<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period ended March 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File No. 1-13778
PHYSICIANS RESOURCE GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 76-0456864
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Three Lincoln Centre, 5430 LBJ Freeway, Suite 1540, Dallas, TX 75240
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (972) 982-8200
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 the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
CLASS OUTSTANDING AT MAY 8, 1998
---------------------------- --------------------------
Common Stock, $.01 par value 29,927,313 shares
<PAGE>
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
INDEX
PART I. FINANCIAL INFORMATION
---------------------
PAGE
----
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets as of March 31, 1998 (unaudited) and
December 31, 1997....................................................1
Statements of Operations for the three months
ended March 31, 1998 and March 31, 1997 (unaudited)..................2
Statements of Cash Flows for the three months
ended March 31, 1998 and March 31, 1997 (unaudited)..................3
Condensed Notes to Financial Statements..............................4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................8
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings...................................................10
Item 6. Exhibits and Reports on Form 8-K....................................12
SIGNATURES....................................................................19
- ----------
Exhibit 11.1..................................................................20
Exhibit 27....................................................................21
<PAGE>
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
ASSETS 1998 1997
------ --------- ------------
<S> <C> <C>
(unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 16,942 $ 15,056
Accounts receivable, net 31,575 29,517
Income tax receivable 4,293 6,682
Due from affiliates, net 47,102 41,187
Pharmaceuticals and supplies 5,761 5,719
Prepaid expenses and other 2,399 3,328
Assets held for disposition, net 10,473 10,473
Deferred taxes 4,801 4,801
-------- --------
Total current assets 123,346 116,763
PROPERTY AND EQUIPMENT, net 56,503 57,989
INTANGIBLE ASSETS, net 346,951 350,538
OTHER NONCURRENT ASSETS, net 8,291 8,696
-------- --------
Total assets $535,091 $533,986
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Current portion of obligations to affiliates $ 4,610 $ 5,093
Current portion of long-term debt 15,073 15,631
Accounts payable and accrued expenses 25,922 23,779
-------- --------
Total current liabilities 45,605 44,503
LONG-TERM DEBT, net of current portion 126,013 126,343
OBLIGATIONS TO AFFILIATES, net of current portion 21,250 21,559
DEFERRED TAXES 71,212 71,212
OTHER LONG-TERM LIABILITIES 3,125 2,904
-------- --------
Total liabilities 267,205 266,521
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 100,000,000 shares authorized,
29,927,000 outstanding in 1998 and 1997 299 299
Preferred stock, $.01 par value, 10,000,000 shares authorized, 200,000
shares outstanding in 1998 and 1997 2 2
Additional paid-in capital 300,016 299,974
Treasury stock, at cost, 227,000 shares in 1998 and 1997 (3,183) (3,183)
Retained deficit (27,023) (27,402)
Note receivable from preferred stock sale (2,225) (2,225)
-------- --------
Total stockholders' equity 267,886 267,465
-------- --------
Total liabilities and stockholders' equity $535,091 $533,986
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
1
<PAGE>
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
---------------------------
1998 1997
-------- --------
(UNAUDITED)
<S> <C> <C>
REVENUES:
Management services $ 63,383 $63,162
Medical services and other 37,897 35,345
-------- --------
Total revenues 101,280 98,507
-------- --------
COSTS AND EXPENSES:
Salaries, wages and benefits 49,589 49,001
Pharmaceuticals and supplies 14,547 11,875
General and administrative 26,558 22,020
Depreciation and amortization 6,690 5,637
Interest expense, net 2,922 2,107
Patent litigation defense costs 82 507
-------- --------
Total costs and expenses 100,388 91,147
-------- --------
INCOME BEFORE INCOME TAXES 892 7,360
PROVISION FOR INCOME TAXES 513 2,674
-------- --------
NET INCOME $ 379 $ 4,686
======== ========
NET INCOME PER BASIC SHARE $ .01 $ .16
======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
USED IN BASIC SHARE CALCULATION 29,782 29,880
======== ========
NET INCOME PER DILUTED SHARE $ .01 $ .16
======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
USED IN DILUTED SHARE CALCULATION 30,097 30,192
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
<PAGE>
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
---------------------------
1998 1997
-------- --------
<S> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................................................... $ 379 $ 4,686
Adjustments to reconcile net income to net cash used in operating activities--
Depreciation and amortization...................................................... 6,690 5,637
Changes in assets and liabilities, net of effects of acquisitions--
Accounts payable and accrued expenses............................................ 2,364 1,172
Receivables, net and due from affiliates......................................... (5,584) (6,497)
Pharmaceuticals and supplies..................................................... (42) 126
Prepaid expenses and other....................................................... 1,265 (2,106)
-------- --------
Net cash provided by operating activities....................................... 5,072 3,018
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of clinic operating assets, net of cash acquired.......................... --- (1,858)
Additions to property and equipment, net of effects of acquisitions.............. (1,506) (2,118)
-------- --------
Net cash used in investing activities........................................... (1,506) (3,976)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt.......................................................... (888) (701)
Net repayments on obligations to affiliates......................................... (792) (4,563)
Proceeds from exercise of stock options............................................. --- 209
-------- --------
Net cash used in financing activities........................................... (1,680) (5,055)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................................. 1,886 (6,013)
CASH AND CASH EQUIVALENTS, beginning of period....................................... 15,056 53,418
-------- --------
CASH AND CASH EQUIVALENTS, end of period............................................. $ 16,942 $ 47,405
======== ========
SUPPLEMENTAL INFORMATION:
NONCASH TRANSACTIONS:
Sale of practice and related ASC in exchange for PRG common stock............... $ --- $ 2,500
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The interim condensed consolidated financial statements of Physicians
Resource Group, Inc. and subsidiaries ("PRG" or the "Company") included herein
have been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Although the Company believes that the
disclosures are adequate to make the information presented not misleading,
certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. It is
suggested that these financial statements be read in conjunction with the
financial statements and notes included in the Company's Annual Report on Form
10-K for the year ended December 31, 1997. In the opinion of management, the
accompanying unaudited interim condensed consolidated financial statements
contain all adjustments, consisting only of those of a normal recurring nature,
necessary to present fairly the Company's results of operations and cash flows
for the periods presented. The results of operations for the periods presented
are not necessarily indicative of the results to be expected for the full year.
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 EyeCorp, Inc. ("EyeCorp"),
American Ophthalmic Incorporated ("AOI") and EquiMed, Inc. ("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, litigation relating to the EquiMed acquisition,
patent litigation relating to refractive procedures at certain of the Company's
affiliated practices 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 and an
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.
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, the tangible assets and re-employ the
practice personnel; and (5) accelerating the payment by the affiliated
physicians/practices of their amounts owed to the Company. This plan is subject
to 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.
4
<PAGE>
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
Management of the Company believes that whether a restructuring plan is
consummated or not, the Company's existing cash balances, 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. REVENUE RECOGNITION AND RECEIVABLES
The Company manages its relationship with certain affiliated ophthalmic and
optometric practices under various types of service and management agreements.
The management service revenues earned under these agreements are based on
several different types of arrangements, including percentages of the medical
service revenues or earnings, flat fees and reimbursement of clinic expenses and
are presented as management service revenues on the accompanying consolidated
statements of operations.
Certain states in which the Company operates allow the corporate practice
of medicine. In those states, the Company's revenues are derived from medical
services performed. In addition, the Company owns, operates and manages
Ambulatory Surgical Centers ("ASCs") through various arrangements. Revenues
derived from company-owned ASCs are based on facility fees charged to patients
and third-party payors for use of the ASC. Revenues from managed ASCs are
derived from a percentage of earnings as well as reimbursement of ASC expenses.
ASC revenues are also net of contractual adjustments. Revenues earned under
these arrangements from majority owned ASCs are presented as medical service
revenues on the accompanying consolidated statements of operations; minority
owned ASCs are presented as management service revenues.
Due from affiliates on the accompanying consolidated balance sheets include
management service receivables, receivables from the practices for certain
expenses paid on their behalf and certain other miscellaneous receivables from
the practices. The receivables due from certain practices are collateralized by
a security interest in the practices' receivables from third-party payors and
patients.
In the latter half of 1997 and early 1998, the Company conducted an in-
depth review of its due from affiliates balances, which resulted in certain
procedural changes relating to account collection and an increase in the
allowance related to these receivables to $11,322,000 as of December 31, 1997
and March 31, 1998. 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 assurances that additional
allowances will not be recorded in the future.
As discussed in Note 4, the Company also recorded certain allowances during
1997 relative to anticipated losses and dispositions of the assets of certain
practices with which the Company plans to terminate its affiliation. The due
from affiliates balances relating to the practices targeted for disassociation
of $11,291,000 has been reclassified to "Assets held for disposition" in the
accompanying balance sheet as of December 31, 1997 and March 31, 1998.
4. ASSETS HELD FOR DISPOSITION
As discussed in Note 2, 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 sheets as
of March 31, 1998 and 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 March 31,
1998:
5
<PAGE>
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
DESCRIPTION MARCH 31, 1998
----------- --------------
(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. CREDIT FACILITY
On April 30, 1998, in response to the loan covenant violations under the
Company's $90,000,000 credit facility discussed in Note 2, the Company
established a smaller $14,000,000 credit facility with NationsBank, of which
$12,248,000 had been borrowed as of March 31, 1998. The credit facility is
secured by a security interest in all service agreements, accounts receivable
and general intangibles and matures on or prior to December 31, 1998. Interest
rates on borrowings are LIBOR plus 2.5%.
The Company's near term working capital needs are expected to be met
through, (1) its $14 million credit facility, (2) collections of affiliates
receivables, and (3) the timely collection of future management fees.
6. INTANGIBLE ASSETS
Intangible assets consist of the value of the non-physician employee
workforce, goodwill associated with ASC acquisitions, and management service
agreements. All intangibles are amortized over varying periods on a straight
line basis. Workforce intangibles are amortized over seven years. Amounts paid
for ASC acquisitions in excess of the net assets acquired are treated as
goodwill and are amortized over 40 years. Effective January 1, 1998, the
Company reduced its maximum period of amortization from 40 years to 25 years as
the useful life for amortization of its management service agreements. This
change in accounting estimate was made to reflect a more conservative
amortization period for management service agreement intangibles and to address
concerns expressed by certain financial regulatory authoritative organizations
regarding the use of amortization periods in excess of 25 years on a prospective
basis. During the first quarter of 1998, additional amortization of
approximately $900,000 was recognized.
7. 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 violation of the federal securities laws (specifically Sections
10 and 20 of the Securities Exchange Act of 1934) including, misrepresentations
and omissions of material facts in connection with purchases and sales of the
Company's securities. Damages are claimed but 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 certain refractive
surgical procedures. 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
$3,165,000 of legal expense related to this litigation through March 31, 1998
and expects to incur additional costs associated with this litigation throughout
1998, but has not agreed to be responsible for any damage amounts that might be
awarded against the practices. Management of the Company
6
<PAGE>
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
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 impact on the
Company's results of operations in 1997 and 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 attorneys'
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 affirmative defenses, including illegality,
mutual mistake and scrivener's error.
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 certain other lawsuits in the normal course
of business. 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.
8. NEW ACCOUNTING PRONOUNCEMENTS
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 periods beginning after December
15, 1997 and has had no impact on the Company's financial statements, as no
comprehensive income items are reflected in the financial results.
7
<PAGE>
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
General
PRG began operations in 1995 and is a provider of physician practice
management services to ophthalmic and optometric 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 ASCs and optical dispensaries. As of May 8, 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 May 8, 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
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 Note 2 of Condensed 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. Late in the 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
8
<PAGE>
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
to (1) the anticipated future dispositions of these practice assets and
liabilities, and (2) the anticipated losses on the 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 May 8, 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 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.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1998 AND MARCH 31, 1997
Revenues
Total revenues for the three months ended March 31, 1998 increased by
$2,773,000, or 3% over the same period in 1997. Management service fees did not
change significantly between the two periods while medical service fees
increased by 7% over 1997, largely as a result of growth within the practices
and acquisitions made after the first quarter of 1997.
Costs and Expenses
Salaries, wages and benefits increased by $588,000, or 1% over the same
period in 1997. As a percent of revenues, costs are down over last year. The
decrease as a percentage of revenues is due to the resignation of certain
members of senior management in late 1997, coupled with open positions
associated with increased employee turnover during the first quarter of 1998.
Pharmaceuticals and supplies for the three months ended March 31, 1998 have
increased by $2,672,000, or 22% over prior year first quarter. As a percent of
revenues, expenses are 14% and 12% for the three months ended March 31, 1998 and
1997, respectively. The increase in costs is primarily due to royalties
associated with use of new excimer lasers and additional medical service
revenues.
General and administrative expenses for the first quarter of 1998 increased
by $4,538,000, or 21% over the first quarter of 1997. As a percent of revenues,
general and administrative expenses are up compared to last year. The increase
in expenses over the same period last year is largely due to increased facility
costs related to expanded operations after the first quarter of 1997, and a
significant increase in professional fees including legal, consulting and
accounting services.
Depreciation and amortization expense for the three months ended March 31,
1998 increased by $1,053,000 over the first quarter of 1997. As a percent of
revenues, depreciation and amortization expense is 7% for 1998, compared to 6%
for the same period last year. The increase in expense is primarily due to the
reduction of useful lives for intangible assets associated with management
service agreements from 40 years to 25 years prospectively, beginning in January
1998.
Interest expense, net for the three months ended March 31, 1998, increased
over the three months ended March 31, 1997 by $815,000. This increase is
attributed to the increase in outstanding debt and the decrease in cash balances
for the first quarter of 1998 as compared to the same period in 1997.
9
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PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
Patent litigation defense costs through March 31, 1998 have decreased from
the same period last year by $425,000, primarily as a result of decreased
activity in the Pillar Point litigation as discussed in Part II, "Legal
Proceedings".
LIQUIDITY AND CAPITAL RESOURCES
Cash, Working Capital and Debt
During the three months ended March 31, 1998, the Company continued to
implement strategic initiatives begun in 1997, as discussed in Note 2 of the
Condensed Notes to the Financial Statements. During this period, PRG made
significant cash expenditures for increases in working capital at the practice
level, payments on long-term and affiliate debt and capital expenditures. The
Company also experienced an increase in affiliate receivables and working
capital during the transition to a new treasury management system that was
implemented in the latter half of 1997. These expenditures and working capital
increases were financed through existing cash balances and cash generated from
operations. Accordingly, net cash flow was $1,866,000 for the three months ended
March 31, 1998. Cash and working capital balances for March 31, 1998 were
$16,942,000 and $77,741,000, respectively.
On April 30, 1998, the Company established a $14,000,000 credit facility
with NationsBank, which is secured by a security interest in all service
agreements, accounts receivable and general intangibles and bears interest at
the rate of LIBOR plus 2.5%. As of March 31, 1998, $12,248,000 had been borrowed
under the predecessor to this credit facility, all of which is due on or before
December 31, 1998.
The Company's near term working capital needs are expected to be met
through, (1) its $14 million credit facility, (2) collections of affiliates
receivables, and (3) the timely collection of future management fees.
Certain statements in this Form 10-Q consist of forward-looking statements
that involve risks and uncertainties, including the Company's ability to
successfully acquire the assets of, service and integrate eye care providers,
regulatory developments, the ability to adapt to the managed care environment
and other risks detailed from time to time in the reports filed by the Company
with the Securities and Exchange Commission, including Form 10-K dated December
31, 1997.
PART II. OTHER INFORMATION
ITEM 1. 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 attorneys' 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 practice's attorneys' fees and costs
associated with this action, but has not agreed to be responsible for any damage
10
<PAGE>
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
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 plaintiffs 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 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.
11
<PAGE>
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 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.(12) (8)
2.3 -- Agreement and Plan of Merger by and among American Ophthalmic
Incorporated, PRG Acquisition Corporation and Physicians Resource
Group, Inc. dated October 7, 1996.(12) (8)
2.4 -- Asset Purchase Agreement by and among Sun Valley Acquisition
Corporation, Barnet-Dulaney Eye Center, P.L.L.C., Ronald W.
Barnet, M.D., David D. Dulaney, M.D., Robert B. Pinkert, O.D. and
Scott A. Perkins, M.D. dated November 29, 1995.(2) (8)
2.5 -- First Amendment to Asset Purchase Agreement 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., Physicians 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)
12
<PAGE>
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
2.13 -- Agreement and Plan of Merger by and among Central Florida Eye
Associates, Partners, Ronald Case, M.D., Brian Renz, M.D., Teo
Kulyk, M.D., Jay Mulaney, M.D., PRG FL Partnership II, and
Physicians Resource Group, Inc.(13) (8)
2.14 -- Agreement and Plan of Merger by and among South Texas Retina
Affiliates, Inc., South Texas Retina Consultants, L.L.P., Charles
H. Campbell, M.D., P.A., Charles H. Campbell, M.D., PRG TX
Acquisition Corp. I and Physicians Resource Group, Inc.(13) (8)
2.15 -- Agreement and Plan of Merger, dated August 13, 1996, between PRG
Ohio III, Inc., Physicians Resource Group, Inc., Cincinnati Eye
Institute, Inc., John S. Cohen, M.D., James D. Faulkner, M.D.,
William J. Faulkner, M.D., Robert C. Kersten, M.D., Richard S.
Kerstine, M.D., Robert H. Osher, M.D., Robert W. Nash, M.D.,
Michael R. Petersen, M.D., Gary A. Varley, M.D., Linda J. Greff,
M.D., Robert J. Cionni, M.D., Kevin T. Corcoran, O.D. and Corwin
M. Smith, 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, MD., 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. 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., Physicians Resource Group, Inc., Tampa Eye Clinic,
P.A., J. Burns Creighton, M.D., Ronald Seeley, M.D., Lewis
Lauring, M.D., William Reynolds, M.D., David Leach, M.D., P.A.
and Timothy Lorenzen, M.D., P.A.(14) (8)
2.21 -- Agreement and Plan of Merger, dated August 13, 1996, between PRG
XI Acq. Corp., Physicians Resource Group, Inc., Timothy Lorenzen,
M.D., P.A. and Timothy Lorenzen, M.D.(14) (8)
2.22 -- Agreement and Plan of Merger, dated August 13, 1996, between PRG
VII Acq. Corp., Physicians Resource Group, Inc., Ronald Seeley,
M.D., P.A. and Ronald Seeley, M.D. (14)(8)
2.23 -- Agreement and Plan of Merger, dated August 13, 1996, between PRG
VI Acq. Corp., Physicians Resource Group, Inc., J. Burns
Creighton, M.D., P.A. and J. Burns 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)
13
<PAGE>
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
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)
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)
14
<PAGE>
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
10.10 -- Form of Service Agreement by and between Physicians Resource
Group, Inc., its wholly-owned subsidiary and Texas Eye Institute
Assoc.(1)
10.11 -- Form of Service Agreement by and between Physicians Resource
Group Subsidiary, Inc., its wholly-owned subsidiary and McDonald
Eye Associates, P.A.(1)
10.12 -- Form of Service Agreement by and between Physicians Resource
Group, Inc., its wholly-owned subsidiary and Michael A. Minadeo,
M.D., P.A.(1)
10.13 -- Form of Service Agreement by and between Physicians Resource
Group, Inc., its wholly-owned subsidiary and Southern Nevada Eye
Clinic, Inc., Kenneth C. Westfield, M.D., Ltd. and Nevada
Institute of Ambulatory Surgery, Inc.(1)
10.14 -- Form of Service Agreement by and between Physicians Resource
Group, Inc., its wholly-owned subsidiary and Eye Clinic, P.C.(1)
10.15 -- Form of Service Agreement by and between Superior Eye Care, Inc.
and Charles D. Fritch, M.D., Inc.(1)
10.16 -- Form of Service Agreement by and among Pacific Vision Services,
Inc. and Loma Linda Ophthalmology Medical Group, Inc., Inland Eye
Institute Medical Group, Inc. and T.E.S.C., Inc.(1)
10.17 -- First Amendment to Service Agreement by and among Physicians
Resource Group, Inc., as successor by merger to Pacific Vision
Services, Inc., Loma Linda Ophthalmology Medical Group, Inc.,
Inland Eye Institute Medical Group, Inc. and T.E.S.C., Inc. dated
August 9, 1995.(4)
10.18 -- Subscription Agreement, dated March 31, 1995, between Notre
Capital Ventures, Ltd. and Physicians Resource Group, Inc.(1)
10.19 -- Form of Registration Rights Agreement.(1)
10.20 -- Form of Registration Rights Agreement.(1)
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, Inc.(6) (7)
10.25 -- Loan Agreement dated as of January 8, 1996, between Physicians
Resource Group, Inc. and NationsBank of Tennessee, N.A.(2)
10.26 -- Subordination Agreement dated as of December 28, 1995, by and
among NationsBank, EyeCorp, Eyecare Resource, Inc., the EyePA,
Inc. and PRG.(2)
10.27 -- Reimbursement Agreement dated as of December 28, 1995, between
EyeCorp and PRG.(2)
15
<PAGE>
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
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 for 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)
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)(22)
10.42 -- Employment Agreement between Physicians Resource Group, Inc. and
Peter Dorflinger.(7)(22)
10.43 -- Employment Agreement between Physicians Resource Group, Inc. and
Pamela Westbrook.(7)(22)
16
<PAGE>
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
10.44 -- First Amendment to Loan Agreement, dated June 27, 1997, between
Physicians Resource Group, Inc. and NationsBank of Tennessee,
N.A., Agent for the Bank's signatory thereto.(21)
10.45 -- Physicians Resource Group, Inc. 401(k) Plan.(18)
10.46 -- Amendment to the Physicians Resource Group, Inc. Employee Stock
Purchase Plan .(20)
10.47 -- Loan Agreement for $20,000,000 Revolving Credit Loan dated
November 1997, between Physicians Resource Group, Inc. and
NationsBank of Tennessee, N.A.(22)
10.48 -- First Amendment to First Amended and Restated Loan Agreement
dated as of April 30, 1998, between Physicians Resource Group,
Inc. and NationsBank of Tennessee, N.A.(17)
11.1 -- Computation of Earnings per Share.(17)
24.1 -- Power of Attorney (contained on the signature page of this
report).
27.0 -- Financial Data Schedule.(17)
17
<PAGE>
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
(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 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 Securities & Exchange 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 (No. 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.
(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) Filed herewith
(18) Previously filed as an exhibit to the Company's Current Report on Form 8-K
dated May 15, 1997, and incorporated herein by reference.
(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.
(20) Previously filed as an exhibit to the company's current report on Form 8-K
dated November 5, 1996 and filed September 3, 1997, and incorporated herein
by reference.
(21) Previously filed as an exhibit to the Company's quarterly report on Form
10-Q for the quarter ending June 30, 1997, and incorporated herein by
reference.
(22) Previously filed as an exhibit to the Company's Form 10-K for the year
ending December 31, 1997, and incorporated herein by reference.
(b) Reports on Form 8-K
18
<PAGE>
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PHYSICIANS RESOURCE GROUP, INC.
Dated: May 15, 1998 By: /s/ Peter G. Dorflinger
-------------------------------------------
Peter G. Dorflinger
President, Chief Operating Officer
Acting Principal Financial and
Accounting Officer
19
<PAGE>
EXHIBIT 10.48
FIRST AMENDMENT TO
FIRST AMENDED AND RESTATED LOAN AGREEMENT
This First Amendment to First Amended and Restated Loan Agreement
("Amendment") is entered into as of the 30th day of April, 1998 by and between
PHYSICIANS RESOURCE GROUP, INC. ("Borrower"), a Delaware corporation, and
NATIONSBANK OF TENNESSEE, N.A., as a Lender and in its capacity as Agent
("Agent").
R E C I T A L S:
WHEREAS, Lender, Agent and Borrower have previously entered into that First
Amended and Restated Loan Agreement (the "Loan Agreement") dated as of November
28, 1997; and
WHEREAS, the parties wish to amend the Loan Agreement in certain respects
as to evidence the occurrence of the "Additional Closing," as defined therein;
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of
which are acknowledged, the parties agree as follows:
1. Capitalized terms not otherwise defined herein shall have the meanings
set forth in the Loan Agreement.
2. The Loan Agreement is hereby amended by adding the following
definition to Article I thereof:
"CONSOLIDATED NET WORTH" means shareholders' equity, determined on a
consolidated basis according to GAAP, as of the last day of each fiscal
quarter.
3. The Loan Agreement is hereby amended by revising the definition of
"Maturity Date" in Article I thereof to provide in full as follows:
"MATURITY DATE" means December 31, 1998. The Maturity Date may be
extended from time to time by the written agreement of all Lenders, Agent
and Borrower.
4. The Loan Agreement is hereby amended by revising Section 2.1 thereof
to provide in full as follows:
2.1 Amount of Revolving Credit Loan. 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) through September 30,
1998, and Nine Million Five Hundred Thousand and No/100 Dollars
($9,500,000.00) thereafter, in
1
<PAGE>
each case less the amount of any permanent reductions of the Revolving
Credit Loan arising from the sale of assets pursuant to Section 6.10
hereof.
5. The Loan Agreement is hereby amended by deleting the definition of
"Additional Closing" in Article I thereof, by deleting Sections 2.17 and 3.3, by
replacing the present text of Section 5.3.13 with the sentence "This Section is
intentionally left blank" and by adding a Section 3.2.7 providing in full as
follows:
3.2.7 Additional Conditions. Borrower shall have satisfied all of the
conditions set forth in that First Amendment to First Amended and Restated
Loan Agreement dated as of April 30, 1998 executed by Borrower and by
NationsBank as Agent and as a Lender.
6. The Loan Agreement is hereby amended by adding a new Section 5.3.15
thereof, providing in full as follows:
5.3.15 Default Notices from Providers. Borrower shall promptly
forward to Agent as received copies of any and all notices of default and
of complaints commencing litigation received by any Borrower Entity with
respect to Service Agreements.
7. The Loan Agreement is hereby amended by adding a second sentence to
Section 5.23 thereof, as follows:
All Borrower Entities that are guarantors of the Obligations shall further
grant a security interest to Agent for the benefit of Lenders in all of
such guarantors' accounts and general intangibles, including, but not
limited to, Service Agreements, and all proceeds thereof, to secure the
Obligations, subject only to Permitted Encumbrances.
8. The Loan Agreement is hereby amended by revising Section 5.24 thereof
to provide in full as follows:
5.24 Diagnostic Examinations. Borrower will assist Agent in the
performance of diagnostic examinations of Borrower's systems, procedures,
trade payables, receivables, treasury systems and other such matters as
Lenders may require. The examinations 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 examinations, including charges for
time spent by Agent's personnel and all travel and related expenses;
provided, however, Borrower's financial responsibility for each examination
shall not exceed $15,000 plus travel and other out of pocket expenses. The
examinations will be completed by December 31, 1997 and by May 31, 1998,
respectively.
2
<PAGE>
9. The Loan Agreement is hereby amended by replacing the first two
sentences of Section 6.2 thereof with the following sentence:
6.2 Borrower shall not allow or suffer any change of management
whereby Richard A. Gilleland would cease serving as Chief Executive
Officer, Peter G. Dorflinger would cease serving as President and Chief
Operating Officer, Richard J. D'Amico would cease serving as Executive Vice
President and General Counsel, Jonathan R. Bond would cease serving as
Senior Vice President - ASC Operations, Michael Yeary would cease serving
as Senior Vice President - Practice Operations, or Pamela B. Westbrook
would cease serving as Vice President and Chief Financial Officer.
10. The Loan Agreement is hereby amended by revising Section 6.10 thereof
to provide in full as follows:
6.10 Further Acquisitions, Mergers, Asset Sales, 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 that
during 1998, the Borrower Entities may dispose of assets without further
approval from Lenders or Agent, provided that (i) the gross proceeds of
such dispositions does not exceed One Million and No/100 Dollars
($1,000,000.00) in the aggregate, (ii) all such dispositions are reported
to Agent in writing as they occur, and (iii) seventy-five percent (75%) of
the gross proceeds of such dispositions are paid to Agent for the benefit
of Lenders upon the closing of the dispositions as permanent reductions in
the availability under the Revolving Credit Loan. Any additional
dispositions of assets must be approved by Agent in writing. If Agent
elects, in its discretion, to permit any such additional disposition, Agent
may require that some or all of the proceeds thereof serve as further
permanent reductions of availability under the Revolving Credit Loan.
11. The Loan Agreement is hereby amended by revising Section 6.12 thereof
to provide in full as follows:
6.12 Disposition of Assets. No Borrower Entity shall dispose of any
of its assets other than as permitted in Section 6.10 of this Agreement.
12. The Loan Agreement is hereby amended by revising the text of Article
VII thereof to provide in full as follows:
7.1 Consolidated EBITDA. Borrower shall maintain at least Ten
Million and No/100 Dollars ($10,000,000.00) of Consolidated EBITDA for each
fiscal
3
<PAGE>
quarter (less the most recent quarterly contribution to Consolidated EBITDA
arising from assets that are disposed of as permitted under Section 6.10 of
this Agreement after April 30, 1998).
7.2 Consolidated Net Worth. Borrower shall maintain a Consolidated
Net Worth equal to Borrower's Consolidated Net Worth as reported in its
audited financial statements as of December 31, 1997 (which net worth, as
reported, shall be at least $250,000,000), less $25,000,000, and increased
by 75% of net income earned after December 31, 1997, without adjustment for
losses.
13. The Loan Agreement is hereby amended by revising the text of Section
8.1.10 thereof to provide in full as follows:
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, or the
occurrence of any Event of Default under any obligation to any Affiliate of
NationsBank.
14. The Loan Agreement is hereby amended by revising Exhibit 2.3 thereof
to provide as set forth in Exhibit 2.3 hereto.
15. Concurrently with the execution and delivery of this Amendment,
Borrower shall deliver to Lender the following documents, all of which shall be
in form and substance acceptable to Lender and its counsel:
a. This Amendment.
b. Second Consolidated, Amended and Restated Revolving Credit Note
executed by Borrower.
c. Security Agreement executed by Borrower and by all Borrower
Entities that are guarantors of the Obligations.
d. UCC-1 Financing Statements executed by each of the Borrower
Entities that are parties to the Security Agreement for filing in such
jurisdictions as Agent may require.
e. First Amended and Restated Unconditional Limited Guaranty executed
by each of David Meyer, M.D. and Lucius E. Burch III.
f. Certification of Organizational Chart executed on behalf of
Borrower.
g. Certificates of Existence for Borrower and for each Borrower
Entity signing the Security Agreement.
4
<PAGE>
h. Certified Copies of Resolutions issued by the Secretaries of each
Borrower Entity executing the Security Agreement, providing (i) that the
corporate charters and bylaws thereof have not been revised since last certified
to Lender, and (ii) confirming the adoption of resolutions authorizing the
execution and delivery of the Security Agreement.
i. Opinion Letter of Borrower's outside counsel addressing such
matters as Lender may require.
j. Evidence that documentation satisfactory to NationsBank of Texas,
N.A. has been entered into regarding its credit with respect to the Mann Berkley
Eye Center, P.A.
k. Evidence of payment of all expenses due in connection with the
closing of the transactions described in this Amendment.
16. Lender shall request UCC searches after the recordation of the above-
referenced financing statements. The expense of obtaining these searches and
the legal fees and expenses incidental thereto shall be paid by Borrower upon
demand. If the searches disclose any encumbrances other than those permitted
under the terms of the Security Agreement referenced above, Agent may declare an
Event of Default under the Loan Agreement.
17. Borrower shall pay all costs incidental to this Amendment, including,
but not limited to, the fees and expenses of Lender's and Agent's counsel and
all recording fees and taxes.
18. Borrower warrants and represents that (i) the Loan Documents are
valid, binding and enforceable against the applicable Borrower Entities
according to their terms, subject to principles of equity and laws applicable to
the rights of creditors generally, including bankruptcy laws, (ii) all
warranties and representations made by Borrower in the Loan Documents are hereby
again warranted and represented to be true as of the date hereof, except with
regard to matters expressed only as of a specific time or which have been
supplemented or superseded by disclosures to Agent and Lenders made in writing,
and (iii) no Unmatured Default or Event of Default presently exists under the
Loan Documents. Borrower further acknowledges that Borrower's obligations
evidenced by the Loan Documents are not subject to any counterclaim, defense or
right of setoff, and Borrower hereby releases Lender from any claim, known or
unknown, that Borrower may have against Lender as of the execution of this
Agreement.
19. As amended hereby, the Loan Agreement remains in full effect, and all
agreements among the parties with respect to the subject hereof are represented
fully in this Amendment and the other written documents among the parties. The
provisions of the Loan Agreement regarding arbitration of disputes and other
general matters also govern this Amendment. THE VALIDITY, CONSTRUCTION AND
ENFORCEMENT HEREOF SHALL BE DETERMINED ACCORDING TO THE SUBSTANTIVE LAWS OF THE
STATE OF TENNESSEE. This Amendment may be executed in counterparts, each of
which shall constitute an original hereof.
5
<PAGE>
Executed as of the date first written above.
PHYSICIANS RESOURCE GROUP, INC.,
a Delaware corporation, as Borrower
By:
------------------------------------------------
Richard J. D'Amico, Executive Vice President
NATIONSBANK OF TENNESSEE, N.A.,
a national banking association, as a Lender and as Agent
By:
------------------------------------------------
Elizabeth L. Knox, Senior Vice President
6
<PAGE>
EXHIBIT 11.1
PHYSICIANS RESOURCE GROUP, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-------------------------------------------------
1998 1997
------------------- -------------------
DILUTED INCOME PER SHARE
<S> <C> <C>
Net income $ 379 $ 4,686
=================== ===================
Weighted average number of common shares outstanding 29,782 29,880
Net effect of dilutive stock options based on the treasury stock method
using the average market price 315 312
------------------- -------------------
Weighted average number of common and common equivalent shares outstanding
30,097 30,192
=================== ===================
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE ASSUMING FULL DILUTION $ .01 $ .16
=================== ===================
</TABLE>
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS
FOUND ON PAGES 1 AND 2 OF THE COMPANY'S FORM 10-Q FOR THE THREE MONTHS ENDED
MARCH 31, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 16,942
<SECURITIES> 0
<RECEIVABLES> 111,068
<ALLOWANCES> 28,098
<INVENTORY> 5,761
<CURRENT-ASSETS> 123,346
<PP&E> 88,299
<DEPRECIATION> 31,796
<TOTAL-ASSETS> 535,091
<CURRENT-LIABILITIES> 45,605
<BONDS> 125,000
0
2
<COMMON> 299
<OTHER-SE> 267,585
<TOTAL-LIABILITY-AND-EQUITY> 535,091
<SALES> 0
<TOTAL-REVENUES> 101,280
<CGS> 0
<TOTAL-COSTS> 100,388
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,922
<INCOME-PRETAX> 892
<INCOME-TAX> 513
<INCOME-CONTINUING> 379
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 379
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
