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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1997
Commission File No. 1-13778
PHYSICIANS RESOURCE GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 76-0456864
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
Three Lincoln Centre, 5430 LBJ Freeway, Suite 1540, Dallas, TX 75240
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
Registrant's telephone number, including area code: (972) 982-8200
Title of each class Name of each exchange on which registered
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COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE
Securities pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in a definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The number of shares outstanding of the Registrant's common stock as of
April 6, 1998 was 29,786,689 shares. The aggregate market value of the voting
stock held by non-affiliates of the Registrant based on 29,525,831 shares held
by non-affiliates and a $3.875 closing price of the Registrant's common stock on
the New York Stock Exchange as of April 6, 1998 was $114,412,595.
Documents incorporated by reference:
DOCUMENT FORM 10-K PART
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Portions of the Registrant's definitive proxy statement
for the Registrant's annual meeting of stockholders to
be held during 1998 and anticipated to be filed within
120 days of the Registrant's fiscal year ended
December 31, 1997 III
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PART I
ITEM 1. BUSINESS
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Overview
General
Physicians Resource Group, Inc. (with its subsidiaries as the context
requires, "PRG" or the "Company") began operations in 1995 and is a provider of
physician practice management services to ophthalmic and optometric practices
(the "Practices") and one of the nation's largest single-specialty physician
practice management companies. PRG develops integrated eye care delivery systems
through affiliations with locally prominent eye care practices in selected
geographic markets across the United States. PRG acquires the operating assets
of these Practices and develops the Practices into comprehensive eye care
networks by providing management expertise, marketing, information systems,
capital resources and ancillary services such as ambulatory surgery centers
("ASCs") and optical dispensaries. As of April 6, 1998, PRG was affiliated with
130 eye care Practices that were staffed with 407 ophthalmologists and 185
optometrists at 347 locations in 22 states, and owned or operated 48 ASCs, 167
optical dispensaries and 23 excimer lasers. As discussed further below, PRG is
in the process of terminating its affiliation with 44 of its Practices, 18 of
which had been terminated as of April 6, 1998.
Company Growth
PRG was incorporated in 1993 but did not conduct any significant operations
until its initial public offering (the "IPO") and reorganization in June 1995
(the "Reorganization") at which time the Company began providing practice
management services to its initial 10 Practices. No further acquisitions were
made during 1995. During 1996, however, the Company made a substantial number
of acquisitions beginning in February, including acquisitions accounted for as
poolings of interests as well as various purchase transactions. The Company
acquired both the assets of individual practices, as well as three large
physician practice management companies. In 1997, the Company continued to
acquire the assets of additional eye care practices, but concentrated on in-
market acquisitions. These in-market acquisitions were designed primarily to
expand existing PRG affiliated practices, as opposed to necessarily increasing
the number of practices with which PRG was affiliated. The Company also
restructured the terms of its agreements with certain practices during 1997
(primarily a number of smaller optometry practices), which resulted in either
the complete termination of any affiliation with these practices or the
elimination of any significant relationship. Additionally, during late 1997 and
early 1998, the Company made a decision to terminate its affiliations with a
number of other practices and to sell and/or dispose of the assets and
liabilities associated therewith. This decision and the effects resulting
therefrom are discussed in more detail below.
1997 Activity
As referred to above, at various times during 1997, the Company acquired,
in purchase transactions, the assets of 27 eye care practices and three ASCs.
Aggregate consideration for these acquisitions was $37,790,000 in cash,
promissory notes, convertible promissory notes and common stock (valued at the
market price on date of issuance). In addition to these practice asset and ASC
acquisitions, the Company developed two ASCs in 1997. These acquisitions and
development projects collectively strengthened PRG's position in Louisiana,
California, Pennsylvania, Kentucky, Ohio, Texas, Arizona, Florida, Tennessee,
Nevada, New York and New Jersey. Seventeen of these 27 acquisitions were
combined into existing PRG practices.
As more fully discussed in Notes 2 and 3 of Notes to Consolidated Financial
Statements, PRG initiated, during the latter half of 1997, a strategic review of
its assets, operations and available resources. As a result of such review, the
Company decided, during the third quarter of 1997, to begin the process of
terminating its affiliations with approximately 13 practices and to sell and/or
dispose of certain of the assets and liabilities associated therewith. In
connection with such process, the Company recorded pre-tax charges of
approximately $27,750,000 as of September 30, 1997 in anticipation of losses to
be incurred in such sales and dispositions. During the late fourth quarter of
1997 and early 1998 in conjunction with a change of executive management, the
Company identified an additional 24 practice affiliations to be terminated. PRG
has recorded additional pre-tax charges of approximately $37,634,000 with
respect to (1) the anticipated future dispositions of these practice assets and
liabilities, and (2) the anticipated losses on the
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disposition of 7 smaller optometry practice affiliations effectively terminated
in an agreement restructuring process, bringing to approximately $65,384,000 the
total of pre-tax charges recorded during 1997 in connection with all the 44
practices to be sold, disposed of or disassociated through restructuring of a
service agreement. As of April 6, 1998, this sales/disassociation process is
ongoing, with 18 of the 44 practice affiliations targeted for disassociation
having effectively ceased revenue generating operations, through either being
sold, disposed of or having their service agreements significantly restructured.
In March of 1998, management and the board of directors of the Company
began pursuing a plan that would significantly restructure the Company and that
would require widespread physician acceptance and shareholder approval to be
successful. No assurance can be provided that the Company will be successful in
gaining physician acceptance and shareholder approval and if such acceptance and
approval are obtained, that the resultant plan will be successful. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for more details regarding this plan.
THE PRACTICES
In the aggregate, PRG's Practices provide primary, secondary and tertiary
eye care. Primary eye care involves diagnosing and treating routine vision
impairments through non-surgical correction. Patients requiring routine eye
examinations can be treated by optometrists or ophthalmologists. PRG seeks to
enable ophthalmologists associated with the Practices to concentrate on
providing secondary and tertiary care. Secondary eye care involves the diagnosis
and treatment of eye diseases and disorders through medical regimens, laser
and/or routine surgical intervention. Secondary eye care includes the treatment
of cataracts, glaucoma, simple corneal problems, and various refractive surgical
procedures such as Laser In-Situ Keratomileusis (LASIK), Radial Keratotomy (RK),
Automated Lamellar Keratoplasty (ALK) and Photo Refractive Keratotomy (PRK).
Secondary eye care is provided by ophthalmologists. Tertiary eye care involves
medical and surgical treatment for vitreoretinal disease, severe glaucoma and
corneal diseases and is provided by ophthalmologists who often have subspecialty
training in these areas. A number of the Practices provide refractive surgical
services. As of April 6, 1998, PRG provided management services to 130 practices
with 407 ophthalmologists and 185 optometrists at 347 locations in 22 states,
owned or operated 48 ASCs and 167 optical dispensaries and owned or leased 23
excimer lasers. The Company is in the process of terminating its relationship
with 44 of its practices 18 of which had been terminated as of April 6, 1998.
The Company considers several practices that are combined under one service
agreement to be a single "practice".
The following table sets forth the locations in which the Company operated
as of April 6, 1998. The table excludes practice information for the 18
practices that PRG has completed the termination process through either sale,
disposition, or disassociation, but includes information for those practices
that have been targeted in the termination process, but which had not been sold,
disposed of or disassociated as of April 6, 1998.
<TABLE>
<CAPTION>
NUMBER
OF EXCIMER OPTICAL
STATE/LOCATION OFFICES OPHTHALMOLOGISTS OPTOMETRISTS ASC'S LASERS DISPENSARIES
-------------- ---------- ----------------- -------------- ------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
ALABAMA 12 11 0 1 1 1
ARIZONA 10 11 14 9 1 4
ARKANSAS 7 5 4 0 0 4
CALIFORNIA 32 53 21 10 6 15
FLORIDA 41 72 12 3 2 22
ILLINOIS 20 12 9 0 1 12
KANSAS 1 3 0 1 0 0
KENTUCKY 10 2 12 0 0 8
LOUISIANA 21 18 7 4 1 6
MASSACHUSETTS 3 7 2 1 0 0
MISSISSIPPI 18 15 10 2 0 13
MISSOURI 4 7 3 0 0 2
NEVADA 16 23 0 2 3 4
NEW JERSEY 2 4 0 1 0 1
NEW YORK 10 13 11 0 1 10
NORTH CAROLINA 2 1 1 0 0 1
OHIO 27 29 20 4 3 4
OKLAHOMA 2 3 4 0 0 2
PENNSYLVANIA 3 5 0 1 0 3
SOUTH CAROLINA 1 2 0 0 0 1
TENNESSEE 26 33 22 3 1 19
TEXAS 79 78 33 6 3 35
---------- ----------------- -------------- ------- --------- -------------
TOTAL 347 407 185 48 23 167
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</TABLE>
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SERVICE AGREEMENTS
PRG is a party to management service agreements ("Service Agreements") with
its Practices, under which PRG generally is the exclusive manager and
administrator of non-physician services relating to the operation of such
Practices. The following summary briefly describes the terms typically set forth
in the Company's Service Agreements with the Practices. The actual terms of the
various Service Agreements vary from the description below, on a case by case
basis, depending on negotiations with the individual Practice and the
requirements of local regulations.
The service fees ("Service Fees") payable to PRG by the Practices under the
Service Agreements vary based on the fair market value, as determined in arms-
length negotiations, for the nature and amount of services provided. Such fees
are payable monthly and consist of various combinations of the following: (i)
percentages of the revenues of the Practices, or percentages of the earnings of
the Practices or net income after payment by the Practices of physician
compensation, (ii) all revenues, or a substantial portion of revenues, relating
to facility and other non-physician fees with respect to certain assets owned by
PRG, (iii) operating and non-operating expenses of the Practices paid by PRG
pursuant to the Service Agreements and (iv) certain negotiated performance and
other adjustments. With respect to several of the Practices, the Service Fees
are based on flat rates, some of which are subject to renegotiation on an annual
basis or transition, over time, to a variable fee. In certain states in which
the corporate practice of medicine is permitted, PRG contracts with the
Practices for the provision of medical services by the Practice on behalf of PRG
and PRG pays such Practices for the services provided. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Overview" and Note 5 of Notes to Consolidated Financial Statements of the
Company.
Pursuant to the Service Agreements, PRG generally (i) acts as the exclusive
manager and administrator of non-physician services relating to the operation of
the Practices, subject to matters reserved for the Practice's Joint Planning
Board (an advisory committee comprised of representatives of the Company and the
practices), (ii) bills patients, insurance companies and other third-party
payors and collects on behalf of the Practices the fees for professional medical
services and other services and products rendered or sold by the Practices,
(iii) provides, as necessary, clerical, accounting, purchasing, payroll, legal,
bookkeeping, personnel and computer services and information management,
preparation of certain tax returns, printing, postage and duplication services
and medical transcribing services, (iv) supervises and maintains custody of
substantially all files and records, (v) provides facilities for the Practices,
(vi) orders and purchases inventory and supplies as reasonably requested by the
Practices, (vii) provides working capital financing and makes capital
expenditures for the Practices and (viii) implements, in consultation with the
Joint Planning Board and/or the Practice, national and local public relations or
advertising programs. In addition, pursuant to all Service Agreements except
those to which PRG became a party as a result of the acquisition of the eye care
of division of EquiMed, Inc. ("EquiMed"), PRG (i) prepares, in most cases in
consultation with the Joint Planning Board and the Practices, all annual and
capital operating budgets, (ii) provides financial and business assistance on
the negotiation, establishment, supervision and maintenance of contracts and
relationships with managed care and other similar providers and payors and (iii)
contracts with various forms of managed care entities and payor organizations on
behalf of the Practices.
The financial terms of the Service Agreements the Company enters into with
its affiliated Practices provide for service fees that are payable monthly and
consist of a combination of (a) the operating and non-operating expenses of the
Practices paid by PRG pursuant to the Service Agreements and (b) a management
fee. The method by which the management fee may be calculated for revenues
relating to physician services and certain other medical services varies, and
includes (i) percentages (ranging from approximately 12% to 16%) of the revenues
of the Practices; (ii) percentages (ranging from 10% to 51%) of the earnings of
the Practices; (iii) for an initial time period (from two to five years) of the
Service Agreement, the greater of a flat rate or a percentage of the earnings of
the Practices and thereafter a percentage (35%) of the earnings of the
Practices; (iv) a combination of percentages (2% to 5%) of the revenues and
percentages (10% to 30%) of the earnings of the Practices; or (v) flat rates,
some of which are subject to renegotiation on an annual basis or transition,
over time, to a percentage of the earnings of the Practices. With respect to
revenues relating to certain facility and other non-physician fees, the
management fee consists of percentages (ranging from 35% to 100%) of the
earnings associated with such revenues. In certain states in which the
corporate practice of medicine is permitted, PRG contracts with the Practices or
individual physicians for the provision of medical services on behalf of PRG.
The method by which PRG pays for such services are (i) percentages (65% to 75%)
of the earnings of the Practices; or (ii) percentages (approximately 50% to 70%)
of the earnings of the individual physicians.
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Generally, under the Service Agreements, the respective Practices retain
the responsibility for, among other things, (i) hiring and compensating
physician employees and other medical professionals, (ii) ensuring that
physicians have the required licenses, credentials, approvals and other
certifications needed to perform their duties and (iii) complying with certain
federal and state laws and regulations applicable to the practice of medicine.
The term of the Service Agreements is generally 40 years, with automatic
extensions (unless specified notice is given). Generally, the Service
Agreements may be terminated by PRG if the Practice (i) files a petition in
bankruptcy or other similar events occur or (ii) defaults on the performance of
a material duty or obligation, which default continues for a specified term
after notice. In addition, all Service Agreements, except those to which PRG
became a party as a result of the EquiMed acquisition and certain of those to
which PRG became a party upon the consummation of the acquisition of American
Ophthalmic Incorporated ("AOI") provide that the Practices may terminate the
agreement if PRG (i) files a petition in bankruptcy or other similar events
occur or (ii) defaults on the performance of a material duty or obligation,
which default continues for a specified term after notice.
During the term of certain of the Service Agreements, the Practice and, in
certain instances, each physician owner of the Practice, agrees not to compete
with PRG and certain other practices for which PRG provides management services
within a specified geographic area. The Service Agreements to which PRG became a
party as a result of the EquiMed acquisition do not contain such provisions;
however, the employment agreements with the physician employees employed by such
practices contain similar provisions.
GOVERNMENT REGULATION AND SUPERVISION
General
The health care industry is highly regulated, and there can be no assurance
that the regulatory environment in which PRG operates will not change
significantly in the future. PRG believes that health care regulations will
continue to change. PRG expects to modify its agreements and operations from
time to time as the business and regulatory environment changes. While PRG
believes it will be able to structure its agreements and operations in
accordance with applicable law, there can be no assurance that its business or
such agreements or operations will not be successfully challenged.
Every state imposes licensing requirements on individual physicians and on
facilities and services operated by physicians. In addition, federal and state
laws regulate health maintenance organizations ("HMOs") and other managed care
organizations ("MCOs") with which PRG may have contracts. Many states require
regulatory approval, including certificates of need, before establishing or
expanding certain types of health care facilities, offering certain services or
making expenditures in excess of statutory thresholds for health care equipment,
facilities or programs. In connection with the expansion of existing operations
and the entry into new markets, PRG may become subject to compliance with
additional regulation.
The United States Congress and many state legislatures routinely consider
proposals to reform or modify the health care system, including measures that
would control health care spending, convert all or a portion of government
reimbursement programs to managed care arrangements, and balance the federal
budget by reducing spending for Medicare and state health programs. These
measures can affect a health care company's cost of doing business and
contractual relationships. For example, recent developments that affect PRG's
activities include: (i) federal legislation requiring a health plan to continue
coverage for individuals who are no longer eligible for group health benefits
and prohibiting the use of "pre-existing condition" exclusions that limit the
scope of coverage; (ii) a Health Care Financing Administration ("HCFA") policy
prohibiting restrictions by Medicare HMOs on physicians recommending to patients
other health plans and treatment options; and (iii) regulations imposing
restrictions on physician incentive provisions in physician provider agreements.
There can be no assurance that such legislation, programs and other regulatory
changes will not have a material adverse effect on PRG's business, financial
condition or results of operations.
The ability of PRG to operate profitably will depend in part upon PRG, the
Practices and their physicians obtaining and maintaining all necessary licenses,
certificates of need and other approvals and operating in compliance with
applicable health care regulations.
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Fee-Splitting; Corporate Practice of Medicine
The laws of many states prohibit physicians from splitting fees with non-
physicians (or other physicians) and prohibit non-physician entities from
practicing medicine. These laws vary from state to state and are enforced by the
courts and by regulatory authorities with broad discretion. The laws in most
states regarding fee splitting and the corporate practice of medicine have been
subjected to limited judicial and regulatory interpretation. Although PRG
believes its operations as described herein are in substantial compliance with
existing applicable laws, PRG's business operations have not been the subject of
judicial or regulatory interpretation. There can be no assurance that review of
PRG's business by courts or regulatory authorities will not result in
determinations that could adversely affect the operations of PRG or that the
health care regulatory environment will not change so as to restrict PRG's
existing operations or their expansion. In addition, the regulatory framework of
certain jurisdictions may limit PRG's expansion into such jurisdictions if PRG
is unable to modify its operational structure to conform with such regulatory
framework.
In particular, at least one Texas court has held that control by a
management company over certain medical related business aspects of a medical
practice constitutes the prohibited corporate practice of medicine by the
management company. Illinois courts have indicated that employment of
physicians by for-profit corporations that are not hospitals violates Illinois
law related to the corporate practice of medicine and that management fees based
on a percentage of revenue or income violate Illinois' prohibitions on fee-
splitting. The Florida Board of Medicine recently entered a final order in a
case titled In Re: The Petition for Declaratory Statement of Magan L.
Bakarania, M.D., supported by a prior Florida Board of Medicine Order, stating
that a management fee based on a specified percentage of net income without
direct relation to the services rendered violates Florida law related to fee-
splitting. That case has been stayed pending appeal. PRG cannot predict the
ultimate outcome of this case. If the Florida Board of Medicine Order is
affirmed by a Florida Court, PRG will seek to restructure certain of the service
agreements to which it is a party in Florida, although there can be no assurance
that PRG will be successful in doing so. PRG has already adjusted its Service
Fee methodology in states where it was deemed necessary to comply with such
laws, although, as stated previously, no assurance can be provided that a party
could not successfully assert that the Service Fee methodology violates any such
laws.
Except as indicated in this document, PRG is not aware of significant
litigation related to the corporate practice of medicine or state laws
prohibiting or limiting fee-splitting that PRG anticipates will materially
affect its business. A determination in any state that PRG is engaged in the
corporate practice of medicine or any unlawful fee-splitting arrangement could
render any Service Agreement between PRG and a Practice located in such state
unenforceable or subject to modification, which could have a material adverse
effect on PRG. There can be no assurance that regulatory authorities or other
parties will not assert that PRG or a Practice is engaged in the corporate
practice of medicine in such states or that the management fees paid to PRG by
the Practices constitute unlawful fee-splitting or the corporate practice of
medicine. If such a claim were asserted successfully, PRG could be subject to
civil and criminal penalties, physicians could have restrictions imposed upon
their licenses to practice medicine and PRG or the Practices could be required
to restructure their contractual arrangements. Such results or the inability of
PRG or the Practices to restructure their relationships to comply with such
prohibitions could have a material adverse effect on PRG's financial condition
and results of operations.
Medicare Physician Payment System
PRG believes that trends in cost containment will continue to result in a
reduction from historical levels in per-patient revenue for medical practices.
The federal government has implemented, through the Medicare program, the
resource-based relative value scale RBRVS payment methodology for physician
services. This methodology went into effect in 1992 and was implemented during a
transition period in annual increments through December 31, 1995. RBRVS is a fee
schedule that, except for certain geographical and other adjustments, pays
similarly situated physicians the same amount for the same services. The RBRVS
is adjusted each year, and is subject to increases or decreases at the
discretion of Congress. To date, the implementation of RBRVS has reduced payment
rates for certain of the procedures historically provided by the Practices.
There can be no assurance that any reduced operating margins could be offset by
PRG through cost reductions, increased volume, introduction of additional
procedures or otherwise.
Rates paid by nongovernmental insurers, including those that provide
Medicare supplemental insurance, are based on established physician, ASC and
hospital charges, and are generally higher than Medicare payment rates. Any
decrease in the relative number of patients covered by private insurance could
adversely affect PRG's revenues and income.
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Medicare and Medicaid Fraud and Abuse
Federal law prohibits the offer, payment, solicitation or receipt of any
form of remuneration in return for, or in order to induce, (i) the referral of a
person, (ii) the furnishing or arranging for the furnishing of items or services
reimbursable under Medicare or Medicaid programs or (iii) the purchase, lease or
order or arranging or recommending purchasing, leasing or ordering of any item
or service reimbursable under Medicare or Medicaid. The federal government has
recently announced a policy of increased scrutiny of joint ventures and other
transactions among health care providers in an effort to reduce potential fraud
and abuse relating to Medicare and Medicaid costs. The applicability of these
provisions to business transactions in the health care industry has been subject
to limited judicial and regulatory interpretation. Noncompliance with the
federal anti-kickback legislation can result in exclusion from Medicare and
Medicaid programs and civil and criminal penalties.
PRG believes that although it receives fees under the Service Agreements
for management services, the Service Agreements do not place PRG in a position
to make or influence referrals of patients for services reimbursed under
Medicare or Medicaid programs to the Practices or their physicians, or to
receive such referrals. Such Service Fees are intended by PRG to be consistent
with fair market value in arm's-length transactions for the nature and amount of
management services rendered and therefore would not constitute unlawful
remuneration under anti-kickback laws and regulations. Further, PRG, with regard
to the management services provided under the Service Agreements, is not a
provider of services under the Medicare or Medicaid programs. For these reasons,
PRG does not believe that fees payable to it would be viewed as remuneration for
referring or influencing referrals of patients or services covered by such
programs as prohibited by statute. If PRG is deemed to be in a position to make,
influence or receive referrals from or to physicians, or PRG is deemed to be a
provider under the Medicare or Medicaid programs, and if fees paid or received
are not commensurate with fair market value, the operations of PRG could be
subject to scrutiny under federal and state anti-kickback and anti-referral
laws.
Significant prohibitions against physician referrals have been enacted by
Congress. These prohibitions, commonly known as "Stark II," amended prior
physician self-referral legislation known as "Stark I" by dramatically
enlarging the field of physician-owned or physician-interested entities to which
the referral prohibitions apply. Stark II prohibits a physician from referring
Medicare or Medicaid patients to an entity providing "designated health
services" in which the physician has an ownership or investment interest, or
with which the physician has entered into a compensation arrangement, unless a
statutory exemption applies. The designated health services include prosthetic
devices, which under applicable regulations and interpretations include one pair
of eyeglasses or contact lenses furnished after cataract surgery and intraocular
lenses provided at ASCs. The penalties for violating Stark II include a
prohibition on payment by these government programs and civil penalties of as
much as $15,000 for each violative referral and $100,000 for participation in a
"circumvention scheme." On January 9, 1998, HCFA published a Notice of
Proposed Rulemaking implementing Stark II. The proposed regulations, when they
become final, will provide for an exception to the referral prohibition for
designated health services furnished in an ASC if payment for the services are
included in the ASC payment rate. To the extent that PRG or any Practice is
deemed to be subject to the prohibitions contained in Stark II for services, PRG
believes its activities fall within the permissible activities defined in Stark
II, including, but not limited to, the provision of in-office ancillary
services.
In some states, PRG owns and operates ASCs in its own right as a provider
of services. PRG also manages physician practices in those states, and thus can
receive referrals from PRG affiliated practices in those market areas. To the
extent that any of those ASCs provide designated health services, PRG believes
that its operations fall within the existing regulatory exception for clinical
laboratory referrals to ASCs under Stark I, and the proposed exception for all
other designated health services under Stark II. To the extent that designated
health services are not involved, the anti-kickback statute is not implicated
because any referring physician's ownership interest in PRG is too remote and
insubstantial to be affected by referrals to the ASC, and fees paid and received
under the management services agreement are not related to any actual or
expected referrals to the ASC by the physician in a managed practice.
In addition, PRG also believes that the methods it uses to acquire the
assets of existing practices do not violate anti-kickback and anti-referral laws
and regulations. Specifically, PRG believes the consideration paid by PRG to
physicians to acquire the tangible and intangible assets associated with their
practices is consistent with fair market value in arm's length transactions and
is not intended to induce the referral of patients. Should this practice be
deemed to constitute an arrangement designed to induce the referral of Medicare
or Medicaid patients, then such could be viewed
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as possibly violating anti-kickback or anti-referral laws and regulations. A
determination of liability under any such laws could have a material adverse
effect on PRG's revenue.
In 1996, Congress passed the Health Insurance Portability and Accountability
Act which, among other things, provides increased funding for federal
investigations of healthcare fraud and abuse. For 1998, the Act provides for an
aggregate of approximately $119,600,000 to be available for the Department of
Health and Human Services and the Department of Justice and approximately
$56,000,000 to be available to the Federal Bureau of Investigation to combat
healthcare fraud. Such increased activity by federal agencies could increase
the likelihood of an investigation of PRG or a Practice.
The last three or four years have also seen an increase in private
whistleblower actions (qui tam actions) against healthcare providers. Such
private enforcement of healthcare laws, often by disgruntled employees, also
could increase the potential for a healthcare investigation of PRG or a
Practice.
Medicare Developments
The recently adopted Balanced Budget Act of 1997 ("BBA") enacted a Medicare
Plus/Medicare Choice Program for Medicare enrollees. The program would broaden
the coverage options available to Medicare recipients, would authorize broader
use of medical savings accounts, and would allow physicians and patients to
contract for health care services at rates beyond what is paid by Medicare.
Such changes potentially could increase the services utilized by Medicare
recipients. In addition, the BBA allows provider-sponsored organizations
("PSOs") to contract directly with Medicare, instead of contracting through an
HMO. If PRG participates in such PSOs, it could increase the percentage of
Medicare-related business, which would also increase the exposure for losses if
Medicare revenues fall short of the cost of services actually utilized by
Medicare beneficiaries. If PRG does not participate in such PSOs, whether by
choice or because it does not obtain a required license to act as a PSO, PRG's
ability to participate in Medicare programs could be limited. The BBA also
amends the fraud and abuse laws to require permanent exclusion from Medicare of
anyone convicted of three Medicare program-related crimes and to impose new
civil monetary penalties on anyone contracting with an excluded health care
provider. These changes increase the regulatory and other risks encountered by
PRG. See "Risk Factors - Risks Associated With Managed Care Contracts". On
January 9, 1998, HCFA published a Notice of Proposed Rulemaking implementing
Stark II. The proposed regulations, when they become final, will reduce some of
the uncertainty surrounding HCFA's interpretation of Stark II and will assist
PRG in better structuring its operations to comply with the law. In some cases,
however, the strict nature of the new rules will make compliance more onerous,
and achieving such compliance may have a material adverse effect on PRG's
business in certain markets.
Legislative Developments
In addition, proposed legislation regarding health care reform has been
introduced before many state legislatures. Any such reform at the federal or
state level could significantly alter patient-provider relationships. State and
federal agency rule-making addressing these issues is also expected. No
predictions can be made as to whether future health care reform legislation,
similar legislation or rule-making will be enacted or, if enacted, its effect on
PRG. Any federal or state legislation prohibiting investment interests in, or
contracting with, PRG by health care providers for which there is no statutory
exception would have a material adverse effect on PRG's business, financial
condition or results of operations.
COMPETITION
The Practices compete with numerous local eye care service providers. PRG
believes that changes in governmental and private reimbursement policies and
other factors have resulted in increased competition among providers for the
provision of medical services to consumers. PRG believes that the cost,
accessibility and quality of services provided are the principal factors that
affect competition. There can be no assurance that the Practices will be able to
compete effectively in the markets that they serve, which inability to compete
could adversely affect PRG.
Further, the Practices will compete with other providers for managed care
contracts. PRG believes that trends toward managed care have resulted, and will
continue to result, in increased competition for such contracts. Other practices
and MSOs may have more experience than the Practices and PRG in obtaining such
contracts. There can be no
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assurance that PRG and the Practices will be able to successfully acquire
sufficient managed care contracts to compete effectively in the markets they
serve, which inability to compete could adversely affect PRG.
PRG experiences competitive pressures for the acquisition of the assets of,
and the provision of management services to, additional practices and ASCs and
the acquisition of MSOs. PRG knows of practice management companies, both
publicly and privately held, some of which are focused on eye care services that
have established operating histories and, in some instances, greater resources
than PRG, and are pursuing the acquisition of the assets of general and
specialty medical practices and ASCs, including eye care practices and ASCs and
the management of such practices. Additionally, some hospitals, clinics, health
care companies, HMOs and insurance companies engage in activities similar to the
activities of these other practice management companies. There can be no
assurance that PRG will be able to compete effectively with such competitors for
the acquisition of, or affiliation with, eye care practices, that additional
competitors will not enter the market, that such competition will not make it
more difficult or expensive to acquire the assets of, and provide management
services to, eye care practices on terms beneficial to PRG or that competitive
pressures will not otherwise adversely affect the Company.
CORPORATE LIABILITY AND INSURANCE
The provision of medical services entails an inherent risk of professional
malpractice and other similar claims. PRG does not influence or control the
practice of medicine by physicians or have responsibility for compliance with
certain regulatory and other requirements directly applicable to physicians and
physician groups. However, as a result of the relationship between PRG and the
Practices, PRG may become subject to medical malpractice actions under various
theories, including agency and successor liability. There can be no assurance
that claims, suits or complaints relating to services and products provided by
the Practices will not be asserted against PRG in the future. PRG maintains
insurance coverage that it believes is adequate both as to risks and amounts.
Such insurance extends to professional liability claims that may be asserted
against employees of PRG that work on site at the Practice locations. In
addition, pursuant to the Service Agreements, either the Practices or PRG on
behalf of the Practices are required to maintain comprehensive professional
liability insurance for the employees of the Practices. The availability and
cost of such insurance has been affected by various factors, many of which are
beyond the control of PRG and the Practices. The cost of such insurance to PRG
and the Practices may have an adverse effect on PRG's operations. Although PRG
believes it will be able to negotiate and acquire malpractice insurance on
behalf of the Practices at a cost below that otherwise available to them, based
on the Practices' historical insurance expenditures, there can be no assurances
to that effect. In addition, successful malpractice or other claims asserted
against the Practices or PRG that exceed applicable policy limits could have a
material adverse effect on PRG.
EMPLOYEES
As of April 6, 1998, PRG had approximately 4,900 full-time and part-time
employees, of which approximately 160 were employed at PRG's corporate and
regional offices and the remainder of which were employed at the Practices. PRG
believes that its relationship with its employees is satisfactory.
EXECUTIVE OFFICERS
The following table sets forth certain information concerning each of the
persons who are executive officers of PRG as of April 6, 1998.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Richard A. Gilleland............. 53 Chairman of the Board and Chief Executive Officer
Peter G. Dorflinger.............. 46 President and Chief Operating Officer
Richard J. D'Amico............... 39 Executive Vice President, Chief Administrative Officer,
General Counsel and Secretary
Jonathan R. Bond................. 39 Senior Vice President - ASC Operations
Michael Yeary.................... 44 Senior Vice President - Practice Operations
Pamela B. Westbrook.............. 40 Vice President - Chief Financial Officer
</TABLE>
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<PAGE>
Executive officers' terms expire upon the first to occur of the following:
the election and qualification of such officer's successor, such officer's
resignation, termination of such officer's employment agreement, if any, or his
or her death.
Richard A. Gilleland has served as Chairman of the Board and Chief
Executive Officer of PRG since December of 1997 and has served as a director of
PRG since June 28, 1995. He was Interim Chairman of Quest Medical, a
manufacturer of proprietary products for the health care industry from July 1996
to November 1996. Mr. Gilleland served as Chief Executive Officer and President
of Amsco International, Inc. (which has been acquired by Steris Corp.), a
manufacturer of orthopedic supplies and equipment from July 1995 to July 1996.
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 Health Corp., 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 a director
of Bird Medical Technologies, Inc., a manufacturer of inhalation therapy and
equipment from 1994 to 1996. Mr. Gilleland received his B.A. from the University
of Minnesota in 1967.
Peter G. Dorflinger was elected President and Chief Operating Officer of
the Company effective January 24, 1998. From June 1990 until October 1996, Mr.
Dorflinger served as Group Vice President and General Counsel of Sulzer Medica
USA, Inc., a subsidiary of Sulzer Medica, Ltd., a Swiss medical device
manufacturer. From January 1997 through January 1998, Mr. Dorflinger was Vice
President and General Counsel of Advanced Medical Instruments, Inc., a
manufacturer of medical monitoring equipment. From September 1997 to January
1998, Mr. Dorflinger also served as President of GlasTech, Inc., a manufacturer
of dental products. Mr. Dorflinger received his J.D. from the University of
Houston Law Center in 1975 and his B.A. from the University of Texas at Austin
in 1972. Mr. Dorflinger is also a director of Benchmark Electronics, Inc., an
electronic manufacturing services company, and Maxxim Medical, Inc., a
manufacturer of diversified specialty medical products.
Richard J. D'Amico has served as Executive Vice President and Chief
Administrative Officer since January 1, 1997, as Senior Vice President of PRG
from January 1, 1996 until January 1, 1997 and as General Counsel and Secretary
of PRG since April 20, 1995. From March 1995 to April 1995, he served as a
consultant to PRG. From December 1994 through March 1995, Mr. D'Amico served as
President and General Counsel and from March 1993 through December 1994, Mr.
D'Amico served as Vice President and General Counsel for Radiation Care, Inc., a
corporation that operated radiation therapy and diagnostic imaging centers in
ten states. From June 1991 through March 1993, Mr. D'Amico served as Assistant
Vice President and in-house counsel for U.S. Healthcare, Inc., a company that
operates HMOs in eight states. Mr. D'Amico received his J.D. from Rutgers
University School of Law -- Camden in 1985 and his B.S. in electrical
engineering from Villanova University in 1981.
Michael Yeary has served as Senior Vice President of PRG since February,
1998. From February 1996 until February 1998, Mr. Yeary served as Regional Vice
President of PRG for South Texas and Louisiana. From January 1, 1998 until March
30, 1998, Mr. Yeary served as the Interim Accounting Manager of PRG in addition
to his other duties. From 1989 to February 1996, he was the Chief Financial
Officer for Mann Berkeley Eye Center in Houston, Texas. From 1981 to 1989, Mr.
Yeary served as the Executive Vice President, Chief Financial Officer for the
Tomasco Group, a real estate development and investment company with operations
in industries related to commercial real estate, manufacturing and oil and gas.
Previously Mr. Yeary served in a variety of capacities in retail and public
accounting with Deloitte and Touche, LLP. Mr. Yeary is a Certified Public
Accountant and received his B.B.A. in Accounting from Lamar University. He is
also a Director of Humble National Bank.
Jonathan R. Bond has served as Senior Vice President of PRG since November
1995. From January 1984 until October 1995, Mr. Bond served in various
capacities with Medical Care America, Inc., its predecessor Medical Care
International, Inc., and Columbia/HCA Healthcare Corporation, which purchased
Medical Care in September 1994. These positions included: Senior Vice
President - Surgery Center Operations; Senior Vice President - Investor
Relations and Administration; Vice President - Acquisitions; Vice President -
Operations; and Vice President - Finance
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<PAGE>
and Treasurer. From 1981 until 1983, Mr. Bond was employed with Arthur Andersen
& Company. Mr. Bond received his B.B.A. in accounting from the University of
Texas in 1981.
Pamela B. Westbrook has served as Vice President and Chief Financial
Officer of PRG since March 30, 1998. From November 1986 to March 1998, she
served in various capacities with Sulzer Medica, Ltd., a manufacturer of
cardiovascular and orthopedic medical implant devices. These positions include
Vice President, Finance for Sulzer Medica USA, Vice President, Controller for
Sulzer Cardiovascular Prostheseis Division, and Director of Accounting for
Sulzer Intermedics. Previously, Ms. Westbrook has served in a variety of
positions in construction and public accounting with Alexander Grant & Co. Ms.
Westbrook is a Certified Public Accountant and received her B.B.A. in accounting
from the University of Texas in 1980.
FACTORS THAT COULD AFFECT FUTURE PERFORMANCE
This report contains certain forward looking statements about the business
and financial condition of the Company, including various statements contained
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations." The actual results of the Company could differ materially from any
forward looking statements contained therein. The following information sets
forth certain factors that could cause the actual results to differ materially
from those contained in the forward looking statements.
Limited Operating History and Integration of Operations
Prior to PRG's acquisition of the initial 10 Practices in June 1995
pursuant to the Reorganization, PRG conducted no significant operations. Since
its formation, PRG has grown principally through acquisitions, a substantial
portion of which have been consummated since March 1996. If PRG is to realize
the anticipated benefits of acquisitions, the operations of these entities must
be integrated and combined effectively. The process of integrating management
services, administrative organizations, facilities, management information
systems and other aspects of operations, while managing a larger and
geographically expanded entity, has presented and will continue to present a
significant challenge to the management of PRG as more fully described in
"Management Discussion of Financial Condition and Results of Operations" and
Notes 2 and 3 in Notes to Consolidated Financial Statements. There can be no
assurance that the integration process will be successful or that the
anticipated benefits of its business combinations will be realized. The
dedication of management resources to such integration may detract from the day-
to-day operations of PRG. The difficulties of integration may be increased by
the necessity of coordinating geographically separated organizations,
integrating personnel with disparate business backgrounds and combining
different corporate structures. There can be no assurance that there will not be
substantial unanticipated costs associated with such activities or that there
will not be other material adverse effects of these integration efforts. Such
efforts could materially reduce the earnings of PRG.
Risks Related to Intangible Assets
As a result of PRG's various acquisition transactions, net intangible
assets of approximately $350,538,000 are recorded on PRG's December 31, 1997
consolidated balance sheet. Using amortization periods ranging from seven to 40
years, amortization expense relating to these intangibles will be approximately
$11,000,000 per year. Purchases of practices or ASCs that result in the
recognition of additional intangible assets or shorter amortization periods
would cause amortization expense to further increase. A substantial portion of
the amortization generated by these intangible assets is not deductible for tax
purposes.
As acquisitions are made, PRG evaluates each acquisition considering the
practice's market position, reputation, profitability, and geographical
penetration, its position in the PRG provider network, the collective experience
of its executives and employees, its relationships with its customers and
physicians, the relationships between its physicians and their patients and the
specific service agreements entered into with the Practices. All of these
factors contribute to the purchase price paid for the acquisition and to the
intangible created in the purchase transaction.
PRG evaluates such facts and circumstances on a periodic basis to determine
if the related intangible asset continues to be realizable and if the
amortization period continues to be appropriate. If it is determined that facts
and circumstances have changed to the extent that it is believed that the
existing amortization periods and carrying values are no longer appropriate,
adjustments to such carrying values and or amortization periods are adopted.
During the latter half of the
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<PAGE>
year ended December 31, 1997, the Company made a decision to begin the process
of termination of its affiliation with 37 ophthalmology practices and
effectively terminated its affiliation with approximately 7 smaller optometry
practices all as more fully described in the "Business-Overview" section above.
As a result, approximately $52,312,000 of net intangible assets associated with
these 44 practices were reclassified out of the "Intangible Assets" balance into
the "Assets held for disposition" balance on the consolidated balance sheet as
of December 31, 1997. Although as of December 31, 1997, the remaining net
unamortized balance of intangible assets acquired of $350,538,000 was not
considered to be impaired, there can be no assurance that the value of such
intangibles will be realized by PRG. Any future determination that a significant
impairment has occurred would require the write-off of the impaired portion of
unamortized intangible assets, which could have a material adverse effect on the
Company's financial condition and results of operations.
During the course of 1997, the Securities and Exchange Commission informed
the Company that it had concerns, on a prospective basis, regarding the use by
physician practice management companies, generally, and the Company,
specifically, of amortization periods for intangible assets in excess of 25
years. While the Company believes its present amortization policies continue to
be appropriate, if the Company were to adopt 25 year lives in place of its
current 40 year lives, the additional amount of amortization in 1998 would be
approximately $5,267,000.
As more fully discussed in Note 3 of Notes to Consolidated Financial
Statements, the Financial Accounting Standards Board's Emerging Issues Task
Force issued new accounting guidelines during 1997 relative to when pooling of
interests accounting could be used by physician practice management companies.
These new guidelines will require that seven of the Company's acquisitions
previously accounted for as poolings of interests be accounted for as purchases
and appropriate intangible assets established. These new guidelines must be
adopted prior to the end of 1998. The establishment of these intangbiles will
result in amortization expense in future periods being larger than it otherwise
would have been.
Government Regulation
Various state and federal laws regulate the relationships between providers
of health care services, physicians and other clinicians. See "Business--
Government Regulation and Supervision."
These laws include the fraud and abuse provisions of the Social Security
Act, which include the "anti-kickback" and "anti-referral" laws. The "anti-
kickback" laws prohibit the offering, payment, solicitation or receipt of any
direct or indirect remuneration for the referral of Medicare or Medicaid
patients or for the ordering or providing of Medicare or Medicaid covered
services, items or equipment. The "anti-referral" laws impose restrictions on
physicians' referrals for designated health services to entities with which they
have financial relationships. Violations of these laws may result in substantial
civil or criminal penalties for individuals or entities, including large civil
monetary penalties and exclusion from participation in the Medicare and Medicaid
programs. Such exclusion, if applied to the Practices, could result in
significant loss of reimbursement. A determination of liability under any such
laws could have a material adverse effect on the Company's operations.
Several states, including states in which some Practices are located, have
adopted laws similar to the "anti-kickback" and "anti-referral" laws that
cover patients in private programs as well as government programs. The laws of
many states also prohibit physicians from splitting fees with non-physicians and
prohibit non-physician entities from practicing medicine. These laws vary from
state to state and are enforced by the courts and by regulatory authorities. A
determination of liability under any such laws could have a material adverse
effect on PRG.
Although PRG believes that its operations are in substantial compliance
with existing applicable laws, PRG's business operations have not been the
subject of judicial or regulatory interpretation. There can be no assurance that
review of PRG's business by courts or regulatory authorities will not result in
determinations that could adversely affect the operations of PRG or that the
health care regulatory environment will not change so as to restrict PRG's
existing operations or their expansion. In addition, the regulatory framework of
certain jurisdictions may limit PRG's expansion into, or ability to continue
operations within, such jurisdictions if PRG is unable to modify its operational
structure to conform with such regulatory framework. Any limitation on PRG's
ability to expand could have a material adverse effect on the Company's
operations.
In addition to extensive existing government health care regulation, there
have been numerous initiatives on the federal and state levels for comprehensive
reforms affecting the payment for and availability of health care services. PRG
believes that such initiatives will continue during the foreseeable future.
Aspects of certain of these reforms as
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<PAGE>
proposed in the past, such as further reductions in Medicare and Medicaid
payments and additional prohibitions on physician ownership, directly or
indirectly, of facilities to which they refer patients, if adopted, could
adversely affect PRG.
Reimbursement; Trends and Cost Containment
PRG's revenues are derived principally from service fees paid to PRG by the
Practices. Since the amount of service fees payable to the Company is generally
determined with reference to the revenues or earnings of the Practices, any
reduction in the revenues of Practices could adversely affect the Company. A
substantial portion of the revenues of the Practices are derived from government
sponsored health care programs (principally, the Medicare and Medicaid programs)
or private third-party payors. The health care industry is experiencing a trend
toward cost containment as government and private third-party payors seek to
impose lower reimbursement and utilization rates and negotiate reduced payment
schedules with service providers. PRG believes that these trends will continue
to result in a reduction from historical levels in per-patient revenue for such
medical practices. Further reductions in payments to physicians or other changes
in reimbursement for health care services would generally reduce the Service
Fees payable to PRG thereby reducing PRG's revenues and, unless PRG is otherwise
able to offset such payment reductions through cost containment, PRG's
profitability would also be reduced.
Rates paid by private third-party payors are based on established
physician, ASC and hospital charges and are generally higher than Medicare
reimbursement rates. Any decrease in the relative number of patients covered by
private insurance could have a material adverse effect on PRG's results of
operations.
The federal government has implemented, through the Medicare program, the
RBRVS payment methodology for physician services. This methodology went into
effect in 1992 and was implemented during a transition period in annual
increments through December 31, 1995. RBRVS is a fee schedule that, except for
certain geographical and other adjustments, pays similarly situated physicians
the same amount for the same services. The RBRVS is adjusted each year, and is
subject to increases or decreases at the discretion of Congress. To date, the
implementation of RBRVS has reduced payment rates for certain of the procedures
historically provided by the Practices. RBRVS-type of payment systems have also
been adopted by certain private third-party payors and may become a predominant
payment methodology. Wider-spread implementation of such programs would reduce
payments by private third-party payors and could indirectly reduce PRG's
operating margins to the extent that costs of providing management services
related to such procedures could not be proportionately reduced.
There can be no assurance that any or all of these reduced revenues and
operating margins could be offset by PRG through cost reductions, increased
volume, introduction of new procedures or otherwise. See "Business--Government
Regulation and Supervision."
Risks Associated with Managed Care Contracts
As an increasing percentage of patients are coming under the control of
managed care entities, PRG believes that its success will, in part, be dependent
upon PRG's ability to negotiate, on behalf of the Practices, contracts with
HMOs, employer groups and other private third-party payors pursuant to which
services will be provided on a risk-sharing or capitated basis by some or all
Practices. Under some of such agreements, the healthcare provider accepts a pre-
determined amount per patient per month in exchange for providing all necessary
covered services to the patients covered under the agreement. Such contracts
pass much of the financial risk of providing care, such as over-utilization,
from the payor to the provider. Such contracts, in general, result in greater
predictability of revenues, but greater unpredictability of expenses. Although
PRG enters into the managed care contracts, in many cases, the risks are passed
on to the affiliated Practices. In the instances where PRG assumes the
risk, PRG attempts to develop rates that support the assumption of risk. There
can be no assurance that PRG will be able to negotiate, on behalf of its
Practices, satisfactory arrangements on a risk-sharing or capitated basis. In
addition, to the extent that patients or enrollees covered by such contracts
require more frequent or extensive care than is anticipated, operating margins
may be reduced, or in the worst case, the revenues derived from such contracts
may be insufficient to cover the costs of the services provided. As a result,
Practices may incur additional costs, which would reduce or eliminate
anticipated earnings under such contracts. Any such reduction or elimination of
earnings could have a material adverse affect on PRG's results of operations.
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<PAGE>
PRG, through its subsidiary, The EyePA, Inc., enters into contracts with
licensed insurance companies, such as HMOs, whereby PRG assumes risks in
connection with providing medical services under capitation arrangements. It is
subject to a variety of regulatory and licensing requirements applicable to
insurance companies or HMOs. The HMO and insurance industries are highly
regulated at the state level and are highly competitive. There can be no
assurance that developments in any of these areas will not have an adverse
effect on PRG's subsidiary.
Shares Eligible for Future Sale; Registration Rights
As of April 6, 1998, PRG had approximately 29,800,000 shares of outstanding
common stock. Of such shares, (i) approximately 9,300,000 shares were registered
in connection with two underwritten public offerings (which included the sale of
1,500,000 shares by certain selling stockholders); (ii) the issuance of
approximately 8,700,000 shares (excluding shares subsequently reacquired by the
Company) was registered and such shares were issued in connection with
acquisitions (with the resale of a portion of such shares contractually subject
to the holding periods and volume limitations provided for under Rule 144 of the
Securities Act (as in effect from time to time)); (iii) the issuance of
approximately 1,500,000 shares was not registered and such shares were issued in
acquisitions or prior to PRG's initial public offering ("IPO"), but the resale
of such shares has been registered; and (iv) the issuance of approximately
10,200,000 shares was not registered and such shares were issued in connection
with acquisitions or prior to PRG's IPO, and the holders of substantial portions
of such shares have certain registration rights. In addition, the Company's
$125,000,000 of 6% convertible subordinated debentures (the "Debentures") are
convertible into approximately 5,000,000 shares of common stock. During 1997,
the Company issued convertible promissory notes in connection with acquisitions.
These convertible promissory notes are convertible into 943,000 shares of common
stock. Neither the issuance of these convertible promissory notes nor the
issuance of common stock upon issuance of the convertible promissory notes have
been registered under the Securities Act.
The Company estimates that on April 29, 1997 approximately 6,900,000 of the
Company's shares became eligible for sale under and in accordance with Rule 144,
as currently in effect, promulgated under the Securities Act (subject to the
volume and manner of sale restrictions of Rule 144). In June 1997, approximately
5,000,000 shares became eligible for sale pursuant to the terms of certain
stockholders rights. In addition, in January 1997, the Company registered the
issuance of approximately 10,000,000 shares under the Securities Act for
issuance in connection with future acquisitions.
In general, shares whose issuance has been registered are freely tradable
without restriction except to the extent held or acquired by affiliates of PRG
and shares whose issuance has not been registered may be resold publicly only in
future transactions registered under the Securities Act or in compliance with an
exemption from registration requirements of the Securities Act, including the
exemption provided by Rule 144 thereunder. The Securities and Exchange
Commission has also implemented changes to Rule 144, such that effective April
29, 1997, the holding period under Rule 144 for sales subject to volume and
manner of sale restrictions was reduced from two years to one year and the
holding period for sales not subject to such restrictions was reduced from three
years to two years.
No prediction can be made as to the effect, if any, that the sale of shares
or the availability of shares for sale will have on the market price prevailing
from time to time. Nevertheless, sales of substantial amounts of the common
stock in the public market or the perception that such sales could occur could
adversely affect prevailing market prices and the ability of PRG to raise equity
capital in the future.
Competition
The Practices compete with numerous local eye care service providers. PRG
believes that changes in governmental and private reimbursement policies and
other factors have resulted in increased competition among providers for the
provision of medical services to consumers. There can be no assurance that the
Practices will be able to compete effectively in the markets that they serve.
PRG believes that the cost, accessibility and quality of services provided are
the principal factors that affect competition. There can be no assurance that
the Practices will be able to compete effectively in the markets that they
serve, which inability to compete could adversely affect PRG.
Further, the Practices will compete with other providers for managed care
contracts. PRG believes that trends toward managed care have resulted, and will
continue to result, in increased competition for such contracts. Other practices
and MSOs may have more experience than the Practices and PRG in obtaining such
contracts. There can be no
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<PAGE>
assurance that PRG and the Practices will be able to successfully acquire
sufficient managed care contracts to compete effectively in the markets they
serve, which inability to compete could adversely affect PRG.
PRG experiences competitive pressures for the acquisition of the assets of,
and the provision of management services to, additional practices and ASCs and
the acquisition of MSOs. PRG knows of practice management companies, both
publicly and privately held, some of which are focused on eye care services that
have established operating histories and, in some instances, greater resources
than PRG, and are pursuing the acquisition of the assets of general and
specialty medical practices and ASCs, including eye care practices and ASCs and
the management of such practices. Additionally, some hospitals, clinics, health
care companies, HMOs and insurance companies engage in activities similar to the
activities of these other practice management companies. There can be no
assurance that PRG will be able to compete effectively with such competitors for
the acquisition of, or affiliation with, eye care practices, that additional
competitors will not enter the market, that such competition will not make it
more difficult or expensive to acquire the assets of, and provide management
services to, eye care practices on terms beneficial to PRG or that competitive
pressures will not otherwise adversely affect the Company.
Potential Liability and Insurance; Legal Proceedings
The provision of medical services entails an inherent risk of professional
malpractice and other similar claims. Generally, PRG only provides facilities
and administrative services in connection with the provision of its management
services to the Practices; however, in some jurisdictions where the Company is
permitted under applicable regulations, PRG, however, directly contracts with
physicians and optometrists for the provision of professional services. In all
cases, PRG does not control or direct the practice of medicine by physicians in
any jurisdiction and does not assume responsibility for compliance with certain
regulatory and other requirements directly applicable to physicians and
physician groups. There can be no assurance that claims, suits or complaints
relating to services and products provided by Practices will not be asserted
against PRG in the future. Additionally, PRG owns and operates ASCs. A source
of potential liability may be claims of negligence on the part of health care
professionals under direct contract with the Company or employed by the
Practices to provide professional services or in connection with surgeries
performed at the Company's ASCs. The Company could also be held liable for
negligence regardless of the relationship between the Company and the Practices
if the Company were deemed negligent in selecting or retaining health care
professionals or otherwise in performing its management services or operating
ASCs.
PRG maintains insurance coverage that it believes is adequate both as to
risks and amounts. Such insurance extends to professional liability claims that
may be asserted against PRG directly or against employees of PRG that work on
site at the Practice locations. In addition, pursuant to the Service
Agreements, the Practices (or PRG on behalf of the Practices) are required to
maintain professional liability insurance. Nevertheless, there can be no
assurance that successful malpractice or other claims will not be asserted
against the Practices or PRG that exceed applicable policy limits, which could
have a material adverse effect on PRG.
PRG, in connection with the acquisition of the assets of certain of the
Practices, typically succeeds to some or all of the liabilities of the
Practices. Therefore, claims may be asserted against PRG for events that
occurred prior to the acquisition of the assets of certain of the Practices. PRG
maintains insurance coverage related to those risks that it believes is adequate
both as to risks and amounts, although no assurance can be provided that any
successful claims will not exceed applicable policy limits.
PRG and certain of its present and former officers and directors have
recently been named in six class action securities claims. PRG maintains
insurance coverage related to those risks that it believes is adequate, although
no assurance can be provided that any successful claims will not exceed
applicable policy limits. See "Item 3. Legal Proceedings". The availability
and cost of directors' and officers' liability insurance has been affected by
various factors. There can be no assurance that such insurance will be
available to PRG in the future at acceptable costs or that the future costs of
such insurance to PRG will not have any adverse effect on PRG's financial
condition or results of operations.
The availability and cost of professional liability insurance has been
affected by various factors, many of which are beyond the control of PRG and the
Practices. There can be no assurance that liability insurance will be available
to PRG in the future at acceptable costs or that the future cost of such
insurance to PRG and the Practices will not have an adverse effect on PRG's
operations. See "Business--Corporate Liability and Insurance."
14
<PAGE>
During 1997 and the first quarter of 1998, the Company was named a
defendant in several material legal proceedings. See "Legal Proceedings".
Anti-Takeover Considerations
Certain provisions of the Company's Restated Certificate of Incorporation,
the Company's Bylaws and Delaware law could discourage potential acquisition
proposals, delay or prevent a change in control of the Company and,
consequently, limit the price that investors might be willing to pay in the
future for shares of the common stock. These provisions include a classified
board of directors, the inability to remove directors except for cause and the
ability to issue, without further stockholder approval, shares of preferred
stock with rights and privileges senior to the common stock. In addition, in
April 1996 the Company adopted a stockholder rights plan, which can have a
significant anti-takeover effect. The Company also is subject to Section 203 of
the Delaware General Corporation Law which, subject to certain exceptions,
prohibits a Delaware corporation from engaging in any of a broad range of
business combinations with an "interested stockholder" for a period of three
years following the date that such stockholder became an interested stockholder.
The Company's principal credit facilities require the Company to obtain the
consent of the lender following a change in PRG's senior management personnel,
and a "change of control" constitutes an event of default under the credit
facilities. In addition, in the event of a "change in control", each holder of
the Debentures will have the right, at the holder's option, to require the
Company to repurchase all or a portion of such holder's Debentures at a purchase
price equal to 100% of the principal amount thereof plus accrued interest to the
repurchase date. These provisions of the Company's credit facilities and the
Debentures could serve to impede or prevent a change of control or have a
depressive effect on the price of the common stock. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
Leverage
The Company's indebtedness is significant in relation to its stockholders'
equity. Long-term debt accounted for approximately 36% of the Company's total
capitalization.
Volatility of Stock Price
The market price of the common stock has been and could continue to be
subject to significant fluctuations in response to various factors and events.
These factors include variations in the Company's earnings results, changes in
earnings estimates by securities analysts, publicity regarding the Company, its
competitors, the physician practice management industry or the health care
industry generally, new statutes or regulations or changes in the interpretation
of existing statutes or regulations affecting the health care industry in
general or the physician practice management industry specifically, changes in
the reimbursement practices or policies of third-party payors, sales of
substantial amounts of common stock in the public market or the perception that
such sales could occur and other factors. In addition, in recent years, the
stock market and, in particular, the physician practice management segment of
the health care industry, has experienced broad price and volume fluctuations
that often have been unrelated to the operating performance of particular
companies. These market fluctuations also may adversely affect the market price
of the shares of common stock. See "Market Information."
Year 2000 System Issues
PRG is dependent upon its various practice management systems to bill
patients for services rendered by the Practices. The Company also relies upon
these practice management systems to bill various third-party payors (i.e.
Medicare, insurance companies, etc.) for services rendered. Approximately, 45-
50% of cash receipts of the Practices are received from Medicare and the
majority of the associated billings to Medicare are completed electronically.
Certain of the Company's practice management systems, as well as various of the
third-party payor systems, will require upgrades to make them functional for the
year 2000 issue. The Company is currently in the process of determining its
approach, developing a plan and determining the cost of such an upgrade and, at
present, estimates the amount of required expenditures to be no more than
$5,000,000, a portion of which will be repaid by the Practices. Additionally,
the Company's portion of these expenditures will be significantly reduced if the
restructuring plan referred to in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" is implemented. These
expenditures will be incurred during the course of 1998 and 1999. Although
management believes all upgrades will be made successfully and in a timely
15
<PAGE>
fashion by both the Company and its major third-party payors, there can be no
assurance that this will be the case, and it could have a material adverse
affect on the Company.
ITEM 2. PROPERTIES
----------
In addition to its various practice facilities, PRG operates and leases
corporate offices in Dallas, Texas; Houston, Texas; Memphis, Tennessee; Orlando,
Florida; Atlanta, Georgia; Bakersfield, California and Las Vegas, Nevada. Its
corporate headquarters are located in Dallas.
ITEM 3. LEGAL PROCEEDINGS
-----------------
EquiMed Inc. v. Physicians Resource Group, Inc. and PRG Georgia, Inc. On
May 15, 1997, EquiMed, Inc. initiated arbitration proceedings against the
Company and a wholly-owned subsidiary of the Company before the American
Arbitration Association, Philadelphia, Pennsylvania, alleging breach of
contract, fraud, trespass, and conversion based principally on the alleged
failure of the Company to cooperate with EquiMed in completing follow on
acquisitions that could have resulted in the payment of additional consideration
to EquiMed and the alleged failure by the Company to provide EquiMed with access
to EquiMed's accounting records. EquiMed has asserted damage claims in excess
of $30,000,000 plus punitive damages, costs and attorney's fees. PRG intends to
vigorously defend such claims and has asserted a counterclaim against EquiMed
for damages in excess of $45,000,000.
Pillar Point Partners, Summit Partners, Inc. and VISX Partners, Inc. v.
David Dulaney and Anne Marie Dulaney, Ronald Barnet and Teri Lynn Barnet, Barnet
Dulaney Eye Center, P.L.L.C. and Sun Valley Acquisition Corp. Pillar Point
Partners, Summit Partners, Inc. and VISX Partners, Inc. initiated this patent
infringement suit against a PRG affiliated Practice in the U.S. District Court
for the District of Arizona. The plaintiffs allege that the refractive
procedure performed by the physicians associated with this practice infringes
certain patents owned by the plaintiffs. The defendants have asserted defenses
of non-infringement and invalidity of the patents. The action was recently
amended to include a wholly-owned subsidiary of the Company. PRG has agreed to
be responsible for the payment of the practices attorneys fees and costs
associated with this action, but has not agreed to be responsible for any damage
awards that may be awarded against the practice. To the extent that PRG is
involved in the action, it intends to vigorously defend such claims.
The Company and certain of its officers and directors have been sued in six
class action suits that are pending in the United States District Court for the
Northern District of Texas, Dallas Division. Each suit alleges violations of
Sections 10 and 20 of the Securities Exchange Act of 1934 including,
misrepresentations and omissions of material facts in connection with purchase
and sale of the Company's securities. The plantiffs seek compensatory damages,
legal interest and attorneys' fees. The company has filed a motion requesting
that these six lawsuits be consolidated into one action and intends to
vigorously defend against the claims alleged in the suits. The suits are styled
as follows: (i) Howard Longman, On Behalf of Himself and All Others Similarly
Situated vs. Physicians Resource Group, Inc., and Emmett E. Moore (filed on
December 18, 1997); (ii) Jeffrey Schiller and Diversified Investment Holdings
LP, On Behalf of Themselves and All Others Similarly Situated vs. Physicians
Resource Group, Inc., Emmett E. Moore, Richard M. Owen, Richard J. D'Amico and
John N. Bingham (filed on December 23, 1997); (iii) Regina Peltz, On Behalf of
Herself and All Others Similarly Situated vs. Physicians Resource Group, Inc.,
and Emmett E. Moore (filed on December 29, 1997); (iv) Bob E. Hall, On Behalf of
Himself and All others Similarly Situated vs. Physicians Resource Group, Inc.
and Emmett E. Moore (filed on February 3, 1998); (v) William G. Rutherford, On
Behalf of Himself and All Others Similarly Situated vs. Physicians Resource
Group, Inc. and Emmett E. Moore, Richard M. Owen, Richard J. D'Amico and John N.
Bingham (filed on February 3, 1998); and (vi) City of Philadelphia, by and
through its Board of Pensions and Retirement, On Behalf of Itself and All Others
Similarly Situated vs. Physicians Resource Group, Inc. and Emmett E. Moore,
Richard M. Owen, Richard J. D'Amico and John N. Bingham (filed on February 20,
1998).
Eye Care Austin, P.A., Tom R. Walter, M.D., Julia B. Sargent, M.D. and
Steven J. Dell, M.D. vs. American Ophthalmic, Inc., American Ophthalmic of
Texas, Inc. and Physicians Resource Group, Inc., Cause No. 97-03757, 98th
Judicial District Court of Travis County was filed on April 8, 1997. The
plaintiffs allege breach of contract, breach of fiduciary duty and imposition of
constructive trust, civil conspiracy, interference with prospective advantage
and negligent misrepresentation arising from a January 1996 series of
agreements. The plaintiffs seek injunctive relief and recovery of actual and
consequential damages in excess of $50,000,000 and exemplary damages of
$50,000,000. A settlement agreement has been reached, in principle, between the
parties and the parties are drafting settlement documents. Under the proposed
settlement agreement, the lawsuit would be dismissed with prejudice, the
arbitration
16
<PAGE>
proceeding would be terminated, the parties would jointly release all claims,
demands and causes of action against one another and certain other contractual
agreements would be entered into relating to the development of an ASC. No
assurance can be provided that the settlement will be finalized.
Sahara-Lindell Surgery Centers, Inc. vs. American Surgery Centers of Las
Vegas, Inc., American Surgery Centers of Las Vegas Limited Partnership and Does
I through X was filed on October 22, 1997 in the District Court, Clark County,
Nevada for breach of a promissory note. Damages sought are unspecified. The
defendants are affiliates of the Company. The Company is vigorously defending
the suit and has asserted a number of affirmative defenses, including
illegality, mutual mistake and scrivener's error.
In the normal course of business, certain of the affiliated physician
groups have been named in lawsuits alleging medical malpractice. In the opinion
of the Company's management, the ultimate liability, if any, without considering
possible insurance recoveries, will not have a material impact on the Company's
financial position, results of operations or cash flows. Additionally, the
Company's affiliated physician groups and the Company are insured with respect
to medical malpractice risks on a claims-made basis.
The Company is also involved in various other disputes or lawsuits, certain
of which are asserted by affiliated practices in relation to the service
agreements. In the opinion of the Company's management, the ultimate liability,
if any, will not have a material impact on the Company's financial position or
results of operations, nor, will they result in material modification of the
service agreements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S EQUITY AND RELATED STOCKHOLDER MATTERS
--------------------------------------------------------------
Market Information
The common stock was initially offered to the public on June 23, 1995 at a
price of $13.00 per share and is listed on the New York Stock Exchange (NYSE)
under the symbol "PRG." The following table sets forth the high and low sales
prices by quarter for the Company's most recent two fiscal years and first
quarter of 1998 as reported by the NYSE.
<TABLE>
<CAPTION>
HIGH Low
---------- -------------
Fiscal year ended December 31, 1996
<S> <C> <C>
1st Quarter........................................ 28 3/4 16 1/4
2nd Quarter........................................ 34 3/8 26 3/4
3rd Quarter........................................ 33 1/8 19 3/4
4th Quarter........................................ 27 1/8 18 3/8
Fiscal year ended December 31, 1997
1st Quarter....................................... 18 1/8 10 3/8
2nd Quarter........................................ 13 3/4 8 1/4
3rd Quarter........................................ 11 9/16 7 3/4
4th Quarter........................................ 11 11/16 2 9/16
Fiscal year ended December 31, 1998
1st Quarter........................................ 4 3/4 3 1/8
</TABLE>
On April 6, 1998, the last sale price for the common stock as reported by
the NYSE was $3.875 per share. On April 6, 1998, there were 423 registered
holders of common stock.
17
<PAGE>
DIVIDEND POLICY
PRG has not paid any cash dividends since its inception and does not intend to
pay cash dividends in the foreseeable future. Any payments of such dividends in
the future will depend upon the earnings and financial position of PRG, its
capital needs and such other factors as the board of directors may deem
appropriate. The Company's credit facilities currently restrict the Company's
ability to pay dividends.
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
PRG was incorporated in 1993, but did not conduct any significant
operations prior to the IPO in June of 1995. The PRG historical financial data
for each of the years in the four-year period ended December 31, 1997 presented
below reflects actual results of operations and financial position of PRG
(including the acquisitions accounted for as poolings of interests) and has been
derived from and should be read in connection with the PRG consolidated
financial statements and notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
PRG HISTORICAL
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
Statement of Operations Data: 1994 1995 1996 1997
---------------- ------------- ------------ ---------------
<S> <C> <C> <C> <C>
Revenues.............................................. $ 57,173 $ 89,967 $ 248,293 $ 411,640
---------------- ------------- ------------ ---------------
Costs and expenses:
Salaries, wages and benefits......................... 31,627 50,061 115,200 207,254
Pharmaceuticals and supplies......................... 6,793 9,487 30,919 52,392
General and administrative........................... 10,951 22,478 62,353 103,055
Depreciation and amortization........................ 2,361 3,498 11,192 24,841
Interest expense, net................................ 1,411 1,516 1,304 11,547
Executive severance expenses......................... -- 1,117 -- 750
Patent litigation defense costs...................... -- -- 353 2,730
Asset valuation losses............................ -- -- -- 76,706
Merger transaction expenses.......................... -- -- 12,030 --
---------------- ------------- ------------ ---------------
Total costs and expenses............................ 53,143 88,157 233,351 479,275
================ ============= ============ ===============
Income (loss) before income taxes and
extraordinary item.................................. 4,030 1,810 14,942 (67,635)
Provision (benefit) for income taxes.................. 1,162 501 7,770 (26,312)
---------------- ------------- ------------ ---------------
Income (loss) before extraordinary item............... 2,868 1,309 7,172 (41,323)
Extraordinary item.................................... -- (119) -- --
---------------- ------------- ------------ ---------------
Net income (loss)..................................... $ 2,868 $ 1,190 $ 7,172 $ (41,323)
================ ============= ============ ===============
Net Income (loss) per basic share:
Income before extraordinary item................ $ 0.37 $ 0.11 $ 0.29 $ (1.39)
Extraordinary item.............................. -- (0.01) -- --
---------------- ------------- ------------ ---------------
Net income (loss)............................... $ 0.37 $ 0.10 $ 0.29 $ (1.39)
================ ============= ============ ===============
Number of shares used in net income(loss)
per basic share calculation.......................... 7,833 12,170 24,596 29,751
================ ============= ============ ===============
Net Income (loss) per diluted share:
Income before extraordinary item..................... $ 0.37 $ 0.10 $ 0.28 $ (1.39)
Extraordinary item................................... -- (0.01) -- --
---------------- ------------- ------------ ---------------
Net income loss...................................... $ 0.37 $ 0.09 $ 0.28 $ (1.39)
================ ============= ============ ===============
Number of shares used in net income(loss)
per diluted share calculation........................ 7,833 12,723 25,365 29,751
================ ============= ============ ===============
AS OF DECEMBER 31,
------------------------------------------------------------------
Balance Sheet Data: 1994 1995 1996 1997
--------------- ------------- ------------ ---------------
Working capital....................................... $ 5,548 $ 25,134 $ 103,559 $ 72,260
Total assets.......................................... 45,912 138,780 581,534 533,986
Long-term debt, net of current portion................ 16,321 32,788 148,988 147,902
Stockholders' equity.................................. 15,105 68,595 310,673 267,465
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED QUARTERLY DATA (UNAUDITED): YEAR ENDED DECEMBER 31, 1996
-------------------------------------------------
FOURTH THIRD SECOND FIRST
DESCRIPTION QUARTER QUARTER QUARTER QUARTER
- ----------- -------------------------------------------------
<S> <C> <C> <C> <C>
(IN 000'S EXCEPT PER SHARE AMOUNTS)
Total revenues $84,902 $60,491 $55,686 $47,214
Net income (loss) before taxes................ $ 8,468 $ 6,052 $ 5,584 $(5,162)
Net income (loss)............................. $ 6,846 $ 3,515 $ 3,554 $(6,743)
Net income (loss) per share
(basic).................................... $ .24 $ .13 $ .15 $ (.34)
Net income (loss) per share
(diluted).................................. $ .24 $ .13 $ .15 $ (.34)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
------------------------------------------------------
FOURTH THIRD SECOND FIRST
DESCRIPTION QUARTER QUARTER QUARTER QUARTER
- ----------- ------------------------------------------------------
<S> <C> <C> <C> <C>
(IN 000'S EXCEPT PER SHARE AMOUNTS)
Total revenues................................ $104,404 $101,774 $106,955 $98,507
Net income (loss) before taxes................ $(52,963) $(27,212) $ 5,180 $ 7,360
Net income (loss)............................. $(30,759) $(18,436) $ 3,186 $ 4,686
Net income (loss) per share
(basic)..................................... $ (1.03) $ (.62) $ .11 $ .16
Net income (loss) per share
(diluted)................................... $ (1.03) $ (.62) $ .11 $ .16
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
The following discussion and analysis should be read in conjunction with
the financial statements and related notes contained elsewhere herein.
OVERVIEW
PRG was incorporated in 1993, but conducted no significant operations until
the IPO and Reorganization in June of 1995. The Company has, since that time,
provided management, marketing, information systems, capital resources and other
services to its Practices, ASCs, and optical dispensaries in accordance with its
Service Agreements. In fulfilling its obligations under the Service Agreements,
the Company pays the operating costs and expenses on behalf of the Practices. As
a result, the operating costs and expenses previously incurred by the Practices
are reflected in the operating expenses of PRG. In addition, the Company
contracts with certain physicians for the provision of medical services to the
various Practices which it controls. PRG also owns and controls certain
Practices, ASCs and optical dispensaries. The revenues recorded by the Company
reflect a combination of (i) management fees earned under its Service Agreements
and (ii) medical services related to patient charges, in the case of its
controlled Practices, ASCs and optical dispensaries. In addition to the
operating costs and expenses discussed above, the Company is incurring personnel
and administrative expenses in connection with maintaining corporate and
regional offices, which provide additional management and administrative
services to the Practices.
COMPANY GROWTH AND RECENT DEVELOPMENTS
As discussed in the preceding paragraph, PRG commenced operations in June
of 1995 when it began providing management services to its initial 10 practices.
No further acquisitions were completed during the course of 1995. However,
throughout 1996, a significant number of acquisitions were made by the Company.
Between March and August 1996, the Company merged, in various pooling of
interests transactions, with EyeCorp, Inc. ("EyeCorp"), and seven additional
practices (the "Merged Entities"). As a result of these mergers, the Company's
prior year financial data was restated to reflect the inclusion of the Merged
Entities for all periods presented. In addition to the mergers/poolings
19
<PAGE>
referred to above, PRG and EyeCorp made various purchase acquisitions throughout
1995 and 1996. On December 28, 1995, EyeCorp acquired an additional 48
practices. Between February 1996 and the end of 1996, the Company acquired 45
individual practices and the eye care division of EquiMed (22 practices) and AOI
(16 practices), all in purchase transactions. During 1997, PRG acquired
affiliations with 27 practices in purchase transactions, 17 of which were
combined with other existing practices.
The practice growth in late 1996 and 1997 referred to above created
substantial integration challenges for PRG relative to its operating
infrastructure, as well as to its financial systems and cash management systems,
especially transaction activity between the practices and corporate accounting.
Concurrently with these substantial integration efforts, PRG experienced a
significant stock price decline, which caused the Company to convert its
acquisition program from a stock based to a cash and note based model and to
reduce the size of its overall program. Also, during the course of 1997,
significant litigation relating to the EquiMed acquisition, a large patent
dispute and various disputes with certain of the affiliated practices created
further demands on corporate resources. Operating income also began to decline.
Cash decreased during 1997 as a result of these events see ("Liquidity and
Capital Resources" below), and as the result of a large increase in the
Company's due from affiliates balance.
In response to these events, the Company, during the latter half of 1997
and early 1998, re-evaluated its strategic position and initiated (1) a review
of its affiliated Practice relationships in light of available resources, market
penetration, geographic coverage and current Company strategy and (2) a
comprehensive review of its due from affiliates balances. These reviews
resulted in a decision by the Company to begin the process of termination of its
affiliations with approximately 44 eye care practices (18 of which had actually
been terminated as of December 31, 1997 through sale, disposition or
disassociation) and a conclusion that certain portions of its due from
affiliates balance might not be realized. This decision and conclusion resulted
in the Company incurring combined pre-tax charges of $76,706,000 during the
third and fourth quarters of 1997 (see "Results of Operations-Historical" below
for more details). These charges further resulted in an overall net loss to the
Company for the year ended December 31, 1997 of $41,323,000. These charges and
losses also caused loan covenant violations in the Company's $90,000,000 credit
facility, which resulted in cancellation of the facility and establishment of a
smaller $14,000,000 facility, $12,248,000 of which has been borrowed as of
December 31, 1997. In addition, certain class action lawsuits were filed during
late 1997 and early 1998. In March of 1998, management and the board of
directors of the Company began pursuing a plan to significantly restructure the
Company by, among other things, (1) lowering the service fees charged to the
affiliated practices; (2) reducing the level of services provided to the
practices; (3) shortening the term of the service agreements significantly; (4)
allowing the affiliated physicians to repurchase, for cash, their tangible
assets and re-employ their practice personnel; and (5) accelerating the payment
by the affiliated physicians/practices of their amounts owed to the Company.
This plan is subject to widespread acceptance by the affiliated physicians, as
well as to shareholder approval. If accepted and approved, management of the
Company believes the plan would significantly reduce the administrative and
accounting burden on the Company and generate additional cash. No assurance can
be provided that the Company will be successful in gaining physician acceptance
and shareholder approval and if such acceptance and approval are obtained, that
the resultant plan will be successful.
RESULTS OF OPERATIONS - HISTORICAL
For the year ended December 31, 1995, the historical statement of
operations data includes operating data for the EyeCorp practices (consisting
of 2 practices throughout most of 1995), the seven Merged Entities (as herein
defined) and the initial 10 PRG Practices for the second half of the year. For
the year ended December 31, 1996, the historical statement of operations data
includes the EyeCorp practices (including the 48 Practices acquired by EyeCorp
on December 28, 1995), the seven Merged Entities, the initial 10 Practices and
the 83 additional Practices acquired throughout 1996 in purchase transactions
(some of which were combined with other entities). For the year ended December
31, 1997, the historical statement of operations data includes the operations of
the 140 Practices acquired in 1996 (50 of which were acquired in the fourth
quarter) and prior and partial data for the 27 Practices acquired in 1997, less
the post disposition results of operations for 11 of the 37 Practices that were
actually terminated in the fourth quarter of 1997, as well as less the post
disposition results for certain of the other 7 smaller optometry practices that
were disassociated with PRG in agreement restructuring transactions.
The Company incurred a number of significant statement of operations
charges during the latter half of 1997. During the third and fourth quarters of
1997, PRG recorded estimated charges for the dispositions or effective
terminations of 44 practice affiliations ($65,384,000) and for the estimated
unrealizability of certain accounts receivable ($11,322,000). These charges
have been included in "Asset valuation losses" in the accompanying statement of
operations data for the year ended December 31, 1997. Additionally, the Company
incurred, during the fourth quarter of
20
<PAGE>
1997, a charge-off of $750,000 for future payments to its former chairman and
chief executive officer in connection with his termination agreement and a
$972,000 charge-off of debt financing fees that had been incurred in connection
with a credit facility that was terminated in late 1997. The charge-off of the
future payments to the former chairman is included in a separate line item on
the accompanying statement of operations for the year ended December 31, 1997,
whereas the debt financing fees charge-off is included in "Interest expense,
net".
The Company's consolidated financial statements have been audited by Arthur
Andersen LLP, ("Arthur Andersen"), independent public accountants. Management
has made available to Arthur Andersen all of the Company's financial records and
related data. In connection with the issuance of an opinion on the Company's
consolidated financial statements, Arthur Andersen provided the Company's board
of directors with a letter reporting on certain matters relating to the internal
controls of the Company. Arthur Andersen states, in that letter, that during
1997 (i) the Company did not maintain adequate control over the recording of
transactions between individual physician practices and the Company's corporate
accounting department, and (ii) the reconciliation of many key general ledger
accounts, including certain cash, receivable and accrued liability accounts, was
not performed by the Company on a timely basis. These matters, which did not
require a modification to the opinion expressed by Arthur Andersen in its audit
report included elsewhere herein, did constitute a material weakness as defined
by standards established by the American Institute of Certified Public
Accountants in the internal control structure of the Company for the period
examined. Arthur Andersen's consideration of the Company's internal control
structure was only to the extent they deemed necessary in connection with the
audit, and would not necessarily disclose all significant deficiencies in the
internal control structure that might be considered material weaknesses. In
conjunction with its year-end closing procedures, the Company has reconciled the
key accounts described above, provided necessary valuations or reserves and has
taken other steps, including the hiring of an experienced chief financial
officer and adoption of a new treasury management system to correct the above
described situation.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenues. Revenues were $411,640,000 for the year ended December 31, 1997
compared to $248,293,000 for the year ended December 31, 1996, an increase of
$163,347,000 or 66%. The primary reason for the increase was the significant
increase in the number of practices that became affiliated with PRG during the
course of 1996 and 1997 as discussed in "Company Growth and Recent Developments"
above, many of which became affiliated late in 1996 in purchase transactions.
This increase was slightly offset by certain of the practice performance issues
discussed in the next paragraph.
Costs and Expenses. Costs and expenses were $479,275,000 for the year ended
December 31, 1997 versus $233,351,000 for the comparable period in 1996. This
increase of $245,924,000 was attributable primarily to the increase in
affiliated Practices discussed in the preceding paragraph and the large asset
valuation, executive severance and debt financing fee charge-offs discussed in
"Company Growth and Recent Developments" above, as well as to increases in
almost all other cost and expense categories that are discussed below. Costs and
expenses also increased substantially as a percentage of revenues (from 89% in
1996 to 97% in 1997), even if 1997 charge-offs, patent litigation and merger
expenses are not considered. This overall increase in costs and expenses as a
percentage of revenues indicates that the Company's operating margins are
declining correspondingly. These cost and expense increases/margin declines are
the result of various factors including, reimbursement rate declines at the
Practices; substantial additional infrastructure investment by the Company; poor
performance by certain of the Practices, particularly many of the EquiMed
Practices; the effect of the practice affiliation termination process; increased
legal and professional fees caused by substantial new litigation and management
turnover; increased depreciation and amortization due to acquisitions and life
adjustments; increased interest expense/decreased interest income resulting from
the lower cash balances during the year (see "Liquidity"); fees relative to the
Company's initiative to maximize shareholder value and adjustments relative to
certain Service Agreements. Additionally, the Company also recorded a loss for
the fourth quarter of 1997 (as compared to pre-tax profits for the previous
quarters), even if the asset valuation losses, executive severance, Pillar Point
litigation costs and debt financing fee chargeoffs are not considered. This loss
is the result of a variety of factors including, reduced income from a number of
practices targeted for disassociation; adjustments related to contractual
allowances and other balance sheet accounts; increased legal and professional
fees due to litigation (other than Pillar Point) and management turnover;
additional severance related to employee turnover; fees relative to the
Company's initiative to maximize shareholder value; and adjustments related to
certain amortization lives and service agreements. The individual components of
the annual costs and expenses are discussed below:
Salaries, Wages and Benefits. Salaries, wages and benefits were
$207,254,000 for the year ended December 31, 1997 compared to $115,200,000
for the year ended December 31, 1996, an increase of $92,054,000 or 80%.
These increases were primarily attributable to the large increase in the
number of Practices affiliated with the Company during 1996 and 1997, as
well as to an expanded number of personnel on the corporate,
21
<PAGE>
administrative and operations staff in 1997 as compared to 1996. As a
percentage of revenues, salaries, wages and benefits increased from 46.4%
of revenues in 1996 to 50.3% of revenues in 1997 due primarily to the same
reasons referred to above, as well as to the reimbursement pressures and
practice performance issues also referred to above.
Pharmaceutical and Supplies. Pharmaceuticals and supplies expenses were
$52,392,000 for the year ended December 31, 1997 compared to $30,919,000
for the year ended December 31, 1996, an increase of $21,473,000 or 69.4%.
These large increases were primarily the result of the increase in the
number of affiliated practices discussed above. Pharmaceuticals and
supplies as a percent of revenues did not change significantly between
1996 (12.5%) and 1997 (12.7%).
General and Administrative. General and administrative expenses were
$103,055,000 for the year ended December 31, 1997, compared to $62,353,000
for the year ended December 31, 1996, an increase of $40,702,000 or 65.3%.
General and administrative expenses remained relatively constant as a
percent of revenues at 25.1% and 25.0% for 1996 and 1997, respectively.
The large increase in the absolute amount of expenses was due to the
increased number of practices, increased legal and professional expenses
generated by increased litigation and management turnover, fees associated
with the Company's initiative to maximize shareholder value and
substantially more infrastructure investment by the Company.
Depreciation and Amortization. Depreciation and amortization expenses
were $24,841,000 for the year ended December 31, 1997, compared to
$11,192,000 for the year ended December 31, 1996, an increase of
$13,649,000 or 122%. These large increases are attributable to the
significant increase in the number of affiliated practices acquired in 1996
and 1997 in purchase transactions, particularly in the AOI and EquiMed
acquisitions which generated large amounts of intangible amortization. As
a percentage of revenues, depreciation and amortization also increased
substantially during 1997 (4.5% of revenues in 1996 vs. 6.0% of revenues in
1997) as the profitability of the more recent acquisitions (particularly
EquiMed and AOI) were not as substantial as the amortization they
generated. Additionally, certain adjustments were made to both depreciable
lives and amortization periods during the year.
Interest Expense, net. Interest expense, net was $11,547,000 for the year
ended December 31, 1997 compared to $1,304,000 for the year ended December
31, 1996, and increase of $10,243,000. This substantial increase is
primarily the result of the interest expense incurred on the $125,000,000
of convertible debentures which were issued in late 1996, the interest
incurred on the $13,398,000 of convertible promissory notes issued in
acquisitions during 1997, interest expense incurred on the AOI and EquiMed
physician debt and the reduced interest income earned on a lower level of
available cash balances in 1997.
Executive Severance Expenses. The $750,000 of 1997 executive severance
expenses were the result of recording the expenses associated with future
payments to be made to PRG's former chairman and chief executive officer in
connection with the terms of his termination agreement in late 1997.
Patent Litigation Defense Costs. The significant increase during 1997 in
the patent litigation defense costs (from $353,000 in 1996 to $2,730,000 in
1997) is attributable to the fact that the Company's defense of the patent
litigation process had only recently commenced in late 1996. During 1997,
the process accelerated rapidly and, as a result, significantly greater
costs were incurred.
22
<PAGE>
Asset Valuation Losses. See "Company Growth and Recent Developments" above
for more details.
Provision (Benefit) for Income Taxes. The income tax benefit in 1997 of
$26,312,000 or 38.9% of loss before income tax is greater than the 35%
statutory rate primarily due to the effect of state income tax benefits.
This compares to an income tax provision of $7,770,000 or 52% of income
before income taxes during 1996. The 1996 income tax provision was greater
than the statutory rate as further explained in "Year Ended December 31,
1996 Compared to Year Ended December 31, 1995" below.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenues. Revenues were $248,293,000 for the year ended December 31, 1996
versus $89,967,000 for the comparable period in 1995, an increase of
$158,326,000 or 176%. This significant increase is primarily attributable
to (i) the fact that the acquisition of the assets of the initial 10
Practices did not occur until June 28, 1995, (ii) the assets of 48 of
EyeCorp's 50 eye care practices were acquired on December 28, 1995, and had
no significant operating results included in the 1995 period, (iii) a
significant increase (45) in the number of individual practice acquisitions
made by PRG during 1996 and (iv) the acquisition of the EquiMed and AOI
practices.
Costs and Expenses. Costs and expenses were $233,351,000 for the year
ended December 31, 1996 versus $88,157,000 for the comparable period in
1995. This overall increase of $145,194,000 or 164.7%, was primarily driven
by the increase in the number of practices as discussed in the revenue
section above. The components of costs and expenses are discussed below:
Salaries, Wages and Benefits. Salaries, wages and benefits were
$115,200,000 for the year ended December 31, 1996, compared to $50,061,000
for the year ended December 31, 1995, an increase of $65,139,000. The
decrease as a percentage of revenues (55.6% in 1995 to 46.4% in 1996) was
due to lower owner physician compensation withdrawals, as a percentage of
revenues, during 1996 versus 1995 related to several large practices that
were acquired under the pooling of interests method of accounting in 1996.
Pharmaceuticals and Supplies. Pharmaceuticals and supplies expenses were
$30,919,000 for the year ended December 31, 1996, compared to $9,487,000
for the year ended December 31, 1995, an increase of $21,432,000. The
increase as a percentage of revenues (10.5% in 1995 to 12.5% in 1996) was
due primarily to increased surgery center activity during 1996 (45 ASCs in
1996 versus six ASCs in 1995). ASCs generally use a higher level of
pharmaceuticals and supplies than an eye care practice.
General and Administrative. General and administrative expenses were
$62,353,000 for the year ended December 31, 1996, compared to $22,478,000
for the year ended December 31, 1995, an increase of $39,875,000 which was
attributable to the larger number of acquisitions discussed above. General
and administrative expenses as a percentage of revenues did not change
significantly between the two periods.
Depreciation and Amortization. Depreciation and amortization expenses were
$11,192,000 for the year ended December 31, 1996, compared to $3,498,000
for the year ended December 31, 1995, an increase of $7,694,000. The
slight increase as a percentage of revenues (3.9% in 1995 to 4.5% in 1996)
was due primarily to increased amortization of intangible assets related to
acquisitions that were accounted for as purchases. A greater percentage of
1996 revenues were generated by practices accounted for as purchases.
Interest Expense, net. Interest expense was $3,395,000 for the year ended
December 31, 1996, compared to $1,752,000 for the year ended December 31,
1995, an increase of $1,643,000. The increase was primarily attributable
to interest on its credit facilities and various practice debt, both of
which were incurred in connection with the significant acquisition activity
in 1996 and due to interest on the $125,000,000 of convertible debentures
sold in December 1996. Interest income was $2,124,000 for the year ended
December 31, 1996, compared to $236,000 for the year ended December 31,
1995, an increase of $1,888,000. The increase was primarily attributable
to additional cash available to invest during 1996 (principally from the
1996 Public Offering which generated net proceeds of approximately
$113,640,000 and excess net proceeds from the $125,000,000 convertible
debentures sold in December 1996).
23
<PAGE>
Patent Litigation Defense Costs. The Company incurred approximately
$353,000 of legal costs in connection with litigation involving alleged
infringement of three patents related to a refractive surgical procedure.
This patent litigation was brought against one of its Practices during late
1996.
Merger Transaction Expenses. The Company incurred approximately
$12,030,000 of transaction expenses during 1996 in connection with its
pooling of interests with EyeCorp (50 practices) and the seven Merged
Entities in the second and third quarter of 1996. There were no poolings
in 1995.
Provision for Income Taxes. The 52.0% effective tax rate for the 1996
period is substantially higher than the U.S. statutory tax rate of 35%,
primarily because of the nondeductibility, for income tax purposes, of
approximately $7,000,000 of the $12,030,000 merger transaction expenses as
well as, to a lesser extent, the effect of state income taxes. The
effective tax rate for the year ended December 31, 1995 was approximately
27.7%. This percentage was less than the U.S. statutory tax rate of 34% as
a result, primarily, of the earnings from nontaxable entities with which
PRG merged in pooling of interests transactions somewhat offset by state
income taxes and the nondeductibility of a portion of the executive
resignation expenses.
LIQUIDITY AND CAPITAL RESOURCES
Cash, Working Capital and Debt
During the year ended December 31, 1997, a number of significant strategic,
operational and financial changes occurred at PRG (many of which are discussed
in "Company Growth and Recent Developments" above). The Company switched from a
stock based acquisition to a cash/note based model; expanded its operational and
administrative infrastructure significantly; made a substantial change in its
cash/treasury management system; explored strategic alternatives relative to
shareholder value; initiated a stock repurchase program; initiated a strategic
review of its assets, operations and available resources; experienced an
increase in its due from affiliates balance; and became a party to several new
loan agreements and various lawsuits. Additionally, many of the costs
associated with its debenture offering, the new credit facilities and the
purchase of AOI and EquiMed became due. In connection therewith, PRG made
significant cash expenditures during 1997 for (a) acquisitions (b) legal and
accounting fees (c) debt offering expenses (d) practice working capital (e)
capital expenditures (f) salaries and (g) debt retirement. Additionally, PRG
was required to draw-down on its credit facilities to help finance these
expenditures. PRG also recorded charges during 1997 amounting to $11,322,000
regarding the realization of certain accounts receivable, which correspondingly
decreased working capital. Accordingly, as of December 31, 1997, cash and
working capital had decreased to $15,056,000 and $72,260,000 respectively, and
overall indebtedness both short and long term had increased to $168,626,000.
Credit Facilities
During late 1995 and early 1996, PRG and EyeCorp established $55,000,000 of
credit facilities with a bank that were used to fund acquisitions, capital
expenditures and working capital throughout 1996. The entire amount of the
facility, plus a $30,000,000 bridge loan, had been substantially utilized in
late November 1996, and were repaid with certain of the proceeds from the
$125,000,000 convertible debenture offering in December 1996. In March 1997,
PRG arranged a new $90,000,000 credit facility with a syndicate of banks led by
its prior bank lender, to be used for acquisitions, capital expenditures,
working capital and common stock repurchases. The new credit facility was
secured by the stock of the subsidiaries of PRG and guaranteed by such
subsidiaries. PRG borrowed approximately $8,000,000 under the facility in early
October of 1997 to finance certain acquisitions but went into default subsequent
thereto as a result of net losses incurred at that time. As a result of Company
losses, the $90,000,000 facility was subsequently terminated and a new
$14,000,000 facility was established with the lead bank from its $90,000,000
facility. PRG has borrowed $12,248,000 from its new facility as of April 6,
1998.
The amended facility requires that the balance outstanding be paid down to
$9,500,000 by September 30, 1998, with the remainder to be repaid on December
31, 1998. The facility bears interest at LIBOR + 2.5%, which is repayable, in
its entirety, on December 31, 1998. The amended facility also requires that
substantial portions of asset sale proceeds be used to repay the facility. The
amended facility has the same security arrangements as the March 1997
$90,000,000 facility and, additionally, allows for a security interest in all
service agreements, accounts receivables and general intangibles of PRG. In
addition, the new facility is guaranteed by one current member of the Company's
board of directors as well as by one former member. The amended facility
requires that PRG maintain
24
<PAGE>
consolidated quarterly, EBITDA of $10,000,000 and net worth of at least
$242,465,000, increased by 75% of future net income.
Liquidity
As discussed previously, the Company is not currently pursuing an active
acquisition program and has in fact been disassociating itself from certain
practice affiliations that are not consistent with its current strategic
objectives. Additionally, PRG has implemented new cash management procedures
which management believes will ultimately improve cash flow from its practices
and has restructured its operating infrastructure. PRG presently has
approximately $1,752,000 of borrowing availability on its current credit
facilities and all amounts currently borrowed ($12,248,000) are due by the end
of 1998. However, management believes that whether the March 1998 restructuring
plan is adopted or not, the Company's existing cash, cash flow from operations
and cash to be generated from practice disassociation or other asset
dispositions, will be sufficient to allow the Company to meet its planned
obligations as they become due and to remain in compliance with its loan
agreements through the remainder of 1998 and the first quarter of 1999.
Inflation
To date, inflation has not had a material effect on the combined results of
operations of the Practices.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
Financial Statements and Supplementary Data are included herein on
pages F-1 through F-24.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
-----------------------------------------------------------
AND FINANCIAL DISCLOSURES
- -------------------------
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF PRG
---------------------------------------
The name, age, position and term of each executive officer of the Company is
set forth under the heading "Executive Officers" on page 8 under Item 1 of this
report. The remaining information required by this Item 10 is hereby
incorporated by reference to the Company's definitive proxy statement (the Proxy
Statement) for the Company's annual meeting of stockholders to be held during
1998 and to be filed pursuant to Regulation 14A promulgated by the Securities
and Exchange Commission under the Securities Exchange Act of 1934, which Proxy
Statement is anticipated to be filed within 120 days after the end of the
Company's fiscal year ended December 31, 1997.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
Information required by this Item 11 is hereby incorporated by reference to
the Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
Information required by this Item 12 is hereby incorporated by reference to
the Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Information required by this Item 13 is hereby incorporated by reference to
the Company's Proxy Statement.
PART IV
25
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
----------------------------------------------------------------
(a) 1. INDEX TO FINANCIAL STATEMENTS.
The following Financial Statements are included herein:
<TABLE>
<CAPTION>
<S> <C>
Reports of Independent Public Accountants.......................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997....................... F-4
Consolidated Statements of Operations for the three years ended
December 31, 1997................................................................ F-5
Consolidated Statements of Changes in Stockholders' Equity for the three years
ended December 31, 1997.......................................................... F-6
Consolidated Statements of Cash Flows for the three years ended
December 31, 1997................................................................ F-7
Notes to Consolidated Financial Statements......................................... F-8
</TABLE>
2. INDEX TO FINANCIAL SCHEDULES.
No schedules are included because of the absence of conditions under
which they are required or because information is disclosed in the
financial statements or notes thereto.
3. EXHIBITS
The exhibits filed as a part of this report are listed under
"Exhibits" at subsection (c) of this Item.
(b) REPORTS ON FORM 8-K:
The following reports on Form 8-K were filed on behalf of the Company
during the last quarter of the period covered by this report.
<TABLE>
<CAPTION>
ITEMS INCLUDED FINANCIAL
FORM DATE OF REPORT DATE FILED REPORTED STATEMENTS
- ---- -------------- ---------- -------- ----------
<S> <C> <C> <C> <C>
8-K 12/18/97 12/23/97 5 N/A
(c) EXHIBITS
</TABLE>
Exhibit
Number Description
------ -----------
2.1 -- Amended and Restated Agreement and Plan of Merger by and among
Physicians Resource Group, Inc., PRG Acquisition Corporation and
EyeCorp, Inc., dated December 22, 1995.(2)(8)
2.2 -- Asset Purchase Agreement by and among EquiMed, Inc., PRG Georgia,
and Physicians Resource Group, Inc. dated October 7, 1996. (8)
2.3 -- Agreement and Plan of Merger by and among American Ophthalmic
Incorporated, PRG Acquisition Corporation and Physician Resource
Group, Inc. date October 7, 1996.(12)(8)
26
<PAGE>
2.4 -- Asset Purchase Agreement by and among Sun Valley Acquisition
Corporation, Barnet-Dulaney Eye Center, P.L.L.C., Ronald W.
Barnet, M.D., David D. Dulaney, M.D., Robert B. Pinkert, O.D. and
Scott A. Perkins, M.D. dated November 29, 1995.(2)(8)
2.5 -- First Amendment to Asset Purchase Agreement by and among Sun
Valley Acquisition Corporation, Barnet-Dulaney Eye Center,
P.L.L.C., Ronald W. Barnet, M.D., David D. Dulaney, M.D., Robert
B. Pinkert, O.D. and Scott A. Perkins, M.D. dated February 14,
1996.(3)(8)
2.6 -- Agreement and Plan of Merger by and among Physicians Resource
Group, Inc., Sun Valley Acquisition Corporation, SVAC Acquisition
Corporation, Daniel D. Chambers, Michael R. Beck, John R. Hedrick
and Michael Yeary dated December 6, 1995.(2)(8)
2.7 -- Agreement and Plan of Reorganization by and among PRG Nevada
Acquisition Corporation II, Inc., Physician Resource Group, Inc.,
Shepard Eye Surgicenter, Ltd., John R. Shepherd, M.D. and Steven
Hansen, M.D. dated December 6, 1995.(2)(8)
2.8 -- Agreement and Plan of Reorganization by and among PRG Nevada
Acquisition Corporation III, Inc., Physicians Resource Group,
Inc., John R. Shepherd, M.D., Ltd., d/b/a Shepherd Eye Center,
John R. Shepherd, M.D. and Steven Hansen, M.D., dated December 6,
1995.(2)(8)
2.9 -- Asset Purchase Agreement by and among Sun Valley Acquisition
Corporation, Mann Berkeley Eye Center, P.A., Paul Michael Mann,
M.D. and Ralph G. Berkeley, M.D. dated November 11, 1995.(2)(8)
2.10 -- First Amendment to Asset Purchase Agreement by and among Sun
Valley Acquisition Corporation, Mann Berkeley Eye Center, P.A.,
Paul Michael Mann, M.D. and Ralph G. Berkeley, M.D. dated
February 14, 1996.(3)(8)
2.11 -- Agreement and Plan of Merger by and among Central Florida Eye
Associates, P.A., Ronald Case, M.D., Brian Renz, M.D., Teo Kulyk,
M.D., Jay Mulaney, M.D., PRG FL Acquisition Corporation, and
Physicians Resource Group, Inc.(13)(8)
2.12 -- Agreement and Plan of Merger by and among G.C.R. Investors,
Ronald Case, M.D., Brian Renz, M.D., Jay Mulaney, M.D., PRG FL
Partnership I, and Physicians Resource Group, Inc.(13)(8)
2.13 -- Agreement and Plan of Merger by and among Central Florida Eye
Associates, Partners, Ronald Case, M.D., Brian Renz, M.D., Teo
Kulyk, M.D., Jay Mulaney, M.D., PRG FL Partnership II, and
Physicians Resource Group, Inc.(13)(8)
2.14 -- Agreement and Plan of Merger by and among South Texas Retina
Affiliates, Inc., South Texas Retina Consultants, L.L.P., Charles
H. Campbell, M.D., P.A., Charles H. Campbell, M.D., PRG TX
Acquisition Corp. I and Physicians Resource Group, Inc.(13)(8)
2.15 -- Agreement and Plan of Merger, dated August 13, 1996, between PRG
Ohio III, Inc., Physicians Resource Group, Inc., Cincinnati Eye
Institite, Inc., John S. Cohen, M.D., James D. Faulkner, M.D.,
William J. Faulkner, M.D., Robert C. Kersten, M.D., Richard S.
Kerstine, M.D., Robert H. Osher, M.D., Robert W. Nash, M.D.,
Michael R. Petersen, M.D., Gary A. Varley, M.D., Linda J. Greff,
M.D., Robert J. Cionni, M.D., Kevin T. Corcoran, O.D., and Corwin
M. Smith, M.D.(14)(8)
2.16 -- Agreement and Plan of Reorganization, dated August 13, 1996,
between PRG HEA Acq. Corp., Physicians Resource Group, Inc.,
Houston Eye Associates, P.A., Malcom L. Mazow, M.D., Robert H.
Stewart, M.D., Robert B. Wilkins, M.D., Jeffrey D. Lanier, M.D.,
Michael A. Bloome, M.D., Paul C. Salmonsen, M.D., Richard L.
Kimbrough, M.D., Jack T. Holladay, M.D., Jeffrey B. Arnoult,
M.D., William H. Quayle, M.D., John D. Goosey, M.D., John M.
27
<PAGE>
Lim, M.D., Kathryn H. Musgrove, M.D., Marsha F. Soechting, M.D.,
and Marc N. Longo, M.D.(14)(8)
2.17 -- Asset Purchase Agreement, dated August 13, 1996, between PRG
Ohio III, Inc., Physicians Resource Group, Inc. and CEI Realty
Associates, Ltd.(14)(8)
2.18 -- Agreement and Plan of Merger, dated August 13, 1996, between PRG
IV Acq. Corp., Physicians Resource Group, Inc., Gregory L.
Henderson, M.D., P.A., and Gregory L. Henderson, M.D.(14)(8)
2.19 -- Agreement and Plan of Merger, dated August 13, 1996, between PRG
IX Acq. Corp., Physicians Resource Group, Inc., William Reynolds,
M.D., P.A., and William Reynolds, M.D.(14)(8)
2.20 -- Agreement and Plan of Merger, dated August 12, 1996, between PRG
II Acq. Corp., Physician Resource Group, Inc., Tampa Eye Clinic,
P.A., J. Burns Creighton, M.D., Ronald Seeley, M.D., Lewis
Lauring, M.D., William Reynolds, M.D., David Leach, M.D., P.A.,
and Timothy Lorenzen, M.D., P.A.(14)(8)
2.21 -- Agreement and Plan of Merger, dated August 13, 1996, between PRG
XI Acq. Corp., Physician Resource Group, Inc., Timothy Lorenzen,
M.D., P.A. and Timothy Lorenzen, M.D.(14)(8)
2.22 -- Agreement and Plan of Merger, dated August 13, 1996, between PRG
VII Acq. Corp., Physician Resource Group, Inc., Ronald Seeley,
M.D., P.A. and Ronald Seeley, M.D.(14)(8)
2.23 -- Agreement and Plan of Merger, dated August 13, 1996, between PRG
VI Acq. Corp., Physicians Resource Group, Inc., J. Burns
Creighton, M.D., P.A. and J. Burn Creighton, M.D.(14)(8)
2.24 -- Agreement and Plan of Merger, dated August 13, 1996, between PRG
X Acq. Corp., Physicians Resource Group, Inc., David Leach, M.D.,
P.A. and David Leach, M.D.(14)(8)
2.25 -- Agreement and Plan of Merger, dated August 13, 1996, between PRG
VIII Acq. Corp., Physicians Resource Group, Inc., Lewis Lauring,
M.D., P.A. and Lewis Lauring, M.D.(14)(8)
2.26 -- Asset Purchase Agreement, dated August 13, 1996, between PRG
Ohio, L.P., CEI Realty Associates, Ltd., and Physicians Resource
Group, Inc.(14)(8)
2.27 -- Share Exchange Agreement by and among PRG Florida XII, Inc.,
Melbourne Eye Associates of Brevard, Inc., Melbourne Eye
Associates, P.A., William Broussard, Trustee U.T.D. March 24,
1980, Michael F. Corcoran, M.D., Trustee U.T.D. September 26,
1988, Andrew Zorbis, M.D., Ralph Paylor, M.D., L. Neal Freeman,
M.D., and Kaukwok Frederick Ho, M.D., Trustee U.T.D. November 24,
1989 and Physicians Resource Group, Inc.(15)(8)
3.1 -- Second Restated Certificate of Incorporation of Physicians
Resource Group, Inc.(10)
3.2 -- Certificate of Designations, Preferences, Rights and Limitations
of Class A Preferred Stock of Physicians Resource Group, Inc.(1)
3.3 -- Third Amended and Restated Bylaws of Physicians Resource Group,
Inc.(5)
4.1 -- Form of Warrant Certificate.(1)
4.2 -- Form of certificate evidencing ownership of common stock of
Physicians Resource Group, Inc.(1)
28
<PAGE>
4.3 -- Rights Agreement dated as of April 19, 1996 between Physicians
Resource Group, Inc. and Chemical Mellon Shareholder Services.(9)
10.1 -- Physicians Resource Group, Inc. Amended and Restated 1995 Stock
Option Plan.(5)(7)
10.2 -- Physicians Resource Group, Inc. 1995 Health Care Professionals
Stock Option Plan.(1)
10.3 -- Employment Agreement between Physicians Resource Group, Inc. and
Gregory L. Solomon.(1)(7)
10.4 -- Employment Agreement between Physicians Resource Group, Inc. and
Emmett E. Moore.(19)(7)
10.5 -- Employment Agreement between Physicians Resource Group, Inc. and
Richard M. Owen.(19)(7)
10.6 -- Form of Indemnification Agreement for certain Directors.(1)
10.7 -- Form of Service Agreement by and between Physicians Resource
Group, Inc., Physicians Resource Group Subsidiary, Inc. and TPZ,
Inc. d/b/a/ Eye Care of Medina, Inc.(1)
10.8 -- Form of Service Agreement by and between Physicians Resource
Group, Inc., its wholly-owned subsidiary and The Eye Clinic of
Texas.(1)
10.9 -- Form of Service Agreement by and between Physicians Resource
Group, Inc., its wholly-owned subsidiary and David M. Schneider,
M.D., Inc.(1)
10.10 -- Form of Service Agreement by and between Physicians Resource
Group, Inc., its wholly-owned subsidiary and Texas Eye Institute
Assoc.(1)
10.11 -- Form of Service Agreement by and between Physicians Resource
Group Subsidiary, Inc., its wholly-owned subsidiary and McDonald
Eye Associates, P.A.(1)
10.12 -- Form of Service Agreement by and between Physicians Resource
Group, Inc., its wholly-owned subsidiary and Michael A. Minadeo,
M.D., P.A.(1)
10.13 -- Form of Service Agreement by and between Physicians Resource
Group, Inc., its wholly-owned subsidiary and Southern Nevada Eye
Clinic, Inc., Kenneth C. Westfield, M.D., Ltd. and Nevada
Institute of Ambulatory Surgery, Inc.(1)
10.14 -- Form of Service Agreement by and between Physicians Resource
Group, Inc., its wholly-owned subsidiary and Eye Clinic, P.C.(1)
10.15 -- Form of Service Agreement by and between Superior Eye Care,
Inc. and Charles D. Fritch, M.D., Inc.(1)
10.16 -- Form of Service Agreement by and among Pacific Vision
Services, Inc. and Loma Linda Ophthalmology Medical Group, Inc.,
Inland Eye Institute Medical Group, Inc. and T.E.S.C., Inc.(1)
10.17 -- First Amendment to Service Agreement by and among Physicians
Resource Group, Inc., as successor by merger to Pacific Vision
Services, Inc., Loma Linda Ophthalmology Medical Group, Inc.,
Inland Eye Institute Medical Group, Inc. and T.E.S.C., Inc. dated
August 9, 1995.(4)
10.18 -- Subscription Agreement, dated March 31, 1995 between Notre
Capital Ventures, Ltd. and
29
<PAGE>
Physicians Resource Group, Inc.(1)
10.19 -- Form of Registration Rights Agreement.(1)
10.20 -- Form of Registration Rights Agreement.(1)
10.21 -- Form of Registration Rights and Stockholders Agreement.(1)
10.22 -- Form of Registration Rights Agreement dated as of March 7, 1996,
by and among Physicians Resource Group, Inc. and the former
stockholders of EyeCorp, Inc.(5)
10.23 -- Form of Option Agreement between Physicians Resource Group, James
A. Price, M.D., Ben F. House, M.D., Bruce E. Herron, M.D. and
Mark R. Bateman, M.D.(1)
10.24 -- Separation and Mutual Release Agreement between Gregory Solomon
and Physicians Resource Group.(6)(7)
10.25 -- Loan Agreement dated as of January 8, 1996 between Physicians
Resource Group, Inc. and NationsBank of Tennessee, N.A.
("NationsBank").(2)
10.26 -- Subordination Agreement dated as of December 28, 1995 by and
among NationsBank, EyeCorp, Eyecare Resource, Inc., the EyePA,
Inc. and Physicians Resource Group, Inc.(2)
10.27 -- Reimbursement Agreement dated as of December 28, 1995 between
EyeCorp and Physicians Resource Group, Inc.(2)
10.28 -- Service Agreement dated as of February 23, 1994, by and
between EyeCorp, Inc., the Vitreoretinal Foundation and David
Meyer, M.D., John E. Linn, M.D., John D. Armstrong, M.D., John L.
Elfervig, M.D. and Thomas A. Browning, M.D.(5)(8)
10.29 -- Amendment to Service Agreement, dated March 8, 1996, by and
between the Vitreoretinal Foundation, David Meyer, M.D., John E.
Linn, M.D., John D. Armstrong, M.D., John L. Elfervig, M.D. and
Thomas A. Browning, M.D. and EyeCorp, Inc.(5)
10.30 -- Second Amendment to Service Agreement dated as of February 23,
1994, by and between EyeCorp, Inc., the Vitreoretinal Foundation
and David Meyer, M.D., John E. Linn, M.D., John D. Armstrong,
M.D., John L. Elfervig, M.D. and Thomas A. Browning, M.D.(5)
10.31 -- Loan and Security Agreement dated as of December 28, 1995
among EyeCorp, Inc., EyeCare Resource, Inc., The EyePA, Inc. and
NationsBank of Tennessee, N.A.(5)
10.32 -- Form of Indenture, dated as of December 11, 1996, between
Physicians Resource Group, Inc. and U.S. Trust Company of New
York, N.A. (10)
10.33 -- Form of Registration Rights Agreement, dated as of December 6,
1996, between Physicians Resource Group, Inc., and Smith Barney,
Inc., Alex Brown & Sons Incorporated, Soloman Brothers, Dillon
Reed & Co., Inc. and Volpe Welty & Company.(10)
10.34 -- Form of Purchase Agreement dated as of December 6, 1996.(10)
10.35 -- Loan Agreement for $90,000,000 Revolving Credit Loan dated March
14, 1997, between Physicians Resource Group, Inc. and NationsBank
of Tennessee, N.A. Agent the Banks Signatory Hereto.(16)
10.36 -- Physicians Resource Group, Inc. Employee Stock Purchase Plan.
(11)
10.37 -- Employment Agreement between Physicians Resource Group, Inc. and
Mark Kingston.(7)(16)
30
<PAGE>
10.38 -- Employment Agreement between Physicians Resource Group, Inc. and
Richard D'Amico.(7)(16)
10.39 -- Employment Agreement between Physicians Resource Group, Inc. and
Jonathan Bond.(7)(16)
10.40 -- Employment Agreement between Physicians Resource Group, Inc. and
Daniel Chambers.(7)(16)
10.41 -- Employment Agreement between Physicians Resource Group, Inc. and
Richard Gilleland.(7)(18)
10.42 -- Employment Agreement between Physicians Resource Group, Inc. and
Peter Dorflinger.(7)(18)
10.43 -- Employment Agreement between Physicians Resource Group, Inc. and
Pamela Westbrook.(7)(18)
10.44 -- Loan Agreement for $20,000,000 Revolving Credit Loan dated
November 1997, between Physicians Resource Group, Inc. and
NationsBank of Tennessee, N.A.
10.45 -- Physicians Resource Group, Inc. 401(K) Plan.(17)
21.1 -- Subsidiaries.(5)
23.1 -- Consent of Arthur Andersen LLP(16)
23.2 -- Consent of Coopers & Lybrand L.L.P.(16)
24.1 -- Power of Attorney (contained on the signature page of this
report).
27.0 -- Financial Data Schedule.(16)
- -------------
(1) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (No. 33-91440) and incorporated herein by reference.
(2) Previously filed as an exhibit to the Company's Registration Statement on
Form S-4 (No. 333-00230) and incorporated herein by reference.
(3) Previously filed as an exhibit to the Company's Current Report on Form 8-K
dated February 14, 1996 and incorporated herein by reference.
(4) Previously filed as an exhibit to the Company's quarterly report on Form
10-Q for the quarter ending June 30, 1995, and incorporated herein by
reference.
(5) Previously filed as an exhibit to the Company's annual report on Form 10-K
for the year ending December 31, 1995, and incorporated herein by
reference.
(6) Previously filed as an exhibit to the Company's quarterly report on Form
10-Q for the quarter ending September 30, 1995, and incorporated herein by
reference.
(7) Management contract or compensatory plan or arrangement, which is being
identified as such pursuant to Item 14(a)3 of Form 10-K.
(8) Schedules and similar attachments to this Exhibit have not been filed
herewith, but the nature of their contents is described in the body of this
Exhibit. The Company agrees to furnish a copy of any such omitted
schedules and attachments to the Commission upon request.
(9) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (no.333-3852) and incorporated herein by reference.
(10) Previously filed as an exhibit to the Company's Registration Statement on
Form S-4 (333-19185) and incorporated herein by reference.
(11) Previously filed as an exhibit to the Company's Registration Statement on
Form S-8 (No. 333-15547) and incorporated herein by reference.
(12) Previously filed as an exhibit to the Company's Current Report on Form 8-K
dated October 7, 1996 and incorporated herein by reference.
31
<PAGE>
(13) Previously filed as an exhibit to the Company's Current Report on Form 8-K
dated June 30, 1996, and incorporated herein by reference.
(14) Previously filed as an amendment to the Company's Current Report on
Form 8-K dated August 30, 1996, and incorporated herein by reference.
(15) Previously filed as an amendment to the Company's Current Report on
Form 8-K dated October 19, 1996, and incorporated herein by reference.
(16) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the year ending December 31, 1996 and incorporated herein by
reference.
(17) Previously filed as an exhibit to the Company's Current Report on Form 8-K
dated May 15, 1997 and incorporated herein by reference.
(18) Filed herewith.
(19) Previously filed as an exhibit to the Company's Quarterly report on Form
10-Q for the quarter ending March 31, 1997, and incorporated herein by
reference.
32
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PHYSICIANS RESOURCE GROUP, INC.
April 14, 1998 By: /s/ RICHARD A.GILLELAND
------------------------------------
Richard A. Gilleland
Director and Chief Executive Officer
By: /s/ ALAN C. BAUM
------------------------------------
Alan C. Baum, M.D., Director
By: /s/ LUCIUS E. BURCH, III
------------------------------------
Lucius E. Burch, III, Director
By: /s/ RONALD L. STANFA
------------------------------------
Ronald L. Stanfa, Director
By: /s/ PETER DORFLINGER
------------------------------------
Peter Dorflinger
President, Chief Operating Officer
Acting Principal Financial and
Accounting Officer
33
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-------
<S> <C>
PHYSICIANS RESOURCE GROUP, INC.:
Reports of Independent Public Accountants............................................................ F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997......................................... F-4
Consolidated Statements of Operations for the three years ended December 31, 1997.................... F-5
Consolidated Statements of Changes in Stockholders' Equity for the three years ended
December 31, 1997................................................................................. F-6
Consolidated Statements of Cash Flows for the three years ended December 31, 1997.................... F-7
Notes to Consolidated Financial Statements........................................................... F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Physicians Resource Group, Inc.:
We have audited the accompanying consolidated balance sheets of Physicians
Resource Group, Inc. (a Delaware corporation) and subsidiaries as of December
31, 1996 and 1997, and the related consolidated statements of operations,
changes in stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We did not audit the financial statements of EyeCorp, Inc., a company
acquired during 1996 in a transaction accounted for as a pooling of interests,
as discussed in Note 1. Such statements are included in the consolidated
financial statements of Physicians Resource Group, Inc., and reflect total
revenues of 55 percent in 1995 of the consolidated total. These statements were
audited by other auditors whose report has been furnished to us and our opinion,
insofar as it relates to the amounts included for EyeCorp, Inc., is based solely
upon the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based upon our audits and the report of the other auditors,
the financial statements referred to above present fairly, in all material
respects, the financial position of Physicians Resource Group, Inc. and
subsidiaries as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Dallas, Texas
April 14, 1998
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
EyeCorp, Inc.
We have audited the balance sheet of EyeCorp, Inc. (described in Note
1) as of December 31, 1995 and the related statements of operations,
shareholders' equity and cash flows for the year ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, all material respects, the financial position of EyeCorp, Inc. as of
December 31, 1995 and the results of its operations and its cash flows for the
year ended December 31, 1995 in conformity with generally accepted accounting
principles.
Coopers & Lybrand, L.L.P.
Memphis, Tennessee
April 5, 1996
F-3
<PAGE>
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(000'S, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
December 31,
---------------------------
ASSETS 1996 1997
------ ---------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents, including restricted cash of $4,100 for 1996
and $0 for 1997................................................................. $ 53,418 $ 15,056
Accounts receivable, net of contractual and other allowances of $20,161
for 1996 and $28,507 for 1997................................................... 32,162 29,517
Income tax receivable............................................................. -- 6,682
Due from affiliates, net of allowances of $0 for 1996 and
$11,322 for 1997.............................................................. 46,170 41,187
Pharmaceuticals and supplies...................................................... 6,768 5,719
Prepaid expenses and other........................................................ 6,125 3,328
Assets held for disposition, net of an allowance of $65,384 in 1997............... -- 10,473
Deferred taxes.................................................................... -- 4,801
---------- ----------
Total current assets........................................................... 144,643 116,763
PROPERTY AND EQUIPMENT, net......................................................... 64,184 57,989
INTANGIBLE ASSETS, net.............................................................. 366,857 350,538
OTHER NONCURRENT ASSETS, net........................................................ 5,850 8,696
---------- ----------
Total assets................................................................... $ 581,534 $ 533,986
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Current portion of obligations to affiliates...................................... $ 8,447 $ 5,093
Current portion of long-term debt................................................ 2,833 15,631
Accounts payable and accrued expenses............................................. 27,205 23,779
Deferred taxes................................................................. 2,599 --
---------- ----------
Total current liabilities...................................................... 41,084 44,503
LONG-TERM DEBT, net of current portion.............................................. 129,339 126,343
OBLIGATIONS TO AFFILIATES, net of current portion................................... 19,649 21,559
DEFERRED TAXES...................................................................... 78,186 71,212
OTHER LONG-TERM LIABILITIES......................................................... 2,603 2,904
---------- ----------
Total liabilities.............................................................. 270,861 266,521
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 100,000,000 shares authorized, 29,782,000 and
29,927,000 shares outstanding for 1996 and 1997, respectively.................... 298 299
Preferred stock, $.01 par value 10,000,000 shares authorized,
0 and 200,000 shares outstanding for 1996 and 1997, respectively............... -- 2
Additional paid-in capital........................................................ 296,454 299,974
Retained earnings (deficit)....................................................... 13,921 (27,402)
Treasury stock, at cost, 227,000 shares in 1997................................... -- (3,183)
Note receivable from preferred stock sale......................................... -- (2,225)
---------- ----------
Total stockholders' equity..................................................... 310,673 267,465
---------- ----------
Total liabilities and stockholders' equity..................................... $ 581,534 $ 533,986
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(000's, Except Per Share Amounts)
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------------------
REVENUES: 1995 1996 1997
---------- ---------- -----------
<S> <C> <C> <C>
Management services...................................................... $ 39,129 $ 167,565 $ 266,481
Medical services......................................................... 49,416 77,245 136,956
Other.................................................................... 1,422 3,483 8,203
---------- ---------- -----------
Total revenues........................................................ 89,967 248,293 411,640
---------- ---------- -----------
COSTS AND EXPENSES:
Salaries, wages and benefits............................................. 50,061 115,200 207,254
Pharmaceuticals and supplies............................................. 9,487 30,919 52,392
General and administrative............................................... 22,478 62,353 103,055
Depreciation and amortization............................................ 3,498 11,192 24,841
Interest expense, net.................................................... 1,516 1,304 11,547
Asset valuation losses................................................... -- -- 76,706
Executive severance expenses............................................. 1,117 -- 750
Patent litigation defense costs......................................... -- 353 2,730
Merger transaction expenses.............................................. -- 12,030 --
---------- ---------- -----------
Total costs and expenses.............................................. 88,157 233,351 479,275
---------- ---------- -----------
INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY
ITEM...................................................................... 1,810 14,942 (67,635)
PROVISION (BENEFIT) FOR INCOME TAXES....................................... 501 7,770 (26,312)
---------- ---------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM.................................... 1,309 7,172 (41,323)
EXTRAORDINARY ITEM, loss on debt extinguishment, net of income
tax benefit of $53........................................................ (119) -- --
---------- ---------- -----------
NET INCOME (LOSS).......................................................... $ 1,190 $ 7,172 $ (41,323)
========== ========== ===========
NET INCOME (LOSS) PER BASIC SHARE:
Income (Loss) before extraordinary item.................................. $ .11 $ .29 $ (1.39)
Extraordinary item....................................................... (.01) -- --
---------- ---------- -----------
NET INCOME (LOSS) PER SHARE................................................ $ .10 $ .29 $ (1.39)
========== ========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
USED IN BASIC SHARE CALCULATION........................................ 12,170 24,596 29,751
========== ========== ===========
NET INCOME (LOSS) PER DILUTED SHARE:
Income (Loss) before extraordinary item.................................. $ .10 $ .28 $ (1.39)
Extraordinary item....................................................... (.01) -- --
---------- ---------- -----------
NET INCOME (LOSS) PER DILUTED SHARE........................................ $ .09 $ .28 $ (1.39)
========== ========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING USED IN DILUTED SHARE CALCULATION.......................... 12,723 25,365 29,751
========== ========== ===========
PRO FORMA ADJUSTMENTS-
Income tax expense (Unaudited)........................................... $ 252
----------
PRO FORMA NET INCOME (LOSS) (Unaudited).................................... $ 938
==========
PRO FORMA NET INCOME (LOSS) PER
DILUTED SHARE (Unaudited)................................................. $ .07
==========
PRO FORMA WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING........................................................ 12,723
==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Three Years Ended December 31, 1997
(000's, Except Share Data)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PREFERRED STOCK PAID-IN RETAINED
------------------------- ------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994............ 8,119,000 $ 81 -- $ -- $ 9,529 $ 5,495
Issuance of common stock in
conjunction with the PRG
Reorganization and IPO, net of
offering costs...................... 7,941,000 80 -- -- 37,149 --
Cash dividends paid to physician
owners of PRG Founding
Affiliated Practices................ -- -- -- -- (13,362) --
Issuance of preferred stock.......... -- -- 174,500 2 1,743 --
Retirement of preferred stock........ -- -- (174,500) (2) (1,743) --
Issuance of common stock in
conjunction with acquisitions....... 3,225,000 32 -- -- 27,668 --
Net income........................... -- -- -- -- -- 1,190
Contributions, net................... -- -- -- -- -- 733
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1995............ 19,285,000 193 -- -- 60,984 7,418
Issuance of common stock in
conjunction with acquisitions....... 6,027,000 60 -- -- 119,893 --
Issuance of common stock in
conjunction with the 1996 Public
Offering............................ 4,250,000 43 -- -- 113,597 --
Exercise of stock options............ 220,000 2 -- -- 1,980 --
Net income........................... -- -- -- -- -- 7,172
Distributions, net................... -- -- -- -- -- (669)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1996............ 29,782,000 298 -- -- 296,454 13,921
Issuance of common stock in
conjunction with acquisitions....... 43,000 -- -- -- 610 --
Issuance of common stock for
obligation to affiliate
cancellation........................ 48,000 -- -- -- 470 --
Receipt of common stock in
conjunction with dispositions and
transaction restructurings.......... -- -- -- -- -- --
Sale of preferred stock.............. -- -- 200,000 2 2,223 --
Common stock repurchases............. -- -- -- -- -- --
Exercise of stock options............ 54,000 1 -- -- 217 --
Net loss............................. -- -- -- -- -- (41,323)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1997............ 29,927,000 $ 299 200,000 $ 2 $ 299,974 $ (27,402)
=========== =========== =========== =========== =========== ===========
<CAPTION>
NOTE
RECEIVABLE
TREASURY STOCK FROM TOTAL
------------------------- PREFERRED STOCKHOLDERS'
SHARES AMOUNT STOCK SALE EQUITY
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1994............ -- $ -- $ -- $ 15,105
Issuance of common stock in
conjunction with the PRG
Reorganization and IPO, net of
offering costs...................... -- -- -- 37,229
Cash dividends paid to physician
owners of PRG Founding
Affiliated Practices................ -- -- -- (13,362)
Issuance of preferred stock.......... -- -- -- 1,745
Retirement of preferred stock........ -- -- -- (1,745)
Issuance of common stock in
conjunction with acquisitions....... -- -- -- 27,700
Net income........................... -- -- -- 1,190
Contributions, net................... -- -- -- 733
----------- ----------- ----------- -----------
BALANCE, December 31, 1995............ -- -- -- 68,595
Issuance of common stock in
conjunction with acquisitions....... -- -- -- 119,953
Issuance of common stock in
conjunction with the 1996 Public
Offering............................ -- -- -- 113,640
Exercise of stock options............ -- -- -- 1,982
Net income........................... -- -- -- 7,172
Distributions, net................... -- -- -- (669)
----------- ----------- ----------- -----------
BALANCE, December 31, 1996............ -- -- -- 310,673
Issuance of common stock in
conjunction with acquisitions....... -- -- -- 610
Issuance of common stock for
obligation to affiliate
cancellation........................ -- -- -- 470
Receipt of common stock in
conjunction with dispositions and
transaction restructurings.......... 191,000 (2,784) (2,784)
Sale of preferred stock.............. -- -- (2,225) --
Common stock repurchases............. 36,000 (399) -- (399)
Exercise of stock options............ -- -- -- 218
Net loss............................. -- -- -- (41,323)
----------- ----------- ----------- -----------
BALANCE, December 31, 1997............ 227,000 $ (3,183) $ (2,225) $ 267,465
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000'S)
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................................ $ 1,190 $ 7,172 $ (41,323)
Adjustments to reconcile net income to net cash provided by (used in)
operating activities--
Depreciation and amortization........................................... 3,498 11,192 24,841
Asset valuation losses.................................................. -- -- 76,706
Change in deferred taxes................................................ (1,394) (3,072) (25,190)
Changes in assets and liabilities, net of effects of acquisitions
and disassociations --
Accounts payable and accrued expenses................................. 2,624 (8,806) (9,073)
Accounts receivable, net and due from affiliates...................... 2,331 (25,639) (23,301)
Pharmaceuticals and supplies.......................................... (275) (904) 273
Prepaid expenses and other............................................ (3,900) 4,091 (2,090)
--------- --------- ---------
Net cash provided by (used in) operating activities.................. 4,074 (15,966) 843
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash consideration paid to acquire a management service
organization, net of cash acquired...................................... (2,174) -- --
Purchases of clinic operating assets, net of cash acquired............... (4,115) (103,034) (23,026)
Cash paid as part of business formation.................................. (2,130) -- --
Additions to property and equipment, net of effects of acquisitions...... (4,982) (6,659) (17,271)
Proceeds from sale of assets............................................. -- -- 4,427
--------- --------- ---------
Net cash used in investing activities................................ (13,401) (109,693) (35,870)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash paid in connection with organization of the Company and the
initial public offering................................................. (5,509) -- --
Proceeds from the issuance of common stock from offerings, net of
offering costs.......................................................... 42,953 113,640 --
Distributions to owners, net............................................. (12,629) (669)
Proceeds from long-term debt............................................. 19,896 255,918 13,471
Payments on long-term debt............................................... (19,888) (209,084) (4,347)
Net proceeds (repayments) on obligations to affiliates................... (708) (893) (12,278)
Proceeds from exercise of stock options.................................. -- 1,982 218
Issuance of preferred stock.............................................. 1,745 -- --
Retirement of preferred stock............................................ (1,745) -- --
Purchase of treasury stock............................................... -- -- (399)
--------- --------- ---------
Net cash provided by financing activities............................ 24,115 160,894 (3,335)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...................... 14,788 35,235 (38,362)
CASH AND CASH EQUIVALENTS, beginning of year.............................. 3,395 18,183 53,418
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of year.................................... $ 18,183 $ 53,418 $ 15,056
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION, BUSINESS AND ORGANIZATION:
PRG Formation
Physicians Resource Group, Inc., a Delaware corporation ("PRG" or the
"Company") and subsidiaries were formed to provide physician practice management
services to ophthalmic and optometric practices (the "Practices"). The Company
was formed in November of 1993, but had no substantive operations prior to June
of 1995. PRG earns revenues by owning or providing management, marketing,
financial resources and other services to ophthalmic and optometric practices,
ambulatory surgery centers ("ASCs") and optical dispensaries. For seven
practices in states that allow the corporate practice of medicine, the Company's
subsidiaries conduct the practice of medicine. The financial statements of
these subsidiaries are consolidated with the Company's due to their 100%
ownership by the Company.
On June 28, 1995, PRG consummated an initial public offering (the "IPO")
and simultaneously exchanged cash, shares of its common stock and a note payable
for certain assets of and liabilities associated with 10 eye care practices and
four ASCs (the "Initial Practices"). A total of 3,553,000 shares of common
stock were issued at $13 per share resulting in proceeds, net of underwriter
commissions and offering costs, of approximately $37,229,000. Simultaneously
with the closing of the IPO, the Company acquired certain assets and assumed
certain liabilities associated with nine of the Initial Practices (the
"Reorganization"). This exchange was accounted for using the historical cost
basis with the stock being valued at the historical cost of the net assets
received by PRG. The owners of the Initial Practices were issued 4,388,000
shares of common stock, a warrant to purchase 40,000 shares of common stock and
were paid $13,362,000 in cash. Concurrently with these transactions, the
physicians associated with seven of the Initial Practices created new entities
for the practice of medicine. These new entities and the three remaining Initial
Practices entered into 40-year service agreements with the Company.
EyeCorp Merger
On March 18, 1996, PRG merged with EyeCorp, Inc. ("EyeCorp") through a
wholly-owned subsidiary, in a transaction accounted for as a pooling of
interests (the "EyeCorp Merger"). In connection therewith, PRG issued 6,090,000
shares of common stock to the stockholders of EyeCorp in exchange for all of its
outstanding common stock. Each outstanding share of EyeCorp common stock was
converted into .582 shares of PRG common stock. The Company incurred
approximately $9,000,000 of costs associated with this merger. The consolidated
financial statements reflect the financial condition and results of operations
of this subsidiary for all periods presented.
At the time of the merger, EyeCorp provided management services to 50 eye
care practices and five ASCs. On December 28, 1995, EyeCorp had acquired certain
operating assets and assumed certain liabilities of 48 of the 50 eye care
practices and four of the five ASCs for consideration of $1,400,000 in cash,
approximately $1,800,000 in notes payable and 3,224,000 shares of EyeCorp common
stock. These acquisitions were accounted for as purchases.
Other 1996 Mergers
In June of 1996, PRG merged with one eye care practice through a wholly-
owned subsidiary in a transaction accounted for as a pooling of interests. In
connection therewith, PRG issued 282,000 shares of common stock to the owners of
the practice. In August 1996, PRG merged with six additional eye care practices
through wholly-owned subsidiaries, in transactions accounted for as poolings of
interests. In connection therewith, PRG issued 3,355,000 shares of common
stock. The Company incurred approximately $3,000,000 of costs associated with
these mergers. These accompanying consolidated financial statements reflect the
financial condition and results of operations of these subsidiaries (the "Other
1996 Mergers") for all periods presented.
Separate and combined results for PRG, the EyeCorp merger and the Other
1996 Mergers for the period prior to consummation are as follows:
F-8
<PAGE>
DESCRIPTION 1995
----------- ----------
(000's)
Revenues:
PRG.................................... $ 26,395
EyeCorp Merger......................... 22,130
Other 1996 Mergers..................... 41,442
Total revenues...................... $ 89,967
==========
Net income:
PRG.................................... $ 1,672
Eye Corp Merger........................ (1,127)
Other 1996 Mergers..................... 645
----------
Total net income.................... $ 1,190
==========
1996 Practice Acquisitions
Over the course of 1996, PRG acquired certain assets and liabilities of,
and entered into service agreements with, 45 eye care practices and 11 ASCs (the
"1996 Acquisitions") that were accounted for as purchases. As consideration for
these acquisitions, PRG paid approximately $11,820,000 in cash and issued
4,704,000 shares of its common stock. The PRG common stock issued in connection
with the 1996 Acquisitions had a market value at the respective closing dates
ranging from $17.75 to $30.45 per share. The Company incurred $2,849,000 of
costs associated with these acquisitions.
1996 Company Acquisitions
On November 5, 1996, the Company acquired substantially all of the assets
and certain of the liabilities of the eye care division of EquiMed, Inc.
("EquiMed"), a publicly held physician practice management company, in exchange
for $55,077,000 in cash and assumption of approximately $9,900,000 of
indebtedness in a purchase transaction. The Company incurred $500,000 of costs
associated with this acquisition. The eye care division of EquiMed provided
management services to 22 eye care practices and 10 ASCs. Certain litigation
has arisen with respect to this acquisition. See Note 10 for details.
On November 22, 1996, PRG acquired American Ophthalmic Incorporated
("AOI"), a privately held physician practice management company devoted solely
to eye care. In connection with the AOI acquisition, PRG paid $30,900,000 in
cash and issued 1,323,000 shares of PRG common stock valued at $30,900,000 in a
purchase transaction. The Company retired $44,500,000 of AOI debt and assumed
approximately $13,400,000 of AOI debt at the date of closing. The Company
incurred $2,418,000 of costs associated with this acquisition. AOI provided
management services to 16 eye care practices and nine ASCs.
1997 Practice Acquisitions:
During 1997, PRG acquired certain assets and liabilities of 27 eye care
practices and three related ASCs all of which were accounted for as purchases.
As consideration for these acquisitions, PRG paid $23,026,000 in cash, issued
promissory notes of $756,000, issued convertible promissory notes of $13,398,000
and issued 43,000 shares of common stock. The convertible promissory notes are
convertible at the option of the holder to PRG common stock at the end of two
years at varying prices ranging from $12.38 to $18.73 per share. The PRG common
stock issued in connection with these acquisitions had a market value at the
respective closing dates of between $12.38 and $17.40 per share. Also during
1997, the Company developed two ASCs at a development cost of approximately
$720,000.
1997 Practice Disassociations
As discussed in Note 2, PRG initiated, during the latter half of 1997, a
review of its affiliated Practice relationships. As a result of such review,
the Company decided during the third quarter of 1997 to begin the process of
terminating its affiliations with approximately 13 practices and to sell and/or
dispose of certain assets and liabilities associated therewith. In connection
with such process, the Company recorded pre-tax charges of approximately
$27,750,000 as of September 30, 1997 in anticipation of losses to be incurred in
such sales and dispositions. During the late fourth quarter of 1997 and early
1998 in conjunction with a change in executive management, the Company
F-9
<PAGE>
identified an additional 24 practice affiliations to be terminated. PRG has
recorded additional charges of $37,634,000 associated with (1) the anticipated
future disposition of these practice assets and liabilities and (2) the
effective termination of its affiliation with the 7 smaller optometry practices
discussed below, bringing to $65,384,000 the total of charges recorded during
1997 in connection with these anticipated disassociations. As of April 6,
1998, this disassociation process is ongoing, with 18 of the 44 practice
affiliations targeted for disassociation having effectively ceased revenue
generating operations through either being sold, disposed of or having
significantly restructured their agreements.
In addition to the 44 practices discussed above, the assets of one practice
and related ASC were returned to the original owner for 125,000 shares of common
stock. The Company also restructured the terms of its agreements with 7 smaller
optometry practices during 1997, which resulted in either the complete
termination of any affiliation with the practice or the virtual elimination of
any significant relationship. These 44 Practices contributed revenues of
$35,544,000 and income before taxes of $3,330,517 during 1997.
2. CURRENT OPERATING ENVIRONMENT:
During the course of late 1996 and early 1997, the Company experienced
significant growth in the number of practices it was affiliated with,
particularly in connection with the acquisition of AOI and EquiMed. This growth
created substantial integration challenges for PRG relative to its operating
infrastructure, as well as to its financial systems and cash management systems,
especially transaction activity between the individual practices and corporate
accounting. Concurrently with these substantial integration efforts, PRG
experienced a significant stock price decline, which caused the Company to
convert its acquisition program from a stock based to a cash and note based
model and to reduce the size of the overall program. Also, during the course of
1997, significant litigation relating to the EquiMed acquisition, a large patent
dispute and various disputes with certain of the affiliated Practices created
further demands on corporate resources. Operating income also began to decline.
Cash decreased during 1997 as a result of these events, as well as because of a
large increase in the Company's due from affiliates balance.
In response to these events, the Company, during the latter half of 1997 and
early 1998, re-evaluated its strategic position and initiated (1) a review of
its affiliated Practice relationships in light of available resources, market
penetration, and geographic coverage and (2) a comprehensive review of its due
from affiliates balances. These reviews resulted in a decision by the Company to
begin termination of its affiliations with approximately 44 eye care practices
and a conclusion that certain portions of its due from affiliates balance might
not be realized. This decision and conclusion resulted in the Company incurring
combined pre-tax charges of $76,706,000 during the third and fourth quarters of
1997, and an overall net loss to the Company for the year of $41,323,000. These
charges and losses also caused loan covenant violations in the Company's
$90,000,000 credit facility, which resulted in cancellation of the facility and
establishment of a smaller $14,000,000 facility, of which $12,248,000 had been
borrowed as of December 31, 1997 and all of which matures on or prior to
December 31, 1998. In addition, certain class action lawsuits were filed during
late 1997 and early 1998. In March of 1998, management and the board of
directors of the Company began pursuing a plan to significantly restructure the
Company which is more fully explained in Note 15.
Management of the Company believes that whether a restructuring plan is
consummated or not, the Company's existing cash, current cash flow from
operations and cash to be generated from practice disassociations or other asset
dispositions, will be sufficient to allow the Company to meet its obligations as
they become due and to remain in compliance with its debt agreement for the
remainder of 1998 and the first quarter of 1999.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements include the financial position and
results of operations of PRG and all of its subsidiaries combined with the
financial position and results of operations of the merger (pooling)
transactions for all periods presented. For seven Practices in states that
allow the corporate practice of medicine, the Company's subsidiaries conduct the
practice of medicine. The financial statements of these subsidiaries are
consolidated with the Company's due to their 100% ownership by the Company. The
results of the practice acquisitions and company acquisitions operations are
included in PRG's consolidated financial statements from the date of purchase.
All
F-10
<PAGE>
significant inter-company transactions have been eliminated. Certain
reclassifications of prior year amounts have been made to conform with the
current year presentation.
Cash and Cash Equivalents
PRG considers all highly liquid investments purchased with an original
maturity or repricing within three months or less to be cash equivalents. The
Company primarily invests in overnight repurchase agreements, tax-free municipal
bonds and money market accounts. The interest rates vary from 3.5 percent to
5.75 percent. These investments are carried at fair value.
Fair Values of Financial Instruments
The carrying amounts of accounts receivable, accounts payable, accrued
expenses and the current portion of both long-term debt and long-term
obligations to affiliates approximate their market value due to short maturity
of these instruments. The carrying value of the long-term portions of long-term
debt and obligations to affiliates, except for amounts pertaining to the
$125,000,000 of convertible subordinated debentures, also approximate their
market values at December 31, 1997. At December 31, 1997 the market value of
PRG's $125,000,000 convertible subordinated debentures was approximately
$93,125,000.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets primarily consist of prepaid
expenses and deferred acquisition costs. All incremental costs incurred in
connection with acquisitions in process at the balance sheet dates have been
capitalized and were charged to expense when the acquisitions were not
successfully completed or included in the purchase consideration upon their
successful completion. At December 31, 1997, there were no deferred acquisition
costs capitalized for acquisitions in process.
Pharmaceuticals and Supplies
Pharmaceuticals and supplies consist primarily of spectacle frames, lenses
and medical and pharmaceutical supplies and are valued at the lower of cost or
market with cost determined using the first-in, first-out (FIFO) method.
Long Lived Assets
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated using a straight-line method over the estimated useful
lives of the assets. Routine maintenance and repairs are charged to expense as
incurred, while costs of betterments and renewals are capitalized.
Intangible Assets
Intangible assets consist of the value of the non-physician employee
workforce, management service agreements and goodwill associated with ASC
acquisitions. The estimated fair value of the non-physician employee workforce
is based on the estimated cost to replace the workforce. The estimated fair
value of the management service agreement for acquired practices is the excess
of the purchase price over the estimated fair value of the tangible assets and
workforce acquired and liabilities assumed. Workforce intangibles are amortized
on a straight line basis over seven years. Intangible assets associated with
management service agreements are generally amortized on a straight line basis
over 15 years for small single-practitioner practices and over 40 years for
multiple-practitioner practices. Amounts paid for ASC acquisitions in excess of
the net assets acquired are treated as goodwill and amortized on a straight line
basis over 40 years. Certain financial regulatory authoritative organizations
have expressed concerns regarding the use of amortization periods in excess of
25 years on a prospective basis. See Note 8 for more details.
The Company reviews the carrying value of the long lived assets and
goodwill at least quarterly on a entity by entity basis to determine if facts
and circumstances exist which would suggest that assets may be impaired or that
the amortization period needs to be modified. Among the factors PRG considers in
making the evaluation are changes in the practices or ASCs market position,
reputation, profitability and geographical penetration. If indicators are
present which may indicate impairment is probable, PRG will prepare a projection
of the undiscounted cash flows of the specific
F-11
<PAGE>
practice and determine if the long lived assets and/or goodwill are recoverable
based on these undiscounted cash flows. If impairment is indicated, then an
adjustment will be made to reduce the carrying amount of these assets to their
fair value. The adoption, in 1995, of Statement of Financial Accounting
Standards (SFAS) No. 121, ''Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of,'' did not have a material impact on
the Company's financial condition or results of operations.
In addition to the normal quarterly reviews conducted as described above,
during the latter half of 1997 and early 1998, the Company engaged in a
strategic review of its assets, operations and available resources, as more
fully discussed in Notes 1 and 2 above. As a result, the Company made a
decision to terminate its affiliation with a number of eye care practices
through either sale, disposition or significant restructuring of their service
agreements. As a result, the Company determined a significant amount of
existing intangibles related to those practices had been impaired. See Note 4
for further details.
Income Taxes
Deferred income tax liabilities and assets are recorded for the differences
between the tax and financial reporting basis of the assets and liabilities and
are based on the enacted income tax rates which are expected to be in effect in
the period in which the difference is expected to be settled or realized. A
change in tax laws results in adjustments to the deferred tax liabilities and
assets.
Net Income Per Share and Pro Forma Net Income Per Share
The Company adopted SFAS No. 128, "Earnings Per Share", effective December
15, 1997. SFAS No. 128 requires the calculation of basic net income per share
which is computed by dividing net income by the weighted average number of
shares of common stock outstanding during the period and diluted net income per
common share which is computed using the weighted average number of shares of
common stock, common stock equivalents and any other dilutive securities.
Accordingly, the Company has restated all previously reported net income per
share amounts in accordance with SFAS No. 128. Diluted net income per share
include 553,000 and 769,000 of common stock equivalents for the years ended
December 31, 1995 and 1996, respectively.
Pro forma net income per share has been computed by dividing pro forma net
income by the pro forma weighted average number of shares of common stock
outstanding during the periods. The pro forma weighted average number of shares
outstanding includes common stock equivalents related to shares issuable upon
exercise of warrants and stock options, if dilutive, and was the same as the
shares used in the diluted net income per share calculation described above.
Use of Estimates
The preparation of these financial statements, in accordance with generally
accepted accounting principles, requires the use of certain estimates by
management in determining the entities' assets, liabilities, revenues and
expenses. Actual results could differ from those estimates.
Concentration of Credit Risk
The Company's accounts receivable consist primarily of management service
revenues due from affiliated physician groups and from medical services due from
patients funded through Medicare, Medicaid, commercial insurance and private
payment. The Company and its Practices perform ongoing credit evaluations of
their patients and generally do not require collateral. The Company and its
Practices maintain allowances for potential credit losses, and such losses have
been within management's expectation.
New Accounting Pronouncements
EITF NO. 97-2
During 1997, the Financial Accounting Standards Board's Emerging Issues
Task Force (EITF) issued new accounting guidelines regarding i) the
establishment of criteria to be met in order for a physician practice management
company ("PPM") to consolidate the affiliated medical practices with the PPM's
financial statements and ii) establishing
F-12
<PAGE>
guidelines for when pooling of interests accounting could be used. The new
accounting guidelines allow one year for a PPM to review and revise, if
necessary, its service agreements to comply with the guidelines or assess the
impact for changing the PPM's financial statements. The new accounting
guidelines provide the option, if a change to the financial statements is
necessary, of retroactive restatement of prior periods financial statements or
recording a one-time cumulative catch-up. Seven of the Company's acquisitions
previously accounted for as poolings of interest will need to be changed to
follow the purchase method of accounting for business combinations. The Company
is in the process of determining which accounting option will be used to affect
the change which must be adopted by the fourth quarter of 1998.
SFAS NO. 130
SFAS No. 130, "Reporting Comprehensive Income" established standards for
the reporting and disclosure of total non-owner changes in stockholders' equity,
which is defined as net income, plus direct adjustments to stockholders' equity,
such as equity and cash investment adjustments and pension liability
adjustments. This statement is effective for financial statements for periods
beginning after December 15, 1997 and will not have an impact on the Company's
consolidated financial statements.
SFAS NO. 131
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", requires a new basis of determining reportable business segments,
i.e., the management approach. This approach (as contrasted with the prior
requirement which utilized a specified classification system for determining
segments) designates the Company's internal organization as used by management
for making operating decisions and assessing performance as the source of
business segments. This statement is effective for financial statements for
periods beginning after December 15, 1997 and will not have an impact on the
Company's consolidated financial statements.
4. ASSETS HELD FOR DISPOSITION:
As discussed in Note 1, during the latter half of 1997 and early 1998, the
Company made a decision to terminate its affiliation with approximately 44 eye
care practices through either sale or disposition, or, with respect to certain
smaller optometry practices, significant restructuring of their agreements. In
connection therewith, pre-tax allowances of approximately $65,384,000 have been
provided for losses to be incurred in this process. The Company anticipates the
sale and disposition process to be completed during 1998 and has reclassified
the net assets of these practices, including the related intangible assets, into
"Assets held for disposition" on the accompanying consolidated balance sheet as
of December 31, 1997, net of such allowances.
The following is a table which reflects the carrying value of the assets
and liabilities reclassified into "Assets held for disposition" as of December
31, 1997:
DESCRIPTION 1997
----------- --------
(000'S)
Current assets.......................................... $ 17,460
Property and equipment.................................. 10,919
Intangible and other non-current assets................. 52,472
Liabilities assumed..................................... (4,994)
--------
Net assets held for disposition....................... 75,857
Less - Asset valuation allowances....................... (65,384)
--------
Assets held for disposition........................... $ 10,473
========
5. REVENUE RECOGNITION AND RECEIVABLES:
Revenues
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<PAGE>
A significant portion of the individual Practices medical service and ASC
revenues are received from Medicare and other governmental programs. Medicare
and other governmental programs reimburse providers based on fee schedules which
are determined by the related governmental agency. In the ordinary course of
business, providers receiving reimbursement from Medicare and other governmental
programs are potentially subject to a review by regulatory agencies concerning
the accuracy of billings and sufficiency of supporting documentation.
The individual Practices and ASCs gross medical service revenues are based
on established rates reduced by contractual adjustments. Contractual
adjustments represent the difference between charges at established rates and
estimated recoverable amounts and are recognized in the period the services are
rendered. Any differences between estimated contractual adjustments and actual
final settlements are reported as contractual adjustments in the period final
settlements are made.
Revenues--Management Services
The Company manages the Practices under various types of service and
management agreements. The management services revenues are based on several
different types of arrangements, including percentages of the medical services
revenues or flat fees and reimbursement of clinic expenses. The following table
presents the amount of medical service revenues included in the determination of
the Company's management service revenues for the years ended December 31, 1995,
1996 and 1997:
<TABLE>
<CAPTION>
DESCRIPTION 1995 1996 1997
----------- --------- --------- ---------
(000'S)
<S> <C> <C> <C>
Gross medical services revenues................................ $ 89,460 $ 293,915 $ 545,896
Less--Contractual adjustments............................... (38,713) (86,758) (216,700)
--------- --------- ---------
Net medical services revenues.................................. 50,747 207,157 329,196
Less--Amounts retained by the Practices owner physicians.... (11,618) (39,592) (62,715)
--------- --------- ---------
Management services revenues............................. $ 39,129 $ 167,565 $ 266,481
========= ========= =========
</TABLE>
Revenues--Medical Services
Certain states in which the Company operates allow for the corporate
practice of medicine. In those states, the Company's revenues are derived from
medical services performed. In addition, the Company owns and operates ASCs
through various arrangements. Revenues derived from ASCs are based on facility
fees charged to patients, third-party payors or other physician practices for
use of the ASCs as well as reimbursement of ASCs expenses. ASC revenues are also
net of contractual adjustments. The following table presents amounts included in
determining the Company's medical service revenues for the years ended December
31, 1995, 1996 and 1997:
<TABLE>
<CAPTION>
DESCRIPTION 1995 1996 1997
----------- -------- ------- -------
(000'S)
<S> <C> <C> <C>
Gross medical services revenues................................ $ 57,730 $ 80,559 147,727
Gross ASCs revenues............................................ 27,314 38,942 102,190
--------- --------- ---------
Total..................................................... 85,044 119,501 249,917
Less--Contractual adjustments............................... (35,628) (42,256) (112,961)
--------- --------- ---------
Net medical services revenues............................. $ 49,416 $ 77,245 136,956
========== ========== =========
</TABLE>
Receivables
Accounts Receivable and Due from Affiliates
Due from affiliates includes management services receivables, receivables
from the Practices for certain expenses being paid on the Practices' behalf and
certain other receivables. The receivables due from certain of the Practices are
collateralized by a security interest in the Practices' receivables from third-
party payors and patients.
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<PAGE>
Pursuant to the terms of certain of the Company's service agreements, the
Practices' accounts receivable are purchased without recourse. The purchase
price is the face amount of the accounts receivable less any reserve recorded by
the Practices for uncollectible amounts. Accounts receivable are purchased daily
and paid at the end of each month.
For the seven practices owned by the Company and for certain other PRG
practices in states which do not prohibit the corporate practice of medicine,
accounts receivable reflects the receivables from patients and third party
payors net of the recorded reserve for contractual and other allowances.
1997 Receivable Allowance
During the six months ended June 30, 1997, the Company's due from
affiliates balance increased by approximately $10,200,000. In addition to
conducting an in depth analysis of this increase during the latter half of 1997
and early 1998, the Company has implemented certain procedural changes relating
to collection of these amounts, including a new treasury management system,
which will limit physicians ability to affect cash flow to PRG. In connection
with the work performed to date, the Company has recorded a $11,322,000
allowance related to these receivables, which has reduced the due from
affiliates balance on the accompanying balance sheet as of December 31, 1997.
The Company's analysis process has been completed but collection efforts and
discussions with physicians are ongoing. Management believes the allowances
provided to date are adequate to provide for any amounts that are not
realizable. However, there can be no assurance that additional allowances will
not have to be recorded in the future.
As discussed in Note 1 above, the Company has also recorded certain
allowances during 1997 relative to anticipated losses on dispositions of the
assets of certain practices that the Company is terminating its affiliation
with. The receivables or due from affiliates balances relating to the practices
targeted for disassociation of $11,291,000 have been reclassified to "Assets
held for disposition" in the accompanying consolidated balance sheet as of
December 31, 1997. See Note 4 for details.
6. ACQUISITIONS:
The consideration paid and total net book value of the assets and
liabilities associated with the acquisition of the Practices were as follows:
PURCHASED
ENTITIES
----------------------
Description 1996 1997
----------- --------- --------
(000'S)
Current assets.................................. $ 37,851 $ 6,757
Property and equipment.......................... 28,863 2,787
Intangible and other noncurrent assets.......... 321,079 48,495
Liabilities assumed............................. (164,276) (20,249)
--------- --------
Net assets acquired....................... 223,517 37,790
Consideration for net assets acquired--
Debt issued.................................. -- 14,154
Stock issued................................. 119,953 610
--------- --------
Cash paid................................. 103,564 23,026
Cash acquired through acquisitions........ (530) --
--------- --------
Net cash paid............................. $ 103,034 $ 23,026
========= ========
As indicated above, the Company made a decision to terminate its
affiliation with certain of these practices in late 1997 and early 1998. See
Note 1 for further details.
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<PAGE>
7. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following as of December 31, 1996
and 1997:
<TABLE>
<CAPTION>
Estimated
USEFUL
LIVES
DESCRIPTION (YEARS) 1996 1997
----------- --------- -------- --------
(000'S)
<S> <C> <C> <C>
Land................................................ -- $ 2,366 $ 2,292
Buildings and improvements.......................... 5-40 11,087 10,177
Equipment, software and other....................... 3-10 44,766 43,756
Leasehold improvements.............................. 3-10 9,948 10,629
Furniture and fixtures.............................. 7-10 13,898 16,629
-------- --------
82,065 83,483
Less--Accumulated depreciation and amortization..... (17,881) (25,494)
-------- --------
Property and equipment, net...................... $ 64,184 $ 57,989
======== ========
</TABLE>
As indicated in Note 1 above, the Company has recorded certain allowances
during 1997 relative to anticipated losses on dispositions of the assets of
certain practices targeted for disassociation. The property and equipment
relating to these practices of $10,919,000 has been reclassified to "Assets held
for disposition" on the accompanying consolidated balance sheet as of December
31, 1997. See Note 4 for details.
8. INTANGIBLE ASSETS:
Intangible assets consists of the following as of December 31, 1996 and
1997:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
LIVES
DESCRIPTION (YEARS) 1996 1997
----------- --------- --------- ---------
(000'S)
<S> <C> <C> <C>
Noncompete agreements........................................ 3-5 $ 255 $ 832
Work force in place.......................................... 7 15,736 14,736
Management service agreements................................ 15-40 250,745 256,180
Goodwill..................................................... 40 105,950 95,023
--------- ---------
372,686 366,771
Less - Accumulated amortization.............................. (5,829) (16,233)
--------- ---------
Intangible assets, net.................................... $ 366,857 $ 350,538
========= =========
</TABLE>
As indicated in Note 1 above, the Company has recorded certain allowances
during 1997 relative to anticipated losses on dispositions of the assets of
certain practices targeted for disassociation. The net intangible assets
relating to these practices of $52,312,000 have been reclassified to "Assets
held for disposition" on the accompanying consolidated balance sheet as of
December 31, 1997. See Note 4 for details.
During the course of 1997, the Securities and Exchange Commission informed
the Company that it had concerns, on a prospective basis, regarding the use by
physician practice management companies, generally, and the Company,
specifically, of amortization periods for intangible assets in excess of 25
years. While the Company believes its present amortization policies continue to
be appropriate, if the Company were to adopt 25 year lives in place of its
current 40 year lives, the additional amount of amortization in 1998 would be
approximately $5,267,000.
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<PAGE>
9. LONG-TERM OBLIGATIONS:
Long-Term Debt
Long-term debt consists of the following as of December 31, 1996 and 1997:
<TABLE>
<CAPTION>
Description 1996 1997
----------- --------- ---------
(000'S)
<S> <C> <C>
6% convertible subordinated debentures due 2001, interest payable
on June 1 and December 1...................................................... $ 125,000 $ 125,000
Bank credit facilities (see below)............................................... -- 12,248
Notes payable to banks, due through 1999 to 2001, bearing interest
from 6% to 10%, secured by certain assets of the Company....................... 4,131 2,341
Term loans payable to insurance company, due 1999, bearing
interest at LIBOR plus 1.5% (7.5% at December 31, 1997), collateralized
by certain assets of the Company............................................... 1,508 1,020
Other obligations................................................................ 1,533 1,365
--------- ---------
Total long-term debt.......................................................... 132,172 141,974
Less--Current portion of long-term debt.......................................... (2,833) (15,631)
--------- ---------
Total......................................................................... $ 129,339 $ 126,343
========= =========
</TABLE>
In December of 1996, PRG completed an offering of 6% convertible
subordinated debentures (the "Debentures") due in December 2001. The Debentures
are convertible at any time after the 60th day following issuance at a
conversion price of $25 per share. Interest is payable on June 1 and December
1. The Debentures are not redeemable by the Company until December 1999. The
Company incurred approximately $3,321,000 in costs related to the offering, with
such amount being amortized over the life of the Debentures and is included in
other non-current assets. The Debentures trade in the Private Offerings, Resales
and Trading through Automated Linkage Market. The most recent trading price for
a Debenture with a $1,000 face value was $620 on April 6, 1998.
In December 1995, EyeCorp entered into a $20,000,000 revolving credit
facility with a bank, a portion of which was used to retire amounts outstanding
under a prior EyeCorp credit facility. This retirement resulted in a $119,000
extraordinary loss (net of tax benefit of $53,000) that was recorded by the
Company in 1995. In January 1996, PRG entered into a $35,000,000 credit
facility with the same bank. Borrowings under both of these facilities, which
bore interest at the bank's prime rate plus 0.5% or LIBOR plus 1.25% to 2.0%,
were retired in December 1996 with the proceeds of the 6% convertible debentures
discussed above.
In March of 1997, PRG entered into a new credit facility with a group of
lenders including the same bank used for the credit facilities discussed above.
This new credit facility, which replaced the credit facilities discussed above,
allowed the Company to borrow up to $90,000,000 for acquisitions, capital
expenditures, working capital and stock repurchases. Advances under this credit
facility were to bear interest at either LIBOR plus 1% to 2.125% or the bank's
prime rate plus 1.125% and were secured by the stock of the subsidiaries of PRG
and guaranteed by the subsidiaries of PRG. On October 1, 1997, the Company
borrowed $8,000,000 under this facility to fund the acquisition of certain eye
care practices.
Primarily as a result of the third quarter net loss, the Company went into
default on various financial covenants under the $90,000,000 credit facility.
On November 28, 1997, the Company received a commitment letter for a $14,000,000
revolving credit facility from its lead bank that would replace the then
existing $90,000,000 facility. In addition to the $8,000,000 that was then
outstanding, the Company borrowed an additional $4,248,000, bringing total
outstanding borrowings under the $14,000,000 facility to $12,248,000 as of
December 31, 1997. This $14,000,000 facility expired and was amended again in
March of 1998. The amended facility requires that the balance outstanding be
paid down to $9,500,000 by September 30, 1998, with the remainder to be repaid
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 also requires that substantial portions
of asset sale proceeds be used to repay the facility.
The amended facility has the same security arrangements as the March 1997
$90,000,000 facility and, additionally, allows for a security interest in all
service agreements, accounts receivables and general intangibles of
F-17
<PAGE>
PRG. In addition, the facility is guaranteed by one current member of the
Company's board of directors, as well as by one former member. The amended
facility requires that PRG maintain consolidated quarterly EBITDA of $10,000,000
and net worth of at least $242,465,000 increased by 75% of future net income.
Obligations to Affiliates
Obligations to affiliates consist of the following as of December 31, 1996
and 1997:
<TABLE>
<CAPTION>
DESCRIPTION 1996 1997
----------- -------- --------
(000'S)
<S> <C> <C>
Installment notes payable to affiliates, bearing interest ranging from 7.5% to 10%,
Payable in monthly installments................................................... $ 24,298 $ 12,002
Convertible promissory notes payable for affiliate acquisitions, bearing interest at
7%, due 1999, principal due at maturity and interest payable semi-annually............. -- 13,398
Promissory notes payable for affiliate aquisitions, bearing interest at 7%
due primarily in 1999, principal due at maturity and interst payable
semi-annually........................................................................... -- 741
Notes payable to affiliates for ASC purchase, bearing interest at 7%...................... 3,049 --
Other obligations to affiliates........................................................... 749 511
-------- --------
Total obligations to affiliates......................................................... 28,096 26,652
Less-current portion of obligations to affiliates......................................... (8,447) (5,093)
-------- --------
Total................................................................................... $ 19,649 $ 21,559
======== ========
</TABLE>
Installment notes payable to affiliates are primarily notes payable to
affiliated physicians. EquiMed and AOI used these notes to finance a portion of
the purchase price of their respective acquisitions prior to being acquired by
PRG. Certain of these notes were paid off during 1997 or were cancelled in
connection with practice sales.
Over the course of 1997, the Company issued various promissory notes and
convertible promissory notes in partial payment for acquisitions. These notes,
which as of December 31, 1997 totaled $14,139,000, bear interest at 7%. Of the
total amounts outstanding, $100,000 is due in 1998 with the remainder having a
two year term. The convertible promissory notes can be converted to PRG common
stock after two years at the option of the holder at prices ranging from $12.38
to $18.73 per share.
Maturities
The Company paid approximately $1,981,000, $1,742,000 and $9,576,000 in
interest for the years ended December 31, 1995, 1996 and 1997. As of December
31, 1997, the aggregate amounts of annual principal maturities of long-term debt
and obligations to affiliates are as follows:
OBLIGATIONS
LONG-TERM TO
YEAR DEBT AFFILIATES
---- --------- ----------
(000'S)
1998........................................... $ 15,631 $ 5,093
1999........................................... 1,080 16,778
2000........................................... 212 3,116
2001........................................... 125,051 665
2002........................................... -- 1,000
Thereafter..................................... -- --
--------- ----------
Total....................................... $ 141,974 $ 26,652
========= ==========
10. COMMITMENTS AND CONTINGENCIES:
The Company and certain of its officers and directors have been named in
six class action lawsuits, all pending in the U.S. District Court for the
Northern District of Texas. These class action lawsuits make various
allegations of violations of the federal securities laws (specifically Sections
10 and 20 of the Securities Exchange Act of 1934)
F-18
<PAGE>
including, misrepresentations and omissions of material facts in connection with
purchases and sales of the Company's securities. Damages are claimed but are
unspecified as to the amount. The Company has filed a motion requesting
consolidation of these six lawsuits into one action and intends to vigorously
defend against the various claims alleged.
During 1996, the Company acquired a practice that is a party to litigation
regarding alleged infringement of three patents related to a refractive surgical
procedure. The Practice believes that its procedure does not infringe the
patented procedures. PRG is assisting in the defense of this litigation due to
the potential impact on certain other Practices. The Company has incurred
$3,083,000 of legal expenses related to this litigation through December 31,
1997 and expects to incur additional costs in 1998, but has not agreed to be
responsible for any damage amounts that might be awarded against the practices.
Management of the Company believes that while the outcome of this litigation
will not have a material impact on its financial condition or results of
operations, the legal costs associated with this litigation to date have had a
material inpact on the Company's results of operations in 1997 and while such
costs have been declining in the latter part of 1997, may continue to have a
material impact during 1998.
On May 15, 1997, EquiMed initiated arbitration proceedings against the
Company and a wholly-owned subsidiary of the Company before the American
Arbitration Association, Philadelphia, Pennsylvania. EquiMed alleged breach of
contract, fraud, trespass, and conversion based principally on the alleged
failure of the Company to cooperate with EquiMed in completing follow on
acquisitions that could have resulted in the payment of additional consideration
to EquiMed and the alleged failure by the Company to provide EquiMed with access
to EquiMed's accounting records. EquiMed has asserted entitlement to damages in
excess of $30,000,000 plus punitive damages, costs and attorney's fees. PRG
intends to vigorously defend such claims, and has asserted a counterclaim
against EquiMed for damages in excess of $45,000,000.
On April 8, 1997, a lawsuit was filed against AOI and the Company by one of
its affiliated practices (as well as certain of the practitioners) acquired in
the AOI transaction. The plaintiffs allege breach of contract, breach of
fiduciary duty and imposition of constructive trust, civil conspiracy,
interference with prospective advantage and negligent misrepresentation arising
from a January 1996 series of agreements. The plaintiffs seek injunctive relief
and recovery of alleged actual and consequential damages in excess of
$50,000,000 and exemplary damages of $50,000,000. A settlement agreement in
principle has been reached between the parties and the parties are drafting
settlement documents. Under the proposed settlement agreement, the lawsuit
would be dismissed with prejudice, the arbitration proceeding would be
terminated, the parties would jointly release all claims, demands and causes of
action against one another and certain other contractual agreements would be
entered into. However, there can be no assurance that the settlement agreement,
as proposed, will be finalized.
During the course of 1997, one of the affiliated practices acquired in the
AOI transaction brought suit against the Company alleging breach of a promissory
note of approximately $6,000,000. The Company is vigorously defending this
action and has asserted a number of defenses, including illegality of the note.
As indicated above with respect to the class action lawsuits, the patent
lawsuit, the EquiMed arbitration and the AOI acquisition disputes, the Company
intends to defend each of the claims vigorously and does not believe that, with
the exception of the potential effect of ongoing legal expenses, that the
actions will have a material adverse effect on the financial condition or
results of operations of the Company.
In the normal course of business, certain of the affiliated physician
groups have been named in lawsuits alleging medical malpractice. In the opinion
of the Company's management, the ultimate liability, if any, without considering
possible insurance recoveries, will not have a material impact on the Company's
financial position, results of operations or cash flows. Additionally, the
Company's affiliated physician groups and the Company are insured with respect
to medical malpractice risks on a claims-made basis.
The Company is also involved in various other disputes or lawsuits, certain
of which are asserted by affiliated practices in relation to the service
agreements. In the opinion of the Company's management, the ultimate liability,
if any, will not have a material impact on the Company's financial position or
results of operations, nor, will they result in material modification of the
service agreements.
F-19
<PAGE>
Long-Term Lease Obligations
PRG leases medical equipment and office space under noncancelable operating
lease agreements which expire at various dates. At December 31, 1997, minimum
annual rental commitments under noncancelable operating leases with terms in
excess of one year are as follows:
YEAR AMOUNT
---- ---------
(000'S)
1998............................................ $ 20,675
1999............................................ 18,185
2000............................................ 15,003
2001............................................ 11,306
2002............................................ 9,378
Thereafter...................................... 26,539
---------
Total........................................ $ 101,086
=========
Rent expense related to operating leases amounted to $3,646,000,
$18,216,000 and $21,012,000 for the years ended December 31, 1995, 1996 and
1997, respectively.
From time to time, the Company acts as a guarantor of various third party
debt of the affiliated practices.
11. STOCKHOLDERS' EQUITY:
Common Stock
In June of 1995, the Company consummated an initial public offering of its
common stock (see Note 1 for further details). In May of 1996, the Company
completed the offering of 5,750,000 shares of common stock. In connection
therewith, the Company issued 4,250,000 new shares of common stock and the then
existing stockholders of the Company sold 1,500,000 shares of common stock.
Proceeds to the Company, net of offering costs and underwriting commissions,
were approximately $113,640,000. The Company also registered an additional
11,000,000 and 10,000,000 shares of common stock during 1996 and 1997,
respectively, 11,111,500 of which have been issued to date in connection with
additional acquisitions.
The Company has reserved (a) 5,000,000 shares of common stock for issuance
upon exercise of stock options under the Company's stock option plans, (b)
40,000 shares of common stock for issuance upon exercise of the warrants, which
are exercisable at $13.00 per share, (c) 5,000,000 shares of common stock for
issuance upon conversion of the Debentures, (d) 943,000 shares of common stock
upon conversion of convertible promissory notes issued in 1997 and (e) 200,000
shares of common stock upon conversion of the preferred stock issued to its
former chairman and chief executive officer of the Company.
In March 1997, the Board of Directors approved the purchase by the Company
of up to 4,000,000 shares of its outstanding common stock. Ultimately, 36,000
shares of PRG common stock were purchased under this program for $399,000 before
such program was terminated in December of 1997.
In addition to the stock issued in acquisitions during 1996 and 1997 as
discussed above and in Note 1, 125,000 shares were received from the sale of
assets of one practice and related ASC back to the original owner. The shares
received from the sale of the assets have been treated as treasury stock.
The Company has restructured or is restructuring the terms of its
agreements with 7 of its smaller optometry practices, wherein its relationship
with these practices was or will be effectively eliminated. In connection with
certain of these restructurings, a small amount of common stock will be returned
to the Company.
Preferred Stock
The Company has authorized the issuance of up to 10,000,000 shares of
preferred stock, $.01 par value. The Company issued 174,500 shares of preferred
stock on June 28, 1995, in conjunction with the Offering. These shares were
retired on July 10, 1995, in exchange for $1,745,000 in cash.
F-20
<PAGE>
In 1997, the Board of Directors created a series of preferred stock, par
value $.01 per share, of the Company and authorized 200,000 shares of
convertible preferred stock designated as Series B Convertible Preferred Stock
("Series B"). The holders of such Series B shares are not entitled to dividends
nor have voting rights, except as provided by law. Each share of Series B is
convertible, at any time, into one share of the common stock of PRG, subject to
certain adjustments. The shares are non-redeemable and are non-cumulative.
Upon liquidation or dissolution of PRG, the holders of the shares shall be
entitled to receive the liquidation value of shares ($.01 per share) in
preference to and in priority over distributions upon the common stock.
Effective February 21, 1997, the board of directors approved the grant of
the right to purchase up to 200,000 of the Series B shares to the former
chairman of the board of directors and chief executive officer during the two
year period beginning February 21, 1997 and ending on February 21, 1999. The
agreement provides that the former chairman should pay to PRG an amount equal to
the closing sale price of PRG's common stock on the New York Stock Exchange on
the date of delivery of notice to PRG of the intention to purchase the shares
times the number of shares purchased. The former chairman exercised his right
to purchase 200,000 Series B shares for an aggregate price of $2,225,000 on
March 25, 1997. The purchase of the shares was funded by a loan from PRG, the
principal of which is not subject to recourse and the interest of which is
subject to recourse. The note evidencing the loan is secured by the Series B
shares that were purchased. The note bears interest at the rate of 6.42% per
annum.
Distributions / Contributions
Distributions and contributions in the accompanying statement of changes in
stockholders' equity represents the funds withdrawn/contributed by the former
owners prior to the merger with PRG, for the Practices with which the Company
merged in pooling of interests transactions.
12. INCOME TAX EXPENSE:
Income tax expense (benefit) for the years ended December 31, 1995, 1996
and 1997 consists of the following:
<TABLE>
<CAPTION>
DESCRIPTION 1995 1996 1997
----------- ------- ------- --------
(000'S)
Current--
<S> <C> <C> <C>
Federal.......................................................... $ 1,573 $ 9,487 $ (1,230)
State............................................................ 322 1,355 (265)
------- ------- --------
Total current................................................. 1,895 10,842 (1,495)
Deferred
Federal.......................................................... (1,161) (2,726) (21,795)
State............................................................ (233) (346) (3,022)
------- ------- --------
Total deferred................................................ (1,394) (3,072) (24,817)
------- ------- --------
Total income tax expense (benefit)............................ $ 501 $ 7,770 $(26,312)
======= ======= ========
</TABLE>
Total income tax expense differed from the amount computed by applying the
statutory federal income tax rate to income before income taxes as a result of
the following:
<TABLE>
<CAPTION>
DESCRIPTION 1995 1996 1997
----------- -------------- ------------ -------------
(000'S)
<S> <C> <C> <C>
Computed statutory tax expense.................................. 34.0 % 35.0 % (35.0)%
Increase (decrease) in income taxes resulting from--
State income taxes, net of federal income tax benefit........ 9.1 % 3.3 % (3.3)%
Nontaxable entities.......................................... (12.1)% -- --
Non deductible merger expenses............................... -- 16.7 % --
Other nondeductible expenses................................. 1.8 % 1.8 % 0.7 %
Tax-exempt interest income................................... (3.7)% (3.1)% (0.3)%
Other........................................................ (1.4)% (1.7)% (1.0)%
-------------- ------------ -------------
Total income tax expense.................................. 27.7 % 52.0 % (38.9)%
============== ============ =============
</TABLE>
F-21
<PAGE>
Deferred income taxes reflect the impact of temporary differences between
the amount of assets and liabilities for financial reporting and such amounts as
measured by tax laws and regulations. Deferred taxes related to intangible
assets result from acquisitions for which there is no basis in the intangibles
for tax purposes. The deferred taxes related to intangible assets will not
result in future cash payments. The components of the net deferred tax
liability are as follows:
<TABLE>
<CAPTION>
DESCRIPTION 1996 1997
----------- -------- --------
(000'S)
Current deferred tax assets (liabilities):
<S> <C> <C>
Temporary differences relating to cash-to-accrual
conversions of the Practices................................................ $ (5,918) $ (3,555)
Allowance for doubtful accounts............................................... 731 1,419
Accrued expenses.............................................................. 1,688 352
Merger transaction expenses................................................... 1,181 --
Other book/tax differences.................................................... (281) 240
Assets held for disposition................................................... -- 6,345
-------- --------
Net current deferred tax assets (liabilities).............................. $ (2,599) $ 4,801
======== ========
Non-current deferred tax liabilities:
Assets held for disposition................................................... $ -- $ 8,862
Property and equipment........................................................ (137) (2,096)
Intangibles................................................................... (77,529) (77,978)
Other......................................................................... (520) --
-------- --------
Net non-current deferred tax liabilities.................................... $(78,186) $(71,212)
======== ========
</TABLE>
The Company paid approximately $1,947,000, $6,413,000 and $10,659,000 for
federal and state income taxes for the years ended December 31, 1995, 1996 and
1997, respectively.
13. EMPLOYEE BENEFIT PLANS:
Savings Plans
The Company maintains various defined contribution plans which permit
participants to make voluntary contributions. The Company pays all general and
administrative expenses of the plans, and, in some cases, makes matching
contributions on behalf of the employees. The Company incurred expenses of
$320,000, $736,000 and $817,000 for the years ended December 31, 1995, 1996 and
1997 related to these plans.
Stock Option Plans
In March 1997, the Company amended, the board of directors adopted, and the
stockholders of the Company approved, the 1995 Stock Option Plan, to provide for
the issuance of options to purchase up to 3,000,000 shares of common stock. The
purpose of the Plan is to provide directors, key employees and certain advisors
with additional incentives by increasing their proprietary interest in the
Company. The Plan provides for the grant of incentive stock options (ISO) and
nonqualified stock options. During December 1997, 1,500,000 of the options were
granted and vested immediately and the remaining options granted in 1997 vest
over a three or five year period and expire ten years from the date of grant.
In March 1997, the Company amended, the board of directors adopted, and the
stockholders of the Company approved, the 1995 Health Care Professionals Stock
Option Plan (the Health Care Professionals Plan) to provide for the issuance of
options to purchase up to 2,000,000 shares of common stock. The Health Care
Professionals Plan permits the Company to grant stock options to employees,
advisors and consultants of the Company, which the Company expects will
generally be ophthalmologists and optometrists, who both (a) provide advisory or
consulting services to the Company and (b) are employed by a Practice. Options
granted under the Health Care Professionals Plan will vest over a period of
three or five years and expire ten years from the date of grant. Generally, such
options will expire upon the
F-22
<PAGE>
termination of employment or the advisory or consultant relationship with the
Company or on the day prior to the tenth anniversary of the date of grant,
whichever occurs first.
In connection with the EyeCorp Merger, options outstanding under the
EyeCorp plans were converted into options to purchase PRG common stock at the
conversion rate as specified in the merger agreement and are included with
existing PRG options.
<TABLE>
<CAPTION>
Transactions of the plans are summarized as follows:
WEIGHTED
STOCK OPTIONS AVERAGE
-------------------------------------------------- EXERCISE
DESCRIPTION ISOS NONQUALIFIED TOTAL PRICE
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1994 -- -- -- $ --
Granted in 1995.................................... 1,014,937 616,386 1,631,323 11.48
Exercised in 1995.................................. -- -- -- --
Canceled in 1995................................... -- -- -- --
---------- ---------- ---------- ----------
Outstanding at December 31, 1995...................... 1,014,937 616,386 1,631,323 11.48
Granted in 1996.................................... 156,548 1,463,311 1,619,859 25.21
Exercised in 1996.................................. (166,038) (53,865) (219,903) 7.27
Canceled in 1996................................... -- (12,261) (12,261) 13.20
---------- ---------- ---------- ----------
Outstanding at December 31, 1996...................... 1,005,447 2,013,571 3,019,018 19.10
Granted in 1997.................................... 233,154 2,748,285 2,981,439 6.91
Exercised in 1997.................................. (46,693) (7,594) (54,287) 5.80
Canceled in 1997................................... (566,828) (1,045,000) (1,611,828) 20.62
---------- ---------- ---------- ----------
Outstanding at December 31, 1997...................... 625,080 3,709,262 4,334,342 $ 10.34
========== ========== ========== ==========
</TABLE>
All stock options granted have an exercise price equal to the fair market
value of the stock on the date of grant, except for certain incentive stock
options, which have an exercise price equal to 110% of the fair market value of
the stock on date of grant.
Of the stock option grants outstanding, 1,969,293 were issued at prices
between $2.50 and $5.00 per share, 190,369 were issued at prices between $5.01
and $10.00 per share, 881,725 were issued at prices between $10.01 and $15.00
per share, 1,216,155 were issued at prices between $15.01 and $25.00 per share,
and 76,800 were issued at prices between $25.01 and $35.00 per share. At
December 31, 1997, 2,227,361 shares were exercisable and the weighted average
exercise price of exercisable shares was $6.11. The weighted average fair value
of options granted in 1995, 1996 and 1997 was $7.60, $17.37 and $4.88,
respectively.
PRG accounts for this plan under APB Opinion 25, under which no
compensation cost has been recognized. Had compensation cost for this plan been
determined consistent with FASB Statement No. 123, net income and earnings per
share would have been reduced to the following proforma amounts:
<TABLE>
<CAPTION>
DESCRIPTION 1995 1996 1997
----------- ------------ --------------- --------------
(000'S, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net income - as reported.................................... $ 1,190 $7,172 $(41,323)
- pro forma.............................. $(1,614) $ (755) $(46,485)
Basic earnings per share - as reported...................... $ .10 $ .29 $ (1.39)
- pro forma.............................. $ (.13) $ (.03) $ (1.56)
Diluted earnings per share - as reported.................... $ .09 $ .28 $ (1.39)
- pro forma.............................. $ (.13) $ (.03) $ (1.56)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions for grants in 1995 through 1997, risk free interest rates from 5.38%
to 7.50% depending on the grant, volatility of 47.2% to 58.4%, depending on the
grant, expected lives from 6.2 to 10, depending on the grant.
F-23
<PAGE>
14. RELATED-PARTY TRANSACTIONS:
The Company leases facility space from various partnerships which include
affiliated physicians as partners and trusts in which relatives of the
affiliated physicians are named beneficiaries. Rent expense on related-party
operating leases amounted to $2,604,000, $6,520,000 and $7,116,000 for the years
ended December 31, 1995, 1996 and 1997, respectively. In addition, the Company
leases facilities to affiliated physicians. Rent income on related-party
operating leases amounted to $245,000, $1,182,000 and $1,162,000 for the years
ended December 31, 1995, 1996 and 1997, respectively.
All of the Company's management service revenue is received from physician
groups which have affiliated with the Company during the past three years. Prior
to a reduction in the size of the board of directors in January of 1998, a
majority of the board of directors of the Company were practicing physicians who
were associated with the Practices. Subsequent to the reduction, only one of the
Company's four board members is an affiliated physician.
In July of 1997, the Company loaned $500,000 to one of its former board
members who is also an affiliated physician of PRG. The purpose of the loan was
to provide funds to the former board member to purchase the practice of a
retiring physician practicing in his market (also a PRG affiliate). This
retiring physician had contractual rights to terminate his practice affiliation
with PRG. The new arrangement also provided for the retiring physician to work
on a contract basis for the new practice. The loan is repayable in two equal
installments of $250,000 in January and July of 1998. The January payment has
not been made. The loan bears interest at 8% and is secured by the accounts
receivable of the practice.
During the course of the Company's 1997 review of its due from affiliates
balance (see Note 5), allowances were provided with respect to approximately
$2,294,000 of receivables from practices where three of the Company's former
board members are practitioners.
15. SUBSEQUENT EVENTS:
In March of 1998, management and the board of directors of the Company
began pursuing a plan that would significantly restructure the Company by, among
other things, (1) lowering the service fees charged to the affiliated practices;
(2) reducing the level of services provided to the practices; (3) shortening the
term of the service agreements significantly; (4) allowing the affiliated
physicians to repurchase, for cash, their tangible assets and re-employ their
practice personnel; and (5) accelerating the payment by the affiliated
physicians/practices of their amounts owed to the Company. This plan is subject
to widespread acceptance by the affiliated physicians, as well as to shareholder
approval. If accepted and approved, management of the Company believes the plan
would significantly reduce the administrative and accounting burden on the
Company and generate additional cash. No assurance can be provided that the
Company will be successful in gaining physician acceptance and shareholder
approval and if such acceptance and approval are obtained that the resultant
plan will be successful.
F-24
<PAGE>
EXHIBIT 10.41
EMPLOYMENT AGREEMENT
--------------------
Employment Agreement, dated as of December 5, 1997 (the "Agreement"), by
and between Physicians Resource Group, Inc., a Delaware corporation (the
"Company"), and Richard A. Gilleland ("Employee"). This Agreement is executed on
December 15, 1997, and is effective as of its date.
W I T N E S S E T H:
-------------------
In consideration of the mutual covenants and conditions contained herein,
the parties hereto agree as follows:
Section 1. Employment. The Company hereby agrees to employ Employee, and
Employee hereby accepts employment by the Company, upon the terms and subject to
the conditions hereinafter set forth. During the term of his employment
hereunder, the Employee shall be a member of the Board of Directors of the
Company (the "Board of Directors" or the "Board"), and shall have the titles and
hold the positions of Chairman of the Board, President and Chief Executive
Officer of the Company.
Section 2. Duties. In his capacity as President and Chief Executive
Officer of the Company, the Employee shall perform such reasonable executive
duties as a president and chief executive officer would normally perform or as
otherwise specified in the By-laws of the Company, and such other reasonable
executive duties as the Board of Directors of the Company may from time to time
reasonably prescribe with the concurrence of Employee. Except as otherwise
provided herein, except as may otherwise be approved by the Board of Directors
of the Company, and except during vacation periods and reasonable periods of
absence due to sickness, personal injury or other disability, Employee agrees to
devote substantially all of his available time to the performance of his duties
to the Company hereunder, provided that nothing contained herein shall preclude
the Employee from (i) serving on the board of directors of any business or
corporation on which he is serving on the date hereof or, with the consent of
the Board of Directors, serving on the board of directors of any other business
or corporation, (ii) serving on the board of, or working for, any charitable or
community organization, (iii) pursuing his personal financial and legal affairs
so long as such activities do not materially interfere with the performance of
Employee's duties hereunder, or (iv) continuing his current consulting
arrangements with STERIS Corporation, or Clayton, Dubilier & Rice, Inc., or any
of their respective subsidiaries or affiliates, and engaging in any activities
in connection with such arrangements (subject to the provisions of Section 9
hereof). Each of the Company and Employee acknowledges that the principal
executive offices of the Company will be located in Dallas, Texas. The Company
acknowledges and agrees that, in accordance with Section 5(b) hereof, it will
maintain an additional executive office at 2829 Townsgate Road, Suite 101,
Westlake Village, California 91361 or such other place as is in or near Westlake
Village, California or as Employee and the Company may mutually agree upon (the
"Other Executive Office").
Section 3. Term. Except as otherwise provided herein, the term of this
Agreement shall be for three years (the "Initial Term"), commencing on the date
of this Agreement. This Agreement shall be automatically renewed thereafter for
successive one year terms (each such
<PAGE>
renewal term, an "Renewal Term") unless either party gives to the other written
notice of termination no fewer than ninety (90) days prior to the expiration of
any such Renewal Term, which notice shall expressly refer to this Section 3 of
the Agreement and state that such party does not wish to extend this Agreement
2
<PAGE>
(any such notice, a "Non-Renewal Notice"). Any such Non-Renewal Notice given by
the Company shall constitute a termination of Employee's employment without
Cause for purposes of this Agreement. The Initial Employment Term, as the same
may be extended by any Renewal Term, is referred to herein as the "Employment
Term." The provisions of this Agreement shall survive any termination hereof.
Section 4. Compensation and Benefits. In consideration for the services
of the Employee hereunder, the Company shall compensate Employee and perform its
other obligations as provided in this Section 4.
(a) Base Salary. Commencing on the date hereof, Employee shall be
entitled to receive, and the Company shall pay the Employee in equal bi-weekly
installments, a base salary at a rate per annum of Three Hundred Sixty Thousand
United States Dollars ($360,000), as increased from time to time by the Board of
Directors of the Company or the Option and Compensation Committee of the Board
of Directors (the "Compensation Committee"). Commencing in 1998 and from time
to time at least annually thereafter, the Compensation Committee shall review
and evaluate the annual base salary of the Employee in accordance with its
standard policies and practices for key executive employee compensation and, in
its discretion, may increase the Employee's annual base salary commencing on
December 1, 1998 and on anniversaries of such date thereafter. The amount of
such base salary for each respective annual one year period, including any
increases hereafter approved, is referred to as the "Base Salary" for such
respective one year period. The Employee's Base Salary may not and shall not be
decreased or reduced, including but not limited to after giving effect to any
such increase.
(b) Bonuses. During the Employment Term, the Employee shall be eligible
to participate in any annual fiscal year bonus program that may be provided by
the Company for its key executive employees, subject to its terms and
conditions. To the extent that any payment thereunder is subject to the
achievement by the Company of certain financial performance objectives, such
objectives shall not be less favorable to the Employee than those applicable to
other executive employees participating thereunder. Employee shall receive a
fixed bonus for 1997 on or before January 31, 1998 equal to Fifty-Four Thousand
United States Dollars ($54,000), without regard to the achievement by the
Company of any specific financial performance objectives. On or before March
31, 1998, the Board shall adopt a formal bonus plan (the "Executive Bonus Plan")
for eligible senior executive officers, including Employee, which shall be in
form and substance reasonably satisfactory to the Company and Employee and
contain terms and conditions consistent with this Agreement. The Executive
Bonus Plan shall provide to Employee (and he shall receive) a bonus for each
calendar year after 1997 in the Employment Term in an amount at least equal to
Six Hundred Thirty Thousand United States Dollars ($630,000) minus his Base
Salary for such year. The Executive Bonus Plan shall provide Employee with a
minimum target bonus opportunity of at least one hundred forty-five percent
(145%) of Base Salary for each calendar year after 1997 in the Employment Term
if the Company attains specified budgeted financial performance objectives for
such year, and a maximum bonus opportunity of at least two hundred fifteen
percent (215%) of Base Salary for such year if the Company exceeds such
specified budgeted financial performance objectives for such year by specified
targets. Such
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objectives and targets shall be determined on an annual basis each year during
the Employment Term, and shall be reasonably satisfactory to the Company and
Employee. The Executive Bonus Plan (including such objectives and targets) will
be initially prepared by Employee or (to the extent he so determines) under his
supervision and presented to the Compensation Committee for review. All bonuses
payable to Employee under the Executive Bonus Plan or any other annual bonus
plan shall be determined and paid on or prior to January 31 of the year
following the year for which such bonus is payable.
(c) Other Long Term Incentive Compensation. After 1997, Employee shall be
entitled to participate in all long-term incentive compensation programs for key
executives (if any) at a level commensurate with his position.
(d) Other Benefits. During the term of this Agreement, Employee shall be
entitled to participate in and receive benefits under any and all pension,
profit-sharing, life and other insurance, medical, dental, health and other
welfare and fringe benefit plans and programs, and be provided any and all other
perquisites, that are from time to time made available to executive employees or
other employees of the Company. Employee and his family and dependents shall in
any event receive medical, dental, health and other welfare benefits from the
Company, whether under such plans or otherwise, that are no less favorable to
Employee and his family and dependents than the benefits that they shall have
been receiving from STERIS Corporation (or any subsidiary or affiliate thereof)
or any other prior employer of Employee immediately prior to his commencement of
employment with the Company. Employee shall also be entitled to an amount of
paid vacation per calendar year, and sick leave and illness and disability
benefits, in accordance with such reasonable Company policy as may be applicable
from time to time to key executive employees.
(e) Options. To induce Employee to enter into employment with the Company
and as a condition of his acceptance of such employment, effective upon the date
of this Agreement, the Company shall grant to Employee an option to purchase One
Million Five Hundred Thousand (1,500,000) shares of the Common Stock, par value
$0.01 per share, of the Company (the "Common Stock") at an exercise price of Two
and Nine-Sixteenths United States Dollars ($2.5625) per share (the "Option").
To evidence the Option, promptly after the execution of this Agreement, but in
no event later than December 21, 1997, the Company shall execute and deliver to
the Employee an option agreement (the "Option Agreement") substantially in the
form of Exhibit A hereto, or otherwise in form and substance reasonably
satisfactory to the Company and Employee, which shall contain terms and
conditions consistent with this Agreement and shall provide, among other things,
for the following:
(i) The Option shall be immediately vested and exercisable upon
grant, with an ultimate expiration date of the later of (x) December 5,
2007 and (y) the tenth anniversary of the date on which the Option is
granted to Employee.
(ii) The grant of the Option shall not be subject to any approval by
stockholders of the Company.
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(iii) If Employee voluntarily terminates his employment without Good
Reason (as defined in Section 6 hereof) prior to June 1, 1998, the Option
shall remain exercisable for thirty (30) days following the date of such
termination. In the event of any other termination of Employee's
employment with the Company, the Option shall remain exercisable for three
hundred sixty-five (365) days following the date of such termination.
(iv) The shares of Common Stock of the Company issuable under the
Option shall be fully registered and freely tradeable and shall be of the
same class of voting common stock of the Company, with the same rights,
powers and privileges, as is currently publicly traded on the New York
Stock Exchange and registered with the United States Securities and
Exchange Commission (the "SEC"). Without limiting the foregoing, such
shares shall not be subject to any restriction, on transfer, on exercise of
any right, power or privilege or otherwise, not applicable to all of such
class of voting common stock generally. If such Option is not granted
under any Company stock option plan, or Executive requests, the Company
shall register such shares with the SEC for resale under a shelf
registration statement in accordance with the terms of a Registration
Rights Agreement (the "Registration Rights Agreement") substantially in the
form of Exhibit B hereto, or otherwise in form and substance reasonably
satisfactory to the Company and Employee, which shall contain terms and
conditions consistent with this Agreement. The Company shall execute and
deliver to Employee the Registration Rights Agreement concurrently with its
execution and delivery to Employee of the Option Agreement.
Section 5. Expenses and Other Employment-Related Matters. (a) It is
acknowledged by the parties that Employee, in connection with the services to be
performed by him pursuant to the terms of this Agreement, will be required to
make payments for travel, entertainment and similar expenses. The Company shall
reimburse Employee for all reasonable expenses incurred by Employee in
connection with the performance of his duties hereunder or otherwise on behalf
of the Company.
(b) During the Employment Term, the Company, at its sole expense, shall
maintain an Other Executive Office in or near Westlake Village, California, in
addition to providing staff support for Employee at the principal executive
offices of the Company. Such Other Executive Office shall, at Employee's
election, either consist of the current California office occupied by him, or be
such other office as shall be substantially the same size and provide
substantially the same amenities as such current California office. In
connection with the maintenance of the Other Executive Office, the Company shall
(i) pay the rent for the Other Executive Office, (ii) provide the Employee with
services of a full-time secretary that he shall select on such terms and
conditions as are customary for rank and file employees of the Company holding
similar positions (provided that such terms and conditions shall be no less
favorable than those applicable to Employee's current secretary immediately
prior to Employee's commencement of employment with the Company), and (iii) pay
such other reasonable office expenses as may be incurred by the Employee and
office staff members in maintaining the Other Executive Office.
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(c) Employee shall receive a car leasing allowance of One Thousand United
States Dollars ($1,000) per month. Employee may continue to maintain his
principal residence in California, and the Company shall promptly reimburse
Employee for reasonable travel expenses between California and the principal
executive offices of the Company and the reasonable living expenses of Employee
incurred in connection with residing in or near the city or area in which the
principal executive offices of the Company are located. The Company shall pay
the fees and expenses of Employee's counsel, Debevoise & Plimpton, incurred by
him in connection with the preparation and negotiation of this Agreement, the
Option Agreement and all employment-related agreements and arrangements,
promptly upon presentation of such counsel's invoice or invoices therefor.
(d) If a federal, state or local income or other similar tax for any
portion of the items for which the Company pays or reimburses Employee pursuant
to this Section 5 is assessed against Employee by the Internal Revenue Service
or any other taxing authority and the Company is unable to successfully contest
such assessment, the Company shall promptly make an additional payment to
Employee equal to the amount of the taxes, interest and penalties ultimately
payable by Employee with respect thereto, plus any taxes due by reason of such
additional payment.
Section 6. Termination. Employee's employment may terminate prior to the
end of the Employment Term as provided in this Section 6.
(a) Death or Disability. Employee's employment will terminate (x)
immediately upon the death of Employee during the term of his employment
hereunder or (y) at the option of the Company, upon 30 days' prior written
notice to Employee, in the event of Employee's disability. Employee shall not be
deemed disabled unless, as a result of Employee's incapacity due to physical or
mental illness (as determined by a physician mutually selected by Employee or
his representative and the Company), Employee shall have been absent from and
unable to perform his duties with the Company on a full-time basis for 120
consecutive business days. In the event of termination of Employee's employment
pursuant to this Section 6(a):
(1) The Company shall immediately pay Employee (i) any portion of
Employee's Base Salary accrued but unpaid through the date of such
termination, (ii) all payments and reimbursements under Section 5 hereof
for expenses incurred prior to such termination, and (iii) a prorated
annual bonus for the year of termination equal to one hundred forty-five
percent (145%) of the amount calculated by dividing Employee's annual Base
Salary at the date of such 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. If the Company achieves target
performance objectives for the entire year in which such termination occurs
that, under the Executive Bonus Plan or any other then effective bonus
plan, would have entitled Employee to receive an annual bonus for such year
calculated at a percent greater than one hundred forty-five percent (145%)
of Base Salary, Employee (or his estate) shall be entitled to receive, at
the time such bonus would have normally been payable, an additional amount
equal to (x) such larger bonus amount divided by twelve and multiplied by
the number of months in the year of such termination
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that began or ended prior to the date of such termination minus (y) the
amount previously paid pursuant to clause (iii) of the preceding sentence.
(2) The Employee shall be entitled to receive all vested benefits
under the Company's otherwise applicable plans and programs.
(b) For Cause. The Company may terminate the Employee's employment for
Cause (as defined below) upon written notice by the Company to Employee, such
termination to take effect on the date determined in accordance with the last
paragraph of this Section 6(b) below to be the termination date for such
purpose. In the event of termination of Employee's employment for Cause
pursuant to this Section 6(b):
(1) The Company shall immediately pay Employee (i) any portion of
Employee's Base Salary accrued but unpaid through the date of such
termination and (ii) all payments and reimbursements under Section 5 hereof
for expenses incurred prior to such termination.
(2) The Employee shall be entitled to receive all vested benefits
under the Company's otherwise applicable plans and programs.
For purposes of this Agreement, the term "Cause" shall mean Employee's (i)
gross negligence in the performance of his duties as the Company's President and
Chief Executive Officer, which gross negligence results in a material adverse
effect on the Company, provided that no such gross negligence will constitute
"Cause" if it relates to an action taken or omitted by Employee in the good
faith, reasonable belief that such action or omission was in or not opposed to
the best interests of the Company; or (ii) habitual neglect or disregard of his
duties as the Company's President and Chief Executive Officer that is materially
and demonstrably injurious to the Company, after written notice from the Company
stating the duties Employee has failed to perform; or (iii) conviction of a
felony, provided that no such conviction will constitute "Cause" if it relates
to an action taken or omitted by Employee in the good faith, reasonable belief
that such action or omission was in or not opposed to the best interests of the
Company. The Employee's employment may not and shall not be terminated for
Cause unless (1) the Board of Directors provides the Employee with written
notice stating the conduct alleged to give rise to such Cause, (2) the Employee
has been given an opportunity to be heard by the Board, (3) in the case of
clause (i) or (ii) of the definition of Cause, the Employee has been given a
reasonable time to cure, and the Employee has not cured, such negligence or
failure to the reasonable satisfaction of the Board and (4) the Board has
approved such termination by majority vote of the members of the Board of
Directors, excluding the Employee.
(c) By Company Without Cause. The Company may terminate Employee's
employment at any time for any reason without Cause. In the event of any
termination of Employee's employment by the Company without Cause:
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(1) The Company shall pay Employee severance pay for the Severance
Period (as defined below), the per annum amount of which shall equal one
hundred seventy-five percent (175%) of his Base Salary at the date of such
termination. The Company shall pay such severance pay in installments on a
bi-weekly basis with the first payment being made with respect to the first
bi-weekly payroll period for executive employees commencing after the date
of his termination of employment (but not later than 14 days after the date
of such termination). The Company's obligation to make such payments shall
be absolute and unconditional. Without limiting the foregoing, such
payments shall not be subject to any right of offset or similar right, and
Employee shall have no obligation of mitigation or similar obligation with
respect thereto.
(2) The Company shall immediately pay Employee (i) the portion of
Employee's Base Salary accrued but unpaid through the date of such
termination, (ii) all payments and reimbursements under Section 5 hereof
for expenses incurred prior to such termination and (iii) a prorated annual
bonus for the year of termination equal to one hundred forty-five percent
(145%) of the amount calculated by dividing Employee's annual Base Salary
at the date of such 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. If the Company achieves target
performance objectives for the entire year in which such termination occurs
that, under the Executive Bonus Plan or any other then effective bonus
plan, would have entitled Employee to receive an annual bonus for such year
calculated at a percent greater than one hundred forty-five percent (145%)
of Base Salary, Employee (or his estate) shall be entitled to receive, and
the Company shall pay, at the time the bonus would have normally been
payable, an additional amount equal to (x) 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
(y) the amount previously paid pursuant to clause (iii) of the preceding
sentence.
(3) Employee shall be entitled to receive all vested benefits under
the Company's otherwise applicable plans and programs.
(4) Following such termination, Employee shall be entitled to
continue participation (including participation of dependents, where
applicable) in all medical, dental, health and other welfare benefit plans
(or receive comparable coverage if such participation is not permitted
under the terms of such plans or if the Board, at its option, determines
that it is in the best interests of the Company to provide such comparable
coverage rather than continued participation in the Company's plans) until
the end of the Severance Period upon the same terms and conditions that
would have applied if Employee continued to be employed by the Company,
provided that the benefits referred to in this clause (4) will cease if and
to the extent Employee becomes eligible for similar benefits by reason of
new employment.
For purposes of this Agreement, the term "Severance Period" means (i) if
the Employee's employment is terminated at or prior to the end of the Initial
Term (including but not limited to by
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the giving of any Non-Renewal Notice or other notice as provided in Section 3
hereof), a period equal to the greater of (x) two full years beginning on the
date of such termination and (y) the then remaining portion of the Initial Term
and (ii) if the Employee's employment is terminated after the end of the Initial
Term and prior to the end of the then-current Renewal Term (including but not
limited to by the giving of any Non-Renewal Notice or other notice as provided
in Section 3 hereof), a period equal to one full year beginning on the date of
such termination.
(d) By Employee for Good Reason. Employee may terminate his employment at
any time for Good Reason. In the event of any termination of Employee's
employment by Employee for Good Reason:
(1) The Company shall pay Employee severance pay for the Severance
Period, the per annum amount of which shall equal one hundred seventy-five
percent (175%) of his Base Salary at the date of such termination. The
Company shall pay such severance pay in installments on a bi-weekly basis
with the first payment being made with respect to the first bi-weekly
payroll period for executive employees commencing after the date of his
termination of employment (but not later than 14 days after the date of
such termination). The Company's obligation to make such payments shall be
absolute and unconditional. Without limiting the foregoing, such payments
shall not be subject to any right of offset or similar right, and Employee
shall have no obligation of mitigation or similar obligation with respect
thereto.
(2) The Company shall immediately pay Employee (i) the portion of
Employee's Base Salary accrued but unpaid through the date of such
termination, (ii) all payments and reimbursements under Section 5 hereof
for expenses incurred prior to such termination and (iii) a prorated annual
bonus for the year of termination equal to one hundred forty-five percent
(145%) of the amount calculated by dividing Employee's annual Base Salary
at the date of such 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. If the Company achieves target
performance objectives for the entire year in which such termination occurs
that, under the Executive Bonus Plan or any other then effective bonus
plan, would have entitled Employee to receive an annual bonus for such year
calculated at a percent greater than one hundred forty-five percent (145%)
of Base Salary, Employee (or his estate) shall be entitled to receive, and
the Company shall pay, at the time the bonus would have normally been
payable, an additional amount equal to (x) 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
(y) the amount previously paid pursuant to clause (iii) of the preceding
sentence.
(3) Employee shall be entitled to receive all vested benefits under
the Company's otherwise applicable plans and programs.
(4) Following such termination, Employee shall be entitled to
continue participation (including participation of dependents, where
applicable) in all medical,
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dental, health and other welfare benefit plans (or receive comparable
coverage if such participation is not permitted under the terms of such
plans or if the Board, at its option, determines that it is in the best
interests of the Company to provide such comparable coverage rather than
continued participation in the Company's plans) during the Severance Period
upon the same terms and conditions that would have applied if Employee
continued to be employed by the Company, provided that the benefits
referred to in this clause (4) will cease if and to the extent Employee
becomes eligible for similar benefits by reason of new employment.
For purposes of this Agreement, "Good Reason" means (A) a material
diminution of Employee's duties or responsibilities, (B) a reduction in
Employee's Base Salary, or minimum annual bonus of at least seventy-five percent
(75%) of Base Salary, or annual bonus or long-term incentive compensation
opportunity, (C) a Change of Control (as defined in Section 7 hereof), (D)
failure of the Board to adopt the Executive Bonus Plan by March 31, 1998, (E)
failure of the Company to execute and deliver to Employee, on or prior to
December 21, 1997, the Option Agreement and Registration Rights Agreement in
form and substance reasonably satisfactory to Employee and containing terms and
conditions consistent with this Agreement, (F) the Board requires Employee's
principal place of business to be located other than at the current location of
the Other Executive Office in Westlake Village, California, or at such location
as Employee and the Company shall from time to time agree in writing, or (G) a
material breach by the Company of any other provision of this Agreement that is
not cured promptly after written notice to the Company by Employee.
(e) By Employee Without Good Reason. Employee may terminate his
employment at any time without Good Reason upon 20 days' prior written notice to
the Company. In the event of any such termination of Employee's employment by
Employee without Good Reason:
(1) The Company shall immediately pay Employee (i) any portion of
Employee's Base Salary accrued but unpaid through the date of such
termination and (ii) all payments and reimbursements under Section 5 hereof
for expenses incurred prior to such termination.
(2) The Employee shall be entitled to receive all vested benefits
under the Company's otherwise applicable plans and programs.
(f) Resignation as Board Member. Upon any termination by the Company of
Employee's employment, the Board shall be entitled, at its option, to remove
Employee as a member of the Board. Any termination by Employee of his
employment shall be deemed automatically to be a resignation by him as a member
of the Board.
(g) Excise Tax Gross Up Payments. If a Change of Control or other
transaction triggers or results in the imposition upon Employee of any excise or
similar tax under Section 4999 of the Internal Revenue Code (or any similar or
successor provision), the Company shall pay (or cause any acquiror in such
transaction to pay) any such excise or similar tax and make "gross-up"
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payments to Employee to the extent necessary so that Employee will receive the
same net after-tax amount he would have received if no excise tax had been
imposed on him.
(h) No Penalty, Forfeiture or Liability. Any termination by Employee of
his employment with the Company in accordance with the terms hereof shall be
without penalty, forfeiture or liability arising out of such termination of any
kind or nature. Notwithstanding any other provision hereof, any termination of
Employee's employment on or after the occurrence of a Change of Control shall be
deemed to be a termination by the Company without Cause (if by the Company) or
by the Employee with Good Reason (in any other case).
Section 7. Change In Control. For purposes of this Agreement, (1) the
term "Person" means any corporation, partnership (general, limited or other),
trust (business or other), company (limited liability, joint-stock, or other),
business, firm, association, organization, individual, governmental
instrumentality or entity, or other person or entity, (2) the term "Voting
Stock" shall mean, as to any Person, the then-outstanding securities of or other
interests in such corporation entitled to vote generally in the election of
directors, trustees or similar managers of such Person, and (3) the term "Change
in Control" shall mean:
(a) The Company is merged, consolidated or reorganized into or with
another corporation or other Person, or the stockholders of the Company approve
such a merger, consolidation or reorganization, and as a result of such merger,
consolidation or reorganization, the holders of the Voting Stock of the Company
immediately prior to such transaction hold or would hold in the aggregate less
than seventy percent (70%) of the combined voting power of the then-outstanding
Voting Stock of the surviving corporation or Person immediately after such
transaction; or
(b) The Company sells or otherwise transfers all or substantially all of
its assets to another corporation or other Person, or the stockholders of the
Company approve such a sale or transfer, and either (x) as a result of such sale
or transfer, the holders of Voting Stock of the Company immediately prior to
such sale or transfer hold or would hold in the aggregate less than seventy
percent (70%) of the combined voting power of the then-outstanding Voting Stock
of such corpora tion or Person immediately after such sale or transfer, or (y)
such corporation or Person does not assume all of the Company's obligations to
the Employee pursuant to an instrument in form and substance reasonably
satisfactory to the Employee; or
(c) The Company is liquidated or dissolved, or the stockholders of the
Company approve such a liquidation or dissolution; or
(d) Any Person or "group" (as the term "group" is used in Section 13(d)(3)
or Section 14(d)(2) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) becomes, or a report is filed on Schedule 13D or Schedule 14D-1
(or any successor schedule, form or report), each as promulgated pursuant to the
Exchange Act, disclosing that any Person or "group" (as the term "group" is used
in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) has become, the
beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or
any successor rules or regulations promulgated under the Exchange Act) of
securities representing
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30% or more of the combined voting power of the then-outstanding Voting Stock of
the Company or 50% or more of the then-outstanding shares of Voting Stock of the
Company; or
(e) The Company files a report or proxy statement with the Securities and
Exchange Commission pursuant to the Exchange Act disclosing in response to Form
8-K or Schedule 14A (or any successor schedule, form or report or item therein)
that a change in control of the Company has occurred or will occur in the future
pursuant to any then-existing contract or transaction; or
(f) If, during any period of two consecutive years, individuals who at the
beginning of any such period constitute the Directors of the Company cease for
any reason to constitute at least a majority thereof; provided, however, that
for purposes of this clause (f) each Director who is first elected, or first
nominated for election by the Company's stockholders, by a vote of at least two-
thirds of the Directors of the Company then still in office who were Directors
of the Company at the beginning of any such period (other than an election or
nomination of any individual whose initial assumption of office is in connection
with an actual or threatened election contest relating to the election of the
Directors of the Company, as such terms are used in Rule 14a-11 or any successor
rule or regulation promulgated under the Exchange Act) will be deemed to have
been a Director of the Company at the beginning of such period.
Section 8. Indemnification. (a) The Company agrees that, to the maximum
extent permitted under the corporate laws of the State of Delaware or, if more
favorable, the By-Laws of the Company as in effect on the date of this
Agreement, (x) the Employee shall be indemnified and held harmless by the
Company as provided under such corporate laws or such By-Laws, as applicable,
for actions or matters taken, undertaken or omitted to be taken or undertaken,
whether in connection with the performance of his duties and responsibilities
under this Agreement, or otherwise on behalf of the Company or any of its
Affiliates (as defined below), and (y) without limiting the foregoing, the
Company shall indemnify and hold harmless the Employee from and against (i) any
claim, loss, liability, obligation, damage, cost, expense, action, suit,
proceeding or cause of action (collectively, "Claims") arising from or out of or
relating to the Employee's acting as an officer, director, employee or agent of
the Company or any of its Affiliates or in any other capacity, including any
fiduciary capacity, in which the Employee serves at the request of the Company
or any of its Affiliates, and (ii) any cost or expense (including fees and
disbursements of counsel) (collectively, "Expenses") incurred by the Employee in
connection with the defense or investigation thereof. If any Claim is asserted
or other matter arises with respect to which the Employee believes in good faith
the Employee is entitled to indemnification as contemplated hereby, the Company
shall pay the Expenses incurred by the Employee in connection with the defense
or investigation of such Claim or matter (or cause such Expenses to be paid) on
a bi-weekly basis, provided that the Employee shall reimburse the Company for
such amounts if the Employee shall be found, as finally judicially determined by
a court of competent jurisdiction, not to have been entitled to indemnification
hereunder.
For purposes of this Section 8(a), the term "Affiliate" means any
corporation or other entity (i) that, directly or indirectly, controls or is
controlled by or under common control with the
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Company or (ii) in respect of which the Company is the beneficial owner (as
defined in Section 7(d) above) of at least 10% of its voting common stock or
similar equity interests entitled to vote generally for the election of such
corporation's or entity's board of directors, managers or trustees.
(b) The Company agrees not to amend or modify its By-Laws as in effect on
the date of this Agreement in any manner that would be adverse to Employee
without the prior written consent of Employee. The Company further agrees to
maintain directors and officers insurance that covers Employee as an insured in
effect throughout the Employment Term in policy amounts not less than, and on
terms and conditions no less favorable to Employee than, those of the directors
and officers insurance policy that is currently in effect. The Company
represents and warrants that it has previously provided to Employee a true,
complete and correct copy of such policy.
Section 9. Confidential Information. Employee recognizes and acknowledges
that certain proprietary, non-public information owned by the Company and its
affiliates, including without limitation proprietary, non-public information
regarding customers, pricing policies, methods of operation, proprietary
computer programs, sales, products, profits, costs, markets, key personnel,
formulae, product applications, technical processes, and trade secrets
(hereinafter called "Confidential Information"), are valuable, special and
unique assets of the Company and its affiliates. Employee will not, during or
after his term of employment, without the prior written consent of a member of
the Board believed by Employee to have been authorized by the Board for such
purpose, knowingly and intentionally disclose any of the Confidential
Information obtained by him while in the employ of the Company to any person,
firm, corporation, association or other entity for any reason or purpose
whatsoever, directly or indirectly (other than to an employee of the Company or
its affiliates, a director of the Company or its affiliates, or a Person to whom
disclosure is necessary or appropriate in Employee's good faith judgment in
connection with the performance of his duties hereunder or otherwise on behalf
of the Company), unless and until such Confidential Information becomes publicly
available (other than as a consequence of the breach by Employee of his
confidentiality obligations under this Section 9), and except as may be required
(or as Employee may be advised by counsel is required) in connection with any
judicial, adminis trative or other governmental proceeding or inquiry. In the
event of the termination of his employment, whether voluntary or involuntary and
whether by the Company or Employee, Employee will deliver to the Company and
will not take with him any documents, or any other reproductions (in whole or in
part) of any items, comprising Confidential Information (except that Employee
may retain any documents or reproductions in his possession on the date hereof,
his personal address, telephone and other contact lists and information, and any
other documents or reproductions retained upon advice of counsel).
Notwithstanding any other provision hereof, the term "Confidential Information"
does not include any information that (a) is or becomes publicly available other
than as the result of the breach by Employee of his confidentiality obligations
under this Section 9, (b) became, is or becomes available to Employee on a
nonconfidential basis from a source, other than the Company, that to Employee's
knowledge is not prohibited from disclosing such information to Employee by a
confidentiality obligation owed to the Company or (c) was known to Employee
prior to becoming a member of the Board of Directors. The provisions of this
Section 9 shall expire and be of no further force or effect on the third
anniversary of the date of termination of Employee's employment with the
Company.
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Section 10. Noncompetition. During his employment with the Company
pursuant to this Agreement, Employee will not knowingly and intentionally (i)
engage, directly or indirectly, alone or as a partner, officer, director,
employee or consultant of any other business organization, in any business
activities that are substantially and directly competitive with the business
activities then conducted by the Company (the "Designated Industry"), (ii)
divert to any competitor of the Company in the Designated Industry any customer
of Employee, which diversion has a material adverse effect on the Company, or
(iii) solicit or encourage any officer, employee, or consultant of the Company
to leave its employ for employment by or with any competitor of the Company in
the Designated Industry, which officer, employee or consultant so enters such
competitor's employment and which occurrence has a material adverse effect on
the Company, provided that Employee shall not be deemed to have breached his
obligations under clause (ii) or (iii) of the preceding sentence if Employee
takes such action in a good faith belief that such action is in the best
interests of the Company. The parties hereto acknowledge that Employee's
noncompetition obligations hereunder will not preclude Employee from (i) owning
less than 5% of the common stock of any publicly traded corporation or other
Person conducting business activities in the Designated Industry, (ii) serving
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 the Company, (iii) serving
on the board of directors of any business or corporation on which he is serving
on the date hereof, or (iv) continuing his current consulting arrangements with
STERIS Corporation, or Clayton, Dubilier & Rice, Inc., or any of their
respective subsidiaries or affiliates, and engaging in any activities in
connection with such arrangements. If at any time the provisions of this
Section 10 are determined to be invalid or unenforceable, by reason of being
vague or unreasonable as to area, duration or scope of activity, this Section 10
will be considered divisible and will become and be immediately amended to only
such area, duration and scope of activity as will be determined to be reasonable
and enforceable by the court or other body having jurisdiction over the matter;
and Employee agrees that this Section 10 as so amended will be valid and binding
as though any invalid or unenforceable provision had not been included herein.
Section 11. Arbitration. (a) Subject Claims; Initiation of Binding
Arbitration. The matters, claims, rights, and obligations subject to these
arbitration provisions consist of any and all rights, claims and obligations
arising out of or relating to this Agreement or to the Employee's employment as
it relates to this Agreement (collectively, "Subject Claims"). IN THE EVENT OF
A DISPUTE BETWEEN THE PARTIES HERETO RELATING TO ANY SUBJECT CLAIM, THEN, UPON
NOTICE BY ANY PARTY TO THE OTHER PARTY (AN "ARBITRATION NOTICE") AND TO THE
AMERICAN ARBITRATION ASSOCIATION ("AAA"), LOS ANGELES, CALIFORNIA, THE DISPUTE
SHALL BE SUBMITTED TO THREE (3) ARBITRATORS WHO ARE INDEPENDENT AND IMPARTIAL,
FOR BINDING ARBITRATION IN LOS ANGELES, CALIFORNIA, IN ACCORDANCE WITH AAA'S
NATIONAL RULES FOR THE RESOLUTION OF EMPLOYMENT DISPUTES (THE "RULES") AS
MODIFIED OR SUPPLEMENTED HEREBY. THE COMPANY AND THE EMPLOYEE AGREE THAT THE
LAWS OF THE STATE OF DELAWARE SHALL APPLY. The Company and the Employee further
agree that, if the Employee prevails as to any material issue, the entire cost
of such proceedings (including, without limitation, the Employee's reasonable
attorneys fees) shall be borne by the Company. If the Employee does not prevail
as to any material issue, the parties shall bear their own respective costs and
expenses. The arbitrators' authority shall be to interpret the
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terms of this Agreement as applied to the facts of the Employee's employment by
the Company (or its successors) and his rights under this Agreement. The parties
agree that they will faithfully observe the provisions of this Section 11 and
the Rules and that they will abide by and perform any award rendered by the
arbitrators in accordance herewith and therewith. The arbitration shall be
subject to the Federal Arbitration Act, 9 U.S.C. Section 1-16 (or to the
principles enunciated by such Act in the event it may not be technically
applicable). The award or judgment of the arbitrators shall be final and binding
on all parties and judgment upon the award or judgment of the arbitrators may be
entered and enforced by any court having jurisdiction. If any party becomes the
subject of a bankruptcy, receivership or other similar proceeding under the laws
of the United States of America, any state or commonwealth or any other nation
or political subdivision thereof, then, to the extent permitted or not
prohibited by applicable law, any factual or substantive legal issues arising in
or during the pendency of any such proceeding shall be subject to all of the
foregoing mandatory arbitration provisions and shall be resolved in accordance
therewith. The agreements contained herein have been given for valuable
consideration, are coupled with an interest and are not intended to be executory
contracts.
(b) Selection of Arbitrators. Promptly after the Arbitration Notice is
given, AAA will select seven possible arbitrators, to whom AAA will give the
identities of the parties and the general nature of the controversy. If any of
those arbitrators disqualifies himself or declines to serve, AAA shall continue
to designate potential arbitrators until the parties have seven to select from.
After the panel of seven potential arbitrators has been completed, a two-page
summary of the background of each of the potential arbitrators will be given to
each of the parties, and the parties will have a period of 10 days after
receiving the summaries in which to attempt to agree upon the arbitrators to
conduct the arbitration. If the parties are unable to agree upon three
arbitrators, then one of the parties shall notify AAA and the other party, and
AAA will notify each party that it has five days from the AAA notice to strike
two names from the list and advise AAA of the two names stricken. After
expiration of the strike period, if all but three candidates have been stricken,
the remaining three will be the arbitrators, but, if four or more have not been
stricken, AAA shall select the three arbitrators from those not stricken. The
decision of AAA with respect to the selection of the arbitrator will be final
and binding in such case.
(c) No Litigation. Unless and only to the extent mandatory arbitration is
validly prohibited or limited by applicable law, statute or regulation, no
litigation or other proceeding may ever be instituted at any time in any court
for the purpose of adjudicating, interpreting or enforcing any of the rights,
duties, liabilities or obligations hereunder of the parties hereto or any of
their respective rights, duties, liabilities or obligations relating to any
Subject Claim, or for the purpose of appealing any decision of an arbitrator,
except a proceeding instituted (i) for the purpose of having the award or
judgment of an arbitrator entered and enforced or (ii) to seek an injunction or
restraining order (but not damages in connection therewith) in circumstances
where such relief is available.
(d) Arbitration Hearing. Within 10 days after the selection of the
arbitrators, the parties and their counsel will appear before the arbitrators at
a place and time designated by the arbitrators for the purpose of each party
making a presentation and summary of the case. Thereafter, the
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arbitrators will set dates and times for additional hearings in accordance with
the Rules until the proceeding is concluded. The desire and goal of the parties
is, and the arbitrators will be advised that their goal should be, to conduct
and conclude the arbitration proceeding as expeditiously as possible. If any
party fails to appear at any hearing, the arbitrators shall be entitled to reach
a decision based on the evidence that has been presented to them by the parties
who did appear.
Section 12. General. (a) Notices. All notices and other communications
hereunder will be in writing, and will be deemed to have been duly given if
delivered personally, or three (3) business days after being mailed by certified
mail with return receipt requested, or upon receipt if sent by written
telecommunication, to the relevant address set forth below, or to such other
address as the recipient of such notice or communication will have specified to
the other party hereto in accordance with this Section 12(a):
If to the Company, to: with a copy to:
Physicians Resource Group, Inc. Fulbright & Jaworski, L.L.P.
Three Lincoln Centre, Suite 1540 2200 Rose Avenue, Suite 2800
5430 LBJ Freeway Dallas, Texas 75201
Dallas, Texas 75240 Attn: Linton E. Barbee
Attn: General Counsel Fax No.: (214) 855-8200
Fax No. : (972) 982-8299
If to Employee, to: with a copy to:
Richard A. Gilleland Debevoise & Plimpton
4994 Summit View Drive 875 Third Avenue
Westlake Village, California 91362 New York, New York 10022
Fax No.: (805) 496-7401 Attn: David A. Brittenham
Fax No.: (212) 909-6836
(b) Withholding; No Offset. All payments required to be made by the
Company under this Agreement to Employee will be subject to the withholding of
such amounts, if any, relating to federal, state and local taxes as may be
required by law. No payment under this Agreement will be subject to offset or
reduction attributable to any amount or obligation Employee may owe or be liable
for to the Company or any other Person.
(c) Equitable Remedies. Each of the parties hereto acknowledges and
agrees that upon any breach by Employee of his obligations under any of Sections
9 and 10 hereof, the Company will have no adequate remedy at law, and
accordingly will be entitled to specific performance and other appropriate
injunctive and equitable relief.
(d) Severability. If any provision of this Agreement is held to be
illegal, invalid or unenforceable, such provision will be fully severable and
this Agreement will be construed and enforced as if such illegal, invalid or
unenforceable provision never comprised a part hereof; and the remaining
provisions hereof will remain in full force and effect and will not be affected
by the illegal, invalid or unenforceable provision or by its severance herefrom.
Furthermore, in lieu of
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such illegal, invalid or unenforceable provision, there will be added
automatically as part of this Agreement a provision as similar in its terms to
such illegal, invalid or unenforceable provision as may be possible and be
legal, valid and enforceable.
(e) Waivers. No delay or omission by either party hereto in exercising
any right, power or privilege hereunder will impair such right, power or
privilege, nor will any single or partial exercise of any such right, power or
privilege preclude any further exercise thereof or the exercise of any other
right, power or privilege.
(f) Counterparts. This Agreement may be executed in multiple
counterparts, each of which will be deemed an original, and all of which
together will constitute one and the same instrument.
(g) Captions. The captions in this Agreement are for convenience of
reference only and will not limit or otherwise affect any of the terms or
provisions hereof.
(h) Reference to Agreement. Use of the words "herein," "hereof," "hereto"
and the like in this Agreement refer to this Agreement only as a whole and not
to any particular Section, subsection or provision of this Agreement, unless
otherwise noted. Any reference to a "Section" or "subsection" shall refer to a
Section or subsection of this Agreement, unless otherwise noted.
(i) Successors and Binding Agreement. (1) The Company shall require any
successor (whether direct or indirect, by purchase, merger, consolidation,
reorganization or otherwise) to all or substantially all of the business or
assets of the Company, by agreement in form and substance satisfactory to the
Employee, expressly to assume and agree to perform this Agreement in the same
manner and to the same extent the Company would be required to perform if no
such succession had taken place. This Agreement shall be binding upon and inure
to the benefit of the Company and any successor to the Company, including
without limitation any Persons acquiring directly or indirectly all or
substantially all of the business or assets of the Company whether by purchase,
merger, consolidation, reorganization or otherwise (and such successor shall
thereafter be deemed the "Company" for the purposes of this Agreement), but
shall not otherwise be assignable, transferable or delegable by the Company.
Without limiting the foregoing, the surviving or transferee corporation or
other Person in any such transaction (whether by merger, consolidation,
reorganization, transfer of business or assets, or otherwise) shall be subject
to the provisions of Section 7 hereof and shall be deemed to be the Company for
purposes of such provisions, regardless of whether such transaction itself
constituted a Change of Control of the Company.
(2) This Agreement is personal in nature and neither of the parties hereto
shall, without the consent of the other, assign, transfer or delegate this
Agreement or any rights or obligations hereunder except (x) in the case of the
Company, as expressly provided in the preceding clause (1) of this Section
12(i), and (y) in the case of Employee, for a transfer by Employee's will or by
the laws of descent and distribution. If Employee dies while any amounts would
still be payable to him hereunder, such amounts will be paid to Employee's
estate.
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(3) This Agreement shall inure to the benefit of and be binding upon the
parties hereto and their respective heirs, successors, legal representatives and
assigns.
(j) Entire Agreement; Amendments and Waivers. This Agreement (together
with the Option Agreement and the Registration Rights Agreement) contain the
entire understanding of the parties, and supersede all prior agreements and
understandings between them, relating to the subject matter hereof. This
Agreement may not be amended or modified except by a written instrument
hereafter signed by each of the parties hereto, and may not be waived except by
a written instrument hereafter signed by the party granting such waiver.
(K) GOVERNING LAW. THIS AGREEMENT AND THE PERFORMANCE HEREOF SHALL BE
GOVERNED AND CONSTRUED IN ALL RESPECTS, INCLUDING BUT NOT LIMITED TO AS TO
VALIDITY, INTERPRETATION AND EFFECT, BY THE LAWS OF THE STATE OF DELAWARE,
WITHOUT REGARD TO THE PRINCIPLES OR RULES OF CONFLICT OF LAWS THEREOF.
EXECUTED as of the date and year first above written.
PHYSICIANS RESOURCE GROUP, INC.
By:
------------------------------------
Its:
-----------------------------------
EMPLOYEE
----------------------------------------
RICHARD A. GILLELAND
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EXHIBIT 10.42
EMPLOYMENT AGREEMENT
Employment Agreement, dated as of January 24, 1998 (the "Agreement"), by
and between Physicians Resource Group, Inc., a Delaware corporation (the
"Company"), and Peter Dorflinger ("Employee"). This Agreement is executed on
January 24, 1998, and is effective as of its date.
W I T N E S S E T H:
In consideration of the mutual covenants and conditions contained herein,
the parties hereto agree as follows:
Section 1. Employment. The Company hereby agrees to employ Employee, and
Employee hereby accepts employment by the Company, upon the terms and subject to
the conditions hereinafter set forth. During the term of his employment
hereunder, the Employee shall have the title of President and Chief Operating
Officer of the Company.
Section 2. Duties. In his capacity as President and Chief Operating
Officer of the Company, the Employee shall perform such reasonable executive
duties as a president would normally perform or as otherwise specified in the
By-laws of the Company, and such other reasonable executive duties as the Board
of Directors of the Company may from time to time reasonably prescribe with the
concurrence of Employee. Except as otherwise provided herein, except as may
otherwise be approved by the Board of Directors of the Company, and except
during vacation periods and reasonable periods of absence due to sickness,
personal injury or other disability, Employee agrees to devote substantially all
of his available time to the performance of his duties to the Company hereunder,
provided that nothing contained herein shall preclude the Employee from (i)
serving on the board of directors of any business or corporation on which he is
serving on the date hereof or, with the consent of the Board of Directors,
serving on the board of directors of any other business or corporation, (ii)
serving on the board of, or working for, any charitable or community
organization, (iii) pursuing his personal financial and legal affairs so long as
such activities do not materially interfere with the performance of Employee's
duties hereunder.
Section 3. Term. Except as otherwise provided herein, the term of this
Agreement shall be for three years (the "Initial Term"), commencing on the date
of this Agreement. This Agreement shall be automatically renewed thereafter for
successive one year terms (each such renewal term, an "Renewal Term") unless
either party gives to the other written notice of termination no fewer than
ninety (90) days prior to the expiration of any such Renewal Term, which notice
shall expressly refer to this Section 3 of the Agreement and state that such
party does not wish to extend this Agreement (any such notice, a "Non-Renewal
Notice"). Any such Non-Renewal Notice given by the Company shall constitute a
termination of Employee's employment without Cause for purposes of this
Agreement. The Initial Employment Term, as the same may be extended by any
Renewal Term, is referred to herein as the "Employment Term." The provisions of
this Agreement shall survive any termination hereof.
Section 4. Compensation and Benefits. In consideration for the services
of the Employee hereunder, the Company shall compensate Employee and perform its
other obligations as provided in this Section 4.
(a) Base Salary. Commencing on the date hereof, Employee shall be
entitled to receive, and the Company shall pay the Employee in equal bi-weekly
installments, a base salary at a rate per annum of Three Hundred Thousand United
States Dollars ($300,000), as increased from time to time by the Board of
Directors
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of the Company or the Option and Compensation Committee of the Board of
Directors (the "Compensation Committee"). Commencing in 1999 and from time to
time at least annually thereafter, the Compensation Committee shall review and
evaluate the annual base salary of the Employee in accordance with its standard
policies and practices for key executive employee compensation and, in its
discretion, may increase the Employee's annual base salary commencing on January
24, 1999 and on anniversaries of such date thereafter. The amount of such base
salary for each respective annual one year period, including any increases
hereafter approved, is referred to as the "Base Salary" for such respective one
year period. The Employee's Base Salary may not and shall not be decreased or
reduced, including but not limited to after giving effect to any such increase.
(b) Bonuses. During the Employment Term, the Employee shall be eligible
to participate in any annual fiscal year bonus program that may be provided by
the Company for its key executive employees, subject to its terms and
conditions. To the extent that any payment thereunder is subject to the
achievement by the Company of certain financial performance objectives, such
objectives shall not be less favorable to the Employee than those applicable to
other executive employees participating thereunder. On January 24, 1998, the
Board adopted a formal bonus plan (the "Executive Bonus Plan") for eligible
senior executive officers, including Employee, which shall be in form and
substance reasonably satisfactory to the Company and Employee and contain terms
and conditions consistent with this Agreement. The Executive Bonus Plan shall
provide Employee with a target bonus opportunity of seventy-five percent (75%)
of Base Salary for each calendar year in the Employment Term 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. Such objectives and targets shall be determined on an
annual basis each year during the Employment Term, and shall be reasonably
satisfactory to the Company and Employee. The Executive Bonus Plan (including
such objectives and targets) will be initially prepared by the Chief Executive
Officer or (to the extent he so determines) under his supervision and presented
to the Compensation Committee for review. All bonuses payable to Employee under
the Executive Bonus Plan or any other annual bonus plan shall be determined and
paid on or prior to January 31 of the year following the year for which such
bonus is payable.
(c) Other Long Term Incentive Compensation. Employee shall be entitled to
participate in all long-term incentive compensation programs for key executives
(if any) at a level commensurate with his position.
(d) Other Benefits. During the term of this Agreement, Employee shall be
entitled to participate in and receive benefits under any and all pension,
profit-sharing, life and other insurance, medical, dental, health and other
welfare and fringe benefit plans and programs, and be provided any and all other
perquisites, that are from time to time made available to executive employees or
other employees of the Company. Employee shall also be entitled to an amount of
paid vacation per calendar year, and sick leave and illness and disability
benefits, in accordance with such reasonable Company policy as may be applicable
from time to time to key executive employees.
(e) Options. To induce Employee to enter into employment with the Company
and as a condition of his acceptance of such employment, effective upon the date
of this Agreement, the Company shall grant to Employee an option to purchase Two
Hundred Thousand (200,000) shares of the Common Stock, par value $0.01 per
share, of the Company (the "Common Stock") at an exercise price of Three and
Five Eighths ($3.625) per share (the "Option"). To evidence the Option,
promptly after the execution of this Agreement, but in no event later than
February 15, 1998, the Company shall execute and deliver to the Employee an
option agreement (the "Option Agreement"), which shall contain terms and
conditions consistent with this Agreement and shall provide, among other things,
for the following:
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(i) The Option shall be vested over a 3-year term, with an ultimate
expiration date of the later of (x) January 23, 2008 and (y) the tenth
anniversary of the date on which the Option is granted to Employee.
(ii) The grant of the Option shall not be subject to any approval by
stockholders of the Company.
(iii) If Employee voluntarily terminates his employment without Good
Reason (as defined in Section 6 hereof), the Option, to the extent it is
vested, shall remain exercisable for thirty (30) days following the date of
such termination. In the event of any other termination of Employee's
employment with the Company, the Option, to the extent it is vested, shall
remain exercisable for three hundred sixty-five (365) days following the
date of such termination.
(iv) The shares of Common Stock of the Company issuable under the
Option shall be fully registered and freely tradeable and shall be of the
same class of voting common stock of the Company, with the same rights,
powers and privileges, as is currently publicly traded on the New York
Stock Exchange and registered with the United States Securities and
Exchange Commission (the "SEC"). Without limiting the foregoing, such
shares shall not be subject to any restriction, on transfer, on exercise of
any right, power or privilege or otherwise, not applicable to all of such
class of voting common stock generally.
Section 5. Expenses and Other Employment-Related Matters. (a) It is
acknowledged by the parties that Employee, in connection with the services to be
performed by him pursuant to the terms of this Agreement, will be required to
make payments for travel, entertainment and similar expenses. The Company shall
reimburse Employee for all reasonable expenses incurred by Employee in
connection with the performance of his duties hereunder or otherwise on behalf
of the Company.
(b) Employee shall receive a car leasing allowance of One Thousand United
States Dollars ($1,000) per month. Employee may continue to maintain his
principal residence in Houston, Texas, and the Company shall promptly reimburse
Employee for reasonable travel expenses between Houston, Texas and the principal
executive offices of the Company and the reasonable living expenses of Employee
incurred in connection with residing in or near the city or area in which the
principal executive offices of the Company are located.
(c) If a federal, state or local income or other similar tax for any
portion of the items for which the Company pays or reimburses Employee pursuant
to this Section 5 is assessed against Employee by the Internal Revenue Service
or any other taxing authority and the Company is unable to successfully contest
such assessment, the Company shall promptly make an additional payment to
Employee equal to the amount of the taxes, interest and penalties ultimately
payable by Employee with respect thereto, plus any taxes due by reason of such
additional payment.
Section 6. Termination. Employee's employment may terminate prior to the
end of the Employment Term as provided in this Section 6.
(a) Death or Disability. Employee's employment will terminate (x)
immediately upon the death of Employee during the term of his employment
hereunder or (y) at the option of the Company, upon 30 days' prior written
notice to Employee, in the event of Employee's disability. Employee shall not
be deemed disabled unless, as a result of Employee's incapacity due to physical
or mental illness (as determined by a physician mutually selected by Employee or
his representative and the Company), Employee shall have been absent from
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and unable to perform his duties with the Company on a full-time basis for 120
consecutive business days. In the event of termination of Employee's employment
pursuant to this Section 6(a):
(1) The Company shall immediately pay Employee (i) any portion of
Employee's Base Salary accrued but unpaid through the date of such
termination, (ii) all payments and reimbursements under Section 5 hereof
for expenses incurred prior to such termination, and (iii) a prorated
annual bonus for the year of termination equal to seventy-five percent
(75%) of the amount calculated by dividing Employee's annual Base Salary at
the date of such 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. If the Company achieves target
performance objectives for the entire year in which such termination occurs
that, under the Executive Bonus Plan or any other then effective bonus
plan, would have entitled Employee to receive an annual bonus for such year
calculated at a percent greater than seventy-five percent (75%) of Base
Salary, Employee (or his estate) shall be entitled to receive, at the time
such bonus would have normally been payable, an additional amount equal to
(x) 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 (y) the amount previously paid pursuant to
clause (iii) of the preceding sentence.
(2) The Employee shall be entitled to receive all vested benefits
under the Company's otherwise applicable plans and programs.
(b) For Cause. The Company may terminate the Employee's employment for
Cause (as defined below) upon written notice by the Company to Employee, such
termination to take effect on the date determined in accordance with the last
paragraph of this Section 6(b) below to be the termination date for such
purpose. In the event of termination of Employee's employment for Cause
pursuant to this Section 6(b):
(1) The Company shall immediately pay Employee (i) any portion of
Employee's Base Salary accrued but unpaid through the date of such
termination and (ii) all payments and reimbursements under Section 5 hereof
for expenses incurred prior to such termination.
(2) The Employee shall be entitled to receive all vested benefits
under the Company's otherwise applicable plans and programs.
For purposes of this Agreement, the term "Cause" shall mean Employee's (i)
gross negligence in the performance of his duties as the Company's President and
Chief Executive Officer, which gross negligence results in a material adverse
effect on the Company, provided that no such gross negligence will constitute
"Cause" if it relates to an action taken or omitted by Employee in the good
faith, reasonable belief that such action or omission was in or not opposed to
the best interests of the Company; or (ii) habitual neglect or disregard of his
duties as the Company's President and Chief Executive Officer that is materially
and demonstrably injurious to the Company, after written notice from the Company
stating the duties Employee has failed to perform; or (iii) conviction of a
felony, provided that no such conviction will constitute "Cause" if it relates
to an action taken or omitted by Employee in the good faith, reasonable belief
that such action or omission was in or not opposed to the best interests of the
Company. The Employee's employment may not and shall not be terminated for
Cause unless (1) the Board of Directors provides the Employee with written
notice stating the conduct alleged to give rise to such Cause, (2) the Employee
has been given an opportunity to be heard by the Board, (3) in the case of
clause (i) or (ii) of the definition of Cause, the Employee has been given a
reasonable time to cure, and the Employee has not cured, such negligence or
failure to the reasonable
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satisfaction of the Board and (4) the Board has approved such termination by
majority vote of the members of the Board of Directors, excluding the Employee.
(c) By Company Without Cause. The Company may terminate Employee's
employment at any time for any reason without Cause. In the event of any
termination of Employee's employment by the Company without Cause:
(1) The Company shall pay Employee severance pay for the Severance
Period (as defined below), the per annum amount of which shall equal one
hundred percent (100%) of his Base Salary at the date of such termination.
The Company shall pay such severance pay in installments on a bi-weekly
basis with the first payment being made with respect to the first bi-weekly
payroll period for executive employees commencing after the date of his
termination of employment (but not later than 14 days after the date of
such termination). The Company's obligation to make such payments shall be
absolute and unconditional. Without limiting the foregoing, such payments
shall not be subject to any right of offset or similar right, and Employee
shall have no obligation of mitigation or similar obligation with respect
thereto.
(2) The Company shall immediately pay Employee (i) the portion of
Employee's Base Salary accrued but unpaid through the date of such
termination, (ii) all payments and reimbursements under Section 5 hereof
for expenses incurred prior to such termination and (iii) a prorated annual
bonus for the year of termination equal to seventy-five percent (75%) of
the amount calculated by dividing Employee's annual Base Salary at the date
of such 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. If the Company achieves target performance
objectives for the entire year in which such termination occurs that, under
the Executive Bonus Plan or any other then effective bonus plan, would have
entitled Employee to receive an annual bonus for such year calculated at a
percent greater than seventy-five percent (75%) of Base Salary, Employee
(or his estate) shall be entitled to receive, and the Company shall pay, at
the time the bonus would have normally been payable, an additional amount
equal to (x) 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 (y) the amount previously paid
pursuant to clause (iii) of the preceding sentence.
(3) Employee shall be entitled to receive all vested benefits under
the Company's otherwise applicable plans and programs.
(4) Following such termination, Employee shall be entitled to
continue participation (including participation of dependents, where
applicable) in all medical, dental, health and other welfare benefit plans
(or receive comparable coverage if such participation is not permitted
under the terms of such plans or if the Board, at its option, determines
that it is in the best interests of the Company to provide such comparable
coverage rather than continued participation in the Company's plans) until
the end of the Severance Period upon the same terms and conditions that
would have applied if Employee continued to be employed by the Company,
provided that the benefits referred to in this clause (4) will cease if and
to the extent Employee becomes eligible for similar benefits by reason of
new employment.
For purposes of this Agreement, the term "Severance Period" means (i) if
the Employee's employment is terminated at or prior to the end of the Initial
Term (including but not limited to by the giving of any Non-Renewal Notice or
other notice as provided in Section 3 hereof), a period equal to the greater of
(x) two full
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years beginning on the date of such termination and (y) the then remaining
portion of the Initial Term and (ii) if the Employee's employment is terminated
after the end of the Initial Term and prior to the end of the then-current
Renewal Term (including but not limited to by the giving of any Non-Renewal
Notice or other notice as provided in Section 3 hereof), a period equal to one
full year beginning on the date of such termination.
(d) By Employee for Good Reason. Employee may terminate his employment at
any time for Good Reason. In the event of any termination of Employee's
employment by Employee for Good Reason:
(1) The Company shall pay Employee severance pay for the Severance
Period, the per annum amount of which shall equal one hundred percent
(100%) of his Base Salary at the date of such termination. The Company
shall pay such severance pay in installments on a bi-weekly basis with the
first payment being made with respect to the first bi-weekly payroll period
for executive employees commencing after the date of his termination of
employment (but not later than 14 days after the date of such termination).
The Company's obligation to make such payments shall be absolute and
unconditional. Without limiting the foregoing, such payments shall not be
subject to any right of offset or similar right, and Employee shall have no
obligation of mitigation or similar obligation with respect thereto.
(2) The Company shall immediately pay Employee (i) the portion of
Employee's Base Salary accrued but unpaid through the date of such
termination, (ii) all payments and reimbursements under Section 5 hereof
for expenses incurred prior to such termination and (iii) a prorated annual
bonus for the year of termination equal to seventy-five percent (75%) of
the amount calculated by dividing Employee's annual Base Salary at the date
of such 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. If the Company achieves target performance
objectives for the entire year in which such termination occurs that, under
the Executive Bonus Plan or any other then effective bonus plan, would have
entitled Employee to receive an annual bonus for such year calculated at a
percent greater than seventy-five percent (75%) of Base Salary, Employee
(or his estate) shall be entitled to receive, and the Company shall pay,
at the time the bonus would have normally been payable, an additional
amount equal to (x) 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 (y) the amount
previously paid pursuant to clause (iii) of the preceding sentence.
(3) Employee shall be entitled to receive all vested benefits under
the Company's otherwise applicable plans and programs.
(4) Following such termination, Employee shall be entitled to
continue participation (including participation of dependents, where
applicable) in all medical, dental, health and other welfare benefit plans
(or receive comparable coverage if such participation is not permitted
under the terms of such plans or if the Board, at its option, determines
that it is in the best interests of the Company to provide such comparable
coverage rather than continued participation in the Company's plans) during
the Severance Period upon the same terms and conditions that would have
applied if Employee continued to be employed by the Company, provided that
the benefits referred to in this clause (4) will cease if and to the extent
Employee becomes eligible for similar benefits by reason of new employment.
For purposes of this Agreement, "Good Reason" means (A) a material
diminution of Employee's duties or responsibilities, (B) a reduction in
Employee's Base Salary, or annual bonus or long-term incentive
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compensation opportunity, (C) a Change of Control (as defined in Section 7
hereof), (D) failure of the Board to adopt the Executive Bonus Plan by March 31,
1998, (E) failure of the Company to execute and deliver to Employee, on or prior
to January 24, 1998, the Option Agreement and Registration Rights Agreement in
form and substance reasonably satisfactory to Employee and containing terms and
conditions consistent with this Agreement, or (F) a material breach by the
Company of any other provision of this Agreement that is not cured promptly
after written notice to the Company by Employee.
(e) By Employee Without Good Reason. Employee may terminate his
employment at any time without Good Reason upon 20 days' prior written notice to
the Company. In the event of any such termination of Employee's employment by
Employee without Good Reason:
(1) The Company shall immediately pay Employee (i) any portion of
Employee's Base Salary accrued but unpaid through the date of such
termination and (ii) all payments and reimbursements under Section 5 hereof
for expenses incurred prior to such termination.
(2) The Employee shall be entitled to receive all vested benefits
under the Company's otherwise applicable plans and programs.
(f) Excise Tax Gross Up Payments. If a Change of Control or other
transaction triggers or results in the imposition upon Employee of any excise or
similar tax under Section 4999 of the Internal Revenue Code (or any similar or
successor provision), the Company shall pay (or cause any acquiror in such
transaction to pay) any such excise or similar tax and make "gross-up" payments
to Employee to the extent necessary so that Employee will receive the same net
after-tax amount he would have received if no excise tax had been imposed on
him.
(g) No Penalty, Forfeiture or Liability. Any termination by Employee of
his employment with the Company in accordance with the terms hereof shall be
without penalty, forfeiture or liability arising out of such termination of any
kind or nature. Notwithstanding any other provision hereof, any termination of
Employee's employment on or after the occurrence of a Change of Control shall be
deemed to be a termination by the Company without Cause (if by the Company) or
by the Employee with Good Reason (in any other case).
Section 7. Change In Control. For purposes of this Agreement, (1) the
term "Person" means any corporation, partnership (general, limited or other),
trust (business or other), company (limited liability, joint-stock, or other),
business, firm, association, organization, individual, governmental
instrumentality or entity, or other person or entity, (2) the term "Voting
Stock" shall mean, as to any Person, the then-outstanding securities of or other
interests in such corporation entitled to vote generally in the election of
directors, trustees or similar managers of such Person, and (3) the term "Change
in Control" shall mean:
(a) The Company is merged, consolidated or reorganized into or with
another corporation or other Per son, or the stockholders of the Company
approve such a merger, consolidation or reorganization, and as a result of such
merger, consolidation or reorganization, the holders of the Voting Stock of the
Company immediately prior to such transaction hold or would hold in the
aggregate less than seventy percent (70%) of the combined voting power of the
then-outstanding Voting Stock of the surviving corporation or Person immediately
after such transaction; or
(b) The Company sells or otherwise transfers all or substantially all of
its assets to another corporation or other Person, or the stockholders of the
Company approve such a sale or transfer, and either (x) as a result of such sale
or transfer, the holders of Voting Stock of the Company immediately prior to
such sale or transfer
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hold or would hold in the aggregate less than seventy percent (70%) of the
combined voting power of the then-outstanding Voting Stock of such corporation
or Person immediately after such sale or transfer, or (y) such corporation or
Person does not assume all of the Company's obligations to the Employee pursuant
to an instrument in form and substance reasonably satisfactory to the Employee;
or
(c) The Company is liquidated or dissolved, or the stockholders of the
Company approve such a liquidation or dissolution; or
(d) Any Person or "group" (as the term "group" is used in Section 13(d)(3)
or Section 14(d)(2) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) becomes, or a report is filed on Schedule 13D or Schedule 14D-1
(or any successor schedule, form or report), each as promulgated pursuant to the
Exchange Act, disclosing that any Person or "group" (as the term "group" is used
in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) has become, the
beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or
any successor rules or regulations promulgated under the Exchange Act) of
securities representing 30% or more of the combined voting power of the then-
outstanding Voting Stock of the Company or 50% or more of the then-outstanding
shares of Voting Stock of the Company; or
(e) The Company files a report or proxy statement with the Securities and
Exchange Commission pursuant to the Exchange Act disclosing in response to Form
8-K or Schedule 14A (or any successor schedule, form or report or item therein)
that a change in control of the Company has occurred or will occur in the future
pursuant to any then-existing contract or transaction; or
(f) If, during any period of two consecutive years, individuals who at the
beginning of any such period constitute the Directors of the Company cease for
any reason to constitute at least a majority thereof; provided, however, that
for purposes of this clause (f) each Director who is first elected, or first
nominated for election by the Company's stockholders, by a vote of at least two-
thirds of the Directors of the Company then still in office who were Directors
of the Company at the beginning of any such period (other than an election or
nomination of any individual whose initial assumption of office is in connection
with an actual or threatened election contest relating to the election of the
Directors of the Company, as such terms are used in Rule 14a-11 or any successor
rule or regulation promulgated under the Exchange Act) will be deemed to have
been a Director of the Company at the beginning of such period.
Section 8. Indemnification. (a) The Company agrees that, to the maximum
extent permitted under the corporate laws of the State of Delaware or, if more
favorable, the By-Laws of the Company as in effect on the date of this
Agreement, (x) the Employee shall be indemnified and held harmless by the
Company as provided under such corporate laws or such By-Laws, as applicable,
for actions or matters taken, undertaken or omitted to be taken or undertaken,
whether in connection with the performance of his duties and responsibilities
under this Agreement, or otherwise on behalf of the Company or any of its
Affiliates (as defined below), and (y) without limiting the foregoing, the
Company shall indemnify and hold harmless the Employee from and against (i) any
claim, loss, liability, obligation, damage, cost, expense, action, suit,
proceeding or cause of action (collectively, "Claims") arising from or out of or
relating to the Employee's acting as an officer, director, employee or agent of
the Company or any of its Affiliates or in any other capacity, including any
fiduciary capacity, in which the Employee serves at the request of the Company
or any of its Affiliates, and (ii) any cost or expense (including fees and
disbursements of counsel) (collectively, "Expenses") incurred by the Employee in
connection with the defense or investigation thereof. If any Claim is asserted
or other matter arises with respect to which the Employee believes in good faith
the Employee is entitled to indemnification as contemplated hereby, the Company
shall pay the Expenses incurred by the Employee in connection with the defense
or investigation of such Claim or matter (or cause such Expenses to be paid) on
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a bi-weekly basis, provided that the Employee shall reimburse the Company for
such amounts if the Employee shall be found, as finally judicially determined by
a court of competent jurisdiction, not to have been entitled to indemnification
hereunder.
For purposes of this Section 8(a), the term "Affiliate" means any
corporation or other entity (i) that, directly or indirectly, controls or is
controlled by or under common control with the Company or (ii) in respect of
which the Company is the beneficial owner (as defined in Section 7(d) above) of
at least 10% of its voting common stock or similar equity interests entitled to
vote generally for the election of such corporation's or entity's board of
directors, managers or trustees.
(b) The Company agrees not to amend or modify its By-Laws as in effect on
the date of this Agreement in any manner that would be adverse to Employee
without the prior written consent of Employee. The Company further agrees to
maintain directors and officers insurance that covers Employee as an insured in
effect throughout the Employment Term in policy amounts not less than, and on
terms and conditions no less favorable to Employee than, those of the directors
and officers insurance policy that is currently in effect. The Company
represents and warrants that it has previously provided to Employee a true,
complete and correct copy of such policy.
Section 9. Confidential Information. Employee recognizes and acknowledges
that certain proprietary, non-public information owned by the Company and its
affiliates, including without limitation proprietary, non-public information
regarding customers, pricing policies, methods of operation, proprietary
computer programs, sales, products, profits, costs, markets, key personnel,
formulae, product applications, technical processes, and trade secrets
(hereinafter called "Confidential Information"), are valuable, special and
unique assets of the Company and its affiliates. Employee will not, during or
after his term of employment, without the prior written consent of a member of
the Board believed by Employee to have been authorized by the Board for such
purpose, knowingly and intentionally disclose any of the Confidential
Information obtained by him while in the employ of the Company to any person,
firm, corporation, association or other entity for any reason or purpose
whatsoever, directly or indirectly (other than to an employee of the Company or
its affiliates, a director of the Company or its affiliates, or a Person to whom
disclosure is necessary or appropriate in Employee's good faith judgment in
connection with the performance of his duties hereunder or otherwise on behalf
of the Company), unless and until such Confidential Information becomes publicly
available (other than as a consequence of the breach by Employee of his
confidentiality obligations under this Section 9), and except as may be required
(or as Employee may be advised by counsel is required) in connection with any
judicial, administrative or other governmental proceeding or inquiry. In the
event of the termination of his employment, whether voluntary or involuntary and
whether by the Company or Employee, Employee will deliver to the Company and
will not take with him any documents, or any other reproductions (in whole or in
part) of any items, comprising Confidential Information (except that Employee
may retain any documents or reproductions in his possession on the date hereof,
his personal address, telephone and other contact lists and information, and any
other documents or reproductions retained upon advice of counsel).
Notwithstanding any other provision hereof, the term "Confidential Information"
does not include any information that (a) is or becomes publicly available other
than as the result of the breach by Employee of his confidentiality obligations
under this Section 9, (b) became, is or becomes available to Employee on a
nonconfidential basis from a source, other than the Company, that to Employee's
knowledge is not prohibited from disclosing such information to Employee by a
confidentiality obligation owed to the Company or (c) was known to Employee
prior to becoming a member of the Board of Directors. The provisions of this
Section 9 shall expire and be of no further force or effect on the third
anniversary of the date of termination of Employee's employment with the
Company.
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Section 10. Noncompetition. During his employment with the Company
pursuant to this Agreement, Employee will not knowingly and intentionally (i)
engage, directly or indirectly, alone or as a partner, officer, director,
employee or consultant of any other business organization, in any business
activities that are substantially and directly competitive with the business
activities then conducted by the Company (the "Designated Industry"), (ii)
divert to any competitor of the Company in the Designated Industry any customer
of Employee, which diversion has a material adverse effect on the Company, or
(iii) solicit or encourage any officer, employee, or consultant of the Company
to leave its employ for employment by or with any competitor of the Company in
the Designated Industry, which officer, employee or consultant so enters such
competitor's employment and which occurrence has a material adverse effect on
the Company, provided that Employee shall not be deemed to have breached his
obligations under clause (ii) or (iii) of the preceding sentence if Employee
takes such action in a good faith belief that such action is in the best
interests of the Company. The parties hereto acknowledge that Employee's
noncompetition obligations hereunder will not preclude Employee from (i) owning
less than 5% of the common stock of any publicly traded corporation or other
Person conducting business activities in the Designated Industry, (ii) serving
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 the Company, (iii) serving
on the board of directors of any business or corporation on which he is serving
on the date hereof. If at any time the provisions of this Section 10 are
determined to be invalid or unenforceable, by reason of being vague or
unreasonable as to area, duration or scope of activity, this Section 10 will be
considered divisible and will become and be immediately amended to only such
area, duration and scope of activity as will be determined to be reasonable and
enforceable by the court or other body having jurisdiction over the matter; and
Employee agrees that this Section 10 as so amended will be valid and binding as
though any invalid or unenforceable provision had not been included herein.
Section 11. Arbitration. (a) Subject Claims; Initiation of Binding
Arbitration. The matters, claims, rights, and obligations subject to these
arbitration provisions consist of any and all rights, claims and obligations
arising out of or relating to this Agreement or to the Employee's employment as
it relates to this Agreement (collectively, "Subject Claims"). IN THE EVENT OF
A DISPUTE BETWEEN THE PARTIES HERETO RELATING TO ANY SUBJECT CLAIM, THEN, UPON
NOTICE BY ANY PARTY TO THE OTHER PARTY (AN "ARBITRATION NOTICE") AND TO THE
AMERICAN ARBITRATION ASSOCIATION ("AAA"), HOUSTON, TEXAS, THE DISPUTE SHALL BE
SUBMITTED TO THREE (3) ARBITRATORS WHO ARE INDEPENDENT AND IMPARTIAL, FOR
BINDING ARBITRATION IN HOUSTON, TEXAS, IN ACCORDANCE WITH AAA'S NATIONAL RULES
FOR THE RESOLUTION OF EMPLOYMENT DISPUTES (THE "RULES") AS MODIFIED OR
SUPPLEMENTED HEREBY. THE COMPANY AND THE EMPLOYEE AGREE THAT THE LAWS OF THE
STATE OF DELAWARE SHALL APPLY. The Company and the Employee further agree that,
if the Employee prevails as to any material issue, the entire cost of such
proceedings (including, without limitation, the Employee's reasonable attorneys
fees) shall be borne by the Company. If the Employee does not prevail as to any
material issue, the parties shall bear their own respective costs and expenses.
The arbitrators' authority shall be to interpret the terms of this Agreement as
applied to the facts of the Employee's employment by the Company (or its
successors) and his rights under this Agreement. The parties agree that they
will faithfully observe the provisions of this Section 11 and the Rules and that
they will abide by and perform any award rendered by the arbitrators in
accordance herewith and therewith. The arbitration shall be subject to the
Federal Arbitration Act, 9 U.S.C. Section 1-16 (or to the principles enunciated
by such Act in the event it may not be technically applicable). The award or
judgment of the arbitrators shall be final and binding on all parties and
judgment upon the award or judgment of the arbitrators may be entered and
enforced by any court having jurisdiction. If any party becomes the subject of
a bankruptcy, receivership or other similar proceeding under the laws of the
United States of America, any state or commonwealth or any other nation or
political subdivision thereof, then, to the extent permitted or not prohibited
by applicable law, any factual or substantive legal issues arising in or during
the pendency of any such proceeding shall be subject to all of the foregoing
mandatory arbitration
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provisions and shall be resolved in accordance therewith. The agreements
contained herein have been given for valuable consideration, are coupled with an
interest and are not intended to be executory contracts.
(b) Selection of Arbitrators. Promptly after the Arbitration Notice is
given, AAA will select seven possible arbitrators, to whom AAA will give the
identities of the parties and the general nature of the controversy. If any of
those arbitrators disqualifies himself or declines to serve, AAA shall continue
to designate potential arbitrators until the parties have seven to select from.
After the panel of seven potential arbitrators has been completed, a two-page
summary of the background of each of the potential arbitrators will be given to
each of the parties, and the parties will have a period of 10 days after
receiving the summaries in which to attempt to agree upon the arbitrators to
conduct the arbitration. If the parties are unable to agree upon three
arbitrators, then one of the parties shall notify AAA and the other party, and
AAA will notify each party that it has five days from the AAA notice to strike
two names from the list and advise AAA of the two names stricken. After
expiration of the strike period, if all but three candidates have been stricken,
the remaining three will be the arbitrators, but, if four or more have not been
stricken, AAA shall select the three arbitrators from those not stricken. The
decision of AAA with respect to the selection of the arbitrator will be final
and binding in such case.
(c) No Litigation. Unless and only to the extent mandatory arbitration is
validly prohibited or limited by applicable law, statute or regulation, no
litigation or other proceeding may ever be instituted at any time in any court
for the purpose of adjudicating, interpreting or enforcing any of the rights,
duties, liabilities or obligations hereunder of the parties hereto or any of
their respective rights, duties, liabilities or obligations relating to any
Subject Claim, or for the purpose of appealing any decision of an arbitrator,
except a proceeding instituted (i) for the purpose of having the award or
judgment of an arbitrator entered and enforced or (ii) to seek an injunction or
restraining order (but not damages in connection therewith) in circumstances
where such relief is available.
(d) Arbitration Hearing. Within 10 days after the selection of the
arbitrators, the parties and their counsel will appear before the arbitrators at
a place and time designated by the arbitrators for the purpose of each party
making a presentation and summary of the case. Thereafter, the arbitrators will
set dates and times for additional hearings in accordance with the Rules until
the proceeding is concluded. The desire and goal of the parties is, and the
arbitrators will be advised that their goal should be, to conduct and conclude
the arbitration proceeding as expeditiously as possible. If any party fails to
appear at any hearing, the arbitrators shall be entitled to reach a decision
based on the evidence that has been presented to them by the parties who did
appear.
Section 12. General. (a) Notices. All notices and other communications
hereunder will be in writing, and will be deemed to have been duly given if
delivered personally, or three (3) business days after being mailed by certified
mail with return receipt requested, or upon receipt if sent by written
telecommunication, to the relevant address set forth below, or to such other
address as the recipient of such notice or communication will have specified to
the other party hereto in accordance with this Section 12(a):
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If to the Company, to: with a copy to:
Physicians Resource Group, Inc. Jackson & Walker
Three Lincoln Centre, Suite 1540 901 Main Street, Suite 6000
5430 LBJ Freeway Dallas, Texas 75202
Dallas, Texas 75240 Attn: Jim Walker
Attn: General Counsel Fax No.: (214) 953-5822
Fax No. : (972) 982-8299
If to Employee, to: with a copy to:
Peter Dorflinger Andrews & Kurth
One Carolane Trail 4200 Texas Commerce Tower
Houston, Texas 77024 Houston, Texas 77002
Fax No.: (713) 467-4960 Attn: Lawrence B. Schreve
Fax No.: (713) 220-4285
(b) Withholding; No Offset. All payments required to be made by the
Company under this Agreement to Employee will be subject to the withholding of
such amounts, if any, relating to federal, state and local taxes as may be
required by law. No payment under this Agreement will be subject to offset or
reduction attributable to any amount or obligation Employee may owe or be liable
for to the Company or any other Person.
(c) Equitable Remedies. Each of the parties hereto acknowledges and
agrees that upon any breach by Employee of his obligations under any of Sections
9 and 10 hereof, the Company will have no adequate remedy at law, and
accordingly will be entitled to specific performance and other appropriate
injunctive and equitable relief.
(d) Severability. If any provision of this Agreement is held to be
illegal, invalid or unenforceable, such provision will be fully severable and
this Agreement will be construed and enforced as if such illegal, invalid or
unenforceable provision never comprised a part hereof; and the remaining
provisions hereof will remain in full force and effect and will not be affected
by the illegal, invalid or unenforceable provision or by its severance herefrom.
Furthermore, in lieu of such illegal, invalid or unenforceable provision, there
will be added automatically as part of this Agreement a provision as similar in
its terms to such illegal, invalid or unenforceable provision as may be possible
and be legal, valid and enforceable.
(e) Waivers. No delay or omission by either party hereto in exercising
any right, power or privilege hereunder will impair such right, power or
privilege, nor will any single or partial exercise of any such right, power or
privilege preclude any further exercise thereof or the exercise of any other
right, power or privilege.
(f) Counterparts. This Agreement may be executed in multiple
counterparts, each of which will be deemed an original, and all of which
together will constitute one and the same instrument.
(g) Captions. The captions in this Agreement are for convenience of
reference only and will not limit or otherwise affect any of the terms or
provisions hereof.
(h) Reference to Agreement. Use of the words "herein," "hereof," "hereto"
and the like in this Agreement refer to this Agreement only as a whole and not
to any particular Section, subsection or provision
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of this Agreement, unless otherwise noted. Any reference to a "Section" or
"subsection" shall refer to a Section or subsection of this Agreement, unless
otherwise noted.
(i) Successors and Binding Agreement. (1) The Company shall require any
successor (whether direct or indirect, by purchase, merger, consolidation,
reorganization or otherwise) to all or substantially all of the business or
assets of the Company, by agreement in form and substance satisfactory to the
Employee, expressly to assume and agree to perform this Agreement in the same
manner and to the same extent the Company would be required to perform if no
such succession had taken place. This Agreement shall be binding upon and inure
to the benefit of the Company and any successor to the Company, including
without limitation any Persons acquiring directly or indirectly all or
substantially all of the business or assets of the Company whether by purchase,
merger, consolidation, reorganization or otherwise (and such successor shall
thereafter be deemed the "Company" for the purposes of this Agreement), but
shall not otherwise be assignable, transferable or delegable by the Company.
Without limiting the foregoing, the surviving or transferee corporation or other
Person in any such transaction (whether by merger, consolidation,
reorganization, transfer of business or assets, or otherwise) shall be subject
to the provisions of Section 7 hereof and shall be deemed to be the Company for
purposes of such provisions, regardless of whether such transaction itself
constituted a Change of Control of the Company.
(2) This Agreement is personal in nature and neither of the parties hereto
shall, without the consent of the other, assign, transfer or delegate this
Agreement or any rights or obligations hereunder except (x) in the case of the
Company, as expressly provided in the preceding clause (1) of this Section
12(i), and (y) in the case of Employee, for a transfer by Employee's will or by
the laws of descent and distribution. If Employee dies while any amounts would
still be payable to him hereunder, such amounts will be paid to Employee's
estate.
(3) This Agreement shall inure to the benefit of and be binding upon the
parties hereto and their respective heirs, successors, legal representatives and
assigns.
(j) Entire Agreement; Amendments and Waivers. This Agreement (together
with the Option Agreement and the Registration Rights Agreement) contain the
entire understanding of the parties, and supersede all prior agreements and
understandings between them, relating to the subject matter hereof. This
Agreement may not be amended or modified except by a written instrument
hereafter signed by each of the parties hereto, and may not be waived except by
a written instrument hereafter signed by the party granting such waiver.
(K) GOVERNING LAW. THIS AGREEMENT AND THE PERFORMANCE HEREOF SHALL BE
GOVERNED AND CONSTRUED IN ALL RESPECTS, INCLUDING BUT NOT LIMITED TO AS TO
VALIDITY, INTERPRETATION AND EFFECT, BY THE LAWS OF THE
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STATE OF DELAWARE, WITHOUT REGARD TO THE PRINCIPLES OR RULES OF CONFLICT OF LAWS
THEREOF.
EXECUTED as of the date and year first above written.
PHYSICIANS RESOURCE GROUP, INC.
By:
------------------------------------------
Richard Gilleland
Chairman and Chief Executive Officer
EMPLOYEE
-----------------------------------------------
PETER DORFLINGER
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EXHIBIT 10.43
EMPLOYMENT AGREEMENT
Employment Agreement (the "Agreement"), dated March 30, 1998 by and between
Physicians Resource Group, Inc., a Delaware corporation (the "Company"), and
Pamela Westbrook ("Employee").
W I T N E S S E T H:
Section 1. EMPLOYMENT. The Company hereby agrees to employ Employee, and
Employee hereby accepts employment by the Company, upon the terms and subject to
the conditions hereinafter set forth.
Section 2. DUTIES. Employee shall serve as the Chief Financial Officer of
the Company. Employee agrees to devote her full time and best efforts to the
performance of her duties to the Company. Employee and the Company acknowledge
that the corporate finance office of the Company will be located in Houston,
Texas. In the event the Company moves the corporate finance office away from
Houston, Texas, Employee shall be entitled to terminate this Employment
Agreement in accordance with the provisions of Section 6(f) hereof. Employee
acknowledges that the corporate finance office is currently located in Dallas,
Texas and agrees to commute to Dallas for a reasonable period of time to
coordinate the transition of such office to Houston, Texas. The Company
acknowledges that the process of relocating the corporate finance function to
Houston will begin immediately.
Section 3. TERM. Except as otherwise provided in Section 6 hereof, the
term of this Agreement shall be for three years ("Initial Term"), commencing on
the date of this Agreement. This Agreement shall be automatically renewed
thereafter for successive one year terms ("Renewal Term") unless either party
gives to the other written notice of termination no fewer than thirty (30) days
prior to the expiration of any such term that it does not wish to extend this
Agreement.
Section 4. COMPENSATION AND BENEFITS. In consideration for the services
of the Employee hereunder, the Company will compensate Employee as follows:
(a) Base Salary. Commencing on the date hereof, Employee shall be
entitled to receive a base salary of $175,000 per annum or as increased
from time to time by the Board of Directors of the Company or the Option
and Compensation Committee of the Board of Directors ("Compensation
Committee") thereof.
(b) Bonus. During the Term of employment, Employee shall be eligible
to receive an annual cash bonus in an amount determined in accordance with
the employee incentive plan adopted by the Board of Directors of the
Company on January 24, 1998 (the "Employee Incentive Plan"). The Employee
Incentive Plan shall provide Employee with a target bonus opportunity of
fifty percent (50%) of Employee's salary range
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midpoint for each calendar year in the Term of 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. The financial performance objectives
shall be determined by the Board of Directors on an annual basis each year
during the Term of employment. With respect to calendar year 1998, the
financial performance objectives of the Employee Incentive Plan are set
forth on Exhibit A, attached hereto and incorporated herein by reference.
All bonuses payable to Employee under the Employee Incentive Plan shall be
determined and paid within the first quarter of the year following the year
for which such bonus is payable.
(c) Benefits. During the term of this Agreement, Employee shall be
entitled to participate in and receive benefits under any and all employee
benefit plans and programs which are from time to time generally made
available to the executive employees of the Company, subject to approval
and grant by the appropriate committee of the Board of Directors of the
Company with respect to programs calling for such approvals or grants.
(d) Options. To induce Employee to enter into employment with the
Company and as a condition of Employee's acceptance of such employment,
effective upon the date of acceptance of employment, the Company shall
grant to Employee an option to purchase One Hundred Thousand (100,000)
shares of the Common Stock, par value $0.01 per share, of the Company (the
"Common Stock") at an exercise price of Three and Three Fourths Dollars
($3.75) per share (the "Option"). To evidence the Option, promptly after
the execution of this Agreement, the Company shall execute and deliver to
the Employee an option agreement, which shall contain terms and conditions
consistent with this Agreement and shall provide, among other things, for
the following:
(i) The Option shall be vested one-third immediately, one-third
on the first anniversary and one-third on the second anniversary, with an
ultimate expiration date of ten years from the date of grant.
(ii) The grant of the Option shall not be subject to any
approval by stockholders of the Company.
(iii) The shares of Common Stock of the Company issuable under
the Option shall be fully registered and freely tradeable and shall be of
the same class of voting common stock of the Company, with the same rights,
powers and privileges, as is currently publicly traded on the New York
Stock Exchange and registered with the United States Securities and
Exchange Commission. Without limiting the foregoing, such shares shall not
be subject to any restriction, on transfer, on exercise of any right, power
or privilege or otherwise, not applicable to all of such class of voting
common stock generally.
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<PAGE>
(iv) In the event of a change in control or threatened change in
control of Employer, Employee's options granted pursuant to Section 4(d)
shall become immediately vested and exercisable. A "change in control"
will be deemed to have occurred for purposes hereof (i) upon the occurrence
of a change of stock ownership of the Company of a nature that would be
required to be reported in response to Item 6(e) of Schedule 14A
promulgated under the Exchange Act, and any successor Item of a similar
nature; or (ii) upon the acquisition of beneficial ownership, directly or
indirectly, by any person (as such term is used in Sections 13(d) and
14(d)(2) of the Exchange Act) of securities of the Company representing 33%
or more of the combined voting power of the Company's then outstanding
securities; or (iii) a change during any period of two consecutive years of
a majority of the members of the Board for any reason, unless the election,
or the nomination for election by the Company's stockholders, of each
director was approved by a vote of a majority of the directors then still
in office who were directors at the beginning of the period; provided that
a change in control will not be deemed to have occurred for purposes hereof
with respect to any person meeting the requirements of clauses (i) and (ii)
of Rule 13d-1(b)(1) promulgated under the Exchange Act.
Section 5. EXPENSES. It is acknowledged by the parties that Employee, in
connection with the services to be performed by her pursuant to the terms of
this Agreement, will be required to make payments for travel (including travel
and housing in Dallas during the transition period), entertainment of business
associates and similar expenses. The Company will reimburse Employee for all
reasonable expenses of types authorized by the Company and incurred by Employee
in the performance of her duties hereunder. Employee will comply with such
budget limitations and approval and reporting requirements with respect to
expenses as the Company may establish from time to time.
Section 6. TERMINATION. Employee's employment hereunder will commence on
the date of this Agreement and continue until the end of the Initial Term and
any renewals of such term, except that the employment of Employee hereunder will
terminate earlier upon the occurrence of the following events:
(a) Death or Disability. Employee's employment will terminate
immediately upon the death of Employee during the term of her employment
hereunder or, at the option of the Company, in the event of Employee's
disability, upon 30 days notice to Employee. Employee will be deemed
disabled if, as a result of Employee's incapacity due to physical or mental
illness, Employee shall have been absent from her duties with the Company
on a full-time basis for 120 consecutive business days. In the event of the
termination of this Agreement pursuant to this subsection, Employee will
not be entitled to any severance pay or other compensation except for any
portion of her base salary accrued but unpaid from the last monthly payment
date to the date of termination, accrued bonus, and expense reimbursements
under Section 5 hereof for expenses incurred
3
<PAGE>
in the performance of her duties hereunder prior to termination.
(b) For Cause. The Company may terminate the Employee's employment
for "Cause" upon five (5) days written notice by the Company to Employee.
For purposes of this Agreement, a termination will be for Cause if: (i)
Employee willfully and continuously fails to perform her duties with the
Company (other than any such failure resulting from incapacity due to
physical or mental illness), (ii) Employee willfully engages in gross
misconduct materially and demonstrably injurious to the Company or (iii)
Employee has been convicted of a felony. In the event of the termination
of this Agreement pursuant to this subsection, Employee will not be
entitled to any severance pay or other compensation except for any portion
of her base salary accrued but unpaid from the last monthly payment date to
the date of termination and expense reimbursements under Section 5 hereof
for expenses incurred in the performance of her duties hereunder prior to
termination.
(c) By Company Without Cause. The Company may terminate this
Agreement at any time for any reason without cause. In the event of the
termination of this Agreement pursuant to this subsection, the Company will
pay Employee, as Employee's sole remedy in connection with such
termination, severance pay in the amount determined by multiplying (i)
Employee's monthly base salary at the rate in effect immediately preceding
the termination of Employee's employment, by (ii) the greater of twelve
(12) months or the remaining number of months of employment in the Initial
Term payable in equal monthly payments in arrears. The Company will also
pay Employee the portion of her base salary accrued but unpaid from the
last monthly payment date to the date of termination, accrued bonus, and
expense reimbursements under Section 5 hereof for expenses incurred in the
performance of her duties hereunder prior to termination.
(d) By Employee for Good Reason. If the Company relocates the
corporate accounting office to a location other than Houston, Texas,
Employee may terminate this Agreement for good reason. In the event of
the termination of this Agreement pursuant to this subsection, the Company
will pay Employee severance pay in the amount determined by multiplying (i)
Employee's monthly base salary at the rate in effect immediately preceding
the termination of Employee's employment, by (ii) the greater of twelve
(12) months or the remaining number of months of employment in the Initial
Term payable in equal monthly payments in arrears. The Company will also
pay Employee the portion of her base salary accrued but unpaid from the
last monthly payment date to the date of termination, accrued bonus, and
expense reimbursements under Section 5 hereof for expenses incurred in the
performance of her duties hereunder prior to termination.
4
<PAGE>
Section 7. EFFECT OF TERMINATION ON OPTIONS. The Employee has been
granted options to purchase shares of the Company's Common Stock and may
continue to be granted such options from time to time. The effect of the
termination of the Employee's employment on such options shall be determined by
this Section.
(a) If the Employee voluntarily leaves the employment of the Company
in breach of this Agreement, her options will automatically expire.
(b) If Employee dies or becomes disabled, as defined in Section 6(a),
while employed by the Company, her options shall become fully vested and
exercisable on the date of her death or disability and shall expire twelve
(12) months thereafter unless by its terms any of such options expire
sooner.
(c) If the Employee's employment with the Company is terminated for
Cause, as defined in Section 6(b), her options will automatically expire.
(d) If the Employee's employment with the Company is terminated
without cause during the Initial Term, pursuant to Section 6(c) or by
Employee for Good Reason pursuant to Section 6(d), her options will remain
exercisable and will vest and expire in accordance with the terms of the
applicable option agreements.
(e) If the Employee's employment with the Company is terminated
without cause subsequent to the Initial Term, pursuant to Section 6(c), her
options shall be exercisable (to the extent exercisable on the date of
termination of employment) at any time within three months following the
date of termination of employment unless by its terms the option expires
earlier.
Section 8. CONFIDENTIAL INFORMATION. Employee recognizes and acknowledges
that certain assets of the Company and its affiliates, including without
limitation information regarding customers, pricing policies, methods of
operation, proprietary computer programs, sales, products, profits, costs,
markets, key personnel, formulae, product applications, technical processes, and
trade secrets (hereinafter called "Confidential Information") are valuable,
special and unique assets of the Company and its affiliates. Employee will not,
during or after her term of employment, disclose any of the Confidential
Information to any person, firm, corporation, association, or any other entity
for any reason or purpose whatsoever, directly or indirectly, except as may be
required pursuant to her employment hereunder, unless and until such
Confidential Information becomes publicly available other than as a consequence
of the breach by Employee of her confidentiality obligations hereunder. In the
event of the termination of her employment, whether voluntary or involuntary and
whether by the Company or Employee, Employee will deliver to the Company all
documents and data pertaining to the Confidential Information and will not take
with her any documents or data of any kind or any reproductions (in whole or in
part) of any items relating to the Confidential Information.
5
<PAGE>
Section 9. NONCOMPETITION. Until one (1) year after termination of
Employee's employment hereunder, Employee will not (i) engage directly or
indirectly, alone or as a shareholder, partner, officer, director, employee or
consultant of any other business organization, in any business activities which
relate to the acquisition and consolidation of medical practices which were
either conducted by the Company at the time of Employee's termination or
"Proposed to be Conducted" (as defined herein) by the Company at the time of
such termination (the "Designated Industry"), (ii) divert to any competitor of
the Company in the Designated Industry any customer of Employee, or (iii)
solicit or encourage any officer, employee, or consultant of the Company to
leave its employ for employment by or with any competitor of the Company in the
Designated Industry. The parties hereto acknowledge that Employee's
noncompetition obligations hereunder will not preclude Employee from (i) owning
less than 5% of the common stock of any publicly traded corporation conducting
business activities in the Designated Industry or (ii) serving as an officer,
director, stockholder or employee of an entity engaged in the healthcare
industry whose business operations are not competitive with those of the
Company. "Proposed to be Conducted", as used herein, shall include those
business activities which are the subject of a formal, written business plan
approved by the Board of Directors prior to termination of Employee's employment
and which the Company takes material action to implement within 12 months of the
termination of Employee's employment. Employee will continue to be bound by the
provisions of this Section 9 until their expiration and will not be entitled to
any compensation from the Company with respect thereto. If at any time the
provisions of this Section 9 are determined to be invalid or unenforceable, by
reason of being vague or unreasonable as to area, duration or scope of activity,
this Section 9 will be considered divisible and will become and be immediately
amended to only such area, duration and scope of activity as will be determined
to be reasonable and enforceable by the court or other body having jurisdiction
over the matter; and Employee agrees that this Section 9 as so amended will be
valid and binding as though any invalid or unenforceable provision had not been
included herein.
Section 10. GENERAL.
(a) Notices. Except as otherwise provided herein, all notices and
other communications hereunder will be in writing or by written
telecommunication, and will be deemed to have been duly given if delivered
personally or if mailed by certified mail, return receipt requested or by
written telecommunication, to the relevant address set forth below, or to
such other address as the recipient of such notice or communication will
have specified to the other party hereto in accordance with this Section
10(a):
6
<PAGE>
If to the Company, to: with a copy to:
Physicians Resource Group, Inc. Physicians Resource Group, Inc.
Three Lincoln Centre, Suite 1540 Three Lincoln Centre, Suite 1540
5430 LBJ Freeway 5430 LBJ Freeway
Dallas, TX 75240 Dallas, Texas 75240
Attn: President Attn: General Counsel
Fax No.: (972) 982-8297 Fax No.: (972) 982-8299
If to Employee, to:
Pamela Westbrook
26 Schubach
Sugar Land, TX 77479
(b) Withholding; No Offset. All payments required to be made by the
Company under this Agreement to Employee will be subject to the withholding
of such amounts, if any, relating to federal, state and local taxes as may
be required by law. No payment under this Agreement will be subject to
offset or reduction attributable to any amount Employee may owe to the
Company or any other person.
(c) Equitable Remedies. Each of the parties hereto acknowledges and
agrees that upon any breach by Employee of her obligations under Section 9
hereof, the Company will have no adequate remedy at law, and accordingly
will be entitled to specific performance and other appropriate injunctive
and equitable relief.
(d) Severability. If any provision of this Agreement is held to be
illegal, invalid or unenforceable, such provision will be fully severable
and this Agreement will be construed and enforced as if such illegal,
invalid or unenforceable provision never comprised a part hereof; and the
remaining provisions hereof will remain in full force and effect and will
not be affected by the illegal, invalid or unenforceable provision or by
its severance herefrom. Furthermore, in lieu of such illegal, invalid or
unenforceable provision, there will be added automatically as part of this
Agreement a provision as similar in its terms to such illegal, invalid or
unenforceable provision as may be possible and be legal, valid and
enforceable.
(e) Waivers. No delay or omission by either party hereto in
exercising any right, power or privilege hereunder will impair such right,
power or privilege, nor will any single or partial exercise of any such
right, power or privilege preclude any further exercise thereof or the
exercise of any other right, power or privilege.
(f) Counterparts. This Agreement may be executed in multiple
counterparts, each of which will be deemed an original, and all of which
together will constitute one
7
<PAGE>
and the same instrument.
(g) Captions. The captions in this Agreement are for convenience of
reference only and will not limit or otherwise affect any of the terms or
provisions hereof.
(h) Reference to Agreement. Use of the words "herein," "hereof,"
"hereto" and the like in this Agreement refer to this Agreement only as a
whole and not to any particular subsection or provision of this Agreement,
unless otherwise noted.
(i) Binding Agreement. This Agreement will be binding upon and inure
to the benefit of the parties and will be enforceable by the personal
representatives and heirs of Employee and the successors of the Company.
If Employee dies while any amounts would still be payable to him hereunder,
such amounts will be paid to Employee's estate. This Agreement is not
otherwise assignable by Employee.
(j) Entire Agreement. This Agreement contains the entire
understanding of the parties, supersedes all prior agreements and
understandings relating to the subject matter hereof and may not be amended
except by a written instrument hereafter signed by each of the parties
hereto.
(k) Governing Law. This Agreement and the performance hereof will be
construed and governed in accordance with the laws of the State of Texas,
without regard to its choice of law principles.
EXECUTED as of the date and year first above written.
PHYSICIANS RESOURCE GROUP, INC.
By:
-------------------------------------
Its:
--------------------------------------
EMPLOYEE
-------------------------------------------
Pamela Westbrook
8
<PAGE>
EXHIBIT 10.44
================================================================================
PHYSICIANS RESOURCE GROUP, INC.
Borrower
_______________________________________
FIRST AMENDED AND RESTATED
LOAN AGREEMENT
$20,000,000 REVOLVING CREDIT LOAN
Dated as of November 28, 1997
________________________________________
NATIONSBANK OF TENNESSEE, N.A., AGENT
NATIONSBANK OF TENNESSEE, N.A.
AND ANY OTHER BANKS PARTY HERETO
Lenders
================================================================================
<PAGE>
TABLE OF CONTENTS
RECITALS................................................................. 1
I. DEFINITIONS....................................................... 1
1.1 Terms Defined in This Agreement....................... 1
1.2 Terms Generally.......................................14
II. LOANS AND LETTERS OF CREDIT.......................................14
2.1 Amount of Revolving Credit Loan.......................15
2.2 Use of Proceeds of Revolving Credit Loan..............15
2.3 Revolving Credit Loan Notes...........................15
2.4 Separate Commitments of Lender........................15
2.5 Advances of Loans.....................................15
2.6 Interest..............................................18
2.7 Alternate Rate of Interest if LIBOR Unavailable.......19
2.8 Change in Circumstances...............................20
2.9 Change in Legality of LIBOR Loans.....................22
2.10 Principal Repayment...................................22
2.11 Prepayment of LIBOR Loans.............................22
2.12 Prepayment of Base Rate Loans.........................23
2.13 Reduction of Commitment...............................24
2.14 Periodic Commitment Fee Based on Use of Facilities....24
2.15 Letters of Credit.....................................24
2.16 Up-Front Fee..........................................31
2.17 Additional Closing....................................31
III. CONDITIONS PRECEDENT..............................................32
3.1 Conditions to Initial Advance and Issuance............32
3.2 Conditions to Subsequent Loans and Issuances..........34
3.3 Conditions to the Additional Closing..................34
IV. REPRESENTATIONS AND WARRANTIES....................................35
4.1 Capacity..............................................35
4.2 Authorization.........................................35
4.3 Binding Obligations...................................36
4.4 No Conflicting Law or Agreement.......................36
4.5 No Consent Required...................................36
4.6 Financial Statements..................................36
4.7 Fiscal Year...........................................36
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4.8 Litigation............................................36
4.9 Taxes; Governmental Charges...........................37
4.10 Title to Properties...................................37
4.11 No Default............................................37
4.12 Casualties; Taking of Properties......................37
4.13 Compliance with Laws..................................37
4.14 Compliance with Fraud and Abuse Laws..................38
4.15 ERISA.................................................38
4.16 Full Disclosure of Material Facts.....................38
4.17 Accuracy of Projections...............................38
4.18 Investment Company Act................................38
4.19 Personal Holding Company..............................38
4.20 Solvency..............................................38
4.21 Chief Executive Office................................38
4.22 Subsidiaries..........................................38
4.23 Ownership of Patents, Licenses, Etc...................38
4.24 Environmental Compliance..............................39
4.25 Labor Matters.........................................39
4.26 OSHA Compliance.......................................39
4.27 Regulation U..........................................39
4.28 Affiliate Transactions................................39
4.29 Subordinated Debentures...............................39
V. AFFIRMATIVE COVENANTS.............................................40
5.1 Payment of Obligations................................40
5.2 Maintenance of Existence and Business.................40
5.3 Financial Statements and Reports......................40
5.4 Taxes and Other Encumbrances..........................43
5.5 Payment of Funded Debt................................43
5.6 Compliance with Laws..................................43
5.7 Maintenance of Property...............................43
5.8 Compliance with Contractual Obligations...............44
5.9 Further Assurances....................................44
5.10 Security Interest; Setoff.............................44
5.11 Insurance.............................................44
5.12 Accounts and Records..................................45
5.13 Official Records......................................45
5.14 Banking Relationships.................................45
5.15 Right of Inspection...................................45
5.16 ERISA Information and Compliance......................46
5.17 Indemnity; Expenses...................................46
5.18 Assistance in Litigation..............................47
5.19 Name Changes..........................................47
5.20 Estoppel Letters......................................47
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5.21 Environmental Matters.................................47
5.22 Opinions of Counsel...................................48
5.23 Borrower Entities.....................................49
5.24 Diagnostic Examination................................49
VI. NEGATIVE COVENANTS................................................49
6.1 Debts, Guaranties, and Other Obligations..............49
6.2 Change of Management..................................50
6.3 Change of Ownership...................................51
6.4 Encumbrances..........................................51
6.5 Investments...........................................51
6.6 Prepayments...........................................51
6.7 Sales and Leasebacks..................................51
6.8 Change of Control.....................................52
6.9 Nature of Business....................................52
6.10 Further Acquisitions, Mergers, Etc....................52
6.11 Advances..............................................52
6.12 Disposition of Assets.................................52
6.13 Inconsistent Agreements...............................52
6.14 Fictitious Names......................................52
6.15 Subsidiaries and Affiliates...........................52
6.16 Place of Business.....................................53
6.17 Adverse Action With Respect to Plans..................53
6.18 Transactions With Affiliates..........................53
6.19 Constituent Document Amendments.......................53
6.20 Adverse Transactions..................................53
6.21 Use of Lenders' Name..................................53
6.22 Margin Securities.....................................53
6.23 Accounting Changes....................................53
6.24 Distributions.........................................54
6.25 Action Outside Ordinary Course........................54
6.26 Modification of Subordinated Debenture Documents......54
6.27 Non-Scheduled Payment of Subordinated Debentures......54
VII. FINANCIAL COVENANTS...............................................54
VIII. EVENTS OF DEFAULT.................................................54
8.1 Events of Default.....................................54
8.2 Remedies..............................................57
IX. AGENT.............................................................58
9.1 Appointment of Agent..................................58
9.2 Powers and Duties of Agent............................58
9.3 Indemnification of Agent..............................59
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9.4 No Representations by Agent...........................60
9.5 Independent Investigations by Lenders.................60
9.6 Notice of Default.....................................60
9.7 Funding of Advances Pursuant to Borrowing Notices.....61
9.8 Agent in its Individual Capacity......................61
9.9 Holders...............................................61
9.10 Successor Agent.......................................61
9.11 Sharing of Payments, etc..............................62
9.12 Separate Liens on Collateral..........................62
9.13 Payments Between Agent and Lenders....................62
9.14 Assignments and Participations........................63
9.15 Bankruptcy Provisions.................................63
9.16 Foreclosure of Collateral.............................63
9.17 Procedures for Notices and Approvals..................64
9.18 Other Relationships With Borrower.....................64
X. GENERAL PROVISIONS................................................65
10.1 Notices...............................................65
10.2 Renewal, Extension, or Rearrangement..................66
10.3 Application of Payments...............................66
10.4 Counterparts..........................................66
10.5 Negotiated Document...................................67
10.6 Consent to Jurisdiction; Exclusive Venue..............67
10.7 Not Partners; No Third Party Beneficiaries............67
10.8 No Reliance on Lenders' Analysis......................67
10.9 No Marshaling of Assets...............................67
10.10 Impairment of Collateral..............................67
10.11 Business Days.........................................67
10.12 Standard of Care; Limitation of Damages...............67
10.13 Incorporation of Schedules............................68
10.14 Indulgence Not Waiver.................................68
10.15 Cumulative Remedies...................................68
10.16 Amendment and Waiver in Writing.......................68
10.17 Assignment............................................68
10.18 Entire Agreement......................................68
10.19 Severability..........................................69
10.20 Time of Essence.......................................69
10.21 Applicable Law........................................69
10.22 Captions Not Controlling..............................69
10.23 Amendment and Restatement.............................69
10.24 Facsimile Signatures..................................69
10.25 Arbitration...........................................69
v
<PAGE>
EXHIBITS
2.3 Form of Revolving Credit Note
2.5.1(b) Form of Borrowing Notice
SCHEDULES
1.1 Initial Borrower Entities
4.8 Litigation
4.28 Affiliate Transactions
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FIRST AMENDED AND RESTATED LOAN AGREEMENT
This First Amended and Restated Loan Agreement is entered into as of
the 28th day of November, 1997, by and among PHYSICIANS RESOURCE GROUP, INC.
("Borrower"), a Delaware corporation; the bank that has executed this Agreement
below and such other lenders as may hereafter become parties hereto
(collectively "Lenders"); and NATIONSBANK OF TENNESSEE, N.A., in its capacity as
Agent for Lenders ("Agent").
RECITALS
WHEREAS, Agent, NationsBank of Tennessee, N.A., AmSouth Bank of
Tennessee and Bank One Texas have previously entered into that Loan Agreement
dated as of March 14, 1997, providing for the extension of a revolving credit
facility to Borrower on certain terms and conditions (such Loan Agreement, as
previously amended, is referred to as the "Prior Loan Agreement"); and
WHEREAS, concurrently with the execution of this Agreement,
NationsBank of Tennessee, N.A., has purchased the Revolving Credit Notes held by
AmSouth Bank of Tennessee and Bank One Texas under the Prior Loan Agreement,
such that NationsBank of Tennessee, N.A. has become the only Lender thereunder;
and
WHEREAS, Borrower, Agent and NationsBank of Tennessee, N.A. wish to
amend and restate the Prior Loan Agreement to provide for a reduced credit
facility on certain revised terms, while preserving the mechanisms by which
other lenders may in the future join as Lenders under the Revolving Credit Loan;
NOW, THEREFORE, as an inducement to cause NationsBank of Tennessee,
N.A. to purchase the Revolving Credit Notes held by AmSouth Bank of Tennessee
and Bank One Texas under the Prior Loan Agreement, and for other valuable
consideration, the receipt and sufficiency of which are acknowledged, it is
agreed as follows:
I. DEFINITIONS
1.1 Terms Defined in This Agreement. As used below in this
Agreement, the following capitalized terms shall have the following meanings,
unless the context expressly requires otherwise:
"ACQUIRED DEBT" means Debt that is outstanding as of the date of
determination and which was previously a loan obligation or a Capital Lease of
an Acquired Practice at the time the Practice was acquired by a Borrower Entity;
provided, however, if any portion of such Debt is subject to the unqualified and
noncontingent written obligation of a Provider to repay the Debt, with interest,
in accordance with its terms, then "Acquired Debt" shall only include the
portion of such Debt that is not subject to the Provider's obligation of
repayment.
<PAGE>
"ACQUIRED PRACTICE" means a Practice that is either (i) owned by a
Borrower Entity as of the date hereof or (ii) acquired by a Borrower Entity
after the date hereof through a Permitted Acquisition.
"ADDITIONAL CLOSING" has the meaning assigned in Section 2.17 hereof.
"AFFILIATE" means, with respect to any Person, another Person that,
directly or indirectly, (i) has an equity interest in that Person in an amount
of more than twenty percent (20%) of such Person, (ii) has common ownership with
that Person, where the common owner owns more than twenty percent (20%) of each
Person so affiliated, (iii) Controls that Person, or (iv) shares common Control
with that Person.
"AGENT" means NationsBank of Tennessee, N.A., in its capacity as
described in Article IX of this Agreement, its lawful corporate successors and
any successor agent appointed pursuant to Article IX hereof.
"AGREEMENT" means this Loan Agreement (including all schedules and
exhibits hereto), as the same may be amended from time to time.
"ALTERNATE BASE RATE" means the greater of (i) the Federal Funds Rate
plus one-half percent ( 1/2%), and (ii) the rate announced by Agent as its
"prime rate" (which rate is not necessarily the lowest rate offered on any
particular type of loan), in each case as it may change from time to time.
"APPLICABLE COMMITMENT FEE" means three-eights percent (.375%).
"APPLICABLE LIBO RATE MARGIN" means two and one-half percent (2.5%).
"APPLICABLE BASE RATE MARGIN" means one-half percent (.5%)
"BANKING DAY" means a Business Day, subject to the following
additional convention. As to notices or payments received on a Business Day at
or before 11:00 a.m. Charlotte, North Carolina time, the Banking Day shall
correspond to the Business Day of receipt. As to notices or payments received
on a Business Day after 11:00 a.m. Charlotte, North Carolina time, the Banking
Day of receipt shall be deemed to be the next following Business Day.
"BANKRUPTCY CODE" means the Bankruptcy Reform Act of 1978, as it may
be amended from time to time.
"BASE RATE LOAN" means a Loan for which Borrower has elected the
application of an interest rate based upon the Alternate Base Rate.
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"BORROWER" means Physicians Resource Group, Inc., a Delaware
corporation, and its successors and assigns. This definition does not abrogate
the requirement set forth below restricting Borrower's ability to assign any
rights under this Agreement.
"BORROWER ENTITIES" means Borrower and all Subsidiaries in existence
from time to time.
"BORROWING NOTICE" has the meaning assigned in Section 2.5.1(b)
hereof.
"BUSINESS DAY" means any day on which Agent and national banks located
in Charlotte, North Carolina are open for the conduct of ordinary business;
provided however, that when used in connection with determining the LIBO Rate,
the term "Business Day" shall exclude any day on which banks are not open for
dealings in U.S. Dollar deposits in the London Interbank Market.
"CAPITAL EXPENDITURES" means expenditures, determined according to
GAAP on a consolidated basis, that would be capitalized and depreciated over
more than one annual accounting period.
"CAPITAL LEASE" means a lease that would be characterized as a
financed sale or purchase under GAAP.
"CHANGE OF CONTROL" means the occurrence, after the date of this
Agreement, of (i) any Person or two or more Persons acting in concert acquiring
beneficial ownership (within the meaning of Rule 13d-3 of the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as amended),
directly or indirectly, of securities of Borrower (or other securities
convertible into such securities) representing 30% or more of the combined
voting power of all securities thereof entitled to vote in the election of
directors; or (ii) during any period of up to 24 consecutive months, individuals
who at the beginning of such 24-month period were directors of Borrower ceasing
for any reason to constitute a majority of the Board of Directors thereof unless
the Persons replacing such individuals were nominated by the Board of Directors
of Borrower; or (iii) any Person or two or more Persons acting in concert
acquiring by contract or otherwise, or entering into a contract or arrangement
which upon consummation will result in its acquisition of, or control over,
securities of Borrower (or other securities convertible into such securities)
representing 30% or more of the combined voting power of all securities of
Borrower entitled to vote in the election of directors.
"CLOSING DATE" means the date of this Agreement.
"COLLATERAL" means all Property now or hereafter securing the
Obligations.
"COMMITMENT" means the amount of each Lender's commitment to fund the
Revolving Credit Loan. Each Lender's several Commitment for the Revolving
Credit Loan shall initially be as set forth below beside their signatures to
this Agreement.
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"CONSOLIDATED EBITDA" means EBITDA as calculated on a consolidated
basis according to GAAP, (i) reduced by the Non-Owned Portion of any EBITDA
arising from a Partially-Owned Subsidiary, and (ii) reduced by any positive
EBITDA arising from Permitted Unpledged Investments and Subsidiaries.
Additionally, EBITDA arising from the operations of Partially-Owned Subsidiaries
shall not exceed 20% of the total Consolidated EBITDA and EBITDA from Permitted
Minority Interest Investment Entities shall not exceed 3% of the total
Consolidated EBITDA.
"CONTROL" or "CONTROLLED" means that a Person has the direct or
indirect power to conduct or govern the policies of another Person, whether this
power exists as a matter of right or through economic compulsion.
"DEBT" means, with respect to any Person, all obligations, contingent
or otherwise, that would be classified under GAAP as a liability of that Person
including, but not limited to, any nonrecourse obligations secured by Property
of that Person.
"DEFAULT RATE" means the lesser of (i) two percent (2%) over the
otherwise applicable rate or, if no other rate is specified, two percent (2%)
over the Alternate Base Rate in effect from time to time, or (ii) the Maximum
Lawful Amount.
"EBITDA" means the sum of net income (before extraordinary gains but
adjusted to reflect extraordinary losses) plus Interest Expense plus expenses
for taxes, depreciation and amortization, determined according to GAAP.
"ENCUMBRANCE" means any interest in Property in favor of one not the
owner thereof, whether voluntary or involuntary, including, but not limited to,
(i) the lien or security interest arising from a deed of trust, mortgage,
pledge, security agreement, conditional sale, Capital Lease, consignment, or
bailment for security purposes, and (ii) reservations, exceptions,
encroachments, easements, rights-of-way, covenants, conditions, restrictions,
leases, and other such title encumbrances.
"ENVIRONMENTAL LAWS" means the Environmental Protection Act, the
Resource Conservation and Recovery Act of 1976, the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, the Hazardous Materials
Transportation Act and any other federal, state or municipal law, rule or
regulation relating to air emissions, water discharge, noise emissions, solid or
liquid waste disposal, hazardous or toxic waste or materials, or other
environmental or health matters.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, including (unless the context otherwise requires) any
rules or regulations promulgated thereunder.
"ERISA AFFILIATE" means any Person who for purposes of Title IV of
ERISA is a member of Borrower's controlled group, or under common control with
Borrower, within
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the meaning of Section 414 of the IRC, the regulations promulgated pursuant
thereto and the published revenue rulings issued thereunder.
"ERISA EVENT" means (i) the occurrence of a reportable event, within
the meaning of Section 4043 of ERISA, unless the 30-day notice requirement with
respect thereto has been waived by the PBGC; (ii) the provision by the
administrator of any Plan of a notice of intent to terminate such Plan, pursuant
to Section 4041(a)(2) of ERISA (including any such notice with respect to a plan
amendment referred to in Section 4041(e) of ERISA); (iii) the cessation of
operations at a facility in the circumstances described in Section 4068(f) of
ERISA; (iv) the withdrawal by Borrower or an ERISA Affiliate from a Multiple
Employer Plan during a plan year for which it was a substantial employer, as
defined in 4001(a)(2) of ERISA; (v) the failure by Borrower or any ERISA
Affiliate to make a material payment to a Plan required under Section 302(f)(1)
of ERISA; (vi) the adoption of an amendment to a Plan requiring the provision of
initial or additional security to such Plan, pursuant to Section 307 of ERISA;
or (vii) the institution by the PBGC of proceedings to terminate a Plan,
pursuant to Section 4042 of ERISA, or the occurrence of any event or condition
which might constitute grounds under Section 4042 of ERISA for the termination
of, or the appointment of a trustee to administer, a Plan.
"EVENT OF DEFAULT" means the occurrence of any of the events specified
in Section 8.1 hereof, as to which any requirement for notice or lapse of time
has been satisfied.
"FEDERAL FUNDS RATE" means, for any day, the rate set forth in the
weekly statistical release designated as H.15(519) or any successor publication,
published by the Federal Reserve Board (including any such successor,
"H.15(519)") for such day opposite the caption "Federal Funds (Effective)." If
on any relevant day such rate is not yet published in H.15(519), the rate for
such day will be the rate set forth in the daily statistical release designated
as the Composite 3:30 p.m. Quotations for U.S. Government Securities, or any
successor publication, published by the Federal Reserve Bank of New York
(including any such successor, the "Composite 3:30 p.m. Quotations") for such
day under the caption "Federal Funds Effective Rate." If on any relevant day the
appropriate rate for such day is not yet published in either H.15(519) or the
Composite 3:30 p.m. Quotations, the rate for such day shall be the arithmetic
mean of the rates for the last transaction in overnight federal funds arranged
prior to 9:00 a.m., New York City time, on that day by each of three leading
brokers of federal funds transactions in New York City, selected by Agent.
"FINANCIAL STATEMENTS" means the audited consolidated balance sheet,
income statement, and statement of cash flows for Borrower dated December 31,
1996 and the unaudited consolidated financial statements dated September 30,
1997 delivered by Borrower to Agent, and all notes thereto.
"FRAUD AND ABUSE LAWS" means Section 1128B(b) of the Social Security
Act, 42 U.S.C. Section 1320a-7b(b) and Section 1877 of the Social Security Act,
42 U.S.C. Section 1877, as from time to time amended; any successor statute(s)
thereto; all rules and regulations
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promulgated thereunder; and any other Law relating to the ownership of medical
facilities by providers of medical services or the referral of patients to
medical facilities owned by providers of medical services.
"FUNDED DEBT" means all Debt for borrowed money evidenced by a
promissory note, debenture or similar instrument including, without limitation,
Capital Leases and the Subordinated Debentures and specifically excluding,
without limitation, trade payables, accrued liabilities, income taxes and
deferred income taxes, determined on a consolidated basis.
"GAAP" means generally accepted accounting principles pronounced by
the Financial Accounting Standards Board or any successor thereto, as in effect
from time to time.
"GOVERNMENTAL AUTHORITY" means any governmental or quasi-governmental
entity, court or tribunal including, without limitation, any department,
commission, board, bureau, agency, administration, service or other
instrumentality of any foreign or domestic governmental entity.
"GUARANTORS" means Lucius E. Burch III and David Meyer M.D.
"HAZARDOUS SUBSTANCES" means those substances included from time to
time within the definition of hazardous substances, hazardous materials, toxic
substances, or solid waste under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 as amended, 42 U.S.C. (S) 9601 et seq.;
the Resource Conservation and Recovery Act of 1976, 42 U.S.C. (S) 6901 et seq.;
the Hazardous Materials Transportation Act, 49 U.S.C. (S) 1801 et seq.; the
Clean Water Act, 33 U.S.C. Section 1251 et. seq.; the Toxic Substances Control
Act, 15 U.S.C. Section 2601 et. seq., and in the regulations promulgated
pursuant to such acts and laws; and such other substances that are or become
regulated under any applicable local, state, or federal law or regulation
addressing environmental hazards.
"INITIAL BORROWER ENTITIES" means Borrower and all Subsidiaries of
Borrower that own, as of the Closing Date, assets and/or engage in business
transactions (other than entering into asset purchase agreements or merger
agreements that have not been closed), except for those Subsidiaries that have
been created or acquired by Borrower within the thirty (30) days preceding the
Closing Date or that have only entered into the foregoing asset purchase
agreements or merger agreements. A list of all Initial Borrower Entities is
attached hereto as Schedule 1.1 hereto.
"INTANGIBLE ASSETS" means goodwill, patents, copyrights, franchises,
trademarks, research and development costs, organizational costs and other
intangible assets under GAAP.
"INTEREST EXPENSE" means expenses for all interest (including current
charges on Capital Leases) and letter of credit fees.
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"INTEREST PAYMENT DATE" means, (i) as to Base Rate Loans, the first
day of each calendar quarter and the Maturity Date and (ii) as to any LIBOR
Loan, the last day of the Interest Period applicable to such Loan.
"INTEREST PERIOD" means, as to any LIBOR Loan, the period commencing
on (and including) the date of such LIBOR Loan and ending on (but excluding) the
numerically corresponding day (or, if there is no numerically corresponding day,
on the last day) in the calendar month that is one (1) month thereafter, as
Borrower may elect; provided, however, that (x) if any Interest Period would end
on a day that is not a Business Day, such Interest Period shall be extended to
the next succeeding Business Day unless, with respect to LIBOR Loans, such next
succeeding Business Day would fall in the next calendar month, in which case
such Interest Period shall end on the next preceding Business Day and (y) no
Interest Period with respect to any Loan shall end later than the Maturity Date.
"IRC" means the Internal Revenue Code of 1986, as amended from time to
time.
"ISSUING BANK" means NationsBank of Tennessee, N.A., its lawful
corporate successors, and any successor appointed pursuant to this Agreement in
the event of its resignation.
"LAW" or "LAWS" means all applicable constitutional provisions,
statutes, codes, acts, ordinances, orders, judgments, decrees, injunctions,
rules, regulations, and requirements of all Governmental Authorities.
"LENDERS" means the bank or banks that are signatory hereto as Lenders
and their respective successors and assigns.
"LETTER OF CREDIT DOCUMENTS" has the meaning assigned in Section
2.15.6 of this Agreement.
"LETTER OF CREDIT LIABILITIES" has the meaning assigned in Section
2.15 of this Agreement.
"LETTERS OF CREDIT" has the meaning assigned in Section 2.15 of this
Agreement.
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"LIBO RATE" means, for any given Interest Period with respect to a
given LIBOR Loan, the rate per annum appearing on Telerate Page 3750 (or any
successor page) as the London interbank offered rate for deposits in Dollars
(rounded upwards, if necessary, to the next higher 1/100 of 1%) at approximately
11:00 a.m. (London time) two Business Days prior to the first day of such
Interest Period for a term comparable to such Interest Period. If for any
reason such rate is not available, the term LIBO Rate shall mean, for any given
Interest Period with respect to a given LIBOR Loan, the rate per annum appearing
on Reuters Screen LIBO Page as the London interbank offered rate for deposits in
Dollars at approximately 11:00 a.m. (London time) two Business Days prior to the
first day of such Interest Period for a term comparable to such Interest Period;
provided, however, if more than one rate is specified on Reuters Screen LIBO
Page, the applicable rate shall be the arithmetic mean of all such rates.
"LIBO RATE RESERVE PERCENTAGE" means the reserve percentage applicable
during any Interest Period (or if more than one such percentage shall be so
applicable, the daily average of such percentages for those days in such
Interest Period during which any such percentage shall be so applicable) under
regulations issued from time to time by the Board of Governors of the Federal
Reserve System (or any successor) for determining the maximum reserve
requirement (including, without limitation, any emergency, supplemental or other
marginal reserve requirement) for Lenders with respect to liabilities or assets
consisting of or including LIBOR Liabilities having a term equal to such
Interest Period.
"LIBOR LIABILITIES" means deposit liabilities which are deemed to be
eurocurrency liabilities as such term is defined under the regulations of the
Board of Governors of the Federal Reserve Bank.
"LIBOR LOAN" means a Loan for which Borrower has elected application
of an interest rate based on the LIBO Rate.
"LOAN" means a loan advanced under the Revolving Credit Loan.
"LOAN DOCUMENTS" means, collectively, each writing delivered at any
time by any Borrower Entity to Lenders or Agent relating to the Revolving Credit
Loan or relating to any Letters of Credit.
"MATERIAL ADVERSE CHANGE" means any material and adverse change in the
business, Properties, financial condition, prospects or operations of the
Borrower Entities in the aggregate. Without limiting the foregoing, the
commencement of a litigation or arbitration proceeding against Borrower may
cause a Material Adverse Change if the damages sought in such a proceeding
exceed One Million and No/100 Dollars ($1,000,000.00).
"MATERIAL ADVERSE EFFECT" means any event or condition which, singly
or in the aggregate with other events or conditions, materially and adversely
affects the business, Properties, financial condition or operations of the
Borrower Entities, in the aggregate.
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"MATURITY DATE" means May 1, 1999. The Maturity Date may be extended
from time to time by the written agreement of all Lenders, Agent and Borrower.
"MAXIMUM LAWFUL AMOUNT" means the maximum lawful amount of interest,
loan charges, commitment fees or other charges that may be assessed under
Tennessee law or, if higher, under applicable federal law.
"MOODY'S" means Moody's Investors Service, Inc. or its successor.
"NATIONSBANK" means NationsBank of Tennessee, N.A., a national banking
association, its successors and assigns.
"NET PROCEEDS" means gross proceeds of a transaction less reasonable
and customary underwriter and brokerage fees and commissions, the fees and
expenses of trustees and attorneys, and other reasonable and customary closing
fees and expenses.
"NON-OWNED PORTION" means the percentage of equity interest of a
Partially-Owned Subsidiary that is not owned by one or more Borrower Entities.
"NOTE" means any of the Revolving Credit Notes referred to in Section
2.3 hereof.
"OBLIGATIONS" means the obligations of Borrower to Lenders to repay
the Revolving Credit Loan, the Reimbursement Obligations and all other
obligations of Borrower and the other Borrower Entities to Lenders and to Agent
under this Agreement and the other Loan Documents.
"OPERATING LEASES" means leases that are not Capital Leases.
"PARTIALLY-OWNED SUBSIDIARY" means a Subsidiary that is not entirely
owned by one or more Borrower Entities.
"PBGC" means the Pension Benefit Guaranty Corporation and any entity
succeeding to any or all of its functions under ERISA.
"PERMITTED ACQUISITION" means acquisitions that were Permitted
Acquisitions under the Prior Loan Agreement and which were completed on or
before November 19, 1997. Permitted Acquisitions does not describe any
transaction occurring after November 19, 1997, as acquisitions after that date
are not permitted.
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"PERMITTED ENCUMBRANCES" means all of the following:
(a) Encumbrances securing the payment of any of the Obligations.
(b) Encumbrances securing taxes, assessments, or other
governmental charges not yet due or which are being
contested in good faith by appropriate action promptly
initiated and diligently conducted, if Borrower has made
reserve therefor as required by GAAP.
(c) Mechanics', repairmen's, materialmen's, warehousemen's,
landlords' and other like liens arising by operation of law
securing accounts that are not delinquent.
(d) Consensual landlords' or real estate lessors' liens on real
or personal Property securing amounts not past due under
leases entered into by a Borrower Entity prior to November
19, 1997.
(e) Encumbrances on real property used by a Borrower Entity not
securing monetary obligations, provided that the
Encumbrances are of a type customarily placed on real
property and do not materially impair the value of the
affected property.
(f) Pledges or deposits in the ordinary course of business to
secure nondelinquent obligations under workman's
compensation or unemployment laws or similar legislation or
to secure the performance of leases or contracts entered
into in the ordinary course of business.
(g) Encumbrances securing Acquired Debt and Purchase Money
Security Interests, to the extent permitted under Section
6.1.7 hereof.
(h) Rights for the use of Property provided for under Service
Agreements entered into in full compliance with this
Agreement.
(i) In addition to any Encumbrance otherwise permitted by this
definition, consensual Encumbrances on assets of Acquired
Practices for thirty (30) days in each case after the
closing of the acquisition thereof by a Borrower Entity.
(j) Encumbrances securing Seller Debt existing as of March 14,
1997.
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"PERMITTED MINORITY INTEREST INVESTMENT ENTITIES" means Persons in
which one or more Borrower Entities own an equity interest and which are not
Subsidiaries, as to which Borrower has delivered or caused to be delivered to
Agent for the benefit of Lenders, within thirty (30) days after the later of (i)
a Borrower Entity's acquisition of an interest in such Person, or (ii) the
Person's first transaction of business (other than the entering into of asset
purchase agreements or merger agreements that have not been closed), a security
agreement granting to Agent to secure the Obligations a first priority perfected
security interest in the Borrower Entities' interest(s) in such Person pursuant
to documentation in form and substance acceptable to Agent, with the validity
and perfection of the security interest and other matters as Agent may
reasonably require confirmed to Agent and Lenders by an opinion of Borrower's
outside counsel satisfactory to Agent and Lenders in all respects, and with all
expenses related to such documentation (including, but not limited to, filing
fees and taxes and the reasonable fees and expenses of Agent's attorneys) to be
paid by Borrower.
"PERMITTED SUBSIDIARY" means a Subsidiary as to which Borrower has
delivered or caused to be delivered to Agent for the benefit of Lenders, within
thirty (30) days after the later of (i) a Borrower Entity's acquisition of an
interest in the Subsidiary, or (ii) the Subsidiary's first transaction of
business (other than the entering into of asset purchase agreements or merger
agreements that have not been closed), (x) if the Subsidiary is a Wholly-Owned
Subsidiary, a guaranty from such Subsidiary securing the Obligations, and (y) in
all circumstances, a security agreement granting to Agent to secure the
Obligations a first priority perfected security interest in the Borrower
Entities' interest(s) in the Subsidiary pursuant to documentation in form and
substance acceptable to Agent, with the validity of the guaranty (if
applicable), the perfection of the security interest and other matters as Agent
may reasonably require confirmed to Agent and Lenders by an opinion of
Borrower's outside counsel satisfactory to Agent and Lenders in all respects,
and with all expenses related to such documentation (including, but not limited
to, filing fees and taxes and the reasonable fees and expenses of Agent's
attorneys) to be paid by Borrower.
"PERMITTED UNPLEDGED INVESTMENTS AND SUBSIDIARIES" means equity
interests owned by Borrower Entities, which interests would qualify as either
Permitted Subsidiaries or Permitted Minority Interest Investment Entities except
that the equity interests owned by Borrower Entities are not encumbered to
secure the Obligations as required by those definitions or, if so encumbered,
the encumbrances are subject to material question as to the ability of Agent to
effect freely a transfer of the encumbered equity interest by exercise of
remedies pursuant to its security interest therein, provided that (i) the equity
interests at issue must be subject to limitations on their transferability or
assignability only pursuant to restrictions included in the constituent
documents of the investment entity that were in effect before the acquisition of
an interest therein by a Borrower Entity, and (ii) the EBITDA resulting from all
such entities shall not exceed the amount equal to 1% of Consolidated EBITDA.
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"PERSON" means any individual, corporation, partnership, joint
venture, limited liability company, association, joint stock company, trust,
unincorporated organization, government, governmental agency or political
subdivision thereof, or any other form of entity.
"PLAN" means any employee benefit or other plan established or
maintained, or to which contributions have been made, by Borrower or any
Subsidiary and covered by Title IV of ERISA or to which Section 412 of the IRC
applies.
"PRACTICE" means a medical or optometric practice, optical practice,
ambulatory surgery center related practice or management service center at a
single location or various locations if owned by a single Seller or related
Sellers prior to acquisition by a Borrower Entity. Whenever in this Agreement
"Practice" is used in describing an acquisition by a Borrower Entity, such
reference is to the acquisition of the assets used in the operation of the
Practice that can lawfully be acquired by such Borrower Entity or to the
acquisition of the stock of a corporation or equity interest of another Person
that owns, as of the time of purchase, only those assets that can be lawfully
acquired by such Borrower Entity.
"PRO RATA" OR "PRO RATA SHARE" refer to the apportionment among
Lenders according to their respective total Commitments at the time of
determination; provided, however, if at a time of determination there are
principal amounts outstanding under the Revolving Credit Loan, and if any Lender
has failed to fund in violation of this Agreement any unrepaid Loan that was
funded by any other Lender or Lenders, this apportionment shall be determined
according to the respective total principal amounts of the Revolving Credit Loan
held by the respective Lenders rather than by their Commitments.
"PROPERTY" or "PROPERTIES" means any interest in any kind of property,
whether real, personal, or mixed, or tangible or intangible.
"PROVIDER" means a physician or optometrist who performs professional
services respecting a Practice that is either managed by a Borrower or the
assets of which are owned by a Borrower.
"PURCHASE MONEY SECURITY INTEREST" means an Encumbrance on specific
equipment (including the Encumbrance arising under a Capital Lease), provided
that (i) the Debt secured by any such Encumbrance is not an Acquired Debt, shall
have arisen at the time of the acquisition thereof and shall not exceed 100% of
the cost of the equipment to the entity acquiring the same, and (ii) each such
Encumbrance shall attach only to the equipment so acquired with the proceeds of
the Debt secured thereby.
"REIMBURSEMENT OBLIGATIONS" has the meaning assigned in Section 2.15.2
of this Agreement.
"REQUIRED LENDERS" means Lenders holding more than sixty-six and two-
thirds percent (66 2/3%) of the total Commitments for the Revolving Credit Loan;
provided,
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however, if at a time of determination there are principal amounts outstanding
under the Revolving Credit Loan, and if any Lender has failed to fund in
violation of this Agreement any unrepaid Loan that was funded by any other
Lender or Lenders, this determination shall be made according to Lenders holding
the required percentage of principal amounts of the Revolving Credit Loan rather
than by the outstanding Commitments.
"REVOLVING CREDIT LOAN" means the revolving credit loan described in
Article II hereof.
"S & P" means Standard & Poor's Corporation or its successor.
"SELLER" means the owner or owners of a Practice that is acquired by a
Borrower Entity or that has entered into a firm and binding commitment letter,
asset purchase agreement, or merger agreement with a Borrower Entity.
"SELLER DEBT" means Debt incurred in favor of one or more Sellers
representing part of the purchase price of an Acquired Practice, including, but
not limited to, amounts due Sellers for the excess of accounts receivable
acquired over the amount of liabilities assumed in the acquisition.
"SENIOR FUNDED DEBT" means Funded Debt other than the Subordinated
Debentures.
"SERVICE AGREEMENT" means one of those Service Agreements now in
effect or hereafter entered into by a Borrower Entity and a Provider setting
forth the terms and conditions under which a Borrower Entity manages the
administration of the Provider's Practice.
"SOLVENT" shall mean, as to any Person, that as of any date of
determination, (i) the then fair value of the assets of such Person is (a)
greater than the then total amount of liabilities (including subordinated
liabilities) of such Person and (b) greater than the amount that will be
required to pay such Person's probable liability on such Person's then existing
debts as they become absolute and matured, (ii) such Person's capital is not
unreasonably small in relation to its business, and (iii) such Person has not
incurred and does not intend to incur, or believe or reasonably should believe
that it will incur, debts beyond its ability to pay such debts as they become
due.
"SUBORDINATED DEBENTURES" has the meaning assigned in Section 6.1.11
hereof.
"SUBSIDIARY" means any present or future corporation or other entity
at least a majority of whose outstanding voting stock or other voting securities
shall at the time be owned directly or indirectly by one or more Borrower
Entities or which is owned to a lesser degree but which is sufficiently
controlled by the Borrower Entities that the owned entity is required to be
reported with the other Borrower Entities on a consolidated basis under GAAP.
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"TAXES" means all taxes and assessments, whether general or special,
ordinary or extraordinary, or foreseen or unforeseen, which at any time may be
assessed, levied, confirmed or imposed on the Borrower Entities or on any of
their properties or assets or any part thereof or in respect of any of their
franchises, businesses, income or profits.
"UCC" means the Uniform Commercial Code as adopted in Tennessee, as it
may be amended from time to time.
"UNMATURED DEFAULT" means any event or condition that, but for the
giving of any required notice by Agent and/or the passing of time, would be an
Event of Default hereunder.
"WHOLLY-OWNED SUBSIDIARY" means a Subsidiary that is entirely owned by
one or more Borrower Entities.
1.2 Terms Generally.
1.2.1 Computations; Accounting Principles. Where the character
or amount of any asset or liability or item of income or expense is
required to be determined, or any consolidation or other accounting
computation is required to be made for the purposes of this Agreement,
such determination or calculation, to the extent applicable and except
as otherwise specified in this Agreement, shall be made in accordance
with GAAP. If a change in GAAP after the date of this Agreement would
require a change affecting the calculation of any requirement under
this Agreement, then the Required Lenders and Borrower shall negotiate
in good faith for the amendment of the affected requirements;
provided, however, until and unless such an amendment is agreed upon,
the requirements of this Agreement shall remain as written and
compliance therewith shall be determined according to GAAP as in
effect prior to the change.
1.2.2 Gender and Number. Words used herein indicating gender or
number shall be read as context may require.
1.2.3 References Include Successors. References herein to
specific Laws, regulatory bodies, parties or agreements also refer to
any successor Laws, regulatory bodies, and parties, and to all
modifications, extensions, renewals and restatements of agreements.
1.2.4 References to This Agreement. "Herein," "hereof" and
words of similar import refer to this Agreement as a whole and not to
any particular provision hereof, unless otherwise expressly stated.
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II. LOANS AND LETTERS OF CREDIT
Concurrently with the execution of this Agreement, Lenders agree on a
several basis, and not on a joint basis, in accordance with their respective
Commitments, to make the Revolving Credit Loan to Borrower, under the following
terms and conditions:
2.1 Amount of Revolving Credit Loan. The principal indebtedness of
Borrower to Lenders under the Revolving Credit Loan shall not exceed Twenty
Million and No/100 Dollars ($20,000,000.00); provided, however, that until the
completion of the Additional Closing, the principal indebtedness of Borrower to
Lenders under the Revolving Credit Loan shall not exceed Fourteen Million and
No/100 Dollars ($14,000,000.00)
2.2 Use of Proceeds of Revolving Credit Loan. The proceeds of the
Revolving Credit Loan drawn prior to the date hereof shall be used for purposes
permitted by the Prior Loan Agreement. Proceeds of the Revolving Credit Loan
drawn on or after the date hereof shall be used by Borrower for (i) general
corporate and working capital purposes, (ii) repayment of Letters of Credit
issued in accordance with this Agreement for working capital purposes, and (iii)
to repay interest under the Subordinated Debentures and to repay the principal
and interest of Seller Debt, in each case as the same become due in the absence
of an acceleration.
2.3 Revolving Credit Loan Notes. Borrower's obligations under the
Revolving Credit Loan shall be evidenced by Revolving Credit Notes (or
amendments or restatements thereof) in favor of the respective Lenders in the
form included as Exhibit 2.3 hereto (or with conforming changes to reflect an
amendment or restatement thereof) payable to each Lender in the maximum amount
of its Commitment.
2.4 Separate Commitments of Lenders. Borrower acknowledges that each
Lender's commitment to fund its portion of the Revolving Credit Loan is made by
each Lender severally, and neither Agent nor any Lender shall be liable for the
failure of another Lender to timely perform under this Agreement.
2.5 Advances of Loans. Subject to the terms and conditions of this
Agreement, Borrower may borrow, repay and reborrow Loans under the Revolving
Credit Loan, provided that the outstanding principal balance of the Revolving
Credit Loan shall not at any time exceed the amount permitted under Section 2.1
above. Loans shall be disbursed as follows:
2.5.1 Loans Advanced Pursuant to Borrowing Notices.
2.5(a) Applicability. Loans under the Revolving Credit
Loan may be LIBOR Loans, Base Rate Loans, or a combination
thereof, and the funding thereof shall be subject to this Section
2.5.1.
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2.5.1(b) Borrowing Notices. As long as Borrower meets
the conditions for funding stated in this Agreement, Borrower may
submit requests for Loans ("Borrowing Notices") to Agent. All
requests shall be made by telephone, subject to such security
procedures as Agent may require from time to time (provided that
all such telephonic notices shall be confirmed by written
Borrowing Notices within one (1) Business Day) and shall specify
the proposed disbursement date for the requested Loan; the amount
of the Loan; the purpose of the Loan (characterized in accordance
with Section 2.2 above); and the type of Loan, i.e., LIBOR Loan
or Base Rate Loan. Each Borrowing Notice shall irrevocably
obligate Borrower to accept the Loan requested thereby. Borrowing
Notices shall be in the form of Exhibit 2.5.1(b) hereto or such
other form as Agent may from time to time reasonably require.
2.5.1(c) Funding of Loans. Lenders shall fund their
respective portions of requested Loans on the next following
Banking Day after the Banking Day (determined with a cutoff of
11:00 a.m. Charlotte, North Carolina time, as provided in the
definition thereof) of Agent's receipt of the Borrowing Notice,
in the case of Base Rate Loans, and on the third (3rd) Banking
Day following the Banking Day of Agent's receipt of the Borrowing
Notice, in the case of LIBOR Loans. All funds shall be disbursed
directly into an account maintained by Borrower with Agent.
Borrower agrees that if any Lender elects to fund any requested
Loan(s) sooner after requested than is required hereunder, the
Lender may nevertheless use the entire response period allowed
hereunder upon receipt of any subsequent request, at the Lender's
sole option.
2.5.1(d) Base Rate Loan Limitations. Individual Base
Rate Loans shall be in the minimum amount of Five Hundred
Thousand and No/100 Dollars ($500,000.00) each and in multiples
of Five Hundred Thousand and No/100 Dollars ($500,000.00).
2.5.1(e) LIBOR Loan Limitations. Individual LIBOR Loans
shall be in the minimum amount of One Million and No/100 Dollars
($1,000,000.00) each and shall be requested in increments of Five
Hundred Thousand and No/100 Dollars ($500,000.00). No more than
three (3) LIBOR Loans may be outstanding under the Revolving
Credit Loan.
2.5.1(f) Additional Limitation on LIBOR Interest
Periods. Notwithstanding anything to the contrary in this
Agreement, if an Unmatured Default or an Event of Default shall
have occurred and be
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continuing, no additional LIBOR Loans may be created or continued
and no Base Rate Loan may be converted into a LIBOR Loan.
2.5.2 Conversion of Loans. Borrower shall have the right, on
prior notice to Agent made by telephone, subject to such security
procedures as Agent may require from time to time (provided that all
such telephonic notices shall be confirmed by written Borrowing
Notices within one (1) Business Day), which notice shall be given
three (3) Banking Days (determined with a cutoff of 11:00 a.m.
Charlotte, North Carolina time, as provided in the definition thereof)
prior to the date of any requested conversion, to convert any Base
Rate Loan or LIBOR Loan into a Loan of another type, or to continue
any LIBOR Loan for another Interest Period, subject in each case to
the following:
2.5.2(a) Application of Loans. Each conversion shall be
effected by applying the proceeds of the new LIBOR Loan and/or
Base Rate Loan, as the case may be, to the Loan (or portion
thereof) being converted.
2.5.2(b) Notices of Conversions. Each notice pursuant to
this 2.5.2(b) shall be irrevocable and shall refer to this
Agreement and specify the identity and principal amount of the
particular Loan that Borrower requests be converted or continued;
if such notice requests conversion, the date of such conversion
(which shall be a Business Day); and if a Loan is to be converted
to a LIBOR Loan or a LIBOR Loan is to be continued, the Interest
Period with respect thereto. No LIBOR Loan shall be converted at
any time other than at the end of the Interest Period applicable
thereto, except in accordance with Section 2.11 hereof.
Conversion notices shall be in the form attached as Exhibit
2.5.1(b) hereto.
2.5.3 Absence of Election. In the event that Borrower shall not
give notice to continue any LIBOR Loan for a subsequent period, such
LIBOR Loan (unless repaid) shall automatically be converted into a
Base Rate Loan. If Borrower fails to specify in any Borrowing Notice
the type of borrowing or, in the case of a LIBOR Loan, the applicable
Interest Period, Borrower will be deemed to have requested a Base Rate
Loan. If Agent reasonably believes that any failure by Borrower to
specify the type of borrowing or the applicable Interest Period shall
have resulted from failure of communications equipment or clerical
error, then prior to funding any such borrowing Agent shall use
reasonable efforts to obtain confirmation from Borrower of the
contents of such Borrowing Notice; provided, however, in the absence
of prompt confirmation by Borrower which specifies the type of
borrowing and/or the applicable Interest Period, Borrower will be
deemed to have requested a Base Rate Loan. Notwithstanding anything to
the contrary contained above, if an Event of
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Default shall have occurred and be continuing, no LIBOR Loan may be
continued and no Base Rate Loan may be converted into a LIBOR Loan.
2.5.4 Implied Representations Upon Request for Loan. Upon
making any request for any Loan, Borrower shall be deemed to have
warranted to Agent and Lenders that all conditions to funding set
forth in Article III hereof are satisfied and that all warranties made
herein are true and shall be true as of the funding of the requested
Loan, subject to exception for warranties that speak to a specific
date or for which the underlying facts have changed pursuant to
transactions permitted under this Agreement, as provided in Exhibit
2.5.1(b) hereto.
2.5.5 Advance Not Waiver. Any Lender's making of any Loan that
it is not obligated to make under any provision of Article III hereof
or any other provision hereof shall not be construed as a waiver of
such Lender's right to withhold future Loans, declare an Event of
Default, or otherwise demand strict compliance with this Agreement,
acting through Agent as permitted by the terms hereof.
2.5.6 Draws by Debit Memorandum. Agent may cause Lenders to
draw amounts that may be available under the Revolving Credit Loan to
pay any Obligation that is not otherwise timely paid.
2.6 Interest. Interest shall accrue on each Loan as follows:
2.6.1 Base Rate Loans. Interest shall accrue on each Base Rate
Loan at an annual rate equal to the Alternate Base Rate plus the
Applicable Base Rate Margin, said rate to change contemporaneously
with any change in the Alternate Base Rate.
2.6.2 LIBOR Loans. Interest shall accrue on each LIBOR Loan at
a rate equal to the LIBO Rate for the selected Interest Period plus
the Applicable LIBO Rate Margin.
2.6.3 Additional Interest on LIBOR Loans. In addition to the
interest described above, Borrower shall pay to any Lender, if and so
long as such Lender shall be required under regulations of the Board
of Governors of the Federal Reserve System to maintain reserves with
respect to liabilities or assets consisting of or including LIBOR
Liabilities, additional interest on the unpaid principal amount of
each LIBOR Loan, from the date of such advance until said principal
amount is paid in full, at an interest rate per annum equal at all
times to the remainder obtained by subtracting (i) the LIBO Rate for
the Interest Period from (ii) the rate obtained by dividing the LIBO
Rate by a percentage equal to 100% minus the LIBO Rate Reserve
Percentage for such Interest
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Period. This additional interest shall be payable on each date on
which interest is payable and shall be effective only after the
affected Lender (or Agent on behalf of all Lenders) gives written
notice thereof to Borrower. The amount of additional interest shall be
determined by each Lender, who shall notify Borrower and Agent thereof
and whose determination shall be conclusive, absent manifest error.
2.6.4 Calculation of Interest. Interest for both Base Rate
Loans and LIBOR Loans shall be computed on the basis of a 360-day year
counting the actual number of days elapsed. Interest shall accrue on
the Business Day a Loan is extended and shall accrue through the
Business Day of payment if payment is received before 11:00 a.m.
Charlotte, North Carolina time and through the next following Business
Day if received after that time.
2.6.5 Default Rate. Notwithstanding the foregoing, upon the
occurrence of an Event of Default and during the continuation of such
Event of Default, interest shall be charged at the Default Rate,
regardless of whether Lenders have elected to exercise any other
remedies available to Lenders, including, without limitation,
acceleration of the maturity of the outstanding principal of the
Revolving Credit Loan.
2.6.6 Payment of Interest. Interest for Base Rate Loans and
LIBOR Loans shall be due and payable in arrears, without notice, on
each Interest Payment Date.
2.6.7 Usury Savings Provision. It is the intention of the
parties that all charges under or in connection with this Agreement
and the Obligations, however denominated, and including (without
limitation) all interest, commitment fees, late charges and loan
charges, shall be limited to the Maximum Lawful Amount. Such charges
hereunder shall be characterized and all provisions of the Loan
Documents shall be construed as to uphold the validity of charges
provided for therein to the fullest possible extent. Additionally, all
charges hereunder shall be spread over the full permitted term of the
Obligations for the purpose of determining the effective rate thereof
to the fullest possible extent, without regard to prepayment of or the
right to prepay the Obligations. If for any reason whatsoever,
however, any charges paid or contracted to be paid in respect of the
Obligations shall exceed the Maximum Lawful Amount, then, without any
specific action by Lenders, Agent or Borrower, the obligation to pay
such interest and/or other charges shall be reduced to the Maximum
Lawful Amount in effect from time to time, and any amounts collected
by Lenders that exceed the Maximum Lawful Amount shall be applied to
the reduction of the principal balance of the Obligations and/or
refunded to Borrower so that at no time shall the interest or loan
charges paid or payable in respect of the Obligations exceed the
Maximum Lawful Amount.
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This provision shall control every other provision herein and in any
and all other agreements and instruments now existing or hereafter
arising between Borrower and Lenders with respect to the Obligations.
2.7 Alternate Rate of Interest if LIBOR Unavailable. In the event,
and on each occasion, that on the date of commencement of any Interest Period
for a LIBOR Loan, a Lender shall have determined (i) that dollar deposits in the
amount of the requested principal amount of such LIBOR Loan are not generally
available in the London Interbank Market; (ii) that the rate at which such
dollar deposits are being offered will not adequately and fairly reflect the
cost to the Lender of making or maintaining such LIBOR Loan during such Interest
Period; or (iii) that reasonable means do not exist for ascertaining the LIBO
Rate, the Lender shall, as soon as practicable thereafter, give written or
telephonic notice of such determination to Borrower and Agent. In the event of
any such determination, any request by Borrower for a LIBOR Loan under this
Agreement shall, until the circumstances giving rise to such notice no longer
exist, be deemed to be a request for a Base Rate Loan. Each determination by a
Lender hereunder shall be conclusive absent manifest error.
2.8 Change in Circumstances.
2.8.1 Imposition of Requirements. Notwithstanding any other
provision herein, if after the date of this Agreement any change in
applicable Laws or in the interpretation or administration thereof by
any Governmental Authority charged with the interpretation or
administration thereof (whether or not having the force of Law) shall
change the basis of taxation of payments to a Lender under any LIBOR
Loan made by the Lender or any other fees or amounts payable hereunder
(other than taxes imposed on the overall net income, gross receipts or
added value of a Lender by the country in which the Lender is located,
or by the jurisdiction in which a Lender has its principal office, or
by any political subdivision or taxing authority therein), or shall
impose, modify or deem applicable any reserve requirement, special
deposit, insurance charge (including FDIC insurance on LIBOR
Liabilities) or similar requirement against assets of, deposits with
or for the account of, or credit extended by, a Lender or shall impose
on a Lender or the London Interbank Market any other condition
affecting this Agreement or LIBOR Loans made by a Lender, and the
result of any of the foregoing shall be to increase the cost to the
Lender of making or maintaining its LIBOR Loan or to reduce the amount
of any sum received or receivable by a Lender hereunder (whether of
principal, interest or otherwise) in respect thereof by an amount
deemed by the affected Lender to be material, then Borrower will pay
to such Lender such additional amount or amounts as will compensate
the Lender for such additional costs of reduction.
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2.8.2 Other Changes. If either (i) the introduction of, or any
change in, or in the interpretation of, any United States or foreign
Law; or (ii) compliance with any directive, guidelines or request from
any central bank or other United States or foreign Governmental
Authority (whether or not having the force of law) promulgated or made
after March 14, 1997, affects or would affect the amount of capital
required or expected to be maintained by a Lender (or any lending
office of a Lender) or any corporation directly or indirectly owning
or controlling a Lender (or any lending office of a Lender) based upon
the existence of this Agreement, and the Lender shall have determined
that such introduction, change or compliance has or would have the
effect of reducing the rate of return on the Lender's capital or on
the capital of such owning or controlling corporation as a consequence
of its obligations hereunder (including its commitment) to a level
below that which the Lender or such owning or controlling corporation
could have achieved but for such introduction, change or compliance
(after taking into account that Lender's policies or the policies of
such owning or controlling corporation, as the case may be, regarding
capital adequacy) by an amount deemed by the Lender (in its sole
discretion) to be material, then, from time to time, Borrower shall
pay to the Lender such additional amount or amounts as will compensate
the Lender for such reduction attributable to making, funding and
maintaining its commitment and Loans hereunder.
2.8.3 Computation of Amounts. A certificate of a Lender setting
forth the basis and method of computation of such amount or amounts
specified in Sections 2.8.1 and 2.8.2 hereof as shall be necessary to
compensate the Lender (or its participating banks) as specified above,
as the case may be, shall be delivered to Borrower and shall be
conclusive absent manifest error; provided however, that Borrower
shall be responsible for compliance herewith and the payment of
increased costs only to the extent that (i) any change in Laws giving
rise to increased costs occurs after the date of this Agreement; (ii)
such increased costs are imposed by the Lender on all other Borrowers
similarly situated with Borrower; and (iii) the Lender gives notice of
the change giving rise to increased costs within ninety (90) Business
Days after the Lender has, or with reasonable diligence should have
had, knowledge of the change, or else Lender can only collect costs
from and after the date of the notice. Subject to the foregoing,
Borrower shall pay the affected Lender the amount shown as due on any
such certificate within ten (10) Business Days after its receipt of
such certificate.
2.8.4 No Duty to Contest. The protection of this Section 2.8
shall be available to a Lender regardless of any possible contention
of invalidity or inapplicability of the Law or condition that shall
have been imposed. Should a Lender assess any charge to Borrower
under this Section 2.8, and provided that Borrower pays the assessment
to the Lender, Borrower may within ninety (90)
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days after receiving notice of such assessment undertake, at
Borrower's own expense, any contest of the matters giving rise to the
charge that may, in the opinion of Borrower's independent counsel
issued to the affected Lender, and concurred in by counsel to the
Lender, have a reasonable chance of success, provided further that the
contest would not require the assertion of any position contrary to a
position taken by the Lender generally with taxing authorities or any
other involved parties and that there does not exist any other
circumstance that would disadvantage the Lender in the event of such
contest, as the affected Lender may determine in its discretion. The
affected Lender shall offer reasonable participation to Borrower for
the purpose of enabling Borrower to pursue the contest of such issue,
with all expenses, including fees and expenses of the affected
Lender's counsel, to be paid by Borrower.
2.8.5 Replacement of Lenders Under Certain Circumstances. If
any specific additional charge is assessed under Sections 2.6.3, 2.7
or 2.8 hereof by less than a majority in number of the Lenders,
Borrower shall be entitled to request of Agent that the Lender(s)
assessing such additional charge be replaced as Lenders hereunder by
other financial institutions proposed by Borrower who do not then
assess such additional charge. Agent shall arrange the appointment of
such replacement Lender(s), who must be acceptable to both Agent and
Borrower in their reasonable discretion. The appointment of such new
Lender(s) shall be accomplished in accordance with the other
provisions of this Agreement and Borrower shall pay the applicable fee
to Agent for the transfer of the interest of the replaced Lender(s).
2.9 Change in Legality of LIBOR Loans. Notwithstanding anything to
the contrary herein contained, if any change in any Law or in interpretation
thereof by any Governmental Authority charged with the administration or
interpretation thereof shall make it unlawful for a Lender to make or maintain
any LIBOR Loan or to give effect to its obligations as contemplated hereby,
then, by written notice to Borrower, the Lender may (i) declare that LIBOR Loans
will not thereafter be made by the Lender hereunder, whereupon Borrower shall be
prohibited from requesting LIBOR Loans from the Lender hereunder unless such
declaration is subsequently withdrawn; and (ii) require that all outstanding
LIBOR Loans made by it be converted to Base Rate Loans, in which event (a) all
such LIBOR Loans shall be automatically converted to Base Rate Loans (but
without imposition of any additional charge that would normally become due under
Section 2.11 hereof) as of the effective date of such notice, and (b) all
payments and prepayments of principal that would otherwise have been applied to
repay the converted LIBOR Loans shall instead be applied to repay the Base Rate
Loans resulting from the conversion of such LIBOR Loans. Under such
circumstances, a borrowing request for a LIBOR Loan shall be regarded, as to the
Lender who has given notice under this Section 2.9, a request for a Base Rate
Loan, and as to all other Lenders, it shall be regarded as a request for a LIBOR
Loan. For purposes of this Section 2.9, a notice to Borrower by the Lender
pursuant to (a) above shall be effective, if lawful, on the last day of
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the then current Interest Period; in all other cases, such notice shall be
effective on the date of receipt by Borrower.
2.10 Principal Repayment. All remaining principal outstanding under
the Revolving Credit Loan shall become due on the Maturity Date or the earlier
acceleration of the Revolving Credit Loan in accordance with the terms of this
Agreement.
2.11 Prepayment of LIBOR Loans.
2.11.1 Notice of LIBOR Loan Prepayment. Borrower may, upon
three (3) Banking Days' prior written notice to Agent (with a Banking
Day cutoff of 11:00 a.m. Charlotte, North Carolina time, as provided
in the definition thereof), and upon payment of all applicable
premiums set forth in Section 2.11.3 hereof, prepay any outstanding
LIBOR Loans prior to any Interest Payment Date for such LIBOR Loans,
in whole or in part. Each notice of prepayment of any LIBOR Loan shall
specify the date and amount of such prepayment and shall be
irrevocable.
2.11.2 Amount of LIBOR Loan Prepayment. Each partial
prepayment of any LIBOR Loan shall be in an aggregate principal amount
which is the lesser of (i) the then outstanding principal balance of
the one or more LIBOR Loans to be prepaid, or (ii) One Million and
No/100 Dollars ($1,000,000.00) or a larger integral multiple of Five
Hundred Thousand and No/100 Dollars ($500,000.00). Interest on the
amount prepaid accrued to the prepayment date shall be paid on such
date.
2.11.3 LIBOR Loan Breakage Costs. Borrower shall indemnify,
defend and hold harmless each Lender against any loss or expense that
a Lender may incur in connection with the prepayment of a LIBOR Loan,
the Borrower's failure to borrow or to pay when it stated it would do
so, including, but not limited to, the fees or charges customarily
included in "breakage costs" that may result to a Lender from the
early repayment of a LIBOR Liability, which costs may be calculated by
a Lender as though Borrower's prepayment had been match-funded with a
corresponding LIBOR Liability, whether or not the Lender manages its
LIBOR Liabilities on a loan-by-loan basis. Additionally, upon
prepayment of any LIBOR Loan on a date other than the relevant
Interest Payment Date for such borrowing, Borrower shall pay to
Lenders, in addition to all other payments then due and owing Lenders,
premiums which shall be equal to an amount, if any, reasonably
determined by Agent to be the difference between the rate of interest
then applicable to the relevant LIBOR Loan and the yield Lenders would
receive upon reinvestment of so much of the relevant LIBOR Loans as is
prepaid for the remainder of the term of the relevant LIBOR Loan or
Loans. Anything in this Section 2.11.3 to the contrary
notwithstanding, the premiums payable upon any
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such prepayment shall not exceed the amount, if any, determined by
Agent to be the difference between the rate of interest then
applicable to the relevant LIBOR Loan and the yield that Lenders could
receive upon reinvestment in the "Floor Reinvestment" of so much of
the relevant LIBOR Loan as is prepaid for the remainder of the term of
the relevant LIBOR Loan. For purposes hereof, "Floor Reinvestment"
shall mean an investment for the time period from the date of such
prepayment to the end of the relevant Interest Period applicable to
such LIBOR Loan at an interest rate per annum equal to the Federal
Funds Rate on the date of such prepayment. All determinations,
estimates, assumptions, allocations and the like required for the
determination of such premiums shall be made by Agent in good faith
and shall be presumed correct absent manifest error.
2.12 Prepayment of Base Rate Loans. Borrower may at any time prepay
any outstanding Base Rate Loans prior to the Maturity Date in whole or in part
without premium or penalty upon at least one Business Day's prior notice to
Agent. All such prepayments shall be made in minimum amounts of One Million and
No/100 Dollars ($1,000,000.00) and in increments of Five Hundred Thousand and
No/100 Dollars ($500,000.00) each.
2.13 Reduction of Commitment. Borrower may prospectively and
permanently reduce the Commitment by giving Agent written notice of a reduction
to be effective on a date certain no earlier than ten (10) Business Days after
the notice is received by Agent. The principal balance of the Revolving Credit
Loan shall be reduced, if necessary, on the effective date of the reduction in
accordance with the notice. Reductions shall be shared by Lenders Pro Rata. If
it is necessary to prepay any LIBOR Loan to accommodate the requested reduction,
Borrower shall be liable for all costs provided for elsewhere in this Agreement.
All reductions shall be in amounts of at least One Million and No/100 Dollars
($1,000,000.00) and shall be made in increments of Five Hundred Thousand and
No/100 Dollars ($500,000.00).
2.14 Periodic Commitment Fee Based on Use of Facilities. Borrower
shall pay to Agent for distribution to Lenders Pro Rata an additional commitment
fee for the unused portion of the Revolving Credit Loan. This fee shall be
determined by applying the Applicable Commitment Fee (applied on the basis of a
360-day year) to the average daily unused balance of the Revolving Credit Loan
(based upon availability of $14,000,000.00 or such greater amount as may
hereafter become available). The commitment fee shall be paid in arrears on
each Interest Payment Date applicable to Base Rate Loans, except that all such
fees accrued under the Prior Loan Agreement shall be paid on the Closing Date.
This commitment fee is not refundable. As provided in Section 2.15.2 hereof,
all outstanding Letter of Credit Liabilities shall be treated as outstanding
Loans for the purpose of determining the nonuse fee.
2.15 Letters of Credit. Subject to the terms and conditions of this
Agreement, Lenders' respective Commitments for the Revolving Credit Loan may be
utilized, upon the request of Borrower, for the issuance by the Issuing Bank of
standby or commercial letters of credit (the "Letters of Credit") for the
account of Borrower for uses that would be permitted
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for the Revolving Credit Loan; provided that in no event shall (i) the aggregate
amount of all stated and undrawn amounts under Letters of Credit (the "Letter of
Credit Liabilities"), together with the aggregate principal amount of the Loans
advanced under the Revolving Credit Loan, exceed the amount stated in Section
2.1 hereof, (ii) the outstanding aggregate amount of all Letter of Credit
Liabilities exceed Five Million and No/100 Dollars ($5,000,000.00), or (iii) the
expiration date of any Letter of Credit extend beyond the Maturity Date
applicable to the Revolving Credit Loan. The following additional provisions
shall apply to Letters of Credit:
2.15.1 Procedure for Issuance. Borrower shall give Agent at
least three (3) Business Days' irrevocable prior notice (effective
upon receipt) specifying the Business Day (which shall be no later
than thirty (30) days preceding the Maturity Date) each Letter of
Credit is to be issued and describing in reasonable detail the
proposed terms of such Letter of Credit (including its beneficiary)
and the nature of the transactions or obligations proposed to be
supported. Borrower shall be the account party for each Letter of
Credit, including Letters of Credit issuable to a beneficiary having a
claim or potential claim against a Subsidiary of Borrower.
2.15.2 Participation Among Lenders. On each day during the
period commencing with the issuance by the Issuing Bank of any Letter
of Credit and until such Letter of Credit shall have expired or been
terminated or, if drawn upon, until the resulting obligations of
reimbursement (the "Reimbursement Obligations") have been satisfied in
full by Borrower (whether by a borrowing under this Agreement or
otherwise), the Commitment of each Lender shall be deemed to be
utilized for all purposes of this Agreement (including, but not
limited to, the calculation of availability and of the nonuse fee) in
an amount equal to such Lender's Pro Rata Share of the Letter of
Credit Liabilities associated with such Letter of Credit. Each Lender
(other than the Issuing Bank) agrees that, upon the issuance of any
Letter of Credit, it shall automatically be deemed to have acquired a
participation in the Issuing Bank's liability under such Letter of
Credit in an amount equal to such Lender's Pro Rata Share of such
liability, and each Lender (other than the Issuing Bank) thereby shall
absolutely, unconditionally and irrevocably assume, as primary obligor
and not as surety, and shall be unconditionally obligated to the
Issuing Bank to pay and discharge when due, its Pro Rata Share of the
Issuing Bank's liability under such Letter of Credit.
2.15.3 Reimbursement Obligation. Upon receipt from the
beneficiary of any Letter of Credit of any demand for payment under
such Letter of Credit, the Issuing Bank shall promptly notify Borrower
of the amount to be paid by the Issuing Bank as a result of such
demand and the date on which payment is to be made by the Issuing Bank
to such beneficiary in respect of such demand. Borrower hereby
unconditionally agrees to pay and reimburse Agent for the
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account of the Issuing Bank and the other Lenders Pro Rata with
respect to the amount of each demand for payment under such Letter of
Credit at or prior to the date on which payment is to be made by the
Issuing Bank to the beneficiary under such Letter of Credit, without
presentment, demand, protest or other formalities of any kind. Any
amounts not so paid or borrowed as set forth in Section 2.15.4 below
shall bear interest at the Default Rate applicable to Base Rate Loans.
2.15.4 Means of Reimbursement. Forthwith upon its receipt of a
notice referred to in Section 2.15.3 hereof, Borrower shall advise
Agent whether or not Borrower intends to obtain a Loan to finance its
obligation to reimburse the Issuing Bank for the amount of the related
demand for payment and, if it does, submit a notice of such borrowing
as provided in this Agreement. In the event that Borrower fails to so
advise Agent, and if Borrower fails to reimburse the Issuing Bank for
a demand for payment under a Letter of Credit by the date of such
payment, Agent shall give each Lender prompt notice of the amount of
the demand for payment, specifying such Lender's Pro Rata Share of the
amount of the related demand for payment, and Borrower shall be deemed
in default hereunder for breaching Section 2.15.3 above.
2.15.5 Payments by Lenders. Each Lender (other than the Issuing
Bank) shall pay to Agent for the account of the Issuing Bank in
Dollars and in immediately available funds, such Lender's Pro Rata
Share of any payment under a Letter of Credit upon notice by Agent to
such Lender requesting such payment and specifying such amount as
provided in Section 2.15.4. Each such Lender's obligation to make
such payments to Agent for the account of the Issuing Bank under this
Section 2.15.5, and the Issuing Bank's right to receive the same,
shall be absolute and unconditional and shall not be affected by any
circumstance whatsoever, including the failure of any other Lender to
make its payment under this Section 2.15.5, the financial condition of
Borrower, the existence of any Unmatured Default or Event of Default
or the termination of the Commitments. Each such payment to the
Issuing Bank shall be made without any offset, abatement, withholding
or reduction whatsoever, EVEN IN THE PRESENCE OF ORDINARY NEGLIGENCE
ON THE PART OF THE ISSUING BANK; provided, nothing contained in the
foregoing shall limit the Issuing Bank's liability for its gross
negligence or willful misconduct in improperly honoring a draft drawn
under a Letter of Credit.
2.15.6 Settlement Among Lenders. Upon the making of each
payment by a Lender to the Issuing Bank pursuant to Section 2.15.5
above in respect of any Letter of Credit, such Lender shall,
automatically and without any further action on the part of Agent, the
Issuing Bank or such Lender, acquire (i) a participation in an amount
equal to such payment in the Reimbursement
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Obligation owing to the Issuing Bank by Borrower under this Agreement
and under the Letter of Credit Documents relating to such Letter of
Credit and (ii) a participation in a percentage equal to such Lender's
Pro Rata Share in any interest or other amounts payable by Borrower
under such Letter of Credit Documents and the other Loan Documents in
respect of such Reimbursement Obligation. Upon receipt by the Issuing
Bank from or for the account of Borrower of any payment in respect of
any Reimbursement Obligation or any such interest or other amount
(including by way of set-off or application of proceeds of any
collateral security) the Issuing Bank shall promptly pay to Agent for
the account of each Lender who shall have previously assumed a
participation in such payment under clause (ii) above, such Lender's
Pro Rata Share of such payment, each such payment by the Issuing Bank
to be made in the same money and funds in which received by the
Issuing Bank. In the event any payment received by the Issuing Bank
and so paid to Lenders is rescinded or must otherwise be returned by
the Issuing Bank, each Lender shall, upon the request of the Issuing
Bank (through Agent), repay to the Issuing Bank (through Agent) the
amount of such payment paid to such Lender, with interest at the rate
specified in Section 2.15.10.
2.15.7 Letter of Credit Fee. Borrower shall pay to Agent for
the account of each Lender Pro Rata a letter of credit fee in respect
of each Letter of Credit on the daily average undrawn face amount of
such Letter of Credit for the period from and including the date of
issuance of such Letter of Credit to and including the date such
Letter of Credit is drawn in full, expires or is terminated (such fee
to be non-refundable, to be paid in arrears on the first day of each
calendar quarter and on the Maturity Date applicable to the Revolving
Credit Loan and to be calculated, for any day, after giving effect to
any payments made under such Letter of Credit on such day) in an
amount equal to the Applicable LIBO Rate Margin(s) in effect during
the relevant period (or such margin plus two percentage points (2%),
upon and during the continuation of an Event of Default hereunder).
All calculations of Letter of Credit fees shall be based on a 360 day
year counting the actual number of elapsed days. The Issuing Bank
shall also receive a facing fee of one-eighth of one percent (1/8%) of
the face amount of any Letter of Credit upon the issuance thereof.
2.15.8 Letter of Credit Information. Upon the request of any
Lender from time to time, the Issuing Bank shall deliver any
information reasonably requested by such Lender with respect to each
Letter of Credit then outstanding.
2.15.9 Conditions Relating to Letters of Credit. The issuance
by the Issuing Bank of each Letter of Credit shall be subject, in
addition to the conditions precedent set forth in Article III hereof,
to the conditions precedent that (i) such Letter of Credit shall be in
such form, contain such terms and support such transactions as shall
be satisfactory to the Issuing Bank consistent
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with its then current practices and procedures with respect to letters
of credit of the same type and (ii) Borrower shall have executed and
delivered such applications, agreements and other instruments relating
to such Letter of Credit as the Issuing Bank shall have reasonably
requested consistent with its then current practices and procedures
with respect to letters of credit of the same type; provided that in
the event of any conflict between any such application, agreement or
other instrument and the provisions of this Agreement, the provisions
of this Agreement shall control. Without limiting the foregoing, it is
agreed that (i) an "Event of Default" under any reimbursement
agreement respecting a Letter of Credit shall be deemed to mean an
Event of Default under this Agreement, and (ii) no Borrower Entity
shall be required to provide any collateral to secure its obligations
regarding any Letter of Credit except as required herein.
2.15.10 Payments Among Lenders. In the event that any Lender
fails to pay any amount required to be paid pursuant to this Section
2.15 when due, such Lender shall pay interest to the Issuing Bank
(through Agent) on such amount from and including such due date to but
excluding the date such payment is made (i) during the period from and
including such due date to but excluding the date three Business Days
thereafter, at a rate per annum equal to the Federal Funds Rate (as in
effect from time to time) and (ii) thereafter, at a rate per annum
equal to the Alternate Base Rate plus 2.0%.
2.15.11 Modifications. The issuance by the Issuing Bank of any
modification or supplement to any Letter of Credit shall be subject to
the same conditions applicable under this Section 2.15 to the issuance
of new Letters of Credit, and no such modification or supplement shall
be issued unless either (x) the respective Letter of Credit as
affected by such action would have complied with such conditions had
it originally been issued in such modified or supplemented form or (y)
each Lender or the Required Lenders, as may be required under Article
IX hereof, shall have consented to such modification or supplement.
2.15.12 Absolute Obligations of Borrower. The obligations of
Borrower under this Section 2.15 shall be unconditional and absolute
and shall not be affected, modified or impaired, upon the happening at
any time or from time to time of any event, including any of the
following, whether or not with notice to or the consent of Borrower:
2.15.12(a) the compromise, settlement, release,
modification, amendment (whether material or otherwise) or
termination of any or all of the obligations, conditions
covenants or agreements of any Person in respect of any of the
Loan Documents;
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2.15.12(b) the occurrence, or the failure by Agent, any
Lender or any other Person to give notice to Borrower of the
occurrence, of any Event of Default or any default under any of
the other Loan Documents;
2.15.12(c) the waiver of the payment, performance or
observance of any of the obligations, conditions, covenants or
agreements of any Person contained in any of the Loan Documents;
2.15.12(d) the extension of the time for performance of
any other obligations, covenants or agreements of any Person
under or arising out of any of the Loan Documents;
2.15.12(e) the taking or the omission of any of the
actions referred to in any of the Loan Documents;
2.15.12(f) any failure, omission or delay on the part
of Agent, any Lender, Borrower or the beneficiary of any Letter
of Credit to enforce, assert or exercise any right, remedy, power
or privilege conferred by this Agreement or any of the Loan
Documents, or any other act or acts on the part of Agent, any
Lender, Borrower or the beneficiary of any Letter of Credit;
2.15.12(g) the voluntary or involuntary liquidation,
dissolution, sale or other disposition of all or substantially
all the assets of, the marshaling of assets and liabilities,
receivership, insolvency, bankruptcy, assignment for the benefit
of creditors, reorganization, arrangement, composition with
creditors or readjustment of, or other similar proceedings which
affect, Borrower or any other party to any of the Loan
Documents;
2.15.12(h) any lack of validity or enforceability of this
Agreement, any Letter of Credit or any other Loan Document, or
any allegation of invalidity or unenforceability or any contest
of such validity or enforceability;
2.15.12(i) the existence of any claim, set-off, defense
or other right which Borrower may have at any time against Agent,
any Lender or any beneficiary or any transferee of any Letter of
Credit (or any persons or entities for whom the Lender or any
such beneficiary or transferee may be acting), or any other
Person, whether in connection with this Agreement or any of the
other Loan Documents or any of the transactions contemplated by
any Loan Document or any unrelated transaction;
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2.15.12(j) any statement in any certificate or any
other document presented under any Letter of Credit proving to be
forged, fraudulent, invalid or insufficient in any respect or any
such statement being untrue or inaccurate in any respect
whatsoever;
2.15.12(k) payment by the Issuing Bank under any Letter
of Credit against presentation of a demand or certificate which
does not comply with the terms of such Letter of Credit;
2.15.12(l) the release or discharge by operation of law
of Borrower form the performance or observance of any obligation,
covenant or agreement contained in any of the Loan Documents; or
2.15.12(m) any other circumstance or happening
whatsoever, whether or not similar to any of the foregoing.
2.15.13 Indemnity. Without affecting Borrower's liability
under any other provision of this Agreement, Borrower agrees to
indemnify the Issuing Bank, Agent and each of the Lenders and their
respective affiliates, directors, officers, employees, attorneys and
agents from, and hold each of them harmless against, any and all
losses, liabilities, damages or expenses incurred by any of them in
connection with or by reason of any actual or threatened
investigation, litigation or other proceeding relating to (a) the
execution and delivery of any Letter of Credit; (b) the use of the
proceeds of any drawing under any Letter of Credit; or (c) the
transfer or substitution of, or payment or failure to pay under, any
Letter of Credit, including the reasonable fees and disbursements of
counsel incurred in connection with any such investigation, litigation
or other proceeding, AND EVEN IN THE PRESENCE OF ORDINARY NEGLIGENCE
BY THE INDEMNIFIED PARTY, but excluding damages, losses, liabilities
or expenses to the extent, but only to the extent, incurred by reason
of the willful misconduct or gross negligence of the Issuing Bank in
determining whether a document presented under any Letter of Credit
complies with the terms of such Letter of Credit. It shall not be a
condition to any such indemnification that the Issuing Bank, Agent or
any Lender shall be a party to any such investigations, litigation or
other proceeding. Nothing in this Paragraph 2.15 is intended to limit
Borrower's payment obligations under this Agreement.
2.15.14 Assumption of Risk. Borrower assumes all risks of the
acts or omissions of any beneficiary of any Letter of Credit with
respect to the use of the Letter of Credit. None of Agent, any Lender
nor any of their respective affiliates, officers, directors,
employees, attorneys or agents shall be liable or responsible for: (a)
the use which may be made of the Letter of Credit or for any acts or
omissions of any beneficiary of any Letter of Credit in connection
with such Letter of Credit; (b) the validity, sufficiency or
genuineness of
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documents presented to the Issuing Bank, or of any endorsement on such
documents, even if such documents should in fact prove to be in any or
all respects invalid, insufficient, fraudulent or forged; (c) payment
by the Issuing Bank against presentation of documents which do not
comply with the terms of any Letter of Credit, including failure of
any documents to bear any reference or adequate reference to such
Letter of Credit; (d) any delay and/or loss in transit of any
messages, letters or documents or delay, mutilation or other errors
arising in the transmission of any telecommunication; or (e) any other
circumstances whatsoever in making or failing to make payment under
any Letter of Credit, EVEN IN THE PRESENCE OF ORDINARY NEGLIGENCE BY
THE ISSUING BANK; provided that Borrower shall have a claim against
the Issuing Bank to the extent, but only to the extent, of any direct,
as opposed to consequential, damages suffered by Borrower which
Borrower proves were caused by the Issuing Bank's willful misconduct
or gross negligence in determining whether a document presented under
any Letter of Credit complied with the terms of such Letter of Credit.
In furtherance and not in limitation of the foregoing, the Issuing
Bank may accept documents that appear on their face to be in order,
without responsibility for further investigation, regardless of any
notice or information to the contrary.
2.15.15 Resignation of Issuing Bank. The Issuing Bank may resign
from its service as such upon at least fifteen (15) Business Days written notice
to Lenders, Agent and Borrower, upon which Borrower and the Required Lenders
shall appoint a replacement Issuing Bank from among the Lenders. The notice of
resignation shall state the material reason(s) that caused the Issuing Bank to
wish to resign from that capacity. Even after such resignation, the Issuing Bank
shall remain subject to the obligations and entitled to the benefits of the
status of Issuing Bank with respect to Letters of Credit that remain
outstanding.
2.16 Up-Front Fee. On January 5, 1998, Borrower shall pay an
amendment and up-front fee to the Lenders in the amount of One Hundred Fifty
Thousand and No/100 Dollars ($150,000.00). This fee shall be secured by a
pledge of cash to Agent in that amount.
2.17 Additional Closing. Borrower acknowledges that it has requested
that Lenders extend the Revolving Credit Loan under this Agreement on an
expedited basis without the opportunity to determine the appropriate financial
covenants that Lenders would require to engage in a continuing credit
relationship with Borrower. Lenders will need additional financial information
to assess the issue of financial covenants and other underwriting issues that
would affect the desirability of a continuing credit relationship with Borrower.
It is in the furtherance of this effort to assess future covenants that Borrower
has undertaken to deliver projections to Agent (Section 5.3.13) to assist in an
evaluation of Borrower's systems (Section 5.24). In order to assist Lenders in
finalizing the financial covenants, Borrower shall advise Lenders of the final
adjustments to Borrower's "due from affiliates" as approved by Arthur Andersen
for the fiscal year ending December 31, 1997 no later than January 15, 1998.
Borrower covenants and agrees that if Lenders and Borrower cannot reach an
agreement on
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appropriate financial covenants and other terms and conditions going forward on
or before January 31, 1998, Lenders may declare the Revolving Credit Loan to be
due and payable upon at least thirty (30) days prior written notice. Lenders'
assessment and proposal of these financial covenants shall be subject to
Lenders' sole discretion and shall take into account the financial condition of
Borrower as it then exists and all other relevant underwriting matters,
including, but not limited to, the possibility of taking additional security
interests in assets of the Borrower Entities to secure the obligations. In
assessing the financial covenants that Lenders will require of Borrower going
forward, Lenders will propose triggers to permit the curtailment or reduction of
the liability of one or both of the Guarantors.
III. CONDITIONS PRECEDENT
3.1 Conditions to Initial Advance and Issuance. Lenders shall not be
obligated to make their initial Loan pursuant to this Agreement, and the Issuing
Bank shall not be obligated to issue any Letters of Credit, unless and until
Borrower satisfies the following conditions:
3.1.1 Loan Documents. Borrower shall have delivered to Agent
the following documents, fully executed and in form and substance
acceptable to Agent and Lenders:
3.1.1(a) Prior Loan Agreement Documents. All documents
required under the terms and conditions of the Prior Loan
Agreement.
3.1.1(b) Loan Agreement. This Loan Agreement.
3.1.1(c) Revolving Credit Loan Note. The First
Consolidated, Amended and Restated Revolving Credit Note issued
by Borrower payable to the order of NationsBank of Tennessee,
N.A. in the maximum principal amount of $20,000,000.00.
3.1.1(d) Charter. Certified Copy of the charter of
Borrower.
3.1.1(e) Certificates of Good Standing and Authorization.
Certificate of Good Standing issued as to Borrower by the
Secretary of State for the State of Delaware and Certificates of
Authority and Existence issued by the Secretary of State of
Texas.
3.1.1(f) Resolutions. Secretary Certifications including
certified copies of resolutions authorizing the execution of all
applicable Loan Documents on behalf of Borrower.
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3.1.1(g) Opinions of Borrower's Counsel. Opinions of
Texas counsel to Borrower addressed to Agent and Lenders
addressing such matters as Agent may require.
3.1.1(h) Closing Statement and Funding of Expenses. Loan
Closing Statement describing expenses due in connection with the
closing of the Revolving Credit Loan and payment thereof in
immediately available funds.
3.1.1(i) Compliance Certificate. A Compliance
Certificate executed by Rich D'Amico, Borrower's general counsel,
David Real, Borrower's chief financial officer, and David Meyer
M.D., a director of Borrower, confirming appropriate matters to
the best of their knowledge, information and belief.
3.1.1(j) Guaranties. Borrower shall provide the joint and
several Unconditional Limited Guaranties of the Guarantors and
current financial statements for the Guarantors.
3.1.1(k) Collateral Assignment of Account. A Collateral
Assignment of Account granting to NationsBank a first priority
perfected security interest in cash to secure the payment of the
fee due January 5, 1998.
3.1.1(l) Closing Statement. A Closing Statement setting
forth the borrowings and disbursements made on the Closing Date.
3.1.1(m) Amendments to Unconditional Joint and Several
Guaranty. Eighth, Ninth, Tenth and Eleventh Amendments to the
Unconditional Joint and Several Guaranty dated as of March 14,
1997 executed by Subsidiaries of Borrower.
3.1.1(n) First Amendment to Stock Pledge and Security
Agreement. First Amendment to the Stock Pledge Agreement dated as
of March 14, 1997 executed by Borrower and certain of its
Subsidiaries.
3.1.1(o) Other Documents. Such other documents as
Lenders or Agent may reasonably require.
3.1.2 Additional Conditions. Borrower shall have satisfied the
following additional conditions:
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3.12(a) Warranties. All warranties made in the Loan
Documents must be true in all material respects and shall be true
in all material respects taking into account the funding of the
requested Loan.
3.12(b) Covenants. All covenants made in the Loan
Documents must have been complied with in all material respects
and shall have been complied with, taking into account the
funding of the requested Loan.
3.12(c) Absence of Unmatured Default. No Event of
Default or Unmatured Default shall exist under this Agreement.
3.12(d) No Adverse Change. There must be no Material
Adverse Change since September 30, 1997 except as has been
disclosed to Agent as of the Closing Date.
3.12(3) Absence of Litigation. There must be no action,
suit, proceeding or investigation against any Borrower Entity
before or through any Governmental Authority which, if adversely
determined, would likely have a Material Adverse Effect.
3.2 Conditions to Subsequent Loans and Issuances. Lenders shall not
be obligated to make any Loan following the initial advance, and the Issuing
Bank shall not be obligated to issue any Letters of Credit, unless all of the
following conditions are satisfied as of the time of the request and of funding
or issuance:
3.2.1 Conditions to Initial Advance. All of the conditions in
Section 3.1 hereof must have been satisfied as of the date of the
initial advance hereunder.
3.2.2 Permitted Subsidiaries. All of the documents required in
Section 3.1 for Initial Subsidiaries shall have been received by Agent
as to any additional Permitted Subsidiaries, within the time required
in this Agreement.
3.2.3 Warranties. All warranties made in the Loan Documents
must be true in all material respects and shall be true in all
material respects taking into account the funding of the requested
Loan.
3.2.4 Covenants. All covenants made in the Loan Documents must
have been complied with in all material respects and shall have been
complied with in all material respects taking into account the funding
of the requested Loan.
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3.2.5 Absence of Unmatured Default. No Event of Default or
Unmatured Default shall exist under this Agreement.
3.2.6 Material Adverse Change. There shall not have occurred a
Material Adverse Change.
3.3 Conditions to the Additional Closing. If Lenders and Borrower
reach an agreement as to the terms going forward for the Additional Closing, the
following conditions shall apply thereto:
3.3.1 Conditions to Initial Advance. All of the conditions in
Section 3.1 hereof must have been satisfied.
3.3.2 Permitted Subsidiaries. All of the documents required in
Section 3.1 for Initial Subsidiaries shall have been received by Agent
as to any additional Permitted Subsidiaries, within the time required
in this Agreement.
3.3.3 Warranties. All warranties then made in the Loan
Documents must be true in all material respects.
3.3.4 Covenants. All covenants then undertaken in the Loan
Documents must have been complied with in all material respects and
shall have been complied with in all material respects.
3.3.5 Absence of Unmatured Default. No Event of Default or
Unmatured Default shall exist under this Agreement.
3.3.6 Material Adverse Change. There shall not have occurred a
Material Adverse Change.
3.3.7 Documentary Requirements. Borrower shall cause to be
executed and delivered to Lenders and Agent such amendments,
certificates, opinions of counsel, resolutions and other documents
with respect to Borrower, the Borrower Entities and their assets as
Lenders or Agent may require, in their discretion.
IV. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants to Lenders and Agent that as of the
Closing Date:
4.1 Capacity. Each Borrower Entity is a corporation or other entity
as set forth in Schedule 1.1 hereof, and is duly organized, validly existing and
in good standing
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under the laws of the state of its domicile as set forth in Schedule 1.1. Each
Borrower Entity is qualified or authorized to do business in all jurisdictions
in which its ownership of property or conduct of business requires such
qualification or authorization or where the failure to be so qualified or
authorized would not have a Material Adverse Effect. Each Borrower Entity has
the power and authority to own its Properties and to carry on its business as
now being conducted and as proposed to be conducted after the execution hereof,
to execute and deliver this Agreement and the other Loan Documents, and to
perform its obligations hereunder and under the other Loan Documents.
4.2 Authorization. The execution, delivery and performance of this
Agreement and the other Loan Documents by each Borrower Entity executing such
documents has been duly authorized by all requisite action.
4.3 Binding Obligations. This Agreement is and the other Loan
Documents, when executed and delivered to Agent and Lenders, will be, legal,
valid and binding upon each Borrower Entity who is a party thereto, enforceable
in accordance with its respective terms, subject only to principles of equity
and laws applicable to creditors generally, including bankruptcy laws.
4.4 No Conflicting Law or Agreement. The execution, delivery and
performance of this Agreement and the other Loan Documents by each Borrower
Entity does not constitute a breach of or default under, and will not violate or
conflict with, any provisions of the corporate charter or other constituent
documents of a Borrower Entity; any contract, financing agreement, lease, or
other agreement to which a Borrower Entity is a party or by which its Properties
may be affected, the violation of which would have a Material Adverse Effect; or
any Law to which a Borrower Entity is subject or by which its Properties may be
affected, the violation of which would have a Material Adverse Effect; nor will
the same result in the creation or imposition of any Encumbrance upon any
Property of any Borrower Entity, other than those contemplated by the Loan
Documents.
4.5 No Consent Required. The execution, delivery, and performance of
this Agreement and the other Loan Documents by the Borrower Entities do not
require the consent or approval of or the giving of notice to any Person except
for those consents which have been duly obtained and are in full force and
effect on the date hereof and others, if any, which by their omission would not
result in a Material Adverse Effect.
4.6 Financial Statements. The Financial Statements are complete and
correct, have been prepared in accordance with GAAP, and present fairly the
financial condition and results of operations of the Borrower Entities as of the
date and for the period stated therein, subject to year-end adjustments. No
Material Adverse Change has occurred since the date of the Financial Statements.
Borrower acknowledges that Lenders have advanced (or shall advance) the
Revolving Credit Loan in reliance upon the Financial Statements.
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4.7 Fiscal Year. Borrower's fiscal year ends on December 31 of each
year.
4.8 Litigation. Except as disclosed on Schedule 4.8 hereto, (i)
there is no litigation, arbitration, legal or administrative proceeding, tax
audit, investigation, or other action or proceeding of any nature pending
against any Borrower Entity or any of its Properties which, if adversely
determined, would likely have a Material Adverse Effect, and (ii) there is no
litigation, arbitration, legal or administrative proceeding, tax audit,
investigation, or other action or proceeding of any nature threatened in writing
against a Borrower Entity which, if adversely determined, would have a Material
Adverse Effect. No Borrower Entity is subject to any outstanding court,
arbitral or administrative order, writ or injunction. To the best of Borrower's
knowledge, information and belief, no facts exist under which third parties have
unasserted claims against any Borrower Entity which, if adversely determined,
would have a Material Adverse Effect.
4.9 Taxes; Governmental Charges. Each Borrower Entity has filed or
caused to be filed or has lawfully extended the deadline for filing all tax
returns and reports required to be filed, other than those which, if not filed,
would not have a Material Adverse Effect. Each Borrower Entity has paid, or
made adequate provision for the payment of, all Taxes that have or may have
become due pursuant to such returns or otherwise, or pursuant to any assessment
received by it, except such Taxes, if any, as are being contested in good faith
by appropriate proceedings and for which adequate reserves have been provided.
To the best of Borrower's knowledge, there is no proposed material tax
assessment against any Borrower Entity. No extension of time for the assessment
of federal, state or local taxes of any Borrower Entity is in effect or has been
requested. Each Borrower Entity has timely made all required remittances of
withholding deposits and other assessments against payroll expenditures except
for matters that would not have a Material Adverse Effect.
4.10 Title to Properties. Each Borrower Entity has good and
marketable title to its Properties, free and clear of all Encumbrances except
for Permitted Encumbrances except for matters that would not have a Material
Adverse Effect.
4.11 No Default. No Borrower Entity is in default in any respect
that affects its business, Properties, operations, or condition, financial or
otherwise, under any indenture, mortgage, deed of trust, obligation to equity
holders, credit agreement, note, agreement, lease, sale agreement or other
instrument to which any Borrower Entity is a party or by which its Properties
are bound, which default would have a Material Adverse Effect. To the best of
Borrower's knowledge, information and belief, no other party to any contract
with any Borrower Entity under which a default would have a Material Adverse
Effect is in default or breach thereof and no circumstances exist which, with
the giving of notice and/or the passing of time would constitute such default or
breach. No Event of Default or Unmatured Default exists under this Agreement.
4.12 Casualties; Taking of Properties. Neither the business nor the
Property of any Borrower Entity is presently impaired as a result of any fire,
explosion, earthquake,
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flood, drought, windstorm, accident, strike or other labor disturbance, embargo,
requisition or taking of property, cancellation of contracts, permits,
concessions by any domestic or foreign government or any agency thereof, riot,
activities of armed forces or acts of God or of any public enemy, in any case as
would have a Material Adverse Effect.
4.13 Compliance with Laws. No Borrower Entity is in violation of any
Law to which it, its business or any of its Properties are subject, the
violation of which would likely have a Material Adverse Effect, and there are no
outstanding citations, notices or orders of noncompliance issued to any Borrower
Entity under any such Law, the violation of which would likely have a Material
Adverse Effect. Each Borrower Entity has obtained all licenses, permits,
franchises, or other governmental authorizations necessary to the ownership of
its Properties or to the conduct of its business, except for those which, if not
obtained, would not have a Material Adverse Effect.
4.14 Compliance with Fraud and Abuse Laws. Without limiting any other
provision of this Agreement, no Borrower Entity and no Provider is in violation
of any Fraud and Abuse Law, the violation of which would have a Material Adverse
Effect.
4.15 ERISA. No ERISA Event has occurred with respect to any Plan or
is reasonably expected to occur with respect to any Plan, except for those
which, if not obtained, would not have a Material Adverse Effect.
4.16 Full Disclosure of Material Facts. Borrower has fully advised
Agent of all matters involving the financial condition, business, operations and
Properties of the Borrower Entities that would be reasonably expected to have a
Material Adverse Effect. No information, exhibit, or report furnished or to be
furnished by Borrower to Lenders in connection with this Agreement contains, as
of the date thereof, any misrepresentation of fact or failed or will fail to
state any material fact, the omission of which would render the statements
therein materially false or misleading.
4.17 Accuracy of Projections. With respect to all business plans and
other forecasts and projections furnished by or on behalf of Borrower and made
available to Agent relating to the financial condition, business, operations or
Properties of the Borrower Entities, all facts stated as such therein were true
and complete in all material respects as of the time made and all estimates and
assumptions were made in good faith and believed to be reasonable at the time
made. As of the Closing Date, nothing had come to the attention of Borrower
that has changed its assessment of any such matters, except for changes that
would not have a Material Adverse Effect and those which have been disclosed to
Agent.
4.18 Investment Company Act. No Borrower Entity is an "investment
company" under the Investment Company Act of 1940, as amended.
4.19 Personal Holding Company. No Borrower Entity is a "personal
holding company" as defined in Section 542 of the IRC.
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4.20 Solvency. Each Borrower Entity is Solvent as of the date hereof
and will remain Solvent upon the consummation of the transactions contemplated
hereby.
4.21 Chief Executive Office. The address designated herein to which
notices are to be sent under this Agreement is Borrower's chief executive office
within the meaning of Tennessee Code Annotated Section 47-9-103(3)(d).
4.22 Subsidiaries. Borrower has no Subsidiaries, except for those
included in the Initial Borrower Entities as disclosed in Schedule 1.1 hereto.
4.23 Ownership of Patents, Licenses, Etc. The Borrower Entities own
all licenses, permits, franchises, registrations, patents, copyrights,
trademarks, trade names or service marks, or the rights to use the foregoing,
that are necessary for the continued operation of their business except for such
licenses, etc., which, if not held or owned, would not have a Material Adverse
Effect.
4.24 Environmental Compliance. Each Borrower Entity has duly
complied with, and their Properties are owned and operated in compliance with,
all Environmental Laws, the violation of which would have a Material Adverse
Effect. There have been no citations, notices or orders of non-compliance issued
to any Borrower Entity or, to the best of Borrower's knowledge, relating to
their business or Properties pursuant to any Environmental Law, except for those
which would not have a Material Adverse Effect. Each Borrower Entity has
obtained all required federal, state and local licenses, certificates or permits
relating to them and their Properties as required by applicable Environmental
Laws, except for those which, if not obtained, would not have a Material Adverse
Effect.
4.25 Labor Matters. No Borrower Entity is subject to any collective
bargaining agreements or any decrees or orders requiring them to recognize, deal
with or employ any Person. No demand for collective bargaining has been
asserted against any Borrower Entity by any union or organization. No Borrower
Entity has experienced any strike, labor dispute, slowdown or work stoppage due
to labor dispute and, to the best knowledge of Borrower, there is no such
strike, dispute, slowdown or work stoppage threatened against any Borrower
Entity. All Borrower Entities are in compliance in all material respects with
the Fair Labor Standards Act of 1938, as amended, except for those matters which
would not have a Material Adverse Effect.
4.26 OSHA Compliance. All Borrower Entities are in compliance in all
material respects with the Federal Occupational Safety and Health Act, as
amended, and all regulations under the foregoing, except for those matters which
would not have a Material Adverse Effect.
4.27 Regulation U. No Borrower Entity is engaged in the business of
extending credit for the purpose of purchasing or carrying margin stock (within
the meaning of Regulation U issued by the Board of Governors of the Federal
Reserve System). No proceeds
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of any Loan will be used to purchase or carry any margin stock (within the
meaning of Regulation U issued by the Board of Governors of the Federal Reserve
System) in violation of applicable law, including, without limitation,
Regulation U issued by the Board of Governors of the Federal Reserve System.
4.28 Affiliate Transactions. No Borrower Entity is a party to any
transaction, contract or agreement with any Affiliate, except for Service
Agreements, lease agreements and other agreements among Borrower and its
Subsidiaries and those other agreements described in Schedule 4.28 hereof.
4.29 Subordinated Debentures. The Obligations constitute "Senior
Indebtedness" for the purpose of the subordination provisions of the Indenture
pursuant to which the Subordinated Debentures have been issued.
V. AFFIRMATIVE COVENANTS
Borrower covenants that, during the term of this Agreement (and
thereafter where expressly stated herein):
5.1 Payment of Obligations. Borrower shall pay all amounts owed
under the Obligations when due without setoff, counterclaim or withholdings of
any kind; provided, however, if Borrower is required by law to withhold any
taxes (other than taxes based upon the income of the Lender imposed by the
jurisdiction in which the Lender is organized or from which its interest herein
has been generated) from any payments on the Obligations to any Lender(s),
Borrower shall make additional payments to such Lender(s) along with the regular
payments as they become due so that the end result is that such Lender(s)
receives the amount that the Lender(s) would have received if no such
withholdings were made.
5.2 Maintenance of Existence and Business. Except for transactions
among Borrower Entities and other transactions permitted under this Agreement,
each Borrower Entity shall maintain its fundamental existence, name, rights, and
franchises, and shall maintain its qualification and good standing in all states
in which such qualification is necessary (except to the extent that failure to
so qualify would not have a Material Adverse Effect), and shall continue to
operate in the same type of business as such Borrower Entity engages in as of
the date hereof.
5.3 Financial Statements and Reports. Borrower shall furnish to
Agent and Lenders or cause Agent and Lenders to receive all of the following,
all of which must be in number sufficient for all Lenders and otherwise in form
and substance satisfactory to Agent and Lenders:
5.3.1 Monthly Financial Reports. As soon as available, and in
any event by the last Business Day of each month, Borrower shall
deliver a balance sheet and income statement of Borrower for and as of
the end of the preceding
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month, all prepared by Borrower on a consolidated basis and certified
by Borrower's president or chief financial officer to be complete and
correct and to present fairly, in accordance with GAAP (excluding
year-end adjustments and required footnote disclosures), the financial
condition of Borrower and its consolidated affiliates as of the date
of such statements and the results of their operations for such
period. The monthly financial information shall further include
calculations of all financial ratios, the certification of Borrower's
president or chief financial officer as to the absence of any Event of
Default or Unmatured Default. The reports delivered under this Section
shall include consolidating financial statements if Agent so requires.
5.3.2 Quarterly Financial Reports. As soon as available, and in
any event by the forty-fifth (45th) day of each calendar quarter,
Borrower shall deliver a balance sheet, income statement and statement
of cash flows of Borrower for and as of the end of the preceding
fiscal quarter, all prepared by Borrower on a consolidated basis and
certified by Borrower's president or chief financial officer to be
complete and correct and to present fairly, in accordance with GAAP
(excluding year-end adjustments and required footnote disclosures),
the financial condition of Borrower and its consolidated affiliates as
of the date of such statements and the results of their operations for
such period. The quarterly financial information shall further include
calculations of all financial ratios, the certification of Borrower's
president or chief financial officer as to the absence of any Event of
Default or Unmatured Default. The reports delivered under this Section
shall include consolidating financial statements if Agent so requires.
5.3.3 Annual Financial Reports. As soon as available, and in
any event within ninety (90) days after the end of each fiscal year,
Borrower shall deliver audited balance sheets of Borrower as of the
end of such year and the related audited statements of income,
retained earnings and cash flows for such year, together with
supporting schedules, all such statements prepared in accordance with
GAAP on a consolidated basis and accompanied by an unqualified audit
report prepared by an independent "big six" certified public
accountant acceptable to Agent showing the financial condition of
Borrower and its consolidated affiliates at the close of such year and
the results of its operations during such year. The annual financial
information shall include calculations of all financial ratios as
determined based upon the audited financial statements and the
certification of Borrower's president or chief financial officer as to
the absence of any Event of Default or Unmatured Default. The reports
delivered under this Section shall include consolidating financial
statements if Agent so requires.
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5.3.4 Budgets. As soon as available, and in any event within
sixty (60) days after the beginning of each fiscal year, Borrower
shall deliver its Capital Expenditures budget and its operating budget
for the current year, including a pro forma balance sheet and income
statement and including information on a consolidating basis if Agent
so requests.
5.3.5 Accountant Reports. Promptly upon the receipt thereof,
Borrower shall deliver a copy of each management letter submitted to
Borrower or its consolidated affiliates by their accountants in
connection with any annual, interim or special audit made by them.
5.3.6 Owner Mailings. Promptly upon the sending thereof,
Borrower shall deliver a copy of each material statement, report or
notice sent to its shareholders.
5.3.7 SEC Filings. Promptly upon the filing thereof, should
such filings become applicable, Borrower shall deliver copies of all
regular, periodic and special reports that any Borrower Entity files
with the United States Securities and Exchange Commission or any
successor thereto, or any national securities exchanges or the
National Association of Securities Dealers.
5.3.8 Change in Accounting Policies. Borrower shall promptly
give written notice of any material change in accounting policies or
financial reporting practices on the part of any Borrower Entity.
5.3.9 Notice Upon Perceived Breach. Borrower agrees to give
prompt written notice of any action or inaction by or on behalf of
Agent or any Lender in connection with this Agreement or the
Obligations that Borrower believes may be actionable against such
party or a defense to payment of any or all of the Obligations for any
reason, including, but not limited to, commission of a tort or
violation of any contractual duty or duty implied by law.
5.3.10 Changes in Constituent Documents. Borrower shall give
prompt written notice of any material change in the corporate charter
or bylaws of Borrower or any Subsidiary following the encumbrance of
the stock thereof in favor of Agent as required under this Agreement,
and shall provide Agent with a copy of such change (Borrower Entities
are restricted in the adoption of such amendments as provided
elsewhere in the Loan Documents, and nothing contained in this Section
shall be deemed a waiver of such restrictions).
5.3.11 Notice of Litigation. Borrower shall give prompt written
notice of any litigation, arbitration, tax audit, administrative
proceeding or investigation that may hereafter be instituted or
threatened in writing in which Borrower would be a party or which
otherwise may affect any Borrower Entity
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or any of their business, operations or Properties, except for (i)
actions seeking only monetary damages in an amount of less than Five
Hundred Thousand and No/100 Dollars ($500,000.00), and (ii) matters
arising from premises or vehicular liability seeking only monetary
damages and which are fully covered by insurance, subject only to any
applicable deductible.
5.3.12 Defaults and Changes. Borrower shall give prompt written
notice if Borrower learns of the occurrence of (i) any event that
constitutes an Event of Default or an Unmatured Default, together with
a detailed statement of the steps being taken as a result thereof, or
(ii) any Material Adverse Change.
5.3.13 Financial Projections. On or before December 31, 1997,
Borrower shall provide Agent with financial projections prepared on a
quarterly basis and covering the period from the date hereof through
December 31, 1999. These projections shall be prepared in sufficient
detail to allow Lender to evaluate them in its consideration of
financial covenants with respect to the Additional Closing and shall
include a pro forma balance sheet, income statement and statement of
cash flow, and shall further include information on a consolidating
basis should Agent so request.
5.3.14 Other Information. Borrower shall provide such other
information respecting the condition or operations, financial or
otherwise, of the Borrower Entities as Agent or any Lender may from
time to time reasonably request.
5.4 Taxes and Other Encumbrances. Each Borrower Entity shall make
due and timely payment or deposit of all federal, state and local taxes,
assessments or contributions required of it by law, and execute and deliver to
Agent, on demand, appropriate certificates attesting to the payment or deposit
thereof; provided, however, that the Borrower Entities shall not be required to
pay or discharge any such tax, assessment, charge or claim for as long as it is
being diligently contested in good faith by proper proceedings and for which
appropriate reserves are being maintained.
5.5 Payment of Funded Debt. Each Borrower Entity shall pay all of
its Funded Debt as and when the same becomes due in accordance with its terms
(unless such payment is not made due to its subordination to the Revolving
Credit Loan), unless the failure to pay would not have a Material Adverse Effect
or is being contested in good faith and appropriate reserves have been made for
payment thereof in accordance with GAAP.
5.6 Compliance with Laws. Each Borrower Entity shall observe and
comply with all Laws (including, but not limited to, Fraud and Abuse Laws), and
shall maintain all certificates, franchises, permits, licenses, and
authorizations necessary to the conduct of its business or the operation of its
Properties, except for such Laws, certificates, etc., which, if violated or not
obtained and full penalties were imposed for such violation, would not cause a
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Material Adverse Effect. Each Borrower Entity shall further use its best
efforts to assure the compliance by all Providers with all applicable Laws,
including, but not limited to, medical licensure and Fraud and Abuse Laws,
relating to their providing of professional services, except for those which, if
violated and full penalties were imposed for such violation, would not cause a
Material Adverse Effect.
5.7 Maintenance of Property. All Borrower Entities shall maintain
their Property (and any Property leased by or consigned or held under title
retention or conditional sales contracts) in good and workable condition at all
times, subject to ordinary wear and tear, normal discards and replacements due
to functional and useful-life obsolescence, and shall make all repairs,
replacements, additions, and improvements to their Property reasonably necessary
and proper to ensure that the business carried on in connection with their
Property may be conducted properly and efficiently at all times.
5.8 Compliance with Contractual Obligations. Each Borrower Entity
will perform all of its obligations in respect of all material contracts to
which it is a party and will use its best efforts to keep, and to take all
action to keep, such contracts in full force and effect and not allow any such
contract to lapse or be terminated or any rights to renew such to be forfeited
or canceled, if such lapse, etc. would have a Material Adverse Effect; provided,
however, that any such contract may lapse or be terminated or such renewal
rights may be forfeited or canceled if in the reasonable business judgment of
the Borrower Entities it is in their best interests to allow or cause such
lapse, termination, forfeiture or cancellation.
5.9 Further Assurances. The Borrower Entities shall promptly cure
any defects in the creation, issuance, or delivery of the Loan Documents. The
Borrower Entities at their expense will execute (or cause to be executed) and
deliver to Agent upon request all such other and further documents, agreements,
and instruments in compliance with or accomplishment of the covenants and
agreements applicable to them in the Loan Documents, or to evidence further and
to describe more fully any Collateral intended as security for the Obligations,
or to correct any omissions in the Loan Documents, or to state more fully the
Obligations and agreements set out in any of the Loan Documents, or to perfect,
protect, or preserve any Encumbrances created pursuant to any of the Loan
Documents, or to make any recordings, to file any notices, or to obtain any
consents, all as may be reasonably necessary or appropriate in connection
therewith. Borrower appoints Agent as Borrower's attorney-in-fact to execute
any financing statements or other instruments of perfection with respect to the
Collateral.
5.10 Security Interest; Setoff. In order to further secure the
payment of the Obligations, Borrower hereby grants to Agent and to each Lender a
security interest and right of setoff against all of Borrower's presently owned
or hereafter acquired monies, items, credits, deposits and instruments
(including certificates of deposit) presently or hereafter in the possession of
any Lender or Agent. By maintaining any such accounts or other property with a
Lender or Agent, Borrower acknowledges that Borrower voluntarily subjects the
property to the security interest arising hereunder. Subject to the provisions
in Article IX hereof, a Lender
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may exercise its rights under this Section without prior notice (but with prompt
notice following the setoff) following an Event of Default. Borrower agrees that
neither Lenders nor Agent shall be liable for the dishonor of any instrument
after notice of setoff shall have been duly given resulting from a Lender's
exercise of its rights under this Section.
5.11 Insurance.
5.11.1 General Insurance Requirements. In addition to the other
specific requirements set forth in this Agreement and as may be
required by other Loan Documents, the Borrower Entities shall maintain
insurance (i) on all insurable Properties now or hereafter owned by
them under coverage that insures against the risks included in fire
and extended coverage insurance and against such other risks as are
customarily insured in their industry, in an amount equal to not less
than the actual cash value thereof and with a deductible of no more
than One Thousand and No/100 Dollars ($1,000.00), (ii) against public
liability in the amount of at least One Million and No/100 Dollars
($1,000,000.00) per occurrence, and (iii) with respect to worker's
compensation liabilities in the amount required by law or, if higher,
the amount customary in the industry. All policies of insurance shall
be issued by insurance companies acceptable to Agent and shall be in
form and substance acceptable to Agent.
5.11.2 Practice-Related Insurance Requirements. The Borrower
Entities shall maintain insurance for claims, however characterized,
against them in connection with the provision of medical services by
Providers and/or ancillary services provided by them at Practices
covered by Service Agreements, in an amount of at least One Million
and No/100 Dollars ($1,000,000.00) per occurrence with respect to
Practices whose Providers are physicians and Three Hundred Thousand
and No/100 Dollars ($300,000.00) per occurrence with respect to
Practices whose Providers who are not physicians. The Borrower
Entities shall further cause each Provider to maintain medical
malpractice insurance of at least One Million and No/100 Dollars
($1,000,000.00) per occurrence. All required insurance shall be in
form and substance acceptable to Agent.
5.12 Accounts and Records. The Borrower Entities shall maintain
current books of record and account, in which full, true, and correct entries
will be made of all transactions.
5.13 Official Records. The Borrower Entities shall maintain current
corporate and official records, minute books and stock ledgers.
5.14 Banking Relationships. The Borrower Entities shall maintain
their deposit accounts with Lenders or with other FDIC-insured depository
institutions.
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5.15 Right of Inspection. The Borrower Entities shall permit any
officer, employee, or agent of a Lender or Agent to visit and inspect during
ordinary business hours any of their Property, to examine their books of record
and accounts and corporate records, to take copies and extracts from such books
of record and accounts, and to discuss the affairs, finances, and accounts of
the Borrower Entities with their respective officers, accountants, and auditors,
all at such reasonable times and as often as Agent or a Lender may reasonably
desire and upon reasonable advance notice absent an Event of Default. Without
limiting Agent's right to obtain equitable relief as to any other appropriate
right in this Agreement or in other Loan Documents, Borrower agrees that the
rights in this Section may be enforced by affirmative injunction and, to the
extent the right to review records may be denied, the right may be enforced by a
restraining order prohibiting the interference by Borrower with the exercise of
rights to review of the records pursuant to this Section. Absent an Event of
Default, all expenses of such inspections, etc. shall be paid by the respective
Lenders, and in the presence of an Event of Default, all reasonable expenses
thereof shall be paid by Borrower.
5.16 ERISA Information and Compliance. The Borrower Entities shall
comply with ERISA and all other applicable laws governing any pension or profit
sharing plan or arrangement to which they are a party, except for matters which
would not have a Material Adverse Effect. The Borrower Entities shall (i) upon
request, provide Agent with copies of any annual report required to be filed
pursuant to ERISA with respect to any Plan or any other employee benefit plan;
(ii) notify Agent upon the occurrence of any ERISA Event or of any additional
act or condition arising in connection with any Plan which they believe might
constitute grounds for termination thereof by the PBGC or for the appointment of
a trustee to administer the Plan; and (iii) furnish to Agent, promptly upon
request, such additional information concerning any Plan or any other employee
benefit plan as Agent may request.
5.16 Indemnity; Expenses. Borrower agrees to indemnify, defend (with
counsel reasonably satisfactory to the indemnified party or parties) and hold
harmless Lenders and Agent against any loss, liability, claim or expense,
including reasonable attorneys' fees, that they may incur in connection with the
Loan Documents or the Obligations, INCLUDING THOSE EXPENSES, ETC. THAT MAY
RESULT FROM THEIR ORDINARY NEGLIGENCE, except those losses, etc. that may result
from a Lender's or Agent's gross negligence or willful misconduct. Without
limiting the foregoing, upon demand by Agent, Borrower will reimburse Lenders
and/or Agent for the following reasonable expenses if not paid by Borrower
promptly after written demand by Agent:
5.17.1 Taxes. All taxes that Lenders or Agent may be required to
pay because of the Obligations or because of Lenders' or Agent's
interest in any property securing the payment of the Obligations,
excepting taxes based upon the net income of a Lender or Agent.
5.17.2 Administration. All reasonable costs of the preparation
of this Agreement and any other related documents and the
administration of the Obligations (except for Lenders' and Agent's
usual overhead incurred in the
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acceptance and processing of payments, the routine review of financial
statements, certifications and reports, routine communications with
Borrower, and other ordinary activities that are not occasioned by an
Unmatured Default, Event of Default or by a request of Borrower to
waive or vary the terms of this Agreement).
5.17.3 Protection of Collateral. All costs of preserving,
insuring, preparing for sale (whether by improvement, repair or
otherwise) or selling any Collateral.
5.17.4 Costs of Collection. All court costs and other costs of
collecting any debt, overdraft or other obligation included in the
Obligations.
5.17.5 Litigation. All reasonable costs arising from any
litigation, investigation, or administrative proceeding (whether or
not Agent or a Lender is a party thereto) that Agent or a Lender may
incur as a result of the Obligations or as a result of their
association with any of the Borrower Entities, including, but not
limited to, expenses incurred by Agent or a Lender in connection with
a case or proceeding involving any Borrower Entity under any chapter
of the Bankruptcy Code or any successor statute thereto.
5.17.6 Attorneys' Fees. Reasonable attorneys' fees incurred in
connection with any of the foregoing (except that Borrower shall only
be responsible for the fees and expenses of Agent's attorneys in
connection with the original negotiation and execution of this
Agreement).
If a Lender or Agent pays any of the foregoing expenses, they shall become a
part of the Obligations and shall bear interest at the Default Rate applicable
to Base Rate Loans. This Section shall remain in full effect regardless of the
full payment of the Obligations, the purported termination of this Agreement,
the delivery of the executed original of this Agreement to Borrower, or the
content or accuracy of any representation made by Borrower to Lenders or Agent;
provided, however, Agent or any Lender may terminate this Section as to itself
by executing and delivering to Borrower a written instrument of termination
specifically referring to this Section.
5.18 Assistance in Litigation. Borrower covenants to, upon request,
cooperatively participate in any proceeding in which Borrower is not an adverse
party to Lenders or Agent and which concerns Lenders' or Agent's rights
regarding the Obligations or any Collateral.
5.19 Name Changes. Borrower shall give Agent notice no more than
thirty (30) days after any Borrower Entity changes its name or begins doing
business under any trade name.
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5.20 Estoppel Letters. Borrower covenants to provide Agent, within
ten (10) days after request, an estoppel letter stating (i) the balance of the
Obligations, (ii) whether Borrower has any defenses to payment of the
Obligations, and (iii) the nature of any defenses to payment of the Obligations.
Such balance as presented for confirmation and the nonexistence of defenses
shall be presumed if Borrower fails to respond to such a request within the
required period.
5.21 Environmental Matters.
5.21.1 Compliance With Environmental Laws. All Borrower Entities
will (i) employ in connection with their operations, appropriate
technology and compliance procedures to maintain compliance with any
applicable Environmental Laws, the violation of which would reasonably
be expected to have a Material Adverse Effect, (ii) obtain and
maintain any and all materials permits or other permits required by
applicable Environmental Laws in connection with its operations,
excepting only such permits, etc. which would not by their absence
cause a Material Adverse Effect, and (iii) dispose of any and all
Hazardous Substances only at facilities and with carriers reasonably
believed to possess valid permits under any applicable state and local
Environmental Laws. All Borrower Entities shall use their best efforts
to obtain all certificates required by law to be obtained by them from
all contractors employed by them in connection with the transport or
disposal of any Hazardous Substances.
5.21.2 Remedial Work. If any investigation, site monitoring,
containment, clean-up, removal, restoration or other remedial work of
any kind or nature with respect to any Borrower Entity's Properties is
required to be performed by them under any applicable local, state or
federal law or regulation, any judicial order, or by any governmental
or non-governmental entity or Person because of, or in connection
with, the current or future presence, suspected presence, release or
suspected release of a Hazardous Substance in or into the air, soil,
groundwater, surface water or soil vapor at, on, about, under, or
within any of a Borrower Entity's Property (or any portion thereof),
Borrower shall within 30 days after written demand for performance
thereof (or such shorter period of time as may be required under
applicable law, regulation, order or agreement), commence and
thereafter diligently prosecute to completion, all such remedial work.
5.21.3 Indemnification of Lenders and Agent. Borrower agrees to
indemnify, defend (with counsel reasonably satisfactory to the
indemnified party or parties) and hold harmless Lenders and Agent
against any loss, liability claim or expense, including attorneys'
fees, that a Lender or Agent may incur as a result of the violation or
alleged violation of any Environmental Law by a Borrower Entity or
with respect to any other violation of Environmental Laws
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with respect to any Borrower Entity's Properties. This covenant shall
survive the repayment of the Revolving Credit Loan.
5.22 Opinions of Counsel. Borrower agrees that Agent may from time to
time, but not more frequently than once per calendar year absent an Unmatured
Default or an Event of Default, request in writing the opinion of in-house
counsel and/or outside healthcare counsel to the Borrower Entities as to the
absence, except as disclosed in the opinion, of such counsel's knowledge of any
actual, threatened or asserted violation of any Fraud and Abuse Law on the part
of any Borrower Entity and/or the Providers, and the sufficiency of
documentation then in use for the operation of Practices as complying with Fraud
and Abuse Laws. Absent the existence of an Unmatured Default or and Event of
Default, such opinions shall require no special diligence on the part of the
opining attorney(s), but only requiring a report of matters then known to such
attorneys, unless Agent specifically inquires about facts that Agent reasonably
believes may raise a Fraud and Abuse Law issue. Such opinions shall be in form
and substance acceptable to Agent, shall be delivered to Agent at Borrower's
expense within fifteen (15) days of the date of request and shall address
specifically any facts inquired of in Agent's request.
5.23 Borrower Entities. All Borrower Entities shall at all times be
guarantors of the Obligations, excepting only Subsidiaries that are not required
to be guarantors under the definition of Permitted Subsidiaries in this
Agreement.
5.24 Diagnostic Examination. Borrower will assist Agent in the
performance of a diagnostic examination of Borrower's systems, procedures, trade
payables, receivables, treasury systems and other such matters as Lenders may
require. The examination shall be conducted by Agent's own personnel and shall
be satisfactory to Agent as to scope and conclusions. Borrower shall pay all
costs of the examination, including charges for time spent by Agent's personnel
and all travel and related expenses; provided, however, Borrower's financial
responsibility for the examination shall not exceed $____________. The
examination will be completed by December 31, 1997.
VI. NEGATIVE COVENANTS
Borrower covenants and agrees that, without Agent's prior written
confirmation of approval by the Required Lenders:
6.1 Debts, Guaranties, and Other Obligations. No Borrower Entity
shall incur, create, assume, or in any manner become or be liable with respect
to any Debt, except the following:
6.1.1 Obligations to Lenders. The Obligations, as defined in
this Agreement.
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6.1.2 Existing Liabilities. Liabilities, direct or contingent,
of Borrower Entities existing on the date of this Agreement that are
reflected in the Financial Statements, subject to additional specific
limitations set forth below.
6.1.3 Endorsements. Endorsements of negotiable or similar
instruments for collection or deposit in the ordinary course of
business.
6.1.4 Trade Debt. Trade payables and accruals from time to time
incurred in the ordinary course of business.
6.1.5 Taxes. Taxes, assessments, or other governmental charges
that are not delinquent or are being contested in good faith by
appropriate action promptly initiated and diligently conducted, if
Borrower has made the reserve therefor required by GAAP.
6.1.6 Seller Debt. Seller Debt, which must be unsecured Debt;
provided, however, the Borrower Entities may have as of September 30,
1997, no more than Sixteen Million Three Hundred Ninety-Nine Thousand
Three Hundred Five and No/100 Dollars ($16,399,305.00) in principal
amount of Seller Debt that is secured by assets of the Borrower
Entities.
6.1.7 Acquired Debt and Purchase Money Security Interests.
Acquired Debt and Debt secured by Purchase Money Security Interests
that are obligations of a Borrower Entity as of November 19, 1997
(which obligations are represented not to presently exceed Twenty
Million and No/100 Dollars ($20,000,000.00) in the aggregate);
provided, however, Borrower Entities may incur up to Two Hundred Fifty
Thousand and No/100 Dollars ($250,000.00) in additional principal
obligations secured by Purchase Money Security Interests.
6.1.8 Accounting Accruals. Liabilities arising from reserves
and accruals required by GAAP that do not reflect liquidated and
mature obligations to third parties, including, but not limited to,
current deferred income taxes.
6.1.9 Debt Among Borrower Entities. Debt incurred to other
Borrower Entities incurred in the ordinary course of business.
6.1.10 Certain Subordinated Debt. Subordinated Debentures in the
amount not exceeding One Hundred Twenty-Five Million and No/100
Dollars ($125,000,000.00) issued pursuant to that certain Indenture
dated as of December 11, 1996, between Borrower and U.S. Trust Company
of New York, N.A. (the "Subordinated Debentures").
6.2 Change of Management. Borrower shall not allow or suffer any
change of management whereby David Real would cease serving as Chief Financial
Officer, Rich
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D'Amico would cease serving as General Counsel, or Dan Chambers would cease
serving as Senior Vice President of Operations. Borrower shall not fill the
positions of Chief Executive Officer, President or Chief Operating Officer
without the prior written approval of the Required Lenders. If a position vacant
as of the Closing Date is later filled with the approval of the Required
Lenders, the appointment shall not change without the approval of the Required
Lenders. Notwithstanding the foregoing, should the managers in any of the named
positions cease active participation in Borrower's management due to their death
or disability, Lenders shall allow Borrower a period of thirty (30) days
thereafter in which a management succession plan may be presented so that the
Required Lenders may, in their discretion, elect to accept new management in
lieu of prior management, subject to such revisions of this Agreement as they
may require. Borrower shall give Agent written notice at any time that Borrower
learns that any of the persons filling the above offices is planning to
terminate employment.
6.3 Change of Ownership. Borrower shall not cause or suffer to exist
a change of ownership or suffer the issuance of new stock or other event that
would result in the ownership of more than 30% of the stock of Borrower by any
Person not presently a shareholder thereof.
6.4 Encumbrances. No Borrower Entity shall create, incur, assume, or
permit to exist any Encumbrance on any of its Property (now owned or hereafter
acquired) except for Permitted Encumbrances, and shall not undertake a
commitment of any kind in favor of any Person (other than Lender) (i) requiring
that any or all of such Borrower Entity's Property be or remain unencumbered, or
(ii) requiring that a Borrower Entity grant an Encumbrance (other than a
Permitted Encumbrance) in favor of any Person (other than Lenders or Agent for
the benefit of Lenders) on a Borrower Entity's Property under any circumstances
whatsoever. No Borrower Entity shall sign or file under the Uniform Commercial
Code a financing statement that names such Borrower Entity as debtor or the
equivalent or sign any security agreement authorizing any secured party
thereunder to file any such financing statement, except to secure Permitted
Encumbrances.
6.5 Investments. No Borrower Entity shall make investments (including
but not limited to acquisitions or purchases of the obligations or stock of, or
any other or additional interest) in any person, firm, partnership, joint
venture or corporation except: (a) those specific investments in existence as of
March 14, 1997, (b) general obligations of, or obligations unconditionally
guaranteed as to principal and interest by, the United States of America
maturing within fifteen (15) months of the date of purchase, (c) commercial
paper having a rating of not less than "A2" or "P2" from Moody's or S & P,
respectively, (d) Permitted Acquisitions, (e) certificates of deposit and
bankers acceptances with maturities of less than one (1) year issued by a Lender
or another banking institution with a minimum net worth of Five Hundred Million
and No/100 Dollars ($500,000,000.00) and having a letter of credit rating of not
less than "A" from Moody's or S & P, respectively, (f) municipal bonds rated "A"
or better by Moody's or S & P, (g) Permitted Minority Investment Entities
acquired
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before November 19, 1997, (h) Permitted Unpledged Investments and Subsidiaries,
and (i) such other investments as Agent may approve, in its reasonable
discretion.
6.6 Prepayments. No Borrower Entity shall prepay the Subordinated
Debentures or any Seller Debt or amend the terms of any Seller Debt to
accelerate the maturity of any payments thereunder. Lenders acknowledge that
Borrower has previously agreed to make certain payments of Fifty Thousand and
No/100 Dollars ($50,000.00) quarterly to one Dr. Jones as special payments on
his Seller Debt, and these payments are permitted.
6.7 Sales and Leasebacks. No Borrower Entity shall enter into any
arrangement, directly or indirectly, with any Person other than another Borrower
Entity by which such Borrower Entity shall sell or transfer any of its Property,
whether now owned or hereafter acquired, and by which a Borrower Entity shall
then or thereafter rent or lease as lessee such Property or any part thereof or
other Property that it intends to use for substantially the same purpose or
purposes as the Property sold or transferred.
6.8 Change of Control. Borrower shall not suffer or permit the
occurrence of a Change of Control.
6.9 Nature of Business. No Borrower Entity shall suffer or permit
any material changes to be made in the character of its business as carried on
at the Closing Date.
6.10 Further Acquisitions, Mergers, Etc. Except for transactions
involving only Borrower Entities, no Borrower Entity shall enter into any
agreement to merge, consolidate, or otherwise reorganize or recapitalize, or
sell, assign, lease, or otherwise dispose of (whether in one transaction or in a
series of transactions) all or substantially all of their Property (whether now
owned or hereafter acquired), except for the "unwinding" of Practice
acquisitions and other dispositions in the ordinary course of business which, in
the aggregate with asset dispositions addressed by Section 6.12 hereof, do not
exceed in value the amount of One Million and No/100 Dollars ($1,000,000.00) in
any fiscal year.
6.11 Advances. No Borrower Entity shall extend any loans to any other
Persons, except for loans to other Borrower Entities in the ordinary course of
business and advances to Providers made in the ordinary course of business
arising from (i) expenses advanced by Borrower Entities, which expenses are
reimbursable to the Borrower Entities under the terms of the applicable Service
Agreements, and (ii) amounts due from Providers due to the difference between
the calculation of fees due under certain Service Agreements on an accrual basis
and the duty of remittance of those fees by Providers on a cash basis, provided
that the amount outstanding under this subsection (ii) shall be reviewed
annually by Agent and may be subject to limitations in amount, as Agent may
reasonably require, based upon such reviews.
6.12 Disposition of Assets. No Borrower Entity shall dispose of any
of its assets other than in the "unwinding" of Practice acquisitions and
otherwise in the ordinary
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course of their present business upon terms standard in the industry, and in any
event, in no fiscal year shall the Borrower Entities collectively dispose of
assets which, in the aggregate with transactions addressed by Section 6.10
hereof, exceed in value the amount of One Million and No/100 Dollars
($1,000,000.00).
6.13 Inconsistent Agreements. No Borrower Entity shall enter into any
agreement containing any provision which would be violated or breached by the
performance by Borrower of the Obligations.
6.14 Fictitious Names. Borrower shall not use any name other than the
name used in executing this Agreement or any assumed or fictitious name.
6.15 Subsidiaries and Affiliates. No Borrower Entity shall create or
acquire any direct or indirect Subsidiary or Affiliate or divest itself of any
material assets by transferring them to any existing Subsidiary or Affiliate
other than Permitted Subsidiaries; nor shall Borrower enter into any
partnership, joint venture, or similar arrangement, or otherwise make any
material change in its corporate structure, except that Borrower may acquire and
create Permitted Subsidiaries from time to time in the ordinary course of
business and may own Permitted Unpledged Investments and Subsidiaries.
6.16 Place of Business. Borrower shall not transfer its executive
offices, or maintain records with respect to accounts at any locations other
than at the address for notices specified herein and at the locations of
Practices affiliated with Borrower, except as Agent may approve, in its
reasonable discretion.
6.17 Adverse Action With Respect to Plans. No Borrower Entity shall
take any action to terminate any Plan which would reasonably result in a
material liability of a Borrower Entity to any Person.
6.18 Transactions With Affiliates. No Borrower Entity shall enter
into any transaction with any Affiliate except in the ordinary course of
business and on fair and reasonable terms no less favorable to the Borrower
Entity than they would obtain in a comparable arms length transaction with a
Person not an Affiliate.
6.19 Constituent Document Amendments. No Borrower Entity shall amend
its corporate charter or bylaws in any material respect, except as necessary to
accomplish corporate transactions that do not require Agent's specific approval
or transactions for which such approval is necessary and has been granted.
6.20 Adverse Transactions. No Borrower Entity shall enter into any
transaction that materially and adversely affects or, to the best of its
knowledge, is likely to materially and adversely affect the Collateral or
Borrower's ability to repay the Obligations.
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6.21 Use of Lenders' Name. No Borrower Entity shall, without the
prior written consent of the applicable Lender, use the name of a Lender or the
name of any Affiliates of a Lender in connection with any of their business or
activities, except in connection with internal business matters, as required in
making required securities law disclosures, in dealings with Providers in the
ordinary course of business, in dealings with governmental agencies and
financial institutions and to trade creditors of the Borrower Entities solely
for credit reference purposes.
6.22 Margin Securities. No Borrower Entity shall own, purchase or
acquire (or enter into any contract to purchase or acquire) any "margin
security" as defined by any regulation of the Federal Reserve Board as now in
effect or as the same may hereafter be in effect.
6.23 Accounting Changes. Borrower shall not change its fiscal year
or make any other significant change in consolidated or consolidating accounting
treatment and reporting practices, except as required or permitted by GAAP. Any
change in fiscal year shall be subject to Agent's prior written approval.
6.24 Distributions. Except in favor of other Borrower Entities, no
Borrower Entity shall declare or pay any dividends or other distributions of
cash or other property (except for dividends paid in its own stock) or redeem
any of its own outstanding stock or the stock of any other Borrower Entity.
6.25 Action Outside Ordinary Course. No Borrower Entity shall take
any other action outside the ordinary course of their business.
6.26 Modification of Subordinated Debenture Documents. Borrower
shall not cause or permit the Subordinated Debentures or the related Indenture
to be modified, directly or indirectly, in any manner that (a) would accelerate
the stated maturity of any principal or interest due thereunder or (b) might
terminate or impair the subordination of the Subordinated Debentures to the
Obligations.
6.27 Non-Scheduled Payment of Subordinated Debentures. Borrower will
not (a) give any notice of election to redeem any or all of the Subordinated
Debentures; (b) take any action to defease the Subordinated Debentures; or (c)
otherwise make or permit to be made any payment (other than regularly scheduled
payments of interest made in accordance with the terms of the Subordinated
Debentures as they exist as of the date hereof or as they may hereafter be
amended with the prior written approval of the Required Lenders) with respect to
the Subordinated Debentures, if an Event of Default then exists or if the taking
of such action (including any borrowing of funds to enable Borrower to take such
an action) would result in the occurrence of an Event of Default under this
Agreement.
VII. FINANCIAL COVENANTS
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Financial covenants shall be as determined in connection with the
Additional Closing.
VIII. EVENTS OF DEFAULT
8.1 Events of Default. Any of the following events shall be
considered an Event of Default under this Agreement:
8.1.1 Payments. Borrower's failure to make payment of any
installment of principal or any payment of interest or expenses
included in the Obligations when due.
8.1.2 Representations and Warranties. The making of any
representation or warranty by Borrower or any other party in any Loan
Document that was incorrect in any material respect as of the date
thereof.
8.1.3 Negative Covenants. The failure of any Borrower Entity to
comply with any of the requirements of Article VI hereof.
8.1.4 Financial Covenants. The failure of any Borrower Entity
to comply with any of the requirements of Article VII hereof.
8.1.5 Reporting Requirements. The failure of any Borrower
Entity or any other party to timely perform any covenant in the Loan
Documents requiring the furnishing of notices, financial reports or
other information to Agent or Lenders within five (5) days of when
due.
8.1.6 Other Covenants. The failure of any Borrower Entity to
observe or perform any covenant contained in any Loan Document, which
covenant is not subject to any specific provision in this Article
VIII; provided, however, as to any such breach that is reasonably
susceptible to being cured, the occurrence of such breach shall not
constitute an Event of Default hereunder if such breach is fully cured
within thirty (30) days (or ten (10) days, if such breach may be cured
by the payment of a specific sum of money) after the earlier of the
Borrower Entity's knowledge of the facts giving rise thereto or
Agent's written notice thereof to Borrower given in accordance with
the provisions hereof.
8.1.7 Involuntary Bankruptcy or Receivership Proceedings. The
appointment of a receiver, custodian, liquidator, or trustee for any
Borrower Entity, or for any of their Property, by the order or decree
of any court or agency or supervisory authority having jurisdiction;
or any Borrower Entity's adjudication as being bankrupt or insolvent;
or the sequestering of any of the
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Property of any Borrower Entity by court order or the filing of a
petition against any Borrower Entity under any state or federal
bankruptcy, reorganization, debt arrangement, insolvency, readjustment
of debt, dissolution, liquidation, or receivership law of any
jurisdiction, whether now or hereafter in effect, unless dismissed (in
the case of involuntary proceedings only) within sixty (60) days.
8.1.8 Voluntary Petitions. Any Borrower Entity's filing of a
petition in voluntary bankruptcy or to seek relief under any provision
of any bankruptcy, reorganization, debt arrangement, insolvency,
receivership, readjustment of debt, assignment of assets or general
arrangement for the benefit of creditors, dissolution, or liquidation
law of any jurisdiction, whether now or hereafter in effect, or their
consent to the filing of any petition against them under any such law.
8.1.9 Discontinuance of Business. Any Borrower Entity's
discontinuance of its usual business or its dissolution, except
pursuant to transactions permitted under this Agreement.
8.1.10 Default on Other Funded Debt. Any Borrower Entity's
failure to make any payment on any Funded Debt when due or, if later,
within any period of grace or cure permitted by the applicable
documents.
8.1.11 Undischarged Judgments. Existence of a final judgment or
judgments for the payment of money in excess of Five Hundred Thousand
and No/100 Dollars ($500,000.00) for the previous fiscal year by any
court or other Governmental Authority or any arbitrator against any
Borrower Entity, which is not paid, discharged or bonded within thirty
(30) days after entry.
8.1.12 Insolvency. Borrower shall no longer be Solvent on a
consolidated basis.
8.1.13 Attachment. The issuance of an attachment or other
process or otherwise) within twenty (20) days, unless the issuance
thereof would not have a Material Adverse Effect.
8.1.14 Insurance. Any Borrower Entity's failure to maintain any
insurance required herein or in any other Loan Document.
8.1.15 Contest. Any Borrower Entity's challenge or contest of
the validity or enforceability of this Agreement or any other Loan
Document or the validity, priority or perfection of any security
interest created hereunder or under any other Loan Document in any
action, suit or proceeding, or should they cease to be in full force
and effect.
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8.1.16 Fraud and Abuse Laws. Receipt by a Borrower Entity of a
notice from a Governmental Authority that it (i) intends to disallow
requested reimbursements, demand adjustment or repayment of past
reimbursements in excess of Five Hundred Thousand and No/100 Dollars
($500,000.00), or (ii) intends to impose civil money penalties or to
seek to exclude any Borrower Entity or a Provider from participation
in the Medicare or Medicaid programs due to a failure to comply with
Fraud and Abuse Laws, if the consolidated gross revenues to the
Borrower Entities arising from the affected Borrower Entity or
Provider exceed Five Hundred Thousand and No/100 Dollars
($500,000.00).
8.1.17 Subordinated Debentures. The occurrence of an Event of
Default under the Subordinated Debentures.
8.1.18 Guarantors. The failure of a Guarantor to maintain the
liquidity requirements established by Lenders in written agreements
with the Guarantors; the occurrence of any of the events listed above
as items 8.1.17, 8.1.18 or 8.1.12 with respect to a Guarantor; the
falseness in any material respect of any representation or warranty
made by a Guarantor with respect to his serving as a guarantor for the
Obligations; or the failure of a Guarantor to perform any of his
obligations under his Unconditional Guaranty securing the Obligations.
8.2 Remedies. Upon the happening of any Event of Default:
8.2.1 Default Rate. The Required Lenders may instruct Agent to
declare that the Obligations thereafter bear interest at the Default
Rate.
8.2.2 Termination of Commitments. As provided in Article III
hereof, Lenders shall not be obligated to advance any additional Loans
and the Issuing Bank will not be obligated to issue any Letters of
Credit, and additionally, the Required Lenders may terminate the
obligation of Lenders to advance any additional Loans and the
obligation of the Issuing Bank to issue Letters of Credit by causing
Agent to give written notice thereof to Borrower, which formal
termination shall remain in effect notwithstanding any subsequent cure
of the Event of Default and whether or not the Revolving Credit Loan
is accelerated unless the Revolving Credit Loan is reinstated in
writing by the Required Lenders.
8.2.3 Acceleration. The Required Lenders may declare the entire
principal amount of all Obligations then outstanding, including
interest accrued thereon, to be immediately due and payable without
presentment, demand, protest, notice of protest, or dishonor or other
notice of default of any kind, all of which are hereby expressly
waived.
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8.2.4 Setoff. Subject to Section 9.11 hereof, any Lender may
exercise its lien upon and right of setoff against any monies, items,
credits, deposits or instruments that such Lender may have in its
possession and which belong to Borrower or to any other person or
entity liable for the payment of any or all of the Obligations.
8.2.5 Cash Security for Letters of Credit. Agent shall, at the
direction of the Required Lenders, demand that Borrower immediately
deposit cash to a deposit account maintained with Agent and pledged to
Agent for the benefit of Lenders to secure the Obligations in the
amount of all Letter of Credit Liabilities.
8.2.6 Other Remedies. Agent shall, at the direction of the
Required Lenders, exercise any right that Lenders have under any other
document evidencing or securing the Obligations or otherwise available
to Lenders or Agent at law or equity.
8.2.7 Attorney-in-Fact. Borrower hereby irrevocably appoints
Agent as Borrower's attorney-in-fact to take any action to facilitate
Agent's exercise of remedies hereunder.
IX. AGENT
9.1 Appointment of Agent. Lenders hereby appoint Agent to act as
specified in this Article IX.
9.2 Powers and Duties of Agent.
9.2.1 Powers and Duties of Agent; Standard of Care. Agent shall
perform all duties expressly imposed upon Agent in this Agreement and
those other duties reasonably incidental thereto, subject to the
approval of the Required Lenders as provided in this Agreement.
Agent's duties hereunder are administrative and ministerial in nature,
and Agent's capacity is that of an independent contractor for Lenders.
Agent is not a trustee or other fiduciary for Lenders, and Agent has
no duties whatsoever to Lenders except as expressly set forth in this
Agreement. Agent shall have no liability to Lenders for any action or
inaction relating to this Agreement or the other Loan Documents, EVEN
FOR MATTERS ARISING FROM ITS ORDINARY NEGLIGENCE, except for actual
losses caused by its gross negligence or reckless or willful
misconduct.
9.2.2 Matters Reserved to all Lenders. Absent the prior
approval of all Lenders, Agent shall not increase any Lender's
Commitment; forgive or reduce any principal, interest or fees due a
Lender or Agent (unless the affected
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party so agrees); extend scheduled maturities or payment dates;
release Collateral release the guarantor Subsidiaries, except for the
release of stock of (and other equity interests in) and guaranties
executed by Subsidiaries in the course of transactions undertaken by
Borrower Entities for which the consent of the Required Lenders is not
required under the other provisions of this Agreement (including, but
not limited to, transactions for the "unwinding" of Practice
acquisitions to the extent expressly permitted under Sections 6.10 and
6.12 of this Agreement, respecting which Agent may issue releases
without obtaining the approval of any Lenders).
9.2.3 Limitations on Agent's Duties. Agent shall not be
obligated to take any action hereunder or under any other Loan
Document (i) if such action would, in the opinion of Agent, be
contrary to applicable law, this Agreement or the other Loan
Documents, (ii) if it shall not first be specifically indemnified to
its satisfaction pursuant to Section 9.3 hereof against any and all
liability and expense that may be incurred by it by reason of taking
or continuing to take any such action, (iii) if it would likely
subject Agent to a tax in any jurisdiction where it is not then
subject to a tax, (iv) if it would likely require Agent to qualify to
do business in any jurisdiction where it is not then so qualified,
unless Agent receives security or indemnity satisfactory to it against
any tax or other liability in connection with such qualification or
resulting from the taking of such action in connection therewith, or
(v) if it would likely subject Agent to in personam jurisdiction in
any location where it is not then so subject.
9.2.4 Agent's Right to Require Instructions in Performance of
Duties. If Agent, in its sole and absolute discretion, requests
instructions from the Required Lenders with respect to any act or
action (including the failure to act) in connection with this
Agreement or any other Loan Document for which the approval of the
Required Lenders or all Lenders is not otherwise required, Agent shall
be entitled, at its option, to refrain from such action, or to
continue such inaction, unless and until Agent shall have received
such instructions, and Agent shall incur no liability by reason of so
acting or refraining from action. No Lender shall have any right of
action whatsoever against Agent as a result of Agent's acting or
refraining from acting hereunder or under any other Loan Document in
accordance with the instructions of the Required Lenders in such a
case.
9.2.5 Agent's Reliance on Others in Performance of Duties.
Agent shall be entitled to rely, and shall be fully protected in
relying, upon any note, writing, resolution, notice, statement,
consent, certificate, telex, teletype or facsimile message, order or
other documentary, teletransmission or telephone message believed by
it in good faith to be genuine and correct and to have been signed,
sent or made by the proper Person. Agent may consult with legal
counsel (including counsel for Borrower), accountants and other
experts selected
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by it with respect to all matters pertaining to this Agreement and the
other Loan Documents and its duties hereunder and thereunder and shall
not be liable for any action taken or omitted to be taken by it in
good faith in accordance with the advice of such counsel (including
counsel for Borrower), accountants or experts.
9.2.6 Sharing of Information. Except as otherwise expressly
provided in this Agreement, Agent shall have no duty or
responsibility, either initially or on a continuing basis, to provide
any Lender with any credit or other information concerning the
business, prospects, operations, properties, financial or other
condition or creditworthiness of the Borrower Entities or any other
Person that may come into its possession, whether before the Closing
Date or at any time or times thereafter. All notices to be given to
Borrower by a Lender hereunder shall be concurrently given to Agent.
9.3 Indemnification of Agent. To the extent Agent is not reimbursed
by or on behalf of Borrower, and without limiting the obligation of Borrower to
do so, Lenders will Pro Rata reimburse and indemnify Agent, from and against any
and all liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses (including attorneys' fees and expenses) or
disbursements of any kind or nature whatsoever that may at any time (including
at any time following the indefeasible repayment in full of the Revolving Credit
Loan) be imposed on, incurred by or asserted against Agent in any way relating
to or arising out of this Agreement or any other Loan Document or the
transactions contemplated thereby or any action taken or omitted by Agent under
or in connection with any of the foregoing, and in particular will reimburse
Agent for out-of-pocket expenses promptly upon demand by Agent therefor, EVEN IF
INCURRED DUE TO THE ORDINARY NEGLIGENCE OF AGENT; provided, however, that no
Lender shall be liable for any portion of such liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses or disbursements
finally determined by a court of competent jurisdiction and not subject to any
appeal or pursuant to arbitration to have resulted from Agent's gross negligence
or reckless or willful misconduct. Agent may offset any amounts due Agent by
any Lender against obligations of Agent to that Lender.
9.4 No Representations by Agent. Each Lender acknowledges that
neither Agent nor any of its officers, directors, employees, attorneys,
accountants or agents has made any representation or warranty to it regarding
the Borrower Entities, the Revolving Credit Loan, the Collateral or otherwise
relating to this Agreement. Agent shall not be responsible to any Lender for
any recitals, statements, information, representations or warranties herein or
in any other Loan Document or in any document, instrument, certificate or other
writing delivered in connection herewith or therewith or for the execution,
effectiveness, genuineness, validity, enforceability, perfection, priority or
sufficiency of this Agreement or any other Loan Document or the financial
condition of the Borrower Entities or any other Person, or be required to make
any inquiry concerning either the performance or observance of any of the terms,
provisions or conditions of this Agreement or any other Loan Document, or the
financial condition of the Borrower Entities or any other Person or the
existence or possible existence of any Unmatured Default or Event of Default.
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9.5 Independent Investigations by Lenders. Each Lender acknowledges
based on such documents and information as it has deemed and may deem
appropriate, (i) it has made its own appraisal of and investigation into the
business, prospects, operations, properties, financial and other condition and
creditworthiness of the Borrower Entities in connection with its decision to
enter into this Agreement and extend credit to Borrower hereunder, and (ii) it
will continue to make its own credit analysis, appraisals and decisions in
taking or not taking action hereunder.
9.6 Notice of Default. Agent shall not be deemed to have knowledge
or notice of the occurrence of any Unmatured Default or Event of Default, other
than any Unmatured Default or Event of Default arising out of the failure to pay
any principal, interest, fees or other amounts payable to Agent for the account
of the Lenders, unless Agent has received written notice from Borrower or a
Lender describing such Unmatured Default or Event of Default and stating that
such notice is a "notice of default." In the event that Agent receives such a
notice, Agent shall promptly give notice thereof to the Lenders; provided,
however, that if any such notice has also been furnished to the Lenders, Agent
shall have no obligation to notify the Lenders with respect thereto. Each
Lender shall promptly give Agent such a notice upon its actual knowledge of an
Unmatured Default or an Event of Default; provided, however, that the failure of
any Lender to deliver such notice in the absence of gross negligence or reckless
or willful misconduct shall not affect its rights hereunder or under the other
Loan Documents.
9.7 Funding of Advances Pursuant to Borrowing Notices. Promptly
following receipt of notice from Agent that a Borrowing Notice has been
submitted, and provided that all conditions to funding are believed to have been
satisfied, each Lender shall, provided that it received timely notice of the new
Loan, transfer to a designated account with Agent that Lender's Pro Rata Share
of the requested funding. The transfer of funds shall occur within the time
required for funding under this Agreement. Should any Lender fail to timely
fund its Pro Rata Share of a requested Loan, Agent may, but shall be under no
obligation whatsoever to, advance to Borrower the defaulted Lender's Pro Rata
Share of the requested Loan. If such an advance is made, it shall be deemed an
advance by Agent for the account of the defaulting Lender and shall bear
interest at the rate applicable to the Loan, payable upon demand.
9.8 Agent in its Individual Capacity. With respect to its
Commitments, and the Loans made by it, Agent shall have the same rights and
powers under the Loan Documents as any other Lender or holder of a Note and may
exercise the same as though it were not performing the duties specified herein;
and the terms "Lenders," "Required Lenders," and any similar terms shall, unless
the context clearly otherwise indicates, include Agent in its individual
capacity as a Lender. Agent may accept deposits from, lend money to and
generally engage in any kind of banking, trust, financial advisory or other
business with the Borrower Entities or any of their respective Affiliates as if
it were not performing the servicing duties specified herein, and may accept
fees and other consideration from Borrower for services in
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connection with this Agreement and otherwise without having to disclose or
account for the same to Lenders.
9.9 Holders. Agent may deem and treat the payee of any Note as the
holder thereof and Lender hereunder for all purposes hereof unless and until a
written notice of the assignment, transfer or endorsement thereof purportedly
executed by the payee, as the case may be, shall have been filed with Agent.
Any request, authority or consent of any Person that, at the time of making such
request or giving such authority or consent, is the holder of any Note according
to Agent's information, shall be conclusive and binding on any subsequent
holder, transferee, assignee or endorsee, as the case may be, of such Note or of
any Note or Notes issued in exchange therefor.
9.10 Successor Agent. Agent may resign at any time upon sixty (60)
days' prior written notice to Borrower and the Lenders. Agent may be removed
upon Agent's insolvency, liquidation or the appointment of a receiver for Agent,
by action of the Required Lenders, at any time upon sixty (60) days' prior
written notice to Borrower and Agent. Such resignation or removal, as the case
may be, shall take effect upon the appointment of a successor Agent as provided
herein. The Required Lenders will, with Borrower's approval (which shall not be
unreasonably withheld), appoint from among the Lenders a successor Agent. If no
successor Agent shall have been appointed within such sixty (60) day period, (i)
if no Unmatured Default or Unmatured Default then exists, Borrower may appoint a
successor Agent from among the Lenders, and (ii) otherwise, Agent may appoint,
after consulting with the Lenders and Borrower, a successor agent from among the
Lenders, which Agent, however selected, shall serve as Agent until such time, if
any, as the Required Lenders and Borrower shall have appointed a successor Agent
as provided hereinabove. Upon the written acceptance of any appointment as Agent
hereunder by a successor Agent, such successor Agent shall thereupon succeed to
and become vested with all the rights, powers, privileges and duties of the
retiring Agent, and the retiring Agent shall be discharged from its duties and
obligations hereunder and under the other Loan Documents. After any retiring
Agent's resignation as Agent, the provisions of this Article shall inure to its
benefit as to any actions taken or omitted to be taken by it while it was Agent.
9.11 Sharing of Payments, etc. Each Lender agrees that if it shall,
through the exercise of a right of banker's lien, set-off, counterclaim or
otherwise, obtain payment with respect to the Obligations which results in its
receiving more than its Pro Rata Share of the aggregate payments with respect to
all of the Obligations, then (a) such Lender shall be deemed to have
simultaneously purchased from the other Lenders a share in the Obligations so
that the amount of the Obligations held by each of the Lenders shall continue to
equal their respective Pro Rata Shares, and (b) such other adjustments shall be
made from time to time as shall be equitable to insure that the Lenders share
such payments ratably. If any Lender remits payments to other Lenders under
this Section 9.11 and later is required to refund the same as a preferential
payment or otherwise, the other Lenders who shared in the payment shall
similarly arrange their interests in the Obligations to reverse the distribution
to them as to allow the originally remitting Lender to refund such payment. No
Lender shall exercise its banker's
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<PAGE>
lien, set-off or other right to accomplish such payment absent Agent's prior
confirmation that the exercise of such right would be consistent with the
instructions of the Required Lenders then in effect regarding the outstanding
Event of Default.
9.12 Separate Liens on Collateral. Each Lender agrees with the other
Lenders that, with the exception of security interests in deposit accounts and
like property in the possession of a Lender as expressly provided for in this
Agreement, it will not take or permit to exist any Encumbrance in its favor on
any of the Collateral or other property of any of Borrowers other than
Encumbrances securing the Obligations due to all Lenders pursuant to the Loan
Documents.
9.13 Payments Between Agent and Lenders. All payments by Agent to
any Lender, and all payments by any Lender to Agent, under the terms of this
Agreement shall be made by wire transfer in immediately available funds to the
receiving party's address specified for notices in this Agreement. If any of
the Lenders fail to pay when due any sum payable to Agent, then, except as
otherwise provided in Section 9.7 hereof, such sum shall bear interest until
paid at the interest rate per annum for overnight borrowing by the payee from
the Federal Reserve Bank for the period commencing on the date such payment was
due and ending on, but excluding, the date such payment is made.
9.14 Assignments and Participations. Any Lender may assign all of
its interest in the Revolving Credit Loan or any portion(s) thereof in the
minimum amount of Ten Million and No/100 Dollars ($10,000,000.00) and in
increments of One Million and No/100 Dollars ($1,000,000.00) each, subject to
the prior written approval of Agent (and of Borrower, provided that no Event of
Default then exists), which approval shall not be unreasonably withheld. The
assignment shall be evidenced by documents in form and substance acceptable to
Agent, and the acquiring Lender shall expressly assume full responsibility as a
Lender hereunder, including, but not limited to, assumption of the applicable
portion of the Commitment. Upon consummation of such assignment, the assigning
Lender shall be deemed released from its obligations under the Loan Documents to
the extent of such assignment. An assignment fee of Three Thousand and No/100
Dollars ($3,000.00) shall be paid to Agent as a condition to any assignment of
an interest in the Revolving Credit Loan (including assignments, if any, among
banks that are already Lenders). Lenders may sell participation interests in
their interests in the Revolving Credit Loan as long as the terms of such
participations establish that no participant will be regarded as a Lender under
this Agreement and permit the participants to vote in determining the vote of
the Lender which sold the applicable participation only with respect to matters
for which the unanimous vote of all Lenders is required under this Agreement.
Lenders may disclose financial information in their possession to prospective
purchasers of interests in the Revolving Credit Loan and to prospective
participants.
9.15 Bankruptcy Provisions. Should any of the Borrower Entities
become a party to a case under the Bankruptcy Code, each Lender shall be
entitled to file its own claim, to the extent such a filing may be necessary.
Agent shall review each claim before being filed
63
<PAGE>
by a Lender to assure that the claim is filed on a basis consistent with Agent's
records and Agent's legal positions taken pursuant to this Agreement. Should any
of the Borrower Entities become a party to a reorganization proceeding under the
Bankruptcy Code, each Lender shall be recognized as the holder of a separate
claim for the purpose of the approval or rejection of a plan under 11 U.S.C. (S)
1126, may freely vote such claim, and the provisions of that Section shall
control the other provisions of this Agreement that otherwise require the
consent of the Required Lenders or all Lenders in certain circumstances. Agent
shall continue to administer the Revolving Credit Loan on behalf of Lenders, as
they may be amended by any adopted Plan of Reorganization.
9.16 Foreclosure of Collateral. In the event of a foreclosure of any
Collateral, Agent may issue a credit bid for the account of all Lenders, up to
the amount of the then outstanding Obligations. Any Property acquired at such a
foreclosure (or acquired by Agent through a conveyance in lieu of foreclosure)
shall be held and administered by Agent for the benefit of all Lenders pursuant
to the terms of this Article IX.
9.17 Procedures for Notices and Approvals. All notices given among
Lenders and Agent with respect to this Agreement or the other Loan Documents
shall be given in the manner provided in this Agreement.
9.18 Other Relationships With Borrower. Each Lender is free to
engage in deposit relationships and other business relationships with the
Borrower Entities, provided that such relationship does not violate any
restriction set forth in this Agreement.
9.19 Foreign Tax Matters. Each Lender which is a foreign person
(i.e., a Person other than a United States Person for United States Federal
income tax purposes) hereby agrees that:
9.19.1 Delivery of Forms. Such Lender shall, no later than the
Closing Date (or, in the case of a Lender which becomes a party hereto
after the Closing Date, the date upon which such Lender becomes a
party hereto) deliver to the Agent and Borrower:
9.19.1(a) two accurate and complete signed originals of
Form 4224, or
9.19.1(b) two accurate and complete signed originals of
Form 1001,
in each case indicating that such Lender is on the date of
delivery thereof entitled to receive payments of principal,
interest and fees for the account of such lending office or
offices under this Loan Agreement free from withholding of
United States Federal income tax.
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<PAGE>
9.19.2 Change of Office. At any time such a Lender changes its
lending office or offices or selects an additional lending office, it
shall, at the same time or reasonably promptly thereafter, deliver to
Agent and Borrower in replacement for, or in addition to, the forms
previously delivered by it hereunder;
9.19.2(a) if such changed or additional lending office is
located in the United States, two accurate and complete signed
originals of Form 4224, or
9.19.2(b) otherwise, two accurate and complete signed
originals of Form 1001,
in each case indicating that such Lender is on the date of
delivery thereof entitled to receive payments of principal,
interest and fees for the account of such changed or additional
lending office under this Loan Agreement free from withholding of
United States federal income tax.
9.19.3 Additional Documentation. Each such Lender shall,
promptly upon Agent's or Borrower's reasonable request to that effect,
deliver to the Agent and Borrower such other forms or similar
documentation as may be required from time to time by any applicable
law, treaty, rule or regulation in order to establish such Lender's
tax status for withholding purposes.
9.20 Responses to Requests. With respect to any consent or approval
requested by Borrower or Agent under a provision of this Agreement, Lenders
shall endeavor to provide to Agent written notice of their approval or
disapproval within seven (7) Business Days of receipt of the request; provided,
however, if any Lender fails to give such notice within seven (7) Business Days,
the request shall be regarded as disapproved by such Lender.
X. GENERAL PROVISIONS
10.1 Notices. All communications relating to this Agreement or any
of the other Loan Documents shall be in writing and shall effective when be
delivered by mail, overnight courier, special courier, telecopier or otherwise
to the following addresses:
65
<PAGE>
if to Borrower:
Physicians Resource Group, Inc.
Attn: President or CFO
5430 LBJ, Three Lincoln Centre, Suite 1540
Dallas, Texas 75240
Telecopier: (972) 982-8299
With a Copy To:
Physicians Resource Group, Inc.
Attn: General Counsel
5430 LBJ, Three Lincoln Centre, Suite 1540
Dallas, Texas 75240
Telecopier: (972) 982-8299
And With a Copy To:
Jackson Walker L.L.P.
Attn: Jim Ryan
901 Main Street, Suite 6000
Dallas, Texas 75202
Telecopier: (214) 953-5736
If to Agent:
NationsBank of Tennessee, N.A., Agent
Attn: Elizabeth Knox
1 NationsBank Plaza
Nashville, Tennessee 37239
Telecopier: (615) 749-4951
With a Copy To:
Boult, Cummings, Conners & Berry
Attn: John E. Murdock III, Esq.
414 Union Street, Suite 1600
Nashville, Tennessee 37219
Telecopier: (615) 252-2380
If to any Lender:
As set forth beside such Lender's signature hereto.
66
<PAGE>
Any party may change its address for receipt of notice by written
direction to the other parties hereto.
10.2 Renewal, Extension, or Rearrangement. All provisions of this
Agreement relating to Obligations shall apply with equal force and effect to
each and all promissory notes executed hereafter which in whole or in part
represent a renewal, extension for any period, increase, or rearrangement of any
part of the Obligations originally represented by any part of such other
Obligations.
10.3 Application of Payments. Amounts received with respect to the
Obligations, except for payments or prepayments expressly provided for elsewhere
in this Agreement, shall be applied (i) first, to any expenses due Lenders or
Agent, (ii) second, to any fee due Agent, (iii) third, to accrued and unpaid
interest under any of the Obligations, (iv) fourth, to any commitment fees due
Lenders, and (iii) fifth, to reduce the unpaid principal portion of the
Obligations, in such manner as determined by Agent.
10.4 Counterparts. This Agreement may be executed in counterparts
with all signatures or by counterpart signature pages, and it shall not be
necessary that the signatures of all parties be contained on any one
counterpart. Each counterpart shall be deemed an original, but all of them
together shall constitute one and the same instrument.
10.5 Negotiated Document. This Agreement and the other Loan
Documents have been negotiated by the parties with full benefit of counsel and
should not be construed against any party as author.
10.6 Consent to Jurisdiction; Exclusive Venue. Each party hereto
hereby irrevocably consents to the jurisdiction of the United States District
Court for the Middle District of Tennessee and of all Tennessee state courts
sitting in Davidson County, Tennessee, for the purpose of any litigation to
which Borrower, Lenders or Agent may be a party and which concerns this
Agreement or the Obligations. It is further agreed that venue for any such
action shall lie exclusively with courts sitting in Davidson County, Tennessee,
unless Lenders and Agent agree to the contrary in writing. This provision
applies to those matters for which litigation is permitted under the provision
below providing for mandatory arbitration and does not abrogate that provision.
10.7 Not Partners; No Third Party Beneficiaries. The relationship
of Lenders and Borrower is that of lenders and borrower only, and neither is a
fiduciary, partner or joint venturer of the other for any purpose. This
Agreement has been executed for the sole benefit of Lenders, and no third party
is authorized to rely upon Lenders' rights or duties hereunder.
10.8 No Reliance on Lenders' Analysis. Borrower acknowledges and
represents that, in connection with the Obligations, Borrower has not relied
upon any financial projection, budget, assessment or other analysis by Lenders
or Agent upon any representation
67
<PAGE>
by Lenders as to the risks, benefits or prospects of Borrower's business
activities or present or future capital needs incidental thereto, all such
considerations having been examined fully and independently by Borrower.
10.9 No Marshaling of Assets. Lenders and Agent may proceed against
collateral securing the Obligations and against parties liable therefor in such
order as they may elect, and neither Borrower nor any surety or guarantor for
Borrower nor any creditor of Borrower shall be entitled to require Lenders or
Agent to marshal assets. The benefit of any rule of law or equity to the
contrary is hereby expressly waived.
10.10 Impairment of Collateral. Lenders or Agent (acting as permitted
under this Agreement) may release any Collateral securing the Obligations or
release any party liable therefor. The defenses of impairment of collateral and
impairment of recourse and any requirement of diligence in collecting the
Obligations are hereby waived.
10.11 Business Days. If any payment date under the Obligations falls
on a day that is not a Business Day, or if the last day of any notice period
falls on such a day, the payment shall be due and the notice period shall end on
the next following Business Day.
10.12 Standard of Care; Limitation of Damages. Lenders and Agent
shall be liable to Borrower only for matters arising from this Agreement or
otherwise related to the Obligations resulting from such Lender's or Agent's
gross negligence or willful misconduct, AND NOT FOR MATTERS ARISING FROM THEIR
ORDINARY NEGLIGENCE, and liability for all other matters is hereby waived.
Lenders and Agent shall not in any event be liable to Borrower for special or
consequential damages arising from this Agreement or otherwise related to the
Obligations.
10.13 Incorporation of Schedules. All Schedules and Exhibits referred
to in this Agreement are incorporated herein by this reference.
10.14 Indulgence Not Waiver. Lenders' or Agent's indulgence in the
existence of a default hereunder or any other departure from the terms of this
Agreement shall not prejudice Lenders' or Agent's rights to declare a default or
otherwise demand strict compliance with this Agreement.
10.15 Cumulative Remedies. The remedies provided Lenders and Agent in
this Agreement are not exclusive of any other remedies that may be available to
Lenders and Agent under any other document or at law or equity.
10.16 Amendment and Waiver in Writing. No provision of this Agreement
can be amended or waived, except by a statement in writing signed by the party
or parties against whom enforcement of the amendment or waiver is sought.
Provisions of this Agreement may be amended or waived by the agreement of
Borrower and the Required Lenders (which consent of the Required Lenders may be
evidenced by the confirmation thereof issued by Agent to
68
<PAGE>
Borrower), except that (i) no amendment or waiver regarding matters expressly
requiring the unanimous consent of Lenders under Section 9.2.2 of this Agreement
may be entered into absent the written consent of all Lenders, (ii) the
amendment of Section 9.2.2 hereof, this subsection (ii), the definition of Pro
Rata or Pro Rata Share and the definition of Required Lenders under this
Agreement shall require the written consent of all Lenders, and (iii) no
amendment or waiver may affect the rights or duties of the Agent or the Issuing
Bank without their written consent.
10.17 Assignment. This Agreement shall be binding upon and inure to
the benefit of the respective successors and assigns of Borrower and Lenders,
except that Borrower shall not assign any rights or delegate any obligations
arising hereunder without the prior written consent of Lenders. Any attempted
assignment or delegation by Borrower without the required prior consent shall be
void.
10.18 Entire Agreement. This Agreement and the other written
agreements among Borrower, Lenders and Agent represent the entire agreement
between the parties concerning the subject matter hereof, and all oral
discussions and prior agreements are merged herein. Provided, if there is a
conflict between this Agreement and any other document executed
contemporaneously herewith with respect to the Obligations, the provision in
this Agreement shall control.
10.19 Severability. Should any provision of this Agreement be
declared invalid or unenforceable for any reason, the remaining provisions
hereof shall remain in full effect.
10.20 Time of Essence. Time is of the essence of this Agreement, and
all dates and time periods specified herein shall be strictly observed.
10.21 APPLICABLE LAW. THE VALIDITY, CONSTRUCTION AND ENFORCEMENT OF
THIS AGREEMENT AND ALL OTHER DOCUMENTS EXECUTED WITH RESPECT TO THE OBLIGATIONS
SHALL BE DETERMINED ACCORDING TO THE LAWS OF TENNESSEE APPLICABLE TO CONTRACTS
EXECUTED AND PERFORMED ENTIRELY WITHIN THAT STATE.
10.22 Captions Not Controlling. Captions and headings have been
included in this Agreement for the convenience of the parties, and shall not be
construed as affecting the content of the respective Sections.
10.23 Amendment and Restatement. This Agreement represents an
amendment and restatement of the Prior Loan Agreement and does not evidence a
novation thereof. All security for the Obligations arising under the Prior Loan
Agreement continues to secure the Obligations as evidenced hereby, with no
interruption of perfection or priority.
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<PAGE>
10.24 Facsimile Signatures. This Agreement may be executed by
facsimile signatures, and shall be effective when Agent has received telecopy
transmissions of the signature pages executed by all parties hereto; provided,
however, that all parties shall deliver original executed documents to Agent
promptly following the execution hereof.
10.25 Arbitration. Any controversy or claim between or among the
parties hereto including but not limited to those arising out of or relating to
this instrument, agreement or document or any related instruments, agreements or
documents, including any claim based on or arising from an alleged tort, shall
be determined by binding arbitration in accordance with the Federal Arbitration
Act (or if not applicable, the applicable state law), the Rules of Practice and
Procedure for the Arbitration of Commercial Disputes of J.A.M.S./Endispute or
any successor thereof ("J.A.M.S."), and the "Special Rules" set forth below. In
the event of any inconsistency, the Special Rules shall control. Judgment upon
any arbitration award may be entered in any court having jurisdiction. Any
party to this Agreement may bring an action, including a summary or expedited
proceeding, to compel arbitration of any controversy or claim to which this
Agreement applies in any court having jurisdiction over such action.
10.25.1 Special Rules. The arbitration shall be conducted in
the city of Borrower's domicile at time of the execution of this
instrument, agreement or document and administered by J.A.M.S who will
appoint an arbitrator; if J.A.M.S. is unable or legally precluded from
administering the arbitration, then the American Arbitration
Association will serve. All arbitration hearings will be commenced
within 90 days of the demand for arbitration; further, the arbitrator
shall only, upon a showing of cause, be permitted to extend the
commencement of such hearing for up to an additional 60 days.
10.25.2 Reservation of Rights. Nothing in this arbitration
provision shall be deemed to (i) limit the applicability of any
otherwise applicable statutes of limitation or repose and any waivers
contained in this arbitration provision; or (ii) be a waiver by Lender
of the protection afforded to it by 12 U.S.C. Sec. 91 or any
substantially equivalent state law; or (iii) limit the right of Lender
(a) to exercise self help remedies such as (but not limited to)
setoff, or (b) to foreclose against any real or personal property
collateral, or (c) to obtain from a court provisional or ancillary
remedies such as (but not limited to) injunctive relief, writ of
possession or the appointment of a receiver. Lender may exercise such
self help rights, foreclose upon such property, or obtain such
provisional or ancillary remedies before, during or after the pendency
of any arbitration proceeding brought pursuant to this instrument,
agreement or document. Neither this exercise of self help remedies
nor the institution or maintenance of an action for foreclosure or
provisional or ancillary remedies shall constitute a waiver of the
right of any party, including the claimant in such action, to
70
<PAGE>
arbitrate the merits of the controversy or claim occasioning resort to
such remedies.
Executed as of the date first written above.
PHYSICIANS RESOURCE GROUP, INC.
By:
-------------------------------------
Title:
-----------------------------------
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<PAGE>
NATIONSBANK OF TENNESSEE, N.A.,
a national banking association, as Agent
By:
-------------------------------------
Elizabeth L. Knox
Senior Vice President
NATIONSBANK OF TENNESSEE, N.A.,
a national banking association, as a
Lender
Commitment in Dollars: $20,000,000.00
Commitment as Percentage of Total: 100%
By:
-------------------------------------
Elizabeth L. Knox
Senior Vice President
Address: 1 NationsBank Plaza
Nashville, TN 37239
Fax number: 615/749-4951
Voice number: 615/749-3918
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<PAGE>
EXHIBIT 2.5.1(b)
AGENCY SERVICES CLOSING INSTRUCTIONS
MUST BE ACCOMPANIED BY A "REQUEST FOR BORROWING"
FROM THE CUSTOMER
SOURCES OF FUNDS AT CLOSING:
Borrowings under the Credit Agreement
-------------------------
Debit from Borrower's Account
-------------------------
Funds wired into NationsBank
-------------------------
TOTAL
-------------------------
DISBURSEMENTS (LIST ALL NECESSARY WIRE INSTRUCTIONS):
- --------------------------------------- -------------------------
- --------------------------------------- -------------------------
- --------------------------------------- -------------------------
- --------------------------------------- -------------------------
TOTAL -------------------------
OTHER INSTRUCTIONS:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
73
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
74
<PAGE>
EXHIBIT 2.5.1(b)-CONT'D
BORROWING/CONVERSION NOTICE
TO: NationsBank of Tennessee, N.A., Agent
LENDERS: Parties to the Loan Agreement
Date: __________, 199_
BORROWER: Physicians Resource Group, Inc.
This notice is delivered under that First Amended and Restated Loan
Agreement (as renewed, extended and amended, the "Loan Agreement") dated as of
November 28, 1997, among Agent, Borrower and Lenders. Terms defined in the Loan
Agreement have the same meanings when used -- unless otherwise defined -- in
this request.
Borrower requests a Loan under the Loan Agreement as follows:
The requested draw is from the Revolving Credit Loan.
Borrowing Date/1/ ___________, 199_
Amount of Borrowing $_________________
Type of Borrowing/2/ __________________
For LIBOR Loans, the Interest Period/3/ 1 month
Select one:
___ The proceeds of the requested Loan shall be disbursed to
Borrower as provided in the Loan Agreement. The purpose of the
requested Loan is (select one for this Loan):
___ New advance for working capital
___ New advance for the permitted repayment of indebtedness
___ The proceeds of the requested LIBOR Loan shall be applied to
the payment of Borrower's existing Base Rate Loan, this new
Loan being a conversion of a Base Rate Loan to a LIBOR Loan
___ The proceeds of the requested LIBOR Loan shall be applied to
the payment of the following LIBOR Loan, subject to all
requirements of the Loan Agreement, this new Loan being a
conversion of a LIBOR Loan to a different LIBOR Loan:
_________________________
/1/Next Banking Day for Base Rate Loans, third following Banking Day for
LIBOR Loans
/2/LIBOR or Base Rate Loan.
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<PAGE>
Date:
--------------------------
Amount:
------------------------
Interest Period:
---------------
___ The proceeds of the requested Base Rate Loan shall be applied to
the payment of the following LIBOR Loan, subject to all
requirements of the Loan Agreement, this new Loan being a
conversion of a LIBOR Loan to a Base Rate Loan:
Date:
--------------------------
Amount:
------------------------
Interest Period:
---------------
Date:
--------------------------
Amount:
------------------------
Interest Period:
---------------
Borrower certifies that on the date hereof and on the date of the
above Borrowing Date -- after giving effect to the requested Loan -- (a) all of
the representations and warranties in the Loan Documents will be true and
correct in all material respects -- unless they speak to a specific date or the
facts on which they are based have been changed by transactions contemplated or
permitted by the Loan Agreement, (b) no Event of Default or Unmatured Default
will exist, and (c) all conditions to Borrower's right to receive the requested
Loan under the Loan Agreement have been satisfied.
PHYSICIANS RESOURCE GROUP, INC., Borrower
By:
-----------------------------------------
(Name)
--------------------------------------
(Title)
-------------------------------------
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<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed Form S-8
Registration Statement File No. 33-93712, Form S-8 Registration Statement File
No. 33-93746, Form S-8 Registration Statement File No. 333-03460, Form S-8
Registration Statement File No. 333-03478, Form S-4 Registration Statement File
No. 333-00230, Form S-4 Registration Statement File No. 333-4406, Form S-4
Registration Statement File No. 333-09905, Form S-3 Registration Statement File
No. 333-10531, Form S-3 Registration Statement File No. 333-11607, and Form S-4
Registration Statement File No. 333-19185.
ARTHUR ANDERSEN LLP
Dallas, Texas,
April 14, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements on
Form S-8 Registration Statement File No. 33-93712, Form S-8 Registration
Statement File No. 33-93746, Form S-8 Registration Statement File No. 333-03460,
Form S-8 Registration Statement File No. 333-03478, Form S-4 Registration
Statement File No. 333-00230, Form S-4 Registration Statement File No. 333-4406,
Form S-4 Registration Statement File No. 333-09905, Form S-3 Registration
Statement File No. 333-10531, Form S-3 Registration Statement File No.
333-11607, and Form S-4 Registration Statement File No. 333-19185 of Physicians
Resource Group, Inc. of our report dated April 5, 1996, on our audit of the
financial statements of Eye Corp, Inc. as of December 31, 1995 and for the year
ended December 31, 1995 which report is included in this Annual Report on Form
10-K.
COOPERS & LYBRAND L.L.P.
Memphis, Tennessee
April 15, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM 1997 CONSOLIDATED
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 15,056
<SECURITIES> 0
<RECEIVABLES> 110,533
<ALLOWANCES> 39,829
<INVENTORY> 5,719
<CURRENT-ASSETS> 116,763
<PP&E> 83,483
<DEPRECIATION> 25,494
<TOTAL-ASSETS> 533,986
<CURRENT-LIABILITIES> 44,503
<BONDS> 0
0
2
<COMMON> 299
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 533,986
<SALES> 0
<TOTAL-REVENUES> 411,640
<CGS> 0
<TOTAL-COSTS> 479,275
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,547
<INCOME-PRETAX> (67,635)
<INCOME-TAX> 26,312
<INCOME-CONTINUING> (41,323)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (41,323)
<EPS-PRIMARY> (1.39)
<EPS-DILUTED> (1.39)
</TABLE>
