section 1331. The claims asserted arise
under Sections 10(b) and 20(a) of the 1934 Act, 15 U.S.C. Sections 78j(b) and
78t(a), and Rule 10b-5.
14. Venue is proper in this District pursuant to Section 27 of the
1934 Act and 28 U.S.C. Section 1391(b). Many of the acts giving rise to the
violations complained of occurred in this District.
15. Defendants used the instrumentalities of interstate commerce, the
U.S. mails and the facilities of the international securities market.
THE PARTIES
16. (a) Plaintiff Jeffrey Schiller purchased or otherwise
acquired 500 shares of PRG stock on 1/28/97 at $15-5/8 per share and 500 shares
on 2/13/97 at $13-1/4 per share and was damaged thereby.
(b) Plaintiff Diversified Investment Holdings LP purchased
or otherwise acquired 177,599 shares of PRG stock on 12/5/96, 5,000 shares on
2/4/97 and 2,716 shares on 2/25/97 and was damaged thereby.
17. Defendant PRG is headquartered in Dallas, Texas. PRG began
operations in 1995. It provides physician practice management services to
ophthalmic and optometric practices and is a single specialty physician
practice management company. PRG attempts to develop integrated eye care
delivery systems through affiliations with locally prominent eye care practices
in
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selected geographic markets across the United States. PRG acquires the
operating assets of these practices and tries to develop the practices into
comprehensive eye care networks, purportedly by providing management expertise,
marketing, information systems, capital resources and ancillary services such
as ambulatory surgery centers ("ASCs") and optical dispensaries. As of 3/21/97,
PRG provided management services to 151 practices with 414 ophthalmologists and
223 optometrists at 387 locations in 25 states. PRG's stock was traded in an
efficient market on the New York Stock Exchange throughout the Class Period.
18. (a) Defendant Emmett E. Moore ("Moore") was, until he was
fired in 11/97, Chief Executive Officer and Chairman of the Board of Directors
of PRG. Because of Moore's position, he knew the adverse non-public information
about the business of PRG, as well as its finances, markets and present and
future business prospects via access to internal corporate documents (including
the Company's operating plans, budgets and forecasts and reports of actual
operations compared thereto), conversations and connections with other
corporate officers and employees, attendance at management and Board of
Directors' meetings and committees thereof and via reports and other
information provided to him in connection therewith. During the Class Period,
Moore participated in the issuance of false and/or misleading statements,
including the preparation of false and/or misleading press releases,
dissemination of false statements during
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presentations at securities conferences, analyst conference calls and/or during
individual conversations with securities analysts.
(b) Defendant Richard M. Owen ("Owen") was, until he was
fired in the fall of 1997, President, Chief Financial Officer and a director of
PRG. Because of Owen's position, he knew the adverse non-public information
about the business of PRG, as well as its finances and present and future
business prospects via access to internal corporate documents (including the
Company's operating plans, budgets and forecasts and reports of actual
operations compared thereto), conversations and connections with other
corporate officers and employees, attendance at management and Board of
Directors' meetings and committees thereof and via reports and other
information provided to him in connection therewith. During the Class Period,
Owen participated in the issuance of false and/or misleading statements,
including the preparation and/or review of the false and/or misleading private
placement memoranda, and the preparation and/or review of false press releases
and presentations to analysts.
(c) Defendant Richard J. D'Amico ("D'Amico") was, at all
times relevant hereto, Executive Vice President and Chief Administrative
officer of PRG. Because of D'Amico's position, he knew the adverse non-public
information about the business of PRG, as well as its finances and present and
future business prospects via access to internal corporate documents (including
the Company's operating plans, budgets and forecasts and reports of actual
operations compared thereto), conversations and
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connections with other corporate officers and employees, attendance at
management meetings and via reports and other information provided to him in
connection therewith. During the Class Period, D'Amico participated in the
issuance of false and/or misleading statements, including the preparation of
false and/or misleading press releases, dissemination of false statements
during presentations at securities conferences, analyst conference calls and/or
during individual conversations with securities analysts.
(d) Defendant John N. Bingham ("Bingham") was Controller
and Vice President and Chief Accounting Officer of PRG. Because of Bingham's
position, he knew the adverse non-public information about the business of PRG,
as well as its finances and present and future business prospects via access to
internal corporate documents (including the Company's operating plans, budgets
and forecasts and reports of actual operations compared thereto), conversations
and connections with other corporate officers and employees, attendance at
management meetings and via reports and other information provided to him in
connection therewith. During the Class Period, Bingham participated in the
issuance of false and/or misleading statements, including the preparation
and/or review of the false and/or misleading private placement memoranda and
assisting in the preparation of false press releases and oral presentations to
analysts.
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<PAGE> 21
(e) The defendants identified in paragraph 18(a)-(d) are
referred to herein as the Individual Defendants.
CONTROLLING PERSONS
19. Until he was fired, defendant Moore by reason of his executive
and Board positions was a controlling person of PRG and had the power and
influence, and exercised the same, to cause PRG to engage in the conduct
complained of. PRG controlled each of the Individual Defendants.
KNOWLEDGE; GROUP-PUBLISHED DOCUMENTS; DUTY
TO DISCLOSE OR ABSTAIN FROM STOCK SALES
20. During the Class Period, each Individual Defendant occupied a
position that made him privy to non-public information concerning PRG. Because
of this access, each of these defendants actually knew the adverse facts
specified herein and that they were being concealed. Notwithstanding their duty
to refrain from causing PRG to sell stock or other securities while it was in
possession of material, non-public information concerning PRG, these defendants
caused PRG to sell over 18 million shares of the Company's stock and $125
million of subordinated debentures, thus benefiting from their fraudulent
scheme and course of business. PRG's press releases, corporate reports to
shareholders and filings with the Securities and Exchange Commission ("SEC")
were each group-published documents for which each defendant is equally
responsible.
21. Each of the defendants is liable for making false and
misleading statements, and for participating in a fraudulent scheme and course
of business that operated as a fraud on
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<PAGE> 22
purchases of PRG stock and damaged Class members in violation of the federal
securities laws. All of the defendants pursued a common goal, i.e., inflating
the price of PRG stock by making false and misleading statements and concealing
material adverse information. The scheme and course of business was designed to
and did: (i) deceive the investing public, including plaintiffs and other Class
members into buying PRG stock at artificially inflated prices and physicians
into selling their eye care practices to PRG; (ii) artificially inflate the
price of PRG stock during the Class Period; (iii) cause plaintiffs and other
members of the Class to purchase or otherwise acquire PRG stock at inflated
prices; and (iv) permit PRG to benefit economically from the fraudulent scheme
and course of business.
DEFENDANTS' MOTIVE FOR PARTICIPATION
IN THE WRONGFUL COURSE OF CONDUCT
22. PRG and PRG's top officers had strong motives to inflate the
price of PRG stock. They wanted PRG to pursue an accelerated acquisition
program, as growth by acquisition provided the only way that defendants could
foster the perception in the business community that PRG was a "growth"
company, thereby ensuring a substantially inflated price for PRG stock. Since
PRG did not have the cash necessary to pay for the acquisitions the defendants
wanted to make, it had to pay for them by issuing PRG stock or selling PRG
stock or securities related to its stock to raise cash, to pay for part of the
acquisition prices. The higher PRG's stock price, the fewer shares had to be
issued. A high stock price was also important to each of the
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<PAGE> 23
defendants as a material part of each defendant's net worth consisted of PRG
stock. Inflating the price of PRG stock was key to defendants' scheme, as doing
so enabled defendants to:
(a) sell 4.25 million shares of new PRG stock to public investors
to raise $115 million in new capital from their illegal conduct;
(b) effect the sale of $125 million of PRG convertible debentures
to investors to benefit from their illegal conduct; and
(c) issue (sell) 14+ million shares of PRG common stock to make
acquisitions, but by artificially inflating the price of that stock they
reduced the number of PRG shares to be issued in connection with PRG's
acquisitions, thus lessening the dilutive impact of the acquisitions.
BACKGROUND TO THE CLASS PERIOD
23. PRG was founded to undertake what is known as a "consolidation
play," whereby small fragmented businesses are acquired and once under common
ownership, are integrated so that economies of scale and synergies of operation
are achieved through management expertise, increased capital, improved
information and accounting systems, operating efficiencies and synergies, etc.
PRG attempted its consolidation play by acquiring optometric and ophthalmic
practices throughout the United States. Ophthalmic and optometric practices are
types of medical practices which traditionally have been conducted on a sole
practitioner or small operation basis, although in recent
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<PAGE> 24
years, other companies also attempted to consolidate ophthalmology practices
into larger regional or national businesses.
24. However, in order to successfully pursue a consolidation play
on the scale -- and in the time frame -- PRG was attempting it was necessary
for PRG to use a combination of cash and its common stock as the currency to
make the acquisitions. This was because the cash flow from PRG's operations,
even as PRG expanded, was inadequate to fund the number of acquisitions of the
size that it was making. Thus, in order for PRG to be able to make the large
number of acquisitions it was attempting to make in rapid-fire fashion, it was
absolutely necessary that PRG's stock price be kept trading at a very high
level. This was because a high stock price was indispensable for PRG to be able
to make those in as non-dilutive a manner as possible -- that is by issuing
the fewest number of shares possible to acquire other opthomology practices and
companies so that the acquisitions would not dilute PRG's EPS power. A high
stock price was also indespensable to PRG raising the millions in additional
capital it needed to fund its ongoing operations and to help pay for the large
number of acquisitions it was making. However, PRG's insiders knew that its
stock price would only trade at high levels if PRG could be presented to the
investing public as not only currently profitable, but a company that would
achieve increased profitability going forward and a business that had the
management talent, experience and expertise, as well as
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<PAGE> 25
the information systems and internal financial and accounting controls that
were critical to successfully completing the large number of acquisitions it
was making and then integrating those acquired practices into its business,
thereby achieving the economies of scale, synergies of operation and EPS growth
that were the sine qua non of PRG's consolidation play.
25. PRG went public in 6/95 at $14 per share. By rapidly pursuing
its acquisition strategy, in the next 18 months, PRG made numerous acquisitions,
issuing in connection therewith millions of shares of its stock, all the while
reporting current profitable operations, while forecasting future profitable
growth, assuring investors that due to its management expertise and its
efficiently operating accounting and management information and control
systems, it was successfully integrating the acquisitions it was making into
its operations and achieving both economies of scale and synergies of
operations.
FALSE STATEMENTS MADE BY DEFENDANTS
FOR THE PURPOSE OF SELLING PRG SECURITIES
AT INFLATED PRICES DURING THE CLASS PERIOD
26. During and throughout the Class Period, PRG issued a "Fact
Sheet" to the public, including the securities markets the financial press and
potential acquisitions, describing PRG, which stated:
Physicians Resource Group, Inc. is the nation's leading
physician practice management services provider focused exclusively on
ophthalmic and optometric practices.
PRG develops integrated eye care delivery systems through
affiliations with locally prominent eye care practices. . . . The
Company provides its affiliates
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<PAGE> 26
with management expertise [and] . . . information systems. . . . This
strategy allows PRG networks to offer lower cost, coordinated,
comprehensive eye care service programs in each market with increased
quality of care.
* * *
Through an aggressive operations acquisition strategy[,] PRG
is building a comprehensive network of eye care affiliates [that] . . .
enables cost reduction strategies, providing network affiliates a
competitive advantage in their markets.
Benefits to Affiliated Practices
PRG's acquisition and consolidation strategy helps its
affiliated practices take advantage of:
o operating cost efficiencies
* * *
o Sophisticated management information systems
* * *
OPERATING EFFICIENCIES
* * *
As PRG provides management and administrative support, the
amount of time eye care professionals must spend on distracting
administrative matters is severely reduced. This enables them to
dedicate more time to the growth of their professional practices.
At the local level, cost efficiencies are achieved through the
consolidation of administrative office management activities and the
sharing of facilities . . . thereby reducing and more efficiently
utilizing personnel.
At a national level, physician practices benefit from . . .
information systems technology . . . .
27. On 9/18/95, PRG announced it would acquire EyeCorp for about
6.9 million shares of PRG stock. According to Moore, the transaction "clearly
makes us the leader in the eye care
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<PAGE> 27
industry" and would boost PRG's earnings by 8%-10% in 1996, or by even a higher
amount if PRG realized certain "expected benefits" from the transaction. These
statements were false because:
o PRG's decision to acquire the EyeCorp practices was motivated
by PRG's determination to acquire any practice it could, regardless of
the quality or strategic value of the practice because PRG's
management knew the only way PRG could grow was by acquisition.
o Many of the EyeCorp practices were "dogs," practices that
would not earn money for PRG. The only use for many of these practices
would have been as referral sources.
o There was no strategic fit between the various EyeCorp
practices, and they did not comprise a profitable mix of different
kinds of practices.
o There was no geographic fit among the EyeCorp practices; they
were scattered all over.
o There were at least $1 million stale receivables at the
EyeCorp practices as the EyeCorp doctors carried receivables on their
books as assets for much longer than is proper.
28. On 9/26-27/95, PRG made a presentation to the Smith Barney
Physicians Practice Management and Health Care Technology Conference at the
Plaza Hotel in New York City. Moore, D'Amico, Owen and Bingham appeared and
presented for PRG to the securities analysts, portfolio and money managers,
institutional investors, brokers and stock traders. At their presentation and
in separate "break out" sessions, Moore, D'Amico, Owen and Bingham stated:
o PRG's acquisition program was moving forward successfully.
o PRG had the management expertise and experience and management
information and accounting systems and controls necessary to permit it
to continue its growth-by-acquisition program.
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<PAGE> 28
o PRG had the personnel and expertise to do the necessary due
diligence on acquisitions to assure it was acquiring only
high-quality, profitable practices that met its standards and could be
quickly integrated into PRG.
o PRG was successfully integrating the eye doctor practices it
had acquired to date and was not encountering any difficulties with
respect to systems integration that would adversely impact its ability
to continue its acquisition program.
o The EyeCorp merger significantly advanced PRG's overall
corporate strategy and positioned it to move forward with the
successful integration of that acquisition and to continue its
acquisitions at the current or an accelerated pace.
o PRG was forecasting EPS growth of 25%-35% over the next
several years including 1997 EPS of $1.10-$1.18.
29. On 2/14/96, PRG made a presentation to the Smith Barney 1996
Health Care Conference at the Plaza Hotel in New York City. Moore, D'Amico,
Owen and Bingham appeared and presented for PRG to the securities analysts,
portfolio and money managers, institutional investors, brokers and stock
traders. At their presentation and in separate "break out" sessions, Moore,
D'Amico, Owen and Bingham stated:
o PRG's acquisition program was moving forward successfully.
o PRG had the management expertise and experience and management
information and accounting systems and controls necessary to permit it
to continue its growth-by-acquisition program.
o PRG had the personnel and expertise to do the necessary due
diligence on acquisitions to assure it was acquiring only
high-quality, profitable practices that met its standards and could be
quickly integrated into PRG.
o PRG was successfully integrating the eye doctor practices it
had acquired to date and was not encountering any difficulties with
respect to systems integration that would adversely impact its ability
to continue its acquisition program.
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<PAGE> 29
o The EyeCorp merger significantly advanced PRG's overall corporate
strategy and positioned it to move forward with the successful integration
of that acquisition and to continue its acquisitions at the current or an
accelerated pace.
o PRG was forecasting EPS growth of 25%-35% over the next several
years including 1997 EPS of $1.10-$1.18.
30. On 2/20/96, PRG announced the acquisition of 10 separate eye care
practices in Texas, Nevada, Arizona, Oklahoma and Ohio for cash of $7.7 million
and 1,439,611 shares of PRG stock worth $31 million. The PRG release stated:
Emmett E. Moore, Chairman, President and CEO, stated, "The recently
completed acquisitions significantly strengthen our position in the
Houston (4 additional practices) and Las Vegas (2 additional practices)
markets and represent substantial entries into new markets in Arizona,
Oklahoma and northern Ohio. Achieving further market penetration
through follow-up acquisitions, as we have in Houston and Las Vegas,
is the first step in executing our Company's strategy of market
consolidation. We look forward to the challenge of integrating these
markets and assisting our physicians in providing high quality, cost
effective eye care services and marketing such services to managed
care."
The release also stated:
Physicians Resource Group, Inc., is the nation's leading provider
of physician practice management services to ophthalmic and optometric
practices. PRG develops integrated eye care delivery systems through
affiliations with locally prominent physician practices in strategic
geographic areas across the United States. PRG acquires the operating
assets of these practices and develops the practices into eye care
networks by providing management expertise marketing [and] information
systems . . . .
31. On 3/18/96, PRG announced the closing of the EyeCorp acquisition in
a release that stated:
Emmett E. Moore, Chairman, President and Chief Executive Officer
of PRG, stated "The closing of the
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<PAGE> 30
EyeCorp merger significantly advances our overall company
strategy, our acquisition pipeline and our presence in a number
of key markets . . . . We are . . . ready to move forward with
the successful future integration of the two companies as well
as additional acquisitions."
Physicians Resource Group, Inc. is the nation's leading provider
of physician practice management services to ophthalmic and
optometric practices. PRG develops integrated eye care delivery
systems through affiliations with locally prominent physician
practices in strategic geographic areas 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 [and] information systems . . . .
32. On 3/18/96, Smith Barney issued a report on PRG, Harris and Heston.
The report was based on and repeated information provided Harris and Heston by
Moore, D'Amico, Owen and Bingham. Moore, D'Amico, Owen and Bingham also
reviewed and approved this report before it was issued, knew it would be
released to the public and become part of the total mix of information
affecting PRG stock. The Smith Barney report forecast 1996 and 1997 EPS of
$.81 and $1.10 for PRG, and a 33% five-year EPS growth rate and stated:
Following the pooling-of-interests acquisition of its
largest competitor, EyeCorp Inc., and the February
acquisitions of 10 other leading eye care practices,
PRG has emerged as the leading consolidator in the
fragmented, $30 billion eye care market. . . .
As a result of the EyeCorp merger and 10
additional acquisitions, PRG is now the largest manager
of eye care practices in the country, with 70
practices, 17 ambulatory surgery centers and 256 eye
care professionals located throughout 13 states. From
a purely financial perspective, these transactions were
extremely positive for PRG. In addition to tripling
the current revenue run rate of PRG from $50-$55
million to around $165 million, we expect the deals to
add around $0.05 to 1996 EPS. Our new 1996 estimate is
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<PAGE> 31
$0.81 . . . . Furthermore, given the strength of the acquired practices we are
initiating a 1997 EPS estimate of $1.10, indicating continued 35%-plus growth
off of our increased 1996 base.
Strategic Benefits Of The Transactions
In addition to the relatively straightforward financial accretion of the
deals, we wish to highlight several positive strategic implications:
PRG has been able to remove its largest competitor from the acquisition
environment. This reality should have a double benefit for PRG. First, one less
significant acquiror will be bidding for each potential acquisition, which
should be positive for acquisition pricing. Second, the full prestige of
EyeCorp and its affiliated professionals will now be behind PRG. While it is
still too early to detect any change in pricing, PRG has definitely seen an
increase in volume of practices that want to talk about selling since the
EyeCorp deal. When selling their practices, ophthalmologists and optometrists
- -- like anyone else -- want to feel that they are going with the winner. After
the recent transactions, PRG is clearly the leader in the eye care market.
While the company keeps its pipeline to 40-50 high-quality active discussions
in the interest of focus, the backlog of potential deals has increased
dramatically over the past several months.
PRG is achieving critical mass in several key markets. In addition to
simply growing through acquisitions, a central strategy of PRG is the creation
of integrated eye care networks in its markets. As a result of the recent
transactions, PRG is well on its way to achieving scale in key markets such as
Houston/Galveston (six practices with 34 professionals), southern California
(three practices with 34 professionals) and Las Vegas (three practices with 14
professionals) . . . . Once PRG achieves scale in a market, it is able to
begin rationalizing the delivery of care, achieving meaningful cost savings and
adding key services such as ambulatory surgery centers and optical
dispensaries. Significantly, PRG believes that when it begins to achieve a
presence in a market, it can grow revenues at 30% in that market over a two to
four year period.
* * *
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<PAGE> 32
PRG has validated its strategy -- Investors will remember that PRG
was formed as the first public consolidator of the eye care market
through an initial public offering and concurrent acquisition of 10
founding practices. While the company became an instant industry leader,
the lack of operating history was a cause of concern to many investors.
We believe that the recent transactions serve as an emphatic validation of
both the company's strategy and its management's ability to find and
complete attractive acquisitions on both a grand and an individual scale.
Starting from a base of $0, management has built a company with a revenue
run rate of $165 million and a clear leadership in its attractive market in
approximately nine months. With a full acquisition pipeline and several
strong existing markets, we believe that PRG is well positioned to continue
its rapid growth over the next several years.
* * *
Our New Model Assumptions
Our 1997 EPS estimate is $1.10, indicating 35%-plus growth over 1996.
Our long-term growth estimate remains 30%-35%, skewed toward 35% or
more in the near term.
33. On 3/19/96, Volpe Welty issued a report, written by Rosenbluth and
Dunn, based on and repeating information provided them by Moore, D'Amico, Owen
and Bingham, who reviewed and approved this report before it was issued and
knew it would be released to the public and become part of the total mix of
information affecting PRG stock. The Volpe Welty report forecast 1996 and 1997
EPS of $.82 and $1.14, respectively, for PRG and a 35% three-year growth rate,
and stated:
Investment Thesis
Physicians Resource Group (PRG) is the market leader in the
rapidly consolidating eye care services segment of the physician
practice management industry. Since its IPO in June of 1995, the
Company has exceeded our expectations. Specifically, PRG has
completed one very large acquisition and a series of smaller ones that
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<PAGE> 33
have caused us to double our revenue estimates for 1996.
These results reinforce our view that Physicians Resource Group will capture a
dominant share of this growing market. With a FY97 EPS estimate of $1.14 and
an estimated long-term growth rate of 35%, our one-year price target is $40.
* * *
On March 18, 1996, PRG completed a merger with EyeCorp, Inc., one of the
largest independent eye care physician practice management companies, comprised
of about 130 professionals in 50 practices. When added to PRG's 126 eye care
professionals in 20 practices (following the recent acquisition of 10
practices), the combined entity is the largest physician practice management
company in the United States focused solely on eye care. Memphis-based EyeCorp
expands PRG's reach from seven to thirteen states. As a result of the merger,
we have doubled our revenue estimates for FY96 from what we had anticipated
following the Company's initial public offering.
* * *
Other Developments. Though perhaps overshadowed by the EyeCorp merger, other
significant developments have occurred since the IPO. First and foremost, PRG
has successfully integrated the 10 "founding" practices acquired concurrent
with the IPO. As a result of this success, Q3:95 results were in line with our
$13.3 million revenue estimate and $0.12 EPS estimate.
In addition, despite the distractions of the EyeCorp merger, the Company in
December announced definitive agreements to acquire 10 additional eye care
practices, comprised of 56 ophthalmologists and optometrists. These
acquisitions, which were completed on February 15, 1996, add to the Company's
presence in Las Vegas and Houston, and allow it to enter new markets in
Phoenix, Oklahoma, and northern Ohio.
* * *
[W]e are confident that the completion of the EyeCorp merger, the recent
closure of the acquisition of additional practices, and the resumption of other
acquisition talks should Place PRG squarely on track to make our estimates.
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<PAGE> 34
PRG: The Nation's Leading Provider of Integrated Eye Care Services
PRG is building a national practice management company focused on
providing integrated eye care delivery systems. The Company enters
new markets by acquiring the practices of premier eye care services
groups throughout the United States. Once a group is established in
a given market, the Company expands within the market by (i) adding
new services, (ii) recruiting additional physicians and optometrists,
and (iii) consolidating other practices in the local market.
* * *
Finally, the Company's acquisition pipeline is large, and there is
limited competition -- Equivision is the only publicly traded
competitor. With its strong management team and access to capital, we
think PRG's prospects are outstanding.
34. On 3/26/96, PRG issued a release reporting its 4thQ 1995 and
1995 results which stated:
The Company reported revenues for the three-month period ended
December 31, 1995 of $13.1 million and net income of $1.3 million or
$0.13 per share.
The merger with EyeCorp, the second largest practice management company
in the eye care field, establishes PRG as the preeminent leader in our
industry. . . . Emmett E. Moore, the Company's Chairman, President and
Chief Executive Officer [said] "We believe PRG is positioned to
continue to take advantage of the rapid changes that are occurring in
the way health care in the United States is being delivered."
PRG is the nation's leading provider of physician practice
management services to ophthalmic and optometric practices. PRG
develops integrated eye care delivery systems through affiliations
with locally prominent physician practices in strategic geographic
areas across the U.S. PRG acquires the operating assets of these
practices and develops the practices into comprehensive eye care
networks by providing management expertise, marketing [and]
information systems . . . .
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<PAGE> 35
35. On 3/26/96, PRG held a telephonic conference call for securities
analysts, money and portfolio managers, large PRG shareholders, institutional
investors, brokers and stock traders. During the conference call and in
follow-up one-on-one conversations with participants, Moore, D'Amico, Owen and
Bingham stated:
o PRG's acquisition program was moving forward successfully.
o PRG had the management expertise and experience and management
information and accounting systems and controls necessary to permit it
to continue its growth-by-acquisition program.
o PRG had the personnel and expertise to do the necessary due
diligence on acquisitions to assure it was acquiring only high-quality,
profitable practices that met its standards and could be quickly
integrated into PRG.
o PRG was successfully integrating the eye doctor practices it had
acquired to date and was not encountering any difficulties with respect
to systems integration that would adversely impact its ability to
continue its acquisition program.
o The closing of the EyeCorp merger significantly advanced PRG's
overall corporate strategy and positioned it to move forward with the
successful integration of that acquisition and to continue its
acquisitions at the current or an accelerated pace.
o PRG was forecasting EPS growth of 25%-35% over the next several
years and 1997 EPS of $1.10-$1.18.
36. On 3/26/96 Smith Barney issued a report on PRG, written by Harris,
that repeated information provided in the 3/26 conference call and follow-up
conversations. The report forecast 1996 and 1997 EPS of $.81 and $1.10,
respectively, and a 33% five-year EPS growth rate. The report also stated:
EPS for the quarter were $0.13, in line with our estimate, as the
company earned $1.3 million on $13.1 in sales. Net income for the year
was $1.7 million, or $0.28 per share.
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<PAGE> 36
* * *
We believe that investors should view these recent results as
positive indicators that PRG -- while in the midst of significant
changes -- has been able to keep its operations on-track.
37. On 3/29/96, Smith Barney issued a report on PRG, written by
Harris, that repeated information provided in the 3/26 conference call and
follow-up conversations. The report forecast 1996 and 1997 EPS of $.81 and
$1.10, respectively, and a 33% five-year EPS growth rate. The report also
stated:
PRG has emerged as the leading consolidator in the fragmented, $30
billion eye care market, with roughly 70 practices, 17 ambulatory
surgery centers and more than 250 eye care professionals located
throughout 13 states.
* * *
PRG's recent M&A activity should enable the company to realize at
least three major benefits, in addition to the relatively
straightforward financial accretion of the deals:
* * *
(2) PRG is achieving critical mass in several key markets, allowing
them to create integrated eye care networks. Once PRG achieves scale
in a market, it is able to begin rationalizing the delivery of care,
achieving meaningful cost savings and adding key services such as
ambulatory surgery centers and optical dispensaries. Significantly,
PRG believes that when it has a presence in a market, it can grow
revenues at 30% in that market over a two- to four-year period.
(3) PRG has expanded into new, attractive markets as the acquisition
of EyeCorp and the 10 additional new products has added five new
states and several new markets to PRG's portfolio.
Moore, D'Amico, Owen and Bingham reviewed and approved this report before it
was issued.
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<PAGE> 37
38. On 4/22/96, PRG issued a release announcing the acquisition of
eight separate eye care providers located in various cities. The release
stated:
Emmett E. Moore, Chairman, President and CEO, stated, "These
practices complement our position in the Houston, Cincinnati and
California markets and represent substantial entries into new markets
in the Dallas and north Texas areas as well as South Carolina.
Achieving market penetration and regional geographic coverage through
follow-up acquisitions is the first step in executing our Company's
strategy of market consolidation. Entering into new markets by
simultaneously acquiring a number of practices, as we have in
the Dallas and north Texas area by acquiring five (5) practices over
past two weeks, represents an exciting opportunity for the Company.
We are able to achieve substantial market penetration as we enter the
market, thereby accelerating the execution of our strategy.
39. On 5/10/96, PRG issued a release reporting its 1stQ 1996 results,
which stated:
The Company reported revenues for the three month period ended
March 31, 1996 of $36.2 million . . . . Exclusive of the
non-recurring merger expenses, income would have been $2.2 million or
$0.13 per share on approximately 17.2 million shares.
PRG is the nation's leading provider of physician practice
management services to ophthalmic and optometric practices. PRG
develops integrated eye care delivery systems through affiliations
with locally prominent physician practices in strategic geographic
areas 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 [and]
information systems . . . .
40. As PRG's stock soared higher in the first half of 1996 due to
PRG's repeated bombarding of the marketplace with favorable statements and
forecasts -- climbing from $18-$19 at the beginning of the year to its all-time
high of $34-3/8 by
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<PAGE> 38
5/2/96, the defendants moved quickly to exploit this inflation in PRG's stock
price by completing a huge secondary offering.
41. During the first two weeks of 5/97, Moore, D'Amico, Owen and
Bingham went on a Roadshow to New York, Boston, Chicago and San Francisco to
meet with institutional investors, money and portfolio managers, investors and
stockbrokers to discuss PRG's business and prospects. The purpose of the
Roadshow was, by presenting very positive information about PRG, to create
strong demand for PRG's stock on the upcoming offering. They said:
o PRG's acquisition program was moving forward successfully and
ahead of schedule.
o PRG had the management expertise and experience and management
information and accounting systems and controls necessary to permit it
to continue its growth-by-acquisition program.
o PRG had the personnel and expertise to do the necessary due
diligence on acquisitions to assure it was acquiring, only
high-quality, profitable practices that met its standards and could be
quickly integrated into PRG.
o PRG was successfully integrating the eye doctor practices it had
acquired to date and was not encountering any difficulties with
respect to systems integration that would adversely impact its ability
to continue its acquisition program.
o The closing of the EyeCorp merger significantly advanced PRG's
overall corporate strategy and positioned it to move forward with the
successful integration of that acquisition and to continue its
acquisitions at the current or an accelerated pace.
o PRG was well on its way to achieving scale of operations in key
markets such as Houston/Galveston, Southern California and Las Vegas,
which would lead to significant cost savings in those areas in the
near term.
o PRG was forecasting EPS growth of 25%-35% over the next several
years and 1997 EPS of $1.10-$1.18.
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<PAGE> 39
42. On 5/14/96, PRG completed a 5,750,000 share secondary offering at
$28-1/2 per share -- with 1.5 million shares sold by certain selling
shareholders, while PRG sold 4,250,000 shares, raising $115 million in needed
capital. The release announcing this offering again said:
PRG is the nation's leading provider of physician practice management
services to ophthalmic and optometric practices. PRG develops integrated
eye care delivery systems through affiliations with locally prominent
physician practices in strategic geographic areas 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 (and] information systems . . . .
43. On 5/21/96, Alex. Brown & Sons issued a report on PRG, authored by
Eleanor Kerns and Nancy Ochers, using and repeating information given to them
by Moore, D'Amico, Owen and Bingham during the PRG secondary offering process,
including the Roadshow. Moore, D'Amico, Owen and Bingham reviewed the report
before it was issued and approved it, knowing it would be released to the
public and become part of the total mix of information impacting PRG stock. The
report forecast 1996 and 1997 EPS for PRG of $.80 and $1.09, respectively, and
stated:
-- We believe that Physicians Resource Group has the management team and
market opportunity to increase earnings 30% Per year over the next 3-5
years.
* * *
Key Investment Consideration
Industry trends favor physicians joining groups and groups seeking
corporate partners. The market forces that have been driving physicians
into group practice and driving group practices to seek a corporate
partner are intensifying.
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<PAGE> 40
$18 billion unpenetrated market niche within Physician Practice
Management Industry.
PRG's dominant position creates barrier to entry.
PRG is now the dominant competitor in the eye care sector. We believe that
the size and power of the franchise PRG has created will act as a
competitive advantage to attaching new groups and as a barrier for
companies trying to enter the niche.
* * *
Earnings growth generated primarily through acquisition in the near term.
Same-market revenues growth for PRG is now is 4-6%, mostly based on
increases in volume and services added. At present PRG is primarily
focused on making acquisitions to increase market penetration and
establish positions in desirable markets. We believe PRG will remain
primarily focused on growth through acquisition through 1996.
Long-term earnings growth generated by providing care with more efficient
use of physician resources and margin improvement.
We expect that in 1997, PRG will also focus on bringing efficiencies to
the acquired groups; resulting in margin improvement.
Strong Management Team
PRG has a deep management team . . . .
44. On 6/7/96, PRG issued a release announcing the acquisition of four
additional eye care practices for cash and 411,678 shares of PRG stock. The
release stated:
Emmett E. Moore, Chairman, President and CEO stated, "These practices
complement our existing strong position in the southern California market
and represent significant entries into new markets in central Florida,
South Carolina and New Jersey.
* * *
-39-
<PAGE> 41
PRG is the nation's leading provider of physician practice management
services to ophthalmic and optometric practices . . . . PRG acquires the
operating assets of these practices and develops the practices into
comprehensive eye care networks by providing management expertise,
marketing [and] information systems . . . .
45. On 6/11/96, Alex. Brown issued a report on PRG, authored by Eleanor
Kerns and Nancy Ochers, using and repeating information given them by Moore,
D'Amico, Owen and Bingham during the PRG secondary offering process, including
the Roadshow, and in discussions with them in recent days. Moore, D'Amico Owen
and Bingham reviewed the report before it was issued and approved it, knowing
it would be released to the public and become part of the total mix of
information impacting PRG stock. The report forecast the following quarterly
EPS for PRG for 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
---------------
<S> <C> <C>
Q1 .13A .26E
Q2 .15E .26E
Q3 .22E .28E
Q4 .28E .31E
</TABLE>
The report also stated:
We believe that the size and power of the franchise Physicians Resource
Group has created will act as a competitive advantage to attracting new
groups and as a barrier for companies trying to enter the niche.
* * *
Acquisition strategy
Physicians Resource Group enters a market by acquiring the leading
specialists (by reputation, not necessarily by size) in the market. It
then attracts other practitioners to practice with the preeminent group.
It is focused on building market dominance and continuity of care. It
generally does not acquire a turnaround or physician retirement situation.
During the due diligence period, the Potential acquisition must
-40-
<PAGE> 42
generally sign a "no shop" agreement for 4-6 months, thereby negotiating
exclusively with Physicians Resource Group. The due diligence process
includes an independent Medicare practice assessment to assure that
practice utilization patterns of elderly fall into acceptable guidelines
and standards.
* * *
Physicians Resource Group has a deep management team
. . . .
46. On 7/2/96, PRG announced the acquisition of the assets of five eye
care practices located in Lakeland, Florida; Houston, Texas; Paducah, Kentucky;
Kingman, Arizona (Phoenix area) and Rockford, Illinois (Chicago area) for cash
and 552,812 shares of PRG common stock. The release stated:
Emmett E. Moore, Chairman, President and CEO stated, "We are
extremely pleased with the strategic value of this latest round of
acquisitions. We believe they strengthen our current positions in Houston,
Phoenix, Kentucky, and Illinois and also represent significant first steps
in the large Florida and South Texas markets. Interest in PRG continues to
be high and our acquisition program is addressing this demand while
accomplishing our overall strategy."
47. On 7/11/96, Smith Barney issued a report on PRG, authored by Harris,
using and repeating information given to Harris by Moore, D'Amico, Owen and
Bingham during the PRG secondary offering process, including the Roadshow.
Moore, D'Amico, Owen and Bingham reviewed the report before it was issued and
approved it, knowing it would be released to the public and become part of the
total mix of information impacting PRG stock. The report forecast 1996 and 1997
EPS for PRG of $.81 and $1.10, respectively, and stated:
PRG's recent M&A activity should enable the company to realize at
least three major benefits, in
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<PAGE> 43
addition to the relatively straightforward financial accretion of the
deals: (1) PRG has been able to remove its largest competitor from the
acquisition environment. Thus, one less significant acquiror will be
bidding for each potential acquisition, and the full prestige of EyeCorp
and its affiliated professionals will now be behind PRG. This should be
positive for acquisition pricing. (2) PRG is achieving critical mass in
several key markets, allowing it to create integrated eye care networks.
Once PRG achieves scale in a market, it is able to begin rationalizing the
delivery of care, achieving meaningful cost savings and adding key
services such as ambulatory surgery centers and optical dispensaries.
Significantly, PRG believes that when it has a presence in a market, it
can grow revenues at 30% in that market over a two- to four-year period.
(3) PRG has expanded into new, attractive markets, as the acquisition of
EyeCorp and the 10 additional new practices has added five new states and
several new markets to the company's portfolio.
48. On 8/14/96, PRG issued a release reporting its 2ndQ 1996 results and
the acquisition of more eye care practices, which stated:
Physicians Resource Group, Inc. (NYSE: PRG) today reported net revenues
for the three month period ended June 30, 1996 of approximately $46.6
million and net income of approximately $3.3 million or $0.16 per share.
The Company also today announced that it has entered into definitive
agreements to acquire the assets of, and provide management services to,
several of the largest eye care practice groups in the United States . . .
The total purchase price for these seven practices is estimated to be
approximately $91.0 million, of which will be payable in PRG common stock,
presently estimated to be approximately 4,167,000 shares.
In addition to entering into these definitive agreements, the Company
also announced that it has completed the acquisition of the assets of, and
entered into service agreements with, five other eye care practices . . . .
The total purchase price for these transactions is approximately $5.5
million, consisting of approximately $450,000 of cash and approximately
233,000 shares of PRG common stock.
-42-
<PAGE> 44
Emmett E. Moore, Chairman, President and CEO stated, "This latest
round of acquisitions has brought into the PRG family some of the largest,
most aggressive and prestigious eye care practices, not only in their
regional markets, but in the entire country. Houston Eye Associates, one
of the largest eye care practices in Texas as well as the U.S., joins 10
other PRG practices in the Houston market to further expand our largest
market and position PRG as the preeminent provider of eye care in the
upper Gulf Coast of Texas. Cincinnati Eye Institute has grown to be one of
the largest and most successful eye care practices in the country and
joins two other PRG practices in Cincinnati to position PRG as the leading
eye care network in southern Ohio and northern Kentucky. The five Tampa
Bay area practices, together with a previously announced practice
acquisition in central Florida, give PRG the leading network in that part
of Florida and position the Company to expand further into a state where
eye care is one of the more significant medical specialties. The other
acquisitions solidify PRG's already strong positions in southern
California, the Chicago area and western Tennessee. We are clearly the
ophthalmic leaders in all of these markets."
Mr. Moore also stated, "This past quarter marks the end of our first
full year of operations. We are excited that we continued to meet our
financial objectives during this period, particularly in light of the
tremendous level of operational and developmental activity. Starting from
scratch, we have grown, this first year, from our initial 10 practices to
a current level of 97 practices, including today's acquisitions . . . .
PRG is the nation's leading provider of physician practice management
services to ophthalmic and optometric practices . . . . PRG acquires the
operating assets of these practices and develops the practices into
comprehensive eye care networks by providing management expertise,
marketing [and] information systems . . . .
49. On 8/14/96, PRG held a telephonic conference call for securities
analysts, money and portfolio managers, large PRG shareholders, institutional
investors, brokers and stock traders. During the conference call and in
follow-up one-on-one conversations with participants, Moore, D'Amico, Owen and
Bingham stated:
-43-
<PAGE> 45
o PRG's acquisition program was moving forward successfully and ahead of
schedule.
o PRG had the management expertise and experience and management information
and accounting systems and controls necessary to permit it to continue its
growth-by-acquisition program.
o PRG had the personnel and expertise to do the necessary due diligence on
acquisitions to assure it was acquiring only high-quality, profitable practices
that met its standards and could be quickly integrated into PRG.
o PRG was successfully integrating the eye doctor practices it had acquired
to date and was not encountering any difficulties with respect to systems
integration that would adversely impact its ability to continue its acquisition
program.
o PRG was well on its way to achieving scale of operations in key markets
such as Houston/Galveston, Southern California and Las Vegas, which would lead
to significant cost savings in those areas in the near term.
o PRG was forecasting EPS growth of 25%-35% over the next several years and
1997 EPS of $1.10-$1.18.
50. On 8/15/96, Alex. Brown issued a report on PRG, written by Kerns and
Ochers, which repeated information provided them in the 8/14 conference call
and in follow-up communications with Moore, D'Amico, Owen and Bingham. The
report forecast the following EPS for PRG:
<TABLE>
<CAPTION>
1996 1997
------------------
<S> <C> <C>
Q1 .13A .26
Q2 .16A .26
Q3 .22 .28
Q4 .28 .31
---- -----
YE .81 1.09
</TABLE>
The report stated:
Highlights of the Quarter
Continues Aggressive Acquisition Pace. Physicians Resource Group (PRG)
completed acquisitions of 13 practices during the second quarter. It has
completed
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<PAGE> 46
acquisitions of 7 practices thus far in the third quarter and has signed
definitive agreements with another 7 practices. PRG is now the market
leader in several of its markets including Houston, Tampa and Cincinnati.
After PRG acquires a leading presence in a market, it can then pursue
operational integration of the practices. For example, PRG currently has
10 practices with 35 locations in Houston, Texas. The Company will now
begin to focus on integrating those practices to increase administrative
efficiencies. PRG will need only 1 billing office for the Houston market;
it currently has a billing office in each of the 10 practices. The Company
estimates that integrating business offices in Houston could save $1.0-1.5
million in annual operating costs. Once PRG has moved towards integrating
the practices, it will then market its services to payors as a
single-source network for all eye care services. We expect 1996 and early
1997 to be acquisition and market development years for PRG. We do not
expect material integration and operating efficiencies until mid 1997.
51. On 8/15/96, Smith Barney issued a report on PRG, authored by Harris,
which repeated information provided him in the 8/14 conference call and in
follow-up communications with Moore, D'Amico, Owen and Bingham. The report
forecast the following 1996 and 1997 EPS for PRG, along with a 33% five-year
EPS growth rate:
<TABLE>
<CAPTION>
1996 1997
------ -----
<S> <C> <C>
Q1 $ .12A
Q2 $ .16A
Q3 $ .23E
Q4 $ .28E
Year $ .81E $1.10E
</TABLE>
The report also stated:
Earlier today, PRG reported 2Q96 EPS of $0.16 for the quarter ended
June 30, 1996, in line with our estimate and that of the Street consensus.
* * *
The results of 2Q96, along with the simultaneous announcement of
acquisitions that expand PRG's network and solidify its leadership
positions in several
-45-
<PAGE> 47
important markets, reflect a company solidly on pace to continue meeting
our expectations.
52. on 8/30/96, Smith Barney issued a report on PRG, authored by Harris,
using and repeating information given to Harris by Moore, D'Amico, Owen and
Bingham during the PRG secondary offering process, including the Roadshow, and
later updated. Moore, D'Amico, Owen and Bingham reviewed the report before it
was issued and approved it, knowing it would be released to the public and
become part of the total mix of information impacting PRG stock. The report
forecast 1996 and 1997 EPS for PRG of $.81 and $1.10, respectively, and stated:
PRG's recent M&A activity should enable the company to realize at
least three major benefits, in addition to the relatively straightforward
financial accretion of the deals: (1) PRG has been able to remove its
largest competitor from the acquisition environment. Thus, one less
significant acquiror will be bidding for each potential acquisition, and
the full prestige of EyeCorp and its affiliated professionals will now be
behind PRG. This should be positive for acquisition pricing. (2) PRG is
achieving critical mass in several key markets, allowing it to create
integrated eye care networks. Once PRG achieves scale in a market, it is
able to begin rationalizing the delivery of care, achieving meaningful
cost savings and adding key services such as ambulatory surgery centers
and optical dispensaries. Significantly, PRG believes that when it has a
presence in a market, it can grow revenues at 30% in that market over a
two- to four-year period. (3) PRG has expanded into new, attractive
markets, as the acquisition of EyeCorp and the 10 additional new practices
has added five new states and several new markets to the company's
portfolio.
53. On 9/25-27/96, Moore, D'Amico, Owen and Bingham appeared at the Smith
Barney Annual Conference on Emerging Sectors in Healthcare held in New York
City and in presentations and breakout sessions, told the assorted securities
analysts,
-46-
<PAGE> 48
money and portfolio managers, institutional investors, brokers and stock
traders present that:
0 PRG's acquisition program was moving forward successfully and ahead
of schedule.
0 PRG had the management expertise and experience and management
information and accounting systems and controls necessary to permit it to
continue its growth-by-acquisition program.
0 PRG had the personnel and expertise to do the necessary due diligence
on acquisitions to assure it was acquiring only high-quality, profitable
practices that met its standards and could be quickly integrated into PRG.
0 PRG was successfully integrating the eye doctor practices it had
acquired to date and was not encountering any difficulties with respect to
systems integration that would adversely impact its ability to continue its
acquisition program.
o PRG was well on its way to achieving scale of operations in key
markets such as Houston/Galveston, Southern California and Las Vegas,
which would lead to significant cost savings in those areas in the near
term.
0 PRG was forecasting EPS growth of 25%-35% over the next several years
and 1997 EPS of $1.10-$1.18.
54. On 10/7/96, PRG announced the acquisition of its two largest
competitors, American Ophthalmic, Inc., and the eye care division of EquiMed
Incorporated in separate transactions, involving stock and cash. The release
stated:
With these acquisitions, Physicians Resource Group's annual revenue
run rate will increase to approximately $378 million, from a
pre-acquisition rate of $248 million. In addition, with these
acquisitions, PRG will provide management services to 136 practices, and
will have 586 professionals and 44 ambulatory surgery centers, making it
the nation's largest single-specialty physician practice management
company.
"These acquisitions are strategically, geographically and financially
very important to the future of PRG," said Emmett E. Moore, Physicians
Resource Group Chairman, President and Chief Executive Officer.
-47-
<PAGE> 49
"American Ophthalmic makes us the market leader in Central and South Florida,
fills out the Central Texas corridor in Austin and San Antonio to complement
PRG's strength in Houston and Dallas, bolsters our strong positions in Las
Vegas and Southern California and offers us market entries in Alabama and North
Carolina.
EquiMed brings us significant new entries into Louisiana and New York
and their practices in Northern California, Ohio, Pennsylvania, Illinois and
Iowa complement PRG's existing practices in and around these markets. Both of
these acquisitions bring us significant operational infrastructure..........
55. On 10/8/97, Alex. Brown issued a report on PRG, written by Kerns and
Hudson, which was based on and repeated information given them by Moore,
D'Amico, Owen and Bingham over the prior few days. The report repeated forecast
the following 1997 EPS for PRG:
<TABLE>
<CAPTION>
1997
<S> <C>
Ql $.26
Q2 $.26
Q3 $.28
Q4 $.31
--------
Year $1.10E
</TABLE>
The report also stated:
Physicians Resource Group announced agreements to acquire American
Ophthalmic (a privately held physician practice management company
focusing on eye care) and the eye-care operations of EquiMed.
* * *
Upon completion of these transactions, Physicians Resource
Group should have annualized revenues of approximately $380 million and
we expect the transactions could add $0.03-$0.05 to 1997 EPS.
In our opinion, the acquisitions afford a unique strategic
opportunity for Physicians Resource Group. The Company has effectively
eliminated its top three competitors in the eye care niche of the
physician practice management industry (EyeCorp in January 1996,
American Ophthalmic and EquiMed due to be completed early in 1997). The
remaining competitors in the niche are relatively small, with annual
revenues of less than
- 48 -
<PAGE> 50
$50 million. We believe that the acquisitions offer three primary
strategic advantages for Physicians Resource Group. (1) The scope of
Physician Resource Group creates a unique presence and visibility for
the Company among physicians in the market, which should help to expand
the acquisition pipeline. (2) The acquisitions eliminate the largest
competitors in the market, which should help hold acquisition prices in
check. (3) Upon completion of the acquisitions, Physicians Resource
Group will have a 12-state contiguous market presence across the
South. The contiguous market presence aids in developing operating
efficiencies as well as in contracting with payors.
56. On 10/14/96, PRG announced the acquisition of the assets of four
eye care practices: (1) Melbourne Eye Associates of Brevard, Inc. and Melbourne
Eye Associates, P.A., located in Melbourne, Florida; (2) Ophthalmological
Associates, Ltd., d/b/a Green Waltman Institute, located in Belleville,
Illinois; (3) Southwest Eye Associates, Ltd., Safford Surgi-Center, Inc. and
SNW, Inc., located in Safford, Arizona (Phoenix area); and (4) Richard D.
Levin, M.D., P.S.C., d/b/a Levin Eye Institute, located in Cincinnati, Ohio,
for cash and 566,767 shares of PRG common stock. The release also stated:
PRG is the nation's leading provider of physician practice
management services to ophthalmic and optometric practices.... PRG
acquires the operating assets of these practices and develops the
practices into comprehensive eye care networks by providing management
expertise, marketing [and] information systems....
57. On 10/29/96, Dillon Read issued a report on PRG, written by
James Lane, which was based on and repeated information provided Lane by Moore,
D'Amico, Owen and Bingham, who also reviewed and approved this report before it
was issued, knowing it would be released to the public and impact the total
- 49 -
<PAGE> 51
mix of information affecting PRG stock. The report forecast 1997 EPS of $1.12
for PRG, and a 28% long-term growth rate for PRG.
The report stated:
Short-term, same-market growth through operating synergies and
external growth through acquisitions should enable PRG to maintain
25-30% EPS growth. While critical mass and information systems are
crucial to long-term viability, same-market synergies and acquisitions
will drive EPS growth and share price appreciation in the near-term....
We have a high degree of confidence that PRG has a healthy pipeline of
acquisitions. This pipeline expanded even more since the announcement
of its acquisitions of AOI and EquiMed.
Despite rapid acquisition pace, there is still substantial
room for growth. Although PRG has been an active leader in
consolidating the eye care market to date -- effectively growing the
company's annualized revenues from $52 million at the time of its IPO
in June 1995 to approximately $378 million inclusive of its recently
announced agreements to acquire AOI and EquiMed, the company will have
less than 2% of the approximately 17,000 ophthalmologists in the United
States. As such, we believe, that there is substantial room for growth
within the company's existing markets and beyond.
PRG has strong operational and financial controls in place,
but significant operating synergies have yet to be realized. Rapid
growth such as that reported by PRG requires competent management and
strong internal monitoring and controls. We have carefully reviewed
with management the states it takes in identifying and evaluating new
acquisitions and in monitoring and managing its existing businesses.
We believe that the company does have the proper controls in place to
continue its rapid growth and to manage its current operations.
Furthermore, PRG has plans to continue to build its infrastructure,
including management and information systems.
Financial Projections and Recommendations
Our 1996 and 1997 estimates are $0.75 and $1.12, respectively
(exclusive of certain one-time acquisition charges that have been
incurred..). We have a high
- 50 -
<PAGE> 52
degree of confidence in these estimates, which are based on highly
conservative acquisition assumptions in 1997 relative to the company's
activity in 1996. Furthermore, we believe that acquisition prices and
terms should remain relatively stable given that AOI and EquiMed will
not be participating in acquisition bidding.
58. On 11/12/96, Dillon Read issued another report on PRG, written by
Lane, which was based on and repeated information provided Lane by Moore,
D'Amico, Owen and Bingham, who also reviewed and approved this report before it
was issued, knowing it would be released to the public and impact the total mix
of information affecting PRG stock. The report 1997 EPS of $1.12 and a
five-year growth rate of 27.5% for PRG. The report stated that:
Despite Rapid Acquisition Pace, There is Still Substantial Room for
Growth
[W]e believe that there is substantial room for growth within the
company's existing markets and beyond.
In the Near Term, PRG to Maintain 25%-30% EPS Growth
While critical mass and information systems are crucial to
long-term viability, same-market synergies and acquisitions will drive
EPS growth and share price appreciation in the near-term. PRG typically
enters a market by acquiring the assets of a leading practice, and
entering into long-term management contracts with the professionals of
that practice. ... We have a high degree of confidence that PRG has a
healthy pipeline of acquisitions. This pipeline has expanded even more
since the announcement of its acquisitions of AOI and EquiMed.
* * *
Emphasis on Operating and Clinical Information Systems
PRG has strong operational and financial controls in place,
but significant operating synergies have yet to be realized. Rapid
growth such as that reported by PRG requires competent management and
strong internal
- 51 -
<PAGE> 53
monitoring and controls. We have carefully reviewed management's
procedures in identifying and evaluating new acquisitions, and in the
monitoring and management of its existing businesses. We believe that
the company does have the proper financial management systems and
controls in place to continue its rapid growth and to manage its
current operations. In addition, PRG operates a corporate data
repository that currently receives information from two regional
systems. Additional systems will begin transferring data to the
repository in coming quarters.
Furthermore, PRG has plans to continue to build its infrastructure,
including management and information systems. ... The development of
these CBOs, and the addition of other administrative efficiencies,
should improve operating margins, which we believe are currently
suppressed by the significant expenditure on infrastructure.
59. The positive statements made by defendants during the Class Period
up to this date about PRG's business and operations, its acquisitions and their
impact upon the Company's business and PRG's EPS prospects, were each false and
misleading when made. The true facts, which were then available to defendants,
but defendants failed to disclose, included:
(a) Contrary to defendants' representations, in order to keep
up with its rapid pace of acquisitions, PRG did virtually no due diligence
prior to making an acquisition and, in the case of the EquiMed/EquiVision
acquisition, never obtained separate accurate and complete financial statements
of EquiMed's EquiVision division, prior to completing the acquisition.
(b) PRG could not generate accurate monthly financial
statements for the individual eye practices it supposedly managed, which
generated persistent disputes with the practices,
- 52 -
<PAGE> 54
including a refusal by practices to pay disputed receivables to PRG.
(c) PRG's internal accounting department was overwhelmed and
thus ineffective. It did not have adequate personnel, systems or controls to
monitor PRG's existing operations, let alone cope with the increasing number of
acquisitions. As a result, PRG could not generate accurate financial statements
for its local practices or the parent public company.
(d) PRG's financial statements were completely unreliable and
false for the reasons detailed in Paragraphs 80-95.
(e) PRG was unable to successfully convert the cash basis
accounting systems used by the local eye care practices it acquired to the
accrual accounting methods necessary for PRG to prepare accrual financial
statements conforming with both GAAP and SEC regulations.
(f) PRG's business model was fundamentally flawed and did not
work as it was not possible for PRG to assemble the practices it was acquiring
into an efficient network which was profitable and generated accurate financial
information.
(g) PRG's acquisition program was out of control, PRG had
neither the personnel nor the systems to make as many acquisitions as it was
making.
(h) Many of PRG's acquired practices were incurring decreasing
revenues rather than growth, due to the lack of
- 53 -
<PAGE> 55
synergies and efficiencies, as well as the ongoing disputes between the
practices and PRG.
(i) Many of the practice management agreements entered into
between PRG and the local practices were illegal because they amounted to
illegal fee-splitting or violations of anti-kickback or patient-brokering laws
of certain states, including Florida.
(j) Contrary to its representations of a strong and
experienced management team, PRG lacked the management personnel and management
information systems and internal accounting controls necessary to permit it to
integrate the large number of acquisitions it was pursuing and still adequately
manage its existing business.
(k) PRG did not have, as represented, a seasoned and
experienced management team as, in fact, none of its top managers had ever
successfully implemented an acquisition program anywhere near the scope of that
being undertaken by PRG, nor had they successfully managed a business
enterprise as large as PRG would be after the EyeCorp, American Ophthalmic and
EquiMed acquisitions.
(l) PRG had undertaken its vastly accelerated acquisition
program without performing a feasibility study to determine whether or not it
would be capable of acquiring and then integrating into its operations the
large number of hospital and laboratory facilities it was acquiring and thus
defendants
- 54 -
<PAGE> 56
knew it was likely that PRG would encounter serious problems in integrating
those acquisitions.
(m) The growth in PRG's existing practices was slowing, due in
part to PRG management's distraction by the demands of pursuing the accelerated
acquisition program and attempting to integrate several acquired businesses
into PRG's existing operations at the same time; as a result, revenue growth in
PRG's core businesses was slowing, which was putting pressure on PRG's ability
to achieve EPS growth.
(n) The businesses being acquired by PRG had internal
accounting and management information systems which were incompatible with
those utilized by PRG in its core business and, notwithstanding claims to the
contrary, PRG did not have software available which would permit those
incompatible systems to efficiently interact with or communicate with its
existing accounting and management information systems. As a result, the PRG
defendants knew that the process of integrating the acquired businesses into
PRG's operations would take much longer and be much more expensive than was
being publicly presented and that as a result, after each of these acquisitions
took place, PRG was encountering serious and persistent difficulties in
obtaining the type of accurate business and accounting information it needed
from the acquired entities in order to successfully oversee or manage those
businesses, let alone integrate them into PRG's operations.
- 55 -
<PAGE> 57
(o) PRG did not have a business plan by which it would
integrate its acquired operations into its business in a way to achieve
economies of scale or generate the type of accurate information on a timely
basis that PRG management needed to oversee those acquired businesses and
manage them in a profitable manner.
(p) As a result of the foregoing, PRG was not experiencing the
acquisition synergies, efficiencies or cost savings represented by the
defendants, but rather was having difficulty integrating the operations of
acquired practices, which was leading to increased costs which would hurt PRG's
4thQ 1996 results and its 1997 results as well.
(q) As a result of the inability of PRG's top managers to pay
attention to this part of the business due to the demands of pursuing PRG's
accelerated acquisition program and the problems they were encountering in
attempting to integrate the acquired businesses into PRG's operations, PRG was
required to cut prices and engage in promotional activities in that part of its
business, which was adversely impacting PRG's EPS growth.
(r) As a result of the foregoing, there was no basis for the
assurances that the acquisitions contained the potential for significant
economies of scale or synergies of operations or that they would be accretive
or non-dilutive to PRG's results during 1997 as, in truth, defendants actually
knew these acquisitions would badly hurt PRG's results from operations.
- 56 -
<PAGE> 58
(s) As a result of the foregoing, defendants' forecasts that
PRG would achieve EPS of $1.05-$1.18 in 1997, were known by defendants to be
false, as such EPS were impossible to achieve in light of these undisclosed
problems.
(t) The forecasts of 25%-35% EPS growth for PRG over the next
three-five years were known by defendants to be false, as they were aware of
the adverse information set forth above which contradicted these forecasts.
60. On 11/14/96, PRG issued a release reporting its 3rdQ 1996 results,
which stated:
Physicians Resource Group,Inc. today reported net revenues for
the three-month period ended September 30, 1996 of approximately $60.5
million and net income of approximately $3.5 million or $0.13 per
share. ... Excluding the non-recurring expenses and related tax
effects associated with pooling of interests transactions and
including pre-acquisition income of the pooled entities, income would
have been approximately $5.9 million or $0.22 per share for the
three-month period.
* * *
Emmett E. Moore, Chairman, President and CEO stated, "This
past quarter was a very significant one for PRG. We made 17
acquisitions and met competitive pressures head-on with the
acquisition of Cincinnati Eye Institute, Houston Eye Associates and a
number of practices in the Tampa, Florida area. We benefited greatly
from pooling certain of these transactions. After quarter end, we
announced the acquisition of our two biggest competitors, American
Ophthalmic Inc. (AOI) and the eye care division of EquiMed. These
acquisitions are strategically, geographically and financially
important to PRG's future. Our management team has been and will
continue to be focused on closing these acquisitions and integrating
their operations over the next few months. We believe that even
though these efforts will cause a delay in the execution of
acquisitions otherwise anticipated in the fourth quarter the Company
will be better positioned for the future."
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<PAGE> 59
61. On 11/14/96, PRG held a telephonic conference call for
securities analysts, money and portfolio managers, large PRG shareholders,
institutional investors, brokers and stock traders. During the conference call
and in follow-up one-on-one conversations with participants, Moore, D'Amico,
Owen and Bingham stated:
o PRG's acquisition program was going to move forward
successfully. While there would be a temporary slowdown of new
acquisitions in the 4thQ of 1996, the acquisition pace would pick up
and be back on schedule in 1997.
o PRG had the management expertise and experience and management
information and accounting systems and controls necessary to permit it
to continue its growth-by-acquisition program.
o PRG had the personnel and expertise to do the necessary due
diligence on acquisitions to assure it was acquiring only
high-quality, profitable practices that met its standards and could be
quickly integrated into PRG.
o PRG was successfully integrating the eye doctor practices it
had acquired to date and was not encountering any difficulties with
respect to systems integration that would adversely impact its ability
to continue its acquisition program.
o PRG was well on its way to achieving scale of operations in
key markets such as Houston/Galveston, Southern California and Las
Vegas, which would lead to significant cost savings in those areas in
the near term.
o PRG was still forecasting EPS growth of 25%-35% over the next
several years 1997 EPS of $1.05-$1.15 and further gains in 1998 to
close to $1.50.
62. While PRG's stock began to decline after the 11/14
disclosures -- from $23-3/4 on 11/14 to $17 on 12/18, defendants continued to
cause PRG's stock to trade at artificially inflated levels throughout the
balance of the Class Period by failing to make full, complete and timely
disclosures of the adverse facts concerning PRG's business and continuing to
make false and
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<PAGE> 60
misleading statements about the true extent, value and seriousness of the
problems then afflicting PRG's business.
63. On 11/14/96, Dillon Read issued a report on PRG, written by
Lane, which was based on and repeated the information provided by Moore,
D'Amico, Owen and Bingham in the 11/14 conference call. The report forecast
1997 EPS of $1.12 and a 28% long-term growth rate. The report also stated:
Earlier today, Physicians Resource Group reported 3Q96 EPS
from continuing operations of $0.22, ahead of our estimate of $0.20.
* * *
Furthermore, management indicated that the pipeline of
potential acquisitions has been enhanced by the AOI and EquiMed
transactions. Based on current trends, PRG should be able to maintain
its current acquisition pace in 1997, although there will likely not
be any acquisitions in 1997 that are the size of EquiMed and AOI.
64. On 11/20/96, Alex. Brown issued a report on PRG, written by
Kerns and Ochers, which was based on and repeated the information provided by
Moore, D'Amico, Owen and Bingham in the 11/14 conference call. The report
forecast the following 1997 EPS for PRG:
1997E
-----
Ql $ .26
Q2 $ .26
Q3 $ .28
Q4 $ .31
Year $1.09
The report also stated:
Physicians Resource Group reported 3Q96 of $0.22 versus $0.12
in the prior year, $0.01 above our estimate of $0.21. Revenues
for the quarter increased 109% over the prior year's level to
$60.5 million, $4.2 million below our estimate of $64.7
million. Due to
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<PAGE> 61
the Company's strong acquisition pace, including the two large
acquisitions of Equivision (completed) and American Ophthalmic
(still pending), we believe that the acquisition pace of 4Q96
will be impaired and are reducing our 4Q96 EPS estimates to
reflect the acquisition timing issue. We are also raising our
revenue expectations to reflect the completion of the
Equivision acquisition and the pending acquisition of American
Ophthalmic.
Original Revised
Estimate Estimate
-------- --------
4Q96 EPS $0.26 $0.22
1997 Revenues $381.9 mil $505.0 mil
1997 EPS $1.09 No change
1998 Revenues $501.8 mil $665.0 mil
1998 EPS $1.46 No change
Other Highlights of the Quarter
-- Recent Pace and Size of Acquisitions Could Slow 4Q96
Acquisitions. During 3Q96, Physicians Resource Group completed
17 acquisitions and signed agreements to acquire its two
next-largest competitors (Equivision and American Ophthalmic).
We believe that the pace and scope of acquisition activity in
3Q96 will impair acquisition completions in 4Q96. We have
reduced our 4Q96 EPS estimate by $0.04 to reflect the lower
acquisition activity and increased expenses associated with
integrating the acquisition. We believe that Physicians
Resource Group will resume its acquisition pace after 4096 and
begin to pursue operating efficiencies in its major markets;
we are not changing our 1997/1998 EPS estimates of
$1.09/$1.46, respectively.
65. On 11/25/96, Smith Barney issued a report on PRG, written by
Harris, which was based on and repeated information provided him by Moore,
D'Amico, Owen and Bingham, who also reviewed and approved this report before it
was issued, knowing it would be released to the public and impact the total mix
of information affecting PRG stock. The report slightly lowered the
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<PAGE> 62
1997 EPS forecast for PRG to $1.07, while continuing to forecast a 33%
five-year EPS growth rate. The report stated:
In 1997, we expect PRG to generate revenues of $541.3 million,
versus $223.4 million in 1996 reflecting the impact of recently closed
acquisitions as well as the assumption that the company can acquire another
$150 million in revenue run-rate during 1997. Given that PRG acquired in excess
of $250 million in revenue run-rate in 1996 even if we exclude large
transactions such as American Ophthalmic, Equivision and EyeCorp., we believe
that this acquisition expectation is reasonable. Revenue growth should drive
fully diluted earnings per share to $1.07 in 1997.
66. On 12/6/96, PRG announced it had sold $125 million in
convertible subordinated debentures in a private placement. The release stated:
PRG is the nation's leading provider of physician practice
management services to ophthalmic and optometric
practices. . . . PRG acquires the operating assets of these
practices and develops the practices into comprehensive eye
care networks by providing management expertise, marketing
[and] information systems. . . .
Smith Barney helped on the American Opthalmic acquisition. Alex. Brown did the
subordinated debenture offering.
67. On 12/13/96, Dillon Read issued a report on PRG, authored by
Lane, which repeated information given him by Moore, D'Amico, Owen and Bingham
in the prior few days. Moore, D'Amico, Owen and Bingham reviewed the report
before it was issued and approved it, knowing it would be released to the
public and become part of the total mix of information impacting PRG stock. The
report forecast 1997 EPS of $1.12 per share and stated:
The company's pipeline of acquisitions remains very strong and should
enable the company's management to continue to grow EPS in excess of
25% throughout 1997. . . . With the completion of the company's recent
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<PAGE> 63
convertible subordinated debenture offering, the company is
well-positioned to continue consolidating this industry.
68. On 12/16/96, Smith Barney issued a report on PRG, authored by
Harris, using and repeating information given to Smith Barney by Moore,
D'Amico, Owen and Bingham during discussions with them in recent days. Moore,
D'Amico, Owen and Bingham reviewed the report before it was issued and approved
it, knowing it would be released to the public and become part of the total mix
of information impacting PRG stock. The report forecast the following 1997 EPS
for PRG and a 33% five-year EPS growth rate:
1997
-----
Ql $ .23
Q2 $ .25
Q3 $ .28
Q4 $ .30
Year $1.07
69. On 12/22/96, PRG issued a release announcing the closing of
the American Ophthalmic acquisition for cash and 1,323,000 shares of PRG stock.
The release stated:
PRG is the nation's leading provider of physician practice
management services to ophthalmic and optometric practices. . . . PRG
acquires the operating assets of these practices and develops the
practices into comprehensive eye care networks by providing management
expertise, marketing [and] information systems. . . .
70. On 1/9/97, PRG announced it had acquired the assets of 8
separate eye care practices since the beginning of December for cash and
approximately 514,000 shares of PRG common stock. Five of these practices were
located in the Dallas, San Antonio and Houston, Texas markets; the remainder
were located in Chicago,
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<PAGE> 64
Illinois; Orlando, Florida and Roanoke Rapids, North Carolina.
The report also stated:
Emmett E. Moore, Chairman, President and CEO, stated, "These
December acquisitions provide substantial additional support for our
Texas networks. Three of these practices are located in the Dallas
area bringing our network in this market to nine (9) practices with
seventeen (17) ophthalmologists and two (2) optometrists practicing at
twenty-seven (27) locations, which include one (1) ambulatory surgery
center, one (1) excimer laser and twelve (12) optical dispensaries. We
are extremely pleased with the progress of our consolidation efforts
in Dallas both with respect to the quality of practices in the
network and the market coverage achieved.
* * *
PRG is the nation's leading provider of physician practice
management services to ophthalmic and optometric practices . . . . PRG
acquires the operating assets of these practices and develops the
practices into comprehensive eye care networks by providing management
expertise, marketing [and] information systems. . . .
71. On 1/10/97, Alex Brown issued a report on PRG, written by
Kerns and Ochers, which was based on and which repeated information given them
by Moore, D'Amico, Owen and Bingham in the prior few days. Moore, D'Amico, Owen
and Bingham reviewed the report before it was issued and approved it, knowing
it would be released to the public and become part of the total mix of
information impacting PRG stock. The report forecast the following 1997 EPS for
PRG:
<TABLE>
<CAPTION>
1997
-----
<S> <C>
Ql $ .23
Q2 $ .27
Q3 $ .28
Q4 $ .30
Year $1.09
</TABLE>
The report also stated:
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<PAGE> 65
During the fourth quarter the Company completed the acquisition of its
two largest competitors (EquiMed and American Ophthalmic, which
together added 37 practices). We expect the level of integration and
due diligence activity in the fourth quarter will cause EPS to be flat
over the third quarter's levels ($0.22 versus $0.13 in the prior
year). We believe that the level of acquisitions in 1997, while still
aggressive, will be at a more normalized pace of 10-12 practices per
quarter.
72. On 2/3/97, Merrill Lynch issued a report on PRG, written by
Kenneth Wakely, which was based on and which repeated information given him by
Moore, D'Amico, Owen and Bingham in the prior few days. Moore, D'Amico, Owen
and Bingham reviewed the report before it was issued and approved it, knowing
it would be released to the public and become part of the total mix of
information impacting PRG stock. The report forecast 1997 EPS of $1.09, as well
as a 25% five-year EPS growth rate for PRG. The report also stated:
-- We believe that Physicians Resource Group will continue to pursue
an aggressive, but focused, acquisition strategy going forward. We
expect revenues to reach approximately $223 million in 1996 and $450
million in 1997, a growth rate of approximately 100%. Such a strong
pace, when coupled with a same-market growth rate in the 10% range,
should support earnings growth of 25% for the next three to five
years.
* * *
The company has steadily expanded its operations across the nation, a
process that we expect to continue for the foreseeable future. As the
clear leader in this PPM niche, we believe that the company has a
significant competitive advantage, at least in terms of acquisition
opportunities, industry presence and sector leadership.
Core Operations:
- 64 -
<PAGE> 66
Physicians Resource Group is the nation's leader in forming
eye-care delivery networks, with a total of 140 group practices.
* * *
Leading Position in Industry: With a revenue run-rate of $400
million, PRG is now one of the largest physician practice management
organizations in the nation. More importantly, with the company's
focus on eye care, it is clearly the leader in that industry niche, a
segment of the physician industry that is more fragmented than the
industry as a whole.
For 1996, earnings per share should increase to $0.76 compared with
$0.16 in 1995. For 1997, we forecast a rise in earnings per share to
$1.09.
Key Positives:
-- Leading Position in Fragmented Market: With a revenue base of $450
million in 1997, PRG is an estimated ten times larger than its nearest
competitor. Such size and presence present substantial barriers to
entry and afford acquisition opportunities that none of its
competitors can match.
-- Impressive Track Record: The company has completed, in rather quick
succession, a number of large acquisitions that have positioned it
favorably in its industry. The company's management clearly has a
focus on the consolidation of this industry, and has completed a
number of acquisitions so as to maximize the company's operational
leverage.
-- Strong Earnings Growth: We expect earnings growth to approximate
25% over the next three to five years, driven in the first year or two
by acquisitions and later by administrative and operational
efficiencies, as well as through the growth of managed care contracts
and capitated lives.
73. On 2/12/97, Merrill Lynch issued a report on PRG, written by
Wakely, based on information provided to him by Moore, D'Amico, Owen and
Bingham over the prior several days. The report forecast 1997 EPS of $1.09 for
PRG, and stated:
The shares of Physicians Resource Group have traded off
recently. . . . After speaking with
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<PAGE> 67
management, we believe that the weakness is not due to any change in
fundamentals.
* * *
After speaking with management last night, we believe that the
current weakness was not due to any change in company fundamentals.
* * *
We talked with the company's management last night, to discuss
operations and the integration of its acquisitions. The integration of
its new acquisitions is going as planned, with no unexpected problems.
However, our level of confidence in our fourth quarter and 1997 EPS
estimates has increased as absolutely nothing has changed since we
picked up coverage last week.
KEY POSITIVES
* * *
Strong Earnings Growth: We expect earnings growth to
approximate 25% over the next three to five years, driven in the first
year or two by acquisitions and later by administrative and
operational efficiencies, as well as through the growth of managed
care contracts and capitated lives.
74. On 2/11/97, PRG appeared at the Smith Barney Fifth Annual
Health Care Services Conference at the Plaza Hotel in New York City, at which
Moore, D'Amico, Owen and Bingham appeared for PRG and in a presentation to the
assembled institutional investors, money and portfolio managers and brokers,
stated:
o PRG's acquisition program was still on schedule, and while
there had been a Company slowdown in the 4thQ of 1996, PRG's
acquisition program would proceed on pace in 1997.
o PRG had the management expertise and experience and management
information and accounting systems and controls necessary to permit it
to continue its growth-by-acquisition program.
o PRG had the personnel and expertise to do the necessary due
diligence on acquisitions to assure it was acquiring
- 66 -
<PAGE> 68
only high-quality, profitable practices that met its standards and
could be quickly integrated into PRG.
o PRG was successfully integrating the eye doctor practices it
had acquired to date and was not encountering any difficulties with
respect to systems integration that would adversely impact its ability
to continue its acquisition program.
o PRG was well on its way to achieving scale of operations in
key markets such as Houston/Galveston, Southern California and Las
Vegas, which would lead to significant cost savings in those areas in
the near term.
o PRG was forecasting EPS growth of 25%-35% over the next
several years and 1997 EPS of $1.05-$1.15 with further gain in 1998 to
close to $1.50.
75. The positive statements made by defendants during
11/14/96-2/11/97 about PRG's business and operations, its acquisitions and
their impact upon the Company's business and PRG's EPS prospects, were each
false and misleading when made. The true facts, which were then available to
defendants, but defendants failed to disclose, included:
(a) Contrary to defendants' representations, in order to
keep up with its rapid pace of acquisitions, PRG did virtually no due diligence
prior to making an acquisition and, in the case of the EquiMed/EquiVision
acquisition, never obtained separate accurate and complete financial statements
of EquiMed's EquiVision division, prior to completing the acquisition.
(b) PRG could not generate accurate monthly financial
statements for the individual eye practices it supposedly managed, which
generated persistent disputes with the practices, including a refusal by
practices to pay disputed receivables to PRG.
- 67 -
<PAGE> 69
(c) PRG's internal accounting department was overwhelmed
and thus ineffective. It did not have adequate personnel, systems or controls
to monitor PRG's existing operations, let alone cope with the increasing number
of acquisitions. As a result, PRG could not generate accurate financial
statements for its local practices or the parent public company.
(d) PRG's financial statements were completely unreliable
and false for the reasons detailed in Paragraphs 80-95.
(e) PRG was unable to successfully convert the cash basis
accounting systems of the local eye care practices it acquired to the accrual
accounting methods necessary for PRG to prepare accrual financial statements
conforming with both GAAP and SEC regulations.
(f) PRG's business model was fundamentally flawed and did
not work as it was not possible for PRG to assemble the practices it was
acquiring into an efficient network which was profitable and generated accurate
financial information.
(g) PRG's acquisition program was out of control, PRG had
neither the personnel nor the systems to make as many acquisitions as it was
making.
(h) Many of PRG's acquired practices were incurring
decreasing revenues rather than growth, due to the lack of synergies and
efficiencies, as well as the ongoing disputes between the practices and PRG.
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<PAGE> 70
(i) Many of the practice management agreements entered
into between PRG and the local practices were illegal because they amounted to
illegal fee-splitting or violations of anti-kickback or patient-brokering laws
of certain states, including Florida.
(j) Contrary to its representations of a strong and
experienced management team, PRG lacked the management personnel and management
information systems and controls necessary to permit it to integrate the large
number of acquisitions it was pursuing and still adequately manage its existing
business.
(k) PRG did not have, as represented, a seasoned and
experienced management team as, in fact, none of its top managers had ever
successfully implemented an acquisition program anywhere near the scope of that
being undertaken by PRG, nor had they successfully managed a business
enterprise as large as PRG would be after the EyeCorp, American Ophthalmic and
EquiMed acquisitions.
(1) PRG had undertaken its vastly accelerated acquisition
program without performing a feasibility study to determine whether or not it
would be capable of acquiring and then integrating into its operations the
large number of hospital and laboratory facilities it was acquiring and thus
defendants knew it was likely that PRG would encounter serious problems in
integrating those acquisitions.
(m) The growth in PRG's existing practices was
slowing, due in part to PRG management's distraction by the
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demands of pursuing the accelerated acquisition program and attempting to
integrate several acquired businesses into PRG's existing operations at the
same time; as a result, revenue growth in PRG's core businesses was slowing,
which was putting pressure on PRG's ability to achieve EPS growth.
(n) The businesses being acquired by PRG had internal
accounting and management information systems which were incompatible with
those utilized by PRG in its core business and, notwithstanding claims to the
contrary, PRG did not have software available which would permit those
incompatible systems to efficiently interact with or communicate with its
existing accounting and management information systems. As a result, the
defendants knew that the process of integrating the acquired businesses into
PRG's operations would take much longer and be much more expensive than was
being publicly presented and that as a result, after each of these acquisitions
took place, PRG was encountering serious and persistent difficulties in
obtaining the type of accurate business and accounting information it needed
from the acquired entities in order to successfully oversee or manage those
businesses, let alone integrate them into PRG's operations.
(o) That PRG did not have a business plan by which it
would integrate its acquired operations into its business in a way to achieve
economies of scale or generate the type of accurate information on a timely
basis that PRG management needed
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<PAGE> 72
to oversee those acquired businesses and manage them in a profitable manner.
(p) As a result of the foregoing, PRG was not
experiencing the acquisition synergies, efficiencies or cost savings
represented by PRG defendants, but rather was having difficulty integrating the
operations of acquired practices, which was leading to increased costs which
would hurt PRG's 4thQ 1996 results and its 1997 results as well.
(q) As a result of the inability of PRG's top managers to
pay attention to this part of the business due to the demands of pursuing PRG's
accelerated acquisition program and the problems they were encountering in
attempting to integrate the acquired businesses into PRG's operations, PRG was
required to cut prices and engage in promotional activities in that part of its
business, which was adversely impacting PRG's EPS growth.
(r) As a result of the foregoing, there was no basis for
the assurances that the acquisitions contained the potential for significant
economies of scale or synergies of operations or that they would be accretive
or non-dilutive to PRG's results during 1997 as, in truth, defendants actually
knew these acquisitions would badly hurt PRG's results from operations.
(s) As a result of the foregoing, defendants' forecasts
that PRG would achieve EPS of $1.07-$1.12 in 1997, and close to $1.50 in 1998
were known by defendants to be false, as such EPS were impossible to achieve
in light of these undisclosed problems.
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<PAGE> 73
(t) As a result of the foregoing, the forecasts of 25%
EPS growth for PRG over the next three to five years were known by defendants
to be false, as they were aware of the adverse information set forth above
which contradicted these forecasts and made them impossible to achieve.
76. On 3/26/97, PRG announced its 4thQ 1996 results and held a
conference call for analysts and investors. While PRG reported 4thQ 1996 EPS of
$.21, it also announced that, due to the recent decline in its stock price, PRG
would not be able to maintain its pace of acquisitions, that ongoing
acquisitions would not add to its EPS in 1997 and its 1997 EPS would be lower
than earlier forecast. In the following weeks, PRG admitted to analysts that
instead of the growth-by-acquisition strategy it had previously pursued, it
would now focus on a "same store growth" strategy and on improving margins
through operating integration and efficiencies.
77. However, as 1997 unfolded, PRG continued to reveal very
adverse and disappointing news to the market. Initially, it blamed its
worsening results on "an expected seasonal downturn in earnings" and the
"lower-than-expected performance of the EquiMed practice" acquired in 11/96.
Later, PRG said its 1997 EPS would be lower than even the lowered expectations
because its 1997 acquisitions were going "slower than anticipated" and it had
to spend more money on "operational infrastructures." Then, PRG announced that
it had hired two investment banking firms to try to sell the Company because of
PRG's inability to stabilize or
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improve its operations. Then, PRG's President, Richard Owen, and its Chairman,
Emmett Moore, and its then Chief Financial Officer were fired as PRG revealed
it would take a huge one-time charge of $31.75 million, for "asset valuation
losses," including uncollectible accounts receivable and closing of physician
practices that would result in a huge loss in the 3rdQ of 1997 (later reported
to exceed $18 million) and that PRG would not buy any more eye care physician
practices. PRG's stock ultimately collapsed to as low as $2-5/8 per share --
93% below its Class Period high of $34-3/8 per share.
78. In late 11/97, during a meeting with doctors in Tampa, Florida
whose practices had been acquired by PRG, defendant D'Amico made a number of
admissions demonstrating that PRG's prior statements during the Class Period
had been false, including the following:
o PRG admitted that it had internal control weaknesses in its
accounting and that it could not run a public company in such a
fashion.
o The PRG concept does not work. The practices that PRG acquired
had diminishing bottom lines, whereas the practices that were not
acquired by PRG had increased in the bottom line. Therefore, the
acquired practices were less profitable than they had been in the past.
o PRG's model was flawed.
o PRG's 10-Qs are not reliable.
o PRG's corporate infrastructure had burdened the acquired eye
practices with poor financial structures, had forced mergers of
practices which were not practical, did not take into account the
geographical needs and trends and PRG had acquired too many practices
to manage.
o PRG also had numerous infrastructure problems. It could not add
any more practices to its current operation
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because the infrastructure was not in place to service them.
PRG had 150 practices which it did not have enough personnel
to service. PRG's accrual accounting created a nightmare, as PRG
lacked the necessary systems to convert the cash basis accounting used
by the local practices into accrual accounting needed for PRG's
financial statements.
o That, in actuality, PRG had become an accounting company and
it did not know how to do accounting. It had numerous mistakes on its
payroll and benefits plan and the Company had grown from 200 to 6,000
employees within 12 months without the infrastructure present to
handle this explosive growth.
o PRG had done too many deals, too quickly.
o The integration of the practices had not occurred.
o PRG had tried to centralize too quickly and it had too many
practices.
o The practices and the Company had been in chronic disputes
over the included and excluded expenses and the accuracy of its
financial statements and its model had turned into a failure.
o PRG's model had demolished the entrepreneurial spirit of the
individual doctors in the practices and it had created a lack of
synergy and the practices had decreases in revenue with PRG in place,
rather than increased in revenue as they had historically. PRG
admitted that the corporate culture imposed on the individual
practices had made for disincentives for practice growth.
o PRG's accounting department was discontented, the turnover
rate was high and it lacked the necessary accounting infrastructure.
79. In an article published in the Review Of Ophthalmology in
12/97, PRG Board member Joseph Noreika admitted, "The essential systems that
were lacking were the financial systems." PRG Board member David Schulman, in
the same article, admitted, "In particular, the acquisition of Equimed and AOI
outstripped our ability to provide resources at an adequate level," "[o]ur
reach exceeded our grasp." Standard & Poor's also lowered its
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rating on PRG's debt for a second time, to even lower "junk" levels, saying
that "[A]fter consummating a series of acquisitions, PRG had difficulty in
integrating and controlling operations," stressing PRG's "inability to
adequately track and recoup accounts receivable from affiliated practices."
FALSE FINANCIAL STATEMENTS
80. In order to overstate PRG's revenues, net income and EPS
during the Class Period, the defendants caused PRG to violate GAAP and SEC
rules by improperly recognizing revenue on management services for which the
Company could not reasonably expect to ever be paid due to the Company's
woefully inadequate internal controls, which made collection improbable. The
Company also failed to adequately accrue reserves for its uncollectible
accounts receivable and receivables from affiliates.
81. PRG reported the following financial results for the first
three quarters of 1996:
<TABLE>
<CAPTION>
1stQ 2ndQ 3rdQ
-----------------------------------------
<S> <C> <C> <C>
Total Revenues $36.2 M $46.6 M $60.5 M
Net Income $.2.1 M* $ 3.3 M $ 6.5 M*
EPS $ 0.13 * $ 0.16 $ 0.24 *
</TABLE>
* Excluding Merger Charges.
82. PRG later included these results in Form 10-Qs filed with the
SEC. The Form 10-Qs, which were all signed by Owen and Bingham, each
represented the following:
In the opinion of management, the accompanying consolidated financial
statements include the accounts of the Company and all adjustments
necessary to present fairly the Company's financial position at [the
respective balance sheet date], its results of operations for the
[periods then ended] and its cash flows for the [periods then ended].
-75-
<PAGE> 77
83. This statement was false and misleading as to the financial
information reported in the Form 10-Qs during 1996, as such financial
information was not prepared in conformity with GAAP, nor was the financial
information "a fair presentation" of the Company's operations due to the
Company's improper revenue recognition and inadequate reserves related to its
management services provided to many of its physician practices, for which it
could not reasonably expect to collect due to its complete lack of internal
controls necessary to provide assurance of collection, causing its financial
results to be presented in violation of GAAP and SEC rules.
84. GAAP are those principles recognized by the accounting
profession as the conventions, rules and procedures necessary to define
accepted accounting practice at a particular time. Regulation S-X (17 C.F.R.
210.4-01(a)(1)) states that financial statements filed with the SEC which are
not prepared in compliance with GAAP are presumed to be misleading and
inaccurate. Regulation S-X requires that interim financial statements must also
comply with GAAP, with the exception that interim financial statements need not
include disclosure which would be duplicative of disclosures accompanying
annual financial statements. 17 C.F.R. Section 210.10-01(a).
85. Moreover, pursuant to Section 13(b)(2) of the 1934 Act, PRG
was required to "(A) make and keep books, records, and accounts, which, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the issuer; and
-76-
<PAGE> 78
(B) devise and maintain a system of internal accounting controls
sufficient to provide reasonable assurances that - (i) transactions are
executed in accordance with management's general or specific authorization;
(ii) transactions are recorded as necessary (I) to permit the preparation of
financial statements in conformity with generally accepted accounting
principles. . . . " 15 U.S.C. Section 78m(b)(2).
86. According to Appendix D to Statement on Auditing Standards No.
55, Consideration of the Internal Control Structure in a Financial Statement
Audit ("SAS 55"), management should consider, among other things, such
objectives as (i) making certain that "[t]ransactions are recorded as necessary
to permit preparation of financial statements in conformity with generally
accepted accounting principles. . . . [and] to maintain accountability for
assets," and (ii) making certain that "[t]he recorded accountability for assets
is compared with the existing assets at reasonable intervals and appropriate
action is taken with respect to any differences."
87. GAAP, as set forth in FASB Statement of Concepts ("Concepts")
No. 5, states that revenue should not be recognized until it has been both
earned and is collectible. Concepts No. 5, 183 states in part:
Revenues and gains generally are not recognized until realized or
realizable. . . . Revenues and gains are realizable when related assets
received or held are readily convertible to known amounts of cash or
claims to cash
... Revenues are not recognized until earned
... and revenues are considered to have been earned
-77-
<PAGE> 79
when the entity has substantially accomplished what it must do to be
entitled to the benefits represented by the revenues.
(Footnotes omitted.)
88. GAAP, as set forth in FASB Statement of Financial Accounting
Standard ("SFAS") No. 5, requires that when it is probable that receivables or
a group of receivables or some portion thereof will not be collected, a loss
should be recognized. See SFAS, No. 5, Section 8, 22-23.
89. SEC Regulation S-K, Item 303 (17 C.F.R. Section 229.303(a-b))
requires that issuers include a Management Discussion and Analysis ("MD&A") as
part of its Form 10-Qs, and that the MD&A should provide information about any
significant elements of the issuer's income from continuing operations which
are not necessarily representative of the issuer's ongoing business.
90. Contrary to this requirement, PRG failed to inform readers of
its financial statements as to the extreme risk that existed with respect to
collection of its receivables arising from its management service fees and in
its 1996 Form 10-Qs stated the following:
The Service Fees payable to PRG by the various practices under the
service agreements (Service Agreements) vary based on the nature and
amount of services provided. Such fees are payable monthly and consist
of various combinations of the following: (i) percentages of revenues
or percentages of earnings of the affiliated practices, relating to
professional services and certain other non-medical services,
depending on the scope and breadth of the services provided, (ii) all
revenues, or a substantial portion of revenues, relating to facility
and other non-physician fees with respect to certain assets owned by
PRG, (iii) operating and non-operating expenses of the practices paid
by PRG pursuant to the Service
-78-
<PAGE> 80
Agreements and (iv) certain negotiated performance and other
adjustments.
The amounts due from the affiliated practices include management
service receivables, receivables from the practices for certain
expenses being paid on their behalf and certain other miscellaneous
receivables from the practices. The receivables due from certain of
the affiliated practices are collateralized by a security interest in
the affiliated practices' receivables from third-party payors and
patients.
91. Concealed from the public were severe internal control
problems which prevented PRG's management from even knowing how much in
management fees they should be accruing and which apprised PRG's management of
the fact that it was likely that millions of dollars of the service fees the
Company was recognizing as revenue would never be collected. The internal
control problems included the following:
o PRG did not conduct adequate due diligence into many of its
acquisitions during 1996 to even know what the acquired practices'
accounting capabilities were as far as providing reliable, timely and
relevant information to PRG about the amount of fees payable. With so
little understanding of the practices' accounting capabilities, PRG
had no ability to make changes to the practices' accounting systems.
o PRG did not have mechanisms in place to adequately follow up
with practices which failed to provide timely information. Thus, for
many practices during 1996, PRG received no information regarding the
practices' financial results and services provided. Thus, PRG has now
admitted that the information in its Form 10-Qs was not reliable.
o Some of the acquired practices had never been able to generate
monthly or quarterly financial reports. This did not change upon being
acquired by PRG. Accordingly, these same practices failed to pay
management fees to PRG. PRG did not have in place any procedures for
following up and collecting these fees.
o PRG's infrastructure was so inadequate in relation to its
growth, that many times it did not pay doctors it employed in Florida
for up to five months.
-79-
<PAGE> 81
o As part of its 1996 year-end audit, PRG had to request doctors
to supplement financial information they had sent in months earlier
because PRG's systems were unable to generate the information.
o Many of the practices had historically been on cash-basis
accounting systems. PRG insisted the practices convert to accrual
based systems which caused several of the practices' accounting
systems to fail in that the information provided was inaccurate.
92. Plaintiffs estimate the extent of PRG's misstated financial
results related to the Company's improper revenue recognition and failure to
adequately reserve for uncollectible receivables was to misstate its lstQ, 2ndQ
and 3rdQ operating income (excluding merger charges) by a minimum of $1
million, $1.3 million and $1.9 million, respectively.
93. Ultimately, the Company has had to take reserves to account
for its improper revenue recognition in prior quarters. In the fall of 1997,
the Company revealed that it would have to implement new procedures relating
to the collection of management fees and expense reimbursement, and that its
losses to date were as much as $17 million. Additionally, the Company's
reserve for bad debts, which was less than $6 million in 1995, was increased to
more than $20 million at the end of 1996.
94. Due to these accounting improprieties, the Company presented
its financial results and statements in a manner which violated GAAP, including
the following fundamental accounting principles:
(a) The principle that interim financial reporting should be
based upon the same accounting principles and practices
-80-
<PAGE> 82
used to prepare annual financial statements was violated (APB No. 28,
paragraph 10);
(b) The principle that financial reporting should provide
information that is useful to present and potential investors and creditors and
other users in making rational investment, credit and similar decisions was
violated (FASB Statement of Concepts No. 1, paragraph 34);
(c) The principle that financial reporting should provide
information about the economic resources of an enterprise, the claims to those
resources, and effects of transactions, events and circumstances that change
resources and claims to those resources was violated (FASB Statement of
Concepts No. 1, paragraph 40);
(d) The principle that financial reporting should provide
information about how management of an enterprise has discharged its
stewardship responsibility to owners (stockholders) for the use of enterprise
resources entrusted to it was violated. To the extent that management offers
securities of the enterprise to the public, it voluntarily accepts wider
responsibilities for accountability to prospective investors and to the public
in general (FASB Statement of Concepts No. 1, paragraph 50);
(e) The principle that financial reporting should provide
information about an enterprise's financial performance during a period was
violated. Investors and creditors often use information about the past to help
in assessing the prospects of an enterprise. Thus, although investment and
credit decisions
-81-
<PAGE> 83
reflect investors' expectations about future enterprise performance, those
expectations are commonly based at least partly on evaluations of past
enterprise performance (FASB Statement of Concepts No.1, paragraph 42);
(f) The principle that financial reporting should be
reliable in that it represents what it purports to represent was violated. That
information should be reliable as well as relevant is a notion that is central
to accounting (FASB Statement of Concepts No. 2, paragraphs 58-59);
(g) The principle of completeness, which means that
nothing is left out of the information that may be necessary to insure that it
validly represents underlying events and conditions was violated (FASB
Statement of Concepts No. 2, paragraph 79); and
(h) The principle that conservatism be used as a prudent
reaction to uncertainty to try to ensure that uncertainties and risks inherent
in business situations are adequately considered was violated. The best way to
avoid injury to investors is to try to ensure that what is reported represents
what it purports to represent (FASB Statement of Concepts No. 2, paragraphs
95, 97).
95. Further, the undisclosed adverse information concealed by
defendants during the Class Period is the type of information which, because of
SEC regulations, regulations of the national stock exchanges and customary
business practice, is expected by investors and securities analysts to be
disclosed and is known by
-82-
<PAGE> 84
corporate officials and their legal and financial advisors to be the type of
information which is expected to be and must be disclosed.
CLAIM FOR RELIEF I
For Violation Of Section 10(b) Of The 1934
Act And Rule l0b-5 Against All Defendants
96. Plaintiffs incorporate by reference paragraphs 1-95.
97. Each of the defendants: (a) knew or had access to the material
adverse non-public information about PRG's financial results and then existing
business conditions, which was not disclosed; and (b) participated in drafting,
reviewing and/or approving the misleading statements, releases, reports and
other public representations of and about PRG.
98. During the Class Period, defendants, with knowledge of or
reckless disregard for the truth, disseminated or approved the false statements
specified above, which were misleading in that they contained
misrepresentations and failed to disclose material facts necessary in order to
make the statements made, in light of the circumstances under which they were
made, not misleading.
99. Defendants violated Section 10(b) of the 1934 Act and Rule
l0b-5 in that they:
(a) Employed devices, schemes and artifices to defraud;
(b) Made untrue statements of material facts or omitted
to state material facts necessary in order to make the statements made, in
light of the circumstances under which they were made, not misleading; or
-83-
<PAGE> 85
(c) Engaged in acts, practices and a course of business
that operated as a fraud or deceit upon plaintiffs and others similarly
situated in connection with their purchases of PRG common stock during the
Class Period.
100. Plaintiffs and the Class have suffered damages in that, in
reliance on the integrity of the market, they paid artificially inflated prices
for PRG stock. Plaintiffs and the Class would not have purchased PRG stock at
the prices they paid, or at all, if they had been aware that the market prices
had been artificially and falsely inflated by defendants' misleading
statements.
CLAIM FOR RELIEF II
For Violation Of Section 20(a) Of The 1934
Act Against Defendants Moore And PRG
101. Plaintiffs incorporate by reference paragraphs 1-100.
102. Defendant Moore acted as a controlling person of PRG
within the meaning of Section 20(a) of the 1934 Act. By reason of his position
as an officer and director of PRG, defendant Moore had the power and authority
to cause PRG to engage in the wrongful conduct complained of herein. PRG
controlled each of the Individual Defendants and all of its employees.
103. By reason of such wrongful conduct, Moore and PRG are liable
pursuant to Section 20(a) of the 1934 Act. As a direct and proximate result of
these defendants' wrongful conduct, plaintiffs and the other members of the
Class suffered damages in connection with their purchases of PRG securities
during the Class Period.
-84-
<PAGE> 86
CLASS ACTION ALLEGATIONS
104. Plaintiffs bring this action as a class action pursuant to
Federal Rule of Civil Procedure 23(a) and (b)(3) on behalf of all persons who
purchased or otherwise acquired PRG stock (the "Class") during the Class
Period. Excluded from the Class are the defendants, members of their families
and any entity in which a defendant has an interest.
105. The members of the Class are so numerous that joinder of all
members is impracticable. The disposition of their claims in a class action
will provide substantial benefits to the parties and the Court. During the
Class Period, PRG had more than 17 million shares of stock outstanding, owned
by thousands of shareholders.
106. There is a well-defined community of interest in the questions
of law and fact involved in this case. The questions of law and fact common to
the members of the Class which predominate over questions which may affect
individual Class members include the following:
(a) Whether the federal securities laws were violated by
defendants;
(b) Whether defendants omitted and/or misrepresented
material facts;
(c) Whether defendants knew, had reason to know or
recklessly disregarded that their statements were false and misleading or
failed to have a reasonable basis for those statements;
<PAGE> 87
(d) Whether the price of PRG stock was artificially
inflated during the Class Period; and
(e) The extent of damage sustained by Class members and
the appropriate measure of damages.
107. Plaintiffs' claims are typical of those of the Class because
plaintiffs and the Class sustained damages from defendants' wrongful conduct.
108. The prosecution of separate actions by individual Class
members would create a risk of inconsistent and varying adjudications.
109. Plaintiffs will adequately protect the interests of the Class.
They have retained counsel who are experienced in class action securities
litigation. Plaintiffs have no interests which conflict with those of the
Class.
110. A class action is superior to other available methods for the
fair and efficient adjudication of this controversy.
STATUTORY SAFE HARBOR
111. The statutory safe harbor provided for forward-looking
statements under certain circumstances does not apply to any of the allegedly
false statements pleaded in this Complaint. Many of the statements in Section
26-29, 32, 33, 35-37, 41, 43, 45, 49-53, 55, 57, 58, 61, 63-65, 67, 68 and
71-74 are historical or present tense statements. To the extent that any of the
statements pleaded in Section 26-29, 32, 33, 35-37, 41, 43, 45, 49-53, 55, 57,
58, 61, 63-65, 67, 68 and 71-74 were "forward-looking statements" none of them
were identified as "forward-looking statements" when
-86-
<PAGE> 88
made. Nor was it stated that actual results "could differ materially from
those projected." Nor were the statements accompanied by meaningful
cautionary statements identifying important factors that could cause actual
results to differ materially from the statements made. Alternatively, to the
extent that the statutory safe harbor does apply to any statements pleaded
herein, because they are "forward-looking," the defendants are liable for those
statements because at the time each of those statements was made, the speaker
knew the statement was false and the statement was authorized and/or approved
by an executive officer of PRG who knew that those statements were false when
made.
BASIS OF ALLEGATIONS
112. Because the PSLRA, Section 21D(c) of the 1934 Act [15 U.S.C.
Section 78u-4(c)], requires complaints to be pleaded in conformance with
Federal Rule of Civil Procedure 11, plaintiffs have alleged the foregoing based
upon the investigation of their counsel, which included a review of PRG's SEC
filings, securities analysts' reports and advisories about the Company, press
releases issued by the Company, media reports about the Company, private
investigations, information obtained from former employees and discussions with
consultants, and, pursuant to Rule 11(b)(3), believe that after reasonable
opportunity for discovery, substantial evidentiary support will likely exist
for the allegations set forth at paragraphs ll, 59, 75, 80, 81, 83, 91, 92
and 94.
-87-
<PAGE> 89
PRAYER FOR RELIEF
WHEREFORE, plaintiffs pray for judgment as follows:
1. Declaring this action to be a proper class action pursuant to
Rules 23 (a) and 23 (b)(3) of the Federal Rules of Civil Procedure on behalf
of the Class defined herein;
2. Awarding plaintiffs and the members of the Class compensatory
damages;
3. Awarding plaintiffs and the members of the Class pre-judgment
and post-judgment interest, as well as reasonable attorneys' fees, expert
witness fees and other costs;
4. Awarding extraordinary, equitable and/or injunctive relief as
permitted by law, equity and the federal statutory provisions sued hereunder
pursuant to Rules 64, 65 and any appropriate state law remedies; and
5. Awarding such other relief as this Court may deem just and
proper.
JURY DEMAND
Plaintiffs demand a trial by jury.
-88-
<PAGE> 90
DATED: December 23, 1997
STANLEY, MANDEL & IOLA, L.L.P.
MARC R. STANLEY
Texas State Bar No. 19046500
ROGER L. MANDEL
Texas State Bar NO. 12891750
/s/ MARC R. STANLEY
-------------------------------------
MARC R. STANLEY
3100 Monticello Avenue
Suite 750
Dallas, TX 75205
Telephone: 214/443-4301
Of Counsel:
MILBERG WEISS BERSHAD
HYNES & LERACH LLP
WILLIAM S. LERACH
California Bar No. 68581
ALAN SCHULMAN
California Bar No. 128661
DARREN J. ROBBINS
California Bar No. 168593
/s/ WILLIAM S. LERACH - W/PERMISSION
- -------------------------------------
WILLIAM S. LERACH
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/231-1058
DAVID H. PATTERSON
DAVID H. PATTERSON & ASSOCIATES
612 Berkshire Drive
Pittsburgh, PA 15215
Telephone: 412/767-9737
Attorneys for Plaintiffs
-89-
<PAGE> 91
CERTIFICATION OF NAMED PLAINTIFF
PURSUANT TO FEDERAL SECURITIES LAWS
Jeffrey Schiller ("Plaintiff") declares, as to the claims asserted under
the federal securities laws, that:
1. Plaintiff has reviewed the complaint and authorized its filing.
2. Plaintiff did not purchase the security that is subject of this
action at the direction of plaintiff's counsel or in order to participate in
this private action or any other litigation under the federal securities laws.
3. Plaintiff is willing to serve as a representative party on behalf of
the class, including providing testimony at deposition and trial, if necessary.
4. Plaintiff has made no transaction(s) during the Class Period in the
debt or equity securities that are the subject of this action except those set
forth below:
<TABLE>
<CAPTION>
Security Transaction Date Price Per Share
- -------- ----------- ---- ---------------
<S> <C> <C> <C>
Common Stock Purchased 500 Shares 1/28/97 $15-5/8
Common Stock Purchased 500 Shares 2/13/97 $13-1/4
</TABLE>
5. During the three years prior to the date of this Certificate,
Plaintiff has sought to serve or served as a representative party for a class
in the following actions filed under the federal laws:
None
6. Plaintiff has sought to serve or served as a representative party for
a class in the following actions filed subsequent to December 22, 1995:
None
7. The Plaintiff will not accept any payment for serving as a
representative party on behalf of the class beyond the Plaintiff's pro rata
share of any recovery, except such reasonable costs and expenses (including
lost wages) directly relating to the representation of the class as ordered or
approved by the court.
Certification-
page 1
<PAGE> 92
I declare under penalty of perjury that that foregoing is true and correct.
Executed this 22 day of December, 1997, at Dallas, Texas.
/s/ JEFFREY SCHILLER
----------------------------
Jeffrey Schiller
<PAGE> 93
CERTIFICATION OF NAMED PLAINTIFF
PURSUANT TO FEDERAL SECURITIES LAWS
-----------------------------------
Diversified Investment Holdings LP ("Plaintiff") declares, as to the
claims asserted under the federal securities laws, that:
1. Plaintiff has reviewed the complaint and authorized its filing.
2. Plaintiff did not purchase the security that is the subject of this
action at the direction of plaintiff's counsel or in order to participate in
this private action or any other litigation under the federal securities laws.
3. Plaintiff is willing to serve as a representative party on behalf of
the class, including providing testimony at deposition and trial, if necessary.
4. Plaintiff has made no transaction(s) during the Class Period in the
debt or equity securities that are the subject of this action except those set
forth below:
ACQUISITIONS
------------
<TABLE>
<CAPTION>
Security Transaction Date
- -------- ----------- ----
<S> <C> <C>
Common Stock 177,599 shares 12/05/96
Common Stock 5,000 shares 12/04/97
Common Stock 2,716 shares 02/25/97
</TABLE>
SALES
-----
<TABLE>
<CAPTION>
Security Transaction Date
- -------- ----------- ----
<S> <C> <C>
Common Stock 2,000 shares 01/31/97
Common Stock 3,000 shares 02/04/97
Common Stock 4,000 shares 02/12/97
Common Stock 4,000 shares 02/24/97
Common Stock 2,000 shares 02/25/97
</TABLE>
5. During the three years prior to the date of this Certificate, Plaintiff
has sought to serve or served as a representative party for a class in the
following actions filed under the federal securities laws:
None.
<PAGE> 94
6. The plaintiff will not accept any payment for serving as a
representative party on behalf of the class beyond the Plaintiff's pro rata
share of any recovery, except such reasonable costs and expenses (including
lost wages) directly relating to the representation of the class as ordered or
approved by the court.
I declare under penalty of perjury that the foregoing is true and
correct. executed this 22 day of December, 1997, at Clearwater, Florida.
[ILLEGIBLE]
--------------------------------------
DIVERSIFIED INVESTMENT HOLDINGS LP
<PAGE> 1
EXHIBIT 99.2
IN THE UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF TEXAS
DALLAS DIVISION
- ------------------------------------- }
REGINA PELTZ, On Behalf }
Of Herself And All Others }
Similarly Situated, }
}
Plaintiff, } CIVIL ACTION NO.
}
- against - } 3 9 7 C V 3 1 7 6 - D
}
PHYSICIANS RESOURCE GROUP, INC. } JURY TRIAL DEMANDED
and EMMETT E. MOORE. }
}
}
Defendants. }
}
- -------------------------------------- }
COMPLAINT - CLASS ACTION
Plaintiff, individually and on behalf of all others similarly
situated, by her attorneys, alleges the following upon information and belief
(except for those allegations which pertain to the individual plaintiff and her
attorneys, which allegations are based on personal knowledge). Plaintiffs
information and belief is based, inter alia on the investigation conducted by
her attorneys, including, among other things, a review of the public filings of
Physicians Resource Group, Inc ("PRG" or the "Company") with the Securities and
Exchange Commission ("SEC"), news articles and press releases pertaining to the
Company, and other publicly available information.
COMPLAINT - CLASS ACTION PAGE 1
<PAGE> 2
JURISDICTION AND VENUE
1. This Court has jurisdiction of this action under
Section 27 of the Securities Exchange Act of 1934 (the "Exchange
Act"), 15 U.S.C. Section 78aa, and 28 U.S.C. Section 1331.
2. The claims herein arise under Section 10(b) of the
Exchange Act, as amended, 15 U.S.C. Section 78j(b), and Rule 10b-5
Promulgated thereunder by the SEC, 17 C.F.R. Section 24010b-5.
3. Venue is proper in this District because PRG
maintains offices within this District, Mr. Moore lives in this
District and the acts giving rise to the violations of law complained
of in this complaint occurred in this District.
4. In connection with the conduct complained of herein,
the defendants, directly or indirectly, used means and
instrumentalities of interstate commerce, including the mails and
interstate telephone communications and the facilities of the New York
Stock Exchange, a national securities exchange.
NATURE OF THE ACTION
5. This is a securities class action on behalf of all
persons, other than defendants and affiliated persons as described
below (the "Class"), who purchased the securities of PRG between
June 17, 1997 and November 19, 1997, inclusive (the "Class Period").
6. PRG is a single-specialty provider of management
services to ophthalmic and optometry practices (the "Practices"). As
Of March 21, 1997, PRG provided management
COMPLAINT - CLASS ACTION PAGE 2
<PAGE> 3
services to 151 practices with 414 ophthalmologists and 223
optometrists at 357 locations in 25 states.
7. This action arises out of a scheme by defendants to
misrepresent and conceal the adverse truth as to the success and
financial condition of PRG and thereby inflate artificially the price
of PRG common stock. Defendants concealed and failed to disclose
until the end of the class period, the fact that PRG would have to
take substantial material charges and/or writedowns in connection with
practices acquired from EquiMed, Inc. ("EquiMed"). Defendants
concealed and failed to disclose these and other related material
facts even though they knew, no later than the beginning of the class
period, (i) the underlying facts which would necessitate such charges
and/or writedowns; (ii) that the value of the practices that PRG had
acquired from EquiMed were materially overstated on PRG's financial
statements, causing PRG's financial statements as a whole to be
materially overstated and necessitating huge charges and writedowns
(no less than $27.8 million) and (iii) that PRG's stated accounting
policies and GAAP required such charges and writedowns immediately,
and in no event later than June 30, 1997, Because defendants had
chosen to speak on the issue of the EquiMed acquisitions and their
future effect on PRG's financial performance and PRG's claims against
EquiMed, they were under a continuing duty throughout the class
period to disclose immediately all relevant facts, including those
mentioned above and elsewhere in this Complaint. Throughout the class
period, Defendants had actual knowledge of the negative, underlying
material facts indicating that the value of the EquiMed practices was
materially overstated on PRG's books and would have to be written
down, but consciously failed to disclose same and, in the case of the
June 30, 1997 financial statements, continued to affirmatively and
knowingly overstate materially the value of the
COMPLAINT - CLASS ACTION PAGE 3
<PAGE> 4
company's assets and its financial condition. Thus, defendants acted
with scienter. They were motivated to do so in part to enable the
Company to market itself to third parties as a lucrative acquisition
candidate and enrich themselves and their principals, thus providing
further evidence of scienter.
8. Prior to the beginning of the Class Period, and
continuing throughout the Class Period, PRG adopted a strategy of
growth through acquisition of practices. By using this strategy, PRG
was able to give the appearance that it was a rapidly growing company
that would be a lucrative acquisition candidate to an outside party.
Defendants knew that they could not continue their growth through
acquisition strategy for much longer and the only way for them to reap
substantially monetary benefits would be if PRG were acquired by an
outside party.
9. In order to continue to give the market the
appearance that it was a rapidly growing company, PRG acquired the eye
care division practices of EquiMed in November of 1996. This
acquisition was one of the largest that PRG had ever undertaken and
PRG represented to the market that the acquisition would have
substantially accretive effects on PRG's revenues and earnings.
10. After acquiring these practices from EquiMed, but
prior to the beginning of the class period, PRG discovered that the
practices it had purchased were worth substabtially less than what
EquiMed had represented them to be, that many of the practices
purchased from EquiMed would have to be closed, that as a result
substantially charges and/or writedowns would be necessary and that the
problem was of such a magnitude as to warrant ceasing payments to
EquiMed.
COMPLAINT - CLASS ACTION PAGE 4
<PAGE> 5
11. Faced with the realization that if the market were to
discover that the EquiMed acquisition was not going to be
substantially accretive to PRG's revenues and earnings and that PRG
would be required to take material charges to, and writedown, the
value of the EquiMed practices, defendants engaged in a scheme whereby
they would keep the market from learning the true financial condition
of PRG and the value of the EquiMed practices. Defendants knew that
if the market were to learn that the value of the EquiMed practices
was substantially less than what PRG bad represented in November of
1996 and thereafter, PRG's stock price would fall and it would no
longer be considered a rapidly growing company and its viability as a
potential acquisition candidate would end. Any such revelation would
have been in direct conflict with defendants' public announcement
during the class period (September 4, 1997) to the effect that PRG had
engaged investment bankers to study a possible sale of the Company.
Indeed, Defendants' announcement to that effect was itself actionable
fraud in light of defendants' knowledge that the charges and
writedowns in question should have been, or at the least soon would
have to be, taken.
12. No later than June 17, 1997, defendants knew that PRG
would have to take substantial writedowns to the value of many of the
practices it had purchased from EquiMed, But rather than disclosing
that PRG would have to take charges related to the EquiMed
acquisition, defendants in effect disclosed little more than the fact
that PRG and EquiMed were involved in an arbitration.
13. In furtherance of defendants scheme to defraud
investors, defendants were successful in preventing the market from
learning, until November 19, 1997, the true extent of the charges that
PRG would have to take in connection with its EquiMed acquisition.
COMPLAINT - CLASS ACTION PAGE 5
<PAGE> 6
On November 13, 1997 PRG reported for the first time that it would
record charges in the third quarter, but neither the amount nor the
order of magnitude of the charges was disclosed. It was not until
November 19, 1997 that defendants finally revealed the amount of the
charges that would be taken. Such charges should have been taken no
later than June 30, 1997, and the necessity for same should have been
disclosed no later the June 17, 1997. Defendants knew that the effect
of disclosure of the charges would be that the market would no longer
consider PRG to be a viable acquisition candidate. This is evidenced
by the fact that also on November 19, 1997, PRG disclosed that it was
no longer pursuing a sale of the Company. The knowledge that
disclosure of the writedown, or even the likely need for a writedown,
would kill any chance of a sale of the company, motivated Defendants
to conceal the adverse facts referred to herein. By the time the
market was able to piece together the full story from these
disclosures, PRG shares had tumbled 30%.
THE PARTIES
14. Plaintiff Regina Peltz sold 20 put options on PRG
common stock on November 4, 1997, and sold 260 put options on PRG
common stock on November 5, 1997, and was damaged thereby.
15. PRG is a Delaware corporation with its principal
offices located at Three Lincoln Centre, 5430 LBJ Freeway, Suite 1540,
Dallas, Texas 75240. PRG, which began operations and had its initial
public offering in 1995, is a single-specialty provider of management
services to ophthalmic and optometric practices (the "Practices"). As
of March 21, 1997, PRG provided management services to 151 practices
with 414 ophthalmologists and 223 optometrists at 357 locations in 25
states.
COMPLAINT - CLASS ACTION PAGE 6
<PAGE> 7
16. Defendant Emmett Moore ("Moore" or the "individual
defendant") was Chairman of the Board and Chief Executive Officer of
PRG from September 17, 1995, and a director from April 20, 1995, until
his termination without cause which was announced on or about November
19, 1997. On or about February 21, 1997, defendant Moore entered into
a three year employment agreement with PRG whereby he would receive a
salary of $315,000 per annum in addition to a bonus of $50,000 and a
grant of 100,000 stock options for the purchase of PRG stock. As of
the end of fiscal year 1996, defendant Moore had approximately 700,000
stock options for the purchase of PRG stock. According to the
Company's proxy statement for 1997, defendant Moore owned 390,000
shares of PRG stock.
CLASS ACTION ALLEGATIONS
17. Plaintiff brings this action as a class action
pursuant to Federal Rules of Civil Procedure 23(a) and 23(b)(3) on
behalf of a class (the "Class") of all persons who purchased PRG
securities between June 17, 1997 and November 19, 1997, inclusive (the
"Class Period"), and who were damaged thereby. Excluded from the
Class are the defendants herein, any subsidiaries or affiliates of
PRG, members of the defendants immediate families, the officers and
directors of PRG during the Claim Period, and each of their heirs,
successors and assigns.
18. The members of the Class are so numerous that joinder
of all members is impracticable. While the exact number of Class
members is unknown to plaintiff at the present time and can only be
ascertained from books and records maintained by PRG and/or its
agent(s), plaintiff believes that there are, at a minimum, hundreds, if
not thousands, of members of the Class located throughout the United
States, including Texas. As of March 21, 1997, there were
COMPLAINT - CLASS ACTION PAGE 7
<PAGE> 8
30,146,748 shares of PRG common stock outstanding. Throughout the
Class Period, PRG's common stock was actively traded on the New York
Stock Exchange,
19. Plaintiff will fairly and adequately represent and
protect the interests of the members of the Class. Plaintiff has
retained competent counsel experienced in class and securities
litigation and intends to prosecute this action vigorously. Plaintiff
is a member of the Class and does not have interests antagonistic to,
or in conflict with, the other members of the Class.
20. Plaintiffs claims are typical of the claims of the
members of the Class. Plaintiff and all members of the Class acquired
PRG securities during the Class Period at artificially inflated prices
and have sustained damages arising out of the same wrongful course of
conduct.
21. Common questions of law and fact exist as to all
members of the Class and predominate over any questions solely
affecting individual members of the Class. Among the questions of law
and fact common to the Class are:
(a) Whether the federal securities laws were violated by
defendants' acts and omissions as alleged herein;
(b) Whether defendants participated in and pursued the
common course of conduct and fraudulent scheme complained of herein;
(c) Whether the documents, reports, financial statements,
filings, releases and statements disseminated to the investing public,
including purchasers of PRG securities during the Class Period,
omitted and/or misrepresented material facts about the business,
performance, and financial condition of PRG;
COMPLAINT - CLASS ACTION PAGE 8
<PAGE> 9
(d) Whether defendants acted knowingly and/or recklessly
in omitting to state and/or misrepresenting material facts;
(e) Whether the market price of PRG's securities during
the Class Period was artificially inflated due to the nondisclosures
and/or misrepresentations complained of herein; and
(f) Whether plaintiff and the other members of the Class
have sustained damages and, if so, the appropriate measure thereof.
22. A class action is superior to other available methods
for the fair and efficient adjudication of this controversy since,
among other things, joinder of all members of the Class is
impracticable. Furthermore, as the damages suffered by individual
Class members may be relatively small, the expense and burden of
individual litigation make it virtually impossible for many Class
members individually to seek redress for the wrongful conduct alleged.
Plaintiff does not foresee any difficulty in the management of this
litigation that would preclude its maintenance as a class action.
23. The names and addresses of the record owners of the
shares of PRG's securities acquired during the Class Period are
available from PRG and/or its transfer agent(s). Notice can be
provided to purchasers of PRG's securities by a combination of
published notice and first class mail using techniques and forms of
notice similar to those customarily used in class actions arising
under the federal securities laws.
24. Plaintiff will rely, in part, upon the presumption of
reliance established by the fraud-on-the-market doctrine in that,
among other things:
(a) defendants made public misrepresentations or failed
to disclose material facts during the Class Period;
COMPLAINT - CLASS ACTION PAGE 9
<PAGE> 10
(b) the omissions and misrepresentations were material;
(c) the common stock of the Company traded in an open,
active and efficient market;
(d) the misrepresentations, as well as the omissions,
alleged would tend to induce a reasonable investor to misjudge the
value of the Company's common stock; and
(e) plaintiff and the other members of the Class acquired
PRG's securities between the time defendants failed to disclose or
misrepresented material facts and the time the true facts were
disclosed, without knowledge of the omitted and/or misrepresented
facts.
25. Based upon the foregoing, plaintiff and the other
members of the Class are entitled to a presumption of reliance upon
the integrity of the market for, at least, the purpose of class
certification, as well as for ultimate proof of the claims on their
merits. Plaintiff will also rely, in part, upon the presumption of
reliance established by the omission of material facts.
FACTUAL BACKGROUND AND SUBSTANTIVE ALLEGATIONS
PRG HAS GROWN ALMOST EXCLUSIVELY THROUGH
ACQUISITIONS, INCLUDING THE EQUIMED ACQUISITION
26. In or about the beginning of 1995, PRG adopted a
strategy of growth through acquisition of physician practices. For
example, during 1996, the Company made a substantial number of
acquisitions. These acquisitions included both the assets of
individual practices as well as several large physician practice
management companies. Through these acquisitions PRG was able to give
the appearance of a rapidly growing company with robust revenues and
earnings. Investors were led to believe that PRG would continue to
grow through
COMPLAINT - CLASS ACTION PAGE 10
<PAGE> 11
acquisitions. Defendants' motive for engaging in their growth through
acquisition strategy was, inter alia, to use PRG's rapid growth to
make the Company appear to be an attractive acquisition candidate. If
PRG were acquired, defendant Moore would reap substantial monetary
benefits because of his ownership of PRG common stock and stock
options.
27. Consistent with this strategy, on October 7, 1996,
PRG announced to the public that it had signed definitive agreements
to acquire its two largest competitors, the eye care division of
EquiMed, a publicly held multi-specialty physician practice management
company and American Ophthalmic Incorporated ("AOI"), a privately held
physician management practice company devoted solely to eye care. In
making the announcement of the acquisitions, defendants touted what
these acquisitions would mean to PRG's future results. PRG said that:
"Physicians Resource Group's annual revenue run rate will
increase to approximately, with these acquisitions, $378
million, from a pre-acquisition rate of $248 million. In
addition, with the acquisitions, PRG will provide management
services to 136 practices, and will have 586 professionals and
44 ambulatory surgery centers, making it the nations largest
single-specialty physician practice management company.
"These acquisitions are strategically, geographically and
financially very important to the future of PRG," said Emmett
E. Moore, Physicians Resource Group chairman, president and
CEO. American Ophthalmic makes us the market leader in
Central and South Florida, fills out the Central Texas
corridor in Austin and San Antonio to complement PRG's
strength in Houston and Dallas, bolsters our strong positions
in Las Vegas and Southern California and offers us market
entries in Alabama and North Carolina. EquiMed brings us
significant new entries into Louisiana and New York and their
practices in Northern California, Ohio, Pennsylvania,
Illinois and Iowa complement PRG's existing practices in and
around these markets. Both of these acquisitions bring us
significant operational infrastructure and will enhance PRG's
competitive position."
COMPLAINT - CLASS ACTION PAGE 11
<PAGE> 12
These specific, positive statements, among perhaps other of
defendants' statements, gave rise to an affirmative duty to disclose
promptly any subsequent negative or contradictory information, and a
duty to correct if, as and when the prior statement becomes misleading
or inaccurate.
28. On November 14, 1996, according to PR Newswire, PRG
reported its results for the quarter ending September 30, 1996. In
reporting its results, PRG also announced the closing of its EquiMed
acquisition along with some of the essental terms of the purchase
agreement:
PRG also announced the closing, on November 5, 1996, of the
acquisition of the eye care division of EquiMed, Inc (Nasdaq:
EQMD). The purchase price for the acquisition, which was
originally announced by PRG on October 7, 1996, was
approximately $54 million and was paid in cash. The purchase
price may be increased if EquiMed delivers additional
acquisitions to PRG by the end of the first quarter of 1997.
29. In the November 14, 1996, PR Newswire release, defendant
Moore discussed PRG's growth through acquisition strategy:
This past quarter was a very significant one for PRG. We made
17 acquisitions and met competitive pressures head-on with the
acquisition of Cincinnati Eye Institute, Houston Eye
Associates and a number of practices in the Tampa, Florida
area. We benefitted greatly from pooling certain of these
transactions. After quarter end, we announced the acquisition
of our two biggest competitors, American Ophthamalic Inc. (AOI)
and the eye care division of EquiMed, These acquisitions are
strategically, geographically and financially important to
PRG's future. Our management team has been and will continue
to be focused on closing these acquisitions and integrating
their operations over the next few months. We believe that
even though these efforts will cause a delay in the execution
of acquisitions otherwise anticipated in the fourth quarter,
the Company will be better positioned for the future.
(Emphasis added).
30. On January 9,1997, PRG announced that it had completed
the acquisition of the assets of eight (8) separate eye care practices
since the beginning of December 1997.
COMPLAINT - CLASS ACTION PAGE 12
<PAGE> 13
31. In or about March, 1997, PRG filed its Form 10-K
Annual Report to Shareholders for the year ending December 31, 1996.
In the section entitled "DEVELOPMENT AND OPERATIONS" "Acquisition
Criteria" defendants discussed PRG's growth through acquisition
strategy:
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.
LITIGATION WITH EQUIMED OVER THE
NOVEMBER 1996 PURCHASES OF EQUIMED'S PRACTICES
32. At no time after the acquisition of the eye care
division of EquiMed and before November 13, 1997, did PRG ever
disclose that it would have to take charges because it believed that
EquiMed had overstated the value of the practices EquiMed had sold to
PRG. It was not until November 19. 1997, that defendants disclosed
the amount of the charges.
33. On May 21, 1997 EquiMed announced via PR Newswire
that: "it has filed a claim before the American Arbitration
Association in Philadelphia, Pennsylvania to enforce certain terms of
its October 1996 Asset Purchase Agreement ("Agreement") with
Physicians Resource Group, Inc. (NYSE: PRG) and PRG Georgia, Inc.
(Collectively "PRG") and to recover EquiMed's claim for damages in
excess of $30,000,000 for breach of the Agreement and related
conduct." The release stated further:
COMPLAINT - CLASS ACTION PAGE 13
<PAGE> 14
Pursuant to the Agreement, in November 1996 EquiMed sold
substantially all of the assets of its Ophthalmology Division
to PRG for $54,000,000 in cash, plus assumption of
approximately $14.5 million in debt. In addition to the
consideration received in November 1996, EquiMed agreed to
assist PRG in the acquisition of third party ophthalmology
practices from November 1996 through April 1997. EquiMed was
entitled to receive payment from PRG on May 15, 1997
representing the fees earned on the third party ophthalmology
practice acquisitions. PRG failed to make the May 15, 1997
payment and advised EquiMed that it does not intend to do so.
Based on the acquisitions consummated for which EquiMed is
entitled to compensation in accordance with the Agreement, as
well as those that EquiMed believes also should have been
consummated for which EquiMed is entitled to compensation in
accordance with the Agreement, EquiMed estimates the amount
due on May 15 from PRG to be in excess of $30,000,000.
EquiMed also seeks unspecified damages related to PRG's
refusal to provide EquiMed's auditors with access to financial
records of the Ophthalmology Division, which has caused delays
in the completion of EquiMed's annual audit and securities
filings. (Emphasis added).
34. On June 17, 1997, PRG first announced, via PR
Newswire,that it had asserted in the arbitration counterclaims against
EquiMed in connection with PRG's purchase of practices from EquiMed:
[PRG] has filed counterclaims against EquiMed .... in the
action between PRG and EquiMed pending before the American
Arbitration Association in Philadelphia, Pennsylvania. In the
action, EquiMed asserted claims against PRG seeking damages in
excess of thirty million dollars ($30,000,000) and other
claims seeking unspecified damages. PRG has denied EquiMed's
claims and intends to vigorously defend itself against those
claims. PRG's counterclaims include, among others, breach of
representations and warranties, fraud and conversion. PRG
seeks various forms of relief, including, compensatory damages
in excess of forty five million dollars ($45,000,000) and
punitive damages . . . We are aggressively pursuing our
counterclaim against EquiMed and are confident in our ability
to prevail (Emphasis added).
(The "June 17 Announcement").
35. Having chosen to speak regarding the EquiMed
relationship, the arbitration, PRG's counterclaim and its confidence
regarding that claim, PRG had a continuing duty to disclose all
material information regarding the EquiMed acquisition, the value of
the practices
COMPLAINT - CLASS ACTION PAGE 14
<PAGE> 15
acquired from EquiMed, the arbitration proceeding and PRG's
counterclaim. When PRG made its counterclaims, and when it made the
June 17 announcement, defendants well knew the underlying negative
facts which told them that the practices which PRG had acquired from
EquiMed were overvalued on PRG's books and would have to be written
down. Yet the June 17 announcement made no mention whatsoever of
these facts. Defendants knew no later than June 17, 1997, that the
assets acquired directly from EquiMed in November, 1996 were
overvalued and that a writedown would be required. As of at least
June 17, 1997, PRG was under an obligation to disclose to the
investing market that PRG disputed the value of the assets it acquired
in November 1996 and that it would be forced to make accounting
adjustments to those values and allow for charges PRG would have to
take in connection with that acquisition.
36. On or about August 13, 1997, PRG filed its Form 10-Q
for its second quarter ending June 30, 1997. That filing repeated the
earlier statements to the effect that PRG had asserted a counterclaim
against EquiMed for damages in excess of $45,000,000. However, in
that 10-Q as in the June 17 Announcement, defendants failed to
disclose that PRG would be forced to make accounting adjustments to
account for the fact that PRG would have to take charges in connection
with its November 1996 purchase of practices from EquiMed.
37. PRG's failure to disclose that it would be forced to
take charges in connection with its November 1996 purchase of
practices from EquiMed was a violation of the Company's stated
accounting policies and procedures.
38. Footnote I to PRG's June 30,1997, Form 10-Q stated:
The interim consolidated financial statements ... included
herein have been prepared by the Company pursuant to the
rules and regulations of the Securities and Exchange
Commission. Although the Company believes that the
disclosures are
COMPLAINT - CLASS ACTION PAGE 15
<PAGE> 16
adequate to make the information presented not misleading,
certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. It is suggested that
these financial statements be read in conjunction with
financial statements and notes included in The Company's
Annual Report on Form 10-K for the Year ended December 31
1996. In the opinion of management, the accompanying
unaudited interim financial statements contain all
adjustments, consisting only of those of a normal recurring
nature, necessary to present fairly the Company's results of
operations and cash flows for the periods presented....
(Emphasis added).
39. Note 2 entitled "Summary Of Significant Accounting
Policies" to the financial statements in the December 31, 1996, Form
10-K stated under the section entitled "Intangible Assets:"
The Company reviews the carrying value of the long lived and
goodwill 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.... If an impairment
is indicated, then an adjustment will be made to reduce the
carrying amount of the intangible assets to their fair value.
(Emphasis added).
Thus, defendants reaffirmed at June 30, 1997, that at least quarterly,
they re-evaluate impairment. They did not, however disclose the then
existing impairment in the carrying value of the practices purchased
from EquiMed; impairment which Defendants knew, from the same facts
supporting their counterclaim and offset against EquiMed, was
necessary.
40. The quoted policy in the previous paragraph is in
conformity with 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."
41. Under SFAS No. 121, PRG was required to review the
carrying value of Long-Lived Assets under certain circumstances.
Under PRG's internal accounting policies it was required to review the
EquiMed assets "at least quarterly" and as such were in a position to
know,
COMPLAINT - CLASS ACTION PAGE 16
<PAGE> 17
and did know, or were severely reckless in not knowing, that the
EquiMed assets were impaired as of the end of each Quarter of 1997
beginning, at the latest, with the quarter ended June 30, 1997,
Defendants knew, certainly no later than June 1997, when PRG filed its
counterclaim in the EquiMed arbitration, that EquiMed assets were
impaired and not as represented. In order to assert and determine the
amount of the counterclaim, PRG had to know and believe that the
carrying values of the practices that were the subject of the
counterclaim were substantially less than as represented, PRG failed
to disclose that it believed that the carrying values of the practices
were less than what EquiMed had represented them to be. In addition,
under PRG's Accounting Policies, PRG "reviews the carrying values of
the long-lived and goodwill assets at least quarterly......" If such
review had been conducted in connection with the June 30, 1997, Form
10-Q, adjustments should have been made at that time and the charges
taken in the third quarter of 1997 should have been taken at that time
(June 30, 1997). Because the charges taken in the third quarter of
1997 should have been taken no later than the second quarter of 1997,
PRG's second quarter financial statements were materially overstated
by the amount of the charges taken in the third quarter with respect
to the practices acquired from EquiMed.
42. PRG did not disclose that PRG would have to take
charges related to its EquiMed acquisition because if PRG had
disclosed this information the market would have learned that PRG was
not a rapidly growing company and therefore not a lucrative takeover
candidate and individual defendant Moore's position with the Company
would have been in jeopardy and the value of his substantial stock and
stock options would decrease.
43. In furtherance of their scheme to use PRG's growth
through acquisition strategy to make the Company appear to be a
lucrative takeover candidate, defendants issued a
COMPLAINT - CLASS ACTION PAGE 17
<PAGE> 18
press release on September 4, 1997, stating that PRG had hired
Goldman, Sachs & Co. and Smith Barney Inc. to study a possible sale
of the Company, In response to this announcement, PRG's common stock
rose rapidly in the weeks following the announcement.
DISCLOSURE OF THE TRUTH
44. On November 19, 1997, PRG announced, via the PR
Newswire, that it would post a third quarter loss of $18.4 million, or
62 cents per share, compared with net income of $3.5 million or 13
cents a share a year earlier, The third quarter results also included
pretax charges of $27.8 million from future practice closings and $4
million to establish reserves on accounts receivable. Without these
charges the Company's operating income would have been $0.11 per
share. Additionally, the Company announced the termination by PRG of
its Chairman and Chief Executive officer defendant Moore.
45. Also on November 19, 1997, PRG announced that it was
not pursuing a sale or strategic merger and that PRG would not continue
expanding through acquisitions.
46. On or about November 19, 1997, and as reported in the
November 20, 1997 edition of The Wall Street Journal, PRG admitted
that the charges that PRG was taking stemmed from practices it
acquired from EquiMed, Inc. in November of 1996 and that EquiMed had
overstated the value of the practices. Defendants obviously knew this
when PRG filed its counterclaim against EquiMed in June, 1997. In its
filings in the EquiMed arbitration, PRG claimed it was entitled to an
offset with respect to monies owed to EquiMed. As such, defendants
knew, no later than June 17, 1997 that EquiMed assets were overvalued
and impaired, and that PRG would have to take a substantial related
change against the value of those assets.
COMPLAINT - CLASS ACTION PAGE 18
<PAGE> 19
47. PRG's belated disclosure that the assets it acquired
from EquiMed in November, 1996 were overstated and impaired were
clearly material. PRG's stock price fell by approximately 30% during
the six trading days from November 13 to November 20. At the end of
the class period, the stock was worth a little over half of its class
period high.
COUNT I
AGAINST ALL DEFENDANTS FOR VIOLATION
OF SECTION 10(b) OF THE 1934 ACT AND RULE 10b-5
48. Plaintiff repeats and realleges each and every
allegation contained in each of the foregoing paragraphs as if fully
set forth in full herein.
49. This Count is asserted against defendants and is based
upon Section 10(b) of the Exchange Act, 15 U.S.C. Section 78j(b), and
Rule l0b-5 promulgated thereunder by the SEC.
50. During the Class Period, defendants, directly or
indirectly, engaged in a common plan, scheme, and unlawful course of
conduct pursuant to which they knowingly or recklessly engaged in
acts, transactions, practices, and courses of business which operated
as a fraud and deceit upon plaintiff and the other members of the
Class, and made various deceptive and untrue statements of material
facts and omitted to state material facts necessary in order to make
the statements made, in light of the circumstances under which they
were made, not misleading to plaintiff and the other members of the
Class. The purpose and effect of said scheme, plan, and unlawful
course of conduct was to induce plaintiff and the other members of
the Class to purchase PRG securities during the Class Period at
artificially inflated prices.
51. During the Class Period, defendants, pursuant to said
scheme, plan, and unlawful course of conduct, knowingly and recklessly
issued, caused to be issued, participated in
COMPLAINT - CLASS ACTION PAGE 19
<PAGE> 20
the preparation and issuance of deceptive and materially false and
misleading statements to the investing public which were contained in
or omitted from various documents and other statements, as
particularized above.
52. Throughout the Class Period, defendants each knew the
facts set forth herein and misrepresented them and omitted disclosing
them, thereby deceiving plaintiff and the other members of the Class.
In the alternative, defendants acted with reckless disregard for the
truth when they failed to disclose or cause the disclosure of the true
facts and information to plaintiff and the other members of the Class
despite having the true information.
53. As a result of the dissemination of the false and
misleading statements set forth above, the market price of PRG common
stock was artificially inflated during the Class Period. In ignorance
of the false and misleading nature of the representations described
above and the deceptive and manipulative devices and contrivances
employed by said defendants, plaintiff and the other members of the
Class relied to their detriment on the integrity of the market price
of the stock in purchasing PRG securities. Had plaintiff and the
other members of the Class known of the materially adverse information
misrepresented or not disclosed by defendants, they would not have
purchased PRG securities at all or at the artificially inflated prices
that they did.
54. As a result of the inflation of the prices of PRG
common stock during the Class Period caused by defendants' material
misrepresentations and omissions, plaintiff and the other members of
the Class have suffered substantial damages as a result of the wrongs
alleged.
55. By reason of the foregoing, defendants, directly or
indirectly, violated the 1934 Act and Rule 10b-5 promulgated
thereunder in that they:
(a) employed devices, schemes, and artifices to defraud;
COMPLAINT - CLASS ACTION PAGE 20
<PAGE> 21
(b) made untrue statements of material facts or omitted
to state material facts necessary in order to make the statements
made, in light of the circumstances under which they were made, not
misleading; and/or
(c) engaged in acts, practices, and courses of business
which operated as a fraud and deceit and a scheme to defraud upon
plaintiff and the other members of the Class in connection with their
purchase of PRG securities during the Class Period.
COUNT II
AGAINST THE INDIVIDUAL DEFENDANT
FOR VIOLATION OF SECTION 20(a) OF THE 1934 ACT
56. Plaintiff repeats and realleges each and every
allegation contained in each of the paragraphs set forth above as if
set forth fully herein.
57. The individual defendant was and acted as controlling
persons of PRG within the meaning of Section 20(a) of the Exchange Act
as alleged herein. By virtue of his high-level position with the
Company, participation in and/or awareness of the Company's operations
and/or intimate knowledge of the Company's actual performance, the
individual defendant had the power to influence and control and did
influence and control, directly or indirectly, the decision-making of
the Company, including the content and dissemination of the various
statements which plaintiff contends are false and misleading. The
individual defendant was provided with or had unlimited access to
copies of the Company's reports, press releases, public filings and
other statements alleged by plaintiff to be misleading prior to and/or
shortly after these statements were issued and had the ability to
prevent the issuance of the statements or cause the statements to be
corrected.
COMPLAINT - CLASS ACTION PAGE 21
<PAGE> 22
58. In addition, the individual defendant had direct
involvement in the day-to-day operations of the Company and, therefore,
is presumed to have had the power to control or influence the
particular transactions giving rise to the securities violations as
alleged herein, and exercised the same.
59. As set forth above, PRG and the individual defendant
violated Section 10(b) and Rule 10b-5 by their acts and omissions as
alleged in Complaint. By virtue of his controlling positions, the
individual defendant is liable pursuant to Section 20(a) of the
Exchange Act. As a direct and proximate result of defendants' wrongful
conduct, plaintiff and other members of the Class suffered damages in
connection with their purchases of the Company's securities during the
Class Period.
JURY DEMAND
Plaintiff demands a trial by jury on all issues.
WHEREFORE, plaintiff, on his own behalf and on behalf of the
Class, prays for judgement as follows:
(1) declaring this action to be a proper class action and
certifying plaintiff as the representative of the Class under Rule 23
of the Federal Rules of Civil Procedure;
(2) awarding compensatory damages in favor of plaintiff
and the other members of the Class against all defendants for the
damages sustained as a result of the wrongdoing of defendants,
together with interest thereon;
COMPLAINT - CLASS ACTION PAGE 22
<PAGE> 23
(3) awarding plaintiff and the Class their costs and
expenses incurred in this action, including reasonable allowance of
fees for plaintiff's attorneys, and experts, and reimbursement of
plaintiffs expenses; and
(4) granting such other and further relief as the Court
may deem just and Proper.
Dated: December 29, 1997
Dallas, Texas
KILGORE & KILGORE
By: /s/ ROGER F. CLAXTON
---------------------
Roger F. Claxton
Bar Card No. 04329000
Robert J. Hill
Bar Card No. 09652100
700 McKinney Place
3131 McKinney Avenue - LB-103
(214) 969-9099
(214) 953-0133 - Fax
Of Counsel:
STULL, STULL & BRODY
Jules Brody
6 East 45th Street
New York, New York 10017
(212) 687-7230
COMPLAINT - CLASS ACTION PAGE 23
<PAGE> 24
CERTIFICATION OF PLAINTIFF REGINA PELTZ
PURSUANT TO FEDERAL SECURITIES LAWS
REGINA PELTZ ("Plaintiff") declares, as to the claim asserted
under the federal securities laws, that:
1. Plaintiff has reviewed the complaint and authorized its
filing.
2. Plaintiff did not purchase the security that is the subject
of this action at the direction of plaintiff's counsel or in order to
participate in this private action.
3. Plaintiff is willing to serve as a representative
party on behalf of the class, including providing testimony at
deposition and trial, if necessary,
4. Plaintiff's transaction in the security that is the
subject of this action during the Class Period is as follows.
<TABLE>
<CAPTION>
Security Transactions Date
-------- ------------ ----
<S> <C> <C>
Options Sold 20 puts 11/04/97
Options Sold 260 puts 11/05/97
</TABLE>
5. During the three years prior to the date of this
Certificate, Plaintiff has sought to serve or served as a
representative party for a class in the following actions filed under
the federal securities laws: In re Stratosphere Corporation Securities
Litigation, Master File No. CV-S-96-00708-PMP(RLH), United States
District Court for the District of Nevada.
6. The Plaintiff will not accept any payment for serving
as a representative party on behalf of the class beyond the
Plaintiffis pro rata share of any recovery, except such reasonable
costs (including lost wages) directly relating to the representation
of
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the class as ordered or approved by the court.
I declare under penalty of perjury that the foregoing is true
and correct.
December 21, 1997
/s/ REGINA PELTZ
------------------
Regina Peltz
