<PAGE>
SOLICITATION OF PROXIES
SCHEDULE 14A
[(P) 40,151] Information Required in Proxy Statement
Reg.(S) 240.14a-101
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant [ X ]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to (S)240.14a-11(c) or (S) 240.14a-12
Physicians Resource Group, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1)and 0-11.
1) Title of each class of securities to which transaction applies:
---------------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
---------------------------------------------------------------------------
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
---------------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
---------------------------------------------------------------------------
5) Total fee paid:
---------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
----------------------------------------------------
2) Form, Schedule or Registration Statement No.:
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3) Filing Party:
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4) Date Filed:
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1
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Physicians Resource Group, Inc.
Three Lincoln Centre
5430 LBJ Freeway
Suite 1540
Dallas, TX 75240
July 10, 1998
Dear Stockholder:
You are cordially invited to attend the Annual Meeting of Stockholders (the
"Meeting") of Physicians Resource Group, Inc., a Delaware corporation ("PRG") to
be held 4:00 p.m. local time, on Friday, July 31, 1998, at the Doubletree Hotel
at Lincoln Centre, 5410 LBJ Freeway, Dallas, Texas 75240.
The attached Notice of Annual Meeting and Proxy Statement fully describe
the formal business to be transacted at the Meeting, which includes (i) the
election of nominees for the class of Directors whose term expires in 1998; (ii)
the approval of the sale of selected Company assets to certain affiliated eye
care practices and the execution of new Service Agreements between the Company
and those practices in connection with the Company's Restructuring Plan and
(iii) such other matters as may properly come before the Meeting or any
adjournments thereof.
Directors and officers of PRG will be present to help host the Meeting and
to respond to any questions that our stockholders may have. I hope that you
will be able to attend.
PRG's Board of Directors believes that a favorable vote on each matter to
be considered at the Meeting is in the best interest of PRG and its stockholders
and unanimously recommends a vote "FOR" such matter. Accordingly, we urge you
to review the attached material carefully and to return the enclosed Proxy
promptly. Whether or not you plan to attend the Meeting, please complete, sign,
date and return your proxy in the enclosed envelope. If you attend the Meeting,
you may vote in person if you wish, even though you have previously returned
your proxy. It is important that your shares be represented and voted at the
Meeting.
On behalf of your Board of Directors, thank you for your support.
Sincerely,
Richard A. Gilleland
Chief Executive Officer
and Chairman of the Board of Directors
2
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Physicians Resource Group, Inc.
Three Lincoln Centre
5430 LBJ Freeway
Suite 1540
Dallas, TX 75240
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JULY 31, 1998
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders (the
"Meeting") of Physicians Resource Group, Inc. ("PRG") will be held at 4:00 p.m.,
local time, on Friday, July 31, 1998, at the Doubletree Hotel at Lincoln Centre,
5410 LBJ Freeway, Dallas, Texas 75240, for the following purposes:
(1) The election of nominees for the class of Directors whose term
expires in 1998.
(2) The approval of the sale of selected Company assets to certain
affiliated eye care practices and the execution of new Service
Agreements between the Company and those practices in connection
with the Company's Restructuring Plan.
(3) Such other matters as may properly come before the Meeting or any
adjournments thereof.
The close of business on July 1, 1998 has been fixed as the record date for
determining stockholders entitled to notice of and to vote at the Meeting or any
adjournments thereof. For a period of at least 10 days prior to the Meeting, a
complete list of stockholders entitled to vote at the Meeting will be open for
examination by any stockholder during ordinary business hours at the offices of
PRG at Three Lincoln Centre, 5430 LBJ Freeway, Suite 1540, Dallas, TX 75240.
Information concerning the matters to be acted upon at the Meeting is set
forth in the accompanying Proxy Statement.
ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON.
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE AND SIGN
THE ENCLOSED PROXY AND MAIL IT PROMPTLY TO ASSURE THAT YOUR SHARES ARE
REPRESENTED AT THE MEETING. A RETURN ENVELOPE (WHICH IS POSTAGE PREPAID IF
MAILED IN THE UNITED STATES) IS PROVIDED. EVEN IF YOU HAVE GIVEN YOUR PROXY,
YOU MAY STILL VOTE IN PERSON IF YOU ATTEND THE MEETING. PLEASE NOTE, HOWEVER,
THAT IF YOUR SHARES ARE HELD OF RECORD BY A BROKER, BANK OR OTHER NOMINEE AND
YOU WISH TO VOTE AT THE MEETING, YOU MUST OBTAIN FROM THE RECORD HOLDER A PROXY
ISSUED IN YOUR NAME.
BY ORDER OF THE BOARD OF DIRECTORS
Peter G. Dorflinger
President
Dallas, Texas
July 10, 1998
3
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Physicians Resource Group, Inc.
Three Lincoln Centre
5430 LBJ Freeway
Suite 1540
Dallas, TX 75240
PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JULY 31, 1998
This Proxy Statement is being first mailed on or about July 10, 1998 to
stockholders of Physicians Resource Group, Inc., a Delaware corporation ("PRG")
by the Board of Directors (the "Board") to solicit proxies (the "Proxies") for
use at the Annual Meeting of Stockholders (the "Meeting") to be held at 4:00
p.m., local time, on Friday, July 31, 1998, at the Doubletree Hotel at Lincoln
Centre, 5410 LBJ Freeway, Dallas, Texas 75240, or at such other time and place
to which the Meeting may be adjourned (the "Meeting Date").
The purpose of the Meeting is to consider and act upon (i) the election of
nominees for the class of Directors whose term expires in 1998; (ii) the
approval of the sale of selected Company assets to certain affiliated eye care
practices and the execution of new Service Agreements between the Company and
those practices in connection with the Company's Restructuring Plan (the
"Restructuring Plan") and (iii) such other matters as may properly come before
the Meeting or any adjournments thereof.
All shares represented by valid Proxies, unless the stockholder otherwise
specifies, will be voted (i) FOR the election of the persons named herein under
"Election of Directors" as nominees for election as directors of PRG for the
term described therein; (ii) FOR approval of the Restructuring Plan and (iii) at
the discretion of the Proxy holders with regard to any other matter that may
properly come before the Meeting or any adjournments thereof.
Where a stockholder has appropriately specified how a Proxy is to be voted,
it will be voted accordingly. The Proxy may be revoked at any time by providing
written notice of such revocation to Chase Mellon Shareholder Services, L.L.C.,
600 Willow Tree Road, Leonia, New Jersey 07605, Attention: Norma Cianfaglione at
any time prior to the meeting. If notice of revocation is not received prior to
the Meeting, a stockholder may nevertheless revoke a Proxy if the stockholder
attends the Meeting and desires to vote in person; however, if your shares are
held of record by a broker, bank or other nominee and you wish to vote at the
Meeting, you must obtain from the record holder a proxy issued in your name.
RECORD DATE AND VOTING SECURITIES
The record date for determining the stockholders entitled to vote at the
Meeting is the close of business on July 1, 1998 (the "Record Date"), at which
time PRG had issued and outstanding ______________ shares of Common Stock.
Common Stock is the only class of outstanding voting securities of PRG.
QUORUM AND VOTING
The presence at the Meeting, in person or by proxy, of the holders of a
majority of the issued and outstanding shares of Common Stock is necessary to
constitute a quorum to transact business. Each share represented at the Meeting
in person or by proxy will be counted toward a quorum. In deciding all
questions and other matters, a holder of Common Stock on the Record Date shall
be entitled to cast one vote for each share of Common Stock registered in his or
her name.
In order to be elected a director under Proposal No. 1, a nominee must
receive a plurality of the votes of the shares of Common Stock present in person
or represented by proxy at the Meeting. Votes that are withheld and broker non-
votes will not be counted in the election of directors, but will be counted
toward a quorum.
4
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Although stockholder approval is not required in connection with the
consummation of the Restructuring Plan, the Board has determined that the
Company will not proceed with consummation of the Restructuring Plan unless the
Company obtains the affirmative vote of the holders of a majority of the votes
of the shares of Common Stock present in person or represented by proxy and
voted on that matter at the Meeting.
PROPOSAL I - ELECTION OF DIRECTORS
The Board of PRG is divided into three classes. The Board presently
consists of four directors, with three classes, one consisting of two directors
and two consisting of one director each. Members of each class of directors
serve for a term of three years. Each director shall serve until the Annual
Meeting of Stockholders in the year in which his term expires or until his
successor is elected and shall have qualified.
One director, Alan C. Baum, M.D. is in the class whose term of office
expires in 1998. The Board has nominated Dr. Baum for reelection as director at
the Meeting to serve for a three-year term expiring at PRG's Annual Meeting of
Stockholders in 2001 or until his successor is elected and shall have qualified.
The nominee has indicated his willingness to serve as a member of the Board
if reelected; however, in case the nominee shall become unavailable for
reelection to the Board for any reason not presently known or contemplated, the
Proxy holders have discretionary authority to vote the Proxy for a substitute
nominee. Proxies cannot be voted for more than one nominee. The following sets
forth information as of May 31, 1998 as to the nominee for reelection at the
Meeting and each of the directors whose term of office will continue after the
Meeting, including their ages, present principal occupations, other business
experience during the last five years, membership on committees of the Board and
directorships in other publicly-held companies.
<TABLE>
<CAPTION>
NAME AGE POSITION TERM AS
- ---- --- -------- DIRECTOR
EXPIRES
--------
<S> <C> <C> <C>
Nominee for a three-year term ending in 2001:
Alan C. Baum, M.D. 56 Director 1998
Continuing Directors:
Ronald L. Stanfa 50 Director 1999
Lucius E. Burch, III 56 Director 2000
Richard A. Gilleland 53 Chairman of the Board and Chief Executive Officer 2000
</TABLE>
Alan C. Baum, M.D. has served as a director of PRG since June 28, 1995.
Dr. Baum has served as Vice President of Texas Eye Institute and Associates from
1973 to date, where he has been in the practice of general ophthalmology with an
emphasis on oculoplastic surgery. Dr. Baum is President-Elect of the Texas
Medical Association and is the Past Chairman of the Board of Trustees of the
Texas Medical Association and Past President of the Texas Ophthalmological
Association. He has served as President of the Southwest Branch of the Harris
County Medical Society. Dr. Baum has acted as chief of staff for Memorial
Southeast Hospital, as well as chairman of Ophthalmology sections at both
Memorial SE and SW hospitals in Houston. Dr. Baum received his M.D. Degree in
1968 from the University of Texas Medical Branch at Galveston, and completed his
residency in 1972 from the University of Texas Medical School, Houston.
Lucius E. Burch, III has served as a director of PRG since March 18, 1996.
Mr. Burch is Chairman of the Board of Directors of Massey Burch Investment
Group, Inc., Nashville, Tennessee, a merchant banking firm. He
5
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has been with Massey Burch since 1968, served as President from 1981 to 1990,
and has an extensive background in management consulting and corporate finance.
Mr. Burch serves as a director of Norrell Corporation, an office staffing and
services company, QMS, Inc., a designer and manufacturer of computer graphics
and imaging controllers and Corrections Corporation of America, a developer and
manager of privatized correctional and detention facilities.
6
<PAGE>
Richard A. Gilleland has served as Chairman of the Board and Chief
Executive Officer of PRG since December 15, 1997 and as a director of PRG
since June 28, 1995. Mr. Gilleland served as Chairman, President and Chief
Executive Officer of Kendall International Inc., a manufacturer and distributor
of disposable medical supplies and devices and home health care products from
July 1990 until July 1995. From January to November 1989, he was president,
chief executive officer and chairman of the board of American Medical
International, Inc., which owns and operates acute care hospitals. Mr.
Gilleland also has served as a director of OrNda HealthCorp, a provider of acute
medical, surgical and hospital operation and management services, since 1992,
and since 1994, as a director of Tyco International, Ltd., a manufacturer of
bioprotection and flow control equipment. Mr. Gilleland also serves as a
director of DePuy Inc., a manufacturer of orthopedic supplies and equipment and
Remington Arms Co., a manufacturer of sporting arms and equipment. Mr.
Gilleland served as Chief Executive Officer and President of Amsco International
Inc. (which has been acquired by Steris Corp.), a manufacturer of infection
control products from July 1995 to July 1996. Mr. Gilleland served as a
director of Bird Medical Technologies, Inc., a manufacturer of inhalation
therapy and equipment from 1994 to 1996 and as Interim Chairman of Quest
Medical, a manufacturer of proprietary products for the health care industry,
from July 1996 to November 1996. Mr. Gilleland received his B.A. from the
University of Minnesota in 1967.
Ronald L. Stanfa has served as a director of PRG since June 28, 1995. Mr.
Stanfa has served as a Managing Director of Notre Capital Ventures II, L.L.C.
since July 1995. From June 1993 to July 1995, Mr. Stanfa was an independent
business consultant and investor. Mr. Stanfa was a founder and served as a
director of Allwaste, Inc., an environmental services company, from 1986 to
1995. From October 1988 to June 1993, Mr. Stanfa was the Vice President-
Corporate Development of Allwaste, Inc. Mr. Stanfa also served as a director of
U.S. Delivery Systems, Inc., a same day delivery company, from 1994 until its
sale in February 1996. Mr. Stanfa received his B.A. in Economics from Northern
Illinois University in 1969.
PROPOSAL II - APPROVAL OF SALE OF ASSETS IN CONNECTION WITH RESTRUCTURING PLAN
The Board of Directors has unanimously approved a Restructuring Plan
providing for the sale of selected Company assets to certain affiliated eye care
practices and the execution of new Service Agreements between the Company and
those practices, subject to the approval of the stockholders (the "Restructuring
Plan"). The Company will proceed with the Restructuring Plan if (i) it receives
stockholder approval and (ii) practices contributing at least 51% of the
Company's annual revenue (as determined by the Board of Directors in its sole
discretion) elect to participate in the Restructuring Plan.
The Board of Directors believes that the Restructuring Plan is in the best
interests of the Company. The Company has historically purchased the assets of
eye care practices, which has required the Company to be involved in the day to
day operations of its affiliated practices. Upon acquiring the assets of its
affiliated practices, the Company has employed all of the employees at the
practice, with the exception of the physicians, and has been responsible for a
number of services. The Company believes that it will be better able to improve
the financial performance of its affiliated practices if the responsibility for
the day to day operations of its affiliated practices is returned to the
physicians. The Company believes that its affiliated practices and the Company
will be better served if the Company can focus its corporate resources on
providing its affiliated practices with specific, core services.
Pursuant to the Restructuring Plan, each of the Company's affiliated eye
care practices that participate in the Restructuring Plan will acquire all of
the assets used in, and assume all of the liabilities associated with the
business of such practice from a Company subsidiary. The assets to be acquired
by the Company's affiliated eye care practices pursuant to the Restructuring
Plan are currently located at each such practice. The assets consist of the
property, plant and equipment used by such practice, the inventory and the
intangibles associated with the practice. In addition, each Company subsidiary
will also assign its rights, and each affiliated eye care practice will assume
all obligations, under all contracts and agreements to which such Company
subsidiary is a party which relate to the business of such practice. All
employees of the Company subsidiary located at the practice will also become
7
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employees of the practice as of the closing date. The purchase price for the
assets sold to each such affiliated eye care practice will be equal to either
(i) 1.5 times the management fees earned by the Company in 1997; (ii) the net
book value of the tangible assets acquired or (iii) a multiple of the original
valuation income of the practice, as determined on a case by case basis. The
purchase price will be payable in cash at the closing of the transaction. The
purchase price was determined based on the fair market value of the assets being
transferred, taking into account both the tangible and intangible assets being
transferred and the terms of the revised Service Agreement.
In connection with each Restructuring Plan transaction, the Company and the
participating affiliated eye care practice will amend their current Service
Agreement to reduce the term to 15 years from the consummation of the sale
transaction. A new Service Agreement will be executed such that the Company
will provide the following services to the practice: (i) the development of an
annual strategic business plan, (ii) assistance in the negotiation,
establishment, supervision and maintenance of contracts with managed care and
other similar providers, (iii) access to and arrangements with third party
vendors for the purchase of inventory, supplies, equipment, and insurance, (iv)
assistance in the acquisition of physician groups or practices, (v) professional
recruitment services, (vi) access to computer software programs designed to
collect outcomes data for certain procedures, and (vii) general legal services
for routine operation issues such as physician contracts and leases. The
Company and the affiliated eye care practice will also release each other from
all claims under their present Service Agreement.
Under the new Service Agreements, the affiliated eye care practice will pay
the Company monthly service fees for services provided by the Company under the
Service Agreement based on a fixed percentage of the monthly cash collections of
the practice, which percentage shall be decreased for incremental practice
collections in excess of a specified threshold. The practice will be
responsible for the payment of all expenses and will be in exclusive control of
all aspects of the practice of medicine and retain full responsibility for (i)
hiring and compensating physicians, (ii) ensuring that physicians have required
licenses, credentials, approvals and other certifications needed to perform
their duties and (iii) complying with federal and state laws applicable to the
practice of medicine. On the closing date of the transaction, each practice
will pay in full all of the amounts due to the Company subsidiary pursuant to
the terms of the existing Service Agreement, including receivables, working
capital loans, and acquisition debt and intangibles associated with roll-in
acquisitions.
The service fees payable under the new Service Agreements will continue to
be taxable to the Company at ordinary income tax rates as received or accrued.
The difference between the amount realized by a Company subsidiary pursuant to
each transaction consummated under the Restructuring Plan and the subsidiary's
adjusted tax basis in the assets sold will result in recognition by the Company
of taxable gain or loss, as the case may be, with respect to each asset sold.
The amount realized by each Company subsidiary will include the cash purchase
price received and the liabilities assumed by the affiliated eye care practice
in connection with the sale.
No approval by any federal or state governmental authority is required to
consummate the transactions contemplated under the Restructuring Plan. The
Company will not consummate the Restructuring Plan unless affiliated practices
representing at least fifty-one percent (51%) of the Company's revenues (as
determined by the Board of Directors in its sole discretion) from such
affiliated practices agree to participate in the Plan.
8
<PAGE>
One of the Company's Board members, Alan C. Baum, M.D., is a partner in an
eye care practice affiliated with the Company that will be provided the
opportunity to participate in the Restructuring Plan according to the terms
discussed above.
9
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PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following unaudited pro forma financial statements include the
unaudited pro forma balance sheet as of March 31, 1998 as if PRG had implemented
the Restructuring Plan, as discussed in Proposal II, under two separate
assumptions: 1) 75% of all Management Fee Revenues were converted to the new
Service Agreements, (the "75% Implementation Plan") and 2) 50% of all Management
Fee Revenues were converted to the new Service Agreements, (the "50%
Implementation Plan"), as of March 31, 1998. The unaudited pro forma financial
statements also include the unaudited statement of operations for the year ended
December 31, 1997 and the three months ended March 31, 1998, as if PRG had
implemented the Restructuring Plan, as discussed in Proposal II, under two
separate assumptions: 1) the "75% Implementation Plan", and 2) the "50%
Implementation Plan", as of January 1, 1997.
The implementation plans presented in the attached-unaudited pro forma
financial statements were created under certain assumptions. The "75%
Implementation Plan" assumes that 75% of all management fee revenues for
practices will be converted over to the new Service Agreements, as described in
Proposal II. Practice assets acquired by the participating practices are
assumed to be converted under the new Service Agreements at the same relative
percentage, 75% of total practice assets. The "50% Implementation Plan" assumes
that 50% of all management fee revenues for practices will be converted over to
the new Service Agreements, as described in Proposal II. Practice assets
acquired by the participating practices are assumed to be converted under the
new Service Agreements at the same relative percentage, 50% of total practice
assets. Both assumptions are based upon practice total dollars, and are not
indicative of the percentage of total practices participating in the
Restructuring Program.
The unaudited pro forma financial statements have been prepared by PRG
based upon the financial statements of PRG and assumptions deemed appropriate by
PRG. The value assigned to the new Service Agreements and other assumptions are
more fully discussed in the Notes to the Unaudited Pro Forma Financial
Statements. These unaudited pro forma financial statements may not be
indicative of the actual results that may be realized in the future.
10
<PAGE>
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET
As of March 31, 1998
(000's)
<TABLE>
<CAPTION>
(a) (b) (a) + (b) (c) (a) + (c)
Pro Forma Pro Forma Pro Forma
Adjustments for Pro Forma Adjustments for the
the 50% for the 50% for the 75% 75%
Implementation Implementation Implementation Implementation
Historical Plan Plan Plan Plan
---------- -------------- ---------------- ---------------- ------------------
<S> <C> <C> <C> <C> <C>
Cash $ 16,942 $ 17,968 D $ 34,910 $ 33,076 D $ 50,018
Accounts receivables, net 31,575 (10,806) A 20,769 (16,207) A 15,368
Income tax receivable 4,293 -- 4,293 -- 4,293
Due from affiliates, net 47,102 (23,551) C 23,551 (35,326) C 11,776
Pharmaceuticals and supplies 5,761 (2,050) A 3,711 (3,075) A 2,686
Prepaid expenses, other 2,399 (1,350) A 1,049 (2,026) A 373
Assets held for resale 10,473 -- 10,473 -- 10,473
Deferred taxes 4,801 -- 4,801 -- 4,801
-------- --------- -------- --------- ---------
Total current assets 123,346 (19,789) 103,557 (23,558) 99,788
-------- --------- -------- --------- ---------
PP&E 56,503 (13,697) A 42,806 (20,545) A 35,958
Intangible assets 346,951 (93,430) B 253,521 (140,145) B 206,806
Other noncurrent assets 8,291 (3,662) A 4,629 (5,493) A 2,798
-------- --------- -------- --------- ---------
Total assets $535,091 $(130,578) $404,513 $(189,741) $ 345,350
======== ========= ======== ========= =========
Current portion of obligations
to affiliates $ 4,610 $ (2,305) C $ 2,305 $ (3,458) C $ 1,152
Current portion of LTD 15,073 (13,195) A,D 1,878 (13,668) A,D 1,405
Accounts payable and accrued
expenses 25,922 (8,419) A,E 17,503 (12,633) A,E 13,289
-------- --------- -------- --------- ---------
Total current liabilities 45,605 (23,919) 21,686 (29,759) 15,846
Long-term debt, net 126,013 (334) A 125,679 (501) A 125,512
Obligations to affiliates 21,250 (10,625) C 10,625 (15,938) C 5,312
Deferred taxes 71,212 (37,372) B 33,840 (56,058) B 15,154
Other long-term liabilities 3,125 571 A 3,696 857 A 3,982
-------- --------- -------- --------- ---------
Total liabilities 267,205 (71,679) 195,526 (101,399) 165,806
======== ========= ======== ========= =========
Shareholders' equity
Common stock 299 -- 299 -- 299
Preferred stock 2 -- 2 -- 2
APIC 300,016 -- 300,016 -- 300,016
Treasury stock (3,183) -- (3,183) -- (3,183)
Retained earnings (27,023) (58,899) (85,922) (88,342) (115,365)
Note receivable from preferred
stock sale (2,225) -- (2,225) -- (2,225)
-------- --------- -------- --------- ---------
Total shareholders' equity 267,886 (58,899) 208,987 (88,342) 179,544
-------- --------- -------- --------- ---------
Total Liabilities and
Shareholders' Equity $535,091 $(130,578) $404,513 $(189,741) $ 345,350
======== ========= ======== ========= =========
</TABLE>
See accompanying notes to unaudited pro forma financial statements
11
<PAGE>
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
For the Year Ended December 31, 1997
(000's, Except Per Share Amounts)
<TABLE>
<CAPTION>
(a) (b) (a) + (b) (c) (a) + (c)
Pro Forma Pro Forma Pro Forma
Adjustments for Pro Forma Adjustments for the
the 50% for the 50% for the 75% 75%
Implementation Implementation Implementation Implementation
Historical Plan Plan Plan Plan
---------- --------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Management services $266,481 $(110,469) F $ 156,012 $(165,704) F $ 100,777
Medical services and other 145,159 (41,390) F 103,769 (62,085) F 83,074
--------- --------- --------- --------- ---------
Revenues 411,640 (151,859) F 259,781 (227,789) F 183,851
--------- --------- --------- --------- ---------
Salaries, Wages and benefits 207,254 (90,721) F,I 116,533 (135,687) F,I 71,567
Pharmaceuticals and supplies 52,392 (16,114) F 36,278 (24,171) F 28,221
General and administrative 103,805 (29,728) F,K 74,077 (44,592) F,K 59,213
Depreciation and amortization 24,841 (8,437) F,G 16,404 (11,133) F,G 13,708
Interest expense, net 11,547 (2,761) F,J 8,786 (4,389) F,J 7,158
Loss on sale of practice assets -- 1,608 H 1,608 2,412 H 2,412
Revaluation of intangibles -- 93,430 G 93,430 140,145 G 140,145
Asset valuation losses 76,706 -- 76,706 -- 76,706
Patent litigation defense costs 2,730 -- 2,730 -- 2,730
--------- --------- --------- --------- ---------
Total Costs and expenses 479,275 (52,723) 426,552 (77,415) 401,860
--------- --------- --------- --------- ---------
Loss Before Income Taxes (67,635) (99,136) (166,771) (150,374) (218,009)
Benefit for Income Taxes (26,312) (38,568) L (64,880) (58,500) L (84,812)
--------- --------- --------- --------- ---------
Net Loss $(41,323) $ (60,568) $(101,891) $ (91,874) $(133,197)
========= ========= ========= ========= =========
Net Loss Per Share $(1.39) $ -- $(3.42) $ -- $ (4.48)
========= ========= ========= ========= =========
Number of Shares used in Net
Income Calculation 29,751 -- 29,751 -- 29,751
========= ========= ========= ========= =========
</TABLE>
See accompanying notes to unaudited pro forma financial statements
12
<PAGE>
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
For the Three Months Ended March 31, 1998
(000's, Except Per Share Amounts)
<TABLE>
<CAPTION>
(a) (b) (a) + (b) (c) (a) + (c)
Pro Forma Pro Forma Pro Forma
Adjustments for Pro Forma Adjustments for the
the 50% for the 50% for the 75% 75%
Implementation Implementation Implementation Implementation
Historical Plan Plan Plan Plan
---------- --------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Management services $ 63,383 $(27,004) F $36,379 $(40,506) F $22,877
Medical services and other 37,897 (10,686) F 27,211 (16,029) F 21,868
-------- -------- ------- -------- -------
Revenues 101,280 (37,690) F 63,590 (56,535) F 44,745
-------- -------- ------- -------- -------
Salaries, Wages and benefits 49,589 (21,543) F,I 28,046 (32,213) F,I 17,376
Pharmaceuticals and supplies 14,547 (3,920) F 10,627 (5,879) F 8,668
General and administrative 26,558 (9,674) F 16,884 (14,511) F 12,047
Depreciation and amortization 6,690 (2,587) F,G 4,103 (3,283) F,G 3,407
Interest expense, net 2,922 (682) F,J 2,240 (988) F,J 1,934
Loss on sale of practice assets -- -- -- -- --
Revaluation of intangibles -- -- -- -- --
Asset valuation losses -- -- -- -- --
Patent litigation defense costs 82 -- 82 -- 82
-------- -------- ------- -------- -------
Total Costs and expenses 100,388 (38,406) 61,982 (56,874) 43,514
-------- -------- ------- -------- -------
Income Before Income Taxes 892 716 1,608 339 1,231
Provision for Income Taxes 513 278 L 791 132 L 645
-------- -------- ------- -------- -------
Net Income $ 379 $ 438 $ 817 $ 207 $ 586
======== ======== ======= ======== =======
Net Income Per Share $ 0.01 $ -- $ 0.03 $ -- $ 0.02
======== ======== ======= ======== =======
Number of Shares Used in Net
Income Calculation 30,097 -- 30,097 -- 30,097
======== ======== ======= ======== =======
</TABLE>
See accompanying notes to unaudited pro forma financial statements
13
<PAGE>
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED PRO FORMA FINANCIAL STATEMENTS
(000's, Except Share Amounts)
PRO FORMA FINANCIAL STATEMENTS
The pro forma financial statements have been prepared using the assumptions
discussed below and the valuation of the new Service Agreements was estimated
using 25% discount factor applied to the anticipated cash flow under the new
Service Agreements. The final discount factor used to value the new Service
Agreements may vary from this amount. Assuming a discount factor of 20%, the
following would be the impact on these pro forma financial statements:
<TABLE>
<CAPTION>
The 50% The 75%
Implementation Plan Implementation Plan
------------------- --------------------
<S> <C> <C>
Increase in Intangible Assets $5,747 $8,622
Increase in Depreciation and Amortization
For the year ended December 31, 1997 383 575
For the three months ended March 31, 1998 95 144
Decrease in Net Loss
For the year ended December 31, 1997 5,364 8,047
For the three months ended March 31, 1998 95 144
Decrease in Net Loss per Share
For the year ended December 31, 1997 $ 0.18 $ 0.27
For the three months ended March 31, 1998 $ -- $ --
</TABLE>
The final valuations ultimately depend upon the number and mix of practices
that accept this restructuring, and the final discount factor applied to value
the new Service Agreements.
PRO FORMA BALANCE SHEET ADJUSTMENTS
The accompanying pro forma balance sheets as of March 31, 1998 assume that
the Restructuring Plan providing for the sale of selected Company assets and the
amendment of the Service Agreements between the Company and those practices was
implemented as of March 31, 1998 under two separate assumptions: 1) the "75%
Implementation Plan" and 2) the "50% Implementation Plan".
A. Pursuant to the Restructuring Plan, each of the Company's affiliated
eye care practices that participates in the Restructuring Plan will acquire all
of the assets used in and assume all of the liabilities associated with the
business of such practice from a Company subsidiary.
Net book value of practice assets to be sold are:
<TABLE>
<CAPTION>
The 50% The 75%
Implementation Implementation
Plan Plan
-------------- --------------
<S> <C> <C>
Cash $ 5,677 $ 8,515
Accounts receivables, net 10,806 16,207
Pharmaceuticals and supplies 2,050 3,075
Prepaid expenses, other 1,350 2,026
PP&E 13,697 20,545
Other noncurrent assets 3,662 5,493
Current portion of LTD (947) (1,420)
Accounts payable and accrued expenses (6,531) (9,796)
Long-term debt, net (334) (501)
</TABLE>
14
<PAGE>
<TABLE>
<S> <C> <C>
Other long-term liabilities 571 857
------- -------
Net assets sold $30,001 $45,001
======= =======
</TABLE>
B. Practice intangible assets associated with management Service
Agreements will be revalued to reflect the reduced fee structure and the shorter
contract life included in the provisions of the new Service Agreement. Pursuant
to this agreement, the Company will earn approximately 60% of the management fee
previously earned and the Service Agreement term will be shortened from 40 to 15
years. Accordingly, the value of the service fee intangibles will be reduced to
an amount obtained by applying a discount factor to the anticipated future cash
flows under the new Service Agreement. See pro forma financial statement
discussion above for a discussion of the discount factor used. The revaluation
of service fee intangibles is as follows:
The 50% The 75%
Implementation Implementation
Plan Plan
----------------- ----------------
Reduction in intangibles for new Service
Agreements $(93,430) $(140,145)
======== ==========
Deferred tax benefit of valuation $(37,372) $ (56,058)
adjustment
======== =========
C. Pursuant to the Restructuring Plan, participating practices will
settle all affiliate receivables upon execution of the new Service Agreements,
as follows:
The 50% The 75%
Implementation Implementation
Plan Plan
----------------- ----------------
Due from affiliates, net $23,551 $35,326
Less: Current portion of obligations to
affiliates 2,305 3,458
Less: Obligations to affiliates 10,625 15,938
------- -------
Net affiliate receivables settled under
the Restructuring Plan $10,621 $15,930
======= =======
D. Proceeds from the sale of assets and the collection of affiliate
receivables under the 50% Implementation Plan and the 75% Implementation Plan
are expected to be $17,968 and $33,076, respectively, after the application of
excess funds against the credit facility, which was $12,248 as of March 31,
1998. On May 28, 1998, the company drew down on the remaining letter of credit,
resulting in an outstanding balance of $14,000.
E. Adjustments to taxes payable are as follows:
The 50% The 75%
Implementation Implementation
Plan Plan
----------------- ----------------
Tax benefit for loss on sale of assets $ (640) $ (965)
Tax benefit for reserves on affiliate
receivables $(1,248) $(1,872)
------- -------
======= =======
15
<PAGE>
------- -------
$(1,888) $(2,837)
======= =======
16
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS
The accompanying unaudited pro forma statements of operations for the year
ended December 31, 1997 and the three months ended March 31, 1998 assume that
the Restructuring Plan providing for the sale of selected Company assets and the
amendment of the Service Agreements between the Company and those practices was
implemented as of January 1, 1997, under two separate assumptions: 1) the 50%
Implementation Plan and 2) the 75% Implementation Plan.
F. Under the Restructuring Plan, the new Service Agreements provide that
the practices will pay the Company management service fees based upon cash
collections of the practice. Reductions in services to be provided by the
Company, as discussed in Proposal II, will result in an average discount in
management fees of 40%. Additionally, expenses previously paid by and
reimbursed to the Company and reported as revenue and expense in the Company's
financial statements will no longer be included in the Company financial
results.
Adjustments to revenues under the Restructuring Plan are as follows:
The 50% Implementation Plan
---------------------------
Year Ended Three Months
December 31, Ended March
1997 31, 1998
---------------- -----------------
Management Services $110,469 $27,004
Medical Services and Other 41,390 10,686
---------------- -----------------
Total reduction to revenue $151,859 $37,690
================ =================
The 75% Implementation Plan
---------------------------
Year Ended Three Months
December 31, Ended March
1997 31, 1998
---------------- ----------------
Management Services $165,704 $40,506
Medical Services and Other 62,085 16,029
---------------- -----------------
Total reduction to revenue $227,789 $56,535
================ ================
Reductions to expenses under the new Service Agreement are:
The 50% Implementation Plan
---------------------------
Year Ended Three Months Ended
December 31, 1997 March 31, 1998
-------------------- -------------------
1. Salaries, Wages & Benefits $ 88,931 $21,078
2. Pharmaceuticals and Supplies 16,114 3,920
3. General and Administrative 32,849 9,674
4. Depreciation and Amortization 4,188 1,092
5. Interest Expense, Net 1,529 174
-------------------- -------------------
17
<PAGE>
Total reduction to expense $143,611 $35,938
==================== ===================
The 75% Implementation Plan
---------------------------
Year Ended Three Months Ended
December 31, 1997 March 31, 1998
----------------- ------------------
1. Salaries, Wages & Benefits $133,396 $31,617
2. Pharmaceuticals and Supplies 24,171 5,879
3. General and Administrative 49,274 14,511
4. Depreciation and Amortization 6,282 1,638
5. Interest Expense, Net 2,294 260
-------- -------
Total reduction to expense $215,417 $53,905
======== =======
G. Pursuant to the new Service Agreement, practice service fee
intangibles will be revalued to reflect the shorter contract term of 15 years
and the reduced management fee revenue, resulting in a reduction in the value of
the intangibles, as discussed in Note B, and a reduction in the maximum
amortization life of the service fee intangibles for those practices
participating in the Restructuring Plan.
Adjustments to the valuation and maximum lives of the service fee
intangibles are:
<TABLE>
<CAPTION>
The 50% The 75%
Implementation Plan Implementation Plan
------------------- -------------------
<S> <C> <C>
Total practice service fee intangibles $ 241,109 $ 241,109
Practice service fee intangibles of practices not
converting to the new Service Agreement (120,554) (60,277)
------------------- -------------------
Practice service fee intangibles of practices converting
to the new Service Agreement 120,555 180,832
Valuation adjustment for service fee intangibles under
the new Service Agreements (93,430) (140,145)
------------------- -------------------
New valuation for service fee intangibles under the new
Service Agreement $ 27,125 $ 40,687
Amortization expense for the year ended December 31, 1997
Under the Restructure Plan $ 4,822 $ 4,220
Less Historical 9,071 9,071
------------------- -------------------
Decrease in amortization expense $ (4,249) $ (4,851)
=================== ===================
Amortization expense for the three months ended
March 31, 1998
Under the Restructure Plan $ 1,205 $ 1,055
Less Historical 2,700 2,700
------------------- -------------------
Decrease in amortization expense $ (1,495) $ (1,645)
=================== ===================
</TABLE>
18
<PAGE>
H. As discussed in Note A, pursuant to the Restructuring Plan, each of
the Company's affiliated eye care practices that participates in the
Restructuring Plan will acquire all of the assets used in and assume all of the
liabilities associated with the business of such practice from a Company
subsidiary. The purchase price for assets sold to each affiliated practice has
been calculated at 1.5 times the management service fees earned by PRG as
follows:
<TABLE>
<CAPTION>
For the year ended December 31, 1997
------------------------------------
The 50% The 75%
Implementation Plan Implementation Plan
------------------- -------------------
<S> <C> <C>
Annualized practice management fees $18,928 $28,393
====================== ======================
Estimated proceeds $28,393 $42,589
Less: Net book value of practice assets 30,001 45,001
Loss on sale of practice assets $(1,608) $(2,412)
====================== ======================
</TABLE>
I. Pursuant to the Restructuring Plan, the Company will no longer provide
for the employment of non-physician personnel, accounting and financial
resources, financial reporting, treasury management and human resources services
to the practices. The Company has several regional accounting offices, which
provide these services to the practices under the existing Service Agreement.
Upon implementation of the Restructuring Plan, the Company will significantly
reduce accounting and financial personnel costs in the regional offices as
follows:
The 50% The 75%
Implementation Implementation
Plan Plan
---------------- ----------------
For the year ended December 31, 1997 $1,790 $2,291
For the three months ended March 31, 1998 $ 465 $ 596
In accordance with the rules of pro forma financial statements, the cost
reductions above do not consider all regional office costs and potential
corporate cost reductions available under the Restructuring Plan. Only the
salaries, wages and fringe benefit costs of accounting personnel directly
responsible for providing services which are discontinued under the new Service
Agreement are included in the cost reductions presented above.
J. Proceeds received from the sale of practice assets under the
Restructuring Plan will be applied against the credit facility, as discussed in
Note D. Under the pro forma assumption that the Restructure Plan had been
implemented as of January 1, 1997, reductions in interest expense associated
with the credit facility and increases in interest income associated with
surplus cash on hand will result in a reduction of net interest expense as
follows:
The 50% The 75%
Implementation Implementation
Plan Plan
-------------- --------------
For the year ended December 31, 1997 $1,232 $2,095
For the three months ended March 31,
1998 $ 508 $ 728
19
<PAGE>
K. The Company has been conducting an ongoing review of affiliate
receivables and as of March 31, 1998, has recorded allowances of $11,322. Due
solely to the shorter time frame the Company would have to settle any
receivables in dispute, the Company has assumed additional reserves of $3,121
and $4,682 under the 50% Implementation Plan and the 75% Implementation Plan,
respectively, although the Company intends to make every effort to collect all
affiliate receivables.
L. Provision (Benefit) from income taxes reflects federal and state
income taxes that PRG would have incurred on pro forma income before taxes at an
average combined rate of 38.9%.
VOTE REQUIRED
Although approval of the Restructuring Plan is not required, the Company
will not proceed with the Restructuring Plan unless (i) the Company obtains the
affirmative vote of a majority of the shares of Common Stock present in person
or represented by proxy and voted on this matter at the Meeting and (ii)
practices contributing at least 51% of the Company's annual revenues (as
determined by the Board of Directors in its sole discretion) elect to
participate in the Restructuring Plan. Unless otherwise instructed, it is the
intent of the persons named in the Proxy to vote all Proxies "FOR" the adoption
of this proposal.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE
RESTRUCTURING PLAN
MEETINGS AND COMMITTEES OF THE BOARD
The business of PRG is managed under the direction of the Board. The Board
meets on a regularly scheduled basis to review significant developments
affecting PRG and to act on matters requiring Board approval. It also holds
special meetings when an important matter requires Board action between
scheduled meetings. The Board met 13 times during the fiscal year ended
December 31, 1997 ("1997"). During such period, all members of the Board
participated in at least 75% of the aggregate of all Board and applicable
committee meetings.
The Board is divided into three classes, one consisting of two directors
and two consisting of one director each, each class serving for a term of three
years. At each annual meeting of stockholders, directors of the class the term
of which then expires will be elected by the holders of the Common Stock to
succeed those directors whose terms are expiring.
Dr. Baum and Messrs. Gilleland and Stanfa agreed with PRG and Notre Capital
Ventures, Ltd. ("Notre") (PRG's founding stockholder) to serve as a director of
PRG upon the consummation of the initial public offering of the Company's Common
Stock. At the time of the EyeCorp Merger, Mr. Burch agreed with PRG and EyeCorp
to serve as a director.
The Board has four standing committees (excluding certain advisory
committees): an Executive Committee, an Audit Committee, Compensation and Stock
Option Committee and a Nominating Committee. The function of these committees
is described below.
EXECUTIVE COMMITTEE. The function of the Executive Committee is to direct
and manage the business and affairs of PRG in the intervals between meetings of
the Board. The Executive Committee is empowered with all of the authority of
the Board in the management and affairs of PRG, except where action of the Board
as a whole is expressly required by law, PRG's Restated Certificate of
Incorporation or PRG's Bylaws. The Executive Committee met 14 times during
1997. In 1997, the Executive Committee was comprised of Alan C. Baum, M.D.,
Emmett E. Moore, Ronald L. Stanfa and David M. Schneider, M.D. The Executive
Committee is currently comprised of Alan C. Baum, M.D., Lucius E. Burch, III,
Richard A. Gilleland and Ronald L. Stanfa (currently, the entire Board of
Directors).
20
<PAGE>
AUDIT COMMITTEE. The function of the Audit Committee is to recommend to
the Board the appointment of the firm selected to be independent auditors for
PRG, to review the plan and scope of any audit of PRG's financial statements and
to review PRG's significant accounting policies and related matters. The Audit
Committee met six times in 1997. In 1997, the Audit Committee was comprised of
Lucius E. Burch, III, Ronald L. Stanfa and Paul M. Shimoff. The Audit Committee
is currently comprised of Lucius E. Burch, III and Ronald L. Stanfa.
COMPENSATION AND STOCK OPTION COMMITTEE. The function of the Compensation
and Stock Option Committee is to establish the compensation of executive
officers and the employee benefit plans to be adopted or established from time
to time by PRG, and to administer and determine the options to be granted
pursuant to the Amended and Restated 1995 Stock Option Plan and the1995 Health
Care Professionals Stock Option Plan. The Compensation Committee met 17 times
during 1997. In 1997, the Compensation Committee was comprised of Richard A.
Gilleland, Paul M. Shimoff and Ronald L. Stanfa. The Compensation Committee is
currently comprised of Lucius E. Burch, III and Ronald L. Stanfa.
NOMINATING COMMITTEE. The function of the Nominating Committee is to
develop a policy relating to the size and composition of the Board, to formulate
the criteria relating to candidate selection, to propose to the Board a slate of
Director nominees for election at the annual meeting of the stockholders of PRG,
to recommend candidates to fill vacancies on the Board and to suggest members to
serve on the various committees of the Board. The Nominating Committee met one
time during 1997. In 1997, the Nominating Committee was comprised of Bruce E.
Herron, M.D., James E. McDonald II, M.D., Joseph C. Noreika, M.D., David M.
Schneider, M.D. and Paul M. Shimoff. The Nominating Committee is currently
comprised of Richard A. Gilleland and Lucius E. Burch, III.
During 1997, the Board had two additional committees that were disbanded.
The function of these committees is described below.
ACQUISITION COMMITTEE. The function of the Acquisition Committee was to
evaluate and approve acquisitions; however, potential acquisitions that exceed a
specified dollar threshold are evaluated and approved by the entire Board. The
Acquisition Committee had authority to authorize the issuance of capital stock
and convertible debentures in connection with acquisitions. The Acquisition
Committee met two times during 1997. The Acquisition Committee was comprised of
Charles D. Fritch, M.D., Richard A. Gilleland, Emmett E. Moore, P. Harold
Wallar, M.D. and Kenneth C. Westfield, M.D. The Acquisition Committee was
disbanded on November 14, 1997.
SPECIAL COMMITTEE. The function of the Special Committee was to work with
the Company's financial advisors to review certain strategic alternatives
available to the Company to maximize shareholder value. The Special Committee
was comprised of Lucius E. Burch, III, David Meyer, M.D., David M. Schneider,
M.D. and Ronald L. Stanfa. The Special Committee was disbanded on November 14,
1997.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to beneficial
ownership of Common Stock as of May 31, 1998 by (i) all persons known to PRG to
be the beneficial owner of 5% or more of the Common Stock, (ii) each director of
PRG, (iii) each of the Chief Executive Officer and the four highest paid
executive officers other than the Chief Executive Officer (the "Named Executive
Officers"); and (iv) all PRG directors and executive officers as a group. This
table does not include shares of Common Stock that may be purchased pursuant to
options not exercisable within 60 days of May 31, 1998. All persons listed have
sole voting and investment power with respect to their shares unless otherwise
indicated.
21
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME OF BENEFICIAL OWNER OR BENEFICIAL PERCENT
NUMBER OF PERSONS IN GROUP OWNERSHIP OF CLASS
- -------------------------------------------------------------------------------
<S> <C> <C>
David Meyer, M.D. 2,504,749 (1) 8.41%
Alpert Companies 2,165,400 7.23%
Alan C. Baum, M.D. 195,170 (2) *
Lucius E. Burch, III 8,320 (3) *
Richard A. Gilleland 1,539,100 (4) 5.12%
Ronald L. Stanfa 39,500 (5) *
Richard J. D'Amico 111,692 (3) *
Jonathan R. Bond 37,318 (6) *
Peter Dorflinger 76,667 (3) *
Pamela Westbrook 33,334 (3) *
All directors and executive
officers as a group 2,041,101 6.85%
(8 persons)
</TABLE>
________________
* Less than 1%.
(1) Includes 770,000 shares held by a general partnership in which Dr. Meyer is
a partner and 7,500 shares which may be purchased upon the exercise of
options exercisable within 60 days of May 31, 1998. Dr. Meyer's address is
813 Ridge Lake Blvd., Suite 400, Memphis, Tennessee 38120.
(2) Includes 14,192 shares held by an affiliated general partnership in which
Dr. Baum is a general partner and 2,500 shares which may be purchased upon
the exercise of options exercisable within 60 days of May 31, 1998.
(3) Consists entirely of shares which may be purchased upon the exercise of
options exercisable within 60 days of May 31, 1998.
(4) Includes 21,600 shares held by a general partnership of which Mr. Gilleland
has control and 1,517,500 shares which may be purchased upon the exercise
of options exercisable within 60 days of May 31, 1998.
(5) Includes 12,500 shares which may be purchased upon the exercise of options
exercisable within 60 days of May 31, 1998.
(6) Includes 33,334 shares which may be purchased upon the exercise of options
exercisable within 60 days of May 31, 1998.
22
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth a summary of the compensation paid by PRG
for services rendered in all capacities to PRG during 1997 to the Named
Executive Officers.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
---------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
----------------------------------- ----------------------- -------
OTHER ANNUAL RESTRICTED SECURITIES LTIP ALL OTHER
NAME AND PRINCIPAL COMPENSATION STOCK UNDERLYING PAYOUTS COMPENSATION
POSITION YEAR SALARY($) BONUS($) ($) AWARDS($) OPTIONS ($) ($)
- ----------------------- ---- --------- -------- ------------ ---------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Richard A. Gilleland, (9) 1997 19,153 54,000 1,505,000
Chairman of the Board
and Chief Executive
Officer
Emmett E. Moore (10) 1996 315,000 50,000 (1) 500,000 (5) 8,269 (3)
Chairman of the Board 1997 345,000 367,000 1,903 (3)
and Chief Executive
Officer
Richard M. Owen, (8) 1996 185,000 35,000 (1) 90,000 6,923 (3)
President 1997 208,333 93,940 126,765 (2)(3)
Richard J. D'Amico, (8) 1996 150,000 110,000 195,000 (6) 50,000 (3)(4)
Executive Vice 1997 225,000 290,000 2,076 (3)
President, Chief
Administrative
Officer, General
Counsel and Secretary
Mark Kingston, (8) 1996 140,000 105,000 70,000 (7) 3,846 (3)
Executive Vice 1997 175,000 27,000 2,076 (3)
President
Jonathan R. Bond, 1996 155,000 82,500 15,000 5,961 (3)
Senior Vice President 1997 175,000 100,000 2,076 (3)
- Operations
David Real, (8) 1997 128,153 50,000 1,557 (3)
Chief Financial Officer
</TABLE>
(1) Mr. Moore waived the bonus of approximately $150,000, which would have
accrued pursuant to the terms of his old employment contract and received
an option to purchase 100,000 shares of PRG Common Stock at an exercise
price of $15.25; Mr. Owen waived a bonus of approximately $92,500, which
would have accrued pursuant to the terms of his old employment contract and
received an option to purchase 66,940 shares of PRG Common Stock at an
exercise price of $15.25. See "Employment Agreements".
(2) Includes $125,000 paid by PRG in connection with a severance package.
(3) Represents amounts paid by PRG for health insurance premiums.
(4) Includes approximately $45,000 paid in connection with employee's
relocation pursuant to the terms of the employment agreement between
employee and PRG.
(5) Includes 445,000 options that were subsequently canceled.
(6) Includes 150,000 options that were subsequently canceled.
(7) Includes 45,000 options that were subsequently canceled.
(8) Individuals are no longer employed by the Company; therefore, all stock
options granted to such individuals have or will expire in accordance with
the terms of the Stock Option Plan.
(9) Mr. Gilleland was elected Chairman of the Board and Chief Executive Officer
effective December 15, 1997.
(10) Mr. Moore's position as Chairman of the Board and employment as Chief
Executive Officer were terminated on
23
<PAGE>
November 17, 1997.
OPTION GRANTS DURING 1997
The following table presents information regarding 1997 grants of options
to purchase shares of Common Stock for each of the Named Executive Officers:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM/(1)/
- --------------------------------------------------------------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED(#) FISCAL YEAR ($/SH)/(2)/ DATE 5% ($) 10% ($)
- -------------------------- ---------- ----------------- ---------------- ------------- ----------- ------------
Richard A. Gilleland 5,000 50.48% $12.1250 05/20/07 $ 38,126 $ 96,620
1,500,000 $ 2.5625 12/15/07 $2,417,313 $6,125,947
Emmett E. Moore 367,000 12.31% $15.2500 02/23/07 $3,519,766 $8,919,778
Richard M. Owen 93,940 3.15% $15.2500 01/31/98 (3) $ 59,447 $ 118,423
Richard J. D'Amico 90,000 9.73% $15.2500 02/23/07 (3) $ 863,157 $2,187,411
200,000 $ 4.5000 12/29/07 (3) $ 566,005 $1,434,368
Mark Kingston 27,000 0.91% $15.2500 06/13/98 (3) $ 27,676 $ 55,795
Jonathan R. Bond 100,000 3.35% $ 4.5000 12/29/07 $ 283,002 $ 717,184
David Real 50,000 1.68% $12.5000 03/31/98 (3) $ 31,250 $ 62,500
</TABLE>
(1) The dollar amounts in these columns represent the potential realizable
value that might be realized upon exercise of the options immediately prior
to the expiration of their term, assuming that the market price of Common
Stock appreciates from the date of grant at the 5% and 10% annual rates
prescribed by regulation and, therefore, are not intended to forecast
possible future appreciation, if any, of the price of Common Stock. These
numbers do not take into account provisions of certain options providing
for termination of the option following termination of employment,
nontransferability or vesting over periods.
(2) The option exercise price may be paid in shares of Common Stock owned by
the executive officer, in cash, or in any other form of valid consideration
as determined by the Compensation Committee in its discretion. The
exercise price of each option was equal to the fair market value of the
Common Stock on the date of grant.
(3) Individuals are no longer employed by the Company; therefore, all stock
options granted to such individuals have expired or will expire in
accordance with the terms of the Stock Option Plan.
24
<PAGE>
AGGREGATED OPTION EXERCISES DURING 1997 AND YEAR-END OPTION VALUES
The following table presents information regarding options exercised in
1997 and the value of options outstanding at December 31, 1997 for each of the
Named Executive Officers:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FY-END(#) AT FY-END($)/(1)/
- --------------------- ----------- ---------- --------------------------- ----------------------------
SHARES VALUE
ACQUIRED ON REALIZED
NAME EXERCISE(#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------- ----------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richard A. Gilleland 0 $0.00 1,512,000 7,500 $2,718,750 $0
Emmett E. Moore 0 $0.00 91,000 531,000 $ 0 $0
Richard M. Owen (2) 0 $0.00 30,000 0 $ 0 $0
Richard J. D'Amico (2) 0 $0.00 103,667 301,333 $ 0 $0
Mark Kingston (2) 0 $0.00 20,000 92,000 $ 0 $0
Jonathan R. Bond 0 $0.00 74,334 135,666 $ 0 $0
David Real (2) 0 $0.00 0 0 $ 0 $0
</TABLE>
(1) The closing price for the Common Stock as listed on the New York Stock
Exchange on December 31, 1997, the last trading day of 1997, was $4.375.
Value is calculated on the basis of the difference between the option
exercise price and $4.375 multiplied by the number of shares of Common
Stock underlying the option.
(2) Individuals are no longer employed by the Company; therefore, all stock
options granted to such individuals have expired or will expire in
accordance with the terms of the Stock Option Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Richard A. Gilleland was a member of the Compensation Committee of the
Board of PRG during 1997 and was elected the Chief Executive Officer of PRG
effective December 15, 1997. Mr. Gilleland resigned as a member of the
Compensation Committee prior to his election as Chief Executive Officer and did
not participate, in any way, in the deliberations of the Committee with regard
to his compensation. No other member of the Compensation Committee of the Board
of PRG was, during 1997, an officer or employee of PRG or any of its
subsidiaries, or was formerly an officer of PRG or any of its subsidiaries or
had any relationships requiring disclosure by PRG.
During 1997, no executive officer of PRG served as (i) a member of the
compensation committee (or other board committee performing equivalent
functions) of another entity, one of whose executive officers served on the
Compensation Committee of the Board, (ii) a director of another entity, one of
whose executive officers served on the Compensation Committee of the Board, or
(iii) a member of the Compensation Committee (or other board committee
performing similar functions) of another entity, one of whose executive officers
served as a director of PRG.
25
<PAGE>
COMPENSATION OF DIRECTORS
Directors who are employees of PRG or of a practice with which PRG has
entered a Service Agreement (each an "Affiliated Practice") do not receive
additional compensation for serving as directors. Each director who is neither
an employee of PRG nor of an Affiliated Practice receives a fee of $2,000 for
attendance at each Board of Directors meeting (whether the meeting is in person
or telephonic) and $1,500 (if in person; $500 if telephonic) for each committee
meeting (unless held on the same day as a Board meeting) and an initial grant of
nonqualified options to purchase 10,000 shares of Common Stock. Nonemployee
directors (whether or not employed by an Affiliated Practice) receive annual
grants of nonqualified options to purchase 5,000 shares of Common Stock. All
directors of PRG are reimbursed for out-of-pocket expenses incurred in attending
meetings of the Board or committees thereof, and for other expenses incurred in
their capacity as directors of PRG.
REPORT ON REPRICING OF OPTIONS/SARS
On February 21, 1997, the board of directors granted certain stock options
in connection with the cancellation of existing stock option grants as set forth
in the table below. Such stock option grants were made to restore the incentive
value to the options previously granted. The grant of the new options was
approved by the stockholders at the 1997 annual meeting.
<TABLE>
<CAPTION>
NUMBER OF MARKET PRICE LENGTH OF
SECURITIES OF STOCK AT EXERCISE PRICE ORIGINAL OPTION
UNDERLYING TIME OF AT TIME OF TERM REMAINING
OPTIONS/SARS REPRICING OR REPRICING OR NEW EXERCISE AT DATE OF
NAME REPRICED OR AMENDMENT AMENDMENT PRICE REPRICING OR
DATE AMENDED (#) ($) ($) ($) AMENDMENT
- ------------------- ------- ------------ ------------ ---------------- -------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Emmett E. Moore 2/21/97 445,000 (1) $15.25 $27.625 $15.25 4/17/06 (5)
Richard M. Owen 2/21/97 45,000 (2) $15.25 $27.625 $15.25 4/17/06 (5)
Richard J. D'Amico 2/21/97 150,000 (3) $15.25 $27.625 $15.25 4/17/06 (5)
Mark P. Kingston 2/21/97 45,000 (4) $15.25 $27.625 $15.25 4/17/06 (5)
</TABLE>
(1) Such options were canceled and 267,000 options were granted at the new
exercise price.
(2) Such options were canceled and 27,000 options were granted at the new
exercise price.
(3) Such options were canceled and 90,000 options were granted at the new
exercise price.
(4) Such options were canceled and 27,000 options were granted at the new
exercise price.
(5) Expiration date of original options.
This report is submitted by the members of the Compensation Committee.
Compensation Committee
Lucius E. Burch, III
Ronald L. Stanfa
26
<PAGE>
EMPLOYMENT AGREEMENTS
Mr. Gilleland has entered into an employment agreement with PRG providing
for a base salary of $360,000 per annum or as increased from time to time by the
Board of Directors or the Option and Compensation Committee. Such employment
agreement provides that in the event of a termination of employment without
cause by PRG or for Good Reason (defined below) by Mr. Gilleland, Mr. Gilleland
shall be entitled to receive from PRG, during the Severance Period (defined
below), an annual payment equal to 175% of the amount of Mr. Gilleland's then
current annual salary, to be paid in bi-weekly installments, plus a payment for
accrued but unpaid wages, expense reimbursements and a prorated annual bonus
equal to 145% of the amount calculated by dividing Mr. Gilleland's annual base
salary at the date of termination by twelve and multiplying the result by the
number of months in the year of such termination that began or ended prior to
the date of such termination. Under Mr. Gilleland's employment agreement, the
term Severance Period means (i) if Mr. Gilleland's employment is terminated at
or prior to the end of the initial three year term, (including by failure of the
Company to renew the agreement at the end of the initial term), a period equal
to the greater of (x) two full years beginning on the date of termination and
(y) the then remaining portion of the initial term and (ii) if Mr. Gilleland's
employment is terminated after the end of the initial term and prior to the end
of the then-current renewal term (including by failure of the Company to renew
the agreement at the end of the renewal term), a period equal to one full year
beginning on the date of termination. Good Reason is defined in the employment
agreement as a material diminution of Mr. Gilleland's responsibilities or
duties, a reduction in Mr. Gilleland's base salary or minimum annual bonus of at
least 75% of base salary, or annual bonus or long-term incentive compensation
opportunity, a change of control, failure of the Board of Directors to adopt an
Executive Bonus Program by March 31, 1998, failure of PRG to execute and deliver
to Mr. Gilleland on or prior to December 21, 1997 an Option Agreement and
Registration Rights Agreement, requiring Mr. Gilleland to move his principal
place of business from the current location in Westlake Village, California or
such other location as Mr. Gilleland should agree to in writing, or a material
breach by PRG of the employment agreement which is not cured promptly after
written notice to PRG from Mr. Gilleland. In addition, if PRG achieves target
performance objectives for the entire year in which such termination occurs that
would have entitled Mr. Gilleland to receive an annual bonus for such year
calculated at a percent greater than 145% of base salary, Mr. Gilleland shall be
entitled to an additional amount equal to (a) such larger bonus amount divided
by twelve and multiplied by the number of months in the year of such termination
that began or ended prior to the date of such termination minus (b) the amount
previously paid upon termination. The employment agreement contains a
covenant-not-to-compete with PRG during the term of the employment agreement.
However, the agreement does provide that Mr. Gilleland may own less than 5% of
the common stock of any publicly traded corporation or other Person conducting
business in the Designated Industry (defined as a business organization in
engaging in any business activities that are substantially and directly
competitive with the business activities then conducted by PRG), serve as an
officer, director, stockholder or employee of a corporation or other Person
engaged in the healthcare industry whose business operations are not
substantially and directly competitive with those of PRG, serve on the board of
directors of any business or corporation on which he served as of the date of
the employment agreement, continue his current consulting arrangements with
STERIS Corporation, and Clayton, Dubilier & Rice, Inc. or any of their
respective subsidiaries or affiliates, and engage in any activities in
connection with such arrangements.
In addition to base salary, Mr. Gilleland through his employment agreement
is eligible for a fixed bonus of $54,000 for 1997 and a bonus in an amount equal
to at least $630,000 minus his base salary for all years thereafter.
Additionally, Mr. Gilleland shall have the opportunity to receive a bonus based
on the financial performance objectives of the Company. This bonus is to range
between 145% and 215% of Mr. Gilleland's base salary. Mr. Gilleland was granted
an option to purchase 1,500,000 shares of PRG Common Stock with the per share
exercise price being the closing sale price for PRG stock on the New York Stock
Exchange on the date of the commencement of the employment agreement. The
options were fully vested and exercisable upon grant. The term of Mr.
Gilleland's employment agreement began in December 1997 and is for a term of
three years, automatically renewed thereafter for successive one year terms
unless either party gives 90 days notice of termination.
Mr. Bond has entered into an employment agreement with PRG providing for a
base salary of $155,000
27
<PAGE>
per annum or as increased from time to time by the Board of Directors. Such
employment agreement provides that in the event of a termination of employment
by PRG other than (i) for cause, (ii) upon death or disability or (iii) upon
notice 60 days prior to an automatic renewal date occurring after five years
from the date of first employment, Mr. Bond shall be entitled to receive from
PRG a payment equal to the amount of Mr. Bond's then current annual salary, to
be paid in twelve monthly installments, plus a payment for accrued but unpaid
wages and expense reimbursements. Mr. Bond's employment agreement provides that
in the event Mr. Bond's employment terminates within twelve months following a
change in control (as defined in such employment agreement) of PRG, PRG shall
pay Mr. Bond 2.99 times Mr. Bond's (i) base salary, (ii) maximum potential bonus
and (iii) certain other compensation, with certain adjustments. The employment
agreement provides that PRG will pay an amount necessary to reimburse Mr. Bond,
on an after tax basis, for any excise tax due under Section 4999 of the Code, as
a result of such payment being treated as a "parachute payment" under Section
280G of the Code. The employment agreement contains a covenant-not-to-compete
with PRG for a period of two years following termination of employment. However,
the agreement does provide that Mr. Bond may devote up to ten percent (10%) of
his professional time or two (2) days per month to a consulting business
independent from PRG.
In addition to base salary, Mr. Bond, through an amendment to his
employment agreement effective March 5, 1998, is eligible for an annual bonus
based on performance objectives to be determined by the board of directors on an
annual basis. Mr. Bond shall have a target bonus opportunity of fifty percent
(50%) of his salary range midpoint for each calendar year during the term of his
employment if the Company attains specified budgeted financial performance
objectives for such year, and an over achievement bonus opportunity of five
percent (5%) of target bonus for each one percent (1%) the Company exceeds such
specified budgeted financial performance objectives. In connection with entry
into his employment agreement, Mr. Bond was granted an option to purchase 95,000
shares of PRG Common Stock with the per share exercise price being the closing
sale price for PRG stock on the New York Stock Exchange on the date of the
commencement of the employment agreement. The options vest over a five (5) year
period from the commencement of the employment agreement; however, the options
are immediately exercisable upon a Change in Control. The term of Mr. Bond's
agreement began in October 1995 and is for a term of five years, automatically
renewed thereafter for successive one year terms unless either party gives 60
days prior notice of termination.
Mr. D'Amico entered into an employment agreement with PRG providing for a
base salary of $120,000 per annum or as increased from time to time by the Board
of Directors. Such employment agreement provided that in the event of a
termination of employment by PRG other than (i) for cause or (ii) upon death or
disability, Mr. D'Amico would be entitled to receive from PRG a payment equal to
the amount of Mr. D'Amico's then current annual salary, to be paid in twelve
monthly installments, plus a payment for accrued but unpaid wages and expense
reimbursements. Mr. D'Amico's employment agreement provided that in the event
Mr. D'Amico's employment terminated within twelve months following a change in
control (as defined in such employment agreement) of PRG, PRG would pay Mr.
D'Amico 2.99 times Mr. D'Amico's (i) base salary, (ii) maximum potential bonus
and (iii) certain other compensation, with certain adjustments. The employment
agreement provided that PRG would pay an amount necessary to reimburse Mr.
D'Amico, on an after tax basis, for any excise tax due under Section 4999 of the
Code, as a result of such payment being treated as a "parachute payment" under
Section 280G of the Code. The employment agreement contained a covenant-not-to-
compete with PRG for a period of two years following termination of employment.
However, the agreement did provide that Mr. D'Amico could devote up to ten
percent (10%) of his professional time or two (2) days per month to a consulting
business independent from PRG.
In addition to base salary, Mr. D'Amico, through an amendment to his
employment agreement effective March 5, 1998, was eligible for an annual bonus
based on performance objectives to be determined by the board of directors on an
annual basis. Mr. D'Amico shall had a target bonus opportunity of fifty percent
(50%) of his salary range midpoint for each calendar year during the term of his
employment if the Company attained specified budgeted financial performance
objectives for such year, and an over achievement bonus opportunity of five
percent (5%) of target bonus for each one percent (1%) the Company exceeded such
specified budgeted financial performance objectives. In connection with his
employment by the Company in 1995, Mr. D'Amico was granted an option to purchase
70,000 shares of PRG Common Stock with the per share exercise price for 3,750 of
such shares being $5.00 per share and the per share exercise price for the
remaining 66,250 of such shares being the initial public offering price for the
Company's Common Stock. The options were to vest over a five (5) year period
from
28
<PAGE>
the commencement of the employment agreement; however, the options are
immediately exercisable upon a Change in Control. His agreement began in April
1995 and was for a term of five years, automatically renewable thereafter for
successive one year terms unless either party gives 30 days notice of
termination.
Mr. D'Amico resigned from his position with the Company effective June 12,
1998 and received no severance pay from the Company. Any stock options granted
to Mr. D'Amico have expired or will expire in accordance with the terms of the
Stock Option Plan.
Mr. Kingston entered into an employment agreement with PRG providing for a
base salary of $100,000 per annum or as increased from time to time by the Board
of Directors. Such employment agreement provided that in the event of a
termination of employment by PRG other than (i) for cause or (ii) upon death or
disability, Mr. Kingston would be entitled to receive from PRG a payment equal
to the amount of Mr. Kingston's then current annual salary, to be paid in twelve
monthly installments, plus a payment for accrued but unpaid wages and expense
reimbursements. Mr. Kingston's employment agreement provided that in the event
Mr. Kingston's employment terminated within twelve months following a change in
control (as defined in such employment agreement) of PRG, PRG would pay Mr.
Kingston 2.99 times Mr. Kingston's (i) base salary, (ii) maximum potential bonus
and (iii) certain other compensation, with certain adjustments. The employment
agreement provides that PRG will pay an amount necessary to reimburse Mr.
Kingston, on an after tax basis, for any excise tax due under Section 4999 of
the Code, as a result of such payment being treated as a "parachute payment"
under Section 280G of the Code. The employment agreement contains a covenant-
not-to-compete with PRG for a period of two years following termination of
employment. However, the agreement did provide that Mr. Kingston may devote
up to ten percent (10%) of his professional time or two (2) days per month to a
consulting business independent from PRG.
In addition to base salary, Mr. Kingston through his employment agreement
was eligible for an annual bonus based on earnings per share growth. Bonuses
were capped at 50% of base salary. Under the Employment Agreement, an option to
purchase 75,000 shares of Common Stock at a purchase price of $13.00 per share
was granted to Mr. Kingston. Such options vested over a five (5) year period
but were immediately exercisable upon a Change in Control. His agreement began
in April 1995 and was for an initial term of five years.
Mr. Kingston resigned from his position with the Company effective March
13, 1998 and received no severance pay from the Company. Any stock options
granted to Mr. Kingston have expired or will expire in accordance with the terms
of the Stock Option Plan.
Mr. Moore entered into an employment agreement with PRG providing for a
base salary of $215,000 per annum or as increased from time to time by the Board
of Directors. Such employment agreement provided that in the event of a
termination of employment by PRG other than (i) for cause, (ii) upon death or
disability or (iii) upon notice 30 days prior to an automatic renewal date
occurring after five years from the date of first employment, Mr. Moore would be
entitled to receive from PRG a payment equal to the amount of Mr. Moore's then
current annual salary, to be paid in twelve monthly installments, plus a payment
for accrued but unpaid wages and expense reimbursements. Mr. Moore's employment
agreement provided that in the event Mr. Moore's employment terminated within
twelve months following a change in control (as defined in such employment
agreement) of PRG, PRG would pay Mr. Moore 2.99 times Mr. Moore's (i) base
salary, (ii) maximum potential bonus and (iii) certain other compensation, with
certain adjustments. The employment agreement provided that PRG would pay an
amount necessary to reimburse Mr. Moore, on an after tax basis, for any excise
tax due under Section 4999 of the Code, as a result of such payment being
treated as a "parachute payment" under Section 280G of the Code. The employment
agreement contained a covenant-not-to-compete with PRG for a period of two years
following termination of employment. The agreement provided that Mr. Moore
could devote up to ten percent (10%) of his professional time or two (2) days
per month to a consulting business independent from PRG.
In addition to base salary, Mr. Moore through his employment agreement was
eligible for an annual bonus based on earnings per share growth. Bonuses are
capped at 50% of base salary. His agreement began in April 1995 and was for a
term of five years.
29
<PAGE>
Mr. Moore entered into a new employment agreement effective February 21,
1997, which contained the same terms and conditions as the employment agreement
described above except that it was for a term of three (3) years from the
commencement date of the agreement, annual base salary is $315,000, there was no
provision for reimbursement of excise tax, the bonus calculation was subject to
a new formula and 100,000 options vesting 20% over a five (5) year period at an
exercise price of $15.25 were granted to Mr. Moore as consideration for entering
into the agreement.
Mr. Moore's employment with the Company was terminated November 17, 1997.
The Company will continue to fulfill its obligations to Mr. Moore in accordance
with the terms of his employment agreement.
Mr. Owen entered into an employment agreement with PRG providing for a base
salary of $180,000 per annum or as increased from time to time by the Board of
Directors. Such employment agreement provided that in the event of a
termination of employment by PRG other than (i) for cause, (ii) upon death or
disability or (iii) upon notice 30 days prior to an automatic renewal date
occurring after five years from the date of first employment, Mr. Owen would be
entitled to receive from PRG a payment equal to the amount of Mr. Owen's then
current annual salary, to be paid in twelve monthly installments, plus a payment
for accrued but unpaid wages and expense reimbursements. Mr. Owen's employment
agreement provided that in the event Mr. Owen's employment terminated within
twelve months following a change in control (as defined in such employment
agreement) of PRG, PRG would pay Mr. Owen 2.99 times Mr. Owen's (i) base salary,
(ii) maximum potential bonus and (iii) certain other compensation, with certain
adjustments. The employment agreement provided that PRG would pay an amount
necessary to reimburse Mr. Owen, on an after tax basis, for any excise tax due
under Section 4999 of the Code, as a result of such payment being treated as a
"parachute payment" under Section 280G of the Code. The employment agreement
contained a covenant-not-to-compete with PRG for a period of two years following
termination of employment. However, the agreement did provide that Mr. Owen
could devote up to ten percent (10%) of his professional time or two (2) days
per month to a consulting business independent from PRG.
In addition to base salary, Mr. Owen through his employment agreement was
eligible for an annual bonus based on earnings per share growth. Bonuses were
capped at 50% of base salary. Under the Employment Agreement, an option to
purchase 75,000 shares of Common Stock at a purchase price of $13.00 per share
was granted to Mr. Owen. Such options were to vest over a five (5) year period;
however, the options were immediately exercisable upon a Change in Control. Mr.
Owen's initial agreement began in April 1995 and was for a term of five years,
automatically renewed thereafter for successive one year terms unless either
party gave 30 days notice of termination.
Mr. Owen entered into a new employment agreement effective February 21,
1997, which contained the same terms and conditions as the employment agreement
described above except that it would be for a term of two (2) years from the
commencement date of the agreement, annual base salary was $250,000, there was
no provision for reimbursement of excise tax, the bonus calculation was subject
to a new formula and 66,940 options vesting 20% over a five (5) year period at
an exercise price of $15.25 were granted to Mr. Owen as consideration for
entering into the agreement.
On October 31, 1997, Mr. Owen resigned from his position with the Company.
Mr. Owen received approximately $125,000 in severance pay from the Company. Any
stock options granted to Mr. Owen have expired or will expire in accordance with
the terms of the Stock Option Plan.
Mr. Real entered into an employment agreement with PRG providing for a base
salary of $170,000 per annum. Such employment agreement provided that in the
event the employment agreement was terminated without cause during the one year
term or for six months thereafter, Mr. Real would be entitled to base pay from
the date of notice of termination for the greater of (i) six months or (ii) the
lesser of (a) twelve months or (b) the number of months remaining during a
period beginning with April 1, 1997 and ending 24 months thereafter. The
employment agreement contained a covenant-not-to-compete with PRG for a period
of one year following termination of employment.
30
<PAGE>
In addition to base salary, Mr. Real was entitled to participate in a bonus
program based on performance criteria to be established by the Chief Executive
Officer and the Board of Directors. Mr. Real was granted an option to purchase
50,000 shares of PRG Common Stock with the per share exercise price being the
closing sale price for PRG stock on the New York Stock Exchange on the date of
the commencement of the employment agreement. The options were to vest over a
five (5) year period from the commencement of the employment agreement; however,
the options were to be immediately exercisable upon a Change in Control. His
agreement began in April 1997 and was for a term of one year and could be
terminated upon 90 days written notice by either party.
On December 31, 1997, Mr. Real resigned from his position with the Company.
Mr. Real received no severance pay from the Company. Any stock options granted
to Mr. Real have or will expire in accordance with the terms of the Stock Option
Plan.
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS ON EXECUTIVE
COMPENSATION
The following report of the Compensation Committee of the Board of
Directors of PRG shall not be deemed incorporated by reference into any filing
under the Securities Act of 1933, as amended (the "Securities Act"), or under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and shall
not be deemed filed under either of the Securities Act or the Exchange Act
except to the extent that PRG specifically incorporates this information by
reference.
Overview
The key components of PRG's executive officer compensation are salary,
bonus and stock option awards. During 1997, each of PRG's named executive
officers was a party to a long-term employment agreement (collectively the
"Executive Employment Agreements"). See "Employment Agreements." The Executive
Employment Agreements each provide for a minimum base salary (subject to
increase by the Board of Directors or the Compensation Committee) and a bonus
based on either earnings per share growth or achievement of financial
performance objectives agreed upon by the named executive and the Company.
Additionally, each of the Company's executive officers holds options to purchase
shares of the Company's Common Stock.
The members of the Compensation Committee hold primary responsibility for
determining executive officer compensation levels, subject to the term of the
Executive Employment Agreements and the other employment agreements to which
executive officers are a party. The Compensation Committee is composed entirely
of independent outside directors of PRG, none of whom are or have been officers
or employees of PRG.
The Compensation Committee has adopted a compensation philosophy intended
to align compensation with PRG's overall business strategy. The philosophy
guiding the executive compensation program is designed to link executive
compensation and stockholder value. The goals of the program are:
. To compensate executive employees in a manner that aligns the
employees' interests with the interests of the stockholders;
. To encourage continuation of PRG's entrepreneurial spirit;
. To reward executives for successful long-term strategic management;
. To recognize outstanding performance; and
. To attract and retain highly qualified and motivated executives.
The strategy established by the Compensation Committee with respect to
executive compensation includes maintaining base salaries at a competitive level
for the physician practice management industry, while providing bonuses which,
when combined with base salary amounts, give PRG's executives the potential to
earn in excess of
31
<PAGE>
competitive industry compensation if certain subjective and objective
performance goals for PRG are achieved. The Compensation Committee intends to
continue to grant to PRG's executives and other key employees stock options at
current market value, which options have no monetary value to the executives
unless and until the market price of PRG's Common Stock increases. In this
manner, PRG's executives will be well-compensated when PRG achieves its
operating and performance goals. On the other hand, in less successful years
(measured in terms of stock performance), an executive's pay will be less. The
mix of base salary, bonuses and stock option awards reflects the Compensation
Committee's intention to link executive compensation to PRG's operational
performance and the price of its Common Stock. The Compensation Committee
anticipates that bonus payments and option grants made during 1998 and
thereafter will be based on a subjective analysis of various performance
criteria and will not directly be tied to any one factor. The Compensation
Committee intends to continue to examine ways to more closely link its annual
bonus and long-term incentive plans to PRG's stock performance, with the
objective of creating plans that strengthen the relationship between stockholder
value and executive compensation.
32
<PAGE>
1997 COMPENSATION
Compensation paid during 1997 to Emmett E. Moore, PRG's former Chief
Executive Officer, principally was composed of base salary pursuant to Mr.
Moore's Executive Employment Agreements and stock options. See "Employment
Agreements." Mr. Moore received a salary of $345,000 in 1997. Mr. Moore did
not receive a bonus in 1997. The level of Mr. Moore's salary was dictated by
his Executive Employment Agreement. The level of salary contained in Mr.
Moore's Executive Employment Agreement was based on negotiations between Mr.
Moore and the Compensation Committee and related to the level of responsibility
held by Mr. Moore rather than specific performance criteria.
In February 1997, Mr. Moore received a grant of options to purchase 100,000
shares of PRG Common Stock at a price of $15.25 per share, subject to
stockholder approval and acceptance of a new Executive Employment Agreement,
both of which conditions occurred. Additionally, in February 1997, Mr. Moore
received a grant of options to purchase 267,000 shares of PRG Common Stock at a
price of $15.25 per share in replacement of options to purchase 445,000 shares
of PRG Common Stock at a price of $27.625 per share. This grant was contingent
on stockholder approval, which was obtained in May, 1997. The purpose of the
option grants was to align Mr. Moore's interests with those of PRG's
stockholders by strengthening his equity position with the Company.
Additionally, during 1997, the Board of Directors approved a transaction
pursuant to which (i) PRG sold to Mr. Moore 200,000 shares of Series B
Convertible Preferred Stock (the "Preferred Shares") for an aggregate purchase
price of $2,125,000 and (ii) the purchase of the Preferred Shares was funded by
a loan from the Company to Mr. Moore. The intent of the sale of Preferred Shares
to Mr. Moore was to align his interests with those of the Company's stockholders
by providing Mr. Moore a significant equity interest in the Company. The
principal of the loan is nonrecourse and the interest payable with respect to
the loan is recourse. This loan transaction was contingent on stockholder
approval which was obtained in May of 1997.
As noted above in "Executive Compensation", Mr. Moore's employment with the
Company was terminated November 17, 1997. The Company will continue to fulfill
its obligations to Mr. Moore in accordance with the terms of his employment
agreement.
In negotiating the terms of Mr. Gilleland's Executive Employment Agreement,
which was effective December 15, 1997, the principal factors considered by the
Compensation Committee were the need to develop a compensation package providing
(i) cash compensation and an equity component sufficient to attract a chief
executive with the level of management skills necessary to address the Company's
operational concerns and (ii) appropriate incentives to improve the Company's
financial performance, as well as the performance of the Company's stock price.
A substantial portion of Mr. Gilleland's cash compensation will be comprised of
bonus compensation, the amount of which will vary (between 145% and 215% of base
salary), based on the achievement of performance goals agreed upon by the
Compensation Committee and Mr. Gilleland. Additionally, the Compensation
Committee believes that the options to purchase 1,500,000 shares of the
Company's Common Stock held by Mr. Gilleland provide Mr. Gilleland a significant
equity interest in the Company that aligns Mr. Gilleland's individual interests
with those of the Company.
This report is submitted by the members of the Compensation Committee.
Compensation Committee
Lucius E. Burch, III
Ronald L. Stanfa
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<PAGE>
STOCK PERFORMANCE CHART
The following chart compares the yearly percentage change in the cumulative
total stockholder return on Common Stock from the initial public offering on
June 23, 1995 through December 31, 1997, with the cumulative total return on the
S&P 500 Index and the S&P Health Care (Diversified) Index. The comparison
assumes $100 was invested immediately prior to the period in Common Stock and in
each of the foregoing indices and assumes reinvestment of dividends. PRG's
initial public offering price of $13.00 was used as the beginning price of the
Common Stock. Dates on the following chart represent the last day of the
indicated fiscal year. PRG paid no dividends during such period.
[GRAPH APPEARS HERE]
INDEXED RETURNS
Years Ending
<TABLE>
<CAPTION>
Base
Period
Company/Index 23-Jun-95 Dec95 Dec96 Dec97
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PHYSICIANS RESOURCE GRP INC. 100 152.88 135.57 33.65
HEALTH CARE (DIVERSFD)-500 100 118.46 149.40 218.25
S&P 500 INDEX 100 113.41 139.45 185.97
</TABLE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
REAL ESTATE TRANSACTIONS
On June 28, 1995, PRG became the lessee under a variety of leases. PRG
assumed an office lease for which a partnership, in which Bruce E. Herron, M.D.
is a partner, is the lessor; the annual expenditures under the lease were
approximately $171,000. PRG assumed one office lease for which James E.
McDonald, II, M.D. is the
34
<PAGE>
lessor; the aggregate annual expenditures under the lease were approximately
$170,500. PRG assumed five office leases for which various partnerships, in
which P. Harold Wallar, M.D. is a partner, are the lessors; the aggregate annual
expenditures under these leases were approximately $591,800. PRG assumed four
office leases for which a partnership, in which Kenneth C. Westfield, M.D. is a
partner, is the lessor; the aggregate annual expenditures under these leases
were approximately $24,900. Drs. Herron, McDonald, Wallar and Westfield served
as members of the Board of Directors in 1997 and resigned as members on January
24, 1998.
CERTAIN INDEBTEDNESS
In July, 1997, the Company loaned $500,000 at an interest rate of 8% to Dr.
Kenneth Westfield to provide funds to Dr. Westfield to purchase the practice of
a retiring physician practicing in his market (also a PRG affiliate). The loan
is repayable in two equal installments of $250,000 in January and July of 1998.
The January payment has not been made. Dr. Westfield served as a member of the
Board of Directors in 1997 and resigned as a member on January 24, 1998.
In November, 1997, the Company replaced its $90,000,000 revolving credit
facility with a $14,000,000 revolving credit facility. As of December 31, 1997,
outstanding borrowings under the facility were $12,248,000. The amended
facility requires the balance outstanding to be paid down to $9,500,000 by
September 30, 1998, with the remainder to be paid on December 31, 1998. The
facility bears interest at LIBOR plus 2.5% (8.5% at December 31, 1997), with
such interest being repayable, in its entirety, on December 31, 1998. The
amended facility is guaranteed in an amount up to $8,000,000 by Mr. Burch and
David Meyer, M.D.. Dr. Meyer served as a member of the Board of Directors in
1997 and resigned as a member on January 24, 1998. As of April 1, 1998, Mr.
Burch and Dr. Meyer each received $210,000 as compensation for these
guaranties. In addition, for each month the guaranties remain in place, Mr.
Burch and Dr. Meyer are entitled to $60,000 each, per month as compensation for
these guaranties.
SERVICE AGREEMENTS
PRG is a party to certain Service Agreements with affiliated practices in
which certain directors have an ownership interest. Service fees accrued to PRG
in 1997 by such affiliated practices in which certain directors have an
ownership interest were as follows: Alan C. Baum, M.D. (TEI & Assoc.)
$1,652,110; Charles D. Fritch, M.D. (Fritch Eye Care Center) $227,609; Bruce E.
Herron, M.D. (Eye Clinic, P.C.) $809,300; James E. McDonald, M.D. (McDonald Eye
Associates, P.A.) $136,345; Joseph C. Noreika, M.D. (TPZ, Inc.) $129,393; David
M. Schneider, M.D. (David M. Schneider, M.D., Inc.) $568,184; P. Harold Wallar,
M.D. (Inland Eye Institute Medical Group, Inc.) $98,395; Kenneth C. Westfield,
M.D. (Westfield Eye Center) $(43,595); David Meyer, M.D. (Vitreoretinal
Foundation) $1,609,048; James W. Rayner, M.D. (Rayner Eye Clinic) $921,531; and
Joe E. Ellis, O.D. (Primary Eye Care, P.S.C.) $9,675. Drs. Fritch, Herron,
McDonald, Noreika, Schneider, Wallar, Westfield, Meyer, Rayner and Ellis served
as members of the Board of Directors in 1997 and resigned as members on January
24, 1998.
During the course of the Company's 1997 review of its due from affiliates
balance, approximately $1,584,000, $468,000 and $242,000 of receivables due in
connection with the payment of service fees from the practices of Drs. Meyer,
Schneider and Noreika, respectively, were re-evaluated and subsequently reserved
or written off. Drs. Meyer, Schneider and Norieka served as members of the
Board of Directors in 1997 and resigned as members on January 24, 1998.
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<PAGE>
SALE OF PREFERRED STOCK
During 1997, the Board of Directors approved a transaction pursuant to
which (i) PRG sold to Emmett E. Moore 200,000 shares of Series B Convertible
Preferred Stock (the "Preferred Shares") for an aggregate purchase price of
$2,125,000 and (ii) the purchase of the Preferred Shares was funded by a loan
from the Company to Mr. Moore. The intent of the sale of Preferred Shares to Mr.
Moore was to align his interests with those of the Company's stockholders by
providing Mr. Moore a significant equity interest in the Company. The principal
of the loan is nonrecourse and the interest payable with respect to the loan is
recourse. This loan transaction was contingent on stockholder approval which
was obtained in May of 1997. During 1997, Mr. Moore was Chairman of the Board
of Directors and Chief Executive Officer of the Company. However, his
employment with the Company was terminated on November 17, 1997.
COMPANY POLICY
It is anticipated that future transactions with affiliates of PRG will be
minimal, will be approved by a majority of the disinterested members of the
Board and will be made on terms no less favorable to PRG than could be obtained
from unaffiliated third parties. PRG does not intend to make any further loans
to, or incur any indebtedness to, any of its executive officers or directors.
SECTION 16 REQUIREMENTS
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
PRG's officers and directors, and persons who own more than 10% of a registered
class of PRG's equity securities, to file initial reports of ownership and
reports of changes in ownership with the Securities and Exchange Commission (the
"SEC"). Such persons are required by SEC regulation to furnish PRG with copies
of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it with
respect to 1997, or written representations from certain reporting persons, PRG
believes that all filing requirements applicable to its officers, directors and
persons who own more than 10% of a registered class of PRG's equity securities
have been complied with in a timely manner.
INDEPENDENT PUBLIC ACCOUNTANTS
The Board has selected Arthur Andersen LLP as independent auditors to
examine PRG's accounts for the current fiscal year. It is expected that
representatives of Arthur Andersen LLP will be present at the Meeting, will be
available to respond to appropriate questions of stockholders and will have an
opportunity to make a statement if they desire.
OTHER BUSINESS
PRG does not intend to bring any business before the Meeting other than
those described herein and at this date PRG has not been informed of any matters
that may be presented at the Meeting by others; however, if any other matters
properly come before the Meeting or any adjournment thereof, it is intended that
the persons named in the accompanying Proxy will vote pursuant to such Proxy in
accordance with their best judgment on such matters.
STOCKHOLDER PROPOSALS
Stockholders may submit proposals on matters appropriate for stockholder
action at subsequent annual meetings of PRG consistent with Rule 14a-8
promulgated under the Securities Exchange Act of 1934, as amended. For such
proposals to be considered in the Proxy Statement and Proxy relating to the 1999
Annual Meeting of Stockholders, such proposals must be received by PRG,
Attention: Secretary, at the address set forth on the first page of this proxy
statement, no later than December 23, 1998, in order to be included in PRG's
proxy materials and form of proxy relating to that meeting. Stockholder
proposals must also be otherwise eligible for inclusion.
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<PAGE>
MISCELLANEOUS
All costs of solicitation of Proxies will be borne by PRG. In addition to
solicitation by mail, the officers and employees of PRG may solicit Proxies by
telephone or personally, without additional compensation. PRG may also make
arrangements with brokerage houses and other custodians, nominees and
fiduciaries for the forwarding of solicitation materials to the beneficial
owners of shares of Common Stock held of record by such persons, and PRG may
reimburse them for their out-of-pocket expenses incurred in connection
therewith. PRG has engaged ChaseMellon Shareholder Services, L.L.C., as proxy
solicitor for approximately $6,500.
The Annual Report to Stockholders of PRG, including financial statements
for the fiscal year ended December 31, 1997, accompanies this Proxy Statement.
The Annual Report is not to be deemed part of this Proxy Statement.
BY ORDER OF THE BOARD OF DIRECTORS
Peter G. Dorflinger
President
Dallas, Texas
July 10, 1998
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