The seeds of a physician revolt are being sown among clinics affiliated with Physicians Resource Group.
Financial problems coupled with a perceived lack of service to its eyecare clinics have left the Dallas-based physician practice-management company under siege. Some of the doctors who sold out to PRG for $30 per share now find those shares worth only $4 each. The source of frustration for others has been difficulty contacting anyone in PRG's revolving-door executive suite.
As a result, some doctors reportedly have stopped paying their management fee, usually about 35% of operating profits, to PRG. "Practices have said to me that they've stopped paying PRG," says Steven J. Dell, M.D., a lead physician at PRG's Texan Eye Care clinic in Austin.
Dell says his 20-physician clinic is considering stopping its payments as well. Texan Eye Care already has filed a $30 million lawsuit against PRG scheduled to go to trial on March 23. The lawsuit alleges that PRG cut off services and set up competing clinics in Austin because Texan Eye Care wouldn't renegotiate its management contract to make it more favorable to the company.
"The part where we're included in the company is paying them," says Dell, whose clinic holds no PRG stock. "The part where we're not included is where we get services."
Richard Gilleland, hired Dec. 16 as PRG's chairman, chief executive officer and president, would not comment on the company's legal and financial problems. The company responded to Texan Eye Care's lawsuit by issuing a general denial of the clinic's claims. The subject of physicians not paying management fees was not broached in the suit.
"I can't answer anything," Gilleland says. "It would be inappropriate at this time."
PRG's stock price hovered around $4 in January as the company struggled to regain its footing from a third-quarter earnings loss of 62 cents per share, or $18.4 million, and the firing of Chairman and Chief Executive Officer Emmett Moore, both announced on Nov. 19. Since then, PRG's chief financial officer and two directors also have stepped down. President Richard Owen resigned as of Oct. 31.
Meanwhile, PRG and Moore have been named as defendants in at least four shareholder lawsuits alleging either a falsification or misrepresentation of financial results to boost the company's stock price, which reached its all-time high of $34.37 in May 1996.
One of the latest financial blows to the company came from a Standard & Poor's report issued Jan. 15. The debt-rating agency lowered PRG's rating to "B-minus" from "B-plus." The two-level drop will cause PRG to pay higher interest on its bank loans and bonds. If PRG moved down two more categories, to "CCC," it would be among companies that are considered in danger of defaulting on their debt, says director Elie Radinsky, who put together the PRG report.
Among Radinsky's concerns: In PRG's current bank facility, only $7.5 million is available, which probably would not cover any losses resulting from lawsuits; and in lieu of stock, at least $14 million in promissory notes has been issued to doctors, which may take priority over $125 million in convertible notes outstanding if PRG goes under. Those notes were downgraded to "CCC" by S&P.
The report also listed "relationship problems" between PRG and its 650 ophthalmologists and optometrists as a reason for the downgrade. Radinsky would neither confirm nor deny that physicians have stopped paying management fees to the company.
Such payments made up $199.3 million of PRG's $307.2 million in revenue during the first nine months of 1997, according to the company's Nov. 19 quarterly filing with the Securities and Exchange Commission.
However, the management-fee revenue is transferred out of the clinics to the company's headquarters; like many PPMs, PRG counts every dollar its clinic collects as revenue.